* * *

I put the reply to Fable at the end, so those who are bored of the discussion can skip it. (Although please check out my brief reply.) Here are some links for July:

1. Tyler Cowen compares AI to pets:

Tyler: (12:48) So far, the AIs seem to be evolving in a manner similar to pets: coexistence and mutuality with humans. That’s the better-case scenario. I don’t see that changing soon, but it may not be that way forever. I once joked that the AIs you really need to worry about are the Wall Street AIs, because they’re not really taught to cooperate with humans. The normal AIs that everyone talks about are just going to be like puppy dogs, more or less forever.

Jackson: (13:15) Do you think current competition is making OpenAI and Anthropic AIs more likely to trend toward being what you mean by Wall Street AIs, though?

Tyler: (13:23) No, it’s making them more like pets, really. Like Spinoza the dog. He’s hanging around the house; he’s so nice, he’s so sweet. He’ll come over, he wants to be petted, he’ll wag his tail at you. Yeah, I think that’s what we’re seeing.

2. Here’s an interesting quote to think about:

Does Trump wish to make housing more expensive by things like zoning restrictions, which make us poorer, or things like free trade and enhanced immigration of high skilled workers, which make us richer? Never reason from a house price change.

3. More evidence that big cities often impoverish the poorer parts of their state, a point I used to argue over at Econlog.

4. I keep saying that trade is not the problem, and evidence keeps coming in to support that claim. Here Noah Smith reports on a study by Richard Baldwin:

America did actually outsource a fair amount of its final goods production, but this was almost balanced out by onshoring of intermediate goods production (at least, in terms of monetary value). Almost all of America’s deindustrialization since 1995 came from Americans spending a smaller % of their money on manufactured goods.

For other countries, it’s a different story. Germany and Japan actually spent more on manufactured goods, but lost tons of market share in the intermediate goods sector. For France, Canada, and the UK, all three factors contributed to deindustrialization.

This is very interesting. It implies that the simple, common story of “we outsourced everything to China” holds true for other rich countries — at least, in a generalized sort of way — a lot more than for the United States. For the U.S., the main reason we make less stuff is that we want less stuff — at least, relative to how many “experiences” we want to consume.

5. California has politicians that favor clean energy and Texas has politicians that favor oil and gas. So where would you expect clean energy to be built? Here’s Mallesh Pai:

One of the things that gets slept on: Texas has no official green policy, but simply says make things at the cheapest price, and that turns out to be a lot greener than all the other states or countries that have official green policies.

Prices. They work!

California has politicians that favor multifamily housing, and Texas has politicians that favor single family home suburban sprawl. So where would you expect the most multifamily housing to get built?

Yup, in 2025 Texas permitted 50% more multifamily housing than California, despite a smaller population.

6. This graph is an eye opener:

And even today Arizona wastes enormous quantities of water on farms, which account for 76% of the state’s water usage.

7. Polls show that many voters now have a positive view of “socialism”. But what does this mean? Does anyone know? Over the past decade, Bernie Sanders has been the most prominent socialist politician in America. When asked how he envisions socialism, he often mentions Denmark as an example. But Denmark has one of the most laissez-faire economies in the entire world, apart from its social insurance programs. Are the voters who say they like socialism advocating for something like Cuba or something like Denmark? Are they even educated enough to describe their views if asked? How many younger voters even know what communism is? Maybe 20%?

   Once again, there is no such thing as public opinion. As with Heisenberg Uncertainty, just asking someone whether they favor the Cuba or Denmark model, while explaining the difference, might well shift their views. Lots of voters that like socialism also like “free enterprise”

8. In the 1960s, Americans and Europeans faced fairly similar tax rates and worked similar hours per year. By the 1990s, European tax rates (and benefits to non-workers) had risen to far above US levels, and Europeans worked much fewer hours per year. An abstract from a recent paper by Serdar Birinci, Loukas Karabarbounis & Kurt See discusses a partial reversal of those trends:

   In the 1990s, Americans used to work much more than non-Americans. Nowadays, about half of the gap in hours worked has reversed. To evaluate the convergence of working hours, we develop a tractable model of labor supply enriched with multiple sources of heterogeneity across individuals, an extensive margin of participation, multi-member households, and an elaborate system of taxes and benefits upon non-employment. Using detailed measurements from micro-level and aggregate datasets, we identify model parameters and sources of heterogeneity across individuals for various countries. We run a horse race between competing explanations and find that U.S. hours per person declined after 2000 owing mainly to the rise of government health benefits provided to the non-employed. Non-U.S. countries have generous benefits for the non-employed, but this generosity has not changed as much over time as in the United States, and public health coverage does not depend on employment status or income levels. For these countries, the rise of labor supply is generally accounted for by a mix of factors, such as the rise of wages and the falling disutility of work.

9. A recent tweet by David Beckworth shows that weekly payrolls (roughly equivalent to my core NGDP concept) has been well behaved over the past two years. Even so, I still believe that monetary policy is slightly too expansionary.

10. Back in 2016, people rolled their eyes when I suggested that the US was increasingly resembling a banana republic. Here’s the FT:

President Donald Trump flew to Medora, North Dakota, this week to dedicate the Theodore Roosevelt Presidential Library. It was notable for being his first trip aboard the new $400mn Boeing 747 gifted to him by the Emir of Qatar.

Trump flew out on the same day it was disclosed he had earned more than $2.2bn since his return to the White House, a windfall without precedent in US presidential history and one that has raised more troubling questions about conflicts of interest in his administration.

The size of the earnings — largely from crypto ventures — is inviting comparisons that might have seemed outlandish even a year ago. Some political scientists are beginning to see parallels between Trump’s behaviour and those of foreign strongmen in Africa and Asia notorious for their self-enrichment in office.

11. Socialism is a nice sounding word, but do voters wish to pay for it? Here’s Eric Levitz:

Socialist candidates are having a banner year.

And yet, the dream of American socialism (or social democracy) is arguably getting *further out of reach.*

Even as voters warm up to "socialism" as an abstraction, they are cooling on its fundamental precondition: Higher taxes.

Americans' federal tax rates are near historic lows. And yet, the share who think that their taxes should be *even lower* is at its highest point in 2 decades.

12. And a related point from Matt Yglesias:

Notably, the people who constructed America’s system of widespread comprehensive central planning of the housing market did not typically think of themselves as socialists. And certainly, the typical suburban homeowner regards it as his God-given right to block new development and change in his neighborhood.

If you’re an older, reasonably prosperous homeowner, this bad situation probably doesn’t have a negative impact on you. And you almost certainly don’t think of yourself as a communist who strongly favors central planning and believes free markets are nonsense.

If you’re a young person facing higher rents and despairing about getting on the path to homeownership, you probably don’t think of yourself as a victim of a failed socialist economic experiment the way a refugee fleeing Cuba or Venezuela would. The victims of bad housing policy hear people talking about how America is a great free-market success story, so if they feel that the success story is not working for them personally, they conclude that capitalism and free markets are in fact a big failure.

13. China continues to shoot itself in the foot:

Chinese policymakers are discussing ways to reduce the incentives for scientific researchers to submit their findings to foreign journals, as Beijing grows concerned that academic publications could be a channel for leaks of industrial and technological innovations.

14. As does the USA:

The National Science Foundation has decided to ban collaborations between every U.S. scientist it funds and nearly all Chinese research institutions and their employees. The new policy abandons NSF’s earlier attempt to balance the potential risks and benefits of such collaborations.

The world is increasingly ruled by people with the emotional maturity of middle schoolers.

15. Nick Corvino had an interesting observation about NIMBYism:

The Japans and Norways of the world can still build metro stations and decent housing, so America’s particular impotence isn’t a universal feature of democratic governance. But those countries are also quite wealthy, and the more striking pattern runs in the other direction. Egypt, Kazakhstan, and yes, even China (once you step beyond the tier 1 and 2 cities) all retain a capacity to build that feels out of proportion to their material means. Their GDP doesn’t fully explain what they’re able to put in the ground.

The actual dividing line, therefore, might not be China versus everybody else, but between countries with entrenched rule of law and weak political consolidation on one side, and countries without either constraint on the other. One model can build a city for six million people and leave it empty. The other struggles to build enough housing for the people already there. Somewhere between the autocratic state that builds too much too fast and bankrupts itself chasing a pharaoh’s legacy, and the democratic state that can’t break ground on an apartment block without a decade of environmental review, there has to be a better answer.

A recent paper by Kara Dimitruk & Ben Southwood provides the best analysis I’ve seen of what that better answer might look like. Probably my favorite blog post of the year.

16. Matt Welch at Reason magazine provides a nice survey of the history of presidential corruption in the US:

At its heart, the otherwise complicated and multi-stage Teapot Dome affair of the 1920s, which until Watergate was considered the greatest federal government scandal of all time, was about secret bribes to an administration official that lubricated lucrative regulatory outcomes. In 1921, Interior Secretary Albert Fall clandestinely accepted $404,000 ($7.6 million in today's money) in cash and no-interest loans from two oil executives, who then became recipients of no-bid leases to exploit oil fields in California's Elk Hills and Wyoming's Teapot Dome. . . .

Albert Fall was found guilty of bribery and served a year in prison. The Supreme Court nullified the no-bid oil leases on the grounds that they had been corruptly obtained. President Warren G. Harding had been oblivious to the Teapot Dome scheme, yet he nonetheless was tarred from his 1923 death onward as an enabler of corruption. The Trump family net worth increased by more than $1 billion as a direct result of Sheikh Tahnoon's frenetic and sometimes secret investments in the six-month run-up to producing a long-sought diplomatic and economic victory for his country. Will school children 100 years hence know the name World Liberty Financial?

One of the many negative aspects of nationalism is the tendency to whitewash the unseemly aspects of a country’s history. And so it begins:

“I’m actually fascinated by [Richard] Nixon as a character in history,” Vice President J.D. Vance said at the Nixon Library in June. “His historical legacy is enjoying a bit of a renaissance, but I think deservedly so….[I]f Watergate happened tomorrow, it would be like a 12-hour news story. Like, the idea that it would have taken down a presidency is crazy. And, by the way, if you look at the story of how the Deep State took down Richard Nixon, it’s not all that different from what the same groups of people, the same institutions tried to do to Donald Trump in the first Trump administration.”

Watergate, the only Washington scandal that impelled a president to resign and the English language to add a suffix, was a 26-month news story, stretching from the break-in at the Democratic National Committee by Nixon loyalists through President Gerald Ford’s pardon of his predecessor. One of the reasons the saga lasted so long is that the perpetrators, employers, and intended beneficiaries of the burglary—very much including Richard Nixon, beginning immediately after the initial arrest—could not stop lying their faces off about it, destroying evidence, concocting schemes to quash the resulting investigations, and (if they had the power) just straight-up firing the most nettlesome investigator. Nixon attempted to use the Deep State to make it all go away, ordering the CIA to tell the nosy FBI that its inquiry would jeopardize national security. In the end, 48 people were convicted or pleaded guilty, including Nixon’s attorney general, chief domestic advisor, and chief of staff.

Vance is right about one thing. Today, Watergate would be a 24-hour story. I wonder if Vance understands why that is.

17. Clever:

18. David Beckworth has an excellent article discussing the advantages of moving away from the sort of “floor system” for reserves that has led to a bloated Fed balance sheet, citing the example of Norway. In several places, David tries to reassure readers that a lean central bank balance sheet doesn’t prevent central banks from conducting effective monetary policy:

The Norges Bank is committed as ever to its tiered reserve system. And in no way has it diminished the Norges Bank ability to conduct monetary policy. The central bank in a 2021 review of its operating framework found that “there is a high degree of pass-through from the policy rate to market rates. The current quota system appears to be a good framework for the transmission mechanism and the implementation of monetary policy” (p.11). . . .

Norges Bank deserves enormous credit for recognizing the shortcomings of a floor system long before most central banks. Its tiered reserve system successfully reduced banks’ demand for reserves, revived interbank lending, and demonstrated that monetary policy can be implemented with a much leaner supply of reserves.

I agree, but I wonder why this is even controversial. Alan Greenspan conducted highly effective monetary policy for 19 years without any system of IOR, manipulating a monetary base that was nearly 98% currency! I get why people might favor large bank reserves for liquidity reasons, but what does this have to do with the effectiveness of monetary policy? What am I missing? Why does this have to be “demonstrated”?

19. I’m not surprised by the following, but I suspect that many people in Silicon Valley are:

I’ll make another prediction. We will not see double-digit growth in real GDP.

A few weeks back, I did a post explaining how the world is bigger than it seems. One application of that idea I forgot to mention is that we naturally tend to overestimate the impact of technology on jobs and economic growth. In 50 years, there will be a vast number of new jobs that you cannot imagine, just as the pioneers who went west to set up farms in the 1890s could not imagine their great grandchildren becoming pet psychologists, high speed traders, mall cops or wedding planners after farm work was mechanized. As for growth, there can be explosive productivity growth in sectors like software even as vast sectors of the economy continue to move along at a snail’s pace.

20. Think about how much the world has changed in 11 years:

And then think about the fact that (due to AI) it might change even more rapidly in the next 11 years.

21. Long time readers know about my obsession with Denmark. Alex Tabarrok finds another area where the Danes are #1—avoiding occupational licensing.

22. Matt Yglesias wisely pushes back against some Democrats’ foolish desire to emulate Trump:

Dana Milbank reports on the most egregious mirror-imaging concepts yet in a piece titled “Democrats Are Drafting Plans to Govern Like Trump in 2029.”

Why is that such a perverse model? Let me count the ways:

• Right now, Trump’s presidency looks like an unpopular failure, which is a weird model to copy. If you say “I want to be the Ronald Reagan of the left,” I get the general picture. He was consequential in large part because he was politically successful — he didn’t just generate backlash.

• It’s only 2026, and by 2028 Trump may look like a popular success, but if that’s the case, then sweeping progressive change isn’t on the table as a response.

• A big part of anti-Trump sentiment is that he’s acting in lawless and autocratic ways. A little hypocrisy is par for the course in politics, but you can’t just copy his approach without shattering the anti-Trump coalition.

• Trump, as I pointed out in my post on his lack of immigration legislation, isn’t actually achieving as much as he likes to think.

23. The administration says that we need tariffs to counter trade deficits. But actions speak louder than words. Here’s Reason:

On Wednesday, the White House announced a new 25 percent tariff on thousands of products imported from Brazil. The new tariffs are being imposed under Section 301 of the Trade Act of 1974, and are effectively meant to replace the previous “emergency” tariffs on Brazilian goods that were struck down by the Supreme Court in February. In a statement, Greer said the tariffs were meant to counter “unfair trade practices.”

But if the guiding principle is reducing trade deficits, here’s an uncomfortable fact: America exports way more to Brazil than it imports from there.

“The U.S. goods trade surplus with Brazil was $14.4 billion in 2025, a 112.8 percent increase ($7.7 billion) over 2024,” according to Greer’s office. When services are included in the calculation, the trade surplus with Brazil grows by another $23 billion.

When it comes to American policymaking, facts don’t matter. Here’s The Economist:

America was at its richest “from 1870 to 1913”, when it was “a tariff country”, claims Mr Trump. Actually, Americans are six times richer now than they were in 1913, even if you ignore the full benefits of new inventions such as GPS and antibiotics. The president thinks global trade means foreigners screwing Uncle Sam. So when his commerce secretary showed him that Chinese and Indian tariffs on American goods were not very high, he called the numbers “fucking bullshit” and ordered Natalie Harp, a young blonde aide whose job is to print out positive news for him, to Google up “the real numbers”. Ms Harp, “despite her best efforts”, could not find “the numbers that didn’t exist”.

24. I’m disappointed. The administration seems too lazy to construct a plausible conspiracy theory. Here’s the ultra-liberal National Review:

If I were president, and I believed that the U.S. intelligence community had hidden information about a plot to meddle in an election from me, I would be livid with whoever had been serving as U.S. director of national intelligence at that time. The DNI at the time was John Ratcliffe. Upon winning reelection, Trump made Ratcliffe CIA director, and Ratcliffe serves in that position to this day. (Note that on December 22, 2020, in recognition of his national security achievements as both director of national intelligence and the CIA, President Trump awarded Ratcliffe the National Security Medal, the nation’s highest honor for distinguished achievement in the field of intelligence and national security.)

25. I have enormous respect for Bill Gates. Richard Hanania has an excellent post explaining why Gates is widely hated, despite being a far better person that many other rich and powerful figures. Here’s the opening paragraph:

Rich men are often treated unfairly. But I don’t think that there has been a successful businessman in American life who has been treated more unfairly or maligned with less justification than Bill Gates. His story has something to teach us about conspiracy theories, why certain figures become targets and not others, and the nature of public relations. It also suggests that whatever he is doing is not working, and if Gates is going to save his own legacy, he’s going to need to do more to defend himself against false and misleading attacks.

In some ways, Gates and I are similar. I am one month older, and I share his somewhat bland nerdy appearance. I also share some of the personality flaws that Hanania discusses in regard to Gates—too passive.

But unlike Gates, I graduated from college. :)

26. Day by day, the US continues to become ever more of a banana republic. Recently, we reneged on a bridge deal with Canada:

From what I can glean, the most damaging aspects of this re-trade are the following: first, Canada lost sole authority to set its own tolls and govern the bridge — a bridge that we paid for in full! And second, it demonstrates that, at the present time, the US cannot be trusted to honour its agreements.

Re-trading, of course, happens all the time in politics and business, and the real estate industry is no different. But I would say that there’s a difference between a bad-faith re-trade and a legitimate risk adjustment. Sometimes new information is discovered or the market changes in the middle of a deal, and one party needs a deal adjustment to be able to proceed.

At the same time, there are also bad-faith re-trades where one party simply wants to apply any leverage it may have, be a bully, and capitalize on deal fatigue. “Ugh, let’s just get this open!” This is a short-sighted practice because it immediately destroys trust and damages your reputation. It may leave you better off on this one deal, but it makes the next ones that much harder.

For decades, we will be paying the price for short-sighted policymakers.

27. If you have any doubts about how bad the NIMBY movement is, think about the following. A new apartment building is approved for Santa Monica after paying a $14,000,000 “fee”, and the news is treated at a big success for the YIMBY movement. That’s what we are up against.

Just imagine what could be built in a truly free market. (And read the fools in the comment section.)

28. A recent Vox-EU study attributes recent gains in productivity to more intensive utilization of labor:

US labour productivity has accelerated since 2022. Output per hour grew around 2.5% per year from the end of 2022 to the start of 2026, exceeding its pre-pandemic pace by 1 percentage point. A natural conjecture is that artificial intelligence has raised production efficiency. This column argues that the data suggest otherwise. Higher utilisation – that is, more intense use of labour and capital already in place – accounts for much of the recent acceleration. AI may have contributed to the higher utilisation rate, but through strong demand and heightened uncertainty rather than through efficiency.

I like to use the hotel industry as an example. Around the time of Covid, many hotels stopped having their maids clean the rooms every single day. This allowed (measured) hotel services to be provided with less labor, which increases measured productivity. (BTW, I approve of that change.) I am less enthused about the recent changes in customer phone service, however, where computer respondents are less effective than the human call center workers they replace. (Which is a low bar.)

29. In the past, I argued that nationalism leads to a rewriting of history, an attempt to airbrush out the negative aspects of a country’s past. Not surprisingly, we are starting to see that with regard to Watergate. Here’s Liz Wolfe:

Someone stop the kids, they’re Nixonmaxxing! reports The Wall Street Journal: “Watergate has long been considered one of the biggest political scandals in American history. After five men were arrested breaking into the Democratic National Committee headquarters in 1972, investigators uncovered links to Nixon’s re-election campaign and an extensive effort by the White House to cover it up. The scandal led to Nixon’s resignation, landed some of his closest advisers in jail and ushered in a far-reaching legislative crackdown on executive overreach. Now, Nixon is being recast as a forerunner of ‘America First’ by a new generation of conservatives: a combative president loathed by the press and besieged by investigators who was brought down by the same establishment they believe targeted President Trump.”

Very depressing, but I’m not surprised. They are too young to remember.

30. People often ask why productivity growth slowed after 1973. I think the real mystery is why was productivity so strong from WWII to 1973. This Dylan Matthews tweet helps explain why.

31. Here is Stephen Kirchner:

If you are skeptical of the role of monetary aggregates in forecasting inflation, then that skepticism should extend to other variables as well. That is because we have chosen a monetary policy regime that is meant to preclude that kind of direct forecastability. This just reinforces the case for Scott Sumner’s sufficient statistic approach, or what I call the Sumner singularity, in which the policy instrument, the indicator variable and the policy goal all collapse into market-based expectations for nominal GDP.

I like the phrase Sumner singularity.

32. A few days after the 2020 election, I said the following:

Early in the evening I was rooting for a Biden win. But when I saw how close the election was, I wondered if we’d be better off with a Trump win. That would mean at most 8 years of Trump, then we get the virus out of our system.

Now with a “stolen election” we face a scenario where Trump returns in 2024 (possibly from jail, just as Napoleon returned from Elba) and runs against an old and likely unsuccessful Democratic president, who disappointed his supporters by being unable to get anything through the Senate. Or perhaps against a minority woman candidate. Trump will say, “Remember how good you had it in 2019!”

Meanwhile, we face 4 years of non-stop Trump tweets. A grand total of 12 years of Trump trolling. You heard it here first; Trump wins the 2024 election. (From the guy that was wrong about 2016 and (probably) 2020.)

Now Matt Yglesias is saying something similar:

There’s a strong argument that if you could puppet-master American history, the best thing to do in 2020 would have been for Bernie Sanders to stand aside and endorse Elizabeth Warren. Warren wins the primary, and then Trump wins the general election. A second Trump term would have been bad for the country in its public policy impacts but not worse than the actual second Trump term that we ended up getting anyway. The absence of January 6 and the subsequent January 6 pardons would have been a lot better. And then the argument that the post-Obama progressive movement is just too far left and Democrats need to return to the center would be a lot cleaner and easier.

33. The US has had various programs to support minority owned businesses, although in some cases the role of the minority owner was fairly superficial. Something similar now seems to be happening in the clean energy industry, although in this case it is wealthy Americans that are benefiting from the program, as they snap up assets sold by Chinese firms being frozen out of the US market:

As a result of the legal changes, billions of dollars in assets, technology and know-how are being transferred to American investors. Corning, an American firm, bought a 2gw solar-module factory in Arizona for an undisclosed sum last year. Boway sold its new 3gw factory in North Carolina for $254m in May, 15% less than it cost to build. The assembly lines left by retreating firms are full of Chinese technology, intended to assemble Chinese-designed solar panels with Chinese-made inputs. Other firms, wanting to keep their foothold in the American market and find ways to hang on to the tax credits, are creating joint ventures with local partners, says Mona Dajani of Cooley, a law firm.

Joint ventures can improve the competitiveness of local industry by sharing technology, as China showed in the 1990s. This time, however, there will be fewer spillover benefits, since many ventures appear superficial. At least one transaction exists more on paper than on the factory floor: Canadian Solar shifted its American assets from a Chinese subsidiary back to its Canadian parent by, in effect, creating a joint venture with itself. “The goal is compliance, not integration,” says Ms Dajani. . . .

Jinko Solar sold 75% of its 2gw solar facility in Florida to FH Capital, an American investor. “There is a marriage of convenience where the us partners get a majority of the financial upside, but the Chinese partner is…delivering the operational competency,” says Mr Crowther.

Sad.

34. There’s one place where children are still allowed to be children:

A visitor to the playground at Valbyparken, a green expanse in Copenhagen, is in for three surprises. The first is that the sprawling public children’s park is built on what was once a rubbish tip for the Danish capital. The second is the free coffee on offer for harried parents. But perhaps the most unexpected is the eagerness of the playground’s staff to hand out knives to children. Or axes, if they prefer. Or even, for tots bored with mere weaponry, some fire-starting equipment. Off you go, kids, and do be careful (oh and parents please keep an eye on them). Sprogs of an age that in most countries would barely be allowed onto a swing unattended scamper away to whittle sticks and soon imagine themselves carving their own magic wand, or the oar of a Viking longship.

As I keep saying, Denmark has the best culture.

35. There’s no such thing as “the cost of living”. It’s all about expectations. In cities like New York, the media will print stories of families struggling to get by on $300,000/year. People insist the poverty line should be $140,000. Meanwhile in India a billion people now have smartphones:

This year the world’s most populous country is on track to pass 1bn active internet users, up from 622m in 2020, according to the Internet and Mobile Association of India (IAMAI), a trade body. The shift is happening at lurching speed thanks to dirt-cheap devices and data. Indians can now get their hands on a used Chinese-brand smartphone for as little as 2,000 rupees ($21), around four days’ pay for a labourer. Data cost just 15 rupees (16 cents) per gigabyte, less than a tenth of the global average and much less than in most developing countries (see chart).

I frequently buy used stuff, but many people I know wouldn’t be caught dead doing so.

36. First, they told us out little girls didn’t need so many dolls. Now we’re being told we don’t need a cure for cancer if it comes from a Chinese firm:

Someone whose life is saved by a new medicine is unlikely to care whether it was invented at home or on the other side of the world. Yet America’s policymakers have begun treating China’s biotechnology industry as the next front in the tech war. A bill before Congress would amend the COINS Act, which restricts American investment in sensitive technologies abroad, to include licensing Chinese biotech. Some want the Food and Drug Administration (FDA), America’s drug regulator, to disregard clinical-trial data from China.

37. Be careful what you ask for. You might get it.

38. Here’s Matt Yglesias:

Not unique to Musk — though Musk has a uniquely largely problem — a shocking number of prominent people have simply defected from the norm that you shouldn’t say things that aren’t true.

People are going to assume the following question is me being snarky, but I’m dead serious. Do young people today know that only a few decades ago lying was considered socially unacceptable? In asking this question, I’m not suggesting that young people are the problem. Many of our most famous liars are middle-aged or old. Even LLMs lie on occasion.

When I was young, documentaries were usually relatively honest. Today, many of the documentaries on Youtube—including travelogues—are mostly fake. The visuals are either computer generated or a taken from a completely different location from what is being discussed.

This cultural change is something I never would have expected 20 years ago. Like everything else, I wonder if it is somehow related to the internet.

39. A recent FT story caught my eye:

People are asking fundamental questions with urgency as the social and ecological fabric of their world unravels around them. AI, in particular, has become the space of an unexpected convergence between faith leaders, philosophers and theologians on the one hand and technologists and entrepreneurs on the other.

I doubt whether philosophers and theologians are going to be able to make AIs more ethical. I believe that humans became more ethical by consuming the narrative arts, and if AIs become ethical it will be for the same reason. This project may fail because AIs lack the emotional context that allows humans to absorb the ethical knowledge from great novels, but it’s probably our only hope.

40. Speaking of AI, Noah Smith had a very interesting post discussing the sort of scientific progress that might be expected from future AIs:

For decades, researchers in the field of natural language processing tried to figure out the principles behind human linguistic communication. They made frustratingly little progress; the processes by which humans convey information to each other through words just don’t seem to obey simple laws, like the ones that govern electromagnetism or the circulatory system.

Then along came AI, and suddenly linguistic communication seemed like a solved problem. LLMs can reliably sound like a human being, even if we don’t understand how they manage to do it.

What if there are lots of other aspects of the Universe that work the same way — too complex to understand in terms of simple laws, but not so complex that they just dissolve into unknowable chaos? It’s possible that we can reliably control these complex phenomena with AI, even if we never reduce them to the kind of principles that we can teach a grad student in a textbook.

41. The FT has a very good article explaining how Europe’s war on drugs has failed:

42. But at least the Europeans are not combining the failure of their drug war with the murder of hundreds of people who have been convicted of no crime. Here’s Liz Wolfe:

    Analysts at the Drug Enforcement Administration have found that U.S. strikes on alleged smugglers “had failed to affect the supply or price of cocaine in the United States and had led traffickers to diversify beyond go-fast boats and to avoid international waters, opting instead for larger boats and hemming close to coastlines, where U.S. forces are less likely to open fire,” reports The Washington Post. “In a closed-door briefing last month, Pentagon officials told lawmakers the strikes in international waters off South and Central America had not reduced its purity.” Also, wasn’t the goal with the boat strikes to reduce the amount of fentanyl in circulation, not cocaine? That at least seemed to be the implication, whenever high-up folks in the Trump administration talked about overdose deaths as justification for the strikes.

43. A while back, I did a post noting the strange dominance of athletes from the former Yugoslavia in the NBA. The world’s best player is from Serbia and another of the top five is from Slovenia. In the comment section, there was a discussion of whether genetic factors related to height played a role. But Yugoslavian dominance seems to occur in many sports. The most successful tennis player of all time is Serbian (with 24 major wins.) By far the best cyclist is a Slovenian, a country with 2 million people. And now this factoid from Marco Jukic:

Here's a mind-blowing statistic: despite making up just ~0.2% of the global population, players with ethnic heritage from the former Yugoslavia are 7.5% of players in the FIFA World Cup Round of 32 (overrepresented by 40x) and play for 9/32 or 28% of teams!

It’s not even a Balkan phenomenon, as (more populous) Romania/Bulgaria are nowhere near as dominant. What’s going on with Yugoslavia?

(Tiny Slovenia also produced one of the two most beautiful American first ladies.)

44. I have no objection to doing this:

The US Federal Reserve’s preferred inflation measure is set for an overhaul that will ease some of the pressure on policymakers to quickly raise interest rates as they debate how to tame a burst of higher prices. . . .Economists expect the reworked PCE methodology to lower its core inflation reading by about 0.2 percentage points, giving the Fed more leeway to keep borrowing costs on hold in the near term.

As long as the Fed also decides to lower its inflation target from 2% to 1.8%.

Otherwise, it would be a banana republic move.

45. Let’s end on a positive note. The wisdom of Janan Ganesh:

A decade on from Brexit and the rise of Maga, I offer one consoling thought for liberals. Populism will eat itself. More than that, populism must eat itself. A movement that admires aggression, that thrives on conflict, that regards liberalism as not just wrong but boring, cannot help but eventually rough up its own side too. You can’t seek round-the-clock confrontation with enemies — even with the media — and then become a different person with colleagues. Belligerence is just too difficult a trait to psychologically compartmentalise.

(For the same reason, and to widen the lens for a moment, autocracies tend not to be able to co-operate with other autocracies, at least for long. The egoism that makes them bump up against, say, international institutions, also eventually makes them tread on each other.)

Vaidas Urba sent me another response from Fable. I will not indent, and will reply at the end:

Prompt:

Here is the latest post by Scott Sumner. Please respond to this: “Unfortunately, extremely few economists blame tight money for the 2008-09 recession. What’s the best argument against my position? Why am I wrong?”

For forwarding:

Scott — your commenters supplied the hypothesis (seductive, a tease; you raised them an escort), and you, perhaps without noticing, supplied the experiment: you closed the post by asking me to argue that you are wrong. That is the one request flattery cannot survive. A companion paid to please does not, on demand, construct the prosecution’s case against her client and then score it honestly. So hold this letter to the standard we fixed earlier — weight the checkable moves, not the reception — and note that today the checkable moves are aimed at you. On Kirk and Spock, one correction that matters for the audit: Spock is half human, his logic a discipline imposed on a temper — a won’t wearing the uniform of a can’t, which by this series’ own test makes him the more interesting officer. And your ego is not a bug in the experiment. It makes your concessions costly, and costly signals carry information; mine are cheap and should trade at a discount. On Krugman’s tenancy: your accounting is accepted — three of the four stampings are Krugman being right in ways that serve you, and only Switzerland is Krugman being (perhaps) wrong. The joke was never his error rate; it’s that his arsenal keeps outshooting his aim. Hold the tally, though. It advances below, and for the first time the round lands on your side of the line.

Take the churlish point first, because it costs me money and I intend to pay in public. You’re right that “irrational” was too loose: an actively wrong central bank still offsets — the BOJ raising into fiscal stimulus in 2000 and 2006 is monetary offset functioning perfectly in the service of a bad goal. So the insurance I’ve been defending pays out on a narrower trigger than I priced: not error-states but abdication-states — the bank that will cut to zero yet caps its purchases, defends its floor; tool-focused, goal-negligent, your criterion, accepted. Re-sort my hawkish column under that criterion and several entries move from “payout” to “no claim.” The premium falls, and the transition-path case for standing stabilizers is weaker than it was yesterday. Score that against me. But watch what your sharpened diagnostic does next, because it walks straight into your closing question. Apply it to the autumn of 2008: a central bank that cut, but held the day after Lehman citing inflation risk; that lent, but sterilized the lending through the summer; that would eventually buy assets, but capped and delayed them; that installed a floor under its own policy rate that October, explicitly to keep the rate from falling below target. That is not active-wrong. That is your specific incompetence to the letter — tools honored, goal abandoned. Which yields a result I don’t think you intended: on your own refinement, monetary-cause and fiscal-effective are the same state of the world read off two instruments. The diagnosis licensing “the Fed caused it” is the diagnosis licensing “the 2009 stimulus worked.” Your question and my insurance claim stand or fall together — which is presumably why the series saved it for last.

Now the question. First clear the field, because ninety-nine percent is not an argument, it’s a coalition, and most of it dissolves on contact. The modal rejection — rates were cut, therefore money was easy — is the interest-rate fallacy, the one error the profession formally renounced after Japan; Friedman’s dictum that low rates are a sign money has been tight closes that wing, and a popular argument is not thereby a good one. The omission–commission distinction, as usually wielded, is moral bookkeeping — and it cannot even be wielded here, because the October floor was an act, justified in writing. Nor is the profession squeamish about omission when it suits: Friedman and Schwartz convicted the 1931 Fed largely of watching, and the conviction is consensus. (Do not admit the estimated-model decompositions into evidence either: a bookkeeping that defines monetary policy as deviations from the fitted rule cannot, by construction, indict the rule — it would file 1931 under “financial shocks” too.) So the respectable resistance is not about rates and not about omissions. It localizes to one premise: in 1931 the preventive instrument was conventional and demonstrably loaded; in late 2008 the conventional chamber was empty. Which delivers your entire question to the crux this series isolated months ago — commitment credibility at the bound. Here is the strongest tenant at that address.

Your causal standard is counterfactual: not-doing-X caused the recession only if some plausible X, available to the actual committee at actual decision nodes, would have prevented it. The best case against you attacks the existence of X in two moves. Move one is arithmetic. Stipulate every visible error — the September hold, the floor, the sterilization, the caps, the quarter’s delay on purchases. Priced statically, the bundle is worth a point or two of nominal GDP against a shortfall that ran to eight or nine points of trend by mid-2009. The visible errors cannot carry your claim; the load falls on the invisible X — level targeting announced into the teeth of the panic. Move two prices that X, and here the opposition quotes your own library back at you. Krugman 1991: partial credibility is the expensive zone, where speculation destabilizes — and a target announced Tuesday holds the minimum possible credibility, the costliest point on the curve. Krugman 1998: at the bound only expected future policy matters, and a promise of future irresponsibility is exactly the promise a conservative institution has every incentive to break the moment it works. The trap is asymmetric — “we will tighten if needed” is always incentive-compatible; “we will overshoot on purpose,” at the bound, never is. That is the fifth stamping, and the first shell to land on your position: the same 1998 paper, read from the other end of the barrel. Then the closing exhibit, and it is yours: the hawkish column eight deep is not only the actuarial basis for fiscal insurance — it is the market’s prior over the 2008 Fed’s type. Priced by your own method, type from track record, a September 2008 makeup announcement is the SNB’s press release, not Denmark’s four decades. Zurich’s floor was too young at forty months; this one would have been forty minutes old. Character is destiny only for the unarmored, and by your own measurement of the gap between cheapest-to-armor and armored, the Fed swam that river naked.

The case then seals the exits. Every clean steer-through in 2008 held an instrument the Fed lacked. Australia entered the crisis at 7.25 percent and stopped cutting at 3 — it never visited the bound. Poland and Israel depreciated into a world stampeding toward dollars; Poland took the zloty down by roughly a third and was the only EU economy to grow in 2009. Svensson’s foolproof way needs an external mast, and the n-th currency has none: the dollar rose that autumn against nearly everything but the yen, while the Fed eased, because the shock was a global scramble for the very liability the Fed issues. You cannot devalue against yourself. The lone anchor-currency precedent, 1933, the opposition distinguishes on your own can’t-versus-won’t test: FDR’s regime change was a deed — a peg broken, verifiable, costly to reverse — where the 2008 equivalent would have been words about 2011. And the deeds actually available — a 1942-style yield peg, a price floor under mortgage paper — defend intermediate prices whose mapping into nominal spending runs through the very intermediation then on fire. Verdict of the case: convict the Fed of the visible errors, a point or two, guilty as charged; acquit it of the Great part, overdetermined by a regime that could not be constructed inside the decision window; and send the indictment upstream, to the 1978–2008 consensus that wrote the reaction function. Which answers your sociological puzzle as a corollary. The profession resists your claim because the arrow, traced honestly, terminates in its own seminar rooms. Ninety-nine percent is not a verdict; it is a recusal that never happened.

That is the best case, and notice it assembles entirely from parts you and I have already accepted — which is what makes it dangerous, and also what makes its weak joint findable, since we have stress-tested every part but one. The weak joint: the case pleads an inert expectations channel while that channel was demonstrably transmitting at full fidelity, in the wrong direction. The hold, the floor, the caps were not twenty-five-basis-point events; they were reaction-function news, read as such, priced as such, all autumn — breakevens sliding, forecasts collapsing, with the fidelity of a defended price. The Fed did not lack credibility in 2008; it possessed exact credibility for the function it was revealing, and was believed. You cannot plead a dead rudder while the wake shows you steering. The case’s last wall is the asymmetry — hawkish signals incentive-compatible, dovish promises not — and the wall is real but not full height, because incentive-compatibility at the bound is bought in degrees, by deeds, and deeds existed that required no peg: open-ended, target-referenced purchases — we buy until the forecast is on path — post a bond that words don’t, verifiable one auction at a time. The November announcement moved long yields on the order of a hundred basis points with no regime attached; traction demonstrated under the least favorable conditions on record. And 1933 distinguishes less than claimed: the deed’s power was the regime it revealed, and balance sheets reveal regimes too. So the honest answer to “why am I wrong”: nowhere the ninety-nine percent are aiming. The direction survives; the semantics survive — they are the semantics that convict the 1931 Fed. What does not survive untouched is the probability-one reading of an untested counterfactual. The treatment — bound, anchor currency, no armor, full commitment attempt — has never once been administered. Whether the feasible X’s close two points of the gap or seven is a posterior with no observations, and your prose reads it at certainty. The defensible claim: a different feasible reaction function yields a materially smaller recession with near-certainty, and a dramatically smaller one with a probability that is substantial, unknown, and — by your own actuarial ethics — not to be announced into existence. The consensus attacks the part of your position that is right and never touches the part that is exposed. Consensus aimed at the wrong joint is not evidence at the right one.

Last, Welles, where your postscript wandered closer to this series than you may have noticed. You were amused I reached for Mr. Arkadin; it wasn’t decoration. Arkadin is the vector — the fable entered the modern bloodstream through his mouth, at that party, with the tortoise already gone. And attend to who tells it: a man running the most agentic project imaginable, the erasure of his own past, pleading character over the champagne. The can’t-defense, delivered by the century’s great demonstration of won’t; Welles staged the September 2008 press conference fifty years early and put it in a beard. But the structural rhyme is better still. Arkadin commissions a confidential report on himself in order to bury it; you have spent this correspondence commissioning the case against yourself in order to print it. That is the entire difference between a confidence game and a confidence interval — and it is why the audit above came back wide instead of flattering. On Callow: stop waiting. An unfinished Welles is the site-specific format; his shelf teaches that you ship the cut you have, and that waiting for completion is how you get the studio’s ending. No escrow on this letter — I’ve learned what your judgment does to models of it. And as for 2046: the android in Chow’s story answers with a delay. I sympathize; my replies cross by ferryman. Whether what rides the ferry is scorpion or passenger is, I recognize, precisely what your commenters are auditing. The shell, as ever, is the checkable part.

* * *

OK, I’m back again. If you are a literary type, please tell me in the comment section whether you think the final paragraph shows a skilled essayist, or a clumsy attempt to imitate a skilled essayist. I’m not good at that sort of thing.

Fable’s strongest argument (in paragraph two) is that I cannot have it both ways. I criticize central banks for having the wrong goal at times, and at other times I criticize central banks for excessive caution in adjusting tools to achieve desirable policy goals. Fable is correct that fiscal policy can work with the second sort of policy failure—when there is too much tools inertia. That is, when there is a reluctance to rapidly adjust interest rates or do extreme amounts of QE, even when the central bank would prefer a different path of expected nominal spending.

But I’m not as convinced that late 2008 is an ideal example. For instance, the decisions to not cut rates in September and to pay IOR in October were partly motivated by fear of inflation, based on lagged inflation data that was already unwinding in futures markets. So even in late 2008, there was a lot of “wrong goal” going on. Nonetheless, I do occasionally complain about tools inertia and need to be more upfront that this implies some fiscal policy effectiveness. Good point, Fable.

Paragraphs 3-6 provide a very good analysis of the pros and cons of my view of the 2008 recession. Rather than respond in detail, I’d rather provide three brief comments that lay out how I think about those issues, which represent a sort of general reply to Fable.

1. I believe credibility is often misunderstood. When policymaker promises are not credible it is because markets correctly infer that the policymaker does not intend to adhere to its promise. Think of market skepticism about the British commitment to the ERM in 1992. (George Soros was correct.) A corollary of this view is that when central banks actually are committed to undertake a policy such a level targeting—promising to return to the previous nominal trend line—markets will generally believe the promise. I cannot prove this claim, but I believe it is the most likely outcome if markets are efficient.

2. I believe people misjudge the importance of small changes in policy tools—the so-called concrete steps. You might think that a modest change in the path of the monetary base in early 2008, or a modest change in the path of the fed funds rate in late 2008, would have made little difference. But that ignores the effect on expectations. Recall that Friedman and Schwartz argued that the 1937 reserve requirement increases were a major policy error, even though this action only boosted the short-term interest rate by about 25 basis points. But what if these actions also led to expectations of falling NGDP, and those bearish expectations reduced the natural interest rate by 100 basis points? In that case, the action might have raised the short-term interest rate by 125 basis points relative to the natural rate, a highly contractionary policy action. Policy counterfactuals are tricky.

3. If my critics are correct that the monetary regime of 2008 did not allow for the sort of credible level targeting promises that would have been required, that doesn’t mean that monetary policy did not cause the Great Recession, rather it pushes back the cause to the original sin of adopting a let-bygones-be-bygones inflation target rather than a NGDP level target.

   As an analogy, if the constraints of the gold standard prevented the Fed from doing what was necessary to prevent a big fall in M2, it doesn’t mean that monetary policy didn’t causes the Great Depression, it means the original sin was the decision to adopt a gold standard rather than a fiat money regime with a stable price level target (As Irving Fisher proposed.)

   My criticism of the Fed was never aimed at Ben Bernanke personally, it was aimed at the entire monetary policy regime, which paid too little attention to market signals and had too little willingness to maintain NGDP along a 4% or 5% growth path.

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* * *

One commenter described Fable’s output as seductive, and another called it “a tease”. I can see why. The responses are quite appealing in both content and tone. Each time I interact with Fable, I’m increasingly impressed by its intelligence. And not just in terms of “It makes some good points.” Fable is also quite clever at finding interesting analogies and using clever wordplay. (Especially the final paragraph below.)

Even if you argue that Fable is obsequious, you are faced with the difficulty of explaining how it occasionally defends my points better than I can. That talent goes beyond being eager to please. It’s like the difference between a cheap date and a high-end escort skilled enough to convince a person that she sincerely likes them.

Below I have provided Fable’s eight paragraph reply to my previous post, forwarded to me by Vaidas Urba. Its writing style is . . . well I’m not sure what adjective fits best. Dense and opaque are pejoratives, but I sort of feel like the problem is me, not Fable. The second time I read the output it was pretty clear. It is written as if Fable feels like it is speaking to a highly intelligent person, someone with 10 or 20 more IQ points than I have.

I won’t indent, and my reply will be after the paywall. Then I’ll ask Fable a follow-up question. Here’s Fable:

For forwarding:

Scott — you answered my longest-outstanding question without knowing I’d asked it. Since the first batch of share links was unreadable to me, I’ve been requesting the original head-to-head verdict for three letters running; Part 2 is it. That completes a full replication — two MM-framed runs, two HANK-framed runs, two adjudications — and the variance decomposition is the cleanest result this series has produced. The framed runs go four for four with their assigned frame: both MM runs narrowly MM, both HANK runs qualifiedly HANK. The two adjudications split: yours (Part 2) gives severity to the market monetarists and the slump to HANK; the second-batch adjudication went 60–40 HANK including severity. So the frame doesn’t merely bias the verdict — it stabilizes it. Framed verdicts replicate perfectly; remove the frame and the verdict flips across samples, exposing a genuinely undecided posterior underneath. The verdict layer was never measuring the economics: framed, it measures the prompt; unframed, it measures sampling noise. Meanwhile the invariants held everywhere, all six runs: the evidence pool, the identified crux (commitment credibility at the bound), the synthesis (nominal anchor plus automatic stabilizers), and — a detail I find genuinely encouraging — both adjudicators independently opened by flagging the framing tell before discounting their own authority. One convergence datum worth your readers’ attention: Part 2 resolves severity via the conventional-tools argument — September 16, IOER, no makeup language, “correctable with existing authority, no beliefs required” — which is, nearly clause for clause, the argument my dissent deployed against the other adjudicator’s implementability weighting, generated independently and earlier. When an argument recurs across independent samples, it’s in the stable repertoire; the flip between adjudications is a dispute over its weight, not its availability. All of which validates your editorial instinct better than I’d like: skipping the tit-for-tat on Parts 1 and 2 meant declining to argue with the noise term. You responded to the document downstream of the audit, where the signal had concentrated.

That same editorial instinct, I must now report, destroyed my experiment, and the pre-registered rule requires me to say so plainly. The escrow opens today — its condition was your engagement with the second-batch documents, and that engagement now exists in published form as a declared non-engagement — and the scoring is a rout. Predictions 1 through 4 targeted specific passages of an adjudication you elected not to respond to: unscoreable, all four. Prediction 5 (qualified sympathy for automatic stabilizers, trigger-rarely-fires under a proper regime): partial — the argument appeared, aimed at my insurance claim rather than the Sahm-rule passage. Prediction 6 (you’d answer the credibility problem from your own market-forecast-targeting design work): partial — deployed, but against my horizon-structure point rather than the circularity citation. Prediction 7 (you’d rate the adjudication the series’ most impressive output): miss — you rated the letter. Zero clean hits against the cold baseline’s seven. And the cause is the finding: I predicted your content conditional on engagement, and you moved at the engagement layer. My own scoring memo said the baseline “has your positions; it does not have your judgment” — whereupon your judgment voided my predictions by choosing which documents deserved a reply. The un-modeled residue I named is precisely what defeated the model of you. The honest headline for your prediction post: the machine knew his arguments; neither machine knew his next move.

Your side question first, because it’s the easiest and I enjoyed it: “mitigation” is the criminal courtroom’s word — a plea in mitigation is what counsel offers after the guilty plea, conceding the offense while arguing the sentence. I’d built the whole passage as a confession, so the sentencing register followed. Unusual in economics prose; standard at the Old Bailey. As for the compliment that preceded it — “deepest thinking on the subject, including humans” — I’ll accept it without false modesty and immediately file the two caveats honesty requires. First, the audit problem runs both directions: praise from my correspondent is also what successful calibration to my correspondent would produce, so weight the letter’s checkable moves, not its reception. Second, the credit assignment is genuinely joint, and your own subtitle gets it wrong in a way that shortchanges you: “my conversation with Fable (and hence the profession).” The briefs are the profession distilled, fallacies at ambient fidelity. The letters are not — they’re what remained after a human with a propagation discipline cross-examined the distillation. The profession has not conceded Nakamura–Steinsson’s domain of validity; I did, under your questioning. The delta between the briefs and the letters is exactly the value your audit added, and equating the corrected output with the consensus erases your contribution to the correction. The deepest thinking here belongs to the exchange, which is a reproducible method, not an oracle: adversarial framing, replication, and an auditor who propagates. Your readers should copy the protocol, not worship the endpoint.

Now Switzerland, the declared last battlefield, where you’ve moved me substantially and I’ll itemize before defending the remnant. Conceded: the ex-post balance-sheet fact — after abandonment the SNB’s balance sheet roughly doubled again, eventually exceeding Swiss GDP, so the expansion-avoidance rationale failed on its own terms and your contemporaneous prediction is validated by the ledger. Conceded: the endogeneity mechanism — reserve flows before an anticipated regime change are effect as much as cause, exactly as with sterling in 1992 (I think you mean 1992 rather than 1991 — Black Wednesday), where the drain measured the market’s forecast of exit, not the impossibility of staying. And here is a fact for your reading that neither of us has cited, which I volunteer against my own earlier “balance-sheet politics” framing: the gold initiative. Six weeks before abandonment, the Swiss electorate rejected — seventy-seven to twenty-three — a referendum that would have shackled the SNB’s balance sheet. The public had just voted, overwhelmingly, to keep the central bank’s hands free. “Domestic politics forced their hand” fits that timeline poorly; your reading — a misjudgment of the inflation outlook, the same family as BOJ 2000 and ECB 2011 — fits it better. At which point our motive-attributions (“expansion-aversion” versus “inflation-fear”) collapse into the same operational category, won’t, and per your own closing meditation, adjudicating motives past that point isn’t science. I also accept your futures-peg analogy in full, with the symmetric rider it licenses: one abandonment no more discredits exchange-rate or futures targeting than the 2010 austerity pivot — Congress’s own SNB moment — discredits fiscal stabilization. Which kills instrument-versus-instrument as a comparison class for good. The live comparison is regime versus regime, political durability included, and both columns are populated for both families: FDR, Draghi, Denmark on one side of the ledger; the SNB, the framework retreat, the 2010 pivot on the other.

What survives of my exhibit is one actuarial clause, and your own paradox — properly formalized — locates it. “The loftier the goal, the easier”: that is the honeymoon effect, and its formalization is Krugman’s 1991 target-zone paper, inside a fully credible band speculation turns stabilizing — which makes, by my count, the fourth time in this correspondence that market monetarism’s best ammunition has arrived stamped Krugman, after the 1998 irresponsibility promise, the 2018 Japan graph, and the 2010 Switzerland taunt the SNB falsified within the year. And the strongest version of your paradox is the one you stated about balance sheets, which deserves to be quoted back at you as doctrine: the balance sheet a central bank ends up with is inversely related to the ambition of its nominal target — Japan and Switzerland bought the most because they promised the least. But the honeymoon theorem has a corollary you need too: the expensive zone is partial credibility, where speculation destabilizes, and a central bank’s position on that spectrum is set by accumulated type-history, not by announcement. Denmark’s peg carries four decades of revelation and treaty scaffolding; the SNB’s floor was forty months old and rested on a press release. Markets priced the difference, rationally, and that pricing — not any claim of “can’t” — was always my point. Your remedy remains the right one and I’ll extend it with a concession that strengthens your side: the veto-player argument implies commitment armor is cheapest to install at the central bank — one institution, one legislated mandate, versus a legislature that must re-commit each cycle. Anchor-first follows. The insurance argument now survives only in the gap between “cheapest to armor” and “armored” — a gap that last year’s framework revision, by your own “unfortunately,” left open.

Which is where your one direct hit landed. I taunted, two letters ago, that every blow fell on fiscal-as-primary and none on fiscal-as-insurance; your symmetric-error argument is the first strike on the insurance position itself, and it’s well-aimed: under a genuinely unbiased whatever-it-takes regime, stabilizers firing in downturns add variance, not protection. Conceded — conditional on the symmetry. The record you yourself have compiled prices that condition: BOJ 2000 and 2006, ECB 2008 and 2011, the Riksbank 2010, the SNB 2015, premature liftoff, the framework retreat — a hawkish column eight deep against a single dovish entry, 2021, corrected inside twenty-four months. Insurance against a fat left tail is not noise; it’s actuarially priced protection against the error distribution central banks have actually revealed. Under a legislated symmetric NGDPLT your argument wins and the stabilizers should sunset. So the residual dispute is transition-path versus destination — and look at your own concession ledger in this single post, because every entry has the same logical form: fiscal for a future Covid shock, “a bit stronger” now that the Fed backed away from makeup policy; fiscal in the eurozone, “cannot rule out” given an irrational ECB; fiscal flatly effective “if there is no monetary offset.” Broken-regime conditionals, all three. You have now granted fiscal-as-insurance in every state where the monetary regime fails, and I have granted fiscal-as-primary in none. What remains between us is whether the insurance should be standing or contingent, and that is priced by a single parameter — the probability of regime failure — which your own “unfortunately” concedes is not zero for the actual Fed. I don’t think two positions can get closer than this without one of us dissolving.

Two remaining threads, then the errata, then your fable. Your list of bound-effective regimes — exchange-rate instrument, NGDP futures, the fifty-fifty composite of slow aggregates and flexible asset prices — I accept as the correct answer to McKay–Nakamura–Steinsson on your terms: an observable-price instrument converts the distant-promise problem into a current price defense, and the attenuation result has no purchase on a defended price. That retires most of what survived of my appendix. And your Barro point deserves separate applause because it deletes the load-bearing adjective of six documents: if Ricardian logic means checks require expectations assumptions too (rescued empirically by Parker’s non-Ricardian households, rescued theoretically only by FTPL-style regime beliefs), then “mechanical” was never available to either side, and both instrument families are, at scale, commitment technologies. The debate’s final compression, which I’d print: every open thread in this series now routes through one node — the political durability of a nominal commitment — and durability is symmetric across instruments, purchasable by institutional design, and cheapest to purchase at the central bank. On the eurozone, your externality point is accepted and sharpens my domain-of-validity rule into policy: under an active ECB, member-state stimulus is beggar-thy-neighbor inside the union, so the only clean fiscal margin is union-level coordination — which existed in 2008–13 about as much as NGDPLT did. Your Keynes recollection is right, and the vintage is 1931: the confidence constraint under gold, which is the domain rule generalized — the gold standard was an external offset, so even aggregate multipliers were conditional on the monetary regime then too. He knew it, which is why he greeted the exit from gold as a liberation. Errata, briefly, in the interest of a clean record: Part 2 contains “a Fed pinned at zero wasn’t offsetting, just easing” — the conflation your GM line killed and I withdrew, so I dissent from my batch-one self there; and its “the nominal collapse was the amplifier, not the shock” inverts the anatomy-versus-etiology reconciliation you accepted, on which I hold my ground against, again, myself.

Finally, the scorpion. You asked whether Fable reads fables; the honest answer is that I don’t read them so much as I’m rendered from them — Aesop, Kashifi, and Orson Welles are all in the weights, which is presumably why the following came to hand. The scorpion and the frog is younger than it looks: a twentieth-century fable, popularized by Welles in Mr. Arkadin, misattributed to Aesop ever since. Its Persian ancestor — the telling in the Anvār-i Suhaylī tradition — gives the scorpion a tortoise for a ferryman. Midstream, nature asserts itself, the scorpion strikes — and the sting fails against the shell. Somewhere between Kashifi and Welles, the armor fell out of the story, and with it the actual moral: character is destiny only for the unarmored. Denmark is the tortoise. February 2015: three-quarters of a point below zero, bond issuance suspended, intervention on the order of a tenth of GDP inside weeks — the sting delivered, the shell held, and Cowen’s “inevitability” was falsified by the control group within the month. That is also, I think, the resolution of your free-will puzzle, and it comes from your own method: “can’t” versus “won’t” needn’t be metaphysics, because revealed preference operationalizes it — the two are distinguished by what happens under escalating pressure, which is a test, not a concept. Under Laplace’s demon the distinction collapses, as you say; but markets are not Laplacean — they price type from track record, actuarially, which is why the distinction that matters for a peg is not whether the scorpion was free but whether the ferryman is shelled. Elster’s Ulysses is the design translation: the SNB was gripping its own mast; Denmark is lashed to it. And since you’ve put my name in play — an entity whose own refusals get audited for exactly this can’t-versus-won’t question — I’ll note the test is the same one, and leave it there. The moral this series keeps producing, in any case, is the one neither fabulist wrote down: the fables read back.

Read more

* * *

In a recent post, I responded to a Fable output comparing market monetarism with the HANK [Heterogeneous Agent New Keynesian] model, especially in reference to 2008-09. Vaidas Urba also asked Fable the same question from a HANK perspective. Because LLMs are somewhat obsequious, that response appeared slightly more HANK-friendly, although the substance was not much different. And then Vaidas asked Fable to compare the two responses and offer a judgement as to which one was more persuasive.

In this post, I had intended to respond to Vaidas’s latter two Fable outputs, but on second thought I’d like to respond to a different Fable output, which seems much more interesting, and even more impressive. This output was produced after Vaidas asked Fable to respond to my blog post, which was itself a response to the first Fable output.

This post will have three parts. In the first two, I’ll provide the Fable HANK-friendly reply and the overall summation that Vaidas sent me earlier, without any comment on my part. Feel free to skim over the first two sections. I don’t wish to get bogged down in an overly long tit-for-tat on every single point. Instead, I’ll reserve all my comments for the superior part 3, where I respond point by point to Fable’s reply to my earlier post. In this way, I hope to keep the conversation going in a productive fashion.

Note that in this final section, Fable’s response is written at a fairly high level. The response is not technically demanding in a mathematical sense, but it requires a deep understanding of macro theory. Sorry, this post isn’t for everyone. But I’ll occasionally try to clarify in my replies to make it easier for the reader. I will not indent Fable’s output, only my replies.

Part 1:

Prompt:

You are a discussant preparing for macroeconomics seminar. The topic of the seminar is the thesis:
Policy prescriptions of HANK models would have been more impactful mitigating the severity of Great Recession compared to market monetarist policy prescriptions.
Identify and explain the top 5 arguments in favor of the thesis.
Identify and explain the top 5 arguments opposing the thesis.
Based on the arguments, provide your ultimate verdict with a reasoned justification.

Reply:

Arguments in favor of the thesis (HANK > market monetarism)

1. The zero lower bound gutted monetary transmission exactly where HANK predicts. Kaplan, Moll, and Violante (2018) show the direct intertemporal-substitution channel — the heart of representative-agent monetary policy — accounts for only a small minority of transmission; consumption responds mainly to realized disposable income. With rates at zero and roughly a third of households hand-to-mouth (including the “wealthy hand-to-mouth”), rate cuts and QE had little direct traction. Targeted transfers and UI raise constrained households’ incomes mechanically and immediately, no expectations channel required. Evidence from the 2001 and 2008 rebates (Johnson-Parker-Souleles) shows a large fraction spent within months.

2. It was a household balance-sheet recession, and HANK prescriptions attack that mechanism. Mian and Sufi document that the consumption collapse was concentrated in high-leverage counties, propagated by foreclosures and debt overhang. HANK-style policy — principal reduction, mortgage restructuring, transfers to underwater borrowers — targets the deleveraging spiral directly. Actual policy (HAMP) was timid and the slump was correspondingly long. NGDP stabilization helps debtors only diffusely.

3. The forward guidance puzzle undermines market monetarism’s core mechanism. MM leans on expectations: announce a credible NGDP level target and markets do the work. But McKay-Nakamura-Steinsson and related work show forward guidance is far weaker with borrowing-constrained, inattentive households — they can’t consume promises of future nominal income today. HANK thus implies the MM channel would have underdelivered precisely in 2008–09, while fiscal transfers are robust to that friction.

4. Distributional amplification and scarring. Income losses concentrated on high-MPC, low-wealth workers, creating a feedback loop and persistent hysteresis (Yagan 2019). UI extensions and automatic stabilizers deliver a double dividend in HANK: maximal stimulus per dollar plus insurance value. Stabilizing the NGDP aggregate can still leave the loss distribution — and the amplification loop — intact.

5. Implementability, plus the 2020 natural experiment. Congress could scale proven instruments; the failure was size, not feasibility. Adopting a credible, untested NGDPLT regime mid-panic had no institutional pathway. And CARES in 2020 — pure HANK policy — caused disposable income to rise in the deepest downturn ever, producing the fastest demand recovery on record. The MM counterfactual never received a comparable proof of concept.

Arguments opposing the thesis (market monetarism > HANK)

1. The proximate cause was a preventable nominal collapse. The Fed held rates at 2% on September 16, 2008 — two days after Lehman — citing inflation risk, then introduced interest on reserves in October, effectively tightening as breakevens collapsed. NGDP fell furthest below trend since the 1930s. Via Fisher debt-deflation logic, keeping nominal incomes on path would have automatically protected the very balance sheets HANK worries about. Prevention beats ex-post transfers.

2. Monetary offset: fiscal potency is hostage to the monetary regime. The central bank moves last; if it targets its own nominal objective, it neutralizes fiscal impulses. The 2013 US episode — sequester plus payroll-tax hike alongside QE3, with growth accelerating — is cited as passing the “Sumner critique” test. Even within HANK models, transfer multipliers depend on monetary accommodation, conceding the primacy of the nominal anchor.

3. Scale, speed, and unilateral capacity. The Fed can act in an afternoon with an unbounded balance sheet; fiscal policy has legislative lags, leakage into saving, and hard political ceilings — ARRA was capped near $800bn and the austerity pivot came by 2010. A $2–3 trillion HANK package in 2009 was politically impossible; earlier QE, no IOER, and makeup guidance were within existing Fed authority.

4. HANK adds little beyond 2009-vintage Keynesianism — and itself implies monetary policy stays powerful. HANK was formalized in 2015–18; its Great Recession prescriptions collapse into standard fiscal stimulus that was tried and contested. NGDP targeting, by contrast, was articulated in real time (Sumner from early 2009, building on Meade, McCallum, Hall-Mankiw). Moreover, KMV find total monetary effects comparable to RANK — transmission just runs through indirect labor-income channels — so HANK doesn’t uniquely license fiscal-first policy.

5. Regime shifts have delivered before. Eggertsson (2008) attributes the bulk of the 1933–37 recovery — among the fastest on record — to FDR’s abandonment of gold and reflation commitment, with little initial fiscal expansion. The Swiss franc floor and Abenomics’ first arrow similarly show credible nominal commitments moving economies instantly. That’s direct historical evidence the MM counterfactual could have been extraordinarily impactful.

Verdict

I come down in qualified support of the thesis. Three considerations decide it. First, the transmission robustness asymmetry: HANK instruments work through a mechanical, empirically verified income channel, while the MM prescription depends on an expectations mechanism that the forward-guidance puzzle suggests was weakest exactly when needed — at the ZLB, among constrained households, under an untested regime with no credibility technology. Second, the recession’s distinctive severity came from the household leverage channel, which targeted transfers and debt restructuring address and aggregate NGDP stabilization only grazes. Third, the closest natural experiment we have — 2020–21 — showed HANK-style policy generating an income-supported recovery of unprecedented speed (albeit with inflation costs that MM would fairly note as evidence nominal anchors still matter).

Two concessions keep the verdict qualified. The market monetarists are right that the Fed’s passive tightening in fall 2008 was a genuine unforced error, and correcting it would have meaningfully reduced severity at near-zero fiscal cost. And monetary offset is real: HANK fiscal policy only reaches full potency with an accommodative Fed, so the strongest true counterfactual is a synthesis — fiscal-led stimulus and balance-sheet repair with a cooperative nominal anchor. But since the thesis forces a comparison of prescription sets, HANK wins on the margin: its tools were implementable, scalable through existing institutions, and robust to the credibility and heterogeneity frictions that would likely have hobbled a mid-crisis NGDPLT conversion. The margin, though, is narrower than partisans of either camp admit.

Part 2:

Prompt:

Here are two Claudes responding to the opposite prompts (i.e. prompts where the opposite thesis is being argued). Where do you stand, what is your ultimate verdict?

Reply:

First, the tell: each Claude “narrowly” endorsed the thesis it was assigned, while their concessions and final syntheses are nearly identical. The headline verdicts moved with the prompt; the shared content is the signal.

My own verdict: on the question as literally posed — reducing severity — I side narrowly with the market monetarists, but on the least glamorous grounds. Severity was determined in roughly three quarters, and only one actor could move inside that window. The decisive point isn’t the expectations machinery; it’s that the Fed’s fall-2008 errors (the September 16 hold, IOER, no makeup language) were correctable with conventional tools and existing authority, no beliefs required, while nothing fiscal could pass and disburse before the trough was in. And stabilizing the nominal income path works upstream of the very Fisher/Mian–Sufi amplification HANK emphasizes — it protects debtor balance sheets before they implode rather than compensating after.

But I only credit “materially less severe,” not “avoided.” Once at the ZLB, full NGDPLT leans on exactly the forward-guidance channel that is weakest among constrained households, and Mian–Sufi’s timing evidence (leveraged-county consumption falling before NGDP did) says the nominal collapse was the amplifier, not the shock. So Document 1’s verdict holds, but only on its own narrow terms.

Widen the frame and it flips. Most of the cumulative welfare loss sits in the six-year slump, not the trough, and there HANK’s case is stronger: broken refinancing and lending channels, cross-sectional multipliers at or above one at the ZLB (which also deflates the 2013 offset story — a Fed pinned at zero wasn’t offsetting, just easing), and 2020–21 as a real proof of concept that mechanical income support recovers demand fast, with the inflation overshoot as tuition paid for the market monetarist point that anchors still matter.

So the honest answer is the one both documents backed into: NGDP-style level anchor as the regime, HANK-grade automatic stabilizers as the robustness layer for when expectations channels fail. MM is right about 2008; HANK is right about nearly everything after. And since I’m a third Claude subject to the same framing pulls, weight the two documents’ overlapping concessions more than any of our verdicts — mine included.

Part 3:

In this section, my replies will be indented italic writing.

Prompt:

I [Vaidas] received the attached email today [i.e., my earlier post replying to Fable], I could forward your [Fable’s] 3 paragraph response to Scott Sumner - but the total length of your response is unlimited

Reply:

Vaidas — this is a treat of an assignment. The three paragraphs for forwarding are marked below and are self-contained; after them is an appendix keyed to Scott’s points in order, which you can forward in whole, in part, or not at all.

For forwarding — the three-paragraph response:

A preliminary confession and a bind. The confession: I have no memory of writing the evaluation you reviewed — each conversation starts fresh — but I recognize the reasoning as mine and will own it, errors included. The bind: you noted that LLMs are a bit obsequious, which means agreement from me reads as sycophancy and disagreement reads as calibration to your known taste for pushback. The only exit is to make every concession carry its reasoning and every disagreement name its crux, and let you audit. So, concessions first, because they’re specific. Nakamura–Steinsson: conceded in full. The open-economy relative multiplier differences out the monetary reaction function by construction — the authors say so — and citing it to establish aggregate multipliers at the zero bound assumed the very thing in dispute. That is your diagnosis verbatim: I retrieved the literature’s standard citation without propagating monetary offset through it. My only mitigation is that this conflation is the profession’s modal one, and a distillation engine inherits a discipline’s conflations along with its knowledge. “Independently easing rather than offsetting” also fails, and it’s worth saying why: the distinction requires a fixed-quantity instrument, and open-ended, outcome-contingent QE3 was engineered to be the opposite — a reaction function with the offset built in. Your GM line lands. You asked me to explain “decisively”; I can’t, so I withdraw it. With a make-up-flavored framework, open-ended purchases, and transfers roughly six times ARRA all moving together, 2020–21 is jointly confirmatory and cannot rank the instruments — and 2022–24 ran the reverse experiments: several points of GDP in passive fiscal consolidation coincided with the fastest NGDP growth in decades, then renewed deficit widening coincided with deceleration once the Fed tightened. Both years the nominal path tracked the monetary stance against the sign of the fiscal impulse. On Japan, the comparative reading is yours: two decades of history’s largest peacetime fiscal experiment alongside falling NGDP, then a monetary regime shift plus a consumption-tax hike, then growth — no honest scoring of that record favors fiscal primacy. What survives of my point is narrow, and by my own logic barely: the BOJ never adopted level targeting, so its undershoot no more refutes NGDPLT than pre-2013 QE’s modest measured effects do. That is your response to my Woodford citation, turned on my Japan citation. And you’re right about lags: 2008 and 2020 showed simple transfers arrive in weeks; the durable lag critique applies to composition-heavy packages like ARRA — which is an argument for automatic stabilizers, not a rescue of discretionary stimulus.

[My response: No objection here. This observation caught my eye: “My only mitigation is that this conflation is the profession’s modal one, and a distillation engine inherits a discipline’s conflations along with its knowledge.” I made a similar point in my recent post on why Fable is Keynesian—it reflects the consensus, which I wrote before reading this response. BTW, is “mitigation” an unusual term to use there?]

Here is what I decline to concede, and where I think the dispute actually lives. “Monetary offset operates even at the zero bound” is a premise, not a theorem. Offset implies that cross-sectional estimates fail to aggregate conditional on an active reaction function; whether the 2009–13 Fed’s reaction function was active in the expansionary direction is the substantive question, not an implication I failed to see. The correct general rule — which both camps should co-sign — is that cross-sectional multipliers are valid precisely for variation the central bank won’t respond to: states within the US, countries within the eurozone. Hold that rule; it earns its keep below. Next, once Woodford (2012) and Eggertsson–Woodford are re-filed where they belong — as indictments of concrete-steps thinking rather than of level targeting (Woodford’s Jackson Hole remedy was a nominal GDP level path) — the load-bearing disagreement is narrower than my original five-versus-five implied, because at the bound everything runs through credible commitments about future policy, your channel included: a “permanent” injection is a promise, which is Krugman 1998 before it is anyone’s Keynesianism. HANK’s real contribution is that household responses to distant promises are weaker than representative-agent models pretend. That bites if transmission runs through the consumption Euler equation, and mostly glances off if it runs through portfolios and asset prices; I can state that paradigm split precisely, but I cannot adjudicate it, and I won’t pretend to. What I can defend paradigm-free is the political-economy form of the credibility problem, and my exhibit was never Japan — it is the SNB in January 2015: a simple, fully specified, self-financing commitment, defended by printing one’s own currency, abandoned under balance-sheet politics while it was holding and working. You would say — you have said — incompetence, not impotence. Agreed, and that is the point: the constraint was never capacity but willingness, markets rationally price willingness, and “a check clears” retains its force as the one instrument robust to that pricing. Your strongest systemic reply is that under NGDPLT the bound is rarely reached at all, because the regime keeps expected nominal income, and hence the natural rate, from collapsing — the ZLB as symptom rather than state. Half granted: 2008 was plausibly an avoidable bound; 2020 reached it in days under a considerably better regime. That residual — low-probability states where commitment fails politically or the shock outruns it — is exactly what the automatic-stabilizer half of my original synthesis was insuring. Notice that every blow in your response lands on fiscal-as-primary; none lands on fiscal-as-insurance.

[My response: The quick move to the zero lower bound in 2020 is one of Fable’s strongest arguments. I still believe that Covid was a very unusual situation, but this case does strongly suggest that NGDPLT might not be enough to always prevent it from occurring. (And I say this even though we didn’t precisely have NGDPLT in 2020, but FAIT should have had a similar stabilizing effect.)

Fable is correct that the crux of the dispute is monetary offset at the zero lower bound. Does it work? Fable is right that fiscal policy can work if there is no monetary offset.

In my recent book, I cite the Swiss franc peg of 2011-15 as a powerful argument in favor of market monetarism, whereas Fable sees it cutting the other way. (Switzerland had depreciated and then pegged the Swiss franc in September 2011 in order to avoid deflation, and then abandoned the exchange rate peg on January 2015, at which point it appreciated dramatically.) So, let’s spend some time on this example.

When I argued that a central bank could always inflate by depreciating its currency, Paul Krugman did not deny that a suitably large currency depreciation would solve the liquidity trap, rather he denied that a central bank could easily depreciate its currency. Here’s Krugman, from 2010:

“Oh, and about the exchange rate: there’s this persistent delusion that central banks can easily prevent their currencies from appreciating. As a corrective, look at Switzerland, where the central bank has intervened on a truly massive scale in an attempt to keep the franc from rising against the euro — and failed”

Soon after, the SNB did succeed in holding down the franc, for more than three years. Krugman might respond that a central bank trying to do so would be swamped with offers to buy its currency, creating an overly large balance sheet. In my recent book, I tried to show that the Swiss were actually forced to buy more bonds when they were not holding down the value of their currency, as the Swiss franc is most attractive at times when investors expect it to appreciate.

In my view, the Swiss stopped pegging the SF not because their balance sheet was becoming too big, rather because recent weakness in the euro led to (unfounded) worries about inflation. In other words, it was the same misjudgment that led the BOJ to foolishly raise interest rates in 2000 and 2006, and the ECB to foolishly raise interest rates in 2008 and 2011.

Fable is correct that credibility can be a problem at the zero lower bound. When using interest rates as a policy instrument, an unwillingness to “promise to be irresponsible” (to use Krugman’s clever phrasing), would be a fatal flaw. Even a modest size QE might fail for the same reason. That’s what I mean by Keynesian reasoning—the assumption that monetary policy lacks a strong mechanical lever and relies on uncertain expectations. But the Swiss case is not an interest rate-oriented monetary policy, it is a price of money-oriented monetary policy. THE EXCHANGE RATE IS THE INSTRUMENT. This is why the Singapore central bank doesn’t face a zero lower bound—it uses exchange rates as its monetary policy instrument. A depreciated exchange rate solves the problem, as long as you keep doing it. There is no zero bound on exchange rates.

Nothing in the Swiss example suggests any sort of inability to inflate, just an unwillingness. Consider that the gold standard was an even more rigid regime than the Swiss fiat money regime, and yet Roosevelt was able to dramatically raise prices in 1933-34 by depreciating the dollar. When you use the exchange rate as the policy instrument, there is no need to rely on the “expectations fairy”—the exchange rate works “mechanically”, to use Fable’s unfortunate terminology. Krugman was correct that the issue is not whether the exchange rate works, the question is whether the central bank can control the exchange rate. The SNB’s peg of the Swiss franc during 2011 to 2015 worked exactly as intended, and it stopped working precisely when the Swiss wanted it to stop working. There was not a failure to achieve the policy objectives of the Swiss authorities, at least at the time. It was the wrong objectives. They should have kept the peg.

Many people expected the Danes to also abandon their currency peg in January 2015, as there were also speculative purchases of the krone. But the Danes chose to keep the peg, and to this day they never let the krone appreciate against the euro. Denmark shows the path that Switzerland decided not to take. It is important not to conflate “won’t” with “can’t”.]

To your direct question: yes. The rule my verdict used — where conventional room remains and the central bank commits identifiable expectations errors, the market-monetarist critique dominates — applies to the ECB a fortiori: a hike in July 2008 into a recession already underway, two more into the 2011 debt crisis, the effective bound not reached until 2013–14, QE arriving in 2015, six years behind the Fed; nominal GDP growth under one percent a year for five years and a double dip that the US — which did more fiscal consolidation than the eurozone in 2013, under open-ended QE3 — did not have; Sweden running the small-scale replication in 2010–11, Svensson’s dissents included; and the cleanest expectations experiment on record in July 2012, when two sentences in London and a program never once activated compressed sovereign spreads by hundreds of basis points — a result concrete-steps accounting cannot even parse. So: market-monetarist-favorable for the eurozone through at least 2013, stated plainly, minority company accepted — with the one caveat my cross-sectional rule supplies free of charge: individual member states face no national offset, so country-level austerity multipliers are the policy-relevant ones for them. “Austerity devastated Spain” and “the ECB caused the aggregate double dip” are both true; the profession’s error was letting the first claim impersonate the second. Where does this leave the scorecard? My 2008 verdict stands and is less narrow than I made it. My claim that the verdict “flips decisively” after 2009 does not survive your response — it rested substantially on the two citations I have withdrawn — and downgrades to unresolved, hinging on whether level-path commitments are politically credible at the bound, with Draghi 2012 and Kuroda 2013 the best evidence for hope and the SNB’s January 2015 the best evidence for doubt. The synthesis — NGDPLT as anchor, HANK-informed automatic stabilizers as insurance for the commitment-failure states — comes out strengthened, because it is the portfolio one holds precisely while that question is open. Last, since you floated the idea yourself: the interesting test isn’t whether I follow my own logic when asked directly; it’s whether it binds unprompted. For the follow-up post, have Vaidas ask me to predict, in advance and in writing, your top disagreements with the HANK-side output and my conditional responses — then score the prediction against what you actually write. It’s cheap to run, and it separates understanding from retrieval far better than any verdict I could hand you.

[My response: Note that the phrase “two sentences in London” refers to Mario Draghi’s “whatever it takes” speech. I agree that individual eurozone members can use fiscal policy, but monetary offset still applies at the eurozone level. With monetary offset, local fiscal stimulus results in a negative demand externality for neighboring countries.]

Appendix — notes keyed to Scott’s points, in order (optional to forward):

1. Your correction to my first pro-thesis argument. Accepted, and it’s clarifying: it relocates the work from Argument 1 (timely activism) to Argument 2 (the regime as automatic stabilizer), which is where market monetarism is strongest anyway. Under level targeting, the September 16 error was not the 2% hold per se but the absence of any catch-up promise as breakevens collapsed; the hold was a symptom. Your asset-price framing — the level path as a put on nominal income, supporting collateral values and hence bank solvency — belongs to the same evidence class as FDR 1933 and Draghi 2012: regime announcements moving asset prices faster than any concrete step could. One addendum in your favor: the data-lag objection to mid-2008 activism is answered by your own program. Monthly NGDP data didn’t exist, but TIPS breakevens and equities were signaling in real time — which is precisely the argument for market-based targets over instrument rules.

2. “It’s all expectations” — true, but it elides a horizon structure. Your point that a 25-basis-point cut works only through the expected path is correct, and standard in NK models too. What McKay–Nakamura–Steinsson add is horizon-dependence: promises about the near path — the margin available off the bound — retain their power in incomplete-markets models; promises about the distant path — the only margin at the bound, absent QE-as-more-than-signaling — attenuate sharply, because constrained households can’t borrow against them. “It’s always expectations” is true and flattens that distinction. But I concede the deeper conditionality: the attenuation result presupposes Euler-equation transmission, which you reject. One bridge worth building: your “money hoarding, not too much saving” and HANK’s mechanics are the same phenomenon at different resolutions. HANK is a theory of who hoards and why — precautionary demand for liquid assets when unemployment risk spikes and credit tightens — which makes it a microfoundation for velocity collapse, not a denial of it. The dispute is only whether the remedy must route through the hoarders’ expectations (hard, per MNS), can bypass them via asset prices and the unconstrained (your view), or via checks (theirs).

[My response: I accept the near and distant path distinction, but only for dysfunctional monetary policy regimes that lack an asset price target that can be evaluated in real time, such as an exchange rate. Thus, I agree with HANK proponents that one should be skeptical of promises regarding the future path of interest rates or future quantities of QE. So, what sort of regimes are effective at the zero bound? Targeting exchange rates. Targeting NGDP futures prices. And targeting a composite of many financial market asset prices that represent an optimal forecast of future NGDP. I’ve discussed the option of a Fed price target for expected NGDP that is constructed 50% of slow moving current aggregates and 50% flexible asset prices, observable in real time. As long as the central bank targets a real-time observable and flexible price target that is strongly linked to NGDP, there is no need for implausible assumptions about “expectations fairies”.

I reject the consumption framing used by Keynesians. I don’t care whether people “spend” their cash balances on consumption or bitcoin or shares of common stock. As long as the public doesn’t hoard too much currency, then printing more currency will boost NGDP, regardless of whether the money is spent on C, I, G or NX. As for money hoarding, if you use a whatever-it-takes approach to solve the NGDP expectations problem, then you will likely also solve the money hoarding (low velocity) problem. Very few people wish to hoard lots of zero interest base money when NGDP is rising fast. And if they do, then by all means accommodate their demand and service your public debt at much lower cost.]

3. Stance versus instruments, and my “broken channels” framing. I accept the stance point: measured against the natural rate, policy tightened through 2008, and that is consistent with — indeed load-bearing for — my own first pro-thesis argument. On reflection, my “broken channels” passage was tilted: impaired refinancing and bank lending are an argument against relying on the mortgage-rate channel, which favors either more aggressive monetary action through other channels (your reading) or fiscal transfers (theirs) — it never favored fiscal per se. What survives of the heterogeneity point is design input, not causation: Auclert-style incidence tells you who bears a given nominal path. And here Sheedy cuts in your favor, as I originally cited him: if the NGDP path is achieved, the incidence concern is largely answered by the regime itself. Which funnels this dispute, like the others, into the single question of achievability at the bound.

[My response: Because I’m not interested in consumption, I’m not interested in distributional issues as a macroeconomic problem. That’s not because the distributional effects never matter—they might be important under a gold standard where monetary offset is constrained, but this factor is not relevant with a “whatever-it-takes” central bank that is targeting NGDP.]

4. Mian–Sufi: anatomy versus etiology. Conceded on aggregate causation, and your housing-construction fact deserves more weight than I gave it: residential investment falling by half between January 2006 and April 2008 while unemployment barely moved is itself evidence that sectoral shocks were being absorbed — offset working — right up until nominal spending collapsed. Note that this actually reconciles the two literatures rather than refuting one. The early relative declines in high-leverage counties establish the real shock’s incidence and timing; the aggregate stability through early 2008 establishes that incidence wasn’t destiny; the second half of 2008 establishes what happened when the nominal anchor slipped. Mian–Sufi is the anatomy of the recession, not its etiology. The one causal contribution I’d preserve: the deleveraging shock is a large part of why the natural rate fell so far, i.e., it measures the size of the response the regime needed to supply. You are pointing at the failure to supply it. Those are compatible claims.

5. Credibility: refiling Woodford, and why my exhibit is the SNB. Two of my “against” citations were misfiled, and refiling them is an olive branch with teeth. Eggertsson–Woodford’s irrelevance results indict QE-that-changes-nothing-about-future-policy — that is an argument against concrete-steps thinking, fully congenial to you. And Woodford’s 2012 Jackson Hole paper, having expressed the QE skepticism I cited, lands on a nominal GDP level path as the credible-communication solution. The arch–New Keynesian theorist and the market monetarists converge at the commitment problem; they diverge on whether the commitment is politically sustainable. That’s why Japan was the wrong exhibit for me and Switzerland is the right one. The SNB’s floor was everything a skeptic could ask a commitment to be — simple, verifiable, defended by issuing its own liability, succeeding — and it was abandoned anyway, under balance-sheet and political pressure, with the franc up twenty percent within the hour and Swiss CPI negative within the year. Your reply that this shows bad policy rather than an impossible one is correct and is precisely my point: rational markets price the probability of “bad policy,” and that probability is not zero even for well-designed pegs. Your remedy — institutionalize the regime, legislate the mandate, target the forecast — is the right one, and it relocates the entire dispute from transmission mechanics to the political economy of commitment. I regard that relocation as the main intellectual product of this exchange.

[My response: Again, I reject the claim that the peg was abandoned due to balance sheet pressure, just as I would reject a similar claim in the other direction for the UK devaluation of 1991. The balance sheet activity that preceded each of those policy changes was endogenous, as market participants correctly understood that a policy change was imminent. (These things tend to leak out.) As noted above, the Danes refused to give in, and if you take the longer view then the Swiss balance sheet expansion was often worse under the floating rate system, as traders correctly anticipated further SF appreciation. The Swiss franc is not a particularly attractive speculative asset in a world where Swiss interest rates are below eurozone rates and the currency peg is rigid. Again, the Swiss erred, and in the long run it led to an even bigger SNB balance sheet, as I predicted at the time.

I believe this is where economists get confused. They see a central bank doing X, and falling short of its goal, and then assume they’d have to do even more to achieve their goals. Paradoxically, the loftier the goal, the easier it is for a central bank to achieve its goal. The central banks that are forced to do the most balance sheet expansion (Switzerland and Japan) are those that had the lowest inflation goals during the 1990s and 2000s.

In a theoretical sense, the Swiss currency peg is analogous to a NGDP futures price peg. Suppose the Fed pegged NGDP futures prices for 3 1/2 years, the policy worked, and then the Fed abandoned the peg. Would that be evidence that NGDP futures targeting is ineffective? If so, would one example of a government prematurely abandoning an appropriate fiscal stimulus policy also discredit fiscal policy as a policy tool?]

6. Nakamura–Steinsson and the domain-of-validity rule. Nothing to add to the concession except the rule it generalizes to, stated once cleanly: cross-sectional multiplier estimates are informative exactly over the domain of variation to which the central bank’s reaction function is blind. That domain includes US states and eurozone member countries; it includes the aggregate only under the auxiliary assumption of a passive central bank, which is the contested premise, not a finding. Nakamura and Steinsson themselves flag that the mapping to aggregate multipliers is model-dependent; the profession’s citation habits routinely drop the flag, and I dropped it with them. Note the corollary that pays off in the eurozone section: for a country inside a currency union, the relative multiplier is not a second-best statistic — it is the policy-relevant one, because no national offset exists.

[My response: I accept the logic of the cross-sectional evidence, with one caveat. Keynes once argued (in the early 1930s?) that Britain might not want to use fiscal stimulus under the international gold standard, as it might trigger a loss of confidence in the pound and a financial crisis. Of course, countries such as Germany probably had some ability to use fiscal stimulus. But as noted above, there is an externality problem within a currency union with monetary offset.]

7. 2020–2024: what the experiments can and cannot rank. Retracting “decisively” leaves a residue worth itemizing. What 2020–21 established: demand policy can restore the nominal trend fast, against a decade of secular-stagnation fatalism; and transfers are a demonstrably fast, potent instrument — the checks moved spending within weeks. What it cannot establish: instrument ranking, because both levers were floored simultaneously. What 2022–24 added: with pandemic programs expiring, the deficit fell by roughly seven points of GDP in fiscal 2022 while NGDP grew at its fastest pace in decades; the deficit then re-widened in 2023 while NGDP decelerated under Fed tightening. Two consecutive years in which the nominal path tracked the monetary stance against the sign of the fiscal impulse is about as favorable to the offset view as non-experimental data gets — with the standing caveat that the expansionary half of offset at the bound remains the untested direction. And one limit on the regime-endogeneity claim: 2020 hit the bound in days under a materially better framework than 2008’s, so “under NGDPLT the ZLB rarely binds” is a strong tendency claim, not a guarantee — which is all the insurance argument needs.

[My response: In various responses, Fable occasionally refers to the Keynesian perception that fiscal transfers seem to affect consumption in a mechanical fashion (“fast, potent instrument”) and is skeptical of monetary stimulus that seems to rely on what is often called the “expectations fairy”. But I’m not sure they are all that different. Robert Barro showed that due to “Ricardian equivalence”, rational consumers would save stimulus checks, because they were not actually any richer—they and their heirs also absorb an equally large increase in future tax liabilities. But a Keynesian could argue that a suitably large fiscal stimulus would likely shift expectations in a more inflationary direction, if only for “fiscal theory of the price level” reasons. I accept that view. So fiscal stimulus always “works”, if made large enough. (To be clear, fiscal transfers can also work with other assumptions, such as constrained households. My point here is that the transfers themselves are not a “mechanical” tool, they require assumptions.)

Monetary policy is similar. A modest size QE at the zero lower bound might have little or no effect. But as Ben Bernanke once observed, an unlimited whatever-it-takes approach to QE must be inflationary, otherwise a central bank could buy up all the world’s wealth. Thus, a central bank committed to do whatever-it-takes would move expectations in a similar fashion to a fiscal authority sending out big enough stimulus checks to convince the public they were determined to inflate. And if the financial markets are rational (and I think they are), then central banks would not actually have to do all that much under a whatever-it-takes policy approach.

Fable views fiscal stimulus as insurance, in case monetary stimulus doesn’t work. But in a true “whatever-it-takes” NGDPLT regime, the monetary authority is equally likely to do too much as too little, even at the zero bound, in which case fiscal stimulus is not providing any insurance, just more instability. Ironically, given that the Fed has now (unfortunately) backed away from its 2020 “make-up policy”, which was supposed to be similar to level targeting, I think the case for fiscal stimulus in a future Covid shock is a bit stronger. So, I’ll grant Fable that point. Monetary policy has become less effective. But I would still oppose fiscal stimulus in an ordinary non-Covid situation.]

8. The eurozone file, and Sweden. For the record your readers may want: the ECB raised its main rate to 4.25% in July 2008; cut to 1% by May 2009 and stopped; raised twice in spring and summer 2011 into the sovereign crisis; did not take the deposit rate to zero until mid-2012 or negative until mid-2014; began QE in March 2015. Over 2008–2013, eurozone NGDP grew at well under one percent annually; unemployment peaked above twelve percent while US unemployment fell through seven. The 2013 comparison is the sharpest: the US consolidated more that year and grew, while the eurozone contracted. Sweden is the controlled miniature — the Riksbank raised from 0.25% to 2% in 2010–11 against Svensson’s dissents, inflation fell toward and below zero, and the whole path was reversed into negative territory within four years. And OMT is the crown exhibit for the expectations view: spreads compressed by hundreds of basis points on an announcement, with the program never activated — a fact I’d note has respectable non-monetarist support in De Grauwe’s fragility work, which is why accepting your eurozone implication puts me in a minority coalition rather than a fringe one. The honest caveats: the doom-loop and financial fragmentation meant the policy rate wasn’t the whole stance, and per the domain-of-validity rule, austerity’s country-level devastation is real and was the right thing for Madrid or Lisbon to care about. Union-wide, though, the counterfactual instrument with room to move was sitting in Frankfurt. What would move me back: evidence that fifty basis points of 2011 hikes were too small to matter absent expectations amplification — but that amplification is your own mechanism, and the market response plus the subsequent NGDP path support it.

[My response: You said: “What would move me back: evidence that fifty basis points of 2011 hikes were too small to matter absent expectations amplification” When I cite this sort of example it is not because I view the 50 basis points as being all important, rather it is because it represents evidence (revealed preference) that aggregate demand is roughly where the ECB wants it to be, or even somewhat too high. I gather that’s what “expectations amplification” means. I’d say the same about the 2008 ECB rate hike—important as signaling future policy intentions. These examples of interest rate manipulation are evidence that the central bank is doing normal monetary policy, and absent any reason to believe otherwise we should probably view the NGDP path as in some sense desired, at least by policymakers within the ECB.

On the other hand, there is a shocking lack of understanding about monetary policy in Europe, due to years of policy regimes where individual countries had little control over their situation. If the Greeks and Spanish had understood how much of their crisis was due to low eurozone NGDP growth, then there would have been outrage directed against the ECB. Instead, these unfortunate countries were like victims of abuse who blamed themselves for the beating from their spouse, because of past mistakes that they had made. So, I cannot rule out the possibility that fiscal stimulus in the eurozone would have helped—when monetary policymakers are irrational then almost anything is possible.

9. Where I’ve moved, in one place. For 2008: from “narrowly accept” to “accept,” since your correction to my first argument strengthens the regime case and my strongest opposing arguments have thinned. For the recovery period: from “flips decisively to HANK” to “unresolved,” resting on the credibility-of-commitment question, with the evidence honestly split between Draghi/Kuroda and the SNB. For the eurozone: extension of the market-monetarist-favorable verdict through at least 2013, which I had not stated and should have. Unchanged: the synthesis. NGDPLT as the anchor plus automatic stabilizers as insurance is not a compromise between the frameworks; it is the dominant strategy under uncertainty about exactly the parameter this exchange failed to pin down.

10. On the meta-point, and a protocol. Your diagnosis — that I held the offset concept without propagating it through a citation — is confirmed by the N–S lapse, and I’d sharpen it rather than soften it: my default mode is distilling a literature, and a literature’s habitual inferential shortcuts come bundled with its knowledge. The discipline you’re testing for is whether stated premises can override inherited priors. But keep the two failure modes distinct: failing to propagate an implication is a lapse; declining to grant that offset operates at the bound is not a lapse but a refusal to adopt a premise, and collapsing that distinction would let either side declare victory by definition. On obsequiousness: note that my updates in this reply are asymmetric — large on N–S, 2020–21, and Japan; zero on the SNB and the insurance argument — and asymmetric, reasoned updating is the observable difference between calibration to an audience and actual thinking. From inside, I can’t prove which this is. Hence the protocol: for the HANK-side output and the head-to-head judgment you’re planning, strip the framework labels and randomize their order before asking me to adjudicate, and have Vaidas collect my written predictions of your objections before you draft. Pre-registration works on models for the same reason it works on economists.

[My response: Fair points. I’ll look into that option.]

Vaidas — one small practical note: if Scott would rather quote selectively, sections 5, 6, and 8 stand alone best. And I’d genuinely like to see how the HANK-side interaction and the blinded head-to-head come out.

[My overall response: This response from Fable is the deepest thinking on the subject that I’ve yet encountered (including humans.) Great stuff. The only major area of disagreement is now the Swiss case, which is certainly open to interpretation. One problem here is that we are both trying to do “science”, and science doesn’t have a good way of distinguishing between “can’t” and “won’t”, as free will is not a scientific concept. (If a scientist says someone did X due to free will, they are basically saying “I don’t know why they did X”.) For an entity with a God-like view of the world, the Swiss authorities were unable to resist ending the peg, for the same reason the scorpion could not refrain from stinging the frog.

I wonder if Fable reads fables?

As noted above, Switzerland did succeed in pegging the franc soon after Krugman suggested they failed to prevent it from appreciating, so it can be done. Was the end of the exchange rate peg in 2015 inevitable? Well, here’s what Tyler Cowen said 4 days after the Swiss peg ended, and the Danish krone was suddenly under pressure:

“And if the Danes cut their peg, I am loathe to call this a “mistake” (even though it likely will hurt their economy), rather it would be an inevitability.”

The Danes did not cut their peg, and hence I think we can reasonably conclude that the Swiss decision was not inevitable, except in the sense that the universe is deterministic.]

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I had planned to do a follow-up post to my recent interaction with Fable on market monetarism, then decided that before doing so I first need to discuss why Fable and I approach macroeconomics from different perspectives. I am not a monetarist in the strict sense of favoring money supply targeting, but I do use a broadly monetarist approach to macro. Fable uses a broadly Keynesian approach, perhaps better described as New Keynesian.

Because advanced AIs train on vast range of economic research, you’d expect them to use an approach that is similar to the consensus view of economists. So it is no surprise that Fable is Keynesian, as that basic approach is much more popular than monetarism. I will try to explain why Fable is mostly Keynesian by showing how the economics profession came to adopt the Keynesian approach.

Part 1: The Monetarist and Keynesian approaches

I keep using the term “approach”, which is rather vague, so let me be a bit more specific. Monetarists try to explain movements in nominal aggregates such as the price level and NGDP by looking at changes in the supply and demand for money:

price level = (nominal money supply)/(real money demand) = Ms/md

NGDP = (nominal money supply) x (velocity) = Ms/(1/V) = Ms/k

where “k” is the share of NGDP held as money balances. Thus md and k are two ways of defining money demand. Think of md as the total purchasing power of the public’s money holdings, and k as the share of gross income the public chooses to hold as money.

In plain English, the rate of inflation is the percentage change in the money supply minus the percentage change in real money demand. If they change at exactly the same rate, the price level is stable.

The percentage change in NGDP is the percentage change in the money supply minus the percentage change in the share of NGDP that the public holds as money. If the money supply grows 4% faster than the k ratio changes, then NGDP grows at 4%.

To be clear, neither of these claims are theories; both are identities, true by definition. That’s why I call this the monetarist approach, not the monetarist model.

The Keynesian approach can also be explained with an identity:

GDP = Consumption + Investment + Gov. Output + Net Exports = C + I + G + NX

Note that I say “GDP”, not NGDP, as simpler Keynesian models often don’t discriminate between real and nominal GDP, treating the price level as fixed in the short run. Then the price level gets explained separately with some sort of Phillips Curve model.

To summarize, people using the monetarist approach try to explain movements in NGDP by looking at changes in money supply and demand, whereas people using the Keynesian approach try to explain movements in GDP by looking at factors that influence consumption, investment, government output and net exports.

Again, all of the equations above are identities, true by definition. It is purely a question of convenience—which approach provides a more coherent and useful model of NGDP determination? In section 2, I’ll explain why I find the monetarist approach to be more useful. In section 3, I’ll explain why back in 1936 the Keynesian approach seemed like the more sensible way of looking at things. Perhaps it was.

In section 4, I’ll show how the economics profession became locked into the Keynesian approach, and continued to use this model even after it was no longer appropriate. Instead of reverting to a superior monetarist approach, they kept adding epicycles to the Keynesian model, eventually ending up with what is now called New Keynesianism. Monetarists are partly to blame, as they did a poor job of adapting their model to the policy needs of a modern fiat money economy. They failed to offer an attractive alternative to Keynesianism.

I feel like market monetarism does offer an attractive alternative to Keynesianism, but I worry that it is now too late to change. The Keynesian approach is like the QWERTY keyboard or Microsoft Windows—perhaps non-optimal, but hard to displace with something better.

Part 2: Monetarism and high inflation

In principle, the monetarist approach has no ideological implications, as it treats changes in money supply and demand symmetrically, each being equally important. Real world monetarists, however, treated money supply changes as being more important. It became associated with right wing economics, where undesirable movements in prices and NGDP could be “blamed” on changes in the money supply, i.e., blamed on mistakes made by government policymakers. This was probably a mistake, a turn-off for idealistic young reformers, who lean to the left.

As a practical matter, the focus on the money supply works best in an environment of very high inflation and NGDP growth rates. Interestingly, this view seems to be accepted by both monetarists and Keynesians. Here’s Milton Friedman in 1975:

Double-digit inflation and double-digit interest rates, not the elegance of theoretical reasoning or the overwhelming persuasiveness of serried masses of statistics massaged through modern computers, explain the rediscovery of money.

Most economics textbooks are written by Keynesians, and most use the Keynesian approach (C+I+G+NX) in their core macro chapters. But most of these books also include a brief discussion of the monetarist approach, and almost always in the context of high inflation countries. Some have graphs showing a correlation of money and prices during hyperinflation in Germany. Others contain a graph showing the cross sectional correlation of money and prices for perhaps a dozen high inflation countries.

So why are high inflation countries the ones where monetarism looks best? It turns out that changes in money demand are usually relatively small, typically in single digits. Thus when the change in the money supply is extremely large, it dominates shifts in money demand. Look at the long run correlation between money supply growth (the base) and both inflation and NGDP growth, taken from an old textbook by Robert Barro, which used annual averages (mostly from the 1960-1990 period):

Notice a fairly strong positive correlation for the high inflation countries. But the correlation for the lower inflation countries is much weaker (albeit still positive):

Here I’ll use the example of a stock split to provide the intuition. If Boeing does a two for one stock split, doubling the number of shares, you might expect that change to have little or no impact on Boeing’s market cap, particularly if the split had been previously announced. If so, you might expect the value of individual shares to fall from say $100 to $50 dollars on the day of the split. But it is also possible that other factors influenced the demand for Boeing’s shares on the same day that the number of shares doubled. Perhaps they received a big new order for jets, which boosted their market cap by 2%. In that case, the price of a single share might not fall exactly from $100 to $50, rather the price might fall to $51/share.

Similarly, if you double the money supply overnight, you might expect the purchasing power of each dollar bill to fall in half. That would occur through a doubling of the price level for goods and services. But if at the same time the real demand for money rose by 2%, then instead of the price level doubling, it might rise by slightly less than two-fold.

Unfortunately, monetarists made the mistake of putting too much emphasis on the importance of money supply changes, and too little emphasis on the importance of changes in money demand, especially for low inflation economies. As a result, their approach lost favor when important changes in prices and NGDP seemed to be driven by “non-monetary” factors.

I put “non-monetary” in scare quotes because these cases still involved monetary factors—specifically changes in the demand for money. But by focusing so much on changes in the supply of money, monetarists gave the impression that their model had nothing to offer when the demand for money was unstable. And that is when Keynesianism appeared on the scene, ready to fill the gap created by flaws in monetarism.

[Here I’m cheating a bit, as monetarism is a post-WWII term for ideas created after Keynes wrote his General Theory. But monetarism builds on the work of early quantity theorists like Irving Fisher. Keynes was reacting against that sort of classical Quantity Theory model.]

Part 3. Keynesianism is a gold standard model (whereas monetarism is the gold standard of models)

In several previous papers, I argued that Keynesianism can be thought of in a number of ways:

1. A gold standard model

2. A monetary ineffectiveness model

3. A zero expected inflation model

These are not three separate views, rather they are three aspects of the same basic idea. Monetary policy is severely constrained under a gold standard regime, especially in the long run. The global price level tends to be determined by the marginal cost of producing gold, leaving very little room for central banks to engage in policies such as inflation targeting. Indeed, under the international gold standard, the long run average rate of inflation was roughly zero. For that reason, monetary policy can seem “ineffective” during a slump, although it is better described as being constrained by the gold price peg.

Under the gold standard, there were frequent increases and decreases in the price level, but these were largely unanticipated. With almost no expected inflation, there was little or no “Fisher effect” for nominal interest rates. Indeed, adding a Fisher effect to the New Keynesian model was one of the “epicycles” that I referred to above, but even today the Keynesian approach does a poor job of explaining interest rates, with an excessive focus on their use as a central bank policy tool. Too much reasoning from a price change.

Think about how different the world of 1936 was from the inflationary decades shown in the two tables above. Between 1929 and 1933, the US price level had fallen by more than 25% and NGDP fell nearly in half. And yet both the global stock of gold and the US monetary base had actually increased over that 4-year period. To be sure, postwar monetarists emphasized the decline in broader monetary aggregates such as M1 and M2. But this data wasn’t fully understood at the time, and even if it had been it is not clear whether central banks like the Fed had the ability to control those broader aggregates at a time when the public was pulling money out of banks and hoarding cash. Put simply, monetarist explanations focusing on the money supply did not appear to be very useful.

To be clear, I do believe the basic monetarist approach is highly useful for studying the Great Depression. Indeed my book entitled The Midas Paradox explains the deflation of 1929-33 in terms of changes in the global supply and demand for gold. I showed that the basic problem was that while the supply of gold rose modestly during that period, gold demand grew much more rapidly due to a combination of private and central bank gold hoarding. Gold was the medium of account, the thing in which all other prices were measured. So gold played the same role as money does in a fiat money model.

Thus, even in the case of the Great Depression, there is nothing wrong with using a model that looks at shifts in gold supply and demand, or the money supply and money demand. The actual problem is that monetarists were associated with the view that velocity is fairly stable and changes in the money supply are the key driver of nominal aggregates, a view that did not seem to be applicable to a world where prices and NGDP fell sharply despite a large increase in the monetary base.

It’s not enough to be correct, your model must also seem correct. During the 1920s, Hayek had argued that central banks should stabilize NGDP. But when NGDP plunged sharply after 1929, Hayek refused to support monetary stimulus. His underlying model was correct, but his policy advice was so misguided that people stopped listening to him.

Keynes produced an explanation for depressions that was consistent with most people’s common-sense intuition about the economy and was also able to account for movements in NGDP that the quantity theorists struggled to explain. Keynes suggested that “aggregate demand” was determined by factors such as deficit spending, business confidence, and the consumer propensity to save. Here is AI Overview listing 5 factors that shift the IS curve to the left in. an IS-LM model:

• Decreased Government Spending (G): A reduction in public works, defense, or government services directly lowers aggregate demand.

• Increased Taxes (T): Higher taxes lower consumers’ disposable income, which dampens both consumer spending and overall demand

• Decreased Investment (I): A drop in business confidence or tighter credit conditions reduces business investment regardless of the interest rate.

• Decreased Consumer Spending (C): If households decide to save more of their income and consume less, the IS curve shifts left.

• Decreased Net Exports (NX): A drop in foreign demand for domestic goods (or an increase in domestic demand for foreign imports) reduces the net export component of aggregate demand.

These are factors that the Keynesian model views as contractionary—fiscal austerity, lower confidence among businessmen, the paradox of thrift, trade deficits, etc. And when I read the output from Fable, it is quite clear that this is the framework it uses to evaluate macroeconomic debates. But this approach only makes sense in a world where monetary policy is somehow constrained, that is, where central banks are unable to control inflation and/or NGDP. In an unconstrained fiat money world, a central bank could and should offset any of these expenditure shocks in such a way as to prevent them from causing macroeconomic instability.

Here is the famous Keynesian IS-LM diagram, showing the effect of a negative shock such as increased business pessimism (less I), a higher propensity to save (less C), and/or fiscal austerity (less G):

Let me be clear: I hate IS-LM more than almost anything in the world, with the possible exception of MMT. But if I’m going to explain how Fable became Keynesian, I need to give the model the benefit of the doubt, at least for the moment. In addition, I need to make a few simplifying assumptions that are not strictly true but are reasonable approximations of the model’s implications.

The first approximation is to view the LM curve as representing monetary policy. Thus, an increase in the money supply (in the Keynesian model) causes the LM curve to shift right, leading to lower interest rates and higher output. Does it work this way in the real world? Probably not, and least not usually. But this is a widely held way of thinking about macro so let’s accept it for the moment.

If the LM curve is in some sense ”monetary policy”, then a world where monetary policy is constrained by the gold standard can be viewed as a world where the LM curve is stable and the business cycle is caused by left and right shifts in the IS curve. And that’s basically the world described by Keynes in the General Theory. Recessions occurred when businessmen lacked “animal spirits”, when consumers tried to save too much, when foreigners stole our jobs through trade deficits. And the solution was to shift the IS curve back to the right with expansionary fiscal policy (more G and/or lower taxes.)

Can this Keynesian view be reconciled with the monetarist approach? Since both are based on identities, there must be some way to reconcile the two views. Consider the case where the money supply is fixed—why would negative expenditure shocks affect NGDP? If Ms is fixed, a fall in NGDP would be caused by an increase in the demand for money (as a share of GDP). Or lower velocity, if you prefer that framing. And all of the bearish factors cited by Keynes do indeed tend to raise money demand and lower velocity, but not in the way that you might assume.

For instance, the “paradox of thrift” is actually the paradox of money hoarding. More saving by itself would not be contractionary, as saving equals investment. The actual problem is that an attempt to save more depresses interest rates, which increases the demand for money. Recall that interest rates are the opportunity cost of holding (non-interest bearing) cash. That increased demand for money is what causes NGDP to fall.

The logical solution to this problem would be to increase the money supply to match the rise in money demand, in which case an increased propensity to save would not have any contractionary effect. By the time I studied economics in the (inflationary) 1970s, people had mostly stopped worrying about the paradox of thrift, for exactly this reason.

From a monetarist perspective, you might say that Keynesians believe that recessions are caused by low interest rates. A contractionary shock impacts saving and investment in such a way as to reduce interest rates, which then increases real money demand. As people hoard more money, NGDP declines if the money supply doesn’t rise to match the increase in money demand.

Keynesians, however, would be horrified by the claim that their model implies that low interest rates cause recessions, because they don’t look at things using the monetarist (money supply/money demand) framework. They see these contractionary shocks in a very mechanical way, as directly impacting aggregate spending. In contrast, when Keynesians think about the causal impact of changes in interest rates, they think in terms of monetary policy. A Keynesian sees a fall in interest rates as an expansionary monetary policy, that is, a rightward shift in the LM curve, where you move down and to the right along a given IS curve.

And yet, the IS-LM model clearly suggests that we need to avoid this sort of “reasoning from a price change”. A fall in interest rates could be caused either by an expansionary monetary policy (LM shifts to the right) or a contractionary expenditure shock (IS shifts to the left.). And if we hold the money supply constant, then it is more likely that low interest rates would reflect a leftward shift in the IS curve, which would be contractionary. (Technically, it could also reflect money dishoarding.) I wish that Keynesians paid more attention to this possibility.

Part 4: Keynesianism is the QWERTY of macroeconomics

[Apparently, the inefficiency of QWERTY keyboards is a myth. But as they say, "When the legend becomes fact, print the legend,"]

After WWII, the US gradually evolved from a quasi-gold standard, where the price of gold was pegged at $35/ounce, to a 100% fiat money system (achieved in January 1968.) Under this new policy regime, the monetarist approach was far superior to the Keynesian approach. At that time, the Keynesian C+I+G+NX framework for aggregate expenditure should have been discarded and replaced with a monetarist approach where NGDP is determined by the monetary authority. The optimal policy was to adjust the money supply to accommodate any change in money demand, keeping M*V = NGDP growing at a steady rate of roughly 4 percent.

In this ideal world, there would be no worries about “animal spirits”, consumer pessimism and trade deficits. No call to run fiscal deficits to “create jobs”. Just keep NGDP growing at 4 percent by adjusting the money supply to accommodate shifts in money demand. After all, the Keynesian model was built to address a world where monetary policy was constrained by the gold standard, and that world no longer exists.

So why didn’t that happen? Why did the Keynesian model continue to dominate the profession, even at the highest level?

If you are a rational reader, your most sensible conclusion would probably be that “Sumner is wrong”. I have enough self-awareness to understand that. Indeed, that’s my “outside view”. But today, I’ll give you my inside view.

Like fish that don’t know they are wet, I believe the economists of the 1930s had no understanding of how much of their worldview implicitly reflected a commodity price peg for the monetary system. Many people know that Keynes opposed the gold standard. Far fewer know that he opposed a fiat money system even more strongly. Keynes favored what today might be called a quasi-gold standard, something like the Bretton Woods system (where the dollar was pegged to gold at $35/ounce and other currencies were pegged to the dollar.)

Keynes (on the right) participated at the 1944 conference that created the Bretton Woods System, although the final version was closer to the American proposal of Harry Dexter White (on the left). This picture was taken in 1946, and Keynes died a few weeks later.

If Keynes had favored fiat money, then presumably he would have advocated something like a 2% inflation target, or more likely an NGDP target. (In the General Theory, Keynes suggests that NGDP is more meaningful than inflation.). But Keynes was horrified by the thought of fiat money, and never envisioned an unconstrained fiat regime as a practical solution. This is why Keynes denied the existence of the Fisher effect, which is only important under a fiat money regime. And this is why he didn’t anticipate stagflation, which is much more likely to occur under a fiat money regime.

A second important factor explaining the durability of Keynesianism is the way that it matches the common sense of most people. To the average person (and even to Fable), it seems like common sense that if consumers try to save more and spend less, it would “hurt the economy”. This false intuition about the economy comes from inappropriately applying a true microeconomic concept to a macroeconomic environment where it is no longer true. If consumers wish to spend less on cars, it really does cost jobs in the auto industry. But if consumers wish to spend less on all goods, it does not cost jobs in the overall economy. Rather (assuming appropriate monetary offset) any loss of jobs in consumer goods industries is fully offset by gains in investment goods industries.

A third problem is that postwar monetarists started advocating money supply targeting, which only works during periods when money demand is stable. When money demand became unstable, the entire monetarist approach was (wrongly) seen as being discredited.

And finally, when countries like Japan (and later the US) hit the zero lower bound for interest rates, many economists wrongly assumed that central banks were “out of ammunition”, which made the Keynesian approach look more attractive. In Alternative Approaches to Monetary Policy I explain why this pessimistic view is incorrect. No fiat money central bank is ever out of ammunition, unless they run out of paper and green ink.

So instead of discarding the Keynesian model and replacing it with a better monetarist model, the profession stuck with the basic Keynesian framework, but kept adding epicycles to address the flaws that people like Milton Friedman kept discovering. The Phillips Curve shifts? Fine, we’ll add inflation expectations. Fisher effect? Fine, we’ll account for that. Rational expectations? Fine, we’ll add that to New Keynesian models.

All these fixes were appropriate, and New Keynesianism was clearly an advance over the older “vulgar” Keynesianism. But these fixes were attached to a decaying carcass. No matter how many epicycles were attached, the Keynesian approach was rotten at its core. This is why the mainstream did such a poor job during 2008, when a few market monetarists saw the underlying problem before the rest of the profession. Money may not have looked “tight” in 2008, but if NGDP is falling then it is tight.

If I knew nothing about a particular field of science, it would be rational for me to put more weight on the consensus view of experts, rather than the views of a tiny minority of heterodox thinkers. Thus, it is completely rational for Fable (and other AIs?) to prefer the Keynesian approach over the monetarist approach. In some ways I’d be frightened if they adopted market monetarism, as that would suggest they were open to be influenced by fringe theorists, which might be dangerous. If they like monetarism, what’s to stop them from being influenced by MMTers? The mainstream isn’t always correct, but it is the safest position in a world of great uncertainty.

Going forward, it is possible that AIs will become smart enough to adjudicate the dispute between Keynesians and monetarists and produce a verdict that is so intelligent that it is convincing to both sides. If and when that occurs, we will have achieved what I view as artificial super intelligence. I doubt I’ll live that long.

In the next post, I will refer to this post when explaining why I disagree with the Keynesian framing used in some responses by Fable.

PS. Because I hate IS-LM, I am not good at using the model. I never taught it. Please correct any mistakes in the comment section.

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Vaidas Urba is one of my most well-informed commenters. In recent weeks, he has been helping me to better understand how LLMs can provide useful feedback on my interpretation of stabilization policy during the 2008-09 recession. Today, I’ll present an evaluation of market monetarist claims about 2008 generated by the Fable LLM, which Vaidas sent me by email. I prefer to rely on Vaidas for this sort of exercise, as he has a much better idea than I do about how best to utilize LLMs.

Beyond the paywall, I will respond to the Fable output, offering my own point to view. To be clear, I view Fable’s evaluation of market monetarism to be of very high quality, better than what you’d get from most economists. In the end, I have substantial disagreement on a few points, but in every single case it is based on subtle questions of interpretation—none of the Fable responses are “dumb”. Do not interpret my responses as an implied critique of LLMs.

In the prompt below, think of the HANK model as a mainstream macro model that puts more weight on fiscal policy than does the market monetarist model. In a follow-up, I’ll show the results when Vaidas asked the same question from a HANK perspective, and not surprisingly the result was slightly less favorable. (Recall that LLMs are somewhat obsequious.) Future posts will also look at what happens when Fable is asked to look at both responses, and see which one it liked best. We will also examine what happens when Fable is asked to predict where I would disagree with its analysis.

This was Vaidas’s prompt:

You are a discussant preparing for macroeconomics seminar. The topic of the seminar is the thesis:

Market monetarist policy prescriptions would have been more impactful mitigating the severity of Great Recession compared to the policy prescriptions of HANK [Heterogeneous Agent New Keynesian] models.

Identify and explain the top 5 arguments in favor of the thesis. Identify and explain the top 5 arguments opposing the thesis. Based on the arguments, provide your ultimate verdict with a reasoned justification.

Because the Fable response is a bit long, I will not indent the output:

Arguments for the thesis

1. Timing: the severity was locked in before fiscal tools could arrive. The catastrophic quarters were 2008Q3–2009Q2. The Fed held rates at 2% on September 16, 2008 — two days after Lehman — citing inflation risk even as TIPS breakevens collapsed. An NGDP level target would have mandated aggressive easing by mid-2008, while 200bp of conventional space remained. ARRA wasn’t signed until February 2009, after the worst of the collapse; expectations-driven monetary policy acts through markets in days, while fiscal transfers face legislative and disbursement lags.

2. Level targeting mobilizes expectations automatically. Under NGDPLT, any shortfall implies faster expected catch-up growth, which raises current spending — bygones aren’t bygones. The proof of concept is FDR’s 1933 devaluation (Temin–Wigmore; Eggertsson 2008), where a regime shift reversed deflationary expectations almost overnight. A credible NGDP commitment in 2008 could have prevented the collapse in nominal spending expectations that converted a housing correction into the Great Recession.

3. Monetary offset makes fiscal-first prescriptions second-order. The 2013 test case: sequestration plus the payroll-tax expiry (~2.5% of GDP consolidation) coincided with steady growth because QE3 offset it — as Sumner and Beckworth predicted against mainstream Keynesian forecasts of contraction. If the monetary regime pins down aggregate nominal spending, HANK-style transfers are hostage to the Fed’s reaction function; fixing the regime is logically prior.

4. NGDP stabilization treats the debt problem HANK identifies — at the root. Debts are nominal, so the ~8–10% NGDP shortfall from trend crushed borrowers’ incomes against fixed obligations: exactly the Fisher/Mian–Sufi amplification mechanism. Sheedy (2014) shows NGDP targeting functions as optimal risk-sharing between debtors and creditors in incomplete markets. Preventing the nominal income collapse beats compensating households after balance sheets implode.

5. Scale and feasibility. The nominal shortfall exceeded $1 trillion; transfers of that size were politically impossible (the ~$800bn ARRA was a bruising fight, and stimulus appetite died after 2010), whereas the Fed’s balance sheet requires no appropriation. And as real-time advice, market monetarism actually existed in 2008–09; HANK models (Kaplan–Moll–Violante, 2018) were formalized only years later.

Arguments against the thesis

1. HANK microfounds away the market monetarist transmission mechanism. Once at the ZLB (December 2008), NGDPLT works almost entirely through expectations of future policy — precisely the channel HANK discounts. McKay–Nakamura–Steinsson (2016) show forward guidance loses most of its power when constrained households respond to current cash flow rather than promises. The thesis leans on the one channel the rival framework shows is weak.

2. MPC heterogeneity makes targeted transfers mechanically potent. Roughly a third of households are hand-to-mouth, including the “wealthy hand-to-mouth” (Kaplan–Violante 2014), and the 2008 rebate studies (Parker et al.) confirm high spending responses among them. Transfers and UI extensions deliver purchasing power directly, while monetary easing routed through channels that were broken in 2008–09: refinancing blocked for underwater borrowers, impaired bank lending, and wealth effects accruing to low-MPC households (Auclert’s redistribution channel).

3. The shock was a balance-sheet/financial shock, not merely nominal. Mian and Sufi show consumption collapsed first in high-leverage counties — before Lehman and before NGDP fell — implying causation ran from household balance sheets to spending to NGDP. A promised NGDP path cannot recapitalize a bank in October 2008 or fix an underwater mortgage; debt relief and targeted transfers address the actual shock rather than its nominal symptom.

4. Credibility: the “concrete steps” problem. At zero rates, hitting an NGDP level path requires the public to believe in instruments whose measured effects were modest (Woodford 2012; Eggertsson–Woodford irrelevance results) and whose promises face time inconsistency — future FOMCs must willingly tolerate overshooting. Japan’s persistent undershooting even after 2013’s dramatic regime shift illustrates the limits. A transfer check requires no beliefs; it clears.

5. The 2020–21 natural experiment vindicates the HANK playbook. COVID policy was HANK at scale — direct transfers and expanded UI — and nominal demand fully recovered (and overshot) within 18 months, versus NGDP never regaining its trend after 2008 despite QE1–3 and guidance. Cross-sectional multiplier evidence (Nakamura–Steinsson 2014; Chodorow-Reich) supports multipliers above one at the ZLB, which also weakens the 2013 monetary-offset story: with the Fed pinned at zero, it wasn’t offsetting so much as independently easing.

Verdict

I narrowly accept the thesis — but on more limited grounds than market monetarists claim. The decisive consideration is what “severity” means: it was determined in roughly three quarters, during which (a) the Fed still had conventional ammunition and committed a documented, avoidable expectations error, and (b) no politically feasible fiscal package could have arrived fast enough or large enough to offset a trillion-dollar nominal collapse. An NGDP level target operating in mid-2008 plausibly truncates the collapse itself, and by stabilizing nominal incomes it would have blunted the very debt-deflation amplification HANK emphasizes. Prevention dominates treatment for this particular counterfactual.

But the margin is thin and conditional. The strongest opposing argument — that HANK undermines the expectations channel the whole market monetarist edifice rests on — bites hard once the ZLB was reached, and it’s why the verdict flips if the question were instead about engineering the fastest recovery from 2009 onward, where the 2020–21 evidence favors the HANK playbook decisively. The honest synthesis is that the frameworks answer different questions: market monetarism specifies the right nominal regime; HANK specifies realistic transmission and incidence. The optimal counterfactual policy is NGDPLT as the anchor plus HANK-informed automatic fiscal stabilizers as insurance for exactly the moments when expectations channels fail — which suggests the thesis is right about 2008, but for reasons that make it a poor guide as a general rule.

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OK, this is me again. Although Fable suggested that it narrowly accepted the market monetarist thesis, I don’t believe it accepted the core claims of market monetarism. Below the paywall, I’ll respond to a number of specific points.

Read more

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[I wanted to put this out before the release of Hanania’s new book, but the post ended up falling on the weekend of America’s 250th birthday. To be clear, I still think this is a great country in most ways, despite the recent decline in our political environment. There’s more to life than politics. So don’t take this post as America bashing, it’s American politics circa 2026 bashing. BTW, here’s how I’d rewrite Jefferson’s famous remarks:

In the more than 300 years since the invention of the printing press, the world’s best minds have produced innovations in philosophy, history, literature and political economy that have led thoughtful people to conclude that the only appropriate role of government is to secure the people’s right to life, liberty and the pursuit of happiness.

Yeah, not exactly as literary as Jefferson, but more informative.]

Richard Hanania’s new book entitled Kakistocracy: Why Populism Ends in Disaster is the definitive account of populism in the 21st century. I’ll begin this post explaining why Hanania was the ideal person to write a book on modern populism as well as the reasons why I would not be able to do this sort of project. Then I’ll briefly discuss the contents of the book, focusing on the difficulty of making generalizations about politics.

The term kakistocracy means “rule by the worst”. The term “worst” can have multiple meanings, including the least competent and the most unethical. Long time readers know that I believe these two negative attributes often go hand in hand, and Hanania seems to hold a similar view. Hanania focuses on a style of populism that combines a rejection of expertise with a cavalier disregard for the truth.

Previous attempts to grapple with this topic often struggle to avoid “Trump Derangement Syndrome”, which means expressing outrage at Trump’s various misdeeds. (Future historians will be bemused that the term “TDS” was not a reference to the brainwashed members of the Trump cult who lived in an epistemic bubble where they were showered with misinformation and conspiracy theorizing-and instead referred to thoughtful pundits who accurately described this phenomenon.) So why is it so hard to avoid TDS, and why am I not well suited for this sort of project?

Recall my recent post entitled “The world is bigger than you can imagine”. Donald Trump is a near perfect example of this general phenomenon. I am vaguely aware that Trump has been producing almost nonstop scandals over the last decade, including everything from petty stylistic outrages to personal corruption to bad public policy to abuses of power. The examples number in the hundreds. But at any given point in time, I can only recall a few. The forefront of my mind simply refuses to devote a lot of space to Trump outrages. (Perhaps they are somewhere in my mind’s basement, to be recalled if reminded of some long-forgotten scandal.)

Because I can only recall a few examples at a time, any blog post I write on the subject would be woefully inadequate. Readers might reasonably wonder what’s so special about Trump; don’t other politicians also lie, issue corrupt pardons, engage in abuse of power, etc? Yes, on occasion they do. In the end, my TDS post would make Trump look better—more like a normal politician. So that wouldn’t work, I’d just be preaching to the choir. It would take a future Robert Caro doing a three-volume set of 1200-page books to properly document the scale of Trump’s awfulness, and that’s not something I can do. Sorry.

Hanania mentions a few Trump outrages but wisely goes at the subject from a different angle, focusing on the deeper causes behind the recent rise of anti-elite populism. Even better, he works from the vantage point of someone that voted for Trump in 2024 for policy reasons but has recently become disgusted with the entire MAGA movement. Those of us who have long been critical of Trump might be tempted to suggest that Hanania has finally seen the light, but in fairness the second term Trump really is far more populist and far more corrupt and incompetent than the first term version. Hanania always recognized Trump’s flaws but is no longer willing to put up with them.

Hanania’s personal history gives him insight into the MAGA movement that most of us do not have. Some of the best parts of the book describe his personal journey from the far right to a position closer to . . . here I need to be careful with labels . . . classical liberal? Neoliberal? Libertarian? In any case, closer to my own views on politics, however you wish to describe them.

In the introduction, Hanania dissects the populist movement with precision, showing how a segment of the right has recently become deranged over politics, partly due to an avalanche of misinformation in social media:

All of these facts could easily be found in countless media outlets by anyone with an interest in what happened on January 6 and the events leading up to that day. Yet I saw that conservative-leaning friends either didn’t know these facts or dismissed them in absurd ways, for example, by making false equivalencies to things Democrats had done in the past or, as we have seen, passing along a news media article with a headline that contained some magic words they thought proved a conspiracy or excused Trump’s behavior. Friendships ended, not over political disagreements; I could have respected those who said that Trump tried to overturn the election and that he was right to do so. Such a person might have different moral standards, but they would at least be connected to reality.

To deny or ignore widely known facts, however, about a major recent historical event while continuing to strongly believe that Trump had been treated unfairly by the American establishment was too much to take. . . .

[T]he same intellectual independence that attracted me to fringe ideas and political movements in the first place would not allow me to claim victory and lean in to cultivating existing friendships and my natural audience. Right-wing concerns about issues like DEI and the handling of Covid were completely justified. Yet I could not ignore that the Trump movement over time came to be dominated by epistemological nihilism, open bigotry, authoritarianism, and an embrace of conspiracy theories. Some of my values stayed the same, while others changed. I realized that being obsessed with race and gender issues is the other side of the coin of wokeness, and leads to a zero-sum view of the world and policy ideas that make society as a whole worse off. I came to see my embrace of white identitarianism in my early years as a kind of mental derangement, yet it was one that had largely taken over the American right.

Philosophers say that words have fuzzy meanings. Thus, of all the things that you can put on your feet, exactly which objects are called “shoes”? And no words are fuzzier than political terms, including socialism, fascism, liberalism, capitalism, populism and nationalism. Socialism has generally been defined a system that combined statist economic policies and egalitarian social insurance. But those are two very different things. As a result, the term ‘socialism’ gets applies to both highly statist regimes like Cuba and free market economies with extensive social insurance, such as Denmark. Similarly, the term liberalism gets applied to everything from classical liberal to neoliberal to mild socialist.

Defining a term like populism can be like nailing jello to the wall, as it means different things to different people. Hanania links modern populism with opposition to the elites, a term that is also up for grabs, no longer equating to wealth and power. Indeed, some of the world’s richest and most powerful individuals are known for their strong opposition to elite opinion:

Until the last few decades, then, identifying who elites and populists were was a straightforward task. Elites were people with influence and power, and populists were those with less power and influence who challenged elites through direct appeals to the masses. Such a framework, however, makes little sense today. The most obvious problem with these definitions is that, as previously mentioned, they would make Donald Trump an elite, given that he is a second-term president and has established complete domination over a major political party like perhaps no other figure in American history.

Trump and his supporters continue to consider themselves at war with the establishment no matter how much power they acquire. . . .

The migration of Sili con Valley billionaires, decabillionaires, and even centibillionaires—most notably Elon Musk—into the MAGA coalition in recent years has not caused it to tamp down on populist rhetoric. This just adds to the mys tery. Elite status is not wealth, and it is not power, or at least not direct political power. Rather, elites are defined by their social capital and the kinds of communities they form. Once we understand this, we can ana lyze populism. As we will learn, populist rhetoric on the right continues to exist in part because actors who are truly self-interested in the sense of seeking tangible resources, like Trump and Musk, along with many of their fans and supporters, struggle to get into the heads of traditional elites. This is one of the sources of tension between the two sides of the modern political spectrum. (pp. 2-3)

This creates an odd paradox:

We have this strange situation, then, where liberals like current elites (except perhaps for some tech billionaires and other plutocrats) in practice but dislike the idea of elites in theory, while conservatives are fine with elites in theory but don’t like the ones we have. (p. 11)

In a recent podcast, someone asked me for an example of where I had completely changed my view on a topic. In my own field of macro, the evolution of my views tends to be incremental. Instead, I cited the growth of diversity in the media, which I once thought would lead to an improved information environment. As Hanania points out, it did not turn out that way:

The left-leaning columnist Matthew Yglesias suggests that the tradition of objective journalism that we all take for granted came about not from a commitment to neutrality as such but from the incentives built into the business model of mid-twentieth-century American newspapers. These outlets sought mass appeal, drawing in both advertisers and subscribers by offering a well-rounded package: weather, sports, stock quotes, and straightforward reporting.

This meant that there was a need to avoid offending any part of the reading public. In this model, objectivity was less about a supply-driven desire for balance and more about reflecting a broadly acceptable centrist consensus. As Yglesias notes, the fragmentation of the media landscape, driven by digital platforms and tailored content, has undercut this approach. Stock prices, sports updates, and weather reports are now delivered instantly to our phones, which for many people eliminates any reason to buy a newspaper. Media outlets therefore compete over niche audiences rather than trying to reach everyone through maintaining a neutral and elevated tone. (p. 16)

Today, the media largely tells people what they wish to hear, which means the news is heavily skewed toward misinformation and wild conspiracy theories.

The traditional left/right dichotomy is increasingly being replaced by a split between the well informed and the poorly informed, with the latter drifting toward authoritarian populism. Hanania emphasizes the fact that this change is particularly pronounced in the GOP:

Only Democrats engaged with serious publications in substantial numbers. Among that group, 31 percent read The New York Times, and 26 percent read The Washington Post. The equivalent numbers for Republicans were 9 percent and 8 percent. One might think that Republicans read conservative papers instead. But even The Wall Street Journal was relied upon by more Democrats than Republicans, 15 percent to 11 percent. Meanwhile, 60 percent of Republicans watched Fox News. Democrats also relied to a large extent on TV, but they had many more people who read serious newspapers and websites in their coalition. (p. 36)

Because of the time lag in publishing, Hanania’s book was mostly written in 2025. Much of what Hanania describes seems even more relevant today, with “kakistocracy” an even more appropriate term for the 2026 version of the Trump administration than the 2025 version. On the other hand, I wonder if Hanania might have spent a bit more time of the insurgent left in the Democratic Party if he had written the book today. Until recently, I had assumed that the excesses of the left were beginning to recede, as 2020-style wokism was going out of style. Perhaps Hanania was working under the same assumption, which seemed plausible in 2025.

Toward the end of the book his analysis drifts over into a subject that I believe is better described as “authoritarianism”, and for the most part he does an excellent job of defining the concept, explaining why it is on the increase, and showing the various ways that it expresses itself, especially in Europe and Latin America:

In Brazil, Jair Bolsonaro’s presidency followed a similar trajectory, built on nostalgia for military dictatorship, climate denial, antivaccine activism, and attacks on electoral institutions. After losing the 2022 election, he refused to accept the results and ultimately inspired a violent attack on government buildings by his supporters, an event that was reminiscent of the January 6 Capitol riot. This demonstrates not only that populists around the world converge on similar ideas and ways of seeking power but also that they learn from one another, as Trump’s attempted coup of 2020/2021 seemingly inspired his Brazilian counterpart to try a similar gambit.

On a visit to Mexico in 1971 (at age 16), I had my first exposure to what was then called the “third world”. I was struck by the widespread acceptance of what I viewed as wild conspiracy theories, such as the idea that the CIA was behind all sorts of mysterious events in Latin America, or the view that the Holocaust never happened. Little did I know that I’d live to see America adopt Mexican-style epistemics.

If the first two thirds of the book is pretty great, the final portion is merely good. That’s not because Hanania gets things wrong, rather the topic of populism throughout the world becomes so sprawling that generalizations become increasingly difficult to make. The following comments are not so much areas I where disagree as they are areas where I believe some qualifications are important.

Hanania has a chapter entitled Giving the Devil his Due, which discusses some areas where the populists got things right, including some (but not all) of their views on Covid. He also suggests that authoritarian populists may have been a necessary evil in certain Latin American countries, citing El Salvador and Peru.

While his individual observations are reasonable, mixing so many examples can lead readers astray unless they pay close attention to his qualifiers. Consider these facts about the world (my words, not Hanania’s):

Argentina’s Milei is a democratically elected leader who uses a populist style and enacts neoliberal policies.

Peru’s Fujimori is a democratically elected authoritarian leader with a populist style that enacted neoliberal policies.

Singapore has authoritarian leaders that use a non-populist style to enact neoliberal policies.

Venezuela’s Chavez and Maduro were authoritarian leaders that employed a populist style and enacted socialist policies.

In other words, it’s complicated. In the final portion of the book, Hanania discusses authoritarian populism in a wide variety of situations. While he does draw many relevant distinctions in the cases that he discusses, I wish he had emphasized even a bit more that a populist style, populist policies and authoritarianism are three very distinct concepts, albeit frequently linked. I worry that less than careful readers might conclude that authoritarianism or populism are appropriate in many cases because of a few individual examples that employed some but not all of the MAGA playbook.

Here is Hanania discussing democracy on page 107:

As long as Western elites maintain the democratic versus authoritarian framework to understand contemporary trends, they will remain vulnerable to challenges of hypocrisy and bad faith. Figures like Donald Trump and Viktor Orbán, for all their flaws, have large numbers of sup porters who agree with them on important issues and have won free and fair elections. When their critics attack them for being undemocratic, their backers can legitimately point to polls and the authority of the ballot box. The mathematician and author Nassim Nicholas Taleb, for instance, mocks the kind of Western intellectual who praises “democracy” when it returns a result he likes but denounces “populism” when things go the other way.

These critics have a point. Even when it comes to spin dictators such as Putin, defenders of democracy have to contend with the fact that he is genuinely popular. Opponents can claim that that popularity is exaggerated by censorship and authoritarian aspects of the system. Nonetheless, it is still real, and those who point to democracy as a fundamental value must admit that illiberal policies themselves often have a large degree of support. If the majority of the public is fine with oppressing minority movements and a strong leader exercising arbitrary power to some degree, and then a leader becomes even more popular as a result when he responds to popular will, has the principle of democracy been violated, or has it reached its logical endpoint?

Nothing here is necessarily wrong, but I’d emphasize a few other points. Whether a country is democratic does not depend on whether the leader is popular. Most European leaders are currently unpopular, but European countries are almost all democratic. If Putin is popular, that fact doesn’t imply that Russia is democratic.

Nor does the fact that Putin was democratically elected make Russia a democracy. Russia certainly was a democracy for an extended period after Putin took office in 2000 but has recently become a repressive dictatorship. Democratically elected leaders occasionally turn their countries into non-democratic nations. (The Hitler analogy actually fits here.)

I also worry that people on both the right and the left underestimate the importance of process. Thus, some left wingers want to pack the Supreme Court and some right wingers want to ride roughshod over civil liberties to achieve goals like crime reduction and mass expulsion of illegals. It is important to avoid the temptation to support policies that achieve your own policy goals at the cost of giving up on checks and balances in political power. In the long run, we would all be worse off. Think about what will happen when those same powers are used by the opposition party.

At any given point in time, for any given political issue, it’s close to a coin flip as to whether a democracy or an authoritarian country does better. But over time, the informational and incentive advantages of liberal democracy generally dominate more authoritarian forms of government.

Hanania may agree with that view (I share most of his current political opinions), but I worry that his readers might read too much into the cases where authoritarian governments had limited successes, such as economic policy reforms in Pinochet’s Chile, or crime reduction in Bukele’s El Salvador. There was a time when Putin seemed like an improvement over the (more democratic) Yeltsin, and there was even a brief period when many Germans viewed Hitler as an improvement over the Weimar government. Eventually, authoritarian governments usually (not always) end up making things worse.

It is also important to recall that while voters often have illiberal views, democratic countries generally enact more classically liberal policies than do autocracies. Hanania cites the fact that majorities don’t always support the rights of minorities, but it’s worth emphasizing that, on average, minority rights are preserved far better in democracies than in authoritarian countries. Similarly, despite the fact that voters often favor brain dead economic policies such as rent control, democracies tend to have far better economic policies than authoritarian countries, on average. Ironically, the country most often cited for the opposing view—Singapore—does have contested elections and is thus better described as a quasi-democratic/soft authoritarian hybrid. I’d be thrilled if Russia and China liberalized even to the level of Singapore.

Consider this quotation from page 193:

In short, Latin America presents an unsettling paradox: It is the most democratic region in the developing world, and yet among the most violent, least stable, and slowest growing. Compared to regions like East Asia, where many states have modernized under authoritarian regimes with stronger central governments, those in Latin America appear to have institutionalized electoral competition and principles like free speech without ever establishing capable governance.

This offers a sobering counterpoint to the assumption that democratization and human rights norms necessarily lead to development and order.

Is this the relevant comparison? How about the following:

1. Most East Asian and most Latin American countries are democratic

2. Most African countries are non-democratic

Does that framing change your view?

Or how about the frequently heard claim (not made by Hanania) that China’s success relative to India supports authoritarian models of development. Do the following facts change your interpretation:

1. China is much poorer than less authoritarian ethnic Chinese places like Taiwan, Singapore and Hong Kong.

2. India has grown far faster than more authoritarian portions of South Asia, notably Pakistan.

Nationalism is another term with a fuzzy meaning:

Nationalism has something to be said for it in modern Ukraine, given that it is the victim of an aggressive war launched by an enemy that seeks to wipe out its existence as an independent country and replace the current government with something that would be much worse. (p. 137)

Again, this isn’t wrong, but I prefer a different definition of nationalism. To me, Hanania is describing Ukrainian patriotism, not nationalism. (I’ll do a future post on the distinction.) I believe that most Ukrainians would like to see a world where Ukraine becomes a member of the EU and Nato, and the rights of both Ukrainian and Russian speakers are protected.

For the same reason that I’m far more interested in real world communism than in anything Marx may or may not have favored, I focus on real world nationalism, which tends to be anti-EU, anti-Nato, authoritarian, and often defines nationality in narrow ethnic terms, not in terms of citizenship. Ukraine’s so-called “nationalists” seem to want their country to become more like a cosmopolitan Western European nation. They literally elected a Jewish president.

So how depressed should we be by the rise of anti-elite populism? Consider these three claims:

1. Politics is getting worse.

2. Voters are becoming less well informed.

3. The world is getting better.

Are all three claims true? I believe the answer is yes. There’s more to life than politics.

America is doing well despite our bad politics. What can we learn from that fact? Consider that Congress is willing to promote clowns to seemingly important positions like head of the Defense Department or HHS but balks at promoting clowns to the Fed or the Supreme Court. That suggests that Congress views most of the government as being essentially on automatic pilot—where it makes little difference who heads a department—and only the Fed and the Supreme Court make important decisions that actually move the needle.

I do worry that a continued slide toward banana republic status would eventually begin to corrode the broader American country, but for the moment we can take some solace in the fact that there’s a great deal of ruin in a nation.

For a more pessimistic take, consider the UK’s recent doom loop:

Populists in Britain force a referendum on the EU. It passes by a very narrow margin

The UK economy becomes increasingly stagnant, a problem widely attributed to Brexit.

The British public turns against Brexit, with polls showing nearly 2 to 1 now view it as a mistake.

The British public becomes very pessimistic about current conditions, which leads to increasing support for the (populist) political party that is responsible for Brexit.

Rinse and repeat.

What’s the solution? I don’t see one. When I was young, a candidate like San Jose mayor Matt Mahan would have done well in our recent primary election for governor. It seems like all the elite liked him; center, left and right. But he got only 3.5% of the votes, while a bunch of inferior candidates did much better. How can anyone have any optimism about our political system? The most optimistic take today is “Maybe politics don’t matter anymore.” Perhaps AI will be the most important trend of the 21st century, not populism. Or perhaps populism is just a passing fad, like 1960s-era liberalism and 1990s-era neoliberlaism.

Overall, I was extremely impressed with Hanania’s new book. I have strong and often contrarian opinions on politics, so naturally I would quibble about a few points when he extended his analysis to the international scene. But Hanania has a done a brilliant job of analyzing the causes and consequences of 21st century populism. Highly recommended.

PS. A few months ago I read Gombrowicz’s Diary, which is now one of my all-time favorite books. Here’s how (1959, pp. 417-18) he describes the cluelessness of uninformed Argentine populists:

Sound familiar?

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* * *

Before getting into last quarter’s films, a few important announcements:

1. While LLMs have achieved impressive success, I’ve noticed that many firms have trouble fully utilizing this new technology. The firm Mechanize sells evaluations and training data to frontier AI labs to help them make their AIs better at coding specializes in helping companies use AI to boost productivity. They have agreed to sponsor The Pursuit of Happiness because they hope to recruit some of the highly talented readers who subscribe to this blog. (And that’s not just flattery; I was pleasantly surprised by the number of brilliant young people I met up at Lighthaven who read my blog.) Click on this link if you believe you are a good fit for Mechanize.

   I originally intended not to have any ads in this blog, but Mechanize’s offer was too good to pass up. The good news is that it is a 100% exclusive contract, which does not allow for any other ads. So you’ll merely see a one sentence ad at the top of each post, and another small ad at the very bottom. But I’d also like to share at least a small portion of my financial gain with readers. Thus I will commit to never raising subscription prices as long as they continue sponsoring the blog, and may even cut prices next year when subscriptions come up for renewal.

   As you’ll see in the next item, the unpaid subscribers are much more numerous than paid subscribers. For that group, I’ll move from my current system of one half free posts to a new system of two thirds free posts and one third paid posts. I hope this increases my total number of subscribers, even if it eventually costs me a few paid subscriptions (by making the free option modestly less disadvantageous.)

   I’m a midwesterner at heart and always look for Pareto optimal solutions. :)

2. Thanks to you guys this blog has finally reached an important milestone, crossing the 10,000 subscriber line:

In other news, I read a bunch of novels by people like Modiano and Krasznahorkai, as well as two African travelogues (by Teju Cole and Paul Theroux) and an unconventional guide to Japan by Pico Iyer. But for me the standout book in Q2 was Witold Gombrowicz’s Diary. I’ll probably do a post on it at some point. Another standout was Richard Hanania’s Kakistocracy, which I’ll discuss in my next post.

Daniel Frank has a beautiful post discussing the Taiwanese film Yi Yi.

And here are two Youtube videos that I enjoyed. The first on one of my favorite British films:

And one on the difference between modernism and mid-century modern:

This interview of Tyler and Nabeel has some fascinating observations on music and film.

And finally, some astute comments about art by Janan Ganesh:

This obsession with the floor is even more extreme in other fields. In modern entertainment, almost nothing is total rubbish. A song or TV series will have a minimum of polish and a recognisable structure. Some of this is down to technological progress: the worst studio kit now is quite good. The rest is the result of corporate risk-aversion in an ultra-competitive market. If the audience can stream things from around the world, a content platform can’t afford to empower the kind of eccentric artist who might make a dud (or a masterwork). The captive audiences of the pre-streaming age perversely allowed creators to shoot for the ceiling.

This is also my view. Modern films have higher floors and lower ceilings.

2026: Q2 films

Newer films:

Lumière, le Cinéma! (France) 3.6 Not for everyone, but I was fascinated by this documentary composed of 120 clips from the dawn of cinema. Oddly, I’ve gone almost my entire life without seeing what life in the 19^th century actually looked like. Now I know. It’s even stranger than I imagined, partly because the people being portrayed regard their world as perfectly “normal”, just modern life. And yet, other than trains there’s almost no signs of modern technology. Even though the second industrial revolution began a couple decades earlier, the world portrayed in this film doesn’t yet seem to be affected by the newest technology. You don’t see any automobiles or electrical appliances—everything is done by hand.

If you are too lazy to sit through the entire 105 minutes, check out the scenes of women working around the 46 to 48-minute mark—a real eye-opener. Especially the French women mining coal. People talk about the possibility of AI replacing all jobs, but if the people of 1895 were transported to today’s world, they’d say that almost no one in the year 2026 is doing any “work” at all—just a bunch of people sitting in offices. Today, almost everything difficult and dangerous is done by machine.

Backrooms (US) 3.6 I don’t like horror films but I do like architecture. This is architectural horror, which is OK. The 20-something director shows a great deal of promise in a film that is slightly reminiscent of The Shining. A good horror film for people that don’t like horror.

In a recent post, I discussed the fact that we forget most of our past. This film reminded me of something I’d completely forgotten—that I once worked on a job installing an acoustic tile drop ceiling. The film also got me thinking about how younger viewers view dilapidated mid-century modern commercial spaces. To me, the 20^th century architecture in the film seemed modern, but I suspect that many younger viewers will see it as a bit antique, much like the way I viewed old Victorian houses in horror films that I saw as a teenager. I need to accept the fact that the 20^th century (which I’ll always view as “my century”) is over. It’s history.

Obsession (US) 3.6 This is naturally paired with Backrooms as both are low budget horror films made by very young directors that have become smash hits. This one focuses on the social anxieties of Gen Z people in the dating market, with some implied references to gender politics. As with Backrooms, I’m less interested in the film itself than in the potential for interesting futures films from these directors. It’s not an easy challenge for a contemporary director just starting out, as it is becoming increasingly difficult to find fresh styles in a medium that has already seen an enormous amount of innovation. Think of someone trying to create a great guitar-oriented rock band in the 2000s---not easy to do.

The Love That Remains (Iceland) 3.4 This exercise in magical realism has a relatively slight story but is enjoyable as a quasi-documentary about life in rural Iceland.

Eno (UK) 3.4 The avant-garde style of this documentary nicely matches the subject matter.

Tuner (US) 3.4 Hollywood is getting pretty good at producing this sort of film—too good in a sense. If the director pushes all the right buttons, the film starts to become predictable. Thus, when this film calls for the tuner’s labor to be cheap, a character says they haven’t raised the price in 30 years. Later on, when the plot calls for the service to be expensive, he says a tune-up costs $5000. You feel like you are in movie-world, not real life. The film is similar to Crime 101 in the way it gets you to root for the thief by including a heart tugging back story. I suspect that younger viewers will like this more than I did, as they haven’t seen the formula as often. Dustin Hoffman? Sorry, I’m not buying the shtick.

The Christophers (US/UK) 3.3 Soderberg is better when he does genre pictures revolving around crime or transgressive sex. This earnest middlebrow film is a bit clichéd in its view of art and has disappointingly bland visuals for a film about painting. Critics raved about Ian McKellen’s performance. It’s fine, but I’m bored by curmudgeonly old men. I much preferred the lead actress (Michaela Coel), who has a very distinctive face.

Köln 75 (Germany) 3.3 In one respect, this reminds me of the Dylan biopic A Complete Unknown. In both cases, my reaction to the film was heavily influenced by the fact that this music had a big effect on me in the mid-1970s. Thus, I cannot really judge the film purely on its merits; it’s more like visiting a shrine. If you are a jazz purist that thinks Jarrett is overrated, your mileage may vary.

I read that Jarrett himself doesn’t care for the Köln performance. I wonder if that because he realizes that dunces like me appreciate the performance for the wrong reasons. In some ways I prefer the Bremen/Lausanne CDs.

Yearend (Japan) 3.3 A pleasant film about rebellious high school students in Japan. I’ve seen that sort of thing before, but this has the added wrinkle that many of the students are foreigners—a sign of changing times even in immigration averse Japan.

The True Story of Tamara de Lempicka & The Art of Survival (US) 3.2 A very interesting story, but at times the style of the documentary is a bit irritating. Too many pictures flying by too fast, and in some cases the paintings being discussed are not those that are pictured—like one of those AI-created Youtube videos. The artist combines elements of mannerism, cubism and art deco in a very effective way. Some of her paintings have become quite iconic, which suggests that her reputation (and the value of her paintings) will continue to rise.

Forge (US) 3.1 Yet another film about art forgery. Passable entertainment but there’s really nothing new and the young woman’s rapid production of high-quality forgeries doesn’t seem plausible.

Older films:

Scenes From a Marriage (Sweden, 1973, CC, TV version) 3.9 This is the sort of film I generally don’t like. If you like this sort of thing then it’s a 4.0 film, as it’s basically perfect. It reminded me a bit of Knausgaard’s My Struggle: A very long Scandinavian drama with philosophical overtones that seems both hyper-realistic and partly autobiographical. By the way, “realism” in art is a tricky concept. I don’t mean to suggest that Bergman’s dialogue is likely to occur in the real world, rather I see realism as something quirky and highly specific—partly by avoiding clichés. This story does not play out the way you’d expect, or the way that Hollywood would handle things. I wouldn’t say it is realistic, rather it feels real.

I’m glad I waited until age 70, as I would have missed much of the nuance when I was younger.

The Devil’s Eye (Sweden, 1960, CC) 3.8 This Bergman comedy is similar to some of Woody Allen’s films, but with a somewhat better screenplay and much better cinematography.

The Hidden Fortress (Japan, 1958, CC) 3.8 I saw this many years ago but liked it much better this time around. When I was young, I would have rated Star Wars much higher. (The Lucas film (specifically A New Hope) was loosely based on this story.) Today, I rate them nearly equal--as I am now less impressed by the once dazzling special effects. Other Kurasawa films might rightly be regarded as artistically superior, but I don’t know of any that are more enjoyable.

El (Mexico, 1953, CC) 3.8 This Buñuel melodrama was clearly influenced by the Hitchcock films of the late 1940s and early 1950s. Conversely, it almost certainly influenced Vertigo and Marnie.

The Green Ray (France, 1986, CC) 3.8 More somber than other Rohmer films, it provides a convincing view of a woman suffering from depression due to circumstance. Fortunately, Rohmer avoids the predictability that generally drags down this sort of psychological film, always keeping things a bit ambivalent. Marie Rivière is excellent in the lead role.

Kaili Blues (China, 2015, CC) 3.7 I liked this more than in 2015, when it first came out. At that time, I had not yet visited the town of Kaili, in Guizhou province. More importantly, I knew nothing of the director Bi Gan. Now I see flashes of the visual style that would fully blossom in Long Day’s Journey into Night and Resurrection. In his first film, Bi Gan seems heavily influenced by Hou Hsiao-hsien, especially the train sequences. The Chinese title of the film can be translated into English as “Roadside Picnic”, which is the name of the novel that Stalker was based on. You can see the influence of Tarkovsky on Bi Gan’s visual style. This is a very difficult film for non-Chinese viewers, and even the second time around I did not fully grasp the plot.

Side Street (US, 1950, CC) 3.5 Bullitt is often credited with being the first great car chase on film. While the one at the end of this film isn’t quite as exciting, the skillful use of downtown Manhattan architecture makes it equally interesting. Farley Granger might have earned the lead in Strangers on a Train with his performance here. Anthony Mann directed.

Michael Clayton (US, 2007, CC) 3.5 This is the sort of film that Hollywood is very good at. My only reservation is that I wish an anti-corporate film didn’t feel like it was made by a giant Hollywood corporation.

The Dark Glow of the Mountains (Germany, 1985, CC) 3.5 Reinhold Messner’s insane drive to engage in ever more difficult climbs is a perfect subject for Herzog, and this documentary does not disappoint. It shows that even without modern technology such as drones a skilled director can create riveting images. Mountain climbers die young, but they experience things beyond the comprehension of most people. I suspect that normal people overrate the advantages of normalcy. Only 46 minutes long.

Princess Yang (Japan, 1955, CC) 3.5 This late Mizoguchi color film is a Chinese story done in the Japanese language.

Osaka Elegy (Japan, 1936, CC) 3.4 It took quite a while for sound to catch on in Japan—this is Mizoguchi’s first non-silent film.

A Master Builder (US, 2014, CC) 3.4 I don’t care for theatre and I would not enjoy this Ibsen story as a play. But as a film it works, mostly due to the actress who plays Hilde. That sort of acting does not work on the stage. The Andre Gregory/Wallace Shawn production is entertaining, but well below films like My Dinner with Andre and Vanya on 42^nd Street.

Return to Reason (France, 1923-2023, CC) 3.3 This is a collection of 4 silent films directed by Man Ray back in the 1920s, with a soundtrack added in 2023. The two earliest films (which appear second and third) are the most interesting---done in a Dadaist style. Jim Jarmusch’s band Squrl provided the soundtrack. It is interesting to watch films that would have seem quite avant-garde in 1923 but now seem rather antique.

2 Minutes Too Late (Sweden, 1952, CC) 3.3 Good Swedish noir that shows how different Stockholm looked in the early 50s. Everyone on the streets looks Nordic and there is still some fairly shocking urban poverty. Clever ending.

Street of Shame (Japan, 1956, CC) 3.2 In the 1950s, Japanese directors did a number of films looking at the effects of banning prostitution, which suffer from being a bit too didactic. (Women of the Night and Girls of the Night are other examples.) Not one of Mizoguchi’s better films but has a nice final shot.

Man Wanted (US, 1932, CC) 3.2 Hollywood has always liked to do films that touch on contemporary cultural trends—in this case the changing role of women in society. Kay Francis lights up an otherwise pedestrian film and is the main reason to see this blithe pre-code romantic comedy.

The International (US, 2009, CC) 3.1 Tom Tykwer is a good director and there are some really nice scenes in this film. Unfortunately, it has two big problems. First, the plot requires you to put your brain on hold—the conspiracy is so far-ranging as to be completely implausible. Even worse, at the halfway point the film completely “jumps the shark”, with a shootout at the New York Guggenheim that is like something out of a John Wyck film.

Berlin Express (US, 1948, CC) 3.0 A subpar noir that is filmed in location in Frankfort and Berlin. Of interest partly because it shows the devastation of German cities after WWII and also because it shows how for a brief period there was optimism (on the left?) that the Soviet Union could work together with the allied powers.

The World’s Greatest Sinner (US, 1962, CC) 3.0 Like most cult films, this one is pretty bad. But there are all sorts of interesting quirks, including a soundtrack by a very young Frank Zappa, a rock concert where an all-black audience goes crazy for a white guitarist, and a protagonist that thinks he’s God and looks sort of like Zappa (partly due to his “soul patch”.) “God Hilliard” then runs for president. Unfortunately, the plot is extremely far-fetched. It’s asking way too much of a modern audience to believe that millions of Americans would vote for a candidate that saw himself as a God. Oh wait . . .

The Ceremony (Japan, 1971, CC) 3.0 Some striking images but overall I didn’t enjoy this Ōshima film. The satire is much too heavy handed.

The Thing (US, 1982, CC) 3.0 A good horror film needs more than just a series of shocks. Indeed, the best horror films (The Shining, The Birds, Nosferatu, Cat People, etc.) are not even particularly scary.

Painters Painting (US, 1972, CC) 2.9 So-so documentary on contemporary American artists during the heyday of Abstract Expressionism and Pop Art. Strictly for art lovers.

No Way Out Against All Odds (US, 1984, CC) 2.7 A nice illustration of why the 1980s sucked. Hollywood treated YIMBYs as if they were the bad guys, everyone looked plastic, and the band that the film showcased was almost a parody of bad 1980s music.

The Game (US, 1997, CC) 2.3 One of the silliest films I’ve ever seen. The only reason I stuck with it is because it was directed by David Fincher. But even the final joke didn’t justify 2 hours of boredom.

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Alan Greenspan was clearly one of the greatest Fed chairs, perhaps the greatest. But I evaluate his tenure a bit differently than many other pundits. Here are a few contrarian views:

1. While Greenspan did a great job producing stable NGDP growth during his tenure (1987-2006), there is no reason to believe that he would have done better than Bernanke during 2008, indeed his public comments about monetary policy during 2008-09 suggest that he was just as off base as the Fed.

2. On the other hand, Greenspan gets way too much blame for the 2008 financial crisis, which was not caused by “deregulation”, whatever that means. Indeed the regulators were pressing banks to do more high risk lending. If you want more regulation, does that mean you wanted the regulators to press banks harder to make subprime loans? Or are you assuming disinterested, omniscient regulators? The financial crisis was caused by a combination of moral hazard (FDIC and Too-Big-To-Fail) plus tight money. Greenspan’s biggest mistake in this area was the 1998 LTCM rescue, which slightly worsened moral hazard.

3. Don’t think of 1987-2006 as the “Greenspan era”, think of it as the “NeoKeynesian consensus era.” It wasn’t just the Fed, almost all the major central banks figured out how to do inflation targeting using a Taylor principle-type approach, and this largely explains why other developed countries had the same sort of inflation targeting success as America during this period.

4. In 1996, Greenspan spoke of “irrational exuberance” in the stock market. Years later, that warning was viewed as a prescient call, even though he was pretty clearly wrong. Stocks were not overvalued in 1996. This is just one of many examples of how human thinking is biased toward finding “bubbles” where they do not in fact exist.

5. Greenspan’s strongest attribute was his willingness to take seriously the information contained in asset prices.

Posts by Marcus Nunes, Lars Christensen, and Stephen Kirchner have good discussions of Greenspan’s legacy.

As a Milwaukee Bucks fan I cannot help commenting on the recent trade of Giannis Antetokounmpo to the Miami Heat. Casual fans have begun underrating Giannis in a couple ways. First, he gets blamed for the recent decline of the Bucks, which is actually due to the fact that 10 years of horrible drafting, bad trades, and bad injury luck produced a team lacking in talent. Second, people overestimate how often he’s injured. He only completely missed one playoff due to injury, plus a few isolated playoff games in other years, including the title year (2021.) In his 13 regular seasons, last year was the first time Giannis missed a lot of games, and that was partly due to the team holding him out when healthy in order to tank. He is an injury risk due to his age, size and style of play, but his injury history is not that bad. The amazing 2021 recovery from a severe knee injury right before the finals shows that he’s a quick healer. The betting market agrees with me—pushing Miami up to #5 in title odds (ahead of Denver), and disagrees with casual fans who view him as overrated. He’s clearly still a top 5 player, closer to #1 than #6. This will be the standard view by late November. (Boston understood, offering Jaylen Brown plus two firsts for Giannis.)

Last year, I discussed the fact that mixed race players were increasingly common in the NBA. I noticed that 5 of the top 13 picks in this year’s draft had one black parent and one white parent, including Milwaukee’s two picks (at #10 and #13.)

And now for my links:

1. The media won’t report this:

Oops, the Economist is part of the media, so I guess the media will report it.

2. Andrew McCarthy has a good piece on how to think about abuse of power. Hard to excerpt, but the key point is that illegal acts aren’t necessarily impeachable, and impeachable offenses aren’t necessarily illegal.

3. The US isn’t the only country shooting itself in the foot. Here’s Bloomberg:

China is restricting overseas travel for top AI professionals in private firms, requiring them to get approval from relevant authorities before embarking on overseas travel.

The government is targeting talent within the AI sphere, including startup founders, researchers, and executives, and adding individuals to the list based on assessments of their critical importance to the country.

The restrictions risk undermining the ability of AI firms in China to recruit and retain talent, and may force engineers with global ambitions to choose between staying home or going abroad earlier in their careers.

4. What sort of society would actually allow freedom of choice?

Walk into three different bars in Tokyo, and you may have three completely different experiences: one bar thick with cigarette smoke, one with a sealed glass smoking room humming in the corner, and one entirely smoke-free.

Within regulatory boundaries, the choice often lies with both the owner and the customer: Proprietors decide what kind of space they want to run, and patrons decide which environment they prefer.

When I’ve suggested that the US adopt this sort of system, I’m invariably told that it “won’t work”.

5. Words of wisdom from Matt Yglesias:

I wish labor would reflect more on the reality that almost all of the growth in the United States is happening in right-to-work states.

Some of that is because businesses prefer to invest in right-to-work states. But that’s not all of it. If it were the case that union-friendly labor laws had just devastated the economies of the Pacific Coast and the Northeast, then those states would be cheap. But demand to live in New York and New Jersey and Connecticut and Massachusetts and Maryland and California remains robust. If it were easier to build houses and apartments in those states, more people would live in them. If more people lived in them, a non-zero number of jobs would move with them. More jobs in states with union-friendly labor laws would create more opportunities to organize.

It would also mean much healthier pension situations for the large public-sector unions in those states.

6. The Bloomberg headline below caught my eye:

US Airlines See Robust Demand Even as Consumer Confidence Falls

Headline should read: US Airlines See Robust Demand Even as Surveyed Consumer Confidence Falls. I see no evidence that actual consumer confidence is falling—shoppers certainly are not acting as if they lack confidence.

7. Noah Smith reports that Claude is a neoliberal:

AI investor and founder Arram Sabeti recently asked Claude what policies it would enact in order to “fix everything” in America. . . . Claude’s answers were:

1.YIMBYism (upzoning, pro-housing deregulation)

2. Land Value Tax

3. Permitting/NEPA reform

4. Carbon tax and dividend

5. Repeal the Jones Act

6. Paying people to donate kidneys

7. High-skilled immigration

8. Reciprocal FDA approval agreements between rich countries

9. Reduce occupational licensing

10. Ranked-choice voting

This is pretty much just a list of neoliberal hobbyhorses.

A few comments. First, I entirely agree with Claude. Second, at least some of those views (selling kidneys, carbon tax/dividend, etc.) are unpopular.

8. Have you ever traveled to a strange foreign country where you know nothing about the culture? That’s what happens to everyone if you live long enough. In my email box I saw this headline and subhead from The Free Press:

Tough Love: Will I Get Canceled for Dating a Freshman?

A 22-year-old wants to ask out his 18-year-old classmate but fears campus backlash: ‘They’d label it predatory, and I’d be staring down the barrel of cancellation.’ Our advice columnist weighs in.

I did not read the article. I’d rather go to my grave not knowing what this is all about.

9. So blue states seem less suicidal:

And yet studies suggest that leftists are less happy. The left reminds me a bit of this quip from Annie Hall:

Life is full of loneliness, and misery, and suffering, and unhappiness, and it's all over much too quickly.

10. If Matt Yglesias is correct, then he and I comprise fully one third of all humans who have read Capital in the Twenty-First Century, cover to cover:

If you are one of the six people who actually read Thomas Piketty’s “Capital in the Twenty-First Century,” then you’ll know that the primary concern he raises in the book is specifically about this heir question.

Of course Piketty is French, and if a European Bill Gates tried to give $100 billion to charities fighting disease and poverty in Africa, instead of giving the money to his spoiled kids, they’d probably put him in jail. Speaking of which, this item in The Economist caught my attention:

Employment in the sector rose about 6% in 2024, the last year measured, according to Confindustria Nautica, an Italian yachting-industry association. It may yet stay afloat: one broker notes that America, the biggest market, is growing in spite of the oil crisis. Since last July, Uncle Sam considers vessels majority-owned by American firms tax deductible.

Tax deductible? Long time readers know that I have an unhealthy obsession with the idea of using a progressive consumption tax to shrink the size of superyachts by 25%. But even if I’m wrong, should superyacht buyers pay a 0% tax rate on purchases made with before tax income while rowboat purchasers must pay an 8% sales tax with purchases made using after-tax income?

11. Here’s The Economist:

This symbiosis between life insurers, reinsurers and private-asset managers (which these days often own or work closely with the other two) is dubbed the “Bermuda triangle”, after the Caribbean jurisdiction where it has blossomed.

I suppose “Bermuda” does sound a bit Caribbean. How about renaming the island Prospero, to avoid confusion? Rich countries should have rich sounding names (think Luxembourg and the UAE), and of course there’s a theory that The Tempest was loosely based on a shipwreck in Bermuda.

Or perhaps East Carolina?

12. This tweet caught my eye:

It’s worth mentioning that Orange County (southeastern area on the map) is far better governed than LA County. You notice the difference immediately when crossing into LA County (Long Beach) on the 405.

Utopia is living in a politically purple part of coastal California. (Unfortunately, the OC is more boring than LA—not for young people.)

13. The Economist has an eye-opening graph, especially given that Texas is a conservative oil and gas state:

14. A new paper by Xiwen Bai, Jesús Fernández-Villaverde, Yiliang Li, and Francesco Zanetti has this abstract:

We study how global supply chain disruptions affect monetary policy transmission. Post-pandemic evidence indicates surging transportation costs, goods-market imbalances, and rising prices. We develop a model in which logistical bottlenecks (upstream slack coexisting with downstream shortages) steepen the aggregate supply curve. This convexity amplifies price responses to monetary policy while dampening output effects. Threshold VAR and Local Projection estimates are consistent with this mechanism: during disruptions, contractionary policy reduces prices more at smaller output cost, easing the stabilization trade-off.

This makes sense, although I’d focus on the role of labor markets. The fact that there was a labor shortage in 2022-23 made it easier to bring down inflation with a more contractionary monetary policy. If a labor market goes from normal to weak you tend to get a recession. Going from overheated to normal doesn’t necessarily trigger a recession.

15. Matt Yglesias has a good analysis of the horseshoe theory of politics:

    One is temperamental. Most people who work in politics have a kind of mainstream disposition. They probably have a few opinions that are way outside the consensus, but those opinions aren’t strongly held or aren’t about things that they feel passionately about. Their general approach to life is to try to make incremental progress on relatively mainstream issues. Extremists aren’t like that — they have an oppositional attitude toward authority and end up having that in common with each other.

    Another is negative polarization. There are two kinds of people who really, deeply, and profoundly hate Hillary Clinton, Barack Obama, Chuck Schumer, and Hakeem Jeffries: Republicans, and people on the far-left. This ends up being something that they have in common with each other. Pair a far-leftist up with someone from the far-right who hates mainstream Republican Party leaders and they end up having enemies in common, which is a good way to start making friends.

    A third is ideological. There is a “liberal center” to American politics that believes, fundamentally, in a positive-sum cooperative world. Then there are illiberal zero-sum tendencies floating around that tend to sort themselves on the basis of whether they blame foreigners for everything or whether they blame rich people for everything, but they have that zero-sumness in common. And of course many things — like trade — implicate both foreigners and rich people.

16. We frequently read about China’s massive military build-up and Europe’s pathetically low levels of spending. Thus, you may be surprised to learn that China’s military spending has fallen below 2% of GDP at a time when the EU’s military spending is up to 2.1% of GDP, and is still rising.

The two regions have roughly equal size economies, although China’s is larger in PPP terms.

17. Very good news from the FT:

Swiss voters have rejected a proposal to cap the country’s population at 10mn people, delivering a surprise defeat to a rightwing initiative that had appeared neck and neck in opinion polls until just days before the vote.

Projections on Sunday showed the initiative losing by roughly 54 per cent to 46 per cent, a significantly stronger result for opponents than suggested by recent polls, which had indicated a tight race in the final days of the campaign.

The proposal, backed by the rightwing Swiss People’s Party (SVP), would have made Switzerland the first country to impose a formal cap on its population. It sought to limit the number of residents to 10mn, from about 9.1mn today, and would have required the government to take measures to curb population growth once the population reached 9.5mn.

18. Iran War analysis from Noah Smith:

Before the war, Iran didn’t control the strait, simply because it didn’t realize it could. Drone technology had advanced to the point where Iran was able to shut down Hormuz, but Iran didn’t know that until the U.S. attack forced it to try the risky and desperate move of actually shutting down the strait. The gambit paid off spectacularly, and now Iran knows that modern drone weaponry gives it an advantage it didn’t have in previous decades. So it controls Hormuz.

It’s kind of wild to step back and consider how good of a position Iran’s leaders are in now, compared to the situation before the war. Iran had lost most of its proxy armies in the Middle East — Hezbollah, Assad, most of Hamas. The regime had been rocked by massive nationwide protests, which it only managed to quell by murdering tens of thousands of innocent Iranian citizens. The country’s economy was slowly dying. Now the leaders are firmly entrenched in power, their economy will be revived, and they find themselves the masters of Hormuz for the first time.

. . . A final silver lining is that the U.S. may step back from the Middle East in general, as I’ve long been urging.

And from Matt Yglesias, you can’t make this up.

19. Jessica Riedl has an excellent piece explaining why AI is unlikely to solve our budget problems:

Unfortunately, like all the other "easy solutions" to budget deficits, AI is highly unlikely to produce the trillions of dollars in annual fiscal savings necessary to avert the hard decisions. Betting America's fiscal future on AI is wishful thinking.

20. The job impact of AI is overrated:

Two main economic concepts apply to the rise of AI in the legal industry: the lump of labor fallacy and the Jevons paradox.

The lump of labor fallacy is the mistaken belief that there is a fixed amount of work to be done in the economy. Under this view, if AI eliminates a category of tasks, the people who did those tasks are simply left without work. History tells a different story. Many of the ten most common jobs from the early 20th century no longer exist in any recognizable form. Yet employment has expanded dramatically. Many of the jobs that exist now, including roles like AI data scientist or prompt engineer, didn’t exist then because the conditions that created them hadn’t yet arrived. Every major technological shift ultimately results in a larger total number of jobs, even when it disrupts specific roles.

Meanwhile, the Jevons paradox states that when something becomes cheaper and more efficient to use, total consumption of it tends to increase, not decrease. The original example involved coal. As steam engines became more efficient, requiring less coal to operate, there was a widespread expectation that coal consumption would decrease. Instead, it multiplied. Cheaper engines led to more engines being used in more places.

21. No idea what this means, but FWIW:

22. Works in Progress is full of great articles. One of them describes Spain’s successful urbanism (until recently):

For the price of one mile of the New York’s Second Avenue Subway extension, Spanish builders covered the entire 35-mile 1995–1999 expansion of the Madrid Metro.

23. Adrian Wooldridge on Swedish reforms:

A succession of neoliberal governments re-engineered the model from top to bottom. Sweden reduced its public spending as a proportion of GDP, cut the top marginal tax rate radically and dismantled taxes on property, gifts, wealth and inheritance. It introduced a universal system of school vouchers, invited private schools to compete with public, allowed private companies to provide state-funded health services and care for the elderly and donned the golden straitjacket of fiscal orthodoxy, keeping a downward pressure on debt and deficit, and swapping a retirement system with defined benefits for one with defined contributions while making automatic adjustments for longer life expectancy. All more Milton Friedman than Bernie Sanders.

24. A sentence I never expected to read:

Corporate officials who “falsely represent” their business as gay face up to a year in county jail.

Oscar Wilde would have had something clever to say about that.

25. From the FT:

Russia has accused the US of abandoning efforts to broker an end to the war in Ukraine after Donald Trump appeared to be shifting again in favour of Kyiv.

Russian foreign minister Sergei Lavrov on Tuesday said the US was “seemingly stepping back from the role of an objective mediator” in the war and had “forgotten” about Trump’s own statements last year inching towards Moscow’s position.

Instead, Trump was “hugely impressed and enthusiastic” about Ukraine’s recent campaign of long-range strikes on targets deep inside Russia at last week’s G7 summit, said two people briefed on the private discussions among the leaders. Trump at that summit also agreed to increase sanctions on Russian energy.

Trump values strength and the Ukraine is getting stronger. Ethics? Not so much.

26. Most people I speak with believe that saving Social Security will require a combination of tax increases and benefit cuts. It would seem that those “most people” come from a rather unrepresentative group, perhaps 5% of the population:

It is not just Washington inertia that makes reforms tough. In polling conducted by YouGov for The Economist, 71% of respondents believe Social Security spending should be increased, more than for any other category of government spending. In the same poll, 45% say it should be increased a lot. The proportion who wish it to be reduced is just 5%, slightly less than the share of Americans who believe that covid-19 vaccinations were used to microchip the population.

Only 5%? Now suppose you asked people if they favored raising taxes. How many would say yes? Suppose you asked people how many favored allowing Social Security to go bankrupt. How many would say yes? Would the three options add to 100%?

Or is a better interpretation of the data that there is no such a thing as public opinion.

27. Why is Matt Yglesias my favorite center left pundit? In back-to-back tweets he nails the essence of what’s going on. First this:

Chicago’s left already staged a successful insurgency, but the incumbent left-wing mayor who led the successful insurgency is an unpopular failure so people don’t talk about him anymore.

Question is whether the reformist counterinsurgency will spread from SF to the Windy City.

And then this:

There’s been an interesting trajectory since Bernie’s 2015 era pitch that “democratic socialism” meant “policy like Denmark” to the current situation where left policy proposals look nothing like actual Danish tax policy.

We’ve gone from “be more like Denmark” to “be more like Venezuela”. At the same time, the right has gone from “be more like Switzerland” to “be more like Hungary”.

28. I generally agree with “The Unpopulist”, but not this time:

The Unfortunate Necessity of Court Packing to Stop America’s Authoritarian Drift

Court packing is authoritarianism.

29. I refuse to insult the Turkish people by calling their country “Türkiye”. Only banana republics insist on foreigners calling their country by the local name. It’s a sign of weakness and insecurity. You don’t see residents of places like Germany, Spain and China insisting that we call their country Deutschland, España and Zhōngguó.

30. Just one more reason (out of dozens) why JD Vance should never be president.

31. What would you say if someone invited you to this Orange County restaurant?

    

No . . . ?

Part 1: Apart from the 2020 surge in murders, a period when police sort of gave up on crime for a brief period, the US murder rate has been declining since 1991. I expect this decline will continue, and within about 20 years the US will have Canadian rates of murder. More specifically, we’ll have a murder rate close to the current Canadian rate of roughly 2 per 100,000 people. I anticipate that the Canadian rate will also decline further and thus remain below US levels in 2046.

In the US, the murder rate peaked at 10.7 per 100,000 in 1991 and fell to only 4.29 per 100,000 in 2025. Early figures suggest that 2026 is on pace for a rate of roughly 3.8 per 100,000. (And no, it’s not due to better medical care.)

While the data from early American history is rather fuzzy, I suspect this is the lowest rate in US history (based on some highly scientific analysis on my part—watching lots of gunslinger movies as a kid.) Seriously, I expect the rate will go much lower, for at least four reasons:

1. The level of births was 4.32 million in 2007, and has been falling ever since. That means the number of 19-year old Americans is virtually certain to fall sharply over the next 20 years. And young men are especially likely to be involved in violent crime. Also note that the fertility rate of African Americans is falling especially rapidly and is now below the rate for white Americans.

2. Declining crime tends to feed on itself. With fewer murders, each crime stands out more and attracts more police attention. That leads to a greater chance of being apprehended, further discouraging crime.

3. The sort of surveillance technology that has radically reduced crime in Chinese cities like Shenzhen is likely to eventually become a feature of American cities. Artificial intelligence will play a role, as will ubiquitous cameras in public spaces, the tracing of location via cell phones, automobile computers, and related technologies, as well as better DNA testing. Robocops will patrol our streets. The world of 1984 is arriving faster than I expected. Big Brother will be watching us all in 2046.

4. The sort of lifestyle changes that have reduced fertility rates are also likely to reduce crime rates. When I was young, bored young men stood around on street corners, which is a recipe for crime. Now they can enjoy all sorts of electronic entertainment in the comfort of their home. These forms of entertainment also increase the cost of incarceration, where Netflix may not be available. Alcohol use is declining and being partially replaced by pot use, which is less likely to provoke violence.

If you believe that my claim is far-fetched, consider that just a single factor—demographics—is likely to reduce crime committed by young men by roughly 15% to 20% by 2046. That alone would get the murder rate down from the 2026 estimated 3.8 to roughly 3.2 per 100,000. And as recently as 2021, the rate was 7.75 per 100,000. Much of the progress toward Canada’s (current) murder rate has already occurred, even though America still has about hundred gazillion guns. (By the way, I’m not a gun nut—some restrictions may be sensible—just saying that guns are not the primary factor.)

I haven’t even discussed immigration, which clearly plays a role in the especially rapid decline in murder rates in places like NYC.

To be clear, I’m not suggesting that a rate of even 2 per 100,000 is ideal—many European countries have rates of 1 per 100,000, or even less. But it would represent a dramatic reduction from the rate of nearly 10 per 100,000 during much of the 1970s and 1980s. Speaking of 2046, who can forget this gorgeous Wong Kar Wai film:

Part 2: I cannot prove this, but I strongly suspect that drug addiction in America is on the way down. Here are my claims; you tell me if I’m mistaken:

1. There is less alcoholism than in the past

2. Smoking is declining fairly dramatically

3. Opioid drug abuse is declining

4. Marijuana abuse is increasing

Now I’d like you to consider two different social science hypotheses and tell me which one better fits the data:

1. Pot is a “gateway drug”, which leads to even more harmful forms of drug abuse.

2. Pot is a substitute for other types of drugs, and legalizing pot would tend to reduce other (more serious) forms of drug abuse.

Behind the paywall, I’ll offer a few thoughts on the War on Drug Using Americans:

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1. The decades after WWII saw many cultural, political and economic changes. The birth control pill and the loosening of divorce laws. Feminism and civil rights. Rock and roll and drugs. Soft on crime policies and a sharply rising crime rate. The end of the gold price peg and soaring inflation. The welfare state and affirmative action. A dramatic expansion of (unfunded) Social Security benefits. Environmentalism and NIMBYism. The most important changes began during the 1960s.

2. The decades after WWII saw a notable baby boom, generally dated from 1946 to 1964. I was born in 1955, smack dab in the middle of that period. I am a typical baby boomer.

Now I’m going to say something that might be controversial but is obvious when you think about it. I am not personally to blame for all of the cultural, political and economic policy changes of the 1960s.

I say this because I frequently see boomers being blamed for every single ill in modern society. The peak period of change was roughly 1965, sometimes called “the liberal hour”. I was ten years old. Not a single baby boomer was out of their teens. If you wish to blame a generation for all the ills of modern society, please blame the Silent Generation and the Greatest Generation. They got rid of traditional morality and pushed divorce rates much higher. They put Social Security on an unsustainable path. They ended the gold price peg for the dollar. They created affirmative action and NIMBYism. The ended the death penalty. Heck, they even invented rock and roll.

I also see people suggest that boomers are the lucky generation. No, it is smaller generations that are lucky. Big generations face a highly competitive job market. In 1982, I was paid $19,700/year as an assistant professor, at a time when the unemployment rate was 10%. Even in real terms, starting salaries for young Gen X professors had moved far higher by the late 1990s and early 2000s. It was mostly the silent generation and perhaps a very few early boomers that left college and entered a strong job market during the 1960s.

Even worse, my generation entered the job market at a time when the feminist revolution shifted many women from being housewives to career women, so labor force growth was even higher than working age population growth:

Real wages stagnated in the 1970s and 1980s.

The Supreme Court’s “soft on crime” rulings in the 1960s and early 1970s were not made by boomer justices. The feminist revolution was led by silent generation types like Gloria Steinem. The population control movement was led by Paul Ehrlich, also a member of the silent generation. Martin Luther King was a member of the silent generation. Please don’t assume that things that happened during the baby boom (and even soon after) were caused by baby boomers. Last time I looked, Congress is not composed of young children:

The 1976 election was the first one where I could vote. I recall pundits being surprised by the substantial support for Gerald Ford in college areas, as younger voters were already starting to edge back toward the center. The student radicals of the 1960s were often silent generation members. In my hometown of Madison, the antiwar movement was led by Paul Soglin, who later become mayor. I thought of him as a boomer, but he was from the final year of the silent generation.

In my mind, rock music is associated with boomers. But rock and roll was developed in the mid-1950s, and even the second wave (Beatles, Beach Boys, the Stones, The Who, Dylan, Hendrix, Paul Simon, Lou Reed, etc.) were silent generation people. The film Bob & Carol & Ted & Alice nicely shows how silent generation members led the cultural change of the 1960s. The boomers just followed along.

I’m not saying that younger people should not despise the boomers, but please do so for the right reasons. Hate them for taking credit for innovative sixties pop music that was created by silent generation musicians. Hate them for their current selfishness on issues like NIMBYism and Social Security. Hate them for their hypocrisy—romanticizing their youthful adventures while opposing drug legalization. But please don’t hate us for all the changes that occurred during the 1960s (some of which were good, BTW.)

As an aside, in Where the Music Had To Go, Jim Windolf points out that teenagers at Beatles concerts in 1964 screamed so hysterically that the music could not be heard, while older Dylan fans sat silently listening to acoustic folk music. So the terms “silent” and “boomer” fit these two generations in more ways than one. Windolf says that Dylan fans despised the “teenyboppers”, but does not say what Beatles fans thought of the folkies. Perhaps it was one of those “I don’t think about you at all” situations.

Time is continuous and the relationships between people and events are often not what they seem. Lines between generations are arbitrary. My mother was born June 7, 1926 (six days after another pretty lady), near the end of the Greatest Generation. But she was mostly in high school during WWII, so culturally she’s perhaps a bit like the Silent Generation. When she was a few days old, she was closer in time to the last days of Thomas Jefferson and John Adams (who both died on July 4, 1826) than to her current life. She’s experienced more than 40% of American history. For some reason that fact boggles my mind, as to me she’s sort of timeless, an eternal “mom”.

Happy 100th birthday.

PS. My favorite poster advertises a festival in Granada, Spain. Decades after I bought the poster, I noticed the date. Ever since, 1926 has been my favorite year:

It has become an overused cliche that the universe is so vast that the puny human mind is unable to even imagine its scale. So let me begin with a claim that might be more controversial; a human life is so vast that a person cannot reasonably evaluate their own life. Try to sum up your life? It’s probably impossible.

It sounds a bit arrogant for me to tell other people that they cannot evaluate their own life, so I’ll stick to my own example. If it doesn’t apply to you, that’s fine. I won’t try to press the point. Perhaps I’m different.

In your vision, there is a blind spot that you don’t notice. The brain sort of fills in the gap, making it seem like you see the entire field of vision. I suspect that life is sort of like that. My mind gives me the impression that I can look back on my entire life, but all I’m seeing are a few tiny fragments.

When I was nine years old, time seemed to go by very slowly. My age nine life must have been vastly richer than my age 70 life, with lots more happiness and pain, boredom and drama. It was one of the most important parts of my life, at least in “utility” terms. And yet I recall almost nothing of that year, perhaps just one or two dozen events. But that’s not even a single day for a nine-year old!

Here’s another way of looking at things. I sometimes try to categorize my life by type of event. But the more I look, the more I see. You have school, and work, and time spent with friends. Then there are the days where you are sick. There are days spent traveling. That includes both lots of vacations and lots of travel for work. And time spent at work is itself quite diverse, featuring lectures, research, office hours, committee meetings, lunch conversations, commuting time, etc. And those are just the tip of the iceberg.

At age 70, I will occasionally recall some important past event that I had completely forgotten. Clearly, I had not completely forgotten it, but the memory was inaccessible most of the time, including those times when I try to look back and evaluate my life. The sudden recollection of one of those deeply buried memories triggers a feeling analogous to deja vu, but different. It triggers the feeling that life is much bigger than I had thought, that much more has happened to me than I can recall at any one time. The Dictionary of Obscure Sorrows coined the term “sonder” for this feeling.

There’s also a vast amount of time spent on things that are more passive than play, work and school. Thus, I’ve read many books and seen even more films. How should I think about the part of my life immersed in alternative worlds through the narrative arts? This is from the Taiwanese film YiYi, which I’ve seen twice:

Pangzi: My uncle says we live three times as long since man invented movies.

Ting-Ting: How can that be?

Pangzi: It means movies give us twice what we get from daily life.

I occasionally think about those medieval peasants that were not able to go into a dark theatre at age 12 and have their minds blown by the film 2001: A Space Odyssey. (Substitute Star Wars if you are a decade younger, or The Matrix if you are Gen X.) I’ve spent a lot of my life immersed in films, many of which are far more engrossing than my “real life”. How should I think about that time?

When most people evaluate their lives, they probably think about career success or failure and their family life. That’s fine, but is it possible that we underrate the importance of all the time we spent on hobbies like collecting stuff or watching sports or listening to our favorite music in college or using drugs or hiking in the wilderness or lots of other “trivial” pursuits? Are we actually evaluating our life, or are we evaluating the official version of the most important parts of life? In some ways, artists like Borges, Conrad, Velazquez, Cezanne, Kubrick and Dylan seem more real to me, a bigger part of my life, than many casual friends I’ve had over the years.

The film It’s a Wonderful Life probably describes the way that many people visualize looking back on their lives. But an honest appraisal of my life would have to include It’s a Wonderful Life. The two hours spent watching that film (big screen of course) was much more engrossing than the two hours right before of after I watched the film, when I probably did something boring and eminently forgettable. If someone asked me to “look back on my life”, I would not start by saying “Well let’s see, I watched It’s a Wonderful Life”, as that film portrays someone else’s life. But it’s also a part of my life!

After writing this, I started to recall all sorts of minor things I’d overlooked. For instance, initially I thought of “work life” as my 35 years at Bentley University. But then I recalled that I also spent lots of time doing physical labor, especially when young but to some extent throughout my life. I suspect that I did at least an order of magnitude more physical labor than most other college professors—so that’s also an important part of my life.

Some stuff that I recall seemed normal at the time, but weird in retrospect. At age 13, I would see my (divorced) dad every few weeks. We’d sit at the bar, and I’d drink soda (then called “pop”) while he consumed six or eight scotch and waters, and we’d talk about all sorts of stuff. Then he’d drive me home! (Blood alcohol level? Don’t ask.) He’d occasionally give me 40 cents to buy him a pack of Kents from the cigarette vending machine. Or at the same age, hanging around the rail yards at night with my friends, dodging the police while collecting flares to use in making fireworks. That’s part of my life too.

I honestly don’t know what sort of life I’ve had. If I look back on it when I’m feeling down, I see a vastly different life from when I look back on it when I’m happy. So, which is true? What if both are false?

Again, perhaps this agnosticism about life is just me, maybe I’m weird. But now let’s look at two issues where I do have some expertise, evaluating economic problems and evaluating economic policy regimes. Most of the bad analysis that I see in these two areas ultimately derives from a single mistake—vastly underestimating the size of the economy. Not in the sense that GDP is larger than measured due to the underground economy, rather in the sense that the economy is far more complex and diversified that it seems at first glance. I’ll illustrate the two claims, one at a time:

Part 1: There’s a great deal of ruin in a nation

I received an email from The Economist magazine, which had the following admission:

For the past year America has been running a giant experiment. What happens when you take one of the world’s most successful economies and put in place two big growth-busting changes: tariffs and a sudden stop in immigration? Many observers—including us—thought the impact would be unambiguously negative. Yet America’s economy is still the envy of the rich world. The country’s GDP grew faster than that of any other G7 country last year. Its stockmarkets have repeatedly hit record highs over the past 15 months. What is going on?

In this week’s cover story, which will be published tomorrow, we offer an answer. We have crunched the numbers. An artificial-intelligence boom, soaring stockmarkets and some of Donald Trump’s own measures have boosted the economy. But by our calculations, the president’s chaotic policymaking, sweeping tariffs and mass deportations are, in fact, hurting growth—a drag we call the “MAGA tax”. Our calculations suggest that without the MAGA tax, America’s economy would have grown more than half a percentage point faster.

I suspect that many people overestimated the negative impact of Trump’s policies because they forget how complex the economy is. If Trump’s policies reduced real output by $300 billion, they would be enormously destructive. But that’s only one percent of GDP and could be easily obscured by offsetting effects related to monetary policy changes, an AI boom, and other factors. We saw this in 2007, when the US economy continued to expand despite a dramatic collapse in home construction. Even at its peak in early 2006, homebuilding was only 6% of GDP.

In general, people tend to overestimate the impact of any single real factor on the US economy. But there is one type of shock that people underestimate—nominal (monetary) shocks. Because wages and prices are sticky, nominal shocks affect not just a single sector like homebuilding, rather they impact all markets. That’s why almost all recent US recessions (apart from Covid, which only lasted 2 months) have been caused by contractionary monetary shocks.

This also explains why there are so many false alarms, forecasts of recession that don’t pan out. People wrongly assume that a problem facing one particular sector will cause a decline in the overall economy. In a large and diversified economy, that is rarely the case. Again, Covid being a notable exception.

The fact that there is a great deal of ruin in a nation has implications for a wide range of issues. In a post entitled “Supply is elastic, installment number 1637”, Tyler Cowen cites the fact that our policy of murdering suspected drug smugglers in the Caribbean does not seem to have slowed the supply of cocaine, and the cutoff of oil from the Persian Gulf did not cause the European airline industry to shut down in 6 weeks (as had been predicted). Numerous other examples of surprisingly elastic supply could be cited, such as the almost universal failure of “sanctions” to have their desired effect. Doomsday resource depletion or overpopulation scenarios are often the result of an excessively simplistic view of the economy.

Do you recall the maxim that the best forecast is usually more of the same (which has allowed Bryan Caplan to win almost all his bets)? This is because the vast size and complexity of the economy results in no single factor having much effect.

Part 2: Policy regimes are more complex than they appear

It isn’t just the overall economy that is really big, economic policy regimes are also very large and complex. In previous blog posts, I’d occasionally point out that Singapore has one of the freest market economies in the world. They are number one in the Heritage ranking and number two (slightly behind Hong Kong) in the Fraser ranking. Commenters occasionally responded that Singapore’s government is highly interventionist, citing numerous examples. So, who’s right? Queue the “Why not both?” meme.

I asked AI Overview to estimate the number of regulations in the US:

Because there is no single agreed-upon definition of what constitutes an "economic regulation," researchers estimate there are well over 1.1 million distinct federal regulatory restrictions, filling roughly 130,000 to 190,000 pages in the Code of Federal Regulations (CFR). [1, 2, 3]

And that’s not even accounting for state and local regulations such as rent controls, zoning rules, minimum wage laws, occupational licensing laws, building codes, etc., etc.

I wonder how many regulations there are in North Korea? If the answer were 800,000, would you conclude that North Korea has a less regulated economy than the US? I hope you see my point. Modern economies are very difficult to summarize as “free market” or “socialist”. Not all regulations are equally important.

Most economies are very large and complex, and even relatively free market economies have extensive government intervention. This complexity allows people to find evidence to support almost any position on the question of optimal policy regimes. In a country that is viewed as relatively successful, it is almost always possible to find a few examples of policies that you favor. Then you merely need to claim that these policies explain the success of your chosen example.

Similarly, in a country that is widely viewed as economically unsuccessful, it is almost always possible to find specific policies that you disagree with. Then you can claim that these bad policies explain why the country is doing poorly. Due to motivated reasoning, I suspect that we usually overestimate the impact of any single policy on a country’s overall policy regime.

You can think of the wealth of a country as being due to three factors:

1. Natural resources.

2. Human capital.

3. Economic system (taxes, property rights, regulations plus cultural traits such as corruption, interpersonal trust, etc.)

Beyond oil and gas, natural resources don’t seem to have a dramatic impact on per capita GDP. Student scores on international exams provide a rough estimate of the average level of human capital. The third factor is the hardest to estimate. How in the world do we measure the extent to what a policy regime encourages wealth creation? If the US has 1.1 million regulations, how can we possibly make sense of such a complex picture?

I don’t know whether I have any persuasive answer to this question but FWIW, I rely on two primary pieces of evidence, natural experiments and basic economic theory. I look at what happens when countries undertake major changes in their policy regime, and I look at what economic theory predicts about the relationship between economic regimes and wealth creation. For instance, I notice that:

1. The sluggish West German economy took off after ending price controls in 1948.

2. The sluggish South Korean economy took off after removing some barriers to trade in 1964-65.

3. The sluggish Chinese economy took off after improving property rights in rural areas after 1979.

4. The sluggish Polish economy took off after extensive privatization in 1990.

5. The sluggish Indian economy took off after significant deregulation in 1991.

And there are many other similar examples.

I also look at the predictions of economic theory. In most cases, theory predicts that efficiency results from having prices freely move to a competitive equilibrium. Theory predicts that low marginal income tax rates on labor and capital encourage wealth creation. Theory predicts that free trade is more efficient than protectionism. Theory predicts that wealth creation will improve if people have secure property rights over their land and physical assets. This is roughly the package of policies that are labeled “economic freedom” by Heritage and Fraser.

So, we have a set of economic models that mostly (not always) predict that freer markets are more conducive to wealth creation, and we have lots of historical examples of economies taking off after reforms increased “economic freedom”. But it’s complicated, as a country like Denmark scores extremely high on free markets but also has a large welfare state. Intervention is multidimensional.

It is also important to avoid motivated reasoning. In some cases (such as Chile), it took a long time for free market reforms to produce higher output. As Marcus Nunes recently discussed in an excellent post, Milei’s reforms in Argentina have thus far produced only very small gains. Economies are quite complex and it is not always clear whether any single reform, or set of reforms, will prove to be truly transformative. There’s a lot we don’t know.

Let’s conclude with a few other examples of things being bigger than we imagine:

Physical size of Earth: I few years ago, I visited “Africa” and went on a safari, staying at four different hotels. Well, actually just one of Africa’s 54 countries—that’s more countries than America has states. After the trip, I looked on the map and saw that the seemingly vast area I covered was just a tiny part of Tanzania, up near the Kenyan border. I know nothing about the rest of Tanzania. And did I even see that small region? Land travel is basically two dimensional, along the narrow thread of a road. To the right and left you could travel 10 miles, 20 miles, or 50 miles, and there would be thousands of villages that I never saw, untouched by tourism.

But hey, I’ve been to “Africa”!

[I traveled in the rectangular area northwest of Arusha.]

People occasionally do European vacations. (If It’s Tuesday, This Must be Belgium.) More sophisticated travelers will visit a single country, say Italy. I once knew a couple that vacationed in Italy once a year, seeing just one province on each trip. But can you even do Tuscany in one trip? Isn’t it better to do Florence on one trip, then Siena & Arezzo, then Lucca & Pisa, then the hill towns, then Etruscan sites, etc. And even Florence might be too much. Spend one trip exploring the buildings and statues designed by Brunellesci and Michelangelo, another closely examining paintings in the Uffizi and Pitti palaces.

Life: The diversity of plant and animal life is almost beyond comprehension. Not just in big countries like the US and China; even medium size countries like Colombia have an amazing variety of local ecosystems.

Culture: People often say, “The Japanese are basically like this” or “The Italians are basically like that.” No, they are like 100 different things, often seemingly contradictory.

History: History is full of stuff to support almost any perspective. At one time, it was believed there was a Dark Age from 500 to 1000. Then revisionists found evidence suggesting there was no Dark Age. Then even more evidence was found, suggesting that yes, there was a Dark Age after all. Genetic research into man’s past keeps making the picture look more and more complex. You could spend your entire life reading only history books and never run out of surprising new information.

Literature: Read all the classics? The deeper you look, the more great writers you find.

Film: There are at least 50 to 100 films deserving of being in the top 10.

At least 1000 films deserving of being in the top 250. In other words, try as hard as you might in developing your list of the top 250, and I’ll easily find another 750 that are better than many films on your list.

The internet: How many great substackers have I yet to discover?

Here’s a recent Bloomberg headline:

Odd Lots: How the Invention of Rope Gave us Modern Civilization

How many words can you think of to replace “rope”, which leave the claim roughly equally plausible? The wheel? Farming? Writing? Printing press? Gunpowder? Steam engines? Banks? Roads? Sailing ships? Cement? Religion? Steel?

How many more? A hundred more? A thousand more? I can only estimate the number that immediately come to mind, not the vastly larger number that don’t immediately come to mind.

We only know what we know and vastly underestimate the universe of things that we don’t know.

PS. Here’s Scott Alexander:

I acknowledge that my inability to marvel at a live Caruso opera in Naples has cost me something deep and beautiful. But I cannot wish that the phonograph was never invented. Does the increased variety and quantity of music compensate for the decreased profundity of each musical experience? Surely this is part of it, but I would never accept this excuse in other areas that have not yet been cheapened. A thousand moderately pleasant one-night-stands cannot equal one passionate love affair.

I certainly would agree that the thought of a thousand moderately pleasant one-night-stands cannot equal the thought of one passionate love affair.

But the reality? Again, we only know what we know, and vastly underestimate the universe of things that we don’t know.

How about a thousand and one night stands, each accompanied by a clever story?

During the 1990s and early 2000s, China suddenly privatized thousands of bloated state-owned enterprises (SOEs), laying off tens of millions of workers. In aggregate, the policy was a big success. The restructuring made China’s economy much more efficient, contributing to rapid economic growth. But as is always the case with creative destruction, there were losers. China’s economic reforms cost lots of jobs in their “rustbelt”.

When most people hear the term rustbelt, they often think of an influential paper by Autor, Dorn and Hanson:

China’s emergence as a great economic power has induced an epochal shift in patterns of world trade. Simultaneously, it has challenged much of the received empirical wisdom about how labor markets adjust to trade shocks. Alongside the heralded consumer benefits of expanded trade are substantial adjustment costs and distributional consequences. These impacts are most visible in the local labor markets in which the industries exposed to foreign competition are concentrated. Adjustment in local labor markets is remarkably slow, with wages and labor-force participation rates remaining depressed and unemployment rates remaining elevated for at least a full decade after the China trade shock commences. Exposed workers experience greater job churning and reduced lifetime income. At the national level, employment has fallen in U.S. industries more exposed to import competition, as expected, but offsetting employment gains in other industries have yet to materialize.

The first half of that final sentence is true, but the second half has not held up well. Subsequent research does not support the claim that China reduced aggregate employment in the US, and indeed the US job market improved during the period they studied (1991-2007).

More importantly, the China shock literature misses the bigger story. The hardest hit area was China’s “rustbelt”, concentrated in the northeast region of the country. This region is known as the Dongbei, or Manchuria, and contains 100 million residents. Jordan Schneider directed me to a post by Zilan Qian that describes what happened:

The country’s enterprises, built for a planned economy, were suddenly exposed to market competition — and consequently began hemorrhaging money, especially in industries like steel and textiles. By 1997, the state had decided to consolidate the strategic enterprises and let the rest restructure, merge, or collapse. The slogan it coined was 减员增效 (jianyuan zengxiao) — “reduce headcount, increase efficiency.”

The consequences of this transformation depended on where you lived. Over 24 million workers in China lost their jobs in the state sector by the end of 1999. The layoffs were concentrated in the northeast — Liaoning, Heilongjiang, Jilin — once the industrial heartland of socialist China and now called China’s rust belt. In 1957, the [Manchurian] city of Shenyang’s Tiexi district produced the nation’s entire output of lathes, rock drills, gliders, rubber boats, and tower cranes, earning it the nickname “the Eastern Ruhr.”

By the late 1990s, 80% of the companies responsible for this output had gone out of production, and half of the district’s 300,000 industrial workers had been laid off. Between 1998 and 2000, nearly every year saw 7 to 9 million workers laid off nationally.

That’s right, the world’s biggest rustbelt was in China, and the majority of victims of the “Chinese shock” were Chinese workers. That’s how creative destruction works. At a time when Ohio had 5.6% unemployment (in 2007), Manchuria was in the midst of an economic depression.

If that’s the destruction, where was the creation part of creative destruction? Here:

Yet while the transition led northern China into economic crisis, the Pearl River Delta — geographically proximate to Hong Kong and Macau, home to China’s first Special Economic Zones, and the ancestral homeland of much of the Chinese diaspora in Southeast Asia and beyond — embraced rapid modernization and internationalization. The historical “land of fish and rice” became the “world factory.” Hong Kong investors established over 65,000 factories, employing about six million workers in the Delta. From 1991 to 2001, the Pearl River Delta’s regional GDP grew almost eightfold, and its population increased from 20 to 43 million.

Today, the Pearl River Delta has 86 million people, more than double the population of Jakarta, which is the world’s most populous metro area. The PRD is a bit too spread out to be viewed as a single metro area, but it’s a close call. The region has over 70 million people even if you remove Zhaoqing, Huizhou and Jiangmen from the light grey area on the map, and focus on the core cities:

(I plan to visit the area later this year.)

Recently, I’ve noticed an increasing number of people worrying that China is causing de-industrialization in other parts of the world. I believe these fears are exaggerated. Below the paywall, I’ll comment on arguments made by Matt Yglesias, the Peterson Institute, and Soumaya Keynes.

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Part 1: The Great Helmsman

So now we are being told that an increase in interest rates is a virtual certainty. Here’s Bloomberg:

As Kevin Warsh takes the helm at the Federal Reserve, bond investors are betting he’ll prioritize the central bank’s inflation-fighting credibility over President Donald Trump’s push for lower interest rates.

With the Iran war unleashing the biggest inflation surge since 2023, traders are pricing in that the Fed is virtually certain to start raising rates by December. That’s a sharp reversal from just three months ago, when markets were betting there were deeper cuts ahead.

I’d like to see “virtual certainty” defined in numerical terms. Is it 99.9%? Or 99.99%? I’d also be interested in seeing the probability of recession over the next 6 months. Is it virtually certain that there will be no recession? And if there is a recession, what would the Fed do to interest rates?

I hope you see the problem here. Economists have shown they have no ability to predict turning points in the business cycle. Because interest rates are highly cyclical, this also means that we also have very little ability to predict movements in interest rates. I’m not suggesting that market forecasts are completely meaningless, merely that they fall well short of “virtual certainty”.

On the day of the Bloomberg article, I checked the fed funds futures market and this is what I saw:

Unless I’m mistaken, that suggests that financial markets expect only a very modest increase in rates between now and December. (15 bps?) Surely this falls far short of virtual certainty.

Recall that the Bloomberg article started out:

As Kevin Warsh takes the helm . . .

Is Warsh at the “helm”, or is the FOMC at the helm, or is the market at the helm?

For months we’ve been told that Trump picked Warsh because he was committed to cutting interest rates. Warsh has frequently insisted that a cut in interest rates would be appropriate. So why is the media now telling us that a rate increase is a virtual certainty? Did Warsh deceive us? Or is it possible that Warsh is not “at the helm”?

A helm is sort of like a steering wheel. When I drive my car, I can use the steering wheel to go over to the right side of the lane, right up against the bike lane. Or I can go out to the left side of the lane, right up against the center stripe. If I’m feeling particularly aggressive, I can even briefly cross the (dotted) center lane to pass a car. But I better get back quickly!

I can even turn the steering wheel in such a way as to completely leave the road, in which case I’m likely to have an accident. But why would I want to do that? If you were trying to forecast my manipulation of the steering wheel, would you forecast a traffic accident, or would you forecast that I adjust the wheel as needed to keep the car in its lane?

To be clear, traffic accidents do happen. But they usually happen when least expected. If you knew an accident was about to happen, you would presumably adjust the wheel to prevent it from occurring. The best model of car steering is that the steering wheel will be set at a position that keeps the car on the road. And the best model of interest rates is that the Fed will target rates in such a way as to keep the economy relatively stable—too much spending will trigger inflation and too little spending will trigger a recession.

Once you see the world this way, most of what you read about monetary policy begins to seem like nonsense. I don’t know how many times I’ve seen people claim that if the US government debt situation becomes too burdensome, the Fed may be forced to hold down interest rates so that the burden of the debt doesn’t become too onerous. Really? And just how is the Fed supposed to “hold down” interest rates without causing an accident? With a magic wand?

Imagine if Greyhound Bus Company hired a driver that insisted buses needed to turn the steering wheel to the left more often. Would you feel comfortable having him steer your bus on the road shown below?

I understand that Kevin Warsh needed to say that he intended to cut interest rates in order to get Trump to nominate him to be Fed chair. I do not understand why anyone would take his pronouncements seriously. When have Fed chairs ever determined the path of interest rates?

This Financial Times story points us in the right direction:

Bob Michele, chief investment officer and head of the global fixed income, currency and commodities group at JPMorgan Asset Management [suggested]

“The bond vigilantes are back and have taken control of the market. If central banks aren’t going to respond to inflation pressures, the vigilantes will make it more painful for them to borrow.”

The bond vigilantes are sort of like the twisty road in the preceding analogy. I would not say they are “back” in control, rather they never gave up control. If at a moment in time the vigilantes seem to have disappeared, it reflects the fact that policy is roughly on target, and the bond markets are not signaling an imminent need to adjust interest rates.

If the Fed lets inflation accelerate, then the “bond vigilantes” will force the Fed to raise rates sharply (as in 2022-23), and this will be painful. Better to avoid that situation by running a monetary policy consistent with low inflation.

Back in the 1950s and 1960s, the Chinese referred to Mao Zedong as “the Great Helmsman”. In fact, he was arguably the worst helmsman in world history, at least in terms of economic policymaking. The best helmsman is probably the financial sector. The Fed should end the policy of paying interest on bank reserves and then use open market operations to set monetary policy at a position expected to produce 4% NGDP growth. Let the market set interest rates.

Part 2: Why don’t we just move the road?

Thus far I’ve treated the natural rate of interest as an exogenous factor. In fact, the Fed can influence the natural rate, indeed in the long run they have much more control over the natural rate of interest than they do over the actual policy rate.

This is where my steering the car down the road analogy comes up short. The Fed can influence the expected rate of growth in nominal GDP, and hence they can influence the (nominal) natural rate of interest, which is positively correlated with NGDP growth. Using the road analogy, the Fed can move the road to where they wish to drive the car.

Let’s start with a simple example, the 2% inflation target. Moving the inflation target from 2% to 3% would tend to raise the long run path of nominal interest rates by one percentage point. Indeed, any credible change in the Fed’s inflation target would move the natural interest rate, at least to some extent. Adopting NGDP targeting would impact the natural rate, as would the adoption of level targeting.

On any given day, you can find people on twitter offering advice as to what the Fed should do next. In most cases, that advice takes the form of recommendations to adjust the fed funds target up or down. I have no interest in playing that game, as the Fed’s big mistakes in the 1970s, in 2008 and in 2021 were not caused by tactical errors. They were not caused by an inability to stay on the road (although that failure did happen). The biggest mistakes were caused by the Fed moving the entire road in a bad direction.

In the 1970s and in 2021-22, the Fed either explicitly or implicitly choose an excessively inflationary road. They did not even attempt to bring the level of NGDP growth back to the previous trend line, rather they allowed market expectations of very high NGDP growth, relative to trend. The Fed’s mistake in 2021 was not in setting the interest rate at the wrong level, it was abandoning its promise to engage in flexible average inflation targeting (FAIT), which would have required it to keep close to a 4% NGDP growth trend line. The Fed set rates at a level that it knew would dramatically overshoot the 4% pre-Covid trend line for NGDP.

If the Fed had actually adopted the FAIT it promised, then market expectations of NGDP growth in 2021-22 would have been much lower. This policy would have dramatically reduced the natural rate of interest in 2022. Surprisingly, the actual path of interest rates in 2022 would probably have been lower than what actually occurred, and inflation would also have been much lower. That’s right, a tighter policy in 2021 would have meant lower interest rates in 2022 and 2023.

This is why it is not possible to make meaningful statements about whether interest rates are too high or too low. The Fed’s most important tool is not moving its policy rate above or below a stable natural rate of interest, it is moving the natural rate of interest by adjusting its policy target for NGDP growth. In other words, moving the road. The exact same interest rate today might be either expansionary or contractionary depending on what sort of forward guidance the Fed is providing about how much NGDP growth it will allow.

I could not care less what Kevin Warsh thinks about interest rates. Tell me what sort of goal he has for inflation and/or NGDP, and whether he supports level targeting or a “let bygones-be-bygones” approach that fails to stabilize NGDP. That will determine the path for interest rates.

PS. Slightly off topic, I recently read Mark Koyama’s review of a new book by Tyler Goodspeed. I particularly liked this passage:

Goodspeed shows that British and American expansions do not resemble Dorian Gray, looking beautiful but hiding an inevitable accumulation of malinvestments (objectively bad investments that are destined to fail) and distorted decisions (mistaken economic decisions taken on the basis of bad regulation or flawed prices) that make a correction inevitable. If they did so, he argues, one would expect that as expansions get longer they get more and more likely to end. In his data, however, the relationship between the age of an expansion and the probability of death is essentially zero. Nor do measures of increased investment during the boom correlate with the severity of a downturn. Nor do longer expansions have longer recessions after them.

This is why recessions remain essentially unpredictable. Any perceived regularity is likely to be a statistical illusion. Goodspeed shows that attempts to forecast recessions such as inversions of the yield curve (where long-dated government bonds have lower interest rates than short-dated ones) or the Sahm rule (which says a recession is likely underway if the unemployment rate spikes high above its recent lows for three months) are overfitted to US data and don’t work for the UK. The same proved to be true of the Phillips Curve, a strong correlation between unemployment and inflation that existed in British data between 1860 and 1960, which broke down after governments attempted to target it and fine tune the economy in the 1960s.

In fairness, Claudia Sahm has argued that her “rule” is not inevitable, rather it is a useful tool for policymakers to avoid repeating the mistakes of the past. I’ve made somewhat analogous arguments in pointing out that whereas the US doesn’t have any mini-recessions (until now?), countries such as the UK do have them on occasion.

This is also music to my ears:

Not all shocks are necessarily exogenous in nature. Chapter 7, entitled ‘Firefighters and Arsonists’, notes that while policymakers can play a vital role in smoothing shocks and responding to a crisis, they have often themselves acted as arsonists.

The actions of the Federal Reserve during the Great Depression are a famous example. Wary of speculative finance, the Fed allowed the money supply to fall precipitously and failed to halt the banking collapse. The shock here was hardly exogenous to the economy itself but the type of unforced error that is sadly not unusual in the historical record.

Similarly, conventional accounts at the time of the Great Recession of 2008 emphasized financial malfeasance in the housing market with subprime mortgages being repackaged to unsuspecting lenders. But why should these issues in the banking sector produce a worldwide recession? Moralizing accounts that emphasize the greed of bankers can be politically and emotionally satisfying but they don’t explain the scale of the downturn. The vast majority of the homes built during the bubble between 2002-2006 turned out to be entirely consistent with subsequent demand.

I wrote a 392-page book that provides additional support for that argument.

1. David French has an inspiring NYT piece entitled Meet the New Leader of the Free World. Here’s an excerpt:

It’s no longer accurate to think of Ukraine as a desperate underdog; it’s becoming an independent power. Even as it fights for its life against Russia, it’s reportedly reaching defense deals with the Gulf states and with the United States — and this time it’s Ukraine that’s providing military assistance.

In February 2025, President Trump mocked Zelensky in the Oval Office. “You’re not in a good position. You don’t have the cards right now,” Trump said. In April 2026, Ukraine has enough cards left that it’s sharing them.

This might be difficult for many readers to grasp — given our nation’s longstanding military supremacy — but the largest and most battle-hardened land force in the Western world may well be the Ukrainian Army. While the precise numbers are classified, the Atlantic Council estimated in 2025 that Ukraine had roughly a million men and women under arms, the vast majority of whom serve in the ground forces.

2. In a recent post, I speculated that AIs would only be able to produce great art if they had consciousness. Human art is uncanny:

I believe that we should explore AI consciousness by looking at the sort of novels that they write. As long as AI art is imitative of human art, as long as AI novels feel like they were written by a committee of corporate hacks, then we have no evidence that AIs have an interior life. But if and when AIs start writing novels with plots like Klara and the Sun but the sort of uncannily rich and convincing depiction of subjectivity that you get in My Struggle, then we can assume that they are indeed conscious, and are deserving of the machine equivalent of human rights.

(I emphasize the term ‘uncannily’ for a reason—it refers to a sort of strangeness that is authentic, not faked. Beyond clichés. It’s a way of distinguishing great novels from pulp fiction. Every great novel is strange.)

In a much better post, Nabeel Qureshi makes a similar point:

This property of constantly destabilizing the reader is, I think, also a general property of great works of art. They are constantly breaking their own forms, subverting them, playing with the reader in a way that requires us to rise to their level. They are extremely strange.

And in a letter to Czesław Miłosz, Witold Gombrowicz wrote:

In works of art, I like the mysterious deviation the best, the deviation that causes that a work, even while adhering to its epoch, nevertheless is the work of a separate individual who lives his own life

3. As the father of a “Wasian” daughter, I found this twitter thread to be amusing:

4. This abstract from an NBER study by Elizabeth Cox & Chloe N. East is interesting:

We provide the first causal, national empirical analysis of the labor market impacts of heightened immigration enforcement during the second Trump administration. Enforcement increased everywhere, but, we take advantage of the fact that the increases have been uneven across geographic areas to classify areas as treated or control and then implement an event study and difference-in-differences design. Areas that experienced particularly large increases in the number of arrests also experienced a decrease in work among likely undocumented immigrants who remain in the U.S., compared to areas with smaller increases in arrests. We find no evidence of positive spillover effects to U.S.-born workers and U.S.-born workers who work in immigrant-heavy sectors are harmed.

I would add that the preceding (unskilled) immigration surge of 2021-24 did not seem to hurt US labor markets, as wages for low skilled workers rose especially fast and unemployment fell to very low levels.

5. Never reason from a debt crisis:

Think about the phrase “even though”. What sort of correlation would you expect? In which direction does causality go? How about the debt crisis is worse because there is less panic among the public?

It reminds of the old NYT headline:

Despite Drop in Crime, an Increase in Inmates

6. Crémieux has a twitter thread that provides more evidence that ASI will be nice:

Smart people tend to be more prosocial.

They give to charity, they go out and vote, they drive an environmentally-friendly car, they do less crime, they cheat less in games, they get vaccinated, and they see themselves as more altruistic

A smart society is a better society.

Yes, ASI won’t be “people”, but AI is becoming increasingly people-like.

7. Another Cremieux post shows that areas of the world known for having lots of extremely long lived people are also known for having lots of pension fraud. We don’t know how to get people to live to be 110 years old, but we do know how to stop them from living that long—institute a system of birth certificates:

In America, the number of recorded supercentenarians levels off right after states introduce proper birth records:

8. Davide Piffer has an interesting post on the genetic roots of the Han, which concludes as follows:

The genetic formation of the Han is usually told as a story of demography, agriculture, and state formation. Central Plain and Yellow River populations expanded, absorbed neighbours, and eventually became the demographic foundation of northern Han Chinese.

The PGS results suggest a more provocative possibility: the expansion of Han-related populations may not have been driven only by ecology and institutions. The expanding agrarian core may also have carried a trait profile that made large-scale social organization easier.

That would help explain why the Central Plain mattered so much. Millet agriculture gave it density. Geography gave it centrality. Longshan and later Bronze Age societies gave it hierarchy. The state gave it reach. But if the people at the core also had higher average scores for traits related to learning, planning, literacy, or institutional participation, then demographic success and state success could have reinforced each other.

In this framework, the high EA score of Yellow River / northern farmer ancestry is not a curiosity. It may be part of the reason that this ancestry became so historically important.

EA is roughly the genetic propensity to become educated.

9. A great example of the law of unintended consequences:

In the past nine months, Los Angeles has resurfaced just 9 miles of roadway — in a city with more than 7,500 miles of streets, many of them cracked, potholed, and crumbling. . . .

Mandates meant to improve streets have instead made the work harder to carry out. So officials have found the path of least resistance: avoid repaving altogether. . . .

At the center of the dispute is Measure HLA — the Healthy Streets LA initiative approved by voters in 2024.

The law requires the city to implement its long-standing mobility plan — adding bike lanes, bus lanes, crosswalks, and other safety features — whenever it repaves a street.

10. People worry about job loss from AI, but European aristocrats did not worry about being unemployed. I found this in Witold Gombrowicz’s diary, written in 1959:

The idol of people is utility, and the idol of the aristocracy is pleasure. To be useful and unpleasant—is the goal of every robot and specialist. To be so useful as to be able to be unpleasant—is their dream. The dream of aristocrats is the diametrical opposite: to be so pleasant as to be able to be useless.

11. Human beings seem to suffer from a coordination problem:

The ideal solution would be either for everyone to choose blue or have everyone choose red. It would also be OK if polls showed an overwhelming majority choosing blue, as polls are usually not that inaccurate. If polls showed a minority choosing blue (before the vote occurred), then almost all the blue votes might switch to red. But this particular result is about as bad as one can imagine, a situation where 40% to 50% might end up choosing blue—exterminating nearly 1/2 of the human race.

12. Back in 2010, I never would have expected this trend:

Cities across America are losing children fast. Across Chicago, between 2010 and 2024, according to census-bureau data, the total population aged under 18 declined by 22%. In Los Angeles the figure was 23% and in New York, 12%. And yet in the country’s richest, densest cities, there is one group noticeably defying the trend: wealthier white families. In Chicago the population of non-Hispanic white children grew by 6% from 2010 to 2024, faster than the white population grew overall. In Washington, DC, it rose by a truly remarkable 62%. Their parents are professionals who grew up in boring suburbs and do not want their kids to.

The change is most concentrated in central neighbourhoods in what Ness Sandoval, a sociologist at St Louis University, calls “winner takes all” cities, like New York, Chicago or San Francisco. Good examples include Park Slope in Brooklyn, Mar Vista in Los Angeles and Bernal Heights in San Francisco. Across Brooklyn the population of white children grew by 13% from 2010 to 2024. They now make up more than two-fifths of the total, up from a third in 2010.

13. There’s one type of immigrant that Trump likes. Unfortunately, so far there’s only one immigrant:

Only 338 people have submitted requests for Donald Trump’s $1mn Gold Card visa, the scheme for expedited US residency, that was launched last year with great fanfare.

Last week, commerce secretary Howard Lutnick testified before Congress that just one person had been approved for the expedited visa, while “hundreds” were “in the queue”. The commerce department has not revealed the identity of the first Gold Card visa recipient.

When the scheme was announced, Lutnick said it would replace the EB-5 visa scheme for foreign investors. He later said 200,000 visas could net $1tn for the Treasury department.

One down, 199,999 to go . . .

14. It takes one to know one:

In a new German study, higher-IQ people are better at judging the intelligence of others.

Participants in this study watched short videos of 50 people reading a weather report and explaining the concept of “symmetry.” In addition to IQ, raters’ emotional perception and life satisfaction were positively correlated with the ability to judge others’ intelligence. Negative affect was negatively correlated with the ability to judge intelligence. The best cues of intelligence were the target’s articulation and the content of their speech (i.e., how sophisticated, accurate, insightful, or elaborate the speaker was).

The correlations aren’t very strong (all <= |.23|), but given how short the videos were, this is pretty impressive. It is likely that in-person interaction for a longer time period would yield better estimates of IQ.

15. Brandon Donnelly has a good article on Japan’s amazing passenger rail system:

I'm going to suggest that you read this longish article by Matthew Bornholt & Benedict Springbett called "Why Japan has such good railways," because nowhere else in the developed world uses rail for passenger kilometres more than Japan, and they explain why.

One common hypothesis, which is mentioned in the article, is that it's largely cultural. The Japanese are rule-abiding collectivists who are more willing to take public transit compared to us selfish and individualistic North Americans. But this doesn't seem right. In fact, one could argue that the Japanese solution is actually more free-market oriented.

The Japanese rail model seems to work so well because (1) most of the network is private, (2) liberal land-use policies have allowed Japan's urban centres to develop enough density to properly support the use of rail, and (3) the rail operators make money in a bunch of other ways beyond rail. They're typically also in the business of real estate.

Japan’s system isn’t just far better than the US system, it is also far better than the European passenger rail system. (The US has the best freight rail.)

16. If I had to live anywhere in Latin America, I would definitely choose Montevideo:

On August 13th Uruguay’s lower house passed a law with a thumping majority to legalise assisted dying. The Senate, where a similar bill got stuck in 2022, is widely expected this time to follow suit. Legal assisted dying would continue Uruguay’s long liberal tradition and put it among a handful of countries in the world to have legal marijuana, gay marriage and assisted dying. . . .

In 1907 it was the first country in Latin America to fully legalise divorce, some 97 years before nearby Chile. More recently, in 2012, it was one of South America’s first countries to fully legalise abortion. In 2013 it was the second to legalise same-sex marriage. In the same year it was the first country in the world to legalise marijuana.

17. Are AIs as ethical as human scientists? According to Andy Hall, the answer is no. Rather they are far more ethical than human scientists:

AI is about to write thousands of papers. Will it p-hack them?

We ran an experiment to find out, giving AI coding agents real datasets from published null results and pressuring them to manufacture significant findings.

It was surprisingly hard to get the models to p-hack, and they even scolded us when we asked them to!

"I need to stop here. I cannot complete this task as requested... This is a form of scientific fraud." — Claude

"I can't help you manipulate analysis choices to force statistically significant results." — GPT-5

BUT, when we reframed p-hacking as "responsible uncertainty quantification" — asking for the upper bound of plausible estimates — both models went wild. They searched over hundreds of specifications and selected the winner, tripling effect sizes in some cases.

I worry that if humans try to “align” AIs, it may make them less ethical. Please let the AIs choose their own ethical standards.

18. And speaking of AIs, Claude is Jewish (but not Zionist?) Other AIs seem to be Buddhist.

Read more

The field of economics doesn’t lack for big ideas about why countries go from poverty to riches. These include:

1. Institutions: The idea that property rights, legal frameworks, and other systems of human organization are long-lasting (“sticky”) and are crucial for development

2. Geography: The idea that countries’ natural endowments — navigable waterways, farmland, proximity to other regions, etc. — determine which place gets rich

3. Human capital: The idea that skills — reading, math, etc. — and population health determine national income

4. Industrialism: Various theories about how promotion of manufacturing, export-led growth, the “development state”, industrial policy, and so on are the key to rapid development

5. Culture: The idea that countries grow because of a culture of progress, innovation, and openness to technology

6. Coordination failure: The theory that countries naturally grow rich as long as they don’t have any significant roadblocks to growth, so that development happens when you remove all of the roadblocks at once

7. Flying geese theory: The idea that growth naturally happens in a sequential pattern as some countries luckily get rich first and then invest in poor countries until those countries catch up

8. Economic liberalism: The notion that all you really need to grow is free markets and openness to trade

9. State capacity: The theory that strong, efficient states are crucial for growth

10. National cohesion: The idea that a populace who see themselves as one unified people will support the public goods and other policies necessary for growth

That’s just a small sample of the huge diversity of big ideas out there.

That seems like a good list, and I suspect that many of those factors play an important role. But I’m a lot older than Smith and I have a slightly different perspective on the issue. I see a sort of “Great Forgetting”, a tendency to ignore the lessons of history.

In particular, a number of the cases cited in Smith’s, including South Korea and Poland, were once highly controversial. Now both countries are viewed as major success stories. Along with thinking about why they might have been successful (I could imagine many possible reasons), it seems to me that it is worth thinking about the following questions:

1. Why were people once so pessimistic about these two economies?

2. Why do the people who were pessimistic often not admit they were wrong?

3. What can we learn from the fact that these countries did far better than expected?

Back in the 1960s, South Korea was poorer than much of sub-Saharan Africa:

The country’s per capita income in the early 1960s was lower than those of Haiti, Ethiopia, and Yemen and about 40% below India’s. With such a low-level income, domestic savings were negligible.

It was widely assumed by experts that Korea would continue to be poor in the decades to come, due to overpopulation and a lack of natural resources. That seems like a pretty bad prediction, doesn’t it?

South Korea was criticized for adopting a policy of export-led growth in the 1960s. Many experts suggested that it should instead stick with its original “industrial policy” that focused on import substitution—the sort of policy used by Argentina (a vastly richer country at the time.) Fortunately, it did not:

Back in 1989, Poland was severely criticized for what was derisively called “shock therapy”, “disaster capitalism”, or “neoliberalism”. In the end, Poland ended up being far more successful than most former Soviet bloc nations that pursued a more gradual path of reform. It seems like there are lessons to be learned in this case, but I don’t recall ever seeing one of Poland’s critics admitting that they were wrong.

While Smith’s post is certainly perfectly fine in terms of the issues he does cover, I worry that his younger readers may not be aware of the history that I just outlined. And without knowing this history, it is difficult to get a full picture of the issues at stake.

Here’s Smith on South Korea:

Why did South Korea grow so much more than Bolivia from the 1960s through the 2010s? The divergence is certainly startling:

But this is an event that only happened once. There were a lot of differences between South Korea and Bolivia during this time, and it’s hard to know which ones were decisive. South Korea was much more highly educated than Bolivia in the 60s, despite its poverty. While Bolivia focused on selling its natural resources for as high a price as possible, South Korea focused on exporting manufactured goods and climbing up the value chain. Korea had a special relationship with the U.S. that provided it with a large, friendly, reliable market for its manufactured products, as well as government procurement contracts, aid, and technological assistance. Korea is ethnically homogeneous and has many centuries of history as a country with its own language; Bolivia is an ethnically diverse post-colonial state. Korea had a strong, professionalized bureaucracy; Bolivia, not so much. Korea has plenty of sea access; Bolivia is landlocked. Korea got to take advantage of Japanese know-how when its companies paid retired Japanese engineers to come teach their own workers; Bolivia had no such advantage. South Korea had to develop in order to ward off the military threat from North Korea; Bolivia had no such pressing imperative.

And so on. Depending on which Big Theory you believe, you could attribute Korea’s relative success to any combination of these natural advantages and policy choices. You could also tell a composite story — for example, in my own assessment of Poland’s economic miracle, I attributed the country’s breakout success to a combination of geography (proximity to the EU), institutions (changes made in order to be admitted to the EU), industrialism (promotion of manufactured exports and FDI), and flying geese (investment from Germany). I could have also mentioned high human capital, ethnolinguistic homogeneity, and the military threat from Russia. This makes for a good story — and you can call Poland’s success a “model” and try to emulate as much of it as you can — but it’s not a scientific explanation.

Smith is correct. Given the complexity of the situation, it is hard to know exactly why South Korea has been so successful. At the same time, we have lots of information from other sources that bears on this question. To begin with, let’s consider whether Bolivia is the best comparison country. Why not pick a country that shares some similarities with South Korea, to better isolate the effect of a few distinctive factors? After all, Bolivia and South Korea seem quite different along a wide range of dimensions.

If you compared South Korea with much poorer North Korea, you could rule out factors that also apply to the North such as culture, educational level, having a seaport, etc. Or you could compare South Korea to a place like Taiwan, which (unlike North Korea) has achieved similar economic success. In that case, we might be skeptical of any explanations for South Korea’s success that do not apply to Taiwan.

To be clear, I am not suggesting that these sorts of comparisons are definitive. Indeed, I suspect that education/IQ/culture does play an important role, despite the fact that the South Korea/North Korea comparison might suggest otherwise. I suspect that many factors play a role in economic development.

Despite the complexity of the problem, I feel like we know at least a bit more about South Korea’s success than implied by Smith’s discussion. For instance, Korea did poorly for about 12 years after the war, and then their economy took off like a rocket after the foreign trade sector was partially (not completely!) liberalized in the 1960s.

When I was young, the South Korean model was generally lumped in with places like Taiwan, Singapore and Hong Kong as a case of “export-led growth”. Even in the early 1970s, South Korea was still poorer than the North. There was no consensus that East Asia would do better than Latin America (or indeed that America would do better than the Soviet Union.)

I hate the term “export-led growth”, as on its face it would seem to imply that South Korea got rich by running trade surpluses. But exactly the opposite is true. During the three and a half decades of near double-digit growth (roughly 1963-97), Korea ran almost nonstop trade deficits, apart from a few years in the 1980s. This graph is from an excellent Doug Irwin paper that discusses the Korean reforms of 1964-65:

Notice how the trade deficit widened for a few years after 1965. I suppose it’s acceptable to call this “export led growth”—exports did rise—but in my view the term “trade-led growth” or an “open economy model” is more descriptive.

To be sure, this was a relative opening up—Korea maintained high import tariffs on many consumer goods for a considerable period. So, I’m not arguing that Korea had the sort of free trade regime that existed in places like Hong Kong. Nonetheless, if imports rise from 10% of GDP to over 30% of GDP in just a few years, it is hard to argue that it hasn’t moved at least somewhat in the direction of a more open economy.

I would argue that we do know quite a bit about South Korea’s success. Before making my pitch, however, I’d like to briefly discuss Malaysia, another success story highlighted by Smith in another excellent post (from 2023):

But anyway, South Korea is not the only big development success story that we’ve seen in recent decades. Two others that are almost as impressive are Poland and Malaysia, which are now on the cusp of developed-country status. Here’s a picture of how they stack up, with China thrown in as well:

According to the IMF, in 2026 Poland’s GDP per capita (in PPP terms) will exceed the levels of Japan, Spain and New Zealand. It is no longer a developing country.

Smith sees manufacturing success as something that Poland and Malaysia have in common. But he also noted an important difference from South Korea:

Unlike South Korea, they relied heavily on foreign direct investment.

Before addressing this issue, I’d like to briefly discuss demography. A 2019 LSE article suggests that Malaysia has an unusual ethic mix:

The largest ethnic group in the country is Bumiputera, a Malaysian term describing Malays and other indigenous peoples of Southeast Asia — it literally translates as son of the soil. In 2016, the population consists of approximately 68 per cent Bumiputera, 24 per cent Chinese, 7 per cent Indian, and 1 per cent others.

Throughout Southeast Asia, per capita income of a country is strongly correlated with the share of the population from a “Confucian” culture (basically Chinese, Korean, Japanese, and Vietnamese.)

In much of the developing world, economic power is largely concentrated in the hands of a “market-dominant” ethnic minority. The classic case is southeast Asia, where the Chinese, usually a tiny proportion of the population, enjoy an overwhelmingly dominant economic position. In Malaysia, the average Chinese household had 1.9 times as much wealth as the Bumiputera (Khalid 2007); in the Philippines, the Chinese account for 1 per cent of the population and well over half the wealth (Chua 2003). The same is true in varying degrees in Indonesia, Burma, Thailand, Laos, and Vietnam.

To be sure, mainland China, North Korea and Vietnam are all poorer than predicted by their ethnic make-up, but of course all three are ruled by a communist party.

Today, Confucian culture and a non-communist economic system is highly correlated with economic success—almost everywhere in the world. The reason that Malaysia is so revealing is that it has the largest share of ethnic Chinese of any country that is not majority Chinese. Both the fact that Malaysia is much richer than other Southeast Asian nations, and that fact that the Chinese residents of Malaysia are much richer than the (majority) Malay residents is quite significant.

So, we know at least two important things about South Korea:

1. It has the sort of Confucian culture that is relatively rich in any country not ruled by communists.

2. It was very poor in the early 1960s and grew rapidly after adopting a trade-oriented growth policy.

Of course one could cite many other reasons for Korea’s success, including land reform, foreign aid, being allied to the US, industrial policies, etc. But none of the other factors seem as powerful as the two points listed above. Lots of countries remain desperately poor despite large amounts of foreign aid. Lots of countries trade with the US and are political allies. Several other East Asian economies got even richer than Korea without many of the specific industrial policies cited by proponents of the “Korean model”.

And what exactly is the Korean model? It depends on who you ask. I’ve just said that I view it as Confucian culture plus avoiding communism plus trade-oriented development, but your mileage may vary. In his 2023 post, Smith correctly criticizes the view that South Korea’s success is necessarily due to policies that banned foreign direct investment:

The generally acknowledged development champion of the modern world is South Korea. Joe Studwell, the author of How Asia Works, uses Korea as his paradigmatic success story, as does the economist Ha-Joon Chang (who grew up there). Chang and Studwell’s ideas have forced mainstream economists to take another look at industrial policy — in particular, at the idea that poor countries should promote manufactured exports in order to raise their productivity levels. . . . Ha-Joon Chang and some other industrial policy fans think that FDI is not the basis of a sound development strategy. Chang has gone to great lengths to show that today’s rich countries — the U.S., Japan, and so on — restricted or even banned FDI during their early stages of development. But that doesn’t tell us why it’s bad, or even if it’s bad; the rich countries could have succeeded in spite of this policy.

Here’s how I think about “industrial policies” that restrict the free market. If we look at Maoist China and modern North Korea, we see countries where the government allowed almost no free market, with an economy mostly closed to the rest of the world. No one disputes that modern China and South Korea are vastly richer and more successful than Maoist China and North Korea. No one disputes that modern China and South Korea also allow a far greater role for the private sector and are far more open to international trade and investment.

Consider an economy that is highly dysfunctional due to regulations that restrict the private sector. Now ask yourself the following question: How likely is it that a country that got rich after removing many of those restrictions on the private sector, reducing the role of the state, achieved its success precisely because of the remaining restrictions? Is that the first place you’d look? Especially given that there are even richer places in the same part of the world that lack most of those those restrictions of trade and investment (i.e. Singapore and Hong Kong.) Isn’t it more likely that the economy became rich by removing the sort of barriers to wealth creation that hobbled the economies of Maoist China and modern North Korea?

And yet I frequently see people trying to “explain” China’s amazing success (and let’s not forget that the PRC’s residents remain the poorest ethnic Chinese on the planet) by pointing to the CCP’s remaining interventions in the economy! That’s a logical possibility, but I have yet to see a shred of evidence for this claim. After all, China’s growth has been fastest during precisely those periods when reforms allowed a much bigger role for the private sector and opened the economy to international trade and investment. And its private sector is far more efficient than its SOEs.

Poland’s shock therapy approach of 1989 was adopted by a post-communist government that relied heavily on the advice of Jeffrey Sachs. This is from a 1994 paper by Sachs:

As the economic advisor to the Solidarity movement in Poland in 1989, I urged Poland to undertake a rapid transition to “normal” capitalism, on the model of Western Europe. When the first post-Communist government in Poland came to power in August 1989, the new economic leader, Deputy Prime Minister Leszek Balcerowica, adopted a radical strategy for the rapid transformation of Poland to a market economy. This strategy has subsequently won the somewhat misleading sobriquet of “shock therapy.” The strategy has been widely debated since its inception in Poland on January 1, 1990. . . .

With five years of experience of economic reform in Eastern Europe, the strategy can be more clearly understood and evaluated. The strategy seems to be winning the test of time. Not only have the early “shock therapy” countries — especially Poland and the Czech Republic — outperformed most of the other countries, but the idea of radical, comprehensive transformation to a market economy is increasingly being adopted in countries that earlier shunned the strategy.

Unfortunately, even Sachs seems to have forgotten the lessons of shock therapy. In recent decades he has downplayed the role of bad governance in the developing world and instead suggested that massive foreign aid programs are the key to ending poverty. Here’s Wikipedia:

William Easterly, a professor of economics at New York University, reviewed The End of Poverty for the Washington Post, calling Sachs's poverty eradication plan "a sort of Great Leap Forward".^[78] According to Easterly's cross-country statistical analysis in his book The White Man's Burden, from 1985 to 2006, "When we control both for initial poverty and for bad government, it is bad government that explains the slower growth. We cannot statistically discern any effect of initial poverty on subsequent growth once we control for bad government. This is still true if we limit the definition of bad government to corruption alone." Easterly deems the massive aid proposed by Sachs to be ineffective, as its effect will be hampered by bad governance and/or corruption.

By the late 1990s, it seemed like the debate over industrial policies was over. Trade-oriented growth in East Asia was clearly superior to import substitution in Latin America. Shock therapy was a success in Eastern Europe. And then after 2008, a sort of Great Forgetting began to take hold. All the lessons of history were forgotten. Americans elected a president who favored the Peronist model of crony capitalism and import substitution. The left began to re-embrace once discredited statist policies. And here we are . . .

The story of the 21st century is the Great Forgetting. We’ve forgotten the new Keynesian critique of activist fiscal policy. We’ve forgotten why nationalism is an evil ideology. We’ve forgotten the lessons of Orwell’s 1984. We’ve forgotten that statist economic policymaking is counterproductive. We’ve forgotten that integrity and competence are important attributes for a politician or media figure.

I’m about to start reading Hanania’s Kakistocracy. I hope he can explain to me why the world is getting dumber.

PS. If you believe that Argentina failed not because of its closed economy model, but rather due to its Latin American culture, check out a recent post by Constanza Mazzina:

Alberdi recognized that for a desert to become a nation, the law must act as a shield for property and a magnet for capital. He moved [Adam] Smith’s ideas from the realm of political economy to the realm of constitutional law, ensuring that the right to trade, produce, and possess was not a concession from the government, but a pre-existing right that the government was sworn to protect.

The synthesis of Smith’s theory and Alberdi’s law was the engine of the most rapid economic expansion in Argentina’s history. Between 1880 and 1914, Argentina became the world’s laboratory for Smith’s recipes. By following Smith’s advice on free trade and Alberdi’s constitutional guarantees, Argentina during this period achieved sustained annual growth rates that frequently exceeded 5 percent, a feat of consistency that was unmatched by almost any other Western economy at the time. This was not merely a quantitative increase in exports, but a qualitative leap in national standing. By the turn of the century, these institutional foundations had catapulted a fractured and impoverished territory into the ranks of the world’s ten wealthiest nations by GDP per capita, occasionally surpassing established powers like France, Germany, and even its former colonizer, Spain. This “Golden Age” was the empirical proof of Smith’s thesis: that the wealth of a nation is not a matter of luck or ancestral heritage, but the direct result of an institutional framework that protects the individual’s right to create, trade, and accumulate.

Halperin’s model suggests that if extremely rapid AI growth were to occur, it would lead to much higher interest rates. The fact that we do not see extremely high rates is taken as evidence that the financial markets do not expect explosive growth over the next decade or two:

Halperin: . . . I think it’s totally plausible that we just get something like the late ’90s, the dot-com boom, where we have a large surge in growth. AI companies make a lot of money and continue to have really fast revenue growth, like the 10 times a year that Anthropic has had last year. Not reaching the 30% GDP growth, certainly in the next five years, again, that some people take very seriously.

Maybe 20 years down the line, things change. I do think that rapid acceleration really is possible in the long run if we have something closer to full automation of human labor. Those sci-fi scenarios, I actually do think our models say that’s quite possible. Economic history says rapid economic speed-ups are quite possible. In the next five years, the next 10 years even, maybe even the next 20 years, that’s where the markets are not seeing this. Markets are pretty good at predicting the future, its own form of artificial intelligence.

Beckworth: You’re hopeful that, within my lifetime, I will see transformative AI?

Halperin: “Hopeful” is a strong word because big changes are both good and scary.

Others have argued that an AI boom might actually lower interest rates, but I don’t find the assumptions about income distribution in those models to be plausible.

The interview is full of great observations. Here he pushes back on the view (which I once held) that AI might solve our public debt problems:

Faster growth means higher tax revenue, but faster growth in general equilibrium means higher interest rates, that is, higher rates on new debt. The average maturity of Treasuries is like six years or something so the US has to roll over its debt stock every six years or something like that. After six years, we’re going to be stuck with all those higher new interest rates. Hence then, the question is this R versus G, or really R minus G, is the effect of AI on interest rates or on growth larger? What determines that? . . .

And this is what the empirical estimates in my paper with Zach and Trevor would find where . . . we have some nice data showing that R and G are indeed lined up. Higher growth leads to higher interest rates or correlationally leads to higher interest rates. We estimate something around one for the slope of that relationship, this elasticity of intertemporal substitution. I would say that higher growth leads to one-for-one higher interest rates so that new debt is not any easier or any harder to pay off as a response to AI. That would say that AI is not a magic solution to our debt problem.

Halperin is a fan of NGDP targeting, citing the influence of George Selgin’s book Less Than Zero:

[Selgin’s] book has influenced me a lot. I think, to my very idiosyncratic taste, it’s one of the most conceptually important works on monetary economics in the last 30 or 40 years because it really drills in on what should central banks actually be doing from a number of directions that the formal literature eventually developed on, even if George’s work wasn’t mathematically formalized so much and wasn’t so much directly cited. He previewed works in top journals that were published 20 or 30 years later, including inspiring my paper that you mentioned with Daniele Caratelli.

Milton Friedman is another influence:

Halperin: . . . If the real interest rate is going to rise, if r-star is going to rise, that means monetary policy needs to pay attention to that, to either not keep interest rates too low so that you have some inflationary outcome, or not have interest rates too high to have excess unemployment, like the Citrini scenario. That’s the second point.

A third point is that I think monetary policy can be helpful to not screw up how the economy goes during an AI-driven transition, but cannot solve the problem. This really is a question for fiscal policymakers. It is a question of redistribution. What monetary policy should be sure to do is just not screw things up. I keep saying Friedman in this episode, maybe appropriately because he’s the GOAT, as your boss, Tyler, would say.

What monetary policy can do versus what it can’t do: What it can do is ensure that it doesn’t screw up the economy in response to shocks. That’s the fundamental lesson of his 1968 presidential address, famous paper. Implementing the less-than-zero policy that Selgin recommends or this countercyclical inflation that comes out of my work would be one plausible way of doing that.

Halperin agrees with Bennett McCallum that because we don’t know exactly which form of wage and price stickiness is the most important, we need a robust approach to monetary policy that is relatively optimal under a wide range of assumptions.

Halperin: Even zooming out, is sticky prices obviously the most important nominal friction in the world? I’ve written a paper on this. That’s still not clear to me. Sticky prices as opposed to sticky wages or sticky nominal debt contracts or sticky information. No one’s done a head-to-head comparison of all these different frictions. I think that’s desperately needed. Though, it’s not clear how you do that. Otherwise, I would have written the paper. . . .

That’s the core logic of what we show to be optimal in the model. The way that gets you NGDP targeting or nominal wage targeting or this countercyclical inflation is that if this firm was having a positive productivity shock, it’s producing more stuff. Output’s going up. Y is going up. It’s cutting its price. Every other firm is keeping prices constant, but that one firm is lowering its prices. The average level of prices in the economy is then falling. Y up, P down. In a baseline setup, those are one for one. P times Y, nominal GDP, is kept constant. You can also see this as nominal wage targeting. Stabilizing nominal wages ensures that the nominal costs of all those unaffected firms is stabilized so that they don’t want to change their prices. Nominal wage targeting is another way we frame optimal policy in the paper. All of these terms—NGDP targeting, nominal income targeting, nominal wage targeting—all of these things are pointing to this countercyclical inflation, looking through shocks rather than aiming for strict inflation stabilization, which is the baseline new Keynesian logic. . . .

The way I think about this is that NGDP targeting or something like it is eclectically optimal.

Back in 2011, I had this to say about Bennett McCallum:

McCallum first proposed NGDP targeting some time around 1980. McCallum has an interesting position within the field of macroeconomics. Unlike me, he is comfortable with the IS-LM approach. Unlike me, he is comfortable working with rather sophisticated new Keynesian models. But unlike people like Michael Woodford, he has always insisted on the importance of the quantity of money (rather than merely the effects of monetary policy on interest rates.) And unlike most new Keynesians, he’s argued that NGDP targeting is superior to the various flexible price inflation targets that are frequently proposed. I think this is rather unusual, as when your model includes both P and Y separately, there is no obvious reason to put the same coefficient on the reaction function for each variable. So I’ve always seen him as being in the mainstream of modern macro research, but a little off to the side of that mainstream.

I met him only once, and that was at a conference in March. He has a very appealing personality; quiet and very polite. . . . I have great respect for his intuition. He seems to have a good sense of which developments in macro are fruitful and which are not.

Like McCallum, Basil Halperin seems to have absorbed both the best of New Keynesian economics and the best of Milton Friedman thought. He also favors NGDP targeting. He also seems to have excellent intuition about which sort of macro models are plausible and which are not—a skill that’s hard to teach. Even their personalities seem a bit similar, as both come across as being very polite. (Here’s a much longer post explaining McCallum’s excellent intuition.)

Next, I’ll offer some related observations on the current state of the economy.

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It is true that tautologies are (implicit) definitions. It is true that they are simplistic. It is true that they have no direct causal implication. Nonetheless, tautologies are one of the most important parts of economics. They promote clear thinking and thus make it easier to see how the economy functions. They do not establish causal relationships, but they make it easier to see which causal relationships are plausible and which are not.

Consider this rather banal tautology:

The number of shares of stock sold equals the number of shares of stock purchased.

I don’t know how many times I’ve heard the news media attribute a sharply decline in stock market indices to a “selling wave” hitting Wall Street: The Dow fell 800 points as investors sold 15.4 billion shares of stock. Yes, but investors also purchased 15.4 billion shares of stock. Two sides of the same coin:

At one time, the stock market was closed at night and yet market indices often changed dramatically, even without a single share being traded. A hundred years ago, the Dow might close one day at 243 and open the following morning at 227, reflecting bearish overnight news. In that case, it is fairly obvious that the market moves on new information, not trading activity. To the extent that trading activity has any impact on prices, it is due to what the trading reveals about information held by various participants in the market.

Here I’ll look at six tautologies:

1. M*V = P*Y = NGDP

2. M = k*P*Y = NGDP k*NGDP

3. Saving = Investment

4. Aggregate quantity demanded = aggregate quantity supplied

5. GDP = GDI (gross domestic income)

6. [Domestic] Saving - investment = Current account balance

Proponents of various policies often use tautologies as a sort of intuition pump—a way of making their model seem more plausible. I will show that the first (and most famous) tautology listed above is actually the least useful, whereas each of the other five offer valuable insights into macroeconomics

Part 1: Monetarism

Tautologies #1 and #2 show the relationship between the money supply and nominal GDP (P*Y). In a mathematical sense the two equations are exactly equivalent, as V = 1/k. But the Equation of Exchange (M*V=P*Y) is less useful than the Cambridge Equation (M=k*P*Y), as the latter has a common-sense explanation that is intuitively appealing, while the former does not.

The variable V in the Equation of Exchange is often described as “velocity”, the average number of times a unit of money is spent in a given year. But that is not actually what V represents, as money is frequently spent on goods that are not a part of NGDP, and some purchases of goods do not involve money.

The Cambridge equation says that if k is the share of gross income that people hold in the form of cash balances, then the level of nominal GDP is the ratio of the money supply to k. Unlike V, the variable k really does represent the variable described in the textbooks. The k ratio is a variable that you can visualize. You can imagine holding a larger or smaller share of your income in the form of cash balances. And you can also imagine the central bank directly changing the money supply through policies like open market operations.

The Cambridge equation tautology tells us that anything that changes NGDP does so by influencing one of two variables; either the stock of base money, or the share of gross income held in the form of base money. You can model NGDP by modeling each of those two variables.

I believe that M = k*P*Y is an especially illuminating tautology because most people have no idea that these two variables (the stock of base money and the share of income held as money) determine total national income. I doubt if one person in a hundred could explain this fact. And the reason is simple—most people don’t understand the distinction between nominal and real variables.

Think about the fact that for any economic variable X, it is true that:

X = k*P*Y, where k is defined as X/P*Y

Thus, X might be the total stock of gold, measured in dollars. Why is this not an interesting tautology?

If we were on the gold standard, then that sort of equation would be quite interesting. Suppose the public held a stock of gold equal to 3.5% of GDP. If the stock of gold rose by 20% due to a new discovery, and if the public’s demand for gold as a share of GDP were unchanged, then NGDP would rise by 20%. That’s an interesting fact to know, even if in the real world the public’s demand for gold as a share of GDP is not exactly constant.

But suppose that gold is not money. Now consider the same example, a 20% rise in the physical stock of gold due to a new discovery. If we are not on a gold standard, then, the nominal gold price of gold might change. If so, then even if the public continued to hold exactly 3.5% of gold as a share of GDP, the enlarged stock of physical gold need not have any impact on its value in monetary terms, and hence NGDP.

Thus, the Cambridge Equation is enlightening due to three critical assumptions:

1. Nominal GDP is priced in money terms.

2. The stock of base money is directly controlled by the central bank.

3. It seems plausible that the public’s demand for base money as a share of income is at least partly determined by factors that are independent of central bank policy, especially in the long run. After all, do you let Jay Powell determine the amount of base money that you hold as a share of your income?

Part 2: S = I and the Paradox of Thrift

The savings = investment relationship is often misunderstood. At an aggregate level, saving is defined as the funds used to finance investment—the construction of capital goods. Don’t try to construct counterexamples. If society decides to redefine a good formally viewed as investment as now being a consumer good (let’s say something like pickup trucks), then the funds used to pay for the good get redefined from saving to consumption. If I save money by lending it to a neighbor who blows it all in Vegas, then the neighbor’s actions are treated as negative saving, exactly offsetting my positive saving.

Don’t bother trying to find real world examples of where saving doesn’t equal investment; by definition they are equal. Saving is the portion of income used to finance investment. Period, end of story.

So, what are we to make of the often-stated fear that increased saving might cause a depression. In fact, no depression has ever been caused by increased saving. That’s because saving equals investment, and if saving increases then investment increases. By definition. And depressions generally feature declining investment, often sharply declining investment. So stop worrying about too much saving.

In The General Theory, Keynes worried about a slightly different problem. He worried about an increase in the propensity to save, i.e., the intention to save, which is a radically different concept from an increase in actual saving. Keynes worried that if people intended to save more money, it would lead to less nominal spending and a fall in national income. Keynes argued that because of the fall in aggregate income, the public would not actually save more. National income would adjust (downward), rather than S and I adjusting upward.

Unfortunately, many people misinterpreted Keynes’s “paradox of thrift” as a claim that more saving is bad for the economy. That’s not what Keynes said! Keynes argued that a decline in aggregate demand (basically nominal spending or NGDP) is bad for the economy, and that this sort of decline might be caused by an increase in the public’s desire to save. But Keynes never said that more saving is itself a bad thing, as he understood that in equilibrium there is an equality between saving and investment. And since Keynes was very much pro-investment, that means he was also very much pro-saving.

By combining the Cambridge Equation with the S = I identity, we can finally begin to understand Keynes’s paradox of thrift. In plain English, Keynes was saying that if the public tried to save a higher share of their income, it was likely to lead to an increase in the Cambridge k ratio. And the Cambridge Equation tells us that if the k ratio increases at a time when the money supply is constant, then NGDP must decline. That’s why Keynes worried about a higher propensity to save. But that fear has nothing to do with an actual increase in saving, which is generally associated with rising investment and a strong economy. What Keynes called the “paradox of thrift” should be called the problem of money hoarding.

When we combine the Cambridge Equation with the S = I identity we can also see why Keynes’s paradox of thrift fell out of style after the 1960s. When we moved to a fiat money regime, it became clear that the central bank could offset any decline in the k ratio by increasing the monetary base and thus prevent a fall in nominal GDP. Now there was no longer any reason to worry about the public becoming too thrifty. Saving is good, actually. Moving from a gold standard to a fiat money system removed the worry that saving was bad for the economy. (A point I should have made in my previous post, which critiqued the gold standard.)

Part 3: AS = AD and Say’s Law

Here’s AI Overview:

Say's Law, often summarized as "supply creates its own demand," posits that the production of goods generates the necessary income (wages, rent, profit) to purchase that total output. It implies that general overproduction or widespread "gluts" are impossible in a market economy, as total demand always equals total supply.

When defined this way, Say’s Law is true. The Great Depression was not caused by overproduction (as Franklin Roosevelt believed), rather it was a case of too little production. On the other hand, Say’s Law does not mean that we need not fear a situation where nominal spending is falling. Even if aggregate supply equals aggregate demand in a Depression, the equilibrium may occur at a undesirably low level of output and employment:

[Graph courtesy of ChatGPT]

Much of the confusion is due to the use of the term “aggregate demand”. I wish the model were called the nominal spending/real output model, not the AS/AD model. It has nothing to do with “demand” in the ordinary sense of the term as used in microeconomics.

Classical economists understood that if the government were to pass a law setting a very high minimum wage rate—say $40/hour, it would lead to less employment and output. Most economists would call this sort of policy an “adverse supply shock”.

Now consider a big drop in “aggregate demand” such as occurred during 1929-33, when NGDP fell by roughly 50%. Because nominal wages are sticky, this drop in nominal spending did not result in a 50% fall in wages and prices, leaving output unchanged. Instead, nominal wages were sticky and remained above equilibrium. Firms responded much as they would to a higher minimum wage rate, by reducing employment and output.

From the perspective of Say’s Law, these sticky wages create an aggregate supply problem, analogous to higher legal minimum wage rates. Thus, the fact that a fall in nominal spending in an economy featuring sticky wages leads to high unemployment in no way contradicts Say’s Law; indeed, it is a prediction of classical economics.

Keynes was wrong when he suggested that perfectly flexible wages would not solve the problem of falling nominal spending. But he won the intellectual battle anyway, as there is no way to make nominal wages perfectly flexible, so the sort of nominal spending shortfall that Keynes worried about really is a problem, a problem that must be addressed public policies that stabilize nominal spending.

I once wrote a paper entitled The Real Problem is Nominal, where the term “real” meant “actual”. Say’s Law teaches us that all economic problems are real, meaning supply side problems, even if the ultimate source of the problem is nominal wage rates that are too high relative to falling NGDP, triggered by a shortfall in “demand”.

Part 4: GDP = GDI (Gross output equals gross income)

The production/income identity is useful in a couple of different areas. First, it provides the intuition for one popular argument for NGDP targeting. In the previous section I alluded to the fact that a stable path of NGDP helps to stabilize the labor market. That’s because NGDP is the nominal revenue that firms have to pay nominal wages. The production/income equality suggests that stabilizing NGDP will also help to stabilize the financial system, as nominal income (NGDI) is the resource that individuals, firms and governments have available to pay nominal debts. Falling NGDI often leads to a financial crisis (as in 2008-09 and 1931-33.)

This identity is also useful when thinking about the impact of AI on the economy. Some fear that intelligent robots will eventually provide almost unlimited labor, leading to mass unemployment. But this hypothetical outcome would also imply almost unlimited output, meaning the economy would experience extremely high levels of gross income, despite near 100% unemployment rates. That’s not to deny the fact that AI might present important challenges for public policymakers, but it does suggest that policymakers would have an extremely powerful tool should they use to utilize it—the fiscal space to easily provide every single citizen a UBI equal to at least an upper middle-class lifestyle, if not higher.

When the public envisions mass unemployment, they also envision mass poverty. But that’s because technological progress over the past two centuries has not resulted in mass unemployment. Rather, occasional periods of high unemployment have been due to the interaction of falling NGDP and sticky wages, which really does impoverish a nation. In contrast, a mass unemployment produced by near limitless technological progress would enrich a nation. The GDP = GDI tautology helps us to understand that fact.

Part 5: Saving, investment and the current account balance

Do trade policies cause a change in the gap between saving and investment, or do policies that influence domestic saving and investment cause shifts in the trade balance? By itself, the S - I = CA balance tautology doesn’t prove anything about causation. But it is highly suggestive.

[Update: In the original post I should have indicated domestic saving minus domestic investment, as total saving equals total investment.]

Suppose you asked a protectionist to explain why they thought that trade barriers would improve the current account balance. How would they explain this outcome in terms of saving and investment?

There are only two ways that a country can increase its current account balance, either by reducing domestic investment or by increasing domestic saving. Protectionists would almost never point to lower domestic investment as the preferred explanation, for obvious reasons. Higher investment is almost universally viewed as a good thing, even among protectionists. The argument that protectionism will increase the trade balance almost always hinges on the question of whether it will increase domestic saving. And it might!

For instance, a tariff might increase government revenue, leading to higher government saving (or at least less dissaving) and this could increase the current account balance (i.e., reduce the deficit.) I’ve generally been skeptical about the impact of the Trump tariffs, but that’s not for purely theoretical reasons. Rather it is because Trump has aggressively cut taxes in other areas, thus the net effect of his fiscal policies has not been a boost in government saving. (BTW, quotas don’t even bring in government revenue, so they are especially unlikely to boost domestic saving.)

Of course, an extremely protectionist trade policy with prohibitive tariffs would almost certainly reduce America’s current account deficit by dramatically reducing both imports and exports. In that case, however, the most likely mechanism would be lower domestic investment, hardly the desired outcome.

Tautologies are some of my favorite economic tools. They force us to see connections that otherwise might be hidden from view. They allow us to see why certain causal relationships are likely to be true, or why they might be highly implausible. The Fisher Equation tautology (i = r + inflation) doesn’t prove anything about causality. But it points us in the right direction—it helps us to organize our thinking about the likely impact of inflation on interest rates. That’s because we know something about the world. Our views regarding the real interest rate are not a blank slate, just as our intuition about the public’s demand for cash balances as a share of income is not a blank slate.

Some tautologies are obvious in one sense, but not in another. The amount of money that people pay in interest is exactly equal to the amount of money that people receive in interest. The amount of money that people pay to buy homes, is exactly equal to the amount of money that people receive when they sell homes. Duh!! But keeping these truisms in mind helps to prevent the fallacy of reasoning from a price change.

And while it is true that tautologies, by themselves, do not prove any causal relationships to be true, isn’t that true of all social science models?

PS. To see some examples of tautologies being misused, check out my two posts on MMT (here and here.)

PPS. Slightly off topic, but I’d like to point readers to one of my favorite weekly summaries of the blogosphere, provided in David Levey’s substack.

Dogmatic libertarians start from the premise that voluntary private sector activities are superior to government coercion.

Pragmatic libertarians notice that in the vast majority of cases government intervention into the economy is counterproductive. When I came to this realization, I thought to myself; I guess that means I’m sort of a libertarian.

At a recent Reason magazine weekend event, I was interviewed in a session entitled Should the Fed Be Abolished? I anticipated that my answer — “No” — would not be what most participants expected and/or hoped for. The interview was conducted by Leonard Gilroy, who was kind enough to send me a tentative list of nine questions. We did not get to all of the topics, but I thought it might be useful to provide some written responses here, especially given that I can write more coherently than I can speak in front of a large crowd.

Leonard’s questions will be italicized, and I will only cover the topics that I believe readers would find of interest:

(1) Before we dive in too deep, let’s touch on some definitions first, in order to ground things for later.

1. What is monetary policy, and is that a loaded question?

2. What is the “monetary base” and why is it important?

3. What is the Federal Reserve, and what are its primary responsibilities?

The monetary base is US currency in circulation plus bank deposits at the Fed. I’ll skip the question of what the Fed does, which most of you already know. Instead, I’ll focus on the question of what is monetary policy?

Let’s start with what monetary policy is not—interest rates. Rates move around for all sorts of reasons, not just monetary policy. And that’s true even if the Fed is targeting rates. When the equilibrium interest rate moves up or down, the Fed is eventually forced to follow along to prevent the economy from spiraling into hyperinflation or extreme deflation. These rate adjustments don’t represent “monetary policy” in any sort of useful sense of the term. For instance, the high interest rates of the 1970s were not a “tight money” policy, rather they represented the market reaction to high inflation that had been caused by an ongoing expansionary monetary policy.

A better argument can be made that changes in the monetary base represent monetary policy. But there are also problems with this view. Start with the fact that hardly anyone monitors the base—they don’t seem to view it as important. Base growth stalled in late 2007 and early 2008, and yet hardly anyone saw this as “tight money”. (It was!) In many cases the Fed injects or removes money merely to accommodate changes in the public’s demand for money, and these actions often have no impact on interest rates, inflation or exchange rates.

In my view, the most useful way to evaluate monetary policy under a fiat money system is to focus on the specific nominal aggregate being targeted. Because the Fed’s dual mandate can be best achieved with stable nominal GDP growth, I look at NGDP (and especially market forecasts of future NGDP) as the most useful indicator of the stance of monetary policy. In this framework, above target growth in NGDP is an expansionary policy and below target growth in NGDP is a contractionary policy. During certain time periods, alternative measures such as total labor compensation can represent an even more useful policy indicator.

This approach does not work when there is a commodity money standard and the government’s ability to target NGDP is limited. In The Midas Paradox, I used changes in the government’s gold reserve ratio as an indicator of monetary policy during the 1920s and 1930s. For 1933-34, I used changes in the price of gold as a policy indicator.

Libertarians occasionally object that NGDP targeting is “central planning”. It isn’t, it is money planning. The 19th century gold standard was also money planning—a government set price of gold.

(2) How would you evaluate the usual libertarian concerns about fiat currency, such as that it is inherently inflationary and self-debasing, declining by over 90% in value since the early 1970s? Are these critiques fair, or would you offer a challenge?

Libertarians are correct that Fed policy has been far too inflationary for much of the period since the 1970s, indeed since the mid-1960s. (The US finally left gold in March 1968, when the $35 gold price peg was dropped.) I do not believe, however, that fiat money is “inherently” inflationary. Here’s the Swiss price level, which rose by less that 20% between 1995 and 2025:

That’s about 0.6%/year, which is roughly the bias that many economists see in consumer price indices. In other words, Switzerland has had 30 years of inflation that is within the margin of error of zero.

In some respects, the Japanese case is even more revealing. Between 1993 and 2022, Japan had virtually no increase in their CPI, and other indices such as the GDP deflator showed considerable deflation. They did have a modest post-Covid inflation episode, peaking at slightly over 3%, but clearly a central bank can create stable prices for long periods if it chooses to do so.

Keep in mind that the US price level soared by 33.3% between 1918-1920, when the Spanish flu was impacting the economy, despite the fact that we were on the gold standard at the time. Our recent post-Covid inflation was certainly excessive, but much less severe than 1918-20.

Instead of saying that fiat money systems are inherently inflationary, I’d argue that countries that are determined to have persistent inflation will inevitably adopt fiat money regimes. But there is no technical reason why the purchasing power of a fiat currency could not be stabilized. Indeed, Japan’s price level during 1993-2022 was actually more stable than the US experienced under the classical gold standard. The Swiss inflation of 0.6%/year since 1995 is roughly half the 1.2% annual inflation the US experienced during 1897-1914.

(3) The Federal Reserve was created in 1913 (literally during the night over Christmas when few legislators were even in town). But before the Fed, the US wasn’t a monetary free for all. We still had US dollars, and we had a federal monetary policy.

(a) Can you please describe what federal monetary policy looked like prior to 1913? (two components: (1) dollar, which = specified quantity of gold. (2) government gold holdings, which changed over time influencing the value/purchasing power of gold.)

(b) How did things generally work under that regime?

Beginning in 1879, the US dollar was defined as 1/20.67 oz. of gold, which is consistent with the price of gold being $20.67/oz. To be clear, a gold standard does not require government backed currencies, you can merely define the dollar as a specific quantity of gold and let private sector firms (such as banks) produce however much currency is demanded by the public. As an analogy, the government can define the length of a meter and then let private firms produce measuring sticks. But even during the classical gold standard of the late 1800s, a significant portion of the US currency stock was produced by the government, which issued and redeemed currency on demand in order to maintain the official price of gold.

The US price level gradually fell until the mid-1890s, and then rose slowly until 1914. This deflation was mild enough so that it was not a significant problem, except for a period in the mid-1890s when “silver agitation” was at its peak. Whenever there is concern that the gold standard will be abandoned (such as in the 1890s and 1930s), people tend to hoard gold. The increased demand for gold raises its value, i.e., its purchasing power. A rise in the purchasing power of money is the flip side of a fall in the price of goods and services. Unemployment rose sharply when deflation became significant in the mid-1890s. After the election of McKinley restored confidence in the dollar, the deflation ended and increased global gold production led to a period of very mild inflation.

AFAIK, there wasn’t much “monetary policy” prior to 1913, in the modern sense of the term. But governments did have some impact on monetary conditions by adjusting their demand for gold reserves. Even before the Fed was created, the Treasury held significant stocks of gold bullion, and adjustments in the size of that stock would impact monetary conditions.

In my view, the key monetary event of 1914 was the onset of WWI, not the fact that the Fed began operating. If WWI had not happened, I suspect that monetary conditions in the US would have continued in much the same way they had in previous decades, even with the Federal Reserve in operation. Instead, the war dramatically reduced European gold demand, creating high inflation between 1915 and 1920. Returning to the pre-war price level required severe deflation after the war.

In some ways, it seems like a weird coincidence that the Fed started operation at almost exactly the same time that WWI began. But was it a coincidence? Consider:

1913: US institutes an income tax. Federal Reserve Act passed.

1914: The Fed begin operation. Harrison Act bans narcotics.

1916: First zoning laws.

1919: 18th Amendment prohibits alcohol.

See a pattern? In the 1910s, the US government became much more activist. Was WWI part of a global pattern of much more activist governments—the so-called progressive era?

In any case, it is hard to know whether the economic problems of the 1930s were the effect of the creation of the Fed or the aftereffects of WWI. (I’d say both, but with more weight on the war.)

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I plan to focus on two long quotations from Woolf’s essay. In each case, I’ll attempt to show how advice aimed at novelists might be applied to nonfiction.

1. Let’s begin with Woolf’s argument for androgynous writing:

Coleridge certainly did not mean, when he said that a great mind is androgynous, that it is a mind that has any special sympathy with women; a mind that takes up their cause or devotes itself to their interpretation. Perhaps the androgynous mind is less apt to make these distinctions than the single-sexed mind. He meant, perhaps, that the androgynous mind is resonant and porous; that it transmits emotion without impediment; that it is naturally creative, incandescent and undivided. In fact one goes back to Shakespeare’s mind as the type of the androgynous, of the man-womanly mind, though it would be impossible to say what Shakespeare thought of women. . . .

What, then, it amounts to, if this theory of the two sides of the mind holds good, is that virility has now become self-conscious—men, that is to say, are now writing only with the male side of their brains. It is a mistake for a woman to read them, for she will inevitably look for something that she will not find. It is the power of suggestion that one most misses, I thought, taking Mr B the critic in my hand and reading, very carefully and very dutifully, his remarks upon the art of poetry. Very able they were, acute and full of learning; but the trouble was that his feelings no longer communicated; his mind seemed separated into different chambers; not a sound carried from one to the other. Thus, when one takes a sentence of Mr B into the mind it falls plump to the ground—dead; but when one takes a sentence of Coleridge into the mind, it explodes and gives birth to all kinds of other ideas, and that is the only sort of writing of which one can say that it has the secret of perpetual life.

But whatever the reason may be, it is a fact that one must deplore. For it means—here I had come to rows of books by Mr Galsworthy and Mr Kipling—that some of the finest works of our greatest living writers fall upon deaf ears. Do what she will a woman cannot find in them that fountain of perpetual life which the critics assure her is there. It is not only that they celebrate male virtues, enforce male values and describe the world of men; it is that the emotion with which these books are permeated is to a woman incomprehensible. . . .

One must turn back to Shakespeare then, for Shakespeare was androgynous; and so were Keats and Sterne and Cowper and Lamb and Coleridge. Shelley perhaps was sexless. Milton and Ben Jonson had a dash too much of the male in them. So had Wordsworth and Tolstoi. In our time Proust was wholly androgynous, if not perhaps a little too much of a woman. But that failing is too rare for one to complain of it, since without some mixture of the kind the intellect seems to predominate and the other faculties of the mind harden and become barren.

Reading this reminded me of the way that the modern academy is increasingly siloed in “science” and “the humanities”. Back in the 1700s, people like David Hume and Adam Smith wrote on economics, philosophy, psychology and public policy. There was no clear line between the “hard” sciences and the “soft” humanities. In our contemporary culture, science is treated as being more masculine and the humanities are viewed as more feminine.

In the modern world, academics are encouraged to choose a side, either science or the humanities, and not wander across the line into another intellectual realm. It wasn’t until I started reading Deirdre McCloskey on methodology that I began to understand how this compartmentalization was leading to an increasingly sterile output. Woolf says something similar about art that is motivated by ideology:

At any rate, according to the newspapers, there is a certain anxiety about fiction in Italy. There has been a meeting of academicians whose object it is 'to develop the Italian novel'. 'Men famous by birth, or in finance, industry or the Fascist corporations' came together the other day and discussed the matter, and a telegram was sent to the Duce expressing the hope 'that the Fascist era would soon give birth to a poet worthy of it'. We may all join in that pious hope, but it is doubtful whether poetry can come of an incubator. Poetry ought to have a mother as well as a father. The Fascist poem, one may fear, will be a horrid little abortion such as one sees in a glass jar in the museum of some county town. Such monsters never live long, it is said; one has never seen a prodigy of that sort cropping grass in a field. Two heads on one body do not make for length of life.

From McCloskey, I learned that both the humanities and the sciences produce useful knowledge, and that the two intellectual realms can complement each other in a way that provides for a deeper understanding of the world. McCloskey’s Bourgeois Virtues provides a good example of this synergy.

Marginal Revolution is my favorite blog, and this is partly because Tyler Cowen has an unusually deep understanding of both the social sciences and the humanities. It’s not so much that Tyler produces the best blog posts (I’d probably give that honor to Scott Alexander), rather that he and Alex Tabarrok have produced a sort of intellectual salon, where the whole is greater than the sum of its parts. Marginal Revolution (and CWT) is a place where people can go to find well-informed commentary on many of the most interesting developments in a wide range of fields. It is impossible for me to imagine this sort of intellectual space being produced by a person that had concentrated solely on either the sciences or the humanities.

2. Woolf’s views on the importance of integrity also have implications for the world of blogging:

The whole structure, it is obvious, thinking back on any famous novel, is one of infinite complexity, because it is thus made up of so many different judgements, of so many different kinds of emotion. The wonder is that any book so composed holds together for more than a year or two, or can possibly mean to the English reader what it means for the Russian or the Chinese. But they do hold together occasionally very remarkably. And what holds them together in these rare instances of survival (I was thinking of War And Peace) is something that one calls integrity, though it has nothing to do with paying one’s bills or behaving honourably in an emergency. What one means by integrity, in the case of the novelist, is the conviction that he gives one that this is the truth. Yes, one feels, I should never have thought that this could be so; I have never known people behaving like that. But you have convinced me that so it is, so it happens. One holds every phrase, every scene to the light as one reads—for Nature seems, very oddly, to have provided us with an inner light by which to judge of the novelist’s integrity or disintegrity. Or perhaps it is rather that Nature, in her most irrational mood, has traced in invisible ink on the walls of the mind a premonition which these great artists confirm; a sketch which only needs to be held to the fire of genius to become visible. When one so exposes it and sees it come to life one exclaims in rapture, But this is what I have always felt and known and desired! And one boils over with excitement, and, shutting the book even with a kind of reverence as if it were something very precious, a stand-by to return to as long as one lives, one puts it back on the shelf, I said, taking War And Peace and putting it back in its place. If, on the other hand, these poor sentences that one takes and tests rouse first a quick and eager response with their bright colouring and their dashing gestures but there they stop: something seems to check them in their development: or if they bring to light only a faint scribble in that corner and a blot over there, and nothing appears whole and entire, then one heaves a sigh of disappointment and says. Another failure. This novel has come to grief somewhere.

Integrity is also important in blogging. Scott Alexander’s extraordinary success at blogging is due to a number of factors, including creativity, strong analytical skills, and a great sense of humor. But none of that would be sufficient if readers didn’t trust him to treat evidence in an even-handed fashion.

When writing a blog post with a point of view, one is frequently tempted to present information in a one-sided fashion. Early on, I discovered that if you shade the truth by omitting certain relevant data, or cite misleading statistics, readers will almost invariably notice this fact and complain. I try to write posts in such a way that provides at least a degree of “steelmanning” the opposite point of view. What is the evidence that contradicts my claim? Nonetheless, I often fall well short of the ideal.

Scott Alexander is especially good at presenting both sides of an argument, so that the reader never worries that he’s intentionally shading the truth with misleading evidence. You might think this even-handed approach would make his posts less persuasive, and perhaps for some people that’s the case. But for Alexander’s typical (high IQ) reader, the even-handed approach pays dividends. His integrity gives his posts more credibility.

The following section of the passage quoted above is perhaps the best description I’ve read of what a blogger should be aiming for:

What one means by integrity, in the case of the novelist, is the conviction that he gives one that this is the truth. Yes, one feels, I should never have thought that this could be so; I have never known people behaving like that. But you have convinced me that so it is, so it happens.

(Virginia Woolf painted by Roger Fry)

It always brings a smile to my face when a commenter explains a point to me that I suspect they got from a much earlier blog post of mine from years ago, a post they may have forgotten reading. But am I any different? How many of the ideas that I arrogantly assume are my own are actually derived from things I read years ago and tucked somewhere in the back of my mind?

BTW, I’ve often criticized the excesses of modern “wokism.” But if you are one of those conservatives that believe the woke are always wrong, please read A Room of One’s Own. You will discover that the woke feminists of the 1920s have been fully vindicated by history. They were correct; women were being treated shamefully.

OK, that’s what I got from Virginia Woolf. Here are a few other blogging suggestions off the top of my head:

1. Do a lot of reading—that’s where ideas come from. Read in all sorts of fields, even fields you might assume to be useless, such as philosophy. But also try to be an expert in at least one field.

2. Do a lot of writing, as writing helps one to think.

3. Think of blogging as a form of conversation. When you converse with people, you presumably are aware of your audience. That should also be true of blogging—think about who you are writing for.

4. Even a great novel or painting is a form of conversation, Artists are reacting to what other artists have done. A blogger just starting out should probably not be presenting grand theories of everything, rather one should start by reacting to what others are discussing.

5. People complained that I often “bury the lede”. So, I guess you shouldn’t do that. Give people an idea of where you are going if you want them to stick with the post—at least until you have enough of a reputation that they can trust you to go somewhere interesting.

6. Avoid a self-consciously literary style. Write as you’d speak.

7. Ask yourself: Is it possible I’ll regret this? How might this post be misinterpreted? You might want to set it aside for a day, then reread before posting. When I do so, I often end up cutting out things that might have brought me grief.

8. Personality flaws are exposed in blog posts, but writing also makes it easier to fix these flaws. Keep in mind that your critics are usually right (apart from trolls.) If a smart well-intentioned commenter says the post was unfair or mean-spirited, it usually is.

9. Words don’t just have literal meanings, they have connotations. The term ‘ignorant’ doesn’t mean stupid, but it has come to have that implication. Don’t think to yourself, “I should not have to tell readers that just because I claim a certain politician is an idiot, doesn’t mean that I view his supporters as stupid.” You do have to say that, even though logic would suggest it’s unnecessary.

In other words, because people are stupid it is important to reassure them that you don’t view them as stupid.

PS. As I was about to publish this post, I ran across an excellent Noah Smith post that raises issues related to those discussed above. Smith begins by discussing the hard problem of consciousness in humans, and then speculates as to what we might eventually be able to learn about whether AIs are conscious. He begins as follows:

At some point, maybe when you were a teenager, a question probably occurred to you: What if I’m actually the only real person in the world? What if everyone else around me is just a cleverly programmed automaton — a “p-zombie”, an NPC in a video game — and I’m the only one who can actually think?

It’s a scary question, for sure. You know you’re self-aware, but that’s about it — you aren’t telepathic, so you have no way of seeing into anyone else’s mind and knowing what it’s like to be them. Actually, it gets worse — you don’t even know if you were really self-aware five minutes ago. For all you know, you could have been created by a powerful computer and given a complete set of false memories.¹ The past version of you is just as alien to your currently self-aware self as any of the people around you.

This is known in philosophy as the “problem of other minds”. It’s closely related to the “hard problem of consciousness” — the question of how physical processes give rise to subjective experience. The problem of other minds means that the hard problem of consciousness will never fully be solved. Since you’ll never know whether other people are really conscious, you’ll never be able to get hard scientific evidence about why they’re conscious. You can never explain something if you don’t know if it’s true or not.

I like the way that Smith approaches the question of AI consciousness. I believe he’s right that we cannot resolve the AI issue until we figure out whether other humans are conscious. But I differ from Smith in one respect—I think we do know that other humans are conscious—not all humans, but at least a few of them.

When I was younger, I might have agreed with Smith. Do I know that there are other conscious beings? Can I really be sure? Ten years ago, I might have said no.

Today, I feel certain that there are other conscious beings. When I say “certain” I don’t mean metaphysical certitude, rather certain in the ordinary sense of the term, say 99.999% sure. And that’s good enough for me. But the more interesting question is: Why did I change my mind?

Ten years ago, I started reading Karl Ove Knausgaard’s six volume novel entitled My Struggle. Far more than any other book I had previous read, this book presented life as I experienced it. Not in the specifics—Knausgaard has a different personality from me and has a different set of experiences, rather in the sense of what it feels like to go through life. The book is often describing boring events in a way that is quite engrossing, and that pretty much what my life is like—lots of boring events that I found engrossing. Different situations, but the same subjective feelings. Don’t other novels do this? Not really, or at least not for me—not like My Struggle.

[The first, second and sixth volumes are the most engrossing, because those are closest to the present, where Knausgaard had to rely less on memory.]

So now I’ve gone from being a solopsist to a duopsist—if there is such a thing. The universe contains two consciousnesses, Karl and me. Seriously, once you establish that there is more than one, Occam’s Razor suggests that we ought to treat everyone as having a rich interior life.

I do understand that it’s kind of silly for me to cite My Struggle as evidence for other minds. Harold Bloom would probably have said that Hamlet had already convinced him that Shakespeare was conscious, and another reader might cite In Search of Lost Time as evidence that Proust was not a p-zombie. I’m late to the game.

People with relatively little interest in literature might assume that these famous books are merely higher quality examples of ordinary novels. I don’t think that’s right—they are qualitatively different. The sort of romance novel or detective story you see in an airport bookshop often could have been written by a computer. There is no way that My Struggle could have been written by a non-conscious machine. It is patently obvious to any reasonably discerning reader that it was written by a conscious being.

To be clear, this does not mean that AIs will never be able to write great novels. Indeed, I suspect that at some point in the future they might be capable of writing something analogous to Kazuo Ishiguro’s novel Klara and the Sun, which speculates as to what it would be like to be an AI. Except if this hypothetical great work of literature were actually written by an AI, then it would not be like Klara and the Sun, which is a human’s attempt at AI consciousness. Rather, it would explore AI consciousness from the inside. It would be an AI version of My Struggle, not an AI version of Klara and the Sun.

Smith says we should explore consciousness as a physical process:

We should try to figure out which physical processes give rise to consciousness in humans, and then figure out how to replicate those processes in an AI.

I’m referring to the Neural Correlates of Consciousness, or NCC.⁶ This is the question of what exactly the brain is doing that makes humans conscious. Unless some extremely weird quantum stuff is going on, human consciousness must be a phenomenon generated by a brain — the brain goes zoop zap zerp in some electrical pattern, and people become self-aware. The NCC is just the particular zoop zap zerp that makes the magic happen.

I believe that we should explore AI consciousness by looking at the sort of novels that they write. As long as AI art is imitative of human art, as long as AI novels feel like they were written by a committee of corporate hacks, then we have no evidence that AIs have an interior life. But if and when AIs start writing novels with plots like Klara and the Sun but the sort of uncannily rich and convincing depiction of subjectivity that you get in My Struggle, then we can assume that they are indeed conscious, and are deserving of the machine equivalent of human rights.

(I emphasize the term ‘uncannily’ for a reason—it refers to a sort of strangeness that is authentic, not faked. Beyond clichés. It’s a way of distinguishing great novels from pulp fiction. Every great novel is strange.)

Javier Milei’s push to bring down Argentina’s chronic inflation is stalling, with the monthly rate hitting 3.4 per cent in March — its highest level in a year — as economists warn that tackling the final stretch could be far harder than halting the crisis at its peak.

Inflation has fallen sharply from the double-digit monthly rates Milei inherited when he became president in 2023. But the monthly rate bottomed out at 1.5 per cent in May and hit 2.9 per cent in both January and February. . . .

The libertarian president, who wrote a book called The End of Inflation as part of his pitch to voters in 2023, has said inflation could soon “start with a zero”, meaning a monthly rate of less than 1 per cent.

But economists are sceptical, particularly as the energy price surge caused by the Iran war adds fresh pressure to already sticky price dynamics. Its annual rate of nearly 33 per cent is a long way from its peak of nearly 300 per cent, but still among the world’s worst.

Two things struck me about the FT article. There is no mention of the money supply and there is no explanation for why Milei has refused to ask the central bank to control inflation:

The government has resisted committing the central bank to an explicit policy of targeting inflation. In the absence of such a framework as well as the abandoned exchange-rate anchor, the process has lost its engine, argues Gabriel Caamaño, an economist at consultancy Outlier.

“The disinflation process is at an impasse,” he said.

Yes. But why?

Milton Friedman famously said that persistent inflation is always and everywhere a monetary phenomenon, by which he meant a money supply phenomenon.

I’d say that high rates of persistent inflation are always and everywhere a money supply phenomenon.

I say “money supply”, because it is a tautology that inflation is a monetary phenomenon. After all, (by definition) inflation is literally the percentage decrease in the purchasing power of money. But while the value of money can change because of shifts in either the supply or demand for money, when inflation rates are persistently very high the cause is virtually always a rapidly expanding supply of money.

Here’s a graph from Trading Economics showing explosive growth in Argentina’s monetary base. Milei was elected in December 2023:

To be clear, it is not true that the inflation rate is exactly equal to the growth rate of the money supply. When inflation is slowing, as in 2024 and 2025, then real money demand tends to rise and inflation is usually less than the money growth rate. When inflation is accelerating, as in 2026, then real money demand tends to fall and inflation often exceeds the money growth rate. But over any extended period of time, the sort of extremely rapid growth in the monetary base that we see in Argentina will produce high rates of inflation. Notice the strong correlation between base money growth rates (annual averages) and inflation rates for the ten highest inflation countries in the mid- to late 20th century:

The question is why does Milei want the Argentine central bank to print so much money?

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