Noah Smith: Let's Cheer the Success of the US Punitive Expedition in Afghanistan and Accept the Limits to What a US Occupation Can Do →
I wish the commentators in major newspapers were as insightful as Noah is.
The Federalist Papers #36: Alexander Hamilton on Regressive Taxation
Taxes are hated. We could make them hated less; I talk about that in “Scott Adams's Finest Hour: How to Tax the Rich,” “No Tax Increase Without Recompense” and in the other links in “How and Why to Expand the Nonprofit Sector as a Partial Alternative to Government: A Reader’s Guide.” In many ways the US tax system is unnecessarily hateful. For example, while many other countries calculate people’s tax for them, the US requires people to calculate their own taxes or pay a tax preparer. (One reason the US does this is because of the tax preparation lobby. The tax software lobby also gets its strokes; see “Brian Flaxman—A Tale of Bipartisanship and Financial Interests: The Taxpayer First Act of 2019.”)
In addition to the gratuitous ways in which our current tax system is hateful, there is an unavoidable tension between (a) being responsive to the fact that a dollar means a lot more to a poor person than to a rich person and (b) we want to make it attractive for people to become rich by doing things that are helpful to society, which means that once we have blocked ways of getting rich that are not helpful to society, we still need to arrange things so it is attractive to become rich. Although we can do some other things to make it attractive to be rich (the topic of “Scott Adams's Finest Hour: How to Tax the Rich”), financial incentives are likely to be part of how we give people incentives to be ambitious and to work hard. That puts a limit on how quickly tax owed can go up with income—too fast and the incentive to become rich is lessened. The tension between the value of redistribution toward the poor rather than away from the poor and the need for incentives for people to be ambitious and work hard is the topic of my first post on this blog: “What is a Supply-Side Liberal?
If everyone were identical, anything other than a head tax would be stupidity incarnate. That is the theme of “The Flat Tax, The Head Tax and the Size of Government: A Tax Parable.” The only reason to have taxes that go up with income at all is that some people have a lower ability to earn than others—or a genuinely greater need for spending than others—because of forces beyond their control. To the extent that we can directly measure these forces beyond people’s control, we should make taxes depend on those things rather than on income. I talk about that in “Why Taxes are Bad.” But our ability to directly measure the forces beyond people’s control in a minimally controversial way, while rapidly improving (especially on the genetic front), is still embryonic.
Alexander Hamilton, in the Federalist Papers #36, recognizes the problems with taxes that fall just as heavily in absolute terms on the poor as on the rich. He argues that, given the poor-rich variation out there, such taxes are so detestable that elected officials at any level of government are likely to be restrained in using taxes whose magnitude has too low a correlation with being rich.
Here are some key passages in which Alexander Hamilton writes against head taxes (=“poll taxes”) in the Federalist Papers #36, separated by bullets, with emphasis in bold added within longer passages:
the frightful forms of odious and oppressive poll-taxes
if the provision is to be made by the Union that the capital resource of commercial imposts, which is the most convenient branch of revenue, can be prudently improved to a much greater extent under federal than under State regulation, and of course will render it less necessary to recur to more inconvenient methods; and with this further advantage, that as far as there may be any real difficulty in the exercise of the power of internal taxation, it will impose a disposition to greater care in the choice and arrangement of the means; and must naturally tend to make it a fixed point of policy in the national administration to go as far as may be practicable in making the luxury of the rich tributary to the public treasury, in order to diminish the necessity of those impositions which might create dissatisfaction in the poorer and most numerous classes of the society.
Happy it is when the interest which the government has in the preservation of its own power, coincides with a proper distribution of the public burdens, and tends to guard the least wealthy part of the community from oppression!
As to poll taxes, I, without scruple, confess my disapprobation of them; and though they have prevailed from an early period in those States [The New England States.] which have uniformly been the most tenacious of their rights, I should lament to see them introduced into practice under the national government.
But does it follow because there is a power to lay them that they will actually be laid? Every State in the Union has power to impose [head] taxes of this kind; and yet in several of them they are unknown in practice.
Other than points that are repetitive of what Alexander Hamilton said in earlier numbers of the Federalist Papers, the rest of the Federalist Papers #36 is devoted to arguing that the federal government would be able to deal with details of tax administration as well as the state governments—often using the same approaches and potentially using many of the same people for advice and execution—and that the federal government will not put itself needlessly in conflict with state governments in its tax policy.
Tax policy has always been one of the most contentious areas of politics. I wish the insights of the New Dynamic Public Finance and other sophisticated theoretical treatments of optimal taxation could filter down much more into practical debates over tax policy. Two things would be very helpful there: more blog posts (including guest posts) by economists who are engaged in research on optimal taxation and a more accessible textbook covering optimal taxation, including the New Dynamic Public Finance. (Though he is a clear writer, Narayana Kocherlakotas lectures in book form, entitled “The New Dynamic Public Finance,” are not accessible enough.)
Below is the full text of the Federalist Papers #36. See if you agree with the characterization of the content that I gave above. At the bottom of this post are links to all of my previous posts on the Federalist Papers.
FEDERALIST NO. 36
The Same Subject Continued: Concerning the General Power of Taxation
From the New York Packet
Tuesday, January 8, 1788.
Author: Alexander Hamilton
To the People of the State of New York:
WE HAVE seen that the result of the observations, to which the foregoing number has been principally devoted, is, that from the natural operation of the different interests and views of the various classes of the community, whether the representation of the people be more or less numerous, it will consist almost entirely of proprietors of land, of merchants, and of members of the learned professions, who will truly represent all those different interests and views. If it should be objected that we have seen other descriptions of men in the local legislatures, I answer that it is admitted there are exceptions to the rule, but not in sufficient number to influence the general complexion or character of the government. There are strong minds in every walk of life that will rise superior to the disadvantages of situation, and will command the tribute due to their merit, not only from the classes to which they particularly belong, but from the society in general. The door ought to be equally open to all; and I trust, for the credit of human nature, that we shall see examples of such vigorous plants flourishing in the soil of federal as well as of State legislation; but occasional instances of this sort will not render the reasoning founded upon the general course of things, less conclusive.
The subject might be placed in several other lights that would all lead to the same result; and in particular it might be asked, What greater affinity or relation of interest can be conceived between the carpenter and blacksmith, and the linen manufacturer or stocking weaver, than between the merchant and either of them? It is notorious that there are often as great rivalships between different branches of the mechanic or manufacturing arts as there are between any of the departments of labor and industry; so that, unless the representative body were to be far more numerous than would be consistent with any idea of regularity or wisdom in its deliberations, it is impossible that what seems to be the spirit of the objection we have been considering should ever be realized in practice. But I forbear to dwell any longer on a matter which has hitherto worn too loose a garb to admit even of an accurate inspection of its real shape or tendency.
There is another objection of a somewhat more precise nature that claims our attention. It has been asserted that a power of internal taxation in the national legislature could never be exercised with advantage, as well from the want of a sufficient knowledge of local circumstances, as from an interference between the revenue laws of the Union and of the particular States. The supposition of a want of proper knowledge seems to be entirely destitute of foundation. If any question is depending in a State legislature respecting one of the counties, which demands a knowledge of local details, how is it acquired? No doubt from the information of the members of the county. Cannot the like knowledge be obtained in the national legislature from the representatives of each State? And is it not to be presumed that the men who will generally be sent there will be possessed of the necessary degree of intelligence to be able to communicate that information? Is the knowledge of local circumstances, as applied to taxation, a minute topographical acquaintance with all the mountains, rivers, streams, highways, and bypaths in each State; or is it a general acquaintance with its situation and resources, with the state of its agriculture, commerce, manufactures, with the nature of its products and consumptions, with the different degrees and kinds of its wealth, property, and industry?
Nations in general, even under governments of the more popular kind, usually commit the administration of their finances to single men or to boards composed of a few individuals, who digest and prepare, in the first instance, the plans of taxation, which are afterwards passed into laws by the authority of the sovereign or legislature.
Inquisitive and enlightened statesmen are deemed everywhere best qualified to make a judicious selection of the objects proper for revenue; which is a clear indication, as far as the sense of mankind can have weight in the question, of the species of knowledge of local circumstances requisite to the purposes of taxation.
The taxes intended to be comprised under the general denomination of internal taxes may be subdivided into those of the DIRECT and those of the INDIRECT kind. Though the objection be made to both, yet the reasoning upon it seems to be confined to the former branch. And indeed, as to the latter, by which must be understood duties and excises on articles of consumption, one is at a loss to conceive what can be the nature of the difficulties apprehended. The knowledge relating to them must evidently be of a kind that will either be suggested by the nature of the article itself, or can easily be procured from any well-informed man, especially of the mercantile class. The circumstances that may distinguish its situation in one State from its situation in another must be few, simple, and easy to be comprehended. The principal thing to be attended to, would be to avoid those articles which had been previously appropriated to the use of a particular State; and there could be no difficulty in ascertaining the revenue system of each. This could always be known from the respective codes of laws, as well as from the information of the members from the several States.
The objection, when applied to real property or to houses and lands, appears to have, at first sight, more foundation, but even in this view it will not bear a close examination. Land taxes are co monly laid in one of two modes, either by ACTUAL valuations, permanent or periodical, or by OCCASIONAL assessments, at the discretion, or according to the best judgment, of certain officers whose duty it is to make them. In either case, the EXECUTION of the business, which alone requires the knowledge of local details, must be devolved upon discreet persons in the character of commissioners or assessors, elected by the people or appointed by the government for the purpose. All that the law can do must be to name the persons or to prescribe the manner of their election or appointment, to fix their numbers and qualifications and to draw the general outlines of their powers and duties. And what is there in all this that cannot as well be performed by the national legislature as by a State legislature? The attention of either can only reach to general principles; local details, as already observed, must be referred to those who are to execute the plan.
But there is a simple point of view in which this matter may be placed that must be altogether satisfactory. The national legislature can make use of the SYSTEM OF EACH STATE WITHIN THAT STATE. The method of laying and collecting this species of taxes in each State can, in all its parts, be adopted and employed by the federal government.
Let it be recollected that the proportion of these taxes is not to be left to the discretion of the national legislature, but is to be determined by the numbers of each State, as described in the second section of the first article. An actual census or enumeration of the people must furnish the rule, a circumstance which effectually shuts the door to partiality or oppression. The abuse of this power of taxation seems to have been provided against with guarded circumspection. In addition to the precaution just mentioned, there is a provision that "all duties, imposts, and excises shall be UNIFORM throughout the United States.'
It has been very properly observed by different speakers and writers on the side of the Constitution, that if the exercise of the power of internal taxation by the Union should be discovered on experiment to be really inconvenient, the federal government may then forbear the use of it, and have recourse to requisitions in its stead. By way of answer to this, it has been triumphantly asked, Why not in the first instance omit that ambiguous power, and rely upon the latter resource? Two solid answers may be given. The first is, that the exercise of that power, if convenient, will be preferable, because it will be more effectual; and it is impossible to prove in theory, or otherwise than by the experiment, that it cannot be advantageously exercised. The contrary, indeed, appears most probable. The second answer is, that the existence of such a power in the Constitution will have a strong influence in giving efficacy to requisitions. When the States know that the Union can apply itself without their agency, it will be a powerful motive for exertion on their part.
As to the interference of the revenue laws of the Union, and of its members, we have already seen that there can be no clashing or repugnancy of authority. The laws cannot, therefore, in a legal sense, interfere with each other; and it is far from impossible to avoid an interference even in the policy of their different systems. An effectual expedient for this purpose will be, mutually, to abstain from those objects which either side may have first had recourse to. As neither can CONTROL the other, each will have an obvious and sensible interest in this reciprocal forbearance. And where there is an IMMEDIATE common interest, we may safely count upon its operation. When the particular debts of the States are done away, and their expenses come to be limited within their natural compass, the possibility almost of interference will vanish. A small land tax will answer the purpose of the States, and will be their most simple and most fit resource.
Many spectres have been raised out of this power of internal taxation, to excite the apprehensions of the people: double sets of revenue officers, a duplication of their burdens by double taxations, and the frightful forms of odious and oppressive poll-taxes, have been played off with all the ingenious dexterity of political legerdemain.
As to the first point, there are two cases in which there can be no room for double sets of officers: one, where the right of imposing the tax is exclusively vested in the Union, which applies to the duties on imports; the other, where the object has not fallen under any State regulation or provision, which may be applicable to a variety of objects. In other cases, the probability is that the United States will either wholly abstain from the objects preoccupied for local purposes, or will make use of the State officers and State regulations for collecting the additional imposition. This will best answer the views of revenue, because it will save expense in the collection, and will best avoid any occasion of disgust to the State governments and to the people. At all events, here is a practicable expedient for avoiding such an inconvenience; and nothing more can be required than to show that evils predicted to not necessarily result from the plan.
As to any argument derived from a supposed system of influence, it is a sufficient answer to say that it ought not to be presumed; but the supposition is susceptible of a more precise answer. If such a spirit should infest the councils of the Union, the most certain road to the accomplishment of its aim would be to employ the State officers as much as possible, and to attach them to the Union by an accumulation of their emoluments. This would serve to turn the tide of State influence into the channels of the national government, instead of making federal influence flow in an opposite and adverse current. But all suppositions of this kind are invidious, and ought to be banished from the consideration of the great question before the people. They can answer no other end than to cast a mist over the truth.
As to the suggestion of double taxation, the answer is plain. The wants of the Union are to be supplied in one way or another; if to be done by the authority of the federal government, it will not be to be done by that of the State government. The quantity of taxes to be paid by the community must be the same in either case; with this advantage, if the provision is to be made by the Union that the capital resource of commercial imposts, which is the most convenient branch of revenue, can be prudently improved to a much greater extent under federal than under State regulation, and of course will render it less necessary to recur to more inconvenient methods; and with this further advantage, that as far as there may be any real difficulty in the exercise of the power of internal taxation, it will impose a disposition to greater care in the choice and arrangement of the means; and must naturally tend to make it a fixed point of policy in the national administration to go as far as may be practicable in making the luxury of the rich tributary to the public treasury, in order to diminish the necessity of those impositions which might create dissatisfaction in the poorer and most numerous classes of the society. Happy it is when the interest which the government has in the preservation of its own power, coincides with a proper distribution of the public burdens, and tends to guard the least wealthy part of the community from oppression!
As to poll taxes, I, without scruple, confess my disapprobation of them; and though they have prevailed from an early period in those States [The New England States.] which have uniformly been the most tenacious of their rights, I should lament to see them introduced into practice under the national government. But does it follow because there is a power to lay them that they will actually be laid? Every State in the Union has power to impose taxes of this kind; and yet in several of them they are unknown in practice. Are the State governments to be stigmatized as tyrannies, because they possess this power? If they are not, with what propriety can the like power justify such a charge against the national government, or even be urged as an obstacle to its adoption? As little friendly as I am to the species of imposition, I still feel a thorough conviction that the power of having recourse to it ought to exist in the federal government. There are certain emergencies of nations, in which expedients, that in the ordinary state of things ought to be forborne, become essential to the public weal. And the government, from the possibility of such emergencies, ought ever to have the option of making use of them. The real scarcity of objects in this country, which may be considered as productive sources of revenue, is a reason peculiar to itself, for not abridging the discretion of the national councils in this respect. There may exist certain critical and tempestuous conjunctures of the State, in which a poll tax may become an inestimable resource. And as I know nothing to exempt this portion of the globe from the common calamities that have befallen other parts of it, I acknowledge my aversion to every project that is calculated to disarm the government of a single weapon, which in any possible contingency might be usefully employed for the general defense and security.
I have now gone through the examination of such of the powers proposed to be vested in the United States, which may be considered as having an immediate relation to the energy of the government; and have endeavored to answer the principal objections which have been made to them. I have passed over in silence those minor authorities, which are either too inconsiderable to have been thought worthy of the hostilities of the opponents of the Constitution, or of too manifest propriety to admit of controversy. The mass of judiciary power, however, might have claimed an investigation under this head, had it not been for the consideration that its organization and its extent may be more advantageously considered in connection. This has determined me to refer it to the branch of our inquiries upon which we shall next enter.
PUBLIUS.
Links to my other posts on The Federalist Papers so far:
The Federalist Papers #1: Alexander Hamilton's Plea for Reasoned Debate
The Federalist Papers #3: United, the 13 States are Less Likely to Stumble into War
The Federalist Papers #4 B: National Defense Will Be Stronger if the States are United
The Federalist Papers #5: Unless United, the States Will Be at Each Others' Throats
The Federalist Papers #6 A: Alexander Hamilton on the Many Human Motives for War
The Federalist Papers #11 A: United, the States Can Get a Better Trade Deal—Alexander Hamilton
The Federalist Papers #12: Union Makes it Much Easier to Get Tariff Revenue—Alexander Hamilton
The Federalist Papers #13: Alexander Hamilton on Increasing Returns to Scale in National Government
The Federalist Papers #14: A Republic Can Be Geographically Large—James Madison
The Federalist Papers #21 A: Constitutions Need to be Enforced—Alexander Hamilton
The Federalist Papers #24: The United States Need a Standing Army—Alexander Hamilton
The Federalist Papers #27: People Will Get Used to the Federal Government—Alexander Hamilton
The Federalist Papers #30: A Robust Power of Taxation is Needed to Make a Nation Powerful
The Federalist Papers #35 A: Alexander Hamilton as an Economist
The Federalist Papers #35 B: Alexander Hamilton on Who Can Represent Whom
Why Joseph Biden Should Give Jerome Powell a Second Term: It Offers the Best Chance for (Somewhat) Depoliticizing the Fed
Ever since the 2008 Financial Crisis, the Fed has been controversial. I think three things took away from the respect they had commanded: not having avoided the Financial Crisis, being involved in bailing out banks, and not getting a quicker recovery afterwards. Not predicting the Financial Crisis was a failure that was widely shared; bailing out the banks was necessary given that first failure; the last hit to Fed prestige was in an important sense justified; see “America's Big Monetary Policy Mistake: How Negative Interest Rates Could Have Stopped the Great Recession in Its Tracks.” One of the Fed’s most important jobs is to get quick recoveries. In the aftermath of the Financial Crisis of 2008, it didn’t.
For the most part, the Fed has gotten good marks for what it did during the COVID-19 pandemic. But the Fed remains more controversial politically than it was before 2008.
One thing that can put the Fed on more solid ground politically is when Chairs appointed by a president of one party who have done a good job are reappointed by a president of the other party. That happened for Ben Bernanke. It probably should have happened for Janet Yellen. Now, Joseph Biden has the chance to depoliticize the Fed somewhat by reappointing Jerome Powell. Jerome Powell was appointed to the Board of Governors by Barack Obama and appointed Chair by Donald Trump. Jerome has, thus, a bipartisan imprimatur already, that would be burnished further by being reappointed Chair by Joseph Biden.
I am a great admirer of Nick Timiraos as a journalist covering the Fed. Yesterday, he had another excellent bit of reporting with "Progressive Opposition to Jerome Powell Clouds His Chances for Second Term as Fed Chairman.” All quotations below are from that article.
Jerome Powell should have no trouble getting through the Senate:
Powell, a Republican who was nominated to the Fed board as a governor in 2011 by Mr. Obama and tapped to become chairman in 2017 by Mr. Trump, is generally well-liked by lawmakers from both parties. Analysts believe he is likely to draw enough support from Republicans and Democrats to win confirmation by a comfortable margin. Mr. Powell won support from 84 senators during his Senate confirmation in 2018; 68 of those senators remain in office, equally split between the party caucuses.
But he would have to be nominated for reappointment by Joseph Biden. There are some trying to discourage that:
… some progressives are unhappy with his bent toward easing financial regulations that were put in place after the 2008 crisis and think the central bank should have someone more in sync with Democratic politics in charge.
The most likely alternative is Lael Brainard:
If Mr. Powell isn’t given a new four-year term next February, when his current term expires, the leading contender for the job is Fed governor Lael Brainard, an economist appointed to the board in 2014 by former President Barack Obama.
Although experience as Chair is valuable, Lael Brainard otherwise doesn’t seem likely to pursue a dramatically different monetary policy:
Mr. Powell and Ms. Brainard have had similar views on monetary policy in recent years …
But there are some differences on other policies: Lael Brainard might be tougher in requiring banks to be financed more heavily by stock and less by borrowing, and she favors a Fed digital currency:
… Ms. Brainard has in recent months argued more forcefully for the Fed to develop a central bank digital currency. Mr. Powell has said he is undecided on whether the risks outweigh the benefits. Ms. Warren has also recently talked up the potential benefits of such a project.
Being tougher in requiring banks to be financed more heavily by stock and less by borrowing is important. (See “Higher Capital Requirement May Be Privately Costly to Banks, But Their Financial Stability Benefits Come at a Near Zero Cost to Society.”) But Joseph Biden can further that by other Fed appointments, particularly for the vice chairman of bank supervision:
The four-year term of vice chairman of bank supervision, currently held by Randal Quarles, expires in October. …
Administration officials are considering former Fed governor Sarah Bloom Raskin as a possible candidate for that job. Ms. Raskin, a lawyer, served as deputy Treasury secretary in the Obama administration from 2014 to 2017. She was critical last year of some of the Fed’s emergency lending programs and argued officials should have done more to prevent broad market backstops from benefiting certain energy companies.
Other appointments to the Board of Governors of the Fed also matter:
The Biden administration also has been working on filling a vacancy on the seven-member Fed board of governors. The two leading contenders for that job are Williams Spriggs, chief economist at the AFL-CIO, and Lisa Cook, an economics professor at Michigan State University.
Besides making the Consumer Financial Protection Bureau happen, one of the best things Elizabeth Warren has done is make pushing banks to be financed more by stock than by borrowing a litmus test for relevant government officials a central issue. I would be delighted if supporting this—which is often called “high bank capital requirements”—became a key litmus test for Fed appointments. Financial stability matters. And most people smart enough to conduct high-quality monetary policy will be smart enough to see the importance of high bank capital requirements as well. So this isn’t a litmus test that is very costly to the good performance of the Fed’s other duties.
If Joseph Biden does nominate Lael Brainard as Chair, the succeeding musical chairs game is interesting:
If Mr. Powell gets a second term, Ms. Brainard is likely to be asked to serve as the vice chairwoman or as the vice chairwoman for bank supervision.
Richard Clarida’s current term as vice chairman expires in January.
But if Lael Brainard becomes Chair …
Another candidate being considered for the job [as Vice Chair] is Seth Carpenter, an economist who spent 15 years at the Fed, most recently as deputy director of the monetary affairs division.
Mr. Carpenter worked at the Treasury Department from 2013 until 2016. He was nominated in August 2014 to be assistant secretary for financial markets; he filled the position on an acting basis, but his nomination wasn’t ever considered by the Senate. He became global chief economist at Morgan Stanley last month after serving in a similar capacity at UBS Group AG .
I have met Seth Carpenter at several conferences. I am a fan. I would love to see him as Vice Chair of the Fed.
I have this complaint against Richard Clarida:
My curiosity is piqued to see what will happen with these upcoming Fed appointments.
On Monetary Policy, Don’t Miss These Other Posts:
An Economics PhD is Still a Great Deal—Noah Smith →
In addition to the links Noah flags, don’t miss this Quartz article I wrote with Noah:
You Might Need to Educate Your Doctor about the Effects of a Long Fast on Cholesterol Readings
Primary care physicians are especially good at reading situations that come up all the time. So far, not many people have taken on fasting as a health practice in the serious way that I have recommended on this blog. (See the fasting section in “Miles Kimball on Diet and Health: A Reader's Guide” for what I mean by taking fasting on seriously.) So the way cholesterol readings are affected by extended fasts are unfamiliar to most primary care folks.
Fasting for an extended period tends to raise cholesterol. Why? My intuition is that if you are burning body fat, doesn't it have to get to the cells somehow. That makes for more lipids in the blood, which a lipid panel will show up as more cholesterol.
In the article shown at the top of this post, “Hypercholesterolaemia of prolonged fasting and cholesterol lowering of re-feeding in lean human subjects.” K.G. Thampy reports the elevation of cholesterol after a week of fasting in his study of 36 lean, healthy adults. There is an important detail: In K.G. Thampy’s results, although cholesterol readings go up after one week of fasting, they go down after three weeks of fasting. Assuming this result replicates, this must come from something beyond my simple theory of transport of fat from body fat affect cholesterol readings. Somehow, after a three-week period, the body finds a way to get calories from body fat to the cells even with a low concentration of cholesterol in the blood. (I wonder how ketones are counted in a standard cholesterol test.)
Results from 36 individuals are worth more than from 1, but you might be interested in seeing my results.
Here are my standard cholesterol test results after 6 days of eating less than 500 calories a day (see “My Modified Fast.”):
Here are my standard cholesterol results after eating one big meal a day every day for several weeks:
These two tests were only a few weeks apart. In any case, my knowledge that an extended fast could give the illusion of a high-cholesterol problem came in handy in dealing with my doctor. He had suggested I get a test again 3 months later, which would have been less convenient. I insisted on doing the test at an earlier, more convenient time on the basis that the test results were affected by my having been in the middle of an extended partial fast.
In addition to educating my doctor about the effects of extended fasts on cholesterol readings in standard tests, I have been educating my doctor about the better cholesterol tests. Actually, I sent him the link to last week’s post “Standard Cholesterol Tests are Substandard; Better Cholesterol Tests are Available,” and he arranged for me to get the better type of cholesterol test. Here are the results from that test; you can see how much more detailed they are:
For organized links to other posts on diet and health, see:
Fatal Flaws Don't Have To Be Fatal
For each of us, some of the most important truths are things about ourselves that seem like bad news—though usually they are not news at all to anyone but ourselves. And they are only bad news to me or you because you and I have been in denial.
Overcoming denial about one’s own flaws is crucial for becoming a better person. But it is hard. I have two hacks to make it a bit easier. First, I tell myself in that crucial moment when denial is a strong temptation that facing the truth doesn’t mean I have to do anything about it. Some people might be shocked at the idea that one could see something egregious and do nothing about it, but that seems a much smaller danger to me than refusing to see something. If you use this hack, there might be a bit of delay between facing the truth and doing something about it—and sometimes a long delay—but after you get used to that hard truth you will probably be able to gingerly begin thinking if you want to do anything about it.
The second hack is repeating to myself the maxim above: “Fatal flaws don’t have to be fatal.” In saying this, I am consciously using the word “fatal” in two different senses. A “fatal flaw” is used loosely to mean a very serious flaw. The very serious, genuinely bad, shameful flaws you have might seem they could do you in, or make you unworthy of a spot on this planet. But (knowing my readers), however bad they seem, I claim that they are, in fact, unlikely to do you in, and unlikely to make anyone else think you unworthy of a spot on this planet.
Lately, while doing my nightly stretches in my study, I have been listening to Jordan Peterson on YouTube. Jordan Peterson has been slandered by some who put political projects ahead of other values. Disregard those slanders. He has a lot of important things to say and is good at making his case. I recommend listening to some of his talks and Q&A sessions. My experience has been that going to the YouTube video randomly except for whatever help YouTube’s algorithm gives me works fine to get to good stuff. One of Jordan’s big themes is a tragic view of life, in the deep sense of “tragic.” He argues for example, that based on what actually happened under Hitler—an in particular how many ordinary people went along with the evil—that almost all of us, in the same situation would act as the concentration camp guards did. We have that potential for evil within us.
Fortunately, most of us are not in situations that encourage us in evil to the extent that the Third Reich did. But almost all of us do quite bad things even in the situations we are actually in. Jordan emphasizes that we have badness within, but we can become better by working at becoming better. Those who have spent a long lifetime trying to become better almost always in fact become better than those who just stay as they are.
Albertus Magnus emphasizes the trio of goodness, truth and beauty. There is a general regularity that almost all desirable things are positively correlated in the cross-section; and there are causal relationships between goodness, beauty and the knowledge of truth; but they are distinct concepts. We need them all:
“Goodness and beauty without truth are doomed.
Goodness and truth without beauty are grim.
Truth and beauty without goodness are cold.”
Truth is the particular responsibility of scientists. I wrote “Virtues for Economists” with that in mind.
I have two thoughts on beauty. First, I highly recommend the Zen koan practice in the “Waking Up” meditation app. Koans—carefully crafted, seemingly paradoxical statements—are, I believe, a way of gaining fuller access to the beautiful, holistic way of seeing that the right hemispheres of our brains are putting together all the time. Second, my personal value on beauty is such that I have decided to relatively freely retweet what I consider beautiful art on my Twitter feed. In between the tweets trying to seek truth, there are many trying to seek beauty.
As for goodness, in practice the best way I know to foster goodness is the approach I describe in “How Economists Can Enhance Their Scientific Creativity, Engagement and Impact.” (Also see “Reactions to Miles’s Program For Enhancing Economists’ Scientific Creativity, Engagement and Impact.”)
If you pursue all three of goodness, beauty and truth, you will become better and your life will get better. In the meanwhile, remember that fatal flaws don’t have to be fatal.
Don’t Miss These Posts Related to Positive Mental Health and Maintaining One’s Moral Compass:
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How Economists Can Enhance Their Scientific Creativity, Engagement and Impact
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Recognizing Opportunity: The Case of the Golden Raspberries—Taryn Laakso
Taryn Laakso: Battery Charge Trending to 0% — Time to Recharge
Savannah Taylor: Lessons of the Labyrinth and Tapping Into Your Inner Wisdom
Some Victories in the Tough War against Global Warming—David Wallace-Wells →
Hat tip to Noah Smith.
On Critical Race Theory
I argue in “The Right Amount of Wokeness” and “Getting the Best from Wokeness by Having the Right Mean, Reducing the Variance and Mitigating the Losses from Extreme Values” that shifting the mean of the wokeness distribution toward greater wokeness would be a good thing because the horrors currently arising from too little wokeness are more terrible than the horrors currently arising from too much wokeness. Overall, I think an increase in wokeness is in order. If it went too far, that would be bad, but unlike those on the Right, I think the probability that extremes of wokeness will take over is relatively small.
But let there be no mistake: extremes of wokeness would be bad. It is only because I believe the majority of Americans will see how bad those extremes are that I don’t worry too much about extremes of wokeness taking over.
Though not a clear and present danger to America as a whole, extremes of wokeness are not a figment of the imagination either. They are clearly evident in important pockets of American universities and in a few other places in American culture.
On problem with Critical Race Theory is the same as the problem with many enthusiasms: it focuses on one things to the exclusion of other things that are also important. In his July 19, 2021 Wall Street Journal op-ed, Lance Morrow reminds of Isaiah Berlin’s distinction between “foxes” and “hedgehogs”:
In a famous essay, published as a book in 1953, Berlin suggested that the world is divided between hedgehogs and foxes—between those who believe in One Big Thing (one all-sufficient super-explanation), and those who are content with a more modest, irrational and even incoherent idea of history’s unfolding.
Then, Lance applies this distinction to describe Critical Race Theorists:
Hedgehogs are thick on the ground, all of them advancing One Big Thing or another—each peering through the lens of a particular obsession. At the moment, the biggest One Big Thing is race—the key, it seems, to all of America, to the innermost meanings of the country and its history.
It isn’t really true. Race is one of many big things in America. It is hardly the most important. Americans need to desanctify the subject of race—to mute its claims, which have grown absolutist and, as it were, theological in their thoroughness, their dogmatism.
Then Lance compares those who use Critical Race Theory to take wokeness to the extreme to Joe McCarthy:
It was said in the era of Joe McCarthy that he and his followers saw a communist under every bed. The single-minded ideology of critical race theory sees racism in every white face—a racism systemic, pervasive, inescapable, damning. All white people are racists. The doctrine devolves to the crudest form of what might be called racial Calvinism: Americans are predestined—saved or damned, depending on the color of their skin. This doctrine merely reverses the theory of white supremacy, which damned black people—and consigned them to oppressive segregation—because of the color of their skin.
In “How Adherents See ‘Critical Race Theory’” (July 13, 2021) and “A Deeper Look at Critical Race Theory” (July 20, 2021), William Galston provides more detail about Critical Race Theory. Small doses of Critical Race Theory likely have quite a good effect, but large enough doses could be corrosive of what the human race has laboriously built to protect itself from a war of all against all. In the first of those two op-eds, William writes:
… critical race theory is … originated in law schools in the 1970s and has since become a sprawling movement. To find out more about it, I turned to “Critical Race Theory: An Introduction,” co-written by one of the movement’s founders, Richard Delgado. He writes that critical race theory “questions the very foundations of the liberal order, including equality theory, legal reasoning, Enlightenment rationalism, and neutral principles of constitutional law.
He also points out that that Critical Race Theory says explicitly that “Incrementalism is a bankrupt strategy; ‘everything must change at once.’”
In the second of the two op-eds, William Galston gives some bullet points about Critical Race Theory. Giving my own selection from those points in a numbered list, here are some quotations:
Critical race theory denies the possibility of objectivity.
it aims to “recover and revitalize the radical tradition of race-consciousness,” a tradition “that was discarded when integration, assimilation and the ideal of colorblindness became the official norms of racial enlightenment.”
Critical race theory rejects the principle of equality of opportunity. Its adherents insist that equality of opportunity is a myth, not a reality, in today’s America, and that those who pursue it are misguided. The real goal is equality of results, measured by black share of income, wealth and social standing. Critical race theorists reject the idea that sought-after goods should be distributed through systems that evaluate and reward “merit.”
[Critical Race Theory argues that] “conceptions of merit function not as a neutral basis for distributing resources and opportunity, but rather as a repository of hidden, race-specific preferences for those who have the power to determine the meaning and consequences of ‘merit.’”
The typical American notion of “merit” is quite shallow. (I address this a bit in “Virtues for Economists.”) But that doesn’t mean we can get by without some notion of merit. To get outcomes we want, we need what Jordan Peterson calls “hierarchies of competence.”
The need for hierarchies of competence is matched by our need for police as well. It is hard for me to tell just how literally various people took the slogan “Defund the police.” With enough creativity and poetic license, it might be possible to come up with some meaning for that slogan that is actually a good idea. But anything close to the literal meaning is a very bad idea.
Indeed, one of the more dependable approaches to making policing less racist—only hiring people into the police force who have college degrees—would cost significantly more money. Note how this would use the wokeness of colleges and universities to good effect. Without taking things to extremes, we definitely want our police to be at least somewhat more woke than they are. Requiring college degrees for new police can help achieve that goal.
No doubt many of the pillars of our civilization have been corrupted by racism. But simply discarding those pillars would bring the whole edifice crashing down. We need to:
reform our judgements to be more objective;
become more truly and deeply colorblind, while recognizing whatever burdens people bring from their backgrounds and the strengths it took to deal with those burdens well;
provide more equality of opportunity by providing more slots in charter schools and allowing construction of more housing in heretefore exclusionary neighborhoods;
deepen our notions of merit; and
more thoroughly recognize the temptations and corruptions of power. What we shouldn’t do is totally abandon the hacks we have used to raise ourselves up from where we were as a species 500 years ago.
One of the most important lessons of history is how unimaginably bad things used to be. The human race has endured and perpetrated many evils on its own for thousands of years. To take one very important example, if one takes the entirety of human history since the rise of agriculture, the (still not 100% complete) abolition of slavery in the last century or two stands out as the exception, while slavery as an institution was the rule. We have made progress by abolishing slavery. That progress depended crucially on the pillars of our civilization that Critical Race Theory evinces too little appreciation for.
Standard Cholesterol Tests are Substandard; Better Cholesterol Tests are Available
Cholesterol has a big hold on medical practice because it is so easy to measure. Unfortunately standard medical practice hasn’t kept up with advances in the measurement of cholesterol. The total amount cholesterol in LDLs (low-density lipoproteins)—so-called “bad cholesterol”—and the total amount of cholesterol in HDLs (high-density lipoproteins)—so-called “good cholesterol”—are routinely reported. but there is much more to the story.
Somewhat confusingly, within the category of low-density-lipoprotein (LDL) particles, it is the small, dense ones that are most dangerous. A 13-year follow-up report on the Québec Cardiovascular Study (“Low-density lipoprotein subfractions and the long-term risk of ischemic heart disease in men: 13-year follow-up data from the Québec Cardiovascular Study”) summarized its conclusions thus:
These results indicated that estimated cholesterol levels in the large LDL subfraction were not associated with an increased risk of IHD in men and that the cardiovascular risk attributable to variations in the LDL size phenotype was largely related to markers of a preferential accumulation of small dense LDL particles.
In other words, big LDL particles that hold a lot of cholesterol aren’t associated with extra risk of blockage of blood to the heart; small dense LDL particles that may not hold that much total cholesterol account for pretty much all the risk of reduced blood flow to the heart that we associate with LDL cholesterol.
Unless you are quite lucky, your doctor is unlikely to do tests that distinguish between the small, dangerous LDL particles and the large, relatively innocuous LDL particles unless you ask for them. I have no idea how it stacks up with other testing companies, but the Quest Diagnostics webpage I show below is one that you could refer your doctor to for general orientation about a variety of more sophisticated tests of cardiovascular risk, including tests that better distinguish different subtypes of cholesterol particles.
I recommend that you get these more modern tests. You definitely should get these tests if your doctor is recommending any treatment for cholesterol. But you also should get these tests to make sure you aren’t lulled into a false security by the standard cholesterol test.
I learned about these more sophisticated tests of cardiovascular risk from Peter Attia’s podcast. As I have on other occasions let me strongly recommend Peter Attia as a very thoughtful and well-informed source for health knowledge.
For organized links to other posts on diet and health, see:
Richard Feyman on the Centrality of Scientific Disrespect
“Science is the belief in the ignorance of experts.”
Related Links:
Also, relatedly, in “Biological Evolution Right Before Our Eyes” I say:
I get annoyed often these days reading or hearing people express their devotion to science but treating science as if it were an authoritarian enterprise. Saying one should believe in the scientists as if they were some kind of high priests is contrary to the spirit of science. The spirit of science is pointing to the evidence.
The Federalist Papers #35 B: Alexander Hamilton on Who Can Represent Whom
In recent years, it has become common for authors to be criticized for having central characters in their fiction who come from racial or ethnic groups they don’t belong to. Such authors often argue in response that it is the job of authors to try to empathize and understand other human beings—even those from quite different backgrounds.
The question of who can represent whom comes up not only in literature, but also in politics. Can a politician from a different racial or ethnic group effectively represent the interests of that group? This is a controversial question, but when given the choice, voters of one racial or ethnic group often vote for someone of a different racial or ethnic group. (This happens in both group-power-gradient directions.)
Though he is thinking about differences in occupation rather than differences in racial or ethnic group, in the second half of the Federalist Papers #35, Alexander Hamilton takes the position that one can be a good representative for someone from a different occupation—and likely would agree that one can be a good representative for someone who is different in other dimensions.
Alexander Hamilton also points out the sheer impracticality of trying to insist that an individual always be represented by someone else who is very similar. When asked, many people point to their membership in their own family as their primary identity—much more important to them than the racial or ethnic group they belong to. Should we then say that because that identity as a family member is so near and dear to their hearts that each can only be represented by someone else from their own family? That would be a lot of representatives in Congress!
Somewhat contrary to the general drift of what Alexander Hamilton is saying, I really would like to be represented by an economist in Congress (especially if I could have some choice among economists). But agreeing with Alexander Hamilton, I can see that it is impossible to satisfy my desire along those lines and everyone else’s corresponding desires.
The smaller the group, the more likely it is that—without especially good fortune in the vagaries of talent—they will need to hope for representation from someone outside the group—whether literary representation or political representation.
Across occupations, Alexander Hamilton makes some claims about who can reasonably represent someone who is in a different occupation. He says:
merchants can do a good job representing mechanics and manufacturers
“the learned professions” (professor, doctors and lawyers??) might well be able to represent almost any other group
landholders can represent other landholders in relation to their interests as landholders
”Cultural appropriation” is an issue because some people perform quite badly at understanding those who are unlike them. But the right remedy is not to ban people from writing about or politically representing those who are unlike them, but to encourage and support those whose empathetic understanding is strong (regardless of their background) and correct those whose whose empathetic understanding is weak. This includes letting people know that their empathetic understanding is weak on one area even though it is strong in another.
One reason rules against cultural appropriation or against political representation by someone from a different racial or ethnic group are a bad idea is that reducing conflict in our society depends so heavily on encouraging the development of empathetic understanding of those who are different. Declaring empathetic understanding of those who are different to be impossible—or to be somehow automatically second-rate—is not a good way to encourage such understanding. Pointing to actual failures of understanding in detail is a much, much better way to help people course-correct and further their understanding. In this context, it is especially harmful to treat people too much as if they “should have known” already that they were misunderstanding. The “should have known” attitude might be appropriate to the extent that embarrassment is the penalty for not having known. But at the cost of serious embarassment, people should be allowed learning opportunities as they make their mistakes.
Below is the full text of Alexander Hamilton’s argument in the second half of the Federalist Paper #35 that it is possible to effectively represent someone who is quite different.
Let us now return to the examination of objections.
One which, if we may judge from the frequency of its repetition, seems most to be relied on, is, that the House of Representatives is not sufficiently numerous for the reception of all the different classes of citizens, in order to combine the interests and feelings of every part of the community, and to produce a due sympathy between the representative body and its constituents. This argument presents itself under a very specious and seducing form; and is well calculated to lay hold of the prejudices of those to whom it is addressed. But when we come to dissect it with attention, it will appear to be made up of nothing but fair-sounding words. The object it seems to aim at is, in the first place, impracticable, and in the sense in which it is contended for, is unnecessary. I reserve for another place the discussion of the question which relates to the sufficiency of the representative body in respect to numbers, and shall content myself with examining here the particular use which has been made of a contrary supposition, in reference to the immediate subject of our inquiries.
The idea of an actual representation of all classes of the people, by persons of each class, is altogether visionary. Unless it were expressly provided in the Constitution, that each different occupation should send one or more members, the thing would never take place in practice. Mechanics and manufacturers will always be inclined, with few exceptions, to give their votes to merchants, in preference to persons of their own professions or trades. Those discerning citizens are well aware that the mechanic and manufacturing arts furnish the materials of mercantile enterprise and industry. Many of them, indeed, are immediately connected with the operations of commerce. They know that the merchant is their natural patron and friend; and they are aware, that however great the confidence they may justly feel in their own good sense, their interests can be more effectually promoted by the merchant than by themselves. They are sensible that their habits in life have not been such as to give them those acquired endowments, without which, in a deliberative assembly, the greatest natural abilities are for the most part useless; and that the influence and weight, and superior acquirements of the merchants render them more equal to a contest with any spirit which might happen to infuse itself into the public councils, unfriendly to the manufacturing and trading interests. These considerations, and many others that might be mentioned prove, and experience confirms it, that artisans and manufacturers will commonly be disposed to bestow their votes upon merchants and those whom they recommend. We must therefore consider merchants as the natural representatives of all these classes of the community.
With regard to the learned professions, little need be observed; they truly form no distinct interest in society, and according to their situation and talents, will be indiscriminately the objects of the confidence and choice of each other, and of other parts of the community.
Nothing remains but the landed interest; and this, in a political view, and particularly in relation to taxes, I take to be perfectly united, from the wealthiest landlord down to the poorest tenant. No tax can be laid on land which will not affect the proprietor of millions of acres as well as the proprietor of a single acre. Every landholder will therefore have a common interest to keep the taxes on land as low as possible; and common interest may always be reckoned upon as the surest bond of sympathy. But if we even could suppose a distinction of interest between the opulent landholder and the middling farmer, what reason is there to conclude, that the first would stand a better chance of being deputed to the national legislature than the last? If we take fact as our guide, and look into our own senate and assembly, we shall find that moderate proprietors of land prevail in both; nor is this less the case in the senate, which consists of a smaller number, than in the assembly, which is composed of a greater number. Where the qualifications of the electors are the same, whether they have to choose a small or a large number, their votes will fall upon those in whom they have most confidence; whether these happen to be men of large fortunes, or of moderate property, or of no property at all.
It is said to be necessary, that all classes of citizens should have some of their own number in the representative body, in order that their feelings and interests may be the better understood and attended to. But we have seen that this will never happen under any arrangement that leaves the votes of the people free. Where this is the case, the representative body, with too few exceptions to have any influence on the spirit of the government, will be composed of landholders, merchants, and men of the learned professions. But where is the danger that the interests and feelings of the different classes of citizens will not be understood or attended to by these three descriptions of men? Will not the landholder know and feel whatever will promote or insure the interest of landed property? And will he not, from his own interest in that species of property, be sufficiently prone to resist every attempt to prejudice or encumber it? Will not the merchant understand and be disposed to cultivate, as far as may be proper, the interests of the mechanic and manufacturing arts, to which his commerce is so nearly allied? Will not the man of the learned profession, who will feel a neutrality to the rivalships between the different branches of industry, be likely to prove an impartial arbiter between them, ready to promote either, so far as it shall appear to him conducive to the general interests of the society?
If we take into the account the momentary humors or dispositions which may happen to prevail in particular parts of the society, and to which a wise administration will never be inattentive, is the man whose situation leads to extensive inquiry and information less likely to be a competent judge of their nature, extent, and foundation than one whose observation does not travel beyond the circle of his neighbors and acquaintances? Is it not natural that a man who is a candidate for the favor of the people, and who is dependent on the suffrages of his fellow-citizens for the continuance of his public honors, should take care to inform himself of their dispositions and inclinations, and should be willing to allow them their proper degree of influence upon his conduct? This dependence, and the necessity of being bound himself, and his posterity, by the laws to which he gives his assent, are the true, and they are the strong chords of sympathy between the representative and the constituent.
There is no part of the administration of government that requires extensive information and a thorough knowledge of the principles of political economy, so much as the business of taxation. The man who understands those principles best will be least likely to resort to oppressive expedients, or sacrifice any particular class of citizens to the procurement of revenue. It might be demonstrated that the most productive system of finance will always be the least burdensome. There can be no doubt that in order to a judicious exercise of the power of taxation, it is necessary that the person in whose hands it should be acquainted with the general genius, habits, and modes of thinking of the people at large, and with the resources of the country. And this is all that can be reasonably meant by a knowledge of the interests and feelings of the people. In any other sense the proposition has either no meaning, or an absurd one. And in that sense let every considerate citizen judge for himself where the requisite qualification is most likely to be found.
PUBLIUS.
Links to my other posts on The Federalist Papers so far:
The Federalist Papers #1: Alexander Hamilton's Plea for Reasoned Debate
The Federalist Papers #3: United, the 13 States are Less Likely to Stumble into War
The Federalist Papers #4 B: National Defense Will Be Stronger if the States are United
The Federalist Papers #5: Unless United, the States Will Be at Each Others' Throats
The Federalist Papers #6 A: Alexander Hamilton on the Many Human Motives for War
The Federalist Papers #11 A: United, the States Can Get a Better Trade Deal—Alexander Hamilton
The Federalist Papers #12: Union Makes it Much Easier to Get Tariff Revenue—Alexander Hamilton
The Federalist Papers #13: Alexander Hamilton on Increasing Returns to Scale in National Government
The Federalist Papers #14: A Republic Can Be Geographically Large—James Madison
The Federalist Papers #21 A: Constitutions Need to be Enforced—Alexander Hamilton
The Federalist Papers #24: The United States Need a Standing Army—Alexander Hamilton
The Federalist Papers #27: People Will Get Used to the Federal Government—Alexander Hamilton
The Federalist Papers #30: A Robust Power of Taxation is Needed to Make a Nation Powerful
The Federalist Papers #35 A: Alexander Hamilton as an Economist
Forget the Money Supply, It's the Interest Rate, Stupid
The only sensible view on monetary policy is to be a hawk when the situation calls for it and a dove when the situation calls for that. Anyone who is always a hawk or always a dove is off-base. However, there might well be political benefits to being always a hawk or always a dove. And there can be a pecuniary benefit to being always a hawk: it can be a good way to gin up gold sales by scaring everyone about inflation.
Lately inflation has jumped way up. There is a debate about whether that rise is mostly temporary or has a big permanent component. And this is in a context where the Fed has decided it wants somewhat higher inflation than it had before the pandemic. The Fed’s current monetary policy framework is meant to be ill-defined enough to not tie the Fed’s hands—contrary to the desire of some economists, including me, for more of a monetary policy rule. (See “Next Generation Monetary Policy.”) But I interpret the Fed as shifting from an implicit target of about 1.5% per year up to an implicit target of 2.5% per year: going from not being fully willing to do what it would take to get inflation back up to their nominal 2% per year target to being willing to exceed their 2% per year target somewhat for quite some time.
Whatever one’s take on how tight or how stimulative monetary policy should be, the money supply is no longer very relevant to monetary policy on the margin. The Fed now has what is sometimes called a “floor system.” The Fed tries to keep the monetary base—paper currency plus reserves held in electronic accounts at the Fed—large enough that banks have nothing better to do with the last dollar of reserves than leave it earning interest as excess reserves in a reserve account—or earning interest in the Fed’s overnight facility based on Treasury bill repurchase agreements. Those reserves held as excess reserves or funds earning interest from repurchase agreements are economically idle and don’t stimulate the economy. They are part of the money supply, but one can say they aren’t part of the active money supply. Being inactive matters: for example, idle reserves only add 1-for-1 to other money supply measures. I explain all of this in greater detail, with graphs, in “Supply and Demand for the Monetary Base: How the Fed Currently Determines Interest Rates.”
In their July 20, 2021 op-ed “Too Much Money Portends High Inflation,” John Greenwood and Steve Hanke claim the size of the money supply matters, contrary to what Jerome Powell says:
In his Feb. 23 testimony to Congress, Fed Chairman Jerome Powell said that the growth in the money supply, specifically M2, “doesn’t really have important implications.” The experts, the press and the bond vigilantes were as quick to unlearn monetarism, if they ever had learned it, as Mr. Powell. Reporting about U.S. inflation rarely contains the words “money supply.” …
Wrong. The inflation upticks aren’t temporary and were predictable, driven by an extraordinary explosion in the money supply. Since March 2020, the M2 has been growing at an average annualized rate of 23.9%—the fastest since World War II. There is so much money out there that banks don’t know what to do with it. Via reverse repurchase agreements, banks and money-market funds are lending money to the Fed to the tune of $860 billion. That’s unprecedented.
Notice how they say there is so much money sloshing around that a lot of it sits idle in the overnight facility based on repos that I mentioned above. But they don’t seem to understand that money idled like that doesn’t add to economic stimulus. It doesn’t lower the interest rate because the interest rate on reserves has put a floor under interest rates. (For technical reasons, the floor on interest rates is a tad lower than the interest rate on reserves itself, but not much.)
To see that the money supply is no longer crucial in a floor system where the interest rate has been disconnected from marginal changes in the monetary base, consider the following policy shift:
The Fed raises its target rate and the interest rate on reserves by 500 basis points (= 5 percentage points, where a percentage point is a per annum rate).
The Fed doubles the monetary base.
I assure you, this would be quite contractionary. The high interest rate on reserves would reduce the active part of the monetary base even though the entire monetary base doubled.
Money doesn’t matter any more on the margin. But that isn’t to say money doesn’t matter. A floor system only works when the total size of the monetary base is kept quite large. So a large monetary base is a precondition for the kind of logic I laid out above. Friedman’s dictum “Inflation is always and everywhere a monetary phenomenon” is not lost, as John Greenwood and Steve Hanke claim; rather, money—and in particular, “Supply and Demand for the Monetary Base,” is what is enabling the Fed to set interest rates.
It is certainly reasonable for John Greenwood and Steve Hanke to be arguing that the Fed should be tightening sooner than it is saying it will (that is well within the range of reasonable disagreement), but they should leave their money supply rhetoric behind and argue forthrightly for the Fed to raise its target rate and to reduce long-term asset purchases in order to put other rates on a higher track.