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Trickle Down Behaviorism

University of Chicago economist John Cochrane has written one of the most unique and insightful perspectives on inequality in his blog, The Grumpy Economist.  Read Why and how we care about inequality in its entirety.  It is about 6 pages long.


I’ve been reading Piketty, Saez, Krugman, Stiglitz, the New York Times editorial pages to find the answers. They all recognize that inequality per se is not a persuasive problem, so they must convince us that inequality causes some other social or economic ill.

Here’s one. Standard and Poors economists wrote a recent summary report on inequality, (earlier post here) perhaps as penance for downgrading the US debt, and wrote

As income inequality increased before the crisis, less affluent households took on more and more debt to keep up–or, in this case, catch up–with the Joneses….In Vanity Fair, Joe Stiglitz wrote similarly that inequality is a problem because it causes

a well-documented lifestyle effect—people outside the top 1 percent increasingly live beyond their means….trickle-down behaviorismAha! Our vegetable picker in Fresno hears that the number of hedge fund managers in Greenwich with private jets has doubled. So, he goes out and buys a pickup truck he can’t afford. Therefore, Stiglitz is telling us, we must quash inequality with confiscatory wealth taxation… in order to encourage thrift in the lower classes?

If this argument held any water, wouldn’t banning “Keeping up with the Kardashians” be far more effective? (Or, better, rap music videos!) If the problem is truly overspending by low income Americans, can we not think of more directed solutions? For example, might we not want to remove the enormous taxation of savings that they face through social programs?

Another example. The S&P report moved on to a new story: Inequality is a problem because rich people save too much of their money, and poor people don’t. So, by transferring money from rich to poor, we can increase overall consumption and escape “secular stagnation.”

I see. Now the problem is too much saving, not too much consumption. We need to forcibly transfer wealth from the rich to the poor in order to overcome our deep problem of national thriftiness.

I may be bludgeoning the obvious, but let’s point out just a few ways this is incoherent. If Keynesian “spending” and “aggregate demand” are the problems behind low long-run growth rates – and that’s a big if – standard Keynesian answers are a lot easier solutions than confiscatory wealth taxation and redistribution. Which is why standard Keynesians argued for monetary and fiscal policies, not confiscatory anti-inequality taxation, until the latter became politically popular.

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The Death of Magical (Economic) Thinking

John Cochrane writes in the Wall Street Journal An Autopsy for the Keynesians


Inequality was fashionable this year. But no government in the foreseeable future is going to enact punitive wealth taxes. Europe’s first stab at “austerity” tried big taxes on the wealthy, meaning on those likely to invest, start businesses or hire people. Burned once, Europe is moving in the opposite direction. Magical thinking—that, contrary to centuries of experience, massive taxation and government control of incomes will lead to growth, prosperity and social peace—is moving back to the salons.

Yes, there is plenty wrong and plenty to worry about. Growth is too slow, and not enough people are working. Even supporters acknowledge that Dodd-Frank and ObamaCare are a mess. Too many people on the bottom are stuck in terrible education, jobless poverty, and a dysfunctional criminal justice system. But the policy world has abandoned the notion that we can solve our problems with blowout borrowing, wasted spending, inflation, default and high taxes. The policy world is facing the tough tradeoffs that centuries of experience have taught us, not wishing them away.

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Economic Justice

from the Wall Street Journal, a remembrance of Henry Manne-   A Champion of Law Informed by Economics:

From “Bring Back the Hostile Takeover,” June 26, 2002:

Since Enron, there has been an outbreak of regulatory fever in Washington: A tide of “solutions” has sluiced from the pens of journalists and the mouths of politicians. Apparently forgotten is how Enron and other recent scandals were the direct result of regulatory and judicial efforts to stem abuses in the takeover arena 20 and more years ago. They still haven’t learned just how high the cost of interfering with salutary market forces can be.

Among current proposed guardians of executive morality are auditors, lawyers, analysts, financial intermediaries, independent directors, and government officials. But no proposal involving these actors addresses the real problem. New scandals will continue until we bring back the most powerful market mechanism for displacing bad managers: hostile takeovers.

From “For Milken, Verdict First, Trial Later,” Feb. 3, 1990:

The government wants $1.8 billion in RICO forfeitures from [Michael] Milken and his co-defendants. The government claims that Mr. Milken’s alleged securities infractions were RICO violations, which made Drexel part of a RICO “enterprise,” which means he must forfeit all his Drexel compensation. Kafka, hell; anyone for Torquemada?

Every American’s basic civil liberties are critically endangered by this hysterical, politically inspired drive to demean our financial markets and convict or at least disgrace targeted individuals. That the principal defendant has been a disruptive and unsettling innovator in the usually staid financial world makes it all the more important to be vigilant about possible abuse of fair procedures. We hardly need a regime of civil liberties to protect passive, unventuresome members of the community. Tough business competitors should get at least the same legal fairness we normally give Klansmen or crack dealers.



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The Advantage of Limited Power



from John Mauldin at Mauldin Economics, Thoughts from the Frontline:

But the Swiss, not being as smart as the Italians, do not believe in devaluations. You see, in Switzerland they have never believed in the ‘euthanasia of the rentier’, nor have they believed in the Keynesian multiplier of government spending, nor have they accepted that the permanent growth of government spending as a proportion of gross domestic product is a social necessity. The benighted Swiss, just down from their mountains where it was difficult to survive the winters, have a strong Neanderthal bias and have never paid any attention to the luminaries teaching economics in Princeton or Cambridge. Strange as it may seem, they still believe in such queer, outdated notions as sound money, balanced budgets, local democracy, and the need for savings to finance investments. How quaint!

Of course, the Swiss are paying a huge price for their lack of enlightenment. For  example, since the move to floating exchange rates in 1971, the Swiss franc has risen from CHF4.3 to the US dollar to CHF0.85 and appreciated from CHF10.5 to the British pound to CHF1.5. Naturally, such a protracted revaluation has destroyed the Swiss industrial base and greatly benefited British producers [not!]. Since 1971, the bilateral ratio of industrial production has gone from 100 to 175… in favor of Switzerland.

And for most of that time Switzerland ran a current account surplus, a balanced budget, and suffered almost no unemployment, all despite the fact that nobody knows the name of a single Swiss politician or central banker (or perhaps because nobody knows a single Swiss politician or central banker, since they have such limited power? And that all these marvelous results come from that one simple fact: their lack of power.)

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The Warmest Year Ever? Maybe not…


from Investor’s Business Daily, Is 2014 The Hottest Year Ever? Satellites Say No:

‘For the third time in a decade,” shouted the AP, “the globe sizzled to the hottest year on record, federal scientists announced Friday.”

The Washington Post reported that “the year 2014 was the hottest ever measured, based on records going back to the year 1880.” Bloomberg News challenged readers to “deny this” and directed them to “animation below” that documents “2014: The Hottest Year.”

Hysteria also reigned at the BBC in Britain, the New Era in Africa, Australia’s Sydney Morning Herald and all points in between.

In one sense, the breathless stories are correct: 2014 was the hottest year on record — by no more than four-hundredths of a degree. But that’s based on surface thermometer records, which are not reliable.

Better measurement is done by satellites, and they indicate 2014 was the third-warmest in the 36 years that satellites have been used to document temperatures.

John Christy, a professor of atmospheric science and director of the Earth System Science Center at the University of Alabama in Huntsville, says the satellite data show that temperature changes since 2001 are “statistically insignificant.”

As expected, though, some scientists — a few of whom are considered “distinguished” — take the hottest-ever report as confirmation that man is dangerously warming his planet due to fossil-fuel use.

But a few have kept their heads. Roger Pielke, professor of atmospheric science at Colorado State University, told the Post that “there remain significant uncertainties in the accuracy of the land portion of the surface temperature data, where we have found a significant warm bias.”

Judith Curry, professor at Georgia Tech’s school of earth and atmospheric sciences, said that “with 2014 essentially tied with 2005 and 2010 for hottest year,” the implication is “that there has been essentially no trend in warming over the past decade.”

“This ‘almost’ record year does not help the growing discrepancy between the climate model projections and the surface temperature observations,” she added.

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