Henry George: Protective Tariffs are as Much Applications of Force as are Blockading Squadrons

“Trade does not require force. Free trade consists simply in letting people buy and sell as they want to buy and sell. It is protection that requires force, for it consists in preventing people from doing what they want to do. Protective tariffs are as much applications of force as are blockading squadrons, and their object is the same–to prevent trade. The difference between the two is that blockading squadrons are a means whereby nations seek to prevent their enemies from trading; protective tariffs are a means whereby nations attempt to prevent their own people from trading. What protection teaches us, is to do to ourselves in time of peace what enemies seek to do to us in time of war.”
— Henry George in Protection or Free Trade (1886). 

In Praise of the 9th Amendment

“The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people.”

Link to the Wikipedia article on the 9th Amendment to the Constitution of the United States

It is not now, but the 9th Amendment to the Constitution should be one of the greatest defenses of liberty that we have. Here is a very brief description of an interpretation that I find attractive: 

A libertarian originalist, Randy Barnett has argued that the Ninth Amendment requires what he calls a presumption of liberty. Barnett also argues that the Ninth Amendment prevents the government from invalidating a ruling by either a jury or lower court through strict interpretation of the Bill of Rights. According to Barnett, “The purpose of the Ninth Amendment was to ensure that all individual natural rights had the same stature and force after some of them were enumerated as they had before.”[13]

Randy Barnett’s key argument is that the many voters in the thirteen states who ratified the US Constitution would have understood the 9th amendment to mean that there was a personal sphere of liberty that encompassed a great deal. For example, based on the original public meaning of the 9th amendment, it wouldn’t take “penumbras” and “emanations” to see a guarantee of privacy rights in the US Constitution.  

Randy Barnett also argues that the Privileges or Immunities Clause of the 14th Amendment– “The Citizens of each State shall be entitled to all Privileges and Immunities of Citizens in the several States”–which the Supreme Court gutted in the Slaughterhouse Cases, was meant among other things to extend this presumption of liberty to actions of the states. The Supreme Court has partially restored the meaning of the Privileges or Immunities Clause by its interpretation of the Due Process Clause of the 14th amendment, but without as broad a scope of liberty. In particular, many aspects of economic liberty are no longer recognized as protected by the US Constitution. 

John Koskinen: It Takes Patience and Persistence to Change Government Policy

“Academics frequently say the culture is hard to change because the bureaucrat is opposed to major change: I think that’s exactly wrong. You can’t make changes in a large bureaucracy by simply shouting and exhorting. It takes time. Talk to someone in the private sector about marketing and they’ll talk to you about the number of impressions it takes before somebody hears their message. Government is the same way.”
— John A. Koskinen, as quoted in the July 3, 1997 Wall Street Journal article “A Business Executive Sees What Works in Government,” by Albert R. Hunt

John Stuart Mill’s Roadmap for Freedom

The entire argument of John Stuart Mill’s On Liberty is summarized in the 12th paragraph of the “Introductory” chapter:

But there is a sphere of action in which society, as distinguished from the individual, has, if any, only an indirect interest; comprehending all that portion of a person’s life and conduct which affects only himself, or if it also affects others, only with their free, voluntary, and undeceived consent and participation. When I say only himself, I mean directly, and in the first instance: for whatever affects himself, may affect others through himself; and the objection which may be grounded on this contingency, will receive consideration in the sequel. This, then, is the appropriate region of human liberty. It comprises, first, the inward domain of consciousness; demanding liberty of conscience, in the most comprehensive sense; liberty of thought and feeling; absolute freedom of opinion and sentiment on all subjects, practical or speculative, scientific, moral, or theological. The liberty of expressing and publishing opinions may seem to fall under a different principle, since it belongs to that part of the conduct of an individual which concerns other people; but, being almost of as much importance as the liberty of thought itself, and resting in great part on the same reasons, is practically inseparable from it. Secondly, the principle requires liberty of tastes and pursuits; of framing the plan of our life to suit our own character; of doing as we like, subject to such consequences as may follow: without impediment from our fellow-creatures, so long as what we do does not harm them, even though they should think our conduct foolish, perverse, or wrong. Thirdly, from this liberty of each individual, follows the liberty, within the same limits, of combination among individuals; freedom to unite, for any purpose not involving harm to others: the persons combining being supposed to be of full age, and not forced or deceived.

The first key concept here is of a personal sphere that an individual cares about more than other people do–or where other people care mainly if they have freely chosen to interact with that individual. In the middle of the description of that concept is an important phrase: “free, voluntary and undeceived consent.” It is not enough to establish valid consent that it be free and voluntary. It must also be undeceived. 

The delineation of this personal sphere is the hard part. John Stuart Mill identifies what goes on inside one’s own brain as the most obviously personal sphere. It then requires a deep set of arguments to argue that freedom of thought requires freedom of speech–that we can’t really be who we freely, voluntarily and undeceivedly choose to be even in our own minds unless there is freedom of speech. For one thing, it is easier to think something if one dares to express it to others. For another without other people having freedom of speech, one will have relatively few choices of things to think.

Moving beyond speech to action, the delineation of a personal sphere ultimately requires reference to the physicality of human beings and ownership of objects. There are various ways to delineate this personal sphere. But as long as the principles are followed of giving each person a roughly equal personal sphere, without too much overlap, it will probably be all right. There may even be some ownable things that are “frills” and therefore can be distributed unequally as incentives without compromising people’s lives. 

Finally, the idea that people can choose to pool their personal spheres for certain purposes to get together as a group and do their thing is very important. This is one of the most contested areas of the concept of liberty. For example, in current US law, getting together as a group for consensual sexual activity is a liberty that is now quite well protected, but getting together as a group for consensual economic activity is much less well protected–in part because many consensual economic activities that provide surplus to both parts still have a strong adversarial dimension because of disagreements over the relevant wage or price that divides the surplus. Debates about the scope of group liberty rage, with some arguing that sexual freedom should be curtailed, and others arguing that economic freedom should be expanded, while others argue for the status quo of freedom for consensual sexual activities and restraints for consensual economic activities. 

Here, it is worth noticing that every argument for how two parties conducting consensual economic activity might affect others has a counterpart argument for how two parties conducting consensual sexual activity might affect others and vice versa. 

The moral is that liberty is wonderful, but not simple. It takes deep thought to understand liberty. 

To dig deeper into the principles of liberty, see links to other John Stuart Mill posts collected here.

The Extensive Margin: How to Simultaneously Raise Quality and Lower Tuition at Elite Public Universities

Link to the article on the Michigan Daily website

Every year, tuition increases are in the news. What people don’t realize is that for elite public universities like the University of Michigan, there is an easy way to raise quality while lowering tuition. And it is a strategy that can make a particular university more elite while striking a blow against elitism. The strategy is to increase the size of the student body, with a careful plan that scales up everything from dorms to professors to academic advisors to socializing venues necessary to take care of the extra students. 

Increasing Quality: In talking of increasing quality, I mean in the first instance increasing the quality of the faculty, which over time has a big effect on the reputation of a university generally. A larger student body means more total tuition revenue that can pay for more professors. Even if the average quality of the professors in a department stayed the same, a larger department is likely to be perceived as stronger. (Whatever bit of research one thinks is important, it is more likely to have been done by someone in Department X if there are more total professors in Department X.) And it isn’t long before having a larger department makes it easier to recruit more impressive professors because there will be plenty of colleagues in a given field to work with in that department. 

Reducing Tuition Rates: Increasing the number of students by 50% should be accompanied by increasing the number of professors by 50% in departments that have strong enrollments, the number of professors doesn’t need to be increased that much in departments that have many low-enrollment classes to begin with. And having more students should make it possible to offer a wider range of summer classes which can have extra-low tuition because underused classrooms in the summer come at very low cost to the university. In addition, if the number of slots for out-of-state students is increased by a somewhat bigger percentage than the number of slots for in-state students, the same tuition rate for both in-state and out-of-state students will raise more money per student because of the higher fraction of out-of-state students. Note that this shift policy makes it easier, not harder, for in-state students to get admitted, because there are more slots for in-state students. 

Striking a Blow Against Elitism: The beauty of this policy is that while it makes the university more impressive academically, it strikes a blow against elitism since more total people can receive an excellent education. The imprimatur of that prestigious university is given to more total students. 

The biggest problem with the strategy is the mechanical aspect of rankings that gives credit to universities simply for turning away a lot of applicants. So an important aspect of this strategy is introducing measures of how much students know by the end of their college education. But that is something a university that cares about student learning should be doing anyway. 

To press the point, this strategy involves a genuine belief that the university actually teaches students a lot so that someone can arrive at the university not knowing much and leave it knowing a great deal as a result of what the university has done. If actually adding value is a central goal of a university rather than just choosing students who were already smart, then it needs to be measuring how much students have learned and especially how much knowledge and wisdom students have embodied in long-term memory. 

Measuring how much students have learned requires something like adding to the usual practice of student surveys at the end of a class some kind of test that students take two years or so after they have taken core classes to see if they still remember what they learned. To make it a good measure of long-term memory, students should be discouraged from cramming for that test two years later. An easy way to help avoid a temptation for the students to cram is to make their individual grades on that test two years later confidential. Of course, it is important that students try hard on that test. Some very low minimum score needed for passing should ensure that most students try reasonably hard.

Note that the student satisfaction surveys at the end of each class about their experience in the class should also be continued. Student learning may be the most important objective of university classes, but it is not the only one: it also matters how pleasant it was for students to be in the class and learn the amount that they learned. The point is to augment that measure of satisfaction with a measure of learning retained two years later. Having a measure of the success of a class based, say, 2/3 on the amount students learned and 1/3 on how much they enjoyed the experience would have a dramatic effect on how well that objective was achieved.  

Lydia Murray Interviews Me: Understanding where I am coming from, you might be interested in what Lydia Murray wrote based on her interviews with me and others in the article “Increasing tuition: a look at why costs continue to rise” for the University of Michigan’s student newspaper the Michigan Daily:

The University of California system saw a 15 percent cut in state funding between 2006 and 2013 and experienced a 52.8 percent increase in tuition revenue during that time frame. The UC system also maintained a three-year freeze in tuition between 2011 and 2014, when its Board of Regents voted for a five percent tuition increase per year for the next five years.

While it is clear that the University has increased its general fund at a much faster rate than other comparable institutions, according Miles Kimball — a University economics professor — increasing the budget is essential to maintaining a high quality of education. Kimball cited the increasing wage premium for highly skilled labor as a source for the expanding budget, as higher salaries are becoming necessary to maintain a high-quality faculty.  

Kimball said the UC system is now facing fiscal challenges because it has not adjusted its budget to rising costs.

“You can always ruin your University, and basically the UC system has been going in that direction,” Kimball said. “It is actually very troubled by the kind of budget straightjacket that it has been put into.”

Courant echoed these sentiments, citing the so-called “cost disease phenomenon” in which the cost of highly skilled labor has increased rapidly while the productivity of this group has not changed. According to Courant, the University needs to pay higher salaries to faculty members to retain them and the quality of education they provide for students.

“The relative price of University activity, of University faculty in particular, as well as other skilled labor at the University, tends to rise relative to the economy as a whole,” he said.

Alternatives to Raising Tuition

According to Kimball, the University does not need to raise tuition to increase its revenue and budget size. Instead, Kimball said the University could systematically increase enrollment so that there is a both a larger student population and a higher proportion of out-of-state students. The larger student body and the increase in the number of out-of-state students could then circumvent any need for tuition increases.

“There’s a missed opportunity where we could easily keep the tuition from going up simply by increasing the number of students,” he said. “I think that is a big missed opportunity, and, to the extent that, you miss that opportunity, you’re not doing an appropriate thing, because the appropriate thing would be to seize that opportunity.” …

“You’re going to have to increase the budget,” Kimball said. “But increasing the budget doesn’t mean that you have to increase tuition.”

One thing that didn’t make it into the article was my speculation that the University of California schools will show the damage from overly severe budget pressure more slowly than the University of Michigan would because they have better weather. I am very interested to know just how big a problem the budget pressure in the University of California system is and what strains that has caused. Perhaps it isn’t as bad as the picture I painted in my interview. If so, I hope you will correct me.  

Dominic Chu Interviews Miles Kimball for CNBC about the Need for the Fed to Reverse Course More Often

Link to CNBC segment “Economist: Fed needs to be more flexible”

Link to Alex Rosenberg’s companion article “The Fed resembles a defective car — here’s how to fix it: Economist”

I was very pleased at how this interview turned out. Take a look. Both links above have the video. Only 6 minutes and 26 seconds!

Alex Rosenberg made this happen, and does an excellent summary in the accompanying article, which also discusses Narayana Kocherlakota’s column “The Fed Needs More Than One Direction.”

I learned an interesting fact along the way. I did this interview for free, but CNBC paid the University of Michigan $700 for the use of the video facilities and personnel and satellite link at the University of Michigan to do the videotaping.  

Alex Rosenberg interviewed me on the phone the day before the videotaping. Don’t miss his other interviews of me, in these posts:

The Financial Times Endorses Negative Interest Rates

Link to “The wrong lesson to take from negative yields”

The Endorsement

On June 10, 2016, just four days after a remarkable Brookings conference on negative interest rates, the Financial Times gave a ringing endorsement of a vigorous use of negative interest rates. The subtitle, “Central banks should be pushing ahead with monetary stimulus,” aptly describes the tenor of the editorial. The strength of this editorial is in directly answering complaints by bankers about negative rates:

Predictably, banks and investors have renewed their complaints that a negative-rate environment is causing havoc with the financial system and risks a cataclysmic cascade of losses if prices fall and yields go up sharply. Some have explicitly blamed central banks such as the Bank of Japan and European Central Bank which have cut short-term interest rates below zero.

These criticisms are wrong-headed. Long-term yields are not heading below zero because central banks are arbitrarily planning to keep short-term interest rates down for years on end. They are reflecting expectations of anaemic nominal economic growth, with both real expansion and inflation strikingly low, for decades ahead.

The answer is not for central banks to abandon the negative-rate experiment but to continue to find every means possible to deliver the stimulus that will increase growth and, with it, inflation and yields.

Further on in the editorial, the Financial Times drives home the message that the need for negative rates is sad, but the negative rates themselves are part of the solution:

Negative short-term rates are not the problem. They are evidence of central banks’ determination to try to address the problem, which is the weak growth and inflation that is driving longer-term yields to zero and below. Investors and policymakers who fail to see this are making a serious mistake.

Bond yields at or below zero are a bad sign. Savers and banks suffering from them should recognise that throwing as much stimulus at the economy as possible is the answer, not raising short-term interest rates to the levels of earlier decades and imagining that the normality of the past will then return.

Right before that, the Financial Times even answers a potential objection that low rates could hurt financial stability:

If they are worried about the distortion in the financial system caused by low or negative rates, they should turn to their macroprudential tools, such as direct controls, to prevent excessive lending against housing, rather than holding rates higher than is warranted by the growth of nominal demand.

Discussion

Overall, this is a very strong endorsement of negative interest rate policy by the Financial Times editorial board, that bears comparison to, say, Narayana Kocherlakota’s strong endorsement of negative interest rates policy in these Bloomberg View columns:

One reason I think this comparison is apt is that, like the Financial Times editorial board, Narayana still wishes for fiscal policy help along with negative rates, while I argue that going further with negative rates is preferable to relying partially on fiscal policy. You can see my discussion of that here:

I also tend to think that the conventional monetary policy of negative rates should be used instead of relying partially on the term-premium compression of QE. 

Once short-run output gaps are close by interest rate policy, then it will be clearer what the appropriate fiscal policy is from a long-run perspective, which I discuss in 

as well as what kind of financial market interventions along the lines of QE might be appropriate for medium-run or long-run reasons. On that last, see the links in my my post 

Peter Conti-Brown: Central Bankers Are Humans

“… we really do want a central bank that will protect the currency from the winds of electoral politics, without losing the benefits of democratic legitimacy and without indulging the myth that all central bank policy is purely technocratic. We can and should be comfortable with the reality that central bankers, like everyone else, are people whose life experiences—including their technical training—give them an ideological frame of reference through which they evaluate the world. The key to reforming the Fed is to know as much about the values of those central bankers as possible.”
—

Peter Conti-Brown, The Power and Independence of the Federal Reserve. 

Note that with the neutral usage Peter makes of the word “ideological,” the meaning is the same as if it said “give them a frame of reference through which they evaluate the world.'' 

Narayana Kocherlakota: Negative Interest Rates Are Nothing to Fear

Link to Narayana Kocherlakota’s column “Negative Interest Rates Are Nothing to Fear” on Bloomberg View

I had a good chance to talk to Narayana Kocherlakota in person at the Brookings conference on negative interest rates on June 6, 2016, and you can see him on the video nodding when I said that we should be telling people that deep negative interest rates are possible if needed. And sure enough, on June 9, Narayana wrote about the possibility of eliminating the zero lower bound in his Bloomberg View column “Negative Rates Are Nothing to Fear.” Here is the relevant passage: 

Negative interest rates could eventually become an even more powerful tool. Some economists – such as University of Michigan economist Miles Kimball, who presented at the Brookings conference – point out that central banks are capable of taking rates as far below zero as they deem necessary. To increase the cost of holding currency, for example, they could charge banks a fee to change it into electronic central bank money.

Economically useful as such an option would be, central bankers must recognize that the prospect of being charged, say, 6 percent a year just to hold cash could unsettle people. For such a policy to work as intended, officials would have to do a lot of explaining ahead of time – communication that could have the added benefit of ensuring that the public understands the central bank’s goals and supports its methods of achieving them.

The Brookings conference on negative interest rates was a milestone in many other ways as well. Let me go so far as to say that no journalist writing about negative interest rates is well informed unless they have watched that Brookings conference.