The Dark Side of the Human Spirit: Take 1

In my post “A Wish in the Wake of the Boston Marathon Bombings,” I wrote:

May the best in the human spirit vanquish the worst in the human spirit.

In thinking of the worst in the human spirit, I was reminded of a chapter in Stephen Pinker’s wonderful book The Better Angels of Our Nature: Why Violence Has Declined.In chapter 4, “The Humanitarian Revolution,” he writes:

But the practical function of cruel punishments was just a part of their appeal. Spectators enjoyed cruelty, even when it served no judicial purpose….

Samuel Pepys, presumably one of the more refined men of his day, made the following entry in his diary for October 13, 1660:

“Out to Charing Cross, to see Major-general Harrison hanged, drawn and quartered; which was done there, he looking as cheerful as any man could do in that condition…”

Pepys’s cold joke about Harrison’s “looking as cheerful as any man could do in that condition” referred to his being partly strangled, disemboweled, castrated, and shown his organs being burned before being decapitated….

The word keelhaul is sometimes used to refer to a verbal reprimanding. Its literal sense comes from another punishment in the British navy. A sailor was tied to a rope and pulled around the bottom of the ship’s hull. If he didn’t drown, he would be slashed to ribbons by the encrusted barnacles….

The bland phrase broken on the wheel cannot come close to capturing the horror of this form of punishment. According to one chronicler, the victim was transformed into a “huge screaming puppet, writing in rivulets of blood…”…

… Still others, like the American physician and signer of the Declaration of Independence Benjamin Rush, appealed to the common humanity of readers and the people who were targets of punishment. In 1787 he noted that “the men, or perhaps the women, whose persons we detest, possess souls and bodies composed of the same materials as those of our friends and relations…." 

I had to leave out some of the details Steven Pinker gives because the passage was too graphic. But I left some graphic things in because I wanted the message of our brutal human past to come through.

Anger, hatred and cruelty are elements in the human spirit that can be either nursed and encouraged or fought and subdued. Many of those who commit atrocities have spent many years nourishing and tending their anger, hatred and cruelty before the moment when they commit those atrocities. (Some are psychopaths without a conscience.) May we tame our anger at what they have done into an abiding motivation to make the world a better place, safer in all ways from their dark side, and from our own.

Quartz #12—>Yes, There is an Alternative to Austerity vs. Spending: Reinvigorate America's Nonprofits

blog.supplysideliberal.com tumblr_inline_mkvzvh8n041qz4rgp.png

Link to the Column on Quartz

Here is the full text of my 12th Quartz column, “Yes, there is an alternative to austerity vs. spending: Reinvigorate America’s nonprofits,” now brought home to supplysideliberal.com. It was first published on January 15, 2013. Links to all my other columns can be found here.

If you want to mirror the content of this post on another site, that is possible for a limited time if you read the legal notice at this link and include both a link to the original Quartz column and the following copyright notice:

© January 15, 2013: Miles Kimball, as first published on Quartz. Used by permission according to a temporary nonexclusive license expiring June 30, 2014. All rights reserved.

Despite serving only one term from 1989-1993, US President George H. W. Bush (just released from the hospital yesterday after a bout of fever and other complications) has cast a long shadow over subsequent events. His decision to leave Saddam Hussein in place after the First Iraq War led to his son’s immensely controversial Second Iraq War. And the negative reaction to his decision to compromise with Democrats in raising taxes in 1990 despite his pledge “Read my lips, no new taxes” has set the terms of the tax policy debate ever since. Tax reformer Grover Norquist codified the principle of “no new taxes” into the Taxpayer Protection Pledge, which goes as follows:

I, ____ pledge to the taxpayers of the state of ____, and to the American people that I will:

ONE, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and

TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.

Republican Speaker of the House John Boehner made a nod toward this pledge two weeks ago, pushing for the temporary resolution of the fiscal cliff, when he reminded his rank and file that, technically, taxes had already gone up, due to the expiration of the younger Bush’s tax cuts at year end. The implication was that members of Congress would really be voting for a tax cut, not a tax increase, and so would not be breaking their pledge. There is no doubt that this matter of interpretation will feature prominently in the GOP primaries in 2014.

The ongoing crisis in long-run US taxing and spending policy is born from the collision of an almost unstoppable force on the spending side with Grover Norquist’s almost immovable object on the taxing side. Former Treasury Secretary Larry Summers ably describes the almost unstoppable force on the spending side in his Washington Post editorial “The Reality of Trying to Shrink Government.” The bottom line is that the explosion of government spending is primarily the result of (1) an aging population, (2) having to pay interest on ballooning government debt, and (3) the increasing cost of medicine that keeps discovering ways to do more with the expensive skilled labor of doctors and other medical professionals. To put it bluntly, the only way to keep government spending constant in the future, let alone reduce it, would be to dramatically reduce benefit levels for Social Security, Medicare and Medicaid, or to gut all the other functions of government, from national defense to the judicial system to scientific research.

It is easy to be misunderstood when mentioning Hitler, but here I want to invoke a comparison solely in his role as an inept commander-in-chief of the German armed forces and in no other capacity. In his book, The Storm of War: A New History of the Second World War, Andrew Roberts argues that Hitler’s no-retreat, “stand-or-die” orders were strategically disastrous for the German forces. German generals had a brilliant record at turning tactical retreats into great German victories. But Hitler’s stand-or-die orders took away the advantage of maneuver and left German troops to be mowed down by the Russians under Stalin. My point is that the “stand-or-die” approach is likely to do no better against the spending juggernaut than it did against Stalin.

In our long-run fiscal situation, the alternatives (of which we may need more than one) are to convince the American people to swallow straight benefit cuts, to directly raise tax rates, to grow the economy to get more revenue through:

1. Increased immigration, done in a way that focuses on economic growth, as I discussed in a previous Quartz piece entitled “Obama could really help the US economy by pushing for more legal immigration”

2. A more efficient tax system that encourages capital formation, as discussed in my “Twitter Round Table on Consumption Taxation”

3. A big push for increased scientific research to accelerate technological progress

But then what? I propose that many of the jobs the government has set for itself actually be done outside the government, by the non-profit sector.

In my recent blog post “No Tax Increase Without Recompense” (there’s a cliff notes version here), I propose a “public contribution system” that goes far beyond the current tax deduction for charitable contributions. In this program:

A public contribution is a donation to a nonprofit organization meeting high quality standards that engages in activities that (a) could be legitimate, high-priority activities of Federal or State governments and (b) can to an important extent substitute for spending these governments would otherwise be likely to do.

My proposal is to raise marginal tax rates above about $75,000 per person—or $150,000 per couple—by 10% (a dime on every extra dollar), but offer a 100% tax credit for public contributions up to the entire amount of the tax surcharge.

In addition to helping the government budget by taking over tasks the government is now doing and by reducing revenue lost to the current charitable deduction, I believe the non-profit sector (with the usual level of regulation) can do many things better than the government, and this program would be much less painful for people than paying the same amount in taxes. It is easy to find fulfillment in philanthropy. There is satisfaction in knowing one has made a difference in the world, in a way of one’s own choosing. And giving can serve as a good opportunity for teaching children to care. No doubt, some would view these contributions to charitable causes as almost as onerous as the taxes to which they would be an alternative. But I don’t think that would be the typical reaction.

Many people talk as if taxes are hateful only because the government is taking our money. But taxes are also hateful because the government is arrogating to itself the choice of what should be done with the money it takes from us. The government is jealous of its power. But let us insist that any resolution of our long-run fiscal crisis reduces, rather than adds to, government power. We do need to take care of those who are poor, sick and elderly. A program of public contributions shrinks government, while getting the job done. And it would be a fitting honor for George H. W. Bush, who said movingly in his inaugural address:

I have spoken of a thousand points of light, of all the community organizations that are spread like stars throughout the Nation, doing good… . The old ideas are new again because they are not old, they are timeless: duty, sacrifice, commitment, and a patriotism that finds its expression in taking part and pitching in.

Show Me the E-Money

Q: Would negative nominal rates effectively act as a flat tax indiscriminately hitting those who can afford to pay it and those who would struggle to?

A: I really think you would see short rates go down but long rates go up because people would see that there was going to be an economic recovery. Those long-term rates should matter more for retirees, for example.

Even if the worse off are impacted in the short run you’re not going to touch social security or benefits. You’re not hitting the people at the very bottom. So we’re really just talking about relatively better off people who have something more than the state pension to retire on anyway.

Q: Given that we already have negative real returns on cash holdings and there is little evidence that it is causing firms or individuals to spend heavily, why should we expect them to respond differently to negative nominal rates?

A: Theoretically you shouldn’t have much of a response until you get the interest rate below the net rental rate. If you take a very simple model you get very little investment until you get to that point but once it is crossed you get a large amount of investment.

Things are more complicated in the real world because you have a variety of different investment projects. Nevertheless the simple model has a message that there is a critical interest rate at which investment takes off.

Suppose the net rental rate is around -2%. The message from the simple model is that there are lots of investment projects that have an internal rate of return of -2%. You might see some difference if you reduce rates from 0.5% to around zero but you shouldn’t expect to see much activity before you get below that level.

Q: Are you suggesting that at present the weakness in private sector spending is that they in effect expect a negative return on investment?

A: Absolutely. The internal rate of return companies expect, which I call the net rental rate, is currently below the natural rate of interest partly because the economy is doing badly.

This doesn’t mean that an investment will earn a negative rate of return. Investment projects may still be making positive returns on average but after adjusting for risk they might not look so appealing.

What you need to do is make it so that there is no way of getting a safe return of more than -2% anywhere and then people will take the risk of buying a new factory or building new equipment. That is why electronic money is crucial.

Q: How do you prevent huge capital flight in the interim?

A: I would use the more neutral term of a net capital outflows and there’s nothing wrong with that. The way this thing works is that the first adopter country gets a big trade surplus as a weakening currency stimulates exports.

So the first mover gets a big boost to their economy but of course other countries may complain. There are two possible answers for them:

The first is that they bring in electronic money and negative interest rates too so that the world can get the monetary stimulus it needs.

The second answer is to invite other countries to do a currency intervention. You have government debt yielding -2% and if other countries purchase it the UK gets paid handsomely for exporting some of the stimulus it’s providing to the world.

Any major country that adopted electronic money and negative rates would do the service of quickly making it happen in other countries. Although it might seem like there is a big political barrier to doing it initially the fact that any country doing it makes it politically necessary for other countries to do it makes it much more likely to happen than people realise.

Q: There was an implicit assumption behind the current policy mix in the UK that a weaker pound would boost exports. Despite falls in the value of sterling the export boom failed to materialise. Why should people expect a different result with negative nominal rates?

A: If you lower rates into negative territory at some point you are going to get more investment or more exports. It does depend on the balance of investment opportunities in the UK, for example, compared to elsewhere but you’re going to get one or the other.

Quantitative easing is a relatively weak tool and in simple models it doesn’t work at all. So I’m not surprised that it hasn’t been able to weaken sterling more and boost exports. Lowering interest rates is a much more powerful tool.

Q: But if an export boom fails to materialise could you become trapped in negative rates?

A: There’s no way you’re not going to recover. At some point you’re going to get production just for storage.

Even in the worse possible case where there were no factories or equipment that could possibly be a worthwhile investment you would still have some uplift to production from people stocking up on canned goods. So you will eventually get a recovery.

Q: From a more philosophical perspective, could the effect of the combination of electronic money and negative rates prize the commodity aspect of money from its value as a means of exchange?

A: What I would say is that electronic money represents the logical completion of the process of governments taking charge of monetary policy. It’s demoting the store of value aspect of currency, although it’s still important for it to be a decent short-term store of value between the time you get it out of the ATM and when you spend it.

Under the system of electronic money I’m talking about, where you still have paper currency around, you will still need that short-term store of value but you’ve totally demoted money as a long-term store of value. We want people to be funnelling money into building factories, buying new equipment and funding research and development. We don’t want them doing things that are not advancing the world around them.

Q: What are the implications of this for fiscal policy?

A: The zero lower bound does get in the way of monetary policy dominance. Once you get rid of it with electronic money then you really do get monetary policy dominance, and actually we’ve been there before. We didn’t have big discussions about how fiscal policy needed to stabilise the economy in the 1990s or even in the early 2000s. It’s only because we’ve run into the zero lower bound that fiscal policy has been a part of the discussion.

With fiscal policy, however, you really do have a problem as you have to deal with short run stabilisation and long run debt sustainability problems all at once. If you could get the former done through monetary policy then you only have to deal with the debt problem.

Thomas Herndon, Michael Ash, Robert Pollin and Mike Konczal: Researchers Finally Had a Chance to Replicate Reinhart-Rogoff, and There Are Serious Problems. →

I thought it important to put this up right away, since I have referenced the correlations in the Carmen Reinhart, Vincent Reinhart and Ken Rogoff paper “Debt Overhangs, Past and Present.” It is likely that the later paper I relied on has some of the same problems as the earlier paper that Mike Konczal discusses based on Thomas Herndon, Michael Ash, and Robert Pollin’s paper “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff,” In particular, I would like to know how the figures from “Debt Overhangs, Past and Present,” that I copied over in my post “Noah Smith Joins My Debate with Paul Krugman: Debt, National Lines of Credit, and Politics” are affected by the emendations of Thomas Herndon, Michael Ash, and Robert Pollin. I would be grateful for any help in figuring this out. 

Optimal Monetary Policy: Could the Next Big Idea Come from the Blogosphere?

blog.supplysideliberal.com tumblr_inline_mlaoxsKIEv1qz4rgp.png

Here is the link to my 21st Column on Quartz: “This economic theory was born in the blogosphere and could save markets from collapse.”

Even before I started blogging, Noah Smith told me I should write a post about NGDP targeting. This is that post. And it is also the post on “Optimal Monetary Policy” that I have been promising for some time.

What Do You Mean by 'Supernatural'?

Q: kentlyon asked: “What Do you Mean by Supernatural?”

A: My notion of “natural” comes from what I know of science. Since science progresses, that is a moving target, but I think the idea of regular laws will continue to be central to science. A claimed phenomenon is being treated as “supernatural” if there is no serious attempt to subject it to scientific investigation in order to establish its existence and explain it by the principles of regular science. On the other hand, if something exotic–say a claim of mind reading–is subjected to scientific investigation, it will either be (a) drawn within the orbit of science and what we count as “natural,” (b) shown to be a hoax, or (c) investigated by “science” done so badly that we can justifiably call it pseudo-science.

Remarks:

  1. Very often, how statistical issues are handled makes the difference between good science and bad science. For example, people often point to selected anecdotes as persuasive evidence even in situations where large-sample, even-handed evidence is, in principle, available.

  2. If someone makes a claim that would require new physics, the one making the claim should be making an attempt to convince the physicists. More generally, the immediate objections of the relevant experts should be registered alongside whatever claim is made.

  3. In cases where a scientific discipline itself is off target, it may be necessary to find a jury for a claim made up of people capable of understanding a scientific discipline who are enough on the outside that they can have some impartiality. Typically, it will be best to choose such a jury for judging an entire discipline as a panel of academics in other disciplines.

  4. Though particular scientific disciplines may be badly off target, I disagree with any claim that science and academic inquiry as a whole are off target.

  5. Scientific disciplines such as economics often have only weak evidence one way or another on questions people care a great deal about. In that case, it is important to distinguish between scientific statements that are backed by a large, informative body of evidence, and scientific statements that are simply the best one can make of grossly inadequate evidence. In this, I want to emphasize that evidence is often grossly inadequate even after valiant efforts to gather as much evidence as possible. Scientists in disciplines that often have grossly inadequate evidence sometimes forget to remind each other just how uncertain the answers to the questions they are debating really are, given the inadequacy of evidence.

  6. One should be especially slow to accept a claim that requires violating a principle of a scientific discipline such as physics where most statements are backed by a large amount of evidence.

  7. To the extent that there is no conceivable way to test a statement, then it is neither natural nor supernatural. (Indeed, it may not be a “phenomenon.”) Following Wittgenstein, let’s call such a statement “metaphysical.” Metaphysical statements can be important as framing, but they should not be confused with claims of the supernatural. Often, a way to quickly tell the difference between a supernatural claim and a metaphysical claim is that a supernatural claim usually has a hint of something that (if true) would seem like genuine magic (at least outside of religious contexts that desensitize people to the magical element), while a metaphysical claim points to at best metaphorical magic–which isn’t really magic at all.

  8. Just because a claim is extraordinary doesn’t make it a supernatural claim. For example, take the claim that Earth might be observed by intelligent aliens from listening posts inside our own Solar System, and that these aliens make intentional efforts to hide their presence. If the claim is that these aliens came to our Solar System in at only a small fraction of the speed of light, this does not violate any laws of physics. There is no particular implausibility to the idea that intelligent aliens would be interested in studying us scientifically. (Presumably, some species of intelligent aliens would be interested in such a scientific investigation, even if others wouldn’t.) And there is no implausibility to the idea that they might want scientific data about our behavior that was not contaminated by awareness of their existence.

  9. To give another example, there are conspiracy theories that are very implausible, but do not violate the laws of physics. I would be inclined to call these claims natural. That tells me that in my distinction between “natural” and “supernatural,” I am privileging my understanding of the laws of physics over my understanding of social science. This is in line with the phrase “the natural sciences.” It is my impression that pretty much all the principles of the natural sciences can be derived from the principles of physics and basic logic. (Leaving aside any broader claims of evolution, the narrow version of the principle of natural selection is just a matter of the logic of selection–it is like counting.)

Update. This afternoon, Noah Smith tweeted links to two articles that are wonderful on exactly the issue here: 

Luigi Zingales: Pro-Market vs. Pro-Business

From Chrystia Freeland’s book Plutocrats, pp. 261-262:

Luigi Zingales, a professor at the University of Chicago’s Booth School of Business, frames [a central issue for government policy] as the choice between being promarket and being pro business. Super-elites are often the product of a strong market economy, but, ironically, as their influence grows, they can become its opponents. 

Here is how Zingales, an ardently patriotic immigrant to America and a passionate defender of the market economy, describes the dynamic: “True capitalism lacks a strong lobby. That assertion might appear strange in light of the billions of dollars firms spend lobbying Congress in America, but that is exactly the point. Most lobbying seeks to tilt the playing field in one direction or another, not to level it. Most lobbying is pro-business, in the sense that it promotes the interests of existing businesses, not pro-market in the sense of fostering truly free and open competition. Open competition forces established firms to prove their competence again and again; strong successful market players therefore often use their muscle to restrict such competition, and to strengthen their positions. As a result, serious tensions emerge between a pro-market agenda and a pro-business one.”

Quartz #11—>Why the US Needs Its Own Sovereign Wealth Fund

Link to the Column on Quartz

Here is the full text of my 11th Quartz column, “Why the US needs its own sovereign wealth fund,” now brought home to supplysideliberal.com. It was first published on January 3, 2013. Links to all my other columns can be found here.

If you want to mirror the content of this post on another site, that is possible for a limited time if you read the legal notice at this link and include both a link to the original Quartz column and the following copyright notice:

© January 3, 2013: Miles Kimball, as first published on Quartz. Used by permission according to a temporary nonexclusive license expiring June 30, 2014. All rights reserved.

The fate of the US economy, like that of Japan, the euro zone, and the rest of the world will rest on an important fact: unless private investors or another government counteract central bank asset purchases 100%, central banks can drive asset prices up and interest rates down by buying any asset that has an interest rate above zero. The Fed has committed to continue buying $45 billion of longer-term Treasurys every month and $40 billion a month of mortgage-backed securities until the economy recovers.

But what if longer-term Treasuries and mortgage-backed securities are the wrong assets for the Fed to buy? Most of those rates are already below 3%, so it’s not that easy to push the rates down further. What is worse, when long-term assets already have low interest rates, pushing down those interest rates pushes the prices of those assets up dramatically. So the Fed ends up paying a lot for those assets, and when it later has to turn around and sell them—as it ultimately will need to, to raise interest rates and avoid inflation, it will lose money. Avoiding buying high and selling low is tough when the Fed has to move interest rates to do the job it needs to do. At least economic recovery reduces mortgage defaults and so helps raise the prices of mortgage-backed securities through that channel. But the effects of interest rates on long-term assets cut against the Fed’s bottom line in a way that is never an issue when the Fed buys and sells 3-month Treasury bills in garden-variety monetary policy.

From a technical point of view, once 3-month Treasury bill rates (and overnight federal funds rates) are near zero, the ideal types of assets for “quantitative easing” to work with are assets that (a) have interest rates far above zero and (b) are buoyed up in price when the economy does well. That means the ideal assets for quantitative easing are stock index funds or junk bond funds!

Yet, is the Federal Reserve even the right institution to be making investment decisions like this? University of Chicago finance professor John Cochrane writes in his Wall Street Journal editorial “The Federal Reserve: From Central Bank to Central Planner.”

In his speech Friday in Jackson Hole, Wyo., Mr. Bernanke made it clear that “we should not rule out the further use of such [nontraditional] policies if economic conditions warrant.”

But the Fed has crossed a bright line. Open-market operations do not have direct fiscal consequences, or directly allocate credit. That was the price of the Fed’s independence, allowing it to do one thing—conduct monetary policy—without short-term political pressure. But an agency that allocates credit to specific markets and institutions, or buys assets that expose taxpayers to risks, cannot stay independent of elected, and accountable, officials.

This is not a criticism of personalities. It is the inevitable result of investing vast discretionary power in a single institution, expecting it to guide the economy, determine the price level, regulate banks and direct the financial system.

As Cochrane points out, isn’t it a bit much to expect the Fed to both choose the right amount of stimulus for the economy and decide which financial investments are the most likely to turn a profit for a government that faces remarkably low borrowing costs?

Why not create a separate government agency to run a US sovereign wealth fund? Then the Fed can stick to what it does best—keeping the economy on track—while the sovereign wealth fund takes the political heat, gives the Fed running room, and concentrates on making a profit that can reduce our national debt.

Sovereign wealth funds are already standard for governments that have paid off their national debt and gone into the black. And some countries have both debt and sovereign wealth funds on their balance sheet. In order of holdings, the Monitor Group’s Sovereign Wealth Fund Assets Under Management Table shows that Norway, China, United Arab Emirates, Singapore, and Kuwait have the top sovereign wealth funds. Markets today are so hungry for assets as safe as US Treasurys, and so frightened of risk (pdf), that a US sovereign wealth fund would be paid handsomely to provide safe assets and shoulder some of the risk. But those financial returns are a bonus over and above the primary aim: fostering full economic recovery.

As an adjunct to monetary policy, the details of what a US Sovereign Wealth Fund buys don’t matter. As long as the fund focuses on assets with high rates of return, the effect on the economy will be stimulative, and the Fed can use its normal tools to keep the economy from getting too much stimulus. So there can be a division of labor: the US Sovereign Wealth Fund can focus on making as high a return as possible for the US taxpayer, and hire accordingly, as other sovereign wealth funds do, while the Federal Reserve focuses on getting the amount of stimulus right, which is where its expertise lies. The US Sovereign Wealth Fund needs the same level of independence as the Fed, and a single mandate to earn high returns, given the level of risk it is taking on. Above some minimum, the US Treasury can be given the authority to determine the amount the US Sovereign Wealth Fund is allowed to borrow so that no one institution would have too much power or too much responsibility.

Since it would horn in on their turf, big investment banks on Wall Street are likely to offer a chorus of complaints about a US Sovereign Wealth Fund. But after many years of playing a “heads I win, tails you lose” game with the US Government and the US taxpayers, the big investment banks have no moral standing to object to the US government and the US taxpayers finally getting some of the return that should go along with the risks that they have always had to bear.

We Don't Talk Enough About the Story Outside the Model

Tomas Hirst interviewed me for his newly upgraded aggregator website Pieria. The site includes me as one of its “experts.” Here is the link to the interview on Pieria. It appeared yesterday. I highly recommend taking a peek at the new Pieria: here is the homepage.

The full text of the interview is below. Q is Tomas, A is Miles. This interview is closely related to Noah Smith’s post “What is Economic Equilibrium.”

Q: Has the financial crisis prompted a renewed interest in debating and challenging the economic orthodoxy of the “Great Moderation”?

A: The blogosphere was there before the crisis and was helping that conversation to grow, but the crisis certainly brought more people in. Indeed Scott Sumner said on his blog that he was motivated to start blogging because of the crisis. I think people are thinking about a wider range of things.

There are always fashions in economic research, but perhaps not surprisingly there’s more time being devoted to looking at what was going on. People have been working on models where having collateral matters, for example, which show that when the value of houses goes down it’s harder to borrow and lend.

Q: Have the events of the past few years changed the way that you think about policy responses to a crisis?

A: The Great Depression and the Japanese “Lost Decade” certainly made me think about issues surrounding the zero lower bound a lot. It’s true that I wasn’t thinking about the idea of electronic money and negative nominal rates at the time, although I had seen a piece by Greg Mankiw in which he toys with the idea of getting rid of the zero lower bound.

So I was thinking about quantitative easing but then I shifted to thinking about new ideas. It’s too bad that people are simply taking the zero lower bound as a given. I think it will be a hugely important discussion to get people to realise that it’s not some law of nature, it’s an artefact of our paper currency policy.

Q: Some people might consider moving to a world in which we had negative nominal interest rates rather uncharted territory compared with more traditional stimulatory policies such as increasing government spending. Do you think there is a role for more conventional policy moves to pull economies out of a slump?

A: As Reinhart. Reinhart and Rogoff have said, national debt above 90% of GDP has a negative impact. Obviously that’s just a stylised fact just like the fact that you tend to have a long-lasting slump after a financial crisis but I think it’s fairly proven that there are problems with having the national debt at too high a level.

Although you could say that stimulating the economy by massive fiscal stimulus is better understood, some of what we understand is that that has downsides in terms of national debt. Being well understood doesn’t always mean that it’s a better policy.

I would say in that context the conservative policy would be national lines of credit. It is something that is in the range where we understand what it would do, although there is some debate over just how much stimulus it would provide. My guess is that it would have a similar impact on demand as handing people that amount of money.

Policies such as bringing forward already planned government spending would also be a quite conservative option. You could, for example, accelerate the restocking of certain types of military equipment that you know you are going to have to buy later anyway.

As soon as you’re doing types of government spending that you wouldn’t be doing otherwise then that’s a fairly long-term addition to the national debt with probably pretty serious negative consequences.

Q: Are you worried about possible unintended consequences of negative nominal interest rates and electronic money?

A: It depends really on how much you believe in monetary neutrality and monetary superneutrality.

If you believe in approximate monetary neutrality then we’ve already seen negative rates before. It is just low real interest rates. It’s only untried if you think that nominal illusion is important.

I have no doubt that it could be confusing to people at first but the main thing we know is that it would mark a return to the type of effective monetary policy that gave us the “Great Moderation”. If you take away the zero lower bound then monetary policy can keep the economy on target and you get the separation between fiscal policy and keeping the economy at its natural level of output.

That is very helpful in terms of the political economy as it’s a wholly different debate to how much you want to redistribute and how you value different kinds of government spending. It becomes very difficult when you try to mix those things up with trying to keep output at its natural level.

Q: What do you make of the argument that there is a case for raising interest rates in a downturn in order to raise inflation expectations and improve confidence in the economy, as some have suggested?

A: I think that’s a huge mistake. It’s a theoretical error that comes from the fact that people are so used to defining and modelling equilibria that they don’t realise that each of these models has to have a story outside the model for how you got to equilibrium.

As far as I know that’s true without exception. Yet we don’t talk enough about the story outside the model. The reason for this is that it can’t be formalised in the same way.

When people don’t think about how you get to an equilibrium they come to conclusions that are just wrong.

In the real world raising rates would be very contractionary. You can have a model in which there are multiple equilibria but I’m pretty sure that raising rates is not the way to move from the equilibrium we’re in to a better one. I can’t imagine the expectations of people in the real world being such that they would see the Federal Reserve or the Bank of Japan raising rates and think that the economy is suddenly going to do great.

Even if it’s theoretically possible, it would only be one of the possibilities. In terms of way that people like John Taylor have been arguing this point, it seems as though he believes rates should go up and is looking for any reasons that could support this conclusion even if they don’t all come from the same theory.

Q: Does any of your current work touch on this subject?

A: Bob Barsky, Rudi Bachmann and I have a paper in progress that’s related to this. Here’s the model that I’ve worked with a lot, which Bob Barsky also got excited about, and then we recruited Rudi:

Let’s simplify it by leaving aside Q-theory and having no adjustment cost for investment. Now I have a delay condition for investment that says “I want to accelerate investment if the net rental rate is greater than the interest rate”.

So I have a graph of output on the horizontal axis and on the vertical axis I’ve got the net rental rate and the real interest rate. I have a net rental rate curve, which we call a KE curve because I think Sargent called it that. There’s no mystery that the rental rate goes up with output. When the economy is booming you’re going to be more eager to rent some capital by leasing office space or rent some

machines.

The other curve is a monetary policy rule. When I think in continuous time, the number one thing I need for the stability of monetary policy is for it to be steeperthan the net rental rate. However, you’ve got a problem when you get down to the zero lower bound as it’s tough to keep interest rates steeper than rental rates. So you can easily get multiple equilibria.

If you have zero gross investment, that would be a low level of output. Suppose that level of output gives you a net rental rate below zero. That would be an example of a stable equilibrium with zero gross investment. If you did nothing eventually the capital stock would deplete to the point where the net rental rate would come above zero and the economy would restart, but that could be an awfully long slump.

The other thing that can happen is that you have some fiscal stimulus that could get you past the unstable equilibrium in the middle and you could jump up to the good equilibrium again. The very existence of the good equilibrium depends upon monetary policy so you might need a combination of monetary and fiscal policy.

Yet you can get out of it just through monetary policy. If you don’t have a zero lower bound then you can keep cutting the interest rate until it does get past the net rental rate. Moreover, you wouldn’t have fallen into the bad equilibrium in the first place if you had electronic money and no zero lower bound.

What I think is happening in people’s thinking is that they have observed that you have higher interest rates during a boom. That, however, is about the net rental rate and not about the monetary policy. In fact, when you have these two upwards-sloping curves it is precisely by cutting interest rates that you achieve higher interest rates as the economy recovers.

It’s theoretically possible that the economy could miraculously jump to the good equilibrium with no impulse whatsoever and that could coincide with a rise in the interest rate. But in terms of causality it’s still the miraculous restoration of confidence that caused the jump, not the higher interest rate.

Margaret Thatcher From Afar

Margaret Thatcher preceded Ronald Reagan in heralding a rightward shifts in politics, becoming Prime Minister in 1979. To me as an American, three factors combined to make Margaret Thatcher look good from a distance: ignorance of the substance of criticisms of her, a reflexive respect for all things British, and the fact the she had broken a glass ceiling that remains unbroken in the US.

Margaret Thatcher’s presence across the Atlantic seemed to give more heft to what Ronald Reagan represented. That was true especially when I disagreed with Ronald Reagan, as I did because I was upset with the addition he made to the U.S. national debt. Margaret Thatcher avoided debt–in the process providing evidence to us today that the effects of austerity depend critically on whether monetary policy is hobbled by the zero lower bound or not.  (See what David Beckworth has to say about UK fiscal policy during the Thatcher administration in this tweet, and what I have to say about austerity now in my column “Why austerity budgets won’t save your economy.”)

In honor of Maggie, I am collecting here links about the subset of policies I have advocated that I think she would approve of:

  1. A Constitutional Amendment to Limit Government Spending to Less than Half of GDP
  2. Year-Round Schooling
  3. Free Trade
  4. Charter Cities
  5. The Free Market
  6. The Reintroduction of the Deutsche Mark
  7. A Dramatic Reduction in Occupational Licensing
  8. The End of Income Taxes and Capital Taxes, Replaced by Consumption Taxes (also here) 
  9. Reorienting Unions and Workplace Law toward Improving the Workplace Experience and away from Politics and from Artificially Pushing Up Wages and Benefits

(You can see other propoals Maggie might not have approved of in my posts “The Overton Window” and “Within the Overton Window.”)

Quartz #10—>Read His Lips: Why Ben Bernanke Had to Set Firm Targets for the Economy

Link to the Column on Quartz

Here is the full text of my 10th Quartz column, “Read his lips: Why Ben Bernanke had to set firm targets for the economy,” now brought home to supplysideliberal.com. It was first published on December 13, 2012. Links to all my other columns can be found here.

If you want to mirror the content of this post on another site, that is possible for a limited time if you read the legal notice at this link and include both a link to the original Quartz column and the following copyright notice:

© December 13, 2012: Miles Kimball, as first published on Quartz. Used by permission according to a temporary nonexclusive license expiring June 30, 2014. All rights reserved.

The Fed has announced for the first time what levels of unemployment and inflation would lead it to keep short-term interest rates close to zero:

In particular, the Committee decided to keep the target range for the federal funds rate at 0 to ¼ percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-½ percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

There are several remarkable aspects to this sentence. First, the Fed is saying more clearly than ever before that 2% is its long-run inflation target. Second, it is saying it thinks the unemployment rate can be brought down at least as far as 6.5% without causing too much inflation, though it will keep a close watch on where inflation seems to be headed to make sure. Third, the Fed is saying it is willing to tolerate inflation temporarily above 2% if that is what it takes to bring the unemployment rate down that low.

I applaud this move by the Fed. Although the Fed said, “The Committee views these thresholds as consistent with its earlier date-based guidance,” I am not so sure. It is not that easy to know how long it will take for the economy to recover. Specifying the actual economic indicators that the Fed is looking at, and how it is reading them, is much better. Saying specific dates had the danger of suggesting the Fed would keep interest rates low for too long if the economy recovered more quickly than expected. This danger was significant because an important line of thought has suggested that the Fed should promise to overheat the economy in the future to stimulate the economy now. The specific guidepost for unemployment and inflation that the Fed has laid down in yesterday’s statement make it clear that the Fed is not promising to overheat the economy in the future to stimulate the economy now. But those guideposts also make it clear that the Fed intends to continue to do what else it feels it can to return the economy to the lowest level of unemployment consistent with steady inflation.

There are things that the Fed could do to get the economy more quickly to robust health. Most obviously, there is no reason that the Fed should limit its purchases of additional long-term treasury bonds and mortgage bonds to the $85 billion per month rate it has announced. But to take the chains off of monetary policy, the best thing for the Fed to do would be to urge Congress to give it the authority to subordinate paper money to electronic money to eliminate the “zero lower bound” that paper money puts on short-term interest rates, as I discuss in “How paper currency is holding the US Recovery Back” and “Could the UK be the first country to adopt electronic money?”

John Stuart Mill: The Paternalistic Temptation

The temptation toward paternalism is one that I feel keenly. And I think  that paternalism can be justified in some situations. So it is in important measure to cause myself to examine my own motives and cause myself second thoughts on that front that I post here what John Stuart Mill writes in the introduction to On Liberty about the paternalistic temptation:

The ancient commonwealths thought themselves entitled to practise, and the ancient philosophers countenanced, the regulation of every part of private conduct by public authority, on the ground that the State had a deep interest in the whole bodily and mental discipline of every one of its citizens; a mode of thinking which may have been admissible in small republics surrounded by powerful enemies, in constant peril of being subverted by foreign attack or internal commotion, and to which even a short interval of relaxed energy and self-command might so easily be fatal, that they could not afford to wait for the salutary permanent effects of freedom. In the modern world, the greater size of political communities, and above all, the separation between spiritual and temporal authority (which placed the direction of men’s consciences in other hands than those which controlled their worldly affairs), prevented so great an interference by law in the details of private life; but the engines of moral repression have been wielded more strenuously against divergence from the reigning opinion in self-regarding, than even in social matters; religion, the most powerful of the elements which have entered into the formation of moral feeling, having almost always been governed either by the ambition of a hierarchy, seeking control over every department of human conduct, or by the spirit of Puritanism. And some of those modern reformers who have placed themselves in strongest opposition to the religions of the past, have been noway behind either churches or sects in their assertion of the right of spiritual domination: M. Comte, in particular, whose social system, as unfolded in hisSysteme de Politique Positive, aims at establishing (though by moral more than by legal appliances) a despotism of society over the individual, surpassing anything contemplated in the political ideal of the most rigid disciplinarian among the ancient philosophers.

Apart from the peculiar tenets of individual thinkers, there is also in the world at large an increasing inclination to stretch unduly the powers of society over the individual, both by the force of opinion and even by that of legislation: and as the tendency of all the changes taking place in the world is to strengthen society, and diminish the power of the individual, this encroachment is not one of the evils which tend spontaneously to disappear, but, on the contrary, to grow more and more formidable. The disposition of mankind, whether as rulers or as fellow-citizens, to impose their own opinions and inclinations as a rule of conduct on others, is so energetically supported by some of the best and by some of the worst feelings incident to human nature, that it is hardly ever kept under restraint by anything but want of power; and as the power is not declining, but growing, unless a strong barrier of moral conviction can be raised against the mischief, we must expect, in the present circumstances of the world, to see it increase.

The Rise of Tape Recording

Bing Crosby played a key financial role in the rise of tape recording because he wanted to spend more time playing golf. 

Bing Crosby played a key financial role in the rise of tape recording because he wanted to spend more time playing golf. 

From David Byrne’s book How Music Works, pp. 99-100:

Milner tells the curious story of the advent of recording tape–the next medium on which sound would be captured. The sequence of events that led to the adoption of tap is so accidental and convoluted that its invention and adoption were far from inevitable.

Just before WWII, Jack Mullin, an engineer from California, tried recording onto various mediums other than discs, but with limited fidelity or success. When he was stationed overseas during the war, he sometimes heard broadcasts of radio programs featuring German symphonies. Nothing unusual about that: lots of radio stations had their own orchestras that played live in large studios or theaters, and those performances were primarily broadcast live. The odd thing was, these “performances” were happening in the wee hours of the morning, and Mullin heard them when he was working late. So unless Hitler was commanding orchestras to perform in the middle of the night, Mullin’s only conclusion was that the Germans somehow had developed machines that could record orchestras with such fidelity that on playback they sounded live. 

Through a happy accident, Mullin ended up in Germany right after the end of the war, and someone said that those radio transmissions had come from a town near where they were stationed. Mullin went to look, and sure enough, there were a couple of tape machines that had been modified in such a way that their fidelity vastly improved on what any other existing technology could achieve. German technical innovations, like their rocket technology, were now free for the taking, so Mullin dismantled one of the machines and had the parts sent to his mother’s house in Mill valley. 

When he got back to California, he reassembled the machine, and in the process figured out what the Germans had done. Among other things, they had added a “bias tone” to the recordings–a frequency that you can’t hear but that somehow makes all the audible frequencies “stick” better. Mullin eventually put these machines to work, and he discovered that in addition to being a good recording medium, tape also opened up some unexpected possibilities. If a radio announcer flubbed a line, Mullin could edit out the mistake by splicing the tape. You couldn’t do anything like that on disc! If a comedian didn’t get the same laughs he got on his run-through, then, assuming the run through had been recorded, the laughter from that performance could be spliced into the “real” performance. The birth of the laugh track! Furthermore, laughs could be reused. “Canned” laughter could be added to any recorded program if the live audience didn’t yuk it up sufficiently.

The use of editing and splicing meant that a “recording” no longer necessarily represented a single performance, or at least it didn’t have to. The beginning of a song, for example, could be from one “take” and the end from a take done hours later. The broadcast version could even be the result of performances that had been done in many different places spliced together. The elements of a “performance” no longer had to be rooted in contiguous time or space. 

After seeing a presentation by Mullin of his tape recording device, Alexander Poniatoff formed a company, Ampex, to make more tape machines based on Mullin’s designs.  The banks, however, wouldn’t give Amex the loans they needed in order to get things up an running–constructing the early machines required considerable capital–so it looked bad for the future of tape-recording.

Around this time, Bing Crosby, the singer who had mastered an innovative use of microphones, was getting tired of having to do his very successful radio show live every day. Bing wanted to spend more time playing golf, but because his shows had to be done live, his time on the links was limited. Crosby realized that by using these new machines to record his shows, he could conceivably tape a couple of shows in one day and then play golf while the shows were being broadcast. No one would know the shows weren’t live. He asked ABC radio if they would agree to the plan, but when they saw Poniatoff’s “factory”–which was a complete shambles, with parts scattered all over–they said no way. So Crosby wrote a personal check to Ampex that guaranteed the machines would start getting built. They did, and after Crosby’s initial order, ABC soon ordered twenty more. The era of tape recording, and all the possibilities that went with it, was under way. 

I read this passage in the light of what Charlie Stross said in his post “On the diminishing marginal utility of Stuff”: 

So why do the rich keep trying to acquire more money, long past the point at which it can make any noticeable difference to their lifestyle?

I have three answers. One: it becomes a habit. You don’t generally get to be hyper-rich without many years of continual effort; after a decade, just about anything becomes an ingrained habit. Two: it becomes a game, a way of keeping track of how well you’re doing at whatever it is you want to do. And three: you’re trying to build up a war chest that will buy you a very expensive toy—one that isn’t currently available at any price, so that if you want one you’ll have to sink billions of dollars and years of your own time into building it.

The latter is unusual but not unheard-of. Elon Musk has repeatedly explained that he wants to retire on Mars. That’s a not-available-at-any-price option right now, but he’s definitely serious about it; which is why he sank most of a gigantic fortune into building his own space program.

Quartz #9—>Could the UK Be the First Country to Adopt Electronic Money?

Link to the Column on Quartz

Here is the full text of my 9th Quartz column, “Could the UK Be the First Country to Adopt Electronic Money?“ now brought home to supplysideliberal.com. In draft, this column had the working title “How the Transition to Electronic Money Rewards the First Movers and Punishes the Laggards.” It was first published on December 12, 2012. Links to all my other columns can be found here.

If you want to mirror the content of this post on another site, that is possible for a limited time if you read the legal notice at this link and include both a link to the original Quartz column and the following copyright notice:

© December 12, 2012: Miles Kimball, as first published on Quartz. Used by permission according to a temporary nonexclusive license expiring June 30, 2014. All rights reserved.

The “fiscal cliff” of mandated tax increases and spending at the end of this year is simply  the peculiar American version of the struggle of advanced countries around the world to deal with mountains of debt. The euro zone debt crisis can be depended on to provide constant grist for the news mill, as Quartz’s Euro Crunch obsession demonstrates. Japan’s debt is a quieter, but in many respects, larger time bomb, as Anthony Fensom explains in “Forget Europe: Is the Real Debt Crisis in Japan?” backed upby an official International Monetary Fund warning. And our mother country across the pond is not immune.

What people don’t fully appreciate is the extent to which hobbled monetary policy has exacerbated these debt crises. The high levels of unemployment that have dragged down tax revenues and elevated government spending—as well as making it harder for individual households to get out of debt—could have been cut short if monetary policy had more vigorously fought the slumps that have faced the US, the euro zone, Japan and the UK. And whatever the Fed, ECB, Bank of Japan and Bank of England could have done (more Quantitative Easing, anyone?), there is little doubt that they did less than they might have because of their inability to push short-term interest rates more than a hair into negative territory.  In his November 2000 academic article “Overcoming the Zero Bound on Interest Rate Policy,” Carnegie-Mellon economist Marvin Goodfriend explained with admirable directness: “No one will lend money at negative nominal interest if cash is costless to carry over time. Therefore, the power of open market operations to lower short-term interest rates to fight deflation and recession is strictly limited when nominal rates are already low on average.” In other words, if a central bank tries to push short-term interest rates very far below zero, people will shift to storing their own massive piles of paper currency, which makes it a lot harder for central banks to do their jobs.

In “How Paper Currency is Holding the US Recovery Back,” I explained how subordinating paper money to electronic money can end recessions and stop inflation. Freeing up monetary policy then makes it possible to raise taxes or cut spending to deal with debt without throwing the economy back into a deep recession. And as Matthew Yglesias points out, with the means to keep the economy at the natural level of output—at the sweet spot between recession and the overheating that accelerates inflation, we “… could happily move on to more interesting topics, such as: How do countries get rich rather than simply escape recession?”

The key is to allow for an exchange rate between paper currency and money that is recorded electronically in bank accounts. I am proposing that in times of economic emergency, the rate at which electronic money could be converted into paper currency would be allowed to vary over time. Let me use the pound as an example, and a 4% per year rate of depreciation of paper money. The exchange rate would start out at par: withdrawing £100 from a UK bank account would yield £100 of paper money, as usual. But after three months, if you withdrew £100 from a UK bank account, you would be handed about £101 in paper money. After six months, you would get about £102 in paper money, and so on. Of course, the exchange rate would apply for deposits as well: after six months, depositing £102 of paper money would add £100 to what was shown in your bank account. Retailers might accept paper money at par for longer than banks, but after a while, they too would ask for more in paper money than would be charged to a debit or credit card. But the extra paper money banks would give for withdrawals would make that a wash. The exchange rate between paper pounds and electronic pounds wouldn’t directly change how far anyone’s paycheck would go. What it would do is allow the Bank of England to set short-term interest rates anywhere above negative 4%. That is, since the value of paper pounds would be shrinking at the rate of 4% per year in relation to electronic pounds, the Bank of England could push interest rates so low that the number of electronic pounds in a bank account would gradually shrink at a somewhat slower rate.

What a negative interest rate means is that there is no way for someone saving money to stay even using a totally safe saving strategy, either in a bank account, or by saving currency. Negative interest rates help to fight recessions, and once the economy recovers, interest rates will soon return to normal. Indeed, even someone living off of interest income is likely to be helped more by the quick recovery of the economy, leading to interest rates above zero, than if interest rates had not been able to go negative, but had stayed at zero for a long time.

Negative interest rates stimulate investment when firms find that building a new factory or buying new equipment in even a wounded economy earns a better return than putting money in the bank or keeping paper money in a safe. Negative interest rates have another powerful effect as well. They cause savers to seek higher returns in foreign stocks, bonds and other assets. For the UK, the purchase of foreign assets would put pounds in the hands of people outside the UK whose only good use for those pounds is to either to buy UK products or to pass off the unwanted pounds to someone else until someone spends them on UK products. So negative interest rates stimulate exports.

Right now, most major economies are struggling to get enough aggregate demand stimulus for their economies. And one nation’s exports—an addition to aggregate demand, are another nation’s imports—a subtraction from aggregate demand. So the powerful effect of negative interest rates on exports means that the first movers in the transition to electronic money gain aggregate demand at the expense of the laggards. But that should just spur the laggards to make the transition to electronic money as well; then the whole world will have all the aggregate demand stimulus it can possibly use (and more, if care isn’t taken not to overdo the stimulus). Or if other nations stubbornly resist the transition to electronic money, the first movers could still come out ahead even if they invited other countries to do exchange rate interventions that would give them less of a boost in exports, but a bigger boost to investment in factories and equipment. (One reason the first movers would come out ahead is that such exchange rate interventions would involve the laggards lending to the first movers at even lower negative interest rates than would otherwise prevail. That means the laggards would, in effect, be paying the first movers an arm and a leg to take the funds.)

The fact that the transition to electronic money rewards the first movers and punishes the laggards makes it much more likely that this transition will actually happen in the near future. Once any major economy gets the ball rolling, others will soon follow. And nations should be vying to be the first. My use of the UK as an example above is not random. The UK could easily be the first nation to make the transition to electronic money. Such a dramatic move would be easier to push through in a parliamentary system of government, with a powerful Chancellor of the Exchequer, than in the American system of government, replete with checks, balances, and gridlock. As Joe Weisenthal writes, the Bank of England has a creative incoming Governor in Mark Carney—who is now Governor of the Bank of Canada—and a Chancellor of the Exchequer willing to go outside the monetary policy box far enough to appoint a Canadian. The economy of the United Kingdom needs help. It is the mother country for modern economics as well as for American politics. There are many UK economists who can fully appreciate the opportunity the transition to electronic money would provide. This transition is in many ways a small one compared to the great monetary transitions of the past: paper money is just a way station on the road between barter and coins and a full embrace of the electronic money that is already a big part of our daily lives.

Quartz #8—>Judging the Nations: Wealth and Happiness Are Not Enough

Link to the Column on Quartz

Here is the full text of my 8th Quartz column, “Obama the Libertarian? Americans say they’d be happy if the government got out of their way,“ now brought home to supplysideliberal.com. The title of this post is the original working title of the column. Below the text of the column itself, I have an important outtake from my original draft.  This column was first published on December 4, 2012. Links to all my other columns can be found here.

If you want to mirror the content of this post on another site, that is possible for a limited time if you read the legal notice at this link and include both a link to the original Quartz column and the following copyright notice:

© December 4, 2012: Miles Kimball, as first published on Quartz. Used by permission according to a temporary nonexclusive license expiring June 30, 2014. All rights reserved.

Four years from now—or 40—how should we evaluate Barack Obama’s presidency? This is not an easy question. For example, when things go badly (or well), a tricky aspect of this question is “To what extent is the president responsible for what happened?” Ruchir Sharma argues that in their judgment of the last four years, voters put the primary blame for our economic troubles on inevitable after-effects of the financial crisis that hit in 2008. Another tricky aspect of judging a presidency is deciding how to sum things up when a policy initiated by the president helps one group while hurting another. But the first question to ask four years from now, in 2016, will be “Are you better off than you were four years ago?”

It’s often assumed that in answering this question people are referring to their financial situation. But what if they took happiness into account as well? As Allison Steed points out in her Nov. 29 article in the Telegraph, “Here’s How Much You Need to Be ‘Happy’ in Different Countries,”  financial aspirations can differ a lot across countries. And money is clearly not the only thing that matters for happiness. A Pew Research Center Report on happiness around the world shows that while happiness goes up with per capita GDP, at similar middle-income levels, the Latin American countries do better than expected while Eastern European countries do worse than expected.

In two previous Quartz columns, I discussed evidence that happiness is not enough: people want to be rich, successful, happy and much more. In previous research my co-authors and I found that in both hypothetical situations and the real-world choices young doctors make about which residency to choose, happiness was very important, but so was money and prestige.  This would be paradoxical if each of the people we surveyed defined “happiness” as “whatever it is I want,” but in fact, people used the word “happiness” to mean “feeling happy.”

That people want more than money makes GDP an inadequate measure of well-being. That they want more than happiness makes happiness an inadequate measure of well-being. So it won’t work to simply replace GDP with Gross National Happiness as Richard Layard advocates in his book, Happiness. And looking at National Life Satisfaction has a similar problem.

So let’s get serious about what it means for an individual or a nation to be better off. Constructing a solid measure of national well-being requires answering the two questions “What do people want and how much do they want it?” So my coauthors Daniel Benjamin, Ori Heffetz, Nichole Szembrot and I set out to answer exactly those questions in our National Bureau of Economic Research Working Paper “Beyond Happiness and Life Satisfaction: Toward Well-Being Indices Based on Stated Preference.” We gave about 4,600 US adults hard choices to make in computer-generated scenarios where they had to identify both what people wanted for themselves and what they wanted for the nation as a whole. We didn’t want to prejudge, so we started with a list of 136 aspects of life that people might care about, drawing from a wide-ranging scientific and philosophical literature, as well as spirited discussions among the four of us.

The answers we found to “What do people want and how much do they want it?” were at once surprising and the height of common sense. I want to focus on the answers people gave for what they wanted for the nation as a whole, since that is primarily what a president should be judged on. One important finding is that, even across divisions of party, religion, age and sex, people by and large put the same things at the top of the list of what they want for the nation.  And the things they want for the nation as a whole are similar to the things they want for themselves.

Let me give my take on the top 25 things we found people want for the nation as a whole. Freedom comes first: freedom from injustice, corruption, emotional abuse and abuse of power; freedom of speech and political participation, freedom to pursue one’s dreams and the freedom of having choices. Besides freedom, people want for the nation goodness, truth, loyalty, respect and justice.

Only after freedom and goodness, do the “bread-and-butter” aspects of people lives start to come in. These bread-and-butter aspects are reflected in 11 of the top 25 aspects of life, including people’s health and freedom from pain, financial security, someone to turn to in time of need, emotional stability, a sense of security and peace, and activities to enjoy. Beyond freedom, goodness, and the practical, bread-and-butter aspects of people’s lives I just listed, people want meaning—the sense that one is making a difference in the world–for themselves and for others.

Freedom, goodness, truth, loyalty, respect, justice, bread-and-butter concerns, meaning: people’s hopes for our nation, and for themselves, extend to a lot more than money and happiness. I believe the breadth of what people want for the nation has implications for the policies our country should pursue, and how we should judge President Obama four years from now. In drawing out those implications, I will leave aside the bread-and-butter concerns, and concerns about “justice,” since I think our leaders understand those better than the other concerns.

One of the best ways to increase the freedom in the world is to allow more people to come to the United States to experience and tell of the freedom we have here, as I advocated in my Quartz column “Obama Could Really Help the US Economy by Pushing for More Legal Immigration.” But there is a lot to be done to preserve and bolster freedom in the US. Taxes represent a loss of freedom that should be mitigated in the kinds of ways I suggest in my post “No Tax Increase Without Recompense.” The conflict between employees’ freedom at work and employers’ freedom to lay down work requirements need to be fairly adjudicated, as discussed in my post “Jobs.” And every government regulation, in addition to whatever other costs and benefits it has, causes a loss of freedom from telling somebody what they must do.

When we do constrain freedom by regulation, it should be in service of something important, such as truth: people’s freedom from being lied to, deceived or betrayed. It is worth remembering that the standard results about the virtues of the free market all depend on deception being effectively neutralized–so there is no fundamental conflict between economic growth and laws that block corporate deception and throw scam artists in jail.  Enforcing the basic principle of telling the truth, like enforcing property rights, is an area where government is on the side of the angels.

Meaning, goodness, loyalty and respect are the trickiest for public policy to foster. As a social scientist who does research supported by government grants, I would like to think that there is some sense of meaning for all of us in humanity’s efforts at scientific research, such as medical research and the kind of research to slow global warming advocated by Noah Smith in his Atlantic column “The End of Global Warming: How to Save the Earth in 2 Easy Steps.” But I think a big part of what government needs to do to foster meaning, goodness, loyalty and respect is to stay out of the way. In this regard, I am worried about recent discussion of limiting the charitable deduction. My proposal for a system of “public contributions” is a way to reform and refocus the purpose of the charitable deduction instead, in order to reduce the government deficit, and reduce the footprint of the government, without depriving people of help they need.

From doing this research, I am left with the overwhelming impression that—even in the realm of intangibles—what people hope for and wish for is not one thing, but many things. Our desires are boundless. And that is how it should be. As Robert Browning wrote, ”Ah, but a man’s reach should exceed his grasp, Or what’s a heaven for?”

In early drafts, I related what I say in the Quartz column to Jonathan Haidt’s six moral tastes in his book The Righteous Mind: Why Good People Are Divided by Politics and Religion. Here is a New York Times book review by William Saletan, and here is a good passage from Jonathan Haidt summarizing his theory, chosen by Bill Vallicella, in Bill’s post “Jonathan Haidt on Why Working Class People Vote Conservative.”

There is a key chunk of text making the link to Jonathan Haidt’s theory that was appropriately cut for being too wonkish, but that I think you might find valuable

  1. for making that connection and 
  2. for more carefully stating the key findings about people’s preferences in hypothetical policy choices from my paper with Daniel Benjamin, Ori Heffetz and Nichole Szembrot. 

Here it is: 

The most important boon people want for the nation as a whole is freedom. In the words we used for the choices we gave them, the #1, #2, #10, #13, #18 and #23 things people want for the nation are

  • freedom from injustice, corruption, and abuse of power in your nation
  • people having many options and possibilities in their lives and the freedom to choose among them;
  • freedom of speech and people’s ability to take part in the political process and community life;
  • the amount of freedom in society;
  • people’s ability to dream and pursue their dreams; and
  • people’s freedom from emotional abuse or harassment.

The next most important boons people want for the nation are goodness, truth, loyalty, respect and justice. On our list, the #3, #6, #8, #17, #19 and #21 most highly-valued aspects of the good society are

  • people being good, moral people and living according to their personal values;
  • people’s freedom from being lied to, deceived or betrayed
  • the morality, ethics, and goodness of other people in your nation;and
  • people having people around them who think well of them and treat them with respect
  • the quality of people’s family relationships
  • your nation being a just society.

The exact picture of “goodness” and “justice” might differ from one person to the next, but it is clear that they represent more than just money and happiness.  University of Virginia psychologist Jonathan Haidt,  in his brilliant book The Righteous Mind: Why Good People Are Divided by Politics and Religion argues that morality comes in six flavors (“The righteous mind is like a tongue with six tastes.”):

  1. liberty vs. oppression,
  2. fairness vs, cheating,
  3. sanctity vs. degradation,
  4. loyalty vs. betrayal,
  5. authority vs subversion, and 
  6. care vs. harm.

The first five of Haidt’s flavors of morality are well represented above.  The fourth flavor of morality, care vs. harm, is the one many authors focus on, to the exclusion of the others. It is the bread and butter aspects of people’s lives. In our findings, care vs. harm is reflected in 11 of the top 25 (numbers 4, 7, 9, 11, 12, 13, 16, 18, 22, 24, 25), including “the overall well-being of people and their families” in your nation, people’s health, financial security, and freedom from pain; “people having people they can turn to in time of need” and a “sense of security about life and the future in general” and balance, as reflected in the items “people’s mental health and emotional stability,” “how much people enjoy their lives” and “how peaceful, calm and harmonious people’s lives are.”

In addition to all of these, people want meaning, as reflected by #5 and #14 on our list: “people’s sense that they are making a difference, actively contributing to the well-being of other people, and making the world a better place, and “people’s sense that their lives are meaningful and have value.”  In addition to his discussion of key dimensions of morality, in The Righteous Mind: Why Good People Are Divided by Politics and Religion, Jonathan Haidt emphasizes the importance of meaning—in particular, the importance of feeling one is a part of a larger whole. One of his central metaphors is “We are 90 percent chimp and 10 percent bee.” That is, Haidt believes that perhaps 90% of the time we are out for ourselves, however gently, but perhaps 10% of the time we are out for a higher cause (like the general good of everyone in our group) to the deepest level of our beings. A sense of “meaning” often comes from making that connection to something greater than ourselves.  

You can see my other posts on happiness in the happiness sub-blog linked at my sidebar, and here:

http://blog.supplysideliberal.com/tagged/happiness