# Quartz #67—>Nationalists vs. Cosmopolitans: Social Scientists Need to Learn from Their Brexit Blunder

Here is the full text of my 67th Quartz column, “Social scientists need to learn from their Brexit blunder, so we can learn from them,” now brought home to supplysideliberal.com. It was first published on June 29, 2016. Links to all my other columns can be found here.

I give my reasoning behind the first sentence of this column in my July 10, 2016 sermon “Us and Them.”

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The worst thing about Brexit is a key reason Brexit gained so much support: opposition to immigration. Advocates for the UK leaving the European Union were not shy about pointing to opposition to immigration as a key to their success. Nigel Farage captured some of that spirit by declaring “This is a victory for ordinary people, for good people, for decent people.”

The rise in inequality and serious monetary policy mistakes—including the eurozone’s requiring many disparate economies to share monetary policy with Germany—may have set the stage for rebellion against the status quo. But Donald Trump’s “I love to see people take their country back” expresses the nationalism behind the direction of rebellion implicit in Brexit.

One of the most revealing pieces of data on the Brexit vote is Eric Kaufmann’s analysis of Brexit support among the over 24,000 survey respondents in the British Election Study. Support for Brexit was much higher among those who supported capital punishment, and support for the EU was much lower among respondents who supported the public whipping of sex offenders. That is, “hardliners” were much more likely to support Brexit.

I have written the above as if we know what happened with Brexit. And although I think I have the general drift of things right, one of the big messages of Brexit in the UK and of the rise of Donald Trump in the US is that social scientists need to up their game dramatically in understanding what people want and how they think. For some time, social scientists have made a special effort to understand ethnic and sexual minorities. But given how different hardliners are from the people many academic social scientists usually hang out with, and how many hardliners there are, social scientists need to spend a lot more time studying this group. (Though marred by condescension toward “conservatives,” George Lakoff’s book Moral Politics is an excellent place for academics to start in an effort to understand the hardliner worldview.)

In order to give non-pejorative labels to both sides, let me call those who, like me, favor more open immigration “Cosmopolitans” and those who favor more restrictive immigration (and other policies in the same spirit) “Nationalists.” As a Cosmopolitan, what I most want to know from social science is what interventions can help make people more accepting of foreigners. Somewhat controversially, it is now common in the US for elementary school teachers to make efforts to instill pro-environmental attitudes in schoolchildren. Whether or not those efforts make a difference to children’s attitudes, are there interventions or lessons that can make schoolchildren and the adults they grow up to be likely to feel more positive about the foreign-born in their midst? For example, having had a very good experience learning foreign languages on my commute by listening to Pimsleur CDs in my car, I wonder whether dramatically more effective Spanish language instruction for school children following those principles of audio- and recall-based learning with repetition at carefully graded intervals might make a difference in attitudes toward Hispanic culture and toward Hispanics themselves in the US.

Although it is the province of social scientists to test interventions intended to improve attitudes toward the foreign-born, many of the best interventions will be created by writers, artists, script-writers, directors, and others in the humanities. There are also many other marginalized groups in society, but the strength of anti-foreigner attitudes suggests the need for imaginative entertainment and cultural events to help people identify with human beings who were born in other countries.

It is obvious to anyone except those with their heads in the sand that Brexit in the UK and the rise of Donald Trump in the US are a wake-up call to the relatively Cosmopolitan elites who have been running those countries. But that doesn’t mean the Cosmopolitan faction among the elites must surrender to the Nationalists. Cosmopolitan elites are powerful, and shouldn’t go down without a fight.

What is clear is that the strategy of shaming Nationalists and ethnocentrists who say negative things about other groups has its limitations. My grandmother used to quote Dale Carnegie’s now politically incorrect couplet:

A man convinced against his will,

Is of the same opinion still.

Shaming may work to a point, but what is needed now is genuine persuasion about the humanity that we all share, regardless of where on earth we are born.

In addition to such gentle efforts to help people become more accepting of the foreign-born, there is also, in the US, the possibility of an immigrant-voter “nuclear option” for cementing a Cosmopolitan victory—one that works only if Donald Trump goes down in flames and takes the Republican Senate and House majorities down with him. In that situation the Democrats (perhaps with the help of the filibuster-busting “nuclear option”)–could force through a true “amnesty” bill for illegal immigrants, including full naturalization. This would bring millions of additional immigrants onto the voting rolls—the latest in many historical expansions of the franchise.

Back in 1996, historians William Strauss and Neil Howe predicted in The Fourth Turning that the first two decades of the 21st century would bring a political crisis when the senescence of earlier generations finally deprived polarized Baby Boomers of effective adult guidance. Whatever one’s judgment about the overall merits of the Strauss-Howe generational theory, this particular prediction has come true. In such a crisis, it really matters how things get resolved. History is written, by and large, by the victors, so whichever side comes out on top—Nationalists or Cosmopolitans—will look good in the history books.

# Quartz #66—>Japan Should Be Trying Out a Next Generation Monetary Policy

Link to the Column on Quartz

Here is the full text of my 66th Quartz column, “Japan Should Be Trying Out a Next Generation Monetary Policy,” now brought home to supplysideliberal.com. It was first published on September 11, 2015. Links to all my other columns can be found here.

This column was written in conjunction with two other closely related posts that you might want check out as well:

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After twenty years of slow economic growth, Japan’s Sept. 26, 2012 election centered on Shinzo Abe’s promise to shake up monetary policy. Once in office, Abe appointed Haruhiko Kuroda to head the Bank of Japan. In short order, the Bank of Japan went from defending its monetary policy during those two lost decades of slow growth and bragging about the number of different types of assets it was buying to a serious program of quantitative easing on steroids, with a commitment to buying bonds and other securities equal in value to over half of GDP every year.

One of the announced objectives for this massive asset purchase program is to bring inflation quickly up to 2% per year. The idea is that the zero interest rate the Bank of Japan has maintained for a long time would be a more powerful stimulative for the economy if businesses and consumers were comparing it to a higher inflation rate. The logic is similar to the logic driving economists such as Olivier Blanchard, Larry Ball, and Paul Krugman to recommend raising inflation target to 4% in other countries in order to supercharge the stimulative effect of zero interest rates.

The key concept is that of a “real interest rate,” or an interest rate stated in terms of a basket of goods instead of the usual interest rate stated in terms of money.

## Japan is wasting its time trying to raise inflation

Japan may succeed at bringing annual inflation up to 2%; indeed, it has made some real progress toward that goal. But suppose Japan succeeds in getting inflation up to 2%; would that be enough? The US economy has struggled mightily despite the fact that it went into the Great Recession with a 2% annual rate of core inflation. Japan could try to target an even higher rate of inflation, as Blanchard, Ball and Krugman recommend, or Japan could leave behind quantitative easing and higher inflation targets to make the leap to next-generation monetary policy.

The key to next-generation monetary policy is to cut interest rates directly instead of trying to supercharge a zero interest rate by raising inflation. Of course, cutting interest rates below zero pushes them into negative territory. But Switzerland, Denmark, Sweden and the euro zone have already shown that can be done. There is a widespread myth that cutting interest rates much deeper than -0.75% would inevitably cause people and firms to do an end run around those negative interest rates by taking their money out of the banking system as paper currency. Not so!

It is easy to neuter cash taken out of the bank as a way to defeat negative interest rates simply by removing the guarantee that the Bank of Japan will take that cash back at face value. You can find the details of how such a cash-neutralizing policy works here, here and here. This is an idea I have taken on the road that has withstood close examination and grilling by central bankers and economists all over the world. A common reaction is surprise at how easy the practical details are relative to the many much more difficult things central banks already do.

If the guarantee that the Bank of Japan (or other central bank) will always take cash back at face value is removed, it leaves no way to avoid negative interest rates without stimulating the economy. If people take cash out of the bank, store it, and then spend it, that stimulates the economy. If a firm takes a pile of money facing a negative interest rate out of the bank to build a new factory, that stimulates the economy. And even if, say, Japanese households take money that would otherwise earn a negative interest rate out of the bank to buy foreign stocks and bonds, it stimulates the Japanese economy, when excess yen in the hands of the foreigners who sold those stocks and bonds ultimately make their way back to Japan to buy Japanese products, boosting net exports.

Japan is wasting time by trying to raise inflation because it doesn’t need to raise inflation. Raising inflation is an indirect way to get the same effect that can be achieved directly by cutting interest rates. Switzerland, Denmark, Sweden and the euro zone have gingerly dipped their toes in the water of negative interest rates. Japan should go all in.

The alternatives to negative interest rates all have serious downsides. For example, increasing government spending is a bad idea: Japan already has more debt in comparison to its GDP than any other major economy—more than two years worth of GDP. (And saying that the Bank of Japan can just keep buying all that debt ad infinitum should be a last resort.) Worse, Japan has already been down the path of high government spending and has already exhausted most attractive government investment opportunities.

What about ramping up quantitative easing even more? Quantitative easing works in the right direction, but to get the needed effects requires dosages so large that no one knows what side effects it might have. By contrast, economic theory is reasonably clear about how interest rates affect the economy, even when they are negative.

Even if Japan makes the leap to next-generation monetary policy, it will still have serious economic problems. Many economists and politicians argue that monetary stimulus is a distraction from necessary supply-side reforms (often called “structural reforms”).

But it is a lot easier to move workers and capital from low productivity activities to higher productivity activities in a boom, than in a stagnant economy in which people worry about getting the next job or finding the next business opportunity.

Having an economy made worse by monetary policy is not a very reliable aid to jumping over political hurdles to supply-side reform. Instead, a substandard economy due to substandard monetary policy is often a temptation to more government spending and more debt. Japan should fix its monetary policy first, by eliminating any floor on interest rates. Then it can and should face its supply-side problems squarely.

# Quartz #65—>Why Thinking about China is the Key to a Free World

Here is the full text of my 65th Quartz column, “An economist explains why a key to the free world lies with China,” now brought home to supplysideliberal.com. It was first published on July 3, 2015. Links to all my other columns can be found here.

Ori Heffetz pointed out the error of my counting 239 years (“almost a quarter of a millenium”) of freedom in the United States since 1776, since the key date for freedom in the United States can’t be counted any earlier than the adoption of the 13th Amendment to the Constitution on December 18, 1865 abolishing legal slavery in the US. We are coming up on the 150th anniversary of that event later on this year. This actually reinforces my statement in the first sentence of the column that freedom is a rarity in human history. I am leaving this error in the column itself, because it is an instructive error, once pointed out.

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Freedom is a rarity in human history, and still too much of a rarity in the world today. This should be no surprise. Would-be tyrants abound, and it is not easy to establish a system that keeps them all in check. The wonder is that we can celebrate the better part of a quarter of a millennium of freedom in the United States, and comparable freedom in some other lucky countries.

When Dan Benjamin, Ori Heffetz, Nichole Szembrot and I surveyed more than four and a half thousand Americans about what they viewed as the most important objectives for public policy, the top two (of 131 choices) were “freedom from injustice, corruption, and abuse of power in your nation,” and “people having many options and possibilities in their lives and the freedom to choose among them.”

This pairing of responses shows an awareness of the danger to freedom from those who would organize the institutions of a nation to serve the interests of an in-group at the expense of an out-group. At the beginning of the struggle toward freedom, the in-group is very small and the out-group large. At later stages of the struggle toward universal freedom, the in-group will be large and the out-group small. But adding up across the world, it is not at all clear that a majority of the people in the world today can be called truly free.

In international struggles for freedom, the advantage free nations have had in per capita income has helped to keep them from being overwhelmed by a coalition of dictatorships and oligarchies. As Daron Acemoglu and James Robinson argue in Why Nations Fail, the level of economic freedom necessary to enjoy the full benefits of innovation presents a constant danger of undermining the power of those currently in charge. As long as a country is getting up to speed on existing technologies and settled best practices, such dangers can be kept within bounds. But, a small in-group with a toehold on power is loathe to allow a creative adventure into the unknown that could transform the political arena as well as the economy.

The key to the future of freedom in our world is China. Its one-and-a-quarter billion people and high rate of economic growth are the reasons its course is so important to the future:

• In the best case, China may evolve toward full freedom, and the full measure of prosperity possible when no one group manages to obstruct progress in order to cling to power.
• China may descend into a civil war, with advanced weapons on more than one side of that war.
• China may become like Russia under Putin, only more powerful: nominally democratic, but authoritarian and aggressively nationalistic.
• China may continue under the rule of a nominally Communist oligarchy as now, but with economic growth gradually slowing (because of the limits to economic liberalization without political liberalization) so that it stalls out at a GDP per person perhaps 30-40% of that in the US—which would still make the total size of its economy significantly larger than that of the US, simply because China has so many more people.

Thus, over a horizon of two or three decades, China is dangerously unpredictable. The last three possibilities—Chinese civil war, a Chinese Putin, or continued dominance by an oligarchy that attacks freedom as a faulty Western conceit—all represent serious dangers to the progress of freedom in the world, as well as to peace. The imperative of raising the likelihood of full freedom in China means that trying to stand in the way of Chinese economic growth is not the answer. And one should remember Berkeley economist Brad DeLong’s question: “Does it really improve the national security of the United States for schoolchildren in China to be taught that the United States sought to keep them as poor as possible for as long as possible?”

If one rejects the fool’s errand of trying to stunt the economic growth of a dangerously unpredictable China, the best course to protect freedom and relative peace in the world is to make the free world stronger: numerically, economically, militarily, and in the quality of life freedom can be shown to provide. On all of these fronts, I worry about what I see as a lack of seriousness by the leaders and citizens of the free world about meeting the challenge of China.

## Strengthening the free world numerically

Bringing more people into the free world is easier than it sounds. The key is to focus on people, not patches of ground. Although it is hard to bring a patch of ground currently subject to an oppressive regime under free institutions, the economic importance of land—apart from what is on top of the land—continues to decline relative to the importance of people, education and training, ideas and capital. Once one focuses on people, the answer is clear: bring people to where freedom already rules. That is so easy it is hard to do the opposite. Many people in benighted countries seek freedom and the prosperity that full freedom enables. Standing in the way of those hopes, many otherwise free countries make strenuous efforts to keep those people seeking prosperity and freedom out.

The rhetoric is all about those hoping to join the free world taking away the jobs of those already there. Forgotten is the fact that those hoping to join the free world will also serve in the armed forces and pay taxes to support those armed forces, as well as raise children who will invent the technologies that can help us meet the challenge of China economically as well as militarily. (For the record, the only persuasive evidence for immigrants materially hurting the job prospects of those already here is for them hurting the job prospects of other recent immigrants.)

Despite the relative difficulty of bringing nations closer to full freedom, there is important work to be done in that arena—particularly in solidifying and deepening freedom in nations that are well along the road toward freedom, but need to go further. The people in Turkey recently voted decisively against creeping dictatorship. I agree with The Economist in calling for the European Union to move forward with admitting Turkey in order to solidify those gains. And because of the number of people involved, helping India reach its full potential is of crucial importance for the free world.

## Strengthening the free world economically

It is much better to have the democratic tug of war between different groups each looking to get their share of the pie than it is to have one favored group that alone gets its way. But when it comes to strength in a dangerous world, it is the size of the pie that matters most. Economists actually have excellent tools for understanding what it takes to foster economic growth. Monetary policy tools for stabilizing the economy are advancing faster than most people realize.

And although issues of taxation and certain labor market rules continue to be contentious, there is broad agreement among economists about many key measures to foster long-run economic growth: improving education, pouring resources into research and development, and preserving economic freedom: the ability to do new things in new ways without your competitor being able to get the government to stop you. In the area of economic policy, one of the biggest problems is simply the amount of political airtime taken up by a small set of issues that leaves little time to discuss everything else.

## Strengthening the free world militarily

Militarily, one of the free world’s successes is now also a weakness. After World War II, great efforts were made to encourage pacifism in Japan and Germany. Those efforts bore remarkable fruit. Anyone who spends any time in Japan or Germany soon learns how deep pacifism runs in those countries now. Japan’s pacifism only affects its own military efforts, but Germany’s pacifism has contributed to pacifism in the rest of Europe. For the rest of the free world, I would riff on St. Augustine by saying “Make me pacifist, but not yet.” Peace is important, but so is freedom. Let freedom triumph; then we can hope to be able to afford pacifism. In the meanwhile, the pacifism of Japan and Germany means that the rest of the free world needs to shoulder a bigger military burden.

Given numerical and economic strength–fostered by more immigration, education, research and economic freedom–there is no lack of ideas for how to turn technological sophistication and military spending into military strength (with all the frightfulness inherent in military strength). A fascinating article in The Economist details some of these ideas:

• putting a new generation of autonomous drones in the air and under the sea
• lasers and electromagnetic rail guns to protect aircraft carriers against incoming missiles without the huge expense of current anti-missile missiles
• making our own communications and computing networks robust to enemy attack, while going after theirs.

For the free world, the objective of military strength is not war, but deterrence. What all scenarios for China’s future hold in common is that China is likely to behave better if it faces a relatively strong American military than if it faces weakness.

When the free world does well, it is much harder for the unfree world to keep out the winds of freedom. But autocracies use every failure of the free world to argue that autocracy isn’t so bad in comparison. In making the case for freedom, good economic policy in the free world goes a long way. But making sure that the benefits of freedom extend to everyone is also crucial.

Some argue that the way to make sure that the benefits of freedom extend to everyone is to expand government social programs. But the use of government power when it is not necessary is itself an affront to freedom, since people are in effect being told to “get with the program” or be thrown in jail. I don’t think we currently know how to get done what needs to be done with a doctrinaire libertarian approach, but we can edge in that direction. People want to help others who are less fortunate. The only thing that stops them from doing what needs to be done voluntarily is concern about the time and resources that might take away from their own families.

So, as I advocated here in “Yes, There is an Alternative to Austerity vs. Spending: Reinvigorate America’s Nonprofits,” it is enough to use the arm of the government to require more substantial charitable contributions, while giving people wide latitude to decide which particular causes they want to support. This can both assist in things the government is now doing, such as taking care of senior citizens and supporting medical research, and begin to take care of things that should be done, but aren’t. With millions of people each required to do something, but allowed to think and decide for themselves what most needs to be done, the odds that the benefits of freedom and prosperity extend into all the nooks and crannies of society improve dramatically.

Finally, though efforts to measure national well-being in ways that respect the full range of things human beings care about are still in their infancy, there is hope that developing such measures as counterpoints to GDP can guide public policy toward ways of improving the quality of life in nations that use them in unexpected ways. Such measures of national well-being might also be used by autocrats to keep those they rule over just happy enough to forestall rebellion, but those rulers would be faced with this truth: people love freedom, and will never be content for long without it.

# Quartz 64—>Radical Banking: The World Needs New Tools to Fight the Next Recession

Link to the Column on Quartz

Here is the full text of my 64th Quartz column, Radical Banking: The world needs new tools in the fight against the next recession, now brought home to supplysideliberal.com. It was first published on June 25, 2015. Links to all my other columns can be found here.

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The cover of the June 13th Economist magazine trumpets “Watch out: The world is not ready for the next recession.” Within, the cover story explains:

When central banks face their next recession, in other words, they risk having almost no room to boost their economies by cutting interest rates. That would make the next downturn even harder to escape.

The Economist is wrong.

The proof that the Economist is wrong could be heard in a remarkable May 18 conference in London, not far from the Economist’s offices. The conference had an impressive list of co-sponsors–the Brevan Howard Centre for Financial Analysis, the Centre for Economic Policy Research (CEPR), Imperial College Business School, and the Swiss National Bank—who chose the audacious title “Removing the Zero Lower Bound on Interest Rates.” In other words, the conference organizers were announcing at the top of the program to the assembled central bankers, academics, and financial industry participants their belief that any limits on how much interest rates can be cut can be swept away.  That conference was followed by another conference the next day at the Bank of England, with the same theme.

If interest rates can be cut as much as necessary, central banks alone have plenty of firepower to end the next recession, even without any help from fiscal policy. Given the limits to fiscal policy coming from political squabbles and concerns about adding to national debt, monetary policy unhampered by limitations on central banks’ interest rate targets would be good news indeed. For example, if the Fed could have cut interest rates to -4% throughout 2009, the US could have had a robust recovery by the end of 2009 instead of bad economic times dragging on as long as they did.

I spoke at both conferences. The Centre for Economic Policy Research arranged for interviews of several participants at the lunch break of the “Removing the Zero Lower Bound” conference, and did a brilliant job of editing those interviews into videos with high production values. You can see links for all of the interviews here. All of these interviews take negative interest rates very seriously. Collectively, the full set of interviews gives a sense of how much attitudes are shifting.

The three most radical interviews—arguing that there may ultimately be no limits to how low interest rates can go when necessary to bring economic recovery–are with Citigroup’s Chief Economist Willem Buiter

with Martin Andersson, from Sweden’s Ministry of Finance

and with me

The key to unlimited firepower in monetary policy is to deal with the problem of people storing cash. As I describe in my interview, my own approach to avoiding the problem of people storing paper currency to get an interest rate close to zero rather than the intended negative interest rate during a serious downturn is to charge private banks a deposit fee when they turn in cash at the cash window of the central bank for credit in their reserve accounts with the central bank.

Such a charge at the cash window of the central bank closes the loophole that would otherwise allow financial firms to earn a zero interest rate (minus storage costs) by using cash. In this system, regular people who are saving for long periods of time could still in all likelihood earn positive interest rates on bank accounts and a zero rate on cash over longer periods of time, but the ability to earn a zero interest rate from cash would be temporarily suspended during the worst of an economic downturn. As a result, other interest rates could be pushed down as low as necessary to heal the economy.

After these two conferences, I visited the Bank of Finland as well as the central banks of Sweden, Norway and Canada to explain at length my views on how to enable central banks to cut interest rates as much as they think they should, without being stopped short by the problem of paper currency storage. As compared to my visits to central banks before the conference I find the change in attitudes toward the possibility of deep negative interest rates as a result of these conferences has been dramatic.

The Sveriges Riksbank in Sweden already has negative interest rates, and could easily go further.

The Bank of Canada is less likely to need negative interest rates in the immediate future, but already has an “Effective Lower Bound” working group focused on exploring the possibilities for negative interest rate policy in the next recession. After the London conferences, and my extended discussions with them, these central banks are all thinking more seriously about the possibility that the danger of massive paper currency storage in a negative interest rate environment can be averted by appropriate action at the cash window of a central bank.

Introducing new tools for monetary policy is inherently controversial, but recent years have seen important additions to what is seen in most central banks as the acceptable toolkit: the use of quantitative easing (QE) and more recently the use of mild negative interest rates. Modifications to the way paper currency is handled at the cash window of the central bank to make deep negative rates possible could plausibly be the next major addition to the monetary policy toolkit. If so, the world could be better prepared to deal with the next recession than many people expect.

# Quartz #63—>VAT: Help the Poor and Strengthen the Economy by Changing the Way the US Collects Tax

Here is the full text of my 63d Quartz column, “VAT: Help the poor and strengthen the economy by changing the way the US collects tax,” now brought home to supplysideliberal.com. It was first published on June 8, 2015. Links to all my other columns can be found here.

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Despite a hard first quarter, someday soon the US economy may be in a position where it needs people to save more instead of spend more. Economists will start talking about the importance of having people save to provide funds for investment instead of the importance of having people spend to generate enough demand that investment is worthwhile. A few weeks ago, I pointed out in “How Increasing Retirement Saving Could Give America More Balanced Trade” how increasing the saving rate can also raise net exports, in a way that has a long-lasting positive effect on jobs. And I pointed out how a regulation making saving something automatic people have to opt out of, instead of something they have to opt into, could dramatically raise the saving rate.

A change in our tax system could also raise the national saving rate: shifting from taxing income to taxing only the part of income that is consumed, while exempting the part of income that is saved. The clean, well-tested way to tax consumption rather than income is to use a value added tax or VAT.

A VAT tax is like a sales tax on final sales to households that is collected gradually all along the way as goods and services are produced. It is structured so that the buyers in business-to-business transactions are motivated to check that the sellers are paying the tax—which makes it much harder to cheat on than other taxes.

Most rich, well-run countries other than the US use a value added tax. And though it is much harder to compare saving rates accurately across countries than one might think, most of those other countries seem to have higher saving rates than the US. In saying all of this about a VAT tax, I am only repeating the conventional wisdom, which I think in this regard is by and large on target.

But there is another aspect of the conventional wisdom about a VAT tax that I think is totally off target: the idea that a VAT tax hits the poor especially hard. Part of this misconception comes from the simple fact that measuring how progressive or regressive a tax is by the fraction of income paid in taxes at different levels of income is already sneaking in the idea that income is the right basis for taxation—exactly the question that is at issue. Measuring how progressive or regressive a tax is by the fraction of consumption paid in taxes at different levels of consumption would give a different picture.

The other part of this misconception is that typical measures of progressivity or regressivity ignore the other side of the ledger: the government assistance that people are given at different levels of income or consumption. Ignoring that side of the ledger slips in an assumption about how government assistance would be affected by a VAT tax that seems wrong to me. (Here I am counting Social Security and Medicare as government assistance since people don’t have individual Social Security or Medicare accounts and the government can change the level of benefits at any time.)

To think about how taxing consumption taxes rich and poor consider this question: “Who can afford to spend more than they earn from their job?” People who absolutely can’t afford a given level of spending will ultimately fall so deeply in debt that outside forces will stop them from spending so much. So they may pay more taxes on their consumption now, but will pay fewer taxes later. So it is the consumption people can afford that matters for consumption taxes over the long haul.

There are two basic ways you and your immediate family might be able to afford to spend more than you earn from jobs: have a pile of your own wealth to draw on for consumption or have someone else give you money to spend. Other things equal, having a pile of your own wealth to draw on for consumption makes you richer; so that side of things makes a consumption tax–such as a VAT–progressive. If someone else is giving you money to spend when you don’t really need it, that counts as being rich in a spongeing sort of way. Or to put it better, although ignoble, the ability to convince other people to let you sponge off of them is its own form of wealth.

On the other hand, if someone is giving you money to spend because you really do need it, they should realize that the amount of money you need has to be grossed up enough to get the same amount of goods and services even after paying the VAT. In particular, if the someone giving you money to spend is the taxpayer, through the government, whatever dire need motivated the taxpayer to help you out is a need for a given amount of goods and services, and the dollar value of the government assistance should of course be grossed up enough to buy the same amount of goods and services even after paying for the VAT. Since consumer price indices are usually calculated including VAT taxes, this could happen through the standard process of cost-of-living adjustments.

Notice that the government receives the VAT taxes paid on goods purchased with money from government assistance. So grossing up the government assistance to pay the VAT tax is just shuffling money from one government account to another and isn’t an unsustainable drain on the government budget.

Of course, the shift to a VAT tax could be used as an excuse to cut the amount of goods and services provided as government assistance. That would be regressive. But analytically that should be considered a shift to a VAT tax in the more neutral assistance-preserving way described above plus a cut in government assistance. The VAT tax itself should not be blamed for this effective cut in government assistance. But in the flawed accounting all too often used, the VAT tax is blamed for this unmotivated and far from inevitable cut in the effective level of government assistance.

What I have laid out is not the end of the story; there are many other issues in the transition to a value-added tax—for example, while lowering income taxes on 401(k) distributions would keep those who saved that way under the old tax system whole, something needs to be done to honor at least in spirit the promise to those who saved in a Roth plan that after paying taxes on that saving up front, they wouldn’t be taxed later on. But the basic story is that a value-added tax is progressive when the accounting is done right and the shift to a VAT tax is not used as an unwarranted excuse to cut the effective level of government assistance. This shouldn’t really come as any surprise, since governments in many countries that intend to do a lot more redistribution than the US use a value-added tax.

# Quartz #62—>How Increasing Retirement Saving Could Give America More Balanced Trade

Link to the Column on Quartz

Here is the full text of my 62d Quartz column, “The TPP would be great for America if Americans had been saving for retirement,” now brought home to supplysideliberal.com. It was first published on May 14, 2015. Links to all my other columns can be found here.

In the column, I write:

Using back-of-the-envelope calculations based on the effects estimated in this research, they agreed that requiring all firms to automatically enroll all employees in a 401(k) with a default contribution rate of 8% could increase the national saving rate on the order of 2 or 3 percent of GDP.

Here is a rough idea of the kind of simple calculation that could back that claim up:

• Suppose current 401(k)’s give only one-quarter or less of the amount of saving if everyone had an 8% contribution rate–partly because many people aren’t covered at all. Then if no one opted out, the new regulation would add 6% to saving as a fraction of labor income. Multiply that by 2/3 for labor’s share, that is 4% more of GDP if no one opted out. Then the opt-out assumption is that 25% to 50% of people opt out.

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It is no accident that US president Barack Obama asked for fast track trade promotion authority after he had faced his last election. Free trade is good for economic growth. Economic theory predicts that the value to consumers, workers and owners of firms gained from free trade outweighs the value lost. So why do so many politicians see free trade as toxic politically?

Yet despite all these factors, I wonder if many who think of themselves as opposing free trade are really opposed to trade deficits. Let me speak as if the home country at issue is the US, but a similar question can be asked for many countries. How many people would be against free trade if it were balanced trade in which people and firms in other countries buy just as much from Americans as Americans buy from them?

If trade were balanced, it would mean that every dollar of imports would be balanced by a dollar of exports. Intuitively, freer trade means that people in the US can do more of what they are best at and less of what they are worst at—but with this subtlety: in producing goods and services people in the US are better at almost everything than people in other countries. So to have balanced trade, out of all the things people in the US are better at, some at the bottom of the list of US advantage (whether in ability to produce quantity or to produce quality) have to be imported in order to give people in other countries the US dollars they need to buy the things near the top of the list of US absolute advantage.

All of this gets thrown off when trade is not balanced. How can that happen? To simplify, when Americans buy Chinese goods with borrowed Chinese yuan, while the Chinese people and the Chinese government save the US dollars they get instead of spending them on American goods, and Americans follow the same pattern with many other countries, then the US will run a trade deficit. Running a chronic trade deficit results in less employment in a way that goes beyond the business cycle.

What is the remedy for unbalanced trade? It isn’t trade restrictions. Regardless of trade restrictions, as long as Americans are borrowing more from other countries than they are borrowing from us, the simple fact that they are directly or indirectly (when doing the foreign exchange transaction) handing Americans their currency when they lend guarantees that one way or another Americans will end up spending more on foreign goods and services than the other way around. Thus, the equation is that if you borrow from foreigners, you will buy more from foreigners than they will from you. (I explain this principle more on my blog.)

For a country running a trade deficit as the US is, given open financial markets, the only way to get to more balanced trade is for the American people, American firms or the US government to save more, or for Americans to shift their net financial investments toward lending to foreigners.

It might seem that it would be hard to raise the US saving rate given the limited success of past attempts. But the conjunction of psychology and economics has identified a powerful and underappreciated lever for raising saving, waiting to be used. In remarkable research initiated by Brigitte Madrian (now a professor at Harvard’s Kennedy school) and continued with the help of many coauthors, it has been found that when people are automatically enrolled in 401(k)’s, they save a lot more than when they have to actively set up 401(k) contributions themselves. Some people opt out of doing that extra saving, but many don’t.

I talked to Madrian and David Laibson, the incoming chair of Harvard’s Economics Department (who has worked with her on studying the effects of automatic enrollment) on the sidelines of a Consumer Financial Protection Bureau research conference last week. Using back-of-the-envelope calculations based on the effects estimated in this research, they agreed that requiring all firms to automatically enroll all employees in a 401(k) with a default contribution rate of 8% could increase the national saving rate on the order of 2 or 3 percent of GDP.

The regulation I am talking about would not require any change to the rate at which firms match their employee’s contributions. One of the biggest benefits would be helping people arrive at retirement well prepared financially. But it would also have a major effect on the US trade balance. If the US ran smaller trade deficits, employment would go up beyond any particular business cycle. If Americans were saving too much and had too many available jobs tempting them to work too much, that wouldn’t be a good thing for them. But right now, in this economy, more jobs and more savings are appropriate, so it would help them.

Automatic enrollment in retirement savings plans is so powerful that some economists will worry that its spread will help exacerbate a global glut of saving. But if paper currency policy gets out of the way of the appropriate interest rate adjustments, financial markets will find the appropriate equilibrium. They will balance the supply and demand for saving, and companies will realize the extent to which an abundance of saving makes available the funds they need to dream big by creating new markets and technologies that the future of America depends on.

# Quartz #61—>However Low Interest Rates Might Go, the IRS Will Never Act Like a Bank

Link to the Column on Quartz

Here is the full text of my 61st Quartz column, coauthored with my brother Christian Kimball: “However low interest rates might go, the IRS will never act like a bank.” It is now brought home to supplysideliberal.com. It was first published on April 15, 2015. Links to all my other columns can be found here.

Chris has appeared before on supplysideliberal.com. For example, see

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© April 15, 2015: Christian Kimball and Miles Kimball, as first published on Quartz. Used by permission according to a temporary nonexclusive license expiring June 30, 2017. All rights reserved.

A revolution has come to Europe–the revolution of negative interest rates. 10-year Swiss government bonds now have a negative yield. Short-term funds kept at the Swiss National Bank now pay -.75%: that is, private banks have to pay .75% per year to the Swiss National Bank to tend their Swiss francs. Denmark now pays -.75% for short-term funds while Sweden is at -.25% and the Eurozone is at -.2%. How low can interest rates go?

Ben Bernanke has started a blog, now that (in his words) he is free from “being put under the microscope by Fed watchers.” In the first few posts, he got into a debate with Larry Summers about what it means that interest rates are so low. Paul Krugman joined in with his own post “Liquidity Traps, Local and Global.” These three—a former Fed Chairman, a brilliant former Treasury Secretary, and a prolific Nobel laureate New York Times columnist, and without question three of the most famous economists in the world—are unanimous in writing that interest rates cannot go much lower than where Europe is now. Ben Bernanke writes:

The Fed cannot reduce market (nominal) interest rates below zero, and consequently—assuming it maintains its current 2% target for inflation—cannot reduce real interest rates (the market interest rate less inflation) below -2%. (I’ll ignore here the possibility that monetary tools like quantitative easing or slightly negative official interest rates might allow the Fed to get the real rate a bit below -2%.)

Larry Summers similarly writes as if there were some law of nature preventing interest rates from falling very far below zero: “The most obvious answer is that short term interest rates can’t fall below zero (or some bound close to zero) and this inhibits full adjustment.” And Paul Krugman stipulates the same presumption in technical jargon, speaking of a “liquidity trap” and a “zero lower bound.”

Every one of them knows better.

## Interest rates can go as low as needed

What prevents interest rates from falling much below zero is not an immutable law of nature but an artifact of the way we handle paper currency. If we change our paper currency policy, interest rates can go as low as needed to bring economic recovery after an adverse shock throws the economy into a serious recession. Under our current paper currency policy, paper currency earns an interest rate of zero. As long as that is the case, it is hard to get any lender to accept an interest rate much below zero. But having paper currency earn an interest rate of zero is a policy choice, not a law of nature. As long as the paper currency interest rate is lowered along with other interest rates, the only limit to how low interest rates can go is the economic expansion that low interest rates would stimulate—an expansion that would then raise interest rates by increasing the demand for loans.

The reason that Ben Bernanke, Larry Summers and Paul Krugman talk as if the paper currency policy is immutable is that economists have known for over a century how to make interest rates on paper currency, but no nation has yet implemented negative interest rates on paper currency. Thus, many economists have become discouraged, thinking that the policy will never be broken. Ben Bernanke, Larry Summer and Paul Krugman all have written at length about the damage that this zero lower bound on paper currency can cause—most recently in making recovery from the Great Recession such an agonizingly slow process. But they have given up too easily in accepting zero as a limit.

Other economists, now notably including Harvard economist Kenneth Rogoff (who has become famous in part for his now controversial work with Carmen Reinhart on the effects of national debt on growth) see an eventual victory over the zero lower bound when paper currency is entirely supplanted by credit cards, debit cards and other forms of electronic transactions.

What many don’t realize is that a plan due to Willem Buiter, Chief Economist of Citigroup (and foreshadowed by Robert Eisler in 1932) to generate negative interest rates on paper currency can be implemented in a matter of weeks rather than decades. Miles, on his blog and in presentations to central banks around the world, has explained the nuts and bolts of how to implement this plan. The key is to charge private banks a paper currency deposit fee when they bring paper currency to the cash window of the central bank (returning that fee at the current going rate when a bank takes paper currency back out). The fee needs to gradually increase during the time when interest rates are negative, but can gradually shrink back to zero when interest rates are positive again. During the period the fee is gradually increasing, this effectively gives a negative interest rate on paper currency to any bank or other financial firm that withdraws paper currency, stores it and then redeposits that cash.

Among the economists who take a paper currency deposit fee seriously as a way to break through the zero lower bound are many in central banks around the world. Of the many indications of this, one that we have permission to talk about publicly is that the Bank of England, which was the first to host Miles for a seminar on “Breaking Through the Zero Lower Bound” in May 2013, has invited him back to give a keynote speech on that topic to the Chief Economists’ Workshop on the future of money, on May 19.

Another important mark of how seriously economists are taking this possibility of a change in the current paper currency policy are the arguments by University of Chicago Finance Professor John Cochrane that a change in paper currency policy alone is not enough to allow deep negative interest rates, in his blog post “Cancel currency?” (followed up by “More Cash and Zero Bound.”)

Cochrane was inspired to blog on this topic by Rogoff’s discussion of the possibility of eliminating paper currency entirely. His discussion of the disadvantages of eliminating paper currency entirely is only directly relevant to that extreme proposal, but much of what he says about our current paper currency policy is also relevant to the policy of generating a negative interest rate on paper currency through a paper currency deposit fee that gradually changes over time.

Cochrane gives this list of ways to effectively earn an interest rate of zero even if paper currency, along with money in the bank is earning a negative interest rate. His examples are:

• Prepay taxes. The IRS allows you to pay as much as you want now, against future taxes.
• Gift cards. At a negative 10% rate, I can invest in about $10,000 of Peets’ coffee cards alone. There is now apparently a hot secondary market in gift cards, so large values and resale could take off. • Likewise, stored value cards, subway cards, stamps. Subway cards are anonymous so you could resell them. • Prepay bills. Send$10,000 to the gas company, electric company, phone company.
• Prepay rent or mortgage payments.
• Businesses: prepay suppliers and leases. Prepay wages, or at least pre-fund benefits that workers must stay employed to earn.

## It’s not easy to get a guaranteed zero interest rate

Of this list, we take the first—prepaying taxes—very seriously; more on that below. But for all the rest, the counterargument to Cochrane is simple: although private firms are happy to offer a zero interest rate while interest rates in general are higher than zero, they would stop giving that kind of deal if interest rates in general were negative. They would have to carry the freight of the negative interest rate every time they let a customer put in a given dollar value of money now, to get back the same dollar value later. If they did give someone a zero interest rate when interest rates in general were negative, we predict it would typically be some sort of promotion to get people to do something else that added to the businesses’ bottom line. People who had already purchased gift cards, or had a contract that implicitly specified a zero interest rate before the business knew interest rates would turn negative would benefit from those favorable preexisting arrangements, but the businesses wouldn’t give them that deal again.

JP Koning is one of the best bloggers out there on the nature and workings of money. In his post “Does the Zero Lower Bound Exist Thanks to the Government’s Paper Currency Monopoly?” he argues along these lines, in effect, that the zero lower bound is a creation of government, because no other organization but government has both the deep pockets and the willingness to run a loss. JP also chimes in in the comment section of Cochrane’s post explaining why gold doesn’t provide a way to escape negative interest rates, and pointing out that business customs can adapt to new situations. He writes:

No, gold won’t allow a zero riskless nominal return. The moment negative rates are put into place the price of gold will spike to level at which it would be expected to decline at a rate equal to the negative interest rate. You’re still penalized.

I’m also underwhelmed by your claim that our legal and financial system deeply enshrines the right to pay early. It also enshrines the right for contracts to require people to pay penalties for early payment. Take for instance prepayment penalties on mortgages or auto loans. A ‘legal revolution’ as you refer to it isn’t required… the laws already exist.

What JP Koning says about gold is true for any asset that can change in price according to market pressures. The only reason that paper currency as it is handled now creates a zero lower bound floor under interest rates is because central banks currently guarantee that a paper dollar will stay at par relative to dollars in the bank. Take away or modify that guarantee through a paper currency deposit fee that changes over time, and interest rates can go as low as needed.

In general, the place to look for things that could put an effective floor under interest rates is the same place one would look for something that could put an effective floor under, say, milk prices: some kind of government guarantee. In Japan, for example, the post office acts as a bank, and a zero interest rate on funds in this government-run bank could act as a floor under interest rates.

The question that Cochrane raises is whether a tax authority like the IRS can be used if it were a government bank offering a zero interest rate on deposits.

## The IRS is not a bank

In confronting the question of whether to IRS in particular can be used as if it were a government bank offering a zero interest rate, it helps to be a US tax lawyer used to dealing with complex tax questions, as Chris is. There are two key points:

1. The tax code actually has several interest rates, including an overpayment rate, an underpayment rate, and zero. The non-zero rates are a function of Federal short-term borrowing rates and while it has never happened, there is no obvious reason that they could not be negative.
2. The IRS is not a bank with in-and-out privileges. Paying taxes is easy. Getting money back is possible but complicated and uncertain as to time and interest rate.

Underpayment and overpayment rates are defined as the “Federal short-term rate” rounded plus an adjustment (3 percentage points in general, but more or less in specific circumstances, including 0.5 percentage point for large corporate overpayments and 5 percentage points for large corporate underpayments). The Federal short-term rate is determined month by month, and is defined by statute as:

[T]he rate determined by the Secretary based on the average market yield (during any 1-month period selected by the Secretary and ending in the calendar month in which the determination is made) on outstanding marketable obligations of the United States with remaining periods to maturity of 3 years or less.

Translated, this says that if the 3-month Treasury bill rate were negative, the Secretary of the Treasury could declare a negative Federal short-term rate. While an effective zero interest rate would apply to prepayments of taxes, overpayments of taxes could be returned after application of the overpayment rate—which could be negative. Alternatively, an overpayment might be characterized as a deposit. When a deposit is returned, it can be returned dollar for dollar, or with interest, depending on the circumstances. Although it is hard to predict what the IRS would do, in a negative interest rate environment it would be reasonable to expect the IRS to apply a negative interest rate to deposits related to disputed taxes, and to return other amounts quickly, effectively rejecting any deposit not related to a dispute.

In a negative interest rate environment, a taxpayer might want a zero interest rate through a dollar-for-dollar refund or return. The problem is that a taxpayer cannot confidently control how a prepayment or deposit is characterized, and cannot confidently control the timing of a refund or return. To the extent of an actual tax liability, or an actively disputed tax liability, and arguably even a near-term predictable tax liability, money sent to the IRS that is ultimately returned will probably be returned subject to the (possibly negative) overpayment rate. On the other hand, amounts in excess of tax liability (current, disputed, near-term predictable) don’t have an obvious category.

In a positive interest rate environment, taxpayers and the IRS may treat such amounts as zero-rated deposits (and so taxpayers generally are disinclined to make them). In a negative interest rate environment the IRS may simply reject such amounts as not having anything to do with taxes (and so taxpayers generally should be disinclined to make them).

The IRS also largely controls the timing of when a taxpayer gets the money from an overpayment or a deposit. The IRS could decide to return funds immediately upon request, or to return funds significantly later, and could make that decision differently depending on the applicable interest rate. In all this uncertainty, if the IRS takes a position that the taxpayer doesn’t like, e.g., that a negative rate applies, or that the remittance is rejected, or that a deposit will be returned immediately or will be delayed, there may be arguments in some particular cases that the IRS is wrong. However, that probably gets sorted out in court, in a case that could take years to resolve. If the negative interest rate situation only lasts a year or two, even a taxpayer victorious in court (something far from guaranteed) might not get the money back at a zero interest rate until interest rates had been positive again for long enough that a zero interest rate still wouldn’t be as good as what the taxpayer could have earned in the bank.

In short, the IRS is not bank. There are circumstances where money comes back from the IRS, but the effective interest rate might be positive or negative or zero, the taxpayer cannot strictly control or predict the interest rate, and the taxpayer cannot strictly control the timing of refund or repayment. The IRS would be a formidable adversary to someone trying to force it to be a bank when it didn’t want to be. This amount of uncertainty makes it very difficult to arbitrage interest rates against the government through the IRS.

The one concession that is clearly available in the tax law is that prepayment of taxes does have the effect of a zero interest rate. Formally, this may be as much as a one-year opportunity, but after taking account of payroll withholding and estimated tax payment requirements, the most a typical taxpayer could shift the timing of tax payments is only a quarter or two. Because that option is limited in quantity, and not available for unlimited arbitrage, it cannot put a floor under market interest rates. What it does do is provide a welcome shield against negative interest rates up to a reasonable amount of savings for people who are willing to save by paying their taxes early in the year.

We view this as a positive thing for the politics of negative interest rates; the option of prepaying taxes can help protect the diligent small-time savers who would be distressed by negative interest rates. Earlier payment of taxes in a recession combatted by negative interest rates would also partially smooth out the usual effect recessions have of temporarily worsening the government budget deficit.

As for long-term savers, they can always guard against the possibility of negative interest rates by buying long-term bonds that lock-in interest rates at current market levels, which at worst are currently only a little negative. And the monetary stimulus of negative interest rates is likely to soon bring even short-term interest rates back up once an economy is fully back on its feet.

## Where do we go from here?

Right now, Europe is leading the charge toward lower interest rates. With the knowledge of how to prevent paper currency from putting a floor under interest rates in hand, there is no limit to how low their interest rates can go other than the self-limiting effect of low interest rates in spurring economic growth.

What about the US? Currently, the talk is all about when the Fed will raise interest rates above zero, not when it will go negative. But one thing could change that: the effect of Europe’s negative interest rates on value of the US dollar. The dollar has been appreciating in the last few months, as low interest rates in Europe encourage investors to send their funds to the US. The higher dollar is seen as one of the key things that slowed down the US economy in the first three months of this year by making it more expensive for people in other countries to buy US goods. If Europe pushes its interest rates further down, the Fed may need to do more than just delay when it raises interest rates—it may need to cut rates below zero to keep the US economy on an even keel.

Even if interest rates at the bank become negative, regular taxpayers may be able to keep a portion of their money from shrinking by prepaying fixed obligations, including taxes. But that won’t keep negative interest rates from prevailing in the economy generally, so long as the Fed changes its paper currency policy so that an effective negative interest rate on paper currency opens the way for the Fed to lower other rates (especially its target rate and the interest rate it pays banks).

The fact that the tax system does not allow unlimited interest-rate arbitrage to block negative interest rates across the board is a good thing: low and even negative interest rates and the stimulus they provide are one of the best defenses the US has against falling back into recession when we have so recently escaped the after-effects of the last recession.

# Quartz #60—>The Coming Transformation of Education: Degrees Won’t Matter Anymore, Skills Will

Link to the Column on Quartz

Here is the full text of my 60th Quartz column, “Degrees don’t matter anymore: skills do,” now brought home to supplysideliberal.com. It was first published on February 9, 2015. Links to all my other columns can be found here.

Although I think the provocative title on Quartz helped get people to notice the column, I have what I think is a more accurate title above. This is my 2d most popular column ever. You can see the full list in order of popularity here.

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If I were to make a nomination for the most destructive belief in our culture, it would be the belief that some people are born smart and others are born dumb. This belief is not only badly off target as a shorthand description of reality, it is the source of many social pathologies and lost opportunities. For example:

Too much of our educational system, both at the K-12 level and in higher education, is built around the idea that some students are smart and others are dumb. One shining exception are the “Knowledge is Power Program” or KIPP schools. In my blog post “Magic Ingredient 1: More K-12 School” I gave this simple description of the main strategy behind KIPP schools, which do a brilliant job, even for kids from very poor backgrounds:

1. They motivate students by convincing them they can succeed and have a better life through working hard in school.
2. They keep order, so the students are not distracted from learning.
3. They have the students study hard for many long hours, with a long school day, a long school week (some school on Saturdays), and a long school year (school during the summer).

A famous experiment by Harvard psychology professor Robert Rosenthal back in 1964 told teachers that certain students, chosen at random, were about to have a growth spurt—in their IQ. These kids did wind up having their IQ grow faster than the other kids. If we had an educational system that expected all kids to succeed, and gave them the kind of extra encouragement that those teachers unconsciously gave the kids they expected to do well, then kids in general would learn more.

Kids whose teachers had low expectations can expect more typecasting in college. Too many majors fall into one of two categories: (a) majors in which there is no easy way to tell whether a student has mastered any skills that will help get a job or make life richer, or (b) majors designed to weed out all the slow learners and only try to teach the students who catch on quickly. Behind the practice of weeding out slow learners is the misconception that a slow learner is a bad learner, when in fact a slow learner who puts in the time necessary to learn often ends up with a deeper understanding than the fast learner.

The good news is that a total transformation of education is coming, whether the educational establishment likes it or not. I draw my account of this transformation of education from two prophetic books by Harvard Business School professor Clay Christensen and his co-authors:

• Disrupting Class: How Disruptive Innovation Will Change the Way the World Learns by Clay Christensen, Curtis Johnson and Michael Horn
• The Innovative University: Changing the DNA of Higher Education from the Inside Out by Clay Christensen and Henry J. Eyring.

The road ahead is clear: the potential in each student can be unlocked by combining the power of computers, software, and the internet with the human touch of a teacher-as-coach to motivate that student to work hard at learning. Technology brings several elements to the equation:

But since motivation—the desire to learn—is so important, a human teacher to act as coach is also crucial. In particular, without a coach, the flexibility for students to learn at their own pace can be a two-edged sword, because it makes it easy to procrastinate.

In the end, none of this will be hard. The technology and content for that technology are already good and rapidly improving. And although it is a bit much to expect someone to be both a great and inspirational coach and to be at the cutting edge of an academic field, the number of great athletic coaches and trainers at all levels indicates that, on its own, being an inspirational coach is not that rare. Being an inspirational coach in an academic setting is not quite the same thing, but I am willing to bet that it, too, is blessedly common. By having the cutting-edge knowledge from the best scientists and savants in the world built into software and delivered in online lectures, all a community college has to do to deliver a world-class education is to hire teachers who know how to motivate students.

Similarly, at the K-12 level, it is easier to find teachers who will be inspirational if those teachers can connect each student with expertly designed software customized for each student’s learning style. And teachers will be able to encourage each student to dig deeper into some particular interest that student has—well beyond the teacher’s own knowledge. Yet the teachers themselves will end up knowing a lot—much more than they learned in college themselves, simply from working alongside the students.

But what about all the forces arrayed against educational reform? Though they have won over and over in the past, those reactionary forces will be overwhelmed by these new possibilities. They will be like the corporate information technology department trying to stop workers from downloading unapproved, but inexpensive software on their own to get the job done.

The day is not far off (some would argue it is already here), when any parent who has the inclination to be a learning coach can team up with inexpensive online tools to give his or her child an education that is 20% better (say as measured by standardized test scores achieved) than what that child would get in the regular schools. It is hard to start a new charter school, and harder still to change a whole school district. But when an individual family can opt out, it is no longer David vs. Goliath in a duel to the death, but David leaving Goliath behind in the dust in a foot race. In the end, I think organized institutions can do a better job at teaching than parents on their own—but only if those institutions do things right. The ability of individual families to opt out will force most schools to get with the program, or lose a large share of their students.

None of this will happen instantly. In K-12, some states already have a strong tradition of educational reform, and will jump-start these changes. In other states, the forces arrayed against reform will be able to hold back progress for quite some time, by fighting tooth and nail against it. Rich, educated parents may help their kids tap into the new educational possibilities more quickly than poor parents who aren’t as attuned to education. But when performance gaps open wide enough, education in the laggard states will come around, by popular demand. And the scandal of ever more substandard education for the poor will encourage efforts by concerned citizens toward solutions empowered by the new learning technologies.

In higher education, students voting with their feet will make schools at the bottom of the heap change or die. Many of the most prestigious colleges and universities will resist change much longer, but some will embrace the “flipped classroom” model of doing everything online that can effectively be done online, and doing in the classroom only those things for which face-to-face interaction is crucial. And when some of the prestigious colleges and universities embrace the new methods, those colleges and universities will move ahead in the rankings as a result. The rest will ultimately follow.

There is one other force that will propel the transformation of education: a shift from credentials to certification. In most of the current system, the emphasis is diplomas and degrees—credentials saying a student has been sitting in class so many hours, while paying enough attention and cramming enough not to do too much worse than the other students on the exams. More and more, employers are going to want to see some proof that a potential employee has actually gained particular skills. So certificates that can credibly attest to someone’s ability to write computer code, write a decent essay, use a spreadsheet, or give a persuasive speech are going to be worth more and more. And any training program that takes the need to maintain its own credibility seriously can help students gain those skills and certify them for employers in a way that bypasses the existing educational establishment. Just witness the current popularity of “coding bootcamps.” That model can work for many other skills as well. For many students, that kind of certification of specific skills is a very attractive alternative to a two-year degree.

When this transformation of education is complete, K-12 education will cost about the same as it does now, but will be two or three times as effective. College education will not only be much more effective than it is now, it will also be much cheaper. There will still be a few expensive elite colleges and universities–these schools are not just providing an education, they are selling social status, and the opportunity to rub shoulders with celebrity professors. But less elite colleges and universities will find it hard to compete with the cheaper alternative of community college professor as coach for computerized learning. So the problem of college costs will be a thing of the past for anyone focused on learning, as opposed to social status.  (Of course, if lower college costs are one side of the coin, lower college revenue is the other side. College professors as a whole are likely to have a lower position in the income distribution in the future than in the recent past, with premium salaries limited to a shrinking group of well-paid academic stars.)

Florida State University Psychology Professor K. Anders Ericsson studies expert performance, whether in sports, art, or academic pursuits. His research shows that ordinary people with extraordinary motivation can achieve remarkable performance through a pattern of arduous work and study called deliberate practice. By bringing computers and computer networks in to help with the other aspects of teaching, our society will be able to afford to focus on instilling in students that kind of extraordinary motivation. When that happens, the world will never be the same again.

# Quartz #59—>Swiss Pioneers! The Swiss as the Vanguard for Negative Interest Rates

Link to the Column on Quartz

Here is the full text of my 59th Quartz column, “Swiss pioneers! What unpegging the franc from the euro means for the US dollar,” brought home to supplysideliberal.com. It was first published on January 16, 2015. Links to all my other columns can be found here.

This column is a follow-up to “The Swiss National Bank Means Business with Its Negative Rates." Thanks to Mark Fontana for letting me know in real time about the Swiss National Bank’s actions. Note that since I wrote this column, Denmark’s central bank has lowered its certificate of deposit rate to -.75%. I doubt they would have done that at this point without the example of the Swiss National Bank in going down to -.75% for the interest on reserves.

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The Swiss National Bank’s dismantling of its ceiling on the value of the Swiss franc yesterday stunned the financial world. Jim Armitage and Russell Lynch of the Independent called the ensuing jump up in the value of the Swiss franc an earthquake; Social media called it “Francogeddon;” while the CEO of Swatch, Nick Hayek, called it “a tsunami for the export industry and for tourism, and finally for the entire country.” Thomas Jordan, the head of the Swiss National Bank, explained, “If you decide to exit such a policy, you have to take the markets by surprise.”

At points during the day yesterday, the Swiss franc was as much as 39% more expensive relative to the euro and the US dollar than it had been the day before. Exchange rate movements have yet to settle down, but seem to be headed for something closer to a 15%-25% increase in the value of the Swiss franc.

In my Dec. 19, 2014 column “The Swiss are now at a negative interest rate due to the Russian ruble collapse” I made three predictions. On one, I was spectacularly wrong. On the second, I was exactly on target. As for the third, its time has not yet come, but will.

When I wrote “no one should underestimate the Swiss National Bank when it says that it will do whatever it takes to keep its exchange rate at 0.833 euros per Swiss franc” I badly underestimated the speed of events. On top of the continuing crisis of the Russian ruble, the financial markets’ belief that the ECB will soon begin serious quantitative easing to lower yields in the eurozone is now also steering investors toward Swiss assets. And buying Swiss assets requires buying Swiss francs. So there is a scramble to get hold of Swiss francs, even at a premium.

The Swiss National Bank decided it was a fool’s game to fight this: keeping the ceiling on the Swiss franc’s price longer would have meant the Swiss National Bank taking bigger losses. As it is, the Swiss National Bank lost on the order of 60 billion Swiss francs (equivalent to about $68 billion in US dollars) when yesterday’s exchange rate movements made its foreign asset holdings worth that much less in terms of Swiss francs. But events have borne out my second prediction: that the Swiss National Bank would move toward deeper negative interest rates. The SNB’s new interest rate for banks keeping money in an account at the SNB is now down to -0.75 % per year. That is three-quarters of a percent below zero. By comparison, the European Central Bank is still at -0.2% per year, or only a fifth of a percent below zero. My third prediction was that the Swiss National Bank is prepared, if needed, to push interest rates lower still—beyond the -0.75% they are at now. In a bit of hyperbole, Hans Guenther-Redeker said in a Bloomberg interview that if the Swiss National Bank pushed interest rates down to -2%, “You have to make a bank depositor to pay for the services of the bank—or for the luxury of having a deposit with the bank. That is going to turn capitalism upside down.” Swiss National Bank interest rates at -2% now look much more likely to happen. If the Swiss National Bank does lower interest rates to -2%, capitalism will adjust, and the Swiss economy will get stimulus it badly needs. Besides lowering interest rates, the other main option the Swiss National Bank has to keep the Swiss economy from sputtering is to push the Swiss franc down relative to the US dollar, now that the SNB has given up pushing the Swiss franc down so hard relative to the euro. But it will have to buy huge amounts of dollar assets to have much of an effect on the Swiss franc/dollar exchange rate if it doesn’t use interest rate cuts to help make the Swiss franc cheaper relative to the US dollar. I am betting that, going forward, interest rate policy will be the linchpin for the Swiss National Bank rather than exchange rate interventions. What the Swiss National Bank knows that many financial market observers have not yet figured out is this: other than an economy that starts to boom and risk overheating from lower interest rates, there is no limit to how far a central bank can cut interest rates, as long as it cuts the interest rate on paper currency along with other interest rates. As I explained to an attentive audience at the Swiss National Bank on July 15, 2014, in a negative interest rate environment, all that is needed to bring the rate of return on paper currency down in line with the other interest rates a central bank controls is to introduce, and for a time gradually increase, the size of a paper currency deposit fee when private banks come to deposit paper currency at the cash window of the central bank. Then, once a robust economy leads to positive interest rates again, the paper currency deposit fee at the central bank’s cash window can be gradually reduced back to zero, until the next time that negative interest rates are needed to keep the economy on track. (You can find all the details here.) Although lowering the paper currency interest rate in tandem with other interest rates avoids the massive paper currency storage that would otherwise be a serious side effect of deep negative rates, there is no question that negative interest rates will require many detailed adjustments in how banks and other financial firms conduct their business. Like it or not, Swiss banks and the rest of the Swiss financial industry may be forced to lead the way in figuring out these adjustments, just as the Swiss National Bank is leading the way in figuring out how to conduct negative interest rate policy. The Swiss are eminently qualified for that pioneering role. The rest of the world would be well-advised to watch closely. # Quartz #58—>How Big is the Sexism Problem in Economics? Link to the Column on Quartz Here is the full text of my 58th Quartz column, “How big is the sexism problem in economics? This article’s co-author is anonymous because of it,” now brought home to supplysideliberal.com. It is coauthored with an anonymous female economist, with whom I have had many interesting discussions since the column was published as well as in the process of writing it. It was first published on January 6, 2015. Links to all my other columns can be found here. I regret that my coauthor still feels she needs to remain anonymous. But I understand that a bit better now, after seeing the heat of some of the discussion surrounding this column. At this writing, this is my 6th most popular Quartz column ever. You can see a list of my most popular columns here. We want these ideas to get out there. So if you want to mirror the content of this post on another site or make printouts, that is possible for a limited time if you read the legal notice at this link and include both a link to the original Quartz column and the following copyright notice: © January 6, 2015: Miles Kimball and Anonymous, as first published on Quartz. Used by permission according to a temporary nonexclusive license expiring June 30, 2017. All rights reserved. The Economist’s recent list of the 25 most influential economists did not include a single woman. Many male former central bankers and regional Federal Reserve Bank governors were included on the list, but the Economist gave itself a special rule to exclude active central bankers, which meant that Janet Yellen—arguably the world’s most influential economist—didn’t make the list. University of Michigan Professor and New York Times columnist Justin Wolfers responded with a tweeted list of influential women economists. You can read his whole tweetstorm on Twitter Why are top-notch female economists not being taken seriously? Why are they having trouble being recognized for their contributions to the profession? Why do women still have a hard time in the economics profession in general? There is no shortage of potential explanations. In their recent academic paper “Women in Academic Science: A Changing Landscape,” Stephen J. Ceci, Donna K. Ginther, Shulamit Kahn, and Wendy M. Williams document the gender gap in economics and discuss many possible hurdles at each stage of a female economist’s career. And in a recent Bloomberg View article, University of Michigan Economics PhD Noah Smith adds to this list of potential hurdles the climate created by many male economists who defend their sexist views as hard-nosed truth telling. One indication of the career challenges women face in economics is the fact that one of us felt the need to remain anonymous. The co-author of this piece is a still-untenured female economist who has withheld her name because there unfortunately could be real professional risks in publicly discussing many of these issues. Many male economists underestimate the headwinds women face in economics, but they exist at every stage of a woman’s career. Just as an annual economic growth rate of about .33% per year in the 18th century and 1% in the 19th century transformed the world in the First and Second Industrial Revolutions, women in economics face many forces both large and small that add up to a huge overall damper on the number of women who make it to the higher ranks of our profession. And even when women do reach these higher levels—despite the difficulty of getting their work published in male-dominated journals and in getting promoted even when they do get their work published—their wages remain lower. In a Jan. 3 New York Times article, “Racial Bias, Even When We Have Good Intentions,” Harvard economist Sendhil Mullainathan argues that discrimination often operates at an unconscious level: Even if, in our slow thinking, we work to avoid discrimination, it can easily creep into our fast thinking. Our snap judgments rely on all the associations we have—from fictional television shows to news reports. They use stereotypes, both the accurate and the inaccurate, both those we would want to use and ones we find repulsive. The same sort of unconscious biases operate against women at every stage. Here are a few of the issues women in economics face that their male colleagues might not be aware of: • New female economics PhD’s have to worry about what to wear during the job market: skirt too short vs. too long, vs. just right. • Female economists endure the nasty misogyny of many threads on econjobrumors.com. • Students don’t give female professors the same respect as they do male professors. Compare ratings given to online teachers who represent themselves as female to one set of students and male to another, as in the experiment these instructors recently conducted. • Female assistant professors have to worry about whether they dare take advantage of tenure clock extensions to have a child, while male assistant professors have no worries about taking advantage of the tenure clock extensions they get when their wives have a child. For the men, it is a simple strategic choice; for the women, it is reminder to their colleagues that (with rare exceptions) they bear the heaviest burden of taking care of a young child—a burden that might take time away from their research. • Female professors are often inundated by students needing more “emotional” mentoring (a type of help many students assume they can’t get from male professors). • Women in economics often get mistaken at social events for an economist’s spouse instead of being recognized as economists themselves. • Female economists have to figure out how to deal with disrespectful comments or “jokes” made by their senior colleagues. Fostering awareness of issues like these, and a hundred others of the same ilk, is one of the biggest things that can be done to improve women’s lot in economics. Greater gender equality in economics could also be fostered by a better power balance among colleagues. What we mean is that female economists should be encouraged to assert their power, but male economists should find it hard or impossible to exert illegitimate, sexist power over their female colleagues. If this sounds obvious, it’s much harder than it seems. Today, women in economics face a Catch-22, where speaking up can easily make them look like a shrew, while not speaking up robs them of legitimate power. There may be some loopholes in this Catch-22, but women starting out in economics need to be shown the ropes. And with so few senior female professors in economics, who can show a female graduate student how to promote herself gracefully, and break into predominantly male conversations without raising hackles? Somehow, that question needs to be answered. As more women push these boundaries, things will become easier. It may become possible to open up new ways of communicating and asserting power that allow women to be themselves and still have others listen to them carefully and respectfully. If men are allowed to be jerks without suffering serious consequences, while women aren’t, then even well-behaved men have a threat-point that women are denied. One of the most primal reasons to treat someone nicely is the fear of a mistreated person’s anger or revenge. That doesn’t work well for women, because getting angry either makes them look like a harridan, or look overly emotional—both of which carry a big penalty in lost status. It is easy to confirm that men are allowed to be jerks in ways that women aren’t—by flipping genders when someone does something out of line: • What would you think of a particular man’s bad behavior if a woman you know did it? • What would you think of a particular woman’s bad behavior if a man you know did it? We don’t think the answer here is to change the culture so that women can be jerks, too, but to move toward holding everyone, both men and women, to account for bad behavior. For many men, it will be a revelation to be called out on the ways in which they demean others. Some may not even realize all the ways they routinely put others down—especially those in vulnerable positions who dare not strike back. But if you talk to a few women who spend time in economics departments, you will hear the stories. ## Equal pay for equal work Besides the threat point of men behaving badly, there is another threat point that gives men an advantage over women—one that gets men more than equal pay for equal work. It is typical in academia that a tenured professor who receives a competing job offer and can credibly threaten to leave gets a big raise. By comparison, professors who seem unlikely to jump ship end up underpaid. But given gender inequality on the home front (and the male-female wage differential for spouses), it is a lot more credible that a male professor can convince his wife to move to another city than that a female professor can convince her husband to move. This difference in ability to threaten to leave because of a spouse’s willingness to move is just one of the many ways that different levels of career support from spouses affects women in academia. The only thoroughgoing remedy for this inequity will come from greater gender equality throughout society. (The situation is different when both wife and husband are academics, especially when they are both in the same discipline. Joint hiring decisions come up so often and go down so many different ways that no one should read any particular case into what we say. In general, because the couple forms a bargaining unit, some of the advantages men have in academia accrue to the wife in the husband-wife power couple. Women hired only because of their spouses—when they should have been hired in their own right—make academic departments look less sexist on paper than they really are. And when a woman who shouldn’t have been hired in her own right is hired in order to attract her spouse, it can be demoralizing to other women trying to make their way in academia on their own. Unfortunately, we don’t see any easy solution for the issues created by joint hiring decisions. But at a minimum they shouldn’t be allowed to distract economists from deeper issues of gender inequality.) One final step that would make economics less forbidding for women is for each economist to become open to a wider range of scientific approaches and topics. Statistically, men and women are not drawn to the same fields within economics. And even within a field, women are drawn to a different balance between immediate real-world relevance and theoretical elegance. It is natural for each economist (and for each academic in general) to construct a narrative for why his or her approach to economics is the best. But since men in senior ranks in economics are more numerous than women, the narratives that men construct for why their individual approaches to economics are better usually win out in hiring and promotion decisions over the narratives that women construct for why their individual approaches are better. This imbalance disadvantages junior women, whose individual approaches will on average have fewer champions. Here, the solution, difficult as it is, is for economists to appreciate the boost to scientific progress from having many different approaches and topics well represented—and for the subjective opinions of those who don’t appreciate the value of a wide range of approaches to be discounted. In particular, putting a premium on balancing theory with real-world understanding and policy action will not only make economics a stronger force for good in the world, it will help women take their rightful place in economics. # Quartz #57-->In Defense of Clay Christensen: Even the 'Nicest Man Ever to Lecture' at Harvard Can't Innovate Without Upsetting a Few People Here is the full text of my 57th Quartz column, “Defending Clay Christensen: Even the ‘nicest man ever to lecture’ at Harvard can’t innovate without upsetting a few people,“ now brought home to supplysideliberal.com. It was first published on December 23, 2014. Links to all my other columns can be found here. I wrote a version of this first as a blog post. I am delighted that my new editor at Quartz, Paul Smalera, liked it enough to publish it in Quartz. (My previous editor, Mitra Kalita, is now overseeing key aspects of Quartz’s global expansion.) By the way, since I am blogging through Clay’s books (as I have been blogging through John Stuart Mill’s On Liberty) I have a virtual sub-blog on Clay Christensen: http://blog.supplysideliberal.com/tagged/clay In the column, I give my take on Clay’s theory as well as defending him personally. If you want to mirror the content of this post on another site, that is possible for a limited time if you read the legal notice at this link and include both a link to the original Quartz column and the following copyright notice: © December 23, 2014: Miles Kimball, as first published on Quartz. Used by permission according to a temporary nonexclusive license expiring June 30, 2017. All rights reserved. ************************************************************************** Clay Christensen is not only the most famous management guru in the world, he is one of the few public figures—other than full time humanitarians or religious leaders—whom people go out of their way to describe as a good person. For example, in the Financial Times in November 2013, Andrew Hill described Clay Christensen, who had just won an award for most influential management thinker for the second time in a row, as “perhaps the nicest man ever to lecture at Harvard Business School.” So I was surprised to see key Apple executive-turned-tech-entrepreneur Jean-Louis Gassée criticize not only Clay’s theories but also Clay’s character in his Nov. 25, 2014 Quartz article Clayton Christensen should really disrupt his own innovation theories. I want to defend Clay and his theories. To be clear about where I am coming from, let me say that I can personally vouch for both Clay’s brilliance as a business thinker and his positive personal qualities. On the personal side, I carpooled across the country from Utah to Boston with Clay back in 1977 when I was beginning my freshman year at Harvard College and Clay was beginning to work toward his MBA from Harvard Business School. I have had relatively little contact with Clay since then, but still remember that trip as a bright moment in my life, and consider Clay a friend to this day. My daughter Diana’s experience as a Harvard MBA student in Clay’s class only reinforced my impression that Clay is one of the best human beings I have met. My views on Clay as a thinker come from reading six of Clay’s books this year: As an economist, I found them fascinating. One of the hottest areas of economics in the last twenty years has been the border between economics and psychology. One basic idea at that intersection is that people have limitations in their ability to process information and make decisions. This idea that cognition is finite is a key issue in macroeconomics, as Noah Smith and I wrote about in “The Shakeup at the Minneapolis Fed and the Battle for the Soul of Macroeconomics—Again.” But the idea of finite cognition also matters a lot for businesses. Some decisions are hard even for people who spend their careers making those kinds of decisions, and the support of teams of experts. Clay, in the management theory he has developed with various coauthors, identifies one key factor in how hard a decision is for a generally well-run business: whether it involves taking care of what are already the business’s core customers, or trying to sell to either peripheral customers or people who have never bought from the business before. No business is successful for any significant length of time if it doesn’t do a reasonably good job of taking care of its core customers. But being good at understanding and serving its core customers may make it bad as an organization at understanding and serving peripheral or potential customers. Clay’s famous warnings about “disruptive innovation” boil down to saying that any set of peripheral or potential customers a business doesn’t serve well—even if those non-core customers look relatively unprofitable—might provide a ladder for a competitor to climb up and eventually overtake that business. And since the main part of a business is designed to serve its core customers, it may need to set up a separate unit to act like a start-up and focus on other potential customers. When Clay turns to public policy issues in education and health care, the idea of innovative upstarts overtaking an established business by starting with underserved customers or non-customers morphs into the idea of reforming education and health care by finding chinks in the armor of the status quo. The key public policy recommendation I draw from Clay’s logic is that policy should be supportive of organizations doing things in new ways that help people on the margins who find the current systems difficult to navigate, even if those new approaches don’t improve quality for those who are currently well served by the status quo. Here is Gassée’s own summary of Clay’s theory: The incumbency of your established company is forever threatened by lower-cost versions of the products and services you provide. To avoid impending doom, you must enrich your offering and engorge your price tag. As you abandon the low end, the interloper gains business, muscles up, and chases you farther up the price ladder. Some day—and it’s simply a matter of time—the disruptor will displace you. The first charge Gassée makes against Clay is that Clay is a very persuasive, high-priced consultant who advises rival companies: … in the mid-to-late 1980s, parlayed his position into a consulting money pump. He advised—terrorized, actually—big company CEOs with vivid descriptions of their impending failure, and then offered them salvation if they followed his advice. His fee was about$200,000 per year, per company; he saw no ethical problem in consulting for competing organizations.

In Clay’s case, I get the sense that he is giving almost every company a variant of the same advice, which is more concerned with potential competitors who might not even be in the picture yet, rather than existing competitors. So I can see why two rival companies might both feel comfortable hiring Clay. As to the price, I also find Clay’s insights valuable, so I am willing to go with the default view of economists that if someone is willing to pay a lot of money for something, it is an indication that they find it quite valuable.

Gassée’s next charge is that Clay is arrogant:

The guru and I got into a heated argument while walking around the pool at one of Apple’s regular off-sites. When I disagreed with one of his wild fantasies, his retort never varied: I’m never wrong.

Had I been back in France, I would have told him, in unambiguous and colorful words, what I really thought, but I had acclimated myself to the polite, passive-aggressive California culture and used therapy-speak to “share my feelings of discomfort and puzzlement” at his Never Wrong posture. “I’ve always been proved right…sometimes it simply takes longer than expected,” was his comeback.

Hyperbole—”exaggerated statements or claims not meant to be taken literally”—has its place in conversation (for example, there is every indication that the historical Jesus frequently used hyperbole). So the exact tone of voice and context matter a lot. The management consulting context is one in which hyperbole might be appropriate in order to help counteract an attachment by someone one is advising to the status quo. In that context, saying “I’m never wrong” might mean simply “You should really, really, listen to my advice.” Given the magnitude of Clay’s claims, if Clay sincerely believes in the advice he is giving, as I suspect he does, the sentiment “You should really, really, listen to my advice” is understandable.

Gassée’s last charge is that Clay became defensive and lashed out when his work was challenged by Jill Lepore. Here is what Gassée has to say about that:

Christensen is admired for his towering intellect and also for his courage facing health challenges—one of my children has witnessed both and can vouch for the scholar’s inspiring presence. Unfortunately, his reaction to Lepore’s criticism was less admirable. In a Businessweek interview Christensen sounds miffed and entitled:

“I hope you can understand why I am mad that a woman of her stature could perform such a criminal act of dishonesty”

In this case, fortunately, the context is known. You can see Drake Bennett’s Businessweek interview “Clayton Christensen Responds to New Yorker Takedown of ‘Disruptive Innovation‘” here. Clay told Drake

… she starts instead to try to discredit Clay Christensen, in a really mean way. And mean is fine, but in order to discredit me, Jill had to break all of the rules of scholarship that she accused me of breaking—in just egregious ways, truly egregious ways. In fact, every one—every one—of those points that she attempted to make [about The Innovator’s Dilemma] has been addressed in a subsequent book or article. Every one! And if she was truly a scholar as she pretends, she would have read [those]. I hope you can understand why I am mad that a woman of her stature could perform such a criminal act of dishonesty …

So Clay’s intemperate phrase “criminal act of dishonesty” is about Jill Lepore writing as if Clay hadn’t ever given any answer to the kinds of questions she raises. A specific case later in the interview clarifies what is angering Clay. Here is Drake Bennett’s question:

Another point Lepore makes is that you leave out relevant factors that would challenge your thesis. In the case of the steel industry, you don’t talk about unionization, which was a major difference between U.S. Steel and upstart minimills.

Clay replied:

Yes and no. The world is actually very complicated and big huge books are written about unionization and the impact that it has, and so … other people have addressed that.

If she’s interested, there’s a case that I use in my course about U.S. Steel that occurred in 1989. There the union contract in Mon Valley Works [one of U.S. Steel’s plants] was a huge factor. So, again, if she were thorough on this issue and she Googled it and put in my name and U.S. Steel, that would have come up. But because her purpose was to discredit me rather than look for the truth, she didn’t even look. Are you feeling a little bit about how she’s caused me to feel?

That is, Clay thinks Jill Lepore did not do even the most basic homework to see if Clay had any subtlety to his views. Here, actually, Lepore’s point is about how differential unionization might weaken the evidence for Clay’s theory of disruptive innovation, which Clay’s Harvard Business School case might not have done anything to address, so Lepore’s fundamental point might stand, but she should have made that argument. And while it may be unreasonable to expect someone writing a magazine article to know one’s whole body of work before vigorously criticizing a piece of it, it is reasonable to expect her to try to talk to Clay to get his side before publishing a traditional-style long-read article attacking Clay’s work. This is a point Clay himself makes:

… if she’s interested and wants to help me—she’s just an extraordinary writer—and if she’s interested in the theory or its impact, I mean, come over! I would love to have you openly invite her to come do this, if she’s interested.

(Like Clay, Jill Lepore is at Harvard.)

I think Drake Bennett is right that Clay was quite angry at Jill Lepore’s article:

Consistently described by those who know him as a generous and thoughtful and upbeat person, he is also capable of fury. “Keep asking me questions,” [Clay] said, “it’s helping me.”

But, I am not going to change my view of Clay as one of the best human beings I have met for controlled anger in a situation like that.

No one is perfect. But in order for us to have a hope of becoming better human beings, we need to at least know which direction is up. Despite his flaws, I don’t know anyone who wouldn’t do well to become a little more like Clay in at least some respect.

# Quartz #56—>The Swiss National Bank Means Business with Its Negative Rates

Link to the Column on Quartz

Here is the full text of my 56th Quartz column, “The Swiss are now at a negative interest rate due to the Russian ruble collapse,” brought home to supplysideliberal.com. It was first published on December 19, 2014. Links to all my other columns can be found here.

I kept something closer to my working title as the title above. This column is in honor of all the amazing people I met at the Swiss National Bank.

At this writing, this is my 7th most popular column ever, edging out “The National Security Case for Raising the Gasoline Tax Right Now” for that spot.  You can see a list of my most popular columns here.

Paul Krugman links to this column as a news source in his column “Switzerland and the Inflation Hawks.” The link is on the words “charging banks.”

I knew I needed a big update to this column when I saw that the Swiss National Bank abandoned the ceiling on the value of the Swiss franc. So I wrote another whole column:

Swiss Pioneers! The Swiss as the Vanguard for Negative Interest Rates

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

The initials “SNB” for the Switzerland’s central bank, the “Swiss National Bank” are about to become just as familiar as the initials ECB for the European Central Bank. Today, the SNB announced it would cut interest rates for banks that keep large amounts of money at the SNB to -.25%. Yes – a negative interest rate.

The SNB’s negative interest rate surprise is bigger news than it seems. Switzerland has strong reasons to turn to new monetary policy tools. The lackluster economic growth Switzerland has had since the Financial Crisis in late 2008–visible in the graph of Switzerland’s real GDP in the chart above–has brought inflation down until now it hovers around zero, as shown in the graph below:

The Swiss economy is heavily dependent on exports to the eurozone, which hasn’t fared well lately. And the Swiss economy has had troubles of its own. This past September, BBC News ran the headline “Swiss economy fails to grow as EU stagnates,”  accompanied by this quotation from Maxime Botteron Credit Suisse’s Maxime Botterton:

The trend in exports is not a big surprise. Trade data so far already pointed to a rather weak contribution of exports. What is a bit more surprising is the weak investment spending, especially in the construction sector.

Let me explain why the slowness of Swiss exports matters: Thomas Jordan, the head of the SNB, said during Thursday’s press conference that asset markets have been spooked by the fall of the Russian ruble and are looking for a safe haven. Switzerland has a long history of being just such a safe haven: during times of crisis, money flows in. So the ruble crisis is putting upward pressure on how many euros it costs to buy a Swiss franc, because more investors are trying to buy francs. A more expensive Swiss franc will make Swiss exports even more expensive, making it even harder to sell things produced in Switzerland to the rest of the world. The SNB is determined, therefore, to do whatever it takes to keep the Swiss franc from ever costing more than .833 euros.

The main tool the central bank has had for preventing the Swiss franc from appreciating is buying up enough foreign assets with Swiss francs to guarantee there are enough Swiss francs available in the world for anyone to buy one for .833 euros. The trouble with relying on that approach alone is that Switzerland winds up with a lot of foreign assets that are less safe than Swiss assets would be (especially when the effect of possible future exchange rate changes on those foreign assets are taken into account).

The world is used to positive interest rates: a borrower pays a lender for the use of money. Negative interest rates mean that the lender has to pay the borrower to keep money safe. Negative interest rates are a way for Switzerland to get paid for the safety it provides in a financially dangerous world. Then, if Switzerland ends up with risky foreign assets while foreigners end up with safe Swiss assets, at least Switzerland is getting paid for the difference between the safe assets it provides and the riskier assets it is buying.

The most remarkable thing SNB chief Thomas Jordan added to his initial remarks was the statement that despite already having a -.25% interest rate compared to the ECB’s higher -.2% rate, the SNB is prepared to go even further. As James Shotter and Alice Ross reported in the Financial Times

Mr Jordan said the SNB was prepared to take further steps to protect the minimum exchange rate if needed, including pushing rates deeper into negative territory and lowering the threshold above which the negative rates were charged.

The other hint that the SNB is prepared to go further was in its statement that its band for the Libor interest rate now goes all the way down to -.75 %.

A good question to ask now would be: Why is the SNB confident that it can go down to deeper negative rates? Most central banks are afraid that if they cut their target rates or interest rates on reserves too far into negative territory, people will start piling up paper currency, which may be inconvenient to store, but otherwise pays an interest rate of 0%, which might start looking very good, compared to, say -.75%.

The answer, which most observers don’t realize, is that the SNB can actually inflict a negative interest rate on paper currency as well. In a principle that the underappreciated polymath (art and cultural historian, Biblical scholar and monetary theorist) Robert Eisler groped towards back in 1932, there’s an easy way to exact a negative interest rate: Charge customers an exchange rate between paper currency and money in the bank. More recent economists, notably Willem Buiter (now Chief Economist of Citigroup) further elaborated on this idea.

On July 15, 2014, I gave a presentation at the SNB explaining how to use a fee on paper currency deposited at the SNB by private banks to generate a negative interest rate on paper currency. This was a variant on Robert Eisler’s approach. To generate a negative paper currency interest rate, the paper currency deposit fee has to gradually increase in size. But as soon as interest rates are positive again, the paper currency deposit fee can gradually shrink in size until it finally disappears, and things go back to the way things work now. So the SNB has the idea of a paper currency deposit fee to implement negative interest rates on paper currency in its back pocket.

There is a world of difference between a central bank that cuts some of its interest rates, but keeps its paper currency interest rate at zero and a central bank that cuts all of its interest rates, including the paper currency interest rate. If a central bank cuts all of its interest rates, including that paper rate, negative interest rates are a much fiercer animal.

As a professor who teaches for a living, I care most about whether students learn things in the end. But I can’t help but notice the difference between quick learners and slow learners. When it comes to how to do negative interest rates right, the people at the SNB are some of the quickest learners I’ve seen.

The bottom line is that no one should underestimate the Swiss National Bank when it says that it will do whatever it takes to keep its exchange rate at .833 euros per Swiss franc – even if it requires boldly cutting its interest rates to a depth no central bank has gone to before.

# Quartz #55—>Righting Rogoff on Monetary Policy

Link to the Column on Quartz

Here is the full text of my 55th Quartz column, “Righting Rogoff on Monetary Policy,” now brought home to supplysideliberal.com. This column was first published on December 15, 2014. Links to all my other columns can be found here.

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This column is meant to back up my tweet:

Ken Rogoff is wrong when he says the BOJ’s Kuroda has done “whatever it takes” monetary policy for Japan: http://www.project-syndicate.org/commentary/japan-slow-economic-growth-by-kenneth-rogoff-2014-12…

One other note: Ken sent a nice reply to the email I sent him about my work on eliminating the zero lower bound, soon after I sent it.

After the text of the column, which focuses primarily on monetary policy, you can see the text of an update to my companion post, which revisits in greater depth Carmen Reinhart and Ken Rogoff’s research on the effects if government debt on economic growth.

Carmen Reinhart and Ken Rogoff’s 2010 academic paper “Growth in a Time of Debt” was influential in giving policy-makers the impression that higher levels of government debt would lead to slower economic growth. In Spring 2013, University of Massachusetts Amherst graduate student Thomas Herndon and his faculty coauthors Michael Ash and Robert Pollin announced that they had discovered a spreadsheet error marring Reinhart and Rogoff’s work. News of that error led to a broader reevaluation of Reinhart and Rogoff’s claims. My own embarrassment at having relied on Reinhart and Rogoff’s claims led me to examine their claims closely myself, in two Quartz columns coauthored with University of Michigan undergraduate Yichuan Wang. We found no evidence in Reinhart and Rogoff’s data that national debt slows down economic growth at all. Indeed, after taking into account past growth rates, many economies have grown surprisingly fast despite high levels of government debt.

As Reinhart and Rogoff’s claims fell apart, they came under particular criticism for allowing policy-makers to believe they had conclusive evidence that higher government debt slowed down growth at the same time their more cautious words to their fellow economists indicated that they knew the evidence at best only suggested such a view, pending further analysis. Between Reinhart and Rogoff, it was clear this criticism was directed primarily at Rogoff, in view of his greater stature and influence with policy-makers.

Despite his mistakes in badly overstating the evidence that government debt retards growth, Ken Rogoff is a brilliant economist, who has greatly advanced many areas of economics and has a deep concern for real-world economic policy. So it is disappointing to see his analysis of Japanese economic policy limited so sharply by conventional wisdom in his recent Project Syndicate article “Can Japan Reboot?” Indeed, Rogoff makes an unforced error in that article that is every bit as consequential for economic policy as his errors in relation to debt and economic growth.

Rogoff writes:

My own view is that the “three arrows” of Abenomics 1.0 basically had it right: “whatever it takes” monetary policy to restore inflation, supportive fiscal policy, and structural reforms to boost long-run growth. But, though the central bank, under Governor Haruhiko Kuroda, has been delivering on its side of the bargain, the other two “arrows” of Abenomics have fallen far short.

This is wrong. Both the Bank of Japan and Ken Rogoff know that “whatever it takes” monetary policy goes beyond anything the Bank of Japan has done. Governor Kuroda has not been delivering on his side of the bargain. “Whatever it takes” monetary policy would involve cutting the interest rates determined by the Bank of Japan below zero. The fact that paper currency, according to current practice, earns a zero interest rate causes serious complications, but the Bank of Japan knows, at a detailed level, how to implement a negative interest rate on paper currency, too. I know the Bank of Japan knows how to do it because I went to the Bank of Japan in June 2013 to explain the details in an official seminar, to both staff economists and high Bank of Japan officials, and returned in August 2014 to remind them.

On this, my second visit, I spoke about “Portfolio Rebalancing in General Equilibrium” in my official seminar, but I used that visit as an opportunity to talk about negative interest rates in side conversations. And before the financial crisis that precipitated the Great Recession, I spent enough time in residence at the Bank of Japan that I have many friends among the staff economists at the Bank of Japan who have followed my work on negative interest rates closely.

I know that Ken Rogoff appreciates the power of negative interest rates to provide economic stimulus because he has advocated adding negative interest rates to the monetary policy tool kit for exactly that purpose himself. And when I realized from his May 2014 Financial Times opinion piece in that vein of his advocacy of negative interest rates, I emailed him to let him know of my efforts to work out details of implementing negative paper currency interest rates to make deep negative interest rates practical now, instead of a decade or two from now. Thus, Ken Rogoff’s characterization of current Japanese monetary policy being willing to do “whatever it takes” is not just an error, but an unforced error.

The most likely reason Rogoff made the error is because he is too quick to assume the existence of political constraints on monetary policy in Japan. While they may exist today, they could be swept away tomorrow, if Japan’s economy falls deeper into the mire. To my mind, it is the responsibility of an economist giving serious advice to point out what can and should be done even if that may not be politically feasible at the moment. Of course, one should then go on to give the best advice one can within whatever political constraints exist at the moment, as I did when I gave my opinion to the Bank of Japan that quantitative easing would be more powerful if they focused their asset purchases on risky assets.

But progress is ill served if economists fail to point out areas where a government should try to expand the range of what is politically possible. Many economists explain the benefits of free trade, for example, even when the tide of politics is running toward greater protectionism. And many economists explain the benefits of dramatically more open immigration, even when the tide of politics is running toward greater immigration restrictions.

Indeed, while Ken Rogoff has not yet shown the courage of his convictions in his public advice to Japan about monetary policy, he does show the courage of his convictions in tough words about Japan’s immigration policy. He writes:

There has been no significant progress on supply-side reforms, especially on the core issue of how to expand the labor force. With an aging and shrinking population, Japan’s government must find ways to encourage more women to work, entice older Japanese to remain in the labor force, and develop more family-friendly labor policies. Above all, Japan needs to create a more welcoming environment for immigrant workers.

While immigration policy can, for the most part, be cleanly separated from monetary policy, monetary policy and fiscal policy are unavoidably intertwined. Rogoff has this to say about Japan’s recent and possible future increases in its consumption tax:

The timing of the April 2014 consumption-tax hike (from 5% to 8%) was also unfortunate. It would not have been easy for Abe to postpone the move, given that it had been locked in place by broad-based political agreement before he took office. But the government could have engaged in more aggressive fiscal stimulus to counteract the hike’s short-term effects. Instead, two successive quarters of negative growth have had a dispiriting psychological impact. …

Mind you, Japan’s outsize government debt and undersize pension assets are a huge problem …

It is clear from these passages that Rogoff wants lower taxes to stimulate the economy (or to keep from creating a drag on the Japanese economy), but worries about the effect of lower taxes on the already supersized national debt of Japan. But if Japan supercharged its monetary policy with negative interest rates, the fiscal drag from higher consumption taxes would be overwhelmed by the monetary stimulus, so that Japan’s tax policy could be focused on the long-run issue of stabilizing its debt level.

In “Can Japan Reboot,” Ken Rogoff presents himself as someone despairing of the potential for better monetary policy to dramatically improve the situation in Japan, and therefore turning to supply-side measures as the main hope for getting the Japanese economy back on track. In my view, Japan can dramatically improve both its monetary policy and its supply-side policies. I have heard the argument that tight monetary policy can foster supply-side reform by holding an economy hostage until politicians enact the supply-side reforms they know their economy needs, but I don’t believe it. (Fortunately, Rogoff makes no such claims.)

Instead, good monetary policy, by keeping the economy at the level of output consistent with stable prices reveals and highlights supply-side issues that need to be addressed. When people believe, with good reason, that bad monetary policy is part of what ails the economy, it is not surprising that they underestimate the need for supply-side reforms such as loosening immigration restrictions and making it easier for new, innovative firms to enter old, jaded markets. Repairing monetary policy clears the way for repairing the underlying ability of an economy to produce the goods and perform the services that enrich people’s lives with material abundance.

In both the reinforcement he gave to policy makers more worried by the effects of debt on economic growth than by the disastrous human consequences of the persistent worldwide slump, and in his current advice to Japan, Ken Rogoff has erred in the direction of making it easy for people who believe a questionable conventional wisdom to continue in that belief. Economists concerned with real-world economic policy should aim higher. It is all well and good to give a verdict on current policy controversies, as they have been framed by politics as usual. But those who know there is a better way need to say so, with patience and tenacity.

Update December 19, 2014: Although the main point of my column is to emphasize the importance of putting negative paper currency interest rates in the monetary policy toolkit now rather than a decade or two from now (with particular urgency for the European Central Bank and the Bank of Japan), I know that for many readers, the reprise of the Spring 2013 media furor about Carmen Reinhart and Ken Rogoff’s work is equally salient. Personally, I believe eliminating the zero lower bound is much more important as whether debt lowers economic growth even when it doesn’t cause a debt crisis, but the issue of debt and growth does need to be addressed as well.

I had a chance to read Ken Rogoff’s and October 2013 FAQ http://scholar.harvard.edu/rogoff/publications/faq-herndon-ash-and-pollins-critique. Substantively, I think this is a good response to the Thomas Herndon, Michael Ash and Robert Pollin paper (linked there) that started the media furor in Spring 2013. But my own substantive concerns are not those. They are the concerns that Yichuan Wang and I detail in our two Quartz columns and two other posts on Reinhart and Rogoff’s work:

In my view, these posts by Yichuan Wang and me are a good example of how, in Clay Christensen’s terms, the disruptive innovation of the economics blogosphere is beginning to move upscale and challenge traditional economics outlets such as working papers and journal articles.

I hope that, taken as a whole, what I write on my blog puts things in the context of the literature, and—through links—gives the kinds of references that are rightly considered important for academic work. In any case, for me the major source of the not inconsiderable number of references I have had in my academically published work come from other people telling me about work related to my own. The same thing happens online. I deeply appreciate the many links people send me in tweets and in more private communications.

Although it is natural for an individual blog post to be be much less complete than a working paper or journal article, I hope to achieve a reasonable balance between breadth and depth in this blog as a whole. And of course, the relative difficulty of putting mathematical equations in Tumblr means I will choose the working paper format once the number of equations needed to make a point exceeds a certain threshold.

To repeat, although Thomas Herndon, Michael Ash and Robert Pollin’s paper definitely piqued my interest and Yichuan’s interest and so led to our analysis of Carmen Reinhart and Ken Rogoff’s postwar data, I am critical of the substance of Carmen and Ken’s work based on my work with Yichuan, not based on the work of Thomas Herndon, Michael Ash and Robert Pollin.

In relation to our own critique of Carmen and Ken’s work, let me make three substantive points:

1. Nonlinearity. In our last piece on Reinhart and Rogoff’s work, http://blog.supplysideliberal.com/post/55484991854/quartz-25-examining-the-entrails-is-there-any
2. Yichuan and I look nonlinearly at how different levels of debt are related to growth beyond what one would expect from looking at past growth alone. It would be nice to have more evidence total, but on its face, the hint has a higher growth rate after controlling for past growth at a 90% debt to GDP ratio than at a 50% debt to GDP ratio. And we do suggest that what little evidence there is in the data suggests that, say, 130% debt to GDP ratio is associated with lower growth beyond what would be predicted by past growth than a 90% debt to GDP ratio, though a 130% debt to GDP ratio and a 50% debt to GDP ratio give about the same level of growth beyond what would be predicted by past growth alone. On theoretical grounds, it seems plausible to me, though far from an open-and-shut case that high enough debt levels would cause problems for economics growth. That thinking has led me to argue persistently that monetary stimulus is better than fiscal stimulus because it does not raise national debt. See for example my post “Monetary vs. Fiscal Policy: Expansionary Monetary Policy Does Not Raise the Budget Deficit.”But exactly how high that is matters a lot when people can’t be convinced of the virtues of negative interest rates so that fiscal stimulus remains an issue. I consider the nonlinear smoother result that (given what power there is in the postwar data set) the line is the same at a 130% debt to GDP ratio as at a 50% debt to GDP ratio, even after correcting for “illusory growth” on the part of Ireland and Greece as painting a considerably different picture than someone would get from reading Carmen Reinhart and Ken Rogoff’s, or Carmen Reinhart, Vincent Reinhart and Ken Rogoff’s work.
3. Is controlling for past GDP growth appropriate? In my view, yes. I consider the past income growth controls important because countries that are generally messed up are likely to have both high debt and low growth. That doesn’t mean the high debt causes low growth. Most of the discussion has focused on reverse causality, but I consider the positive correlation across many dimensions of bad policy to be another big issue. I worry that the past income controls would make it hard to detect whether or not debt overhangs are followed by long-lasting low-growth periods, as Carmen, Vincent and Ken argue. But without some other way to control for the many, many other possible bad policies besides debt (which goes beyond the kind of growth accounting regressions that Ken’s FAQ document points to as strong evidence in favor of the view that debt might slow growth) this seems to me to point toward genuine empirical agnosticism about whether debt lowers growth as the right conclusion. (Theoretical arguments are a different matter.)
4. Does the prewar data strongly bolster the case the debt slows growth?  Here, it depends on what the question means. The prewar data were not as readily available as the postwar data, so Yichuan and I did not analyze them. And so I don’t know what they say, once subjected to the kind of empirical exercises I would like to subject them to. I would love to see an analysis like the one the Yichuan and I did on the postwar data applied to the prewar data. That said, the prewar data may answer the question of whether a given debt level lowered growth under the gold standard, or with prewar institutions that were weaker than current institutions. So I have my doubts about how much guidance it can give to policy now. Monetary policy in particular, had advanced dramatically since the pre-World War II era, even before the ongoing revolution against the paper currency standard.

Did Carmen and Ken overstate their case?

While I feel confident that Yichuan’s and my substantive critique has not been adequately addressed, I am much less confident about claims I made in “Righting Rogoff on Japan’s monetary policy” about how policy-makers interpreted Carmen and Ken’s work (and how they could have been expected to have interpreted it, given what was written).

Ken’s FAQ document points to the 2010 Voxeu article “Debt and Growth Revisited” as something that could have provided more balance to policy makers in interpreting Carmen (and Vincent) and Ken’s work. Because policymakers might be more likely to read a Voxeu article than an academic paper, this Voxeu piece is an important touchstone for whether Carmen and Ken overstated the strength of the empirical evidence in favor of the idea that high public debt slows down growth in the range that was relevant to policy in the last few years.

The issue I have with the Voxeu article “Debt and Growth Revisited” is that it never mentions the fact that the normal standard of establishing causality in economics is to find a good instrument, or some other source of exogeneity or quasi-exogeneity. In other words, the inherent difficulty of establishing causality in this kind of data is never mentioned. Here is how strongly Carmen and Ken suggest in their Voxeu article “Debt and Growth Revisited” that there is causal evidence despite the highly endogenous nature of the data:

Debt-to-growth: A unilateral causal pattern from growth to debt, however, does not accord with the evidence. Public debt surges are associated with a higher incidence of debt crises.9 This temporal pattern is analysed in Reinhart and Rogoff (2010b) and in the accompanying country-by-country analyses cited therein. In the current context, even a cursory reading of the recent turmoil in Greece and other European countries can be importantly traced to the adverse impacts of high levels of government debt (or potentially guaranteed debt) on county risk and economic outcomes. At a very basic level, a high public debt burden implies higher future taxes (inflation is also a tax) or lower future government spending, if the government is expected to repay its debts.

There is scant evidence to suggest that high debt has little impact on growth. Kumar and Woo (2010) highlight in their cross-country findings that debt levels have negative consequences for subsequent growth, even after controlling for other standard determinants in growth equations. For emerging markets, an older literature on the debt overhang of the 1980s frequently addresses this theme. …

… We have presented evidence – in a multi-country sample spanning about two centuries – suggesting that high levels of debt dampen growth.

I appreciate the note of uncertainty in the sentence

Perhaps soaring US debt levels will not prove to be a drag on growth in the decades to come.

But I feel that for the typical policy maker reading the Voxeu article, this note of uncertainty is largely cancelled out by the next sentence:

However, if history is any guide, that is a risky proposition and over-reliance on US exceptionalism may only prove to be one more example of the “This Time is Different” syndrome.

The phrase “if history is any guide” phrase in particular suggests that the historical evidence gives some clear guidance, and the sentence as a whole points to an interpretation of “Perhaps soaring US debt levels will not prove a drag on growth in the decades to come” as simply making a bow toward random variation around a regression line rather than expressing any uncertainty about what the causal regression line for the effect of debt on growth says before other random factors are added in.

In any case, saying “Perhaps soaring US debt levels will not prove to be a drag on growth in the decades to come” is not the same as if Carmen and Ken had said

Of course further research could overturn the suggestion we find in the evidence that high debt lowers growth, and there are always many difficulties with interpreting historical evidence of this kind.

Of course, there is always the possibility that Carmen and Ken said almost exactly that, in a forum that most policy makers would have noticed, but one that Idid not notice. (My own reading is ridiculously far from comprehensive.) If so, I would love to get a link to it. Ideally, I would like to see the main text of Ken’s FAQ document collect in its main text all the details (including of course venue or outlet and date) about all the strongest caveats and cautions against overreading that Carmen, Vincent and Ken wrote about their work.

One extremely important note that the FAQ document does have is this quotation from Reinhart, Reinhart, and Rogoff (2012), “Public Debt Overhangs: Advanced-Economy Episodes since 1800.” (Journal of Economic Perspectives, 26(3)):

This paper should not be interpreted as a manifesto for rapid public debt deleveraging exclusively via fiscal austerity in an environment of high unemployment. Our review of historical experience also highlights that, apart from outcomes of full or selective default on public debt, there are other strategies to address public debt overhang, including debt restructuring and a plethora of debt conversions (voluntary and otherwise). The pathway to containing and reducing public debt will require a change that is sustained over the middle and the long term. However, the evidence, as we read it, casts doubt on the view that soaring government debt does not matter when markets (and official players, notably central banks) seem willing to absorb it at low interest rates – as is the case for now.”

This suggests to me that Paul Krugman went overboard in his criticism of Carmen and Ken—at least before he backed off somewhat. I am not up on all the details, but it is my understanding that some of Paul Krugman’s stronger criticisms against Carmen and Ken in terms of providing intellectual backing for austerity might have been better leveled against other influential economists, such as Alberto Alesina. But I would need a lot of help to know whether such criticisms were even appropriate for other influential economists such as Alberto. For the record, the current Wikipedia article on Alberto Alesina says:

In October 2009 Alesina and Silvia Ardagna published Large Changes in Fiscal Policy: Taxes Versus Spending,[3] a much-cited academic paper aimed at showing that fiscal austerity measures did not hurt economies, and actually helped their recovery. In 2010 the paper Growth in a Time of Debt by Carmen Reinhart and Kenneth Rogoff) was published and widely accepted, setting the stage for the wave of fiscal austerity that swept Europe during the Great Recession. In April 2013 some analysts at the IMF and the Roosevelt Institute found the Reinhart-Rogoff paper flawed. On June 6, 2013 U.S. economist and 2008 Nobel laureatePaul Krugman published How the Case for Austerity Has Crumbled[4] in The New York Review of Books, noting how influential these articles have been with policymakers, describing the paper by the ‘Bocconi Boys’ Alesina and Ardagna (from the name of their Italian alma mater) as “a full frontal assault on the Keynesian proposition that cutting spending in a weak economy produces further weakness”, arguing the reverse.

Thus, Wikipedia conflates Carmen and Ken’s views with those of Alberto Alesina and Silvia Ardagna.

But just as Carmen and Ken’s views should not be conflated with Alberto and Silvia’s views, neither should my views be conflated with Paul Krugman’s. Soon after Thomas Herndon, Michael Ash and Robert Pollin’s paper came out, I wrote in Quartz:

Unlike what many politicians would do in similar circumstances, Reinhart and Rogoff have been forthright in admitting their errors. (See Chris Cook’s Financial Times post, “Reinhart and Rogoff Recrunch the Numbers.”) They also used their response to put forward their best argument that correcting the errors does not change their bottom line. Given the number of bloggers arguing the opposite case—that Reinhart and Rogoff’s bottom line has been destroyed—it is actually helpful for them to make their case in what has become an adversarial situation, despite their self-justifying motivation for doing so. And though I see a self-justifying motivation, I find it credible that Reinhart and Rogoff’s original error did not arise from political motivations, since as they note in their response, of their two major claims—(1) debt hurts growth and (2) economic slumps typically last a long time after a financial crisis—the claim that debt hurts growth is congenial to Republicans, while the claim that it is normal for slumps to last a long time after a financial crisis is congenial to Democrats.

The results from the fairly straightforward data analysis that Yichuan and I did made me somewhat less sympathetic to Carmen and Ken. Nevertheless, I think they spoke and wrote in good faith. Errors of omission are a different issue, and there we all stand condemned, in a hundred different directions for each of us.

It is from the perspective that we all stand condemned for errors of omission of one type or another, that I hope my words in “Righting Rogoff on Japan’s monetary policy” are taken. I also urge you to distinguish carefully between simply reportingone side of the Spring 2013 debate about Reinhart and Rogoff’s work, and things I say on my own behalf: principally that Ken does not challenge policy-maker conventional wisdom as much as I would like to see.

Carmen and Ken literally did not have time enough to defend themselves adequately back in Spring 2013. Now that the dust has cleared, I would be glad to see them do more to tell their side of the story.

This update is my effort to make up for some of my own errors of omission when I wrote “Righting Rogoff on Japan’s monetary policy.” In particular, I thought wrestling with Ken’s FAQ document was the least I could do to give a little more voice to Carmen and Ken’s side of the story. (To the extent that you were persuaded by Thomas Herndon, Michael Ash and Robert Pollin’s paper, or were persuaded by unjustified accusations of bad faith on Carmen and Ken’s part, you should take a close look at that FAQ document.)

# Quartz #54—>The National Security Case for Raising the Gasoline Tax Right Now

Link to the Column on Quartz

Here is the full text of my 54th Quartz column, “America’s national security case for raising the gasoline tax right now," brought home to supplysideliberal.com. It was first published on December 5, 2014. Links to all my other columns can be found here.

At this writing, this is one of my most popular Quartz column ever. You can see a list of my most popular columns here.

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The world is a dangerous place. The Russianannexation of the Crimea and invasion of Eastern Ukraine behind tissue-thin pretenses has set Europe on edge. Hard-line factions in Iran are working to sabotage talks to rein in Iran’s nuclear program, in counterpoint to dark words from Bret Stephens in the Wall Street Journal speculating that the Obama administration has accepted the inevitability of an Iranian atom bomb. Meanwhile the Islamic State has carved out large chunks of Iraq and Syria for its grim caliphate. And China, despite its growing economic problems amidst its periodic saber-rattling, is still on track to besting the US in the overall size of its economy, simply because it has four times as many people as the US. (While GDP per personmatters for many international comparison it is total GDP that matters most for military strength.)

To deal with the long-run danger of Chinese dominance, the best strategy is to bring more people into the American fold, as I wrote in “Benjamin Franklin’s Strategy to Make the US a Superpower Worked Once, Why Not Try It Again?” But to shrink the more immediate threats from Russia, Iran, and ISIS down to size, there is another remedy: low prices for oil. Russia’s and Iran’s economies survive economic sanctions as well as they do because of oil revenue. Iran has plenty of money to enrich uranium and build missiles because of oil revenue. And the Islamic State earns millions of dollars a day from smuggled oil to help fund its murderous operations. Lowering the world price of oil puts less money in the hands of our enemies.

More subtly, lowering the world price of oil may help undercut or prevent dictators that may become our enemies in the near future. Economists and political scientists have noticed the “natural resource curse” in which many countries have dysfunctional politics because of natural resources. In a country without many natural resources, people are the main source of wealth; they have to be handled with care by rulers or they won’t produce much wealth. But in a country with oil, controlling the oil fields is enough to control most of the wealth of the country, and provides enough funds to buy off the people without giving them freedom, or to pay soldiers to intimidate the people.

Fortunately, the world price of oil has just fallen dramatically. On November 28, 2014, the Wall Street Journal began its editorial “The New Oil Order” with these words:

America’s unconventional oil boom continues to yield major benefits—economic and geostrategic. The latest evidence is OPEC’s decision on Thursday to defy expectations and maintain its current oil production target despite the steepest price decline since the 2008-2009 recession. The price of Brent crude, the global oil benchmark, plunged as a result to about $70 a barrel, continuing its decline from a peak of nearly$116 in June.

Here, the Journal appropriately gives much of the credit to the fracking boom in the US. In addition, the world’s economic troubles have reduced the demand for oil. And the rulers of Saudi Arabia realize (better than most Americans) that low oil prices are a way to weaken its rival Iran.

What can we do to keep the price of the oil that Russia, Iran and the Islamic State are selling as low as possible?

## 1. We can keep the fracking boom going

…and open the way for building the pipelines needed to ship oil and natural gas from point A to point B.

## 2. We can pour more money into solar power research

On November 19, I saw a talk by former Energy Secretary and Nobel Laureate Steven Chu at a (natural gas and oil-funded) conference in Doha, Qatar. He said solar power is close to being cheaper than conventional energy sources even without subsidies. (See also Ramez Naam’s Scientific American article “Smaller, cheaper, faster: Does Moore’s law apply to solar cells?”) Already, solar panels are cheap enough that installation costs are becoming the biggest issue. And there, German firms have figured out how to bring installation costs down far below installation costs in the US. Pushing solar power faster along the path it is already going could do a lot to keep oil demand from pushing prices up as the world economy improves.

## 3. We can increase gasoline and oil taxes and devote the proceeds to rebuilding our military to combat the new national security challenges that confront us

Gasoline and oil taxes raise the price of oil to consumers, but they also lower the price of oil to producers like Russia and Iran—especially if we convince our allies to raise their gasoline and fossil fuel taxes as well (which they might be willing to do, even though for many, their gasoline taxes are much higher than ours already). A basic principle from Economics 101 is that at the end of the day, taxes affect all players in a market, whoever officially pays them. For oil what that means is that although higher gasoline and oil taxes would involve some sacrifice from US consumers and US producers for the sake of national security, they are also taxes that, at the end of the day, are paid in a real way by US enemies.

One way to make an increase in gasoline and oil taxes easier to swallow is to phase those taxes in over time. Economic theory predicts that credible future gasoline and oil taxes will bring down the price of oil now. If everyone knows and believes gasoline and oil taxes will increase over time, the value of keeping oil in the ground to sell it in the future will be lower, so that oil is more likely to be put on the market now—at a lower price. And down the road, if solar power continues to get cheaper—and new ways to store power get cheaper, too—those gasoline and oil taxes in the future won’t be as painful as they would be now.

For too long, the US and many of its allies have either ignored the dangers of the world and turned inward, or have been drawn into fighting wars against dictators or terrorists funded by oil riches. One of the best ways for the US and its allies to support the valiant men and women who fight and die to defend the free world and to keep those parts of the world that are struggling towards freedom from descending into chaos is by taking high oil revenues out of our enemies’ war chests.

Technical Note: In light of the title, I should point out that, from an efficiency standpoint (without regard to politics), there may no justification for phasing in a gasoline tax increase slowly. If a national security externality were like an environmental externality, that externality should ideally be reflected in the tax rate right now. But the national security externality is actually a pecuniary externality, so it would take some nontrivial reasoning to figure out whether or not there is any justification for phasing a gasoline tax in. It is an optimal taxation problem in which money in the hands of certain parties counts negatively.

Syndication: I am pleased that this column was syndicated here to another Atlantic Company website as well: Defense One. Here is a screen shot:

# Quartz #53—>Why You Should Care About Other People's Kids as Much as Your Own

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Here is the full text of my 53d Quartz column, “Why you should care about other people’s kids as much as your own,” now brought home to supplysideliberal.com. It was first published on October 12, 2014. Links to all my other columns can be found here.

This column doesn’t just say we should care, it gives a plan for getting there. In particular, how we handle long-run fiscal policy can make a big difference to the level of altruism in our nation.

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The remarkable popularity of Danielle and Astro Teller’s essay “How American parenting is killing the American marriage” points to an incipient backlash against the cult of parenthood.

But if there is going to be a backlash against the cult of parenthood, I hope it is the right backlash. To me, the problem here is not at all the elevation of child rearing. After all, those who are children today really are the future of our species and our civilization, as I wrote in my Christmas column last year: “That baby born in Bethlehem should inspire society to keep redeeming itself.” What deserves a backlash is the elevation of my child or your child over everyone else’s children, and over all the adults who hold things together and move things forward until those who are now children are ready to run things.

Among the middle-aged, the most common type of thoroughgoing selfishness is not “Me, me, me,” but “my, my, my” on behalf of a precious daughter or son. But isn’t this just human nature? Isn’t it just tilting against windmills in the grand tradition of Don Quixote to inveigh against the extreme favoritism people exhibit towards their own children? Actually, no.  As adult human beings, how many children we care about, and how much, is a curiously malleable aspect of our personalities. People love their adopted children dearly. And it is hard to coach a soccer team, be a Cub Scout den leader, or run a math club without starting to care about the kids one works with.

Growing up, I was often told “You love those whom you serve.”  That is a true principle of psychology. If you help someone out without too much of an ulterior motive, parts of your brain outside the localized glow of consciousness start trying to make sense of why you are being so nice. A handy explanation for your subconscious to turn to is that whoever it is means something to you. And this process of what in economists’ jargon would be called “developing a new altruistic link” works even if you know full well that it is happening. I remember when bargaining with the head of my department over the terms on which I would serve (a now completed term) as director of our Masters of Applied Economics program knowing that I had to be ready for a situation in which I would come to care about those students, even though I didn’t know them yet.

Community and religious organizations that get people involved in helping others—especially when they get people involved in helping others who are in especially bad situations—do a lot to help generate new altruistic links that make the world a fairer, more benevolent place in ways that come easily to us, psychologically, after getting over the initial hump of dealing with someone new. Strangers become friends. And our friends’ problems become our own.

Even government policy can help. Paying taxes does very little toward making us care about those who are helped from those tax revenues. But if, instead of raising taxes, we insisted that those who are comfortable contribute a substantial amount to a charity of their choice, as I advocated in my column “Yes, there is an alternative to austerity versus spending: Reinvigorate America’s nonprofits,” we would care more. And caring more, we would be likely to volunteer our time as well as giving money. And best of all, our children would see us helping other people’s children, and learn early on that loving others—even beyond our own families—is what brings us to the highest level of our own humanity.

# Quartz #52—>How to Turn Every Child into a 'Math Person'

Here is the full text of my 52d Quartz column, ”How to turn every child into a ‘math person,'” now brought home to supplysideliberal.com. It was first published on August 11, 2014. Links to all my other columns can be found here.

This is now my 5th most popular column, edging out “After Crunching Reinhart and Rogoff’s Data, We Found No Evidence High Debt Slows Growth.” See the whole list of most popular columns and posts here

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Last month, the US Math Team took second place in the International Math Olympiad—for high school students—held in Cape Town, South Africa. Since 1989, China has won 20 out of 27 times (including this year), and in the entire history of the Olympiad, the US Math Team has won only 4 out of 55 times, so second place is a good showing. According to the American Mathematical Association website: “team leader Loh noted that the US squad matched China in the individual medal count and missed first place by only eight points.”

Reading about the US Math Team’s performance in the Olympiad this year takes me back to my senior year of high school in 1977 when, having taken 9th place in the US Math Olympiad, I was invited to travel to the International Math Olympiad in Belgrade as an alternate to the 8-member US Math Team. I chose not to go to Belgrade because the Olympiad conflicted with the National Speech Tournament, where my team couldn’t have tied on points for first place without me—while the US Math Team won without needing my help. This profoundly shaped my perception of myself as a “math person.”

Left: an article from 1976 when Miles placed 23rd in the US Math Olympiad; top: in 1977 Miles placed 9th in the competition; bottom: questions from the 1977 USA Math Olympiad.

More than 36 years later, I have come to the view that almost everyone should think of herself or himself as a “math person.” In our column “There’s one key difference between kids who excel at math and those who don’t,” Noah Smith and I wrote this about the often-heard statement: “I’m just not a math person.”

We hear it all the time. But the truth is, you probably are a math person, and by thinking otherwise, you are possibly hamstringing your own career. Worse, you may be helping to perpetuate a pernicious myth—that of inborn genetic math ability.

Not everyone agrees with us. Noah and I got some pushback for our rejection of the idea that inborn math ability is the dominant factor in determining math skill. So I did some more reading in the psychology literature on nature vs. nurture for IQ and for math in particular. The truth is even more interesting than the simple story that Noah and I told.

## Math ability is not fixed at birth

Three facts run contrary to the idea that inborn mathematical ability is a dominant factor in determining whether or not someone is good at math compared to others of the same age.

First, it is a reasonable reading of the very inconsistent evidence from twin studies to think that genes account for only about half of the variation in mathematical skill among kids. For example, this 2007 National Institutes of Health Public Access twin study, using relatively transparent methods, estimates that genes account for somewhere in the range from 32% to 45% of mathematical skill at age 10. That leaves 55% to 68% of mathematical skill to be accounted for by other things—including differences in individual effort. (Other estimates of the percentage of variation of mathematical skill in kids due to genes range all the way from 19% to 90%. )

Second, a remarkable fact about IQ tests, including the mathematical components of IQ tests, is that every generation looks a lot smarter than the previous generation. This steady increase in performance on IQ tests is known as “the Flynn effect” after the political philosopherJames Flynn, who discovered this remarkable fact. The American Psychological Association’s official report “Intelligence: Knowns and Unknowns” says:

… performance has been going up ever since testing began. The “Flynn effect” is now very well documented, not only in the United States but in many other technologically advanced countries. The average gain is about 3 IQ points per decade.

At that rate, an IQ test from 100 years ago would put an average American today at an IQ of 130—in the top 2.5% of everyone back then.  The American Psychological Association’s report goes on to say:

The consistent IQ gains documented by Flynn seem much too large to result from simple increases in test sophistication. Their cause is presently unknown, but three interpretations deserve our consideration. Perhaps the most plausible of these is based on the striking cultural differences between successive generations. Daily life and occupational experience both seem more “complex” (Kohn & Schooler, 1973) today than in the time of our parents and grandparents. The population is increasingly urbanized; television exposes us to more information and more perspectives on more topics than ever before; children stay in school longer; and almost everyone seems to be encountering new forms of experience. These changes in the complexity of life may have produced corresponding changes in complexity of mind.

In other words, although people a century ago were good at many things, many of them would have struggled with the kinds of abstract problems IQ tests focus on.

(As a simple example of how math standards have risen, my father tells me that when he was in high school, people thought calculus was too advanced for high school students. Nowadays, about one of every six high school students takes calculus in the US.)

Third (and I wish the research were clearer about this for math specifically), the fraction of differences in IQ that seem genetically linked increases dramatically with age. For children, about 45% of differences in IQ appear to be genetic, while for adults, about 75% of differences in IQ appear to be genetic. Think about that. How could it be that genes matter more and more as people get older—even though the older you get, the more environmental things have happened to you? What I think is the most plausible answer, is that the genes are influencing what people do and what they do in turn affects their IQ.

## The “love it and learn it” hypothesis

No one yet knows exactly how genes, environment, and effort interact to determine mathematical skill. In light of the evidence above, let me propose what I call the “love it and learn it” hypothesisThis hypothesis has three elements:

1. For anyone, the more time spent thinking about and working on math, the higher the level of mathematical skill achieved.

2. Those who love math spend more time thinking about and working on math.

3. There is a genetic component to how much someone loves math.

Despite emphasizing time spent on math as the driver of math skill, this can explain why identical twins look more alike on math skills than fraternal twins. Since time spent dealing with math matters, it allows plenty of room for the average person to be better at math now than a hundred years ago. And the effect of loving math on math experience and therefore math skill is likely to only grow with time.

## To get better at math, act like someone who loves math

The way a teacher presents a mathematical principle or method in class may not work for you—or, as Elizabeth Green suggested in the New York Times, the whole American pattern of K-12 math instruction may be fatally flawed. If you loved math, you would think about that principle or method from many different angles and look up and search out different mathematical resources, until you found the angle that made most sense to you. Even if you don’t love math, that would be a good way to approach things.

Many people think that because they can’t understand what their math teacher is telling them, it means they can’t understand math. What about the possibility that your teacher doesn’t understand math? Some people are inspired to a life-long love of math by a great math teacher; others are inspired to a life-long hatred of math by an awful math teacher. If you are unlucky enough to have an awful math teacher, don’t blame math for your teacher’s failings.

Cathy O’Neil—who blogs at mathbabe.org—describes well what I like to call “slow-cooked math”:

There’s always someone faster than you. And it feels bad, especially when you feel slow, and especially when that person cares about being fast, because all of a sudden, in your confusion about all sort of things, speed seems important. But it’s not a race. Mathematics is patient and doesn’t mind.

Being good at math is really about how much you want to spend your time doing math. And I guess it’s true that if you’re slower you have to want to spend more time doing math, but if you love doing math then that’s totally fine.

I was lucky to have a dad and older brother who showed me a bit of math early on, in a way that was unconnected to school. Then in school, I spent at least as much time on math when I wasn’t supposed to be doing math as when I was. It was a lot more fun doing math when I wasn’t supposed to be doing math than when I was.

For one thing, when I did it on my own, I could do it my own way. But also, there were no time limits. It didn’t matter if it took me a long time. And nothing seemed like a failure.

I spent a lot of time doing math. And very little of that math was done under the gun of a deadline. I spent some time on literal tangents in geometry and trigonometry. But I spent a lot more time on figurative tangents, running into mathematical dead ends. When Euclid told King Ptolemy “there is no Royal Road to geometry,” it had at least two meanings:

1. Everyone—even a king or queen—has to work hard if he or she wants to learn geometry or any other bit of higher math.

2. The path to learning geometry, or math in general, is not always a straight line. You may have to circle around a problem for a long time before you finally figure out the answer.

## What can be done

I feel acutely my own lack of expertise in math education for students younger than the college students I teach. Fortunately, there are a wealth of practical suggestions for teaching and learning math by others who know more than I do, or have a different perspective from their own experience.

Noah and I received many comments in response to our post but the comments I learned the most from were from these people, who let me turn their comments into guest posts on my blog:

In Green’s article “Why Americans Stink at Math,” she talks about how differently math is taught in Japanese classrooms, and how we should hope that we might someday get that kind of math instruction in the US. The key difference is that in Japan, the students are led by very carefully designed lessons to figure out the key math principles themselves. That kind of teaching can’t easily be done without the right kind of teacher training—teacher training that is not easy to come by in the United States.

But some teachers at least encourage their students to follow a “slow-cooked math” approach where they can dig in and wrap their heads around what is going on in the math, without feeling judged for not understanding instantly. Elizabeth Cleland gives a good description here of how she does it.

Even when a student is lucky enough to have good teachers at school, a little extra math on the side can help a lot. Kids who arrive at school knowing even a tiny bit of math will have more confidence in their math ability and will probably start out liking math more. Even quite young kids will be interested in a Mobius strip made out of paper where a special twist makes what looks like two sides into just one side.  And putting blocks of different lengths next to each other as in a Montessori addition strip board is exactly how I have always pictured addition in my head.

A Montessori addition strip board. Image via jsmontessori.com

Extra math doesn’t all have to come from parents. In some towns, enough Little League soccer coaches are found for almost every kid to be on a soccer team. And even I was once drafted as a Cub Scout Den Leader. If people realized the need, many more adult leaders for math clubs for elementary and middle school kids could be found. In addition to showing kids some things themselves, math club leaders can do a lot of good just by checking out and sorting through the growing number of great math videos and articles online, as well as old-style paper-and-ink books.

I use Wikipedia regularly as a math reference. (There is no reason to think Wikipedia is any less reliable than the typical math textbook; textbooks are not 100% error-free either.)  I have a post on logarithms and percent changes that is one of the most popular posts on my blog. (Maybe it is the evocation of piano keyboards and slide rules, or the before and after pictures of Ronald Reagan.) And Susan Athey, the first woman to win the John Bates Clark Medal for best American economist under forty, highly recommends Glenn Ellison’s Hard Math for Elementary School as a resource for math clubs. All of that just scratches the surface of the resources that are out there.

The obvious issue raised by the “love it and learn it” hypothesis is that some people may not start out loving math, and some may never love math. Acting as if you love math when you don’t may work, but it can be painful. So it is important to figure out what can be done to instill a love of math. Even if they only know a little math themselves, people who can get kids who don’t start out loving math to come to love it are a national treasure. As the brilliant business guru Clay Christensen (among others) has pointed out, in an age when lectures from the best lecturers in the world can be posted online, the kind of help students need on the spot is the help of a coach.

For too long, we have depended too heavily on overburdened math teachers who have remarkably little time in school to actually teach math, and whom the system has deprived of the kind of training they need to teach math as well as it can be taught. It is time for all of us to take the responsibility for learning math and doing what we can to help others learn math–just as we all take responsibility for learning to read and doing what we can to help others learn to read.

Most of us who participated as kids in a sport or other competitive pursuit remember a coach who got us to put in a lot more effort than we ever thought we would. Math holds out the hope of victory not just in a human competition, but in understanding both the visible universe and the invisible Platonic universe. There is no impossibility theorem saying there can’t be math coaches in every neighborhood who make the average kid want to gain that victory.

That is the end of the column proper, but I have also collected here as a postscript a few memories, ideas and suggestions that had to be cut out of the Quartz column to make the column flow well. I added some headings to make it clear where each bit fits in.

I spent at least as much time on math when I wasn’t supposed to be doing math as when I was: The teacher might have been talking about social studies, but I was finding the prime factorizations of all the numbers from 1 to 400 by writing “2 ×” for every other number “3 ×” for every third number, “5 ×” for every fifth number, etc.—and then repeating that process for every other even number, every third multiple of 3, every fifth multiple of 5, and so on). The prime factorizations I learned from that satisfyingly tedious task I distracted myself with in elementary school came in handy when I took my SAT’s. And to this day, the way I get a hotel room number firmly into my memory is by doing its prime factorization.

Nothing seemed like a failure: At one point I knew just enough algebra to know that doing the same thing to both side of an equation left it a true equation. So for a long time, I transformed equations endlessly with no idea at all of where I was trying to go with those equations. Later on, when I actually had a purpose in mind for what I wanted to accomplish with a bit of algebra, I was able to draw on all of that experience just wandering around in algebra-land. And because I knew what it was like to do math without having any particular objective, I was able to appreciate how important it was keep the objective clearly in mind when there was an objective.

Proofs on other topics to get kids ready for proofs in Geometry class: Many kids who do well with arithmetic and algebra have trouble with geometry class in middle school or high school. It is often very hard to understand the idea of a proof when can’t see any reason to doubt the proposition to be proved in the first place. It is much better to get kids used to the idea of a proof earlier on in a context where the proof tells them something that doesn’t seem obvious. My favorite is the proof that there are an infinite number of primes. (There is a whole page of Youtube videos to choose from on this.) And a lot of kids wonder if imaginary numbers are numbers at all. The proof that complex numbers with an imaginary components obey all the rules of arithmetic and algebra and therefore can be treated as legitimate numbers not only answers a question kids really have, but uses concepts from “The New Math” that confused many kids in the 1960’s in a way that is obviously useful.

Math resources I found useful:

Resources to check out that might be good but that I don’t have any experience with:

Note: if you want to advertise your tool or method for math instruction here, I encourage you to advertise it in a comment that you post in the comment box below. When I moderate the comments, I will approve comments that advertise tools or methods for math instruction like that unless I have reason to believe there is something wrong with that tool or method.

# Quartz #51—>Italy Should Look to Ancient Rome to Reform Its Ineffective Senate

Link to the Column on Quartz

Here is the full text of my 51st Quartz column, "Italy should look to ancient Rome to reform its ineffective Senate,“ now brought home to supplysideliberal.com. It was first published on August 8, 2014. Links to all my other columns can be found here.

The idea for this column emerged during my trip to Rome, when I talked to Luigi Guiso about the economic and political situation in Italy. I wanted to thank him for all of his insights. Don’t construe that as his endorsement of my proposal, though!

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

The prime minister of Italy, Matteo Renzi, wants to miniaturize the Italian Senate—both in number of senators and in power. Under Renzi’s reform plan, senators would be appointed by regional councils and have no power to approve budgetspass most national laws, or hold a no confidence vote on the government.

One of the touted motivations is to save money: the equivalent of about $58 million in salaries, plus pension benefits. But even if it all added up to$100 million a year total, that would be only .005% of Italy’s $2 trillion a year economy. Any pluses or minuses for governance have to vastly outweigh the direct cost savings, so the issue should be thought of primarily as a constitutional issue, not a budgetary issue. Italian senators are resisting. They have introduced almost 8000 amendments to Renzi’s reform bill to put the brakes on this constitutional change. This trench warfare was predictable. Back in March, James Mackenzie explained in Reuters that Renzi’s plan “to transform the Senate into a non-elected chamber stripped of the power to approve budgets or hold votes of no-confidence in a government” would meet stiff opposition: [Renzi’s] bill would scrap the current fragmented system, which grants equal powers to the Senate and the lower house Chamber of Deputies but elects them by different rules which make it hard for any group to win a stable overall majority in parliament. … But despite loud public calls for change from all sides of the political spectrum, the reform is expected to encounter strong opposition from many in the 320-strong upper house who will have to vote to scrap their own jobs. Italian blogger Roberta Damiani gives an excellent primer on Renzi’s reform plan for the Italian Senate. She explains: Currently, Italy has a system known as “perfect bicameralism”: both chambers are directly elected during the same general election, and have exactly the same authority on every matter, including monetary ones. This is really rare, especially in parliamentary systems; Italy and Romania are indeed the only two countries in the EU with such a system. Such a system makes it hard to pass legislation. Right after Italy’s Fascist era under Mussolini, it made sense to make it hard for the government to do anything big. But now, when Italy faces a host of economic problems, that need imaginative solutions, it is a problem. Ancient Rome provides the inspiration for a very different reform of the Italian Senate—a reform that doesn’t save any money on senators’ salaries, because it would let the senators keep their jobs, but would: 1. End the gridlock caused by the current system; 2. Elevate the Italian Senate as a deliberative body; 3. Maintain the equality of the Senate with the other house of Parliament, the Chamber of Deputies. The highest officials in the Roman Republic were two consuls. The consuls took turns running the show, with one consul in charge one month and the other in charge the next month. The consul who was in charge was said to hold imperium. One consul could veto the actions of the other when the other was in charge, but used that power sparingly in order to avoid being checked in turn when it was his month. For the modern Italian Parliament, here is what I am proposing: just as consuls in Ancient Rome took turns being in charge in alternate months, let the modern Italian Senate and the other house of Parliament, the Chamber of Deputies, be in charge in alternate years. Require an active vote by 55 percent of the house of Parliament that is not in charge to veto an action by the one that is. (To minimize opposition to this reform plan, leave the number of senators the same as it is now.) Besides an occasional veto vote, what would a house of Parliament do during its off year? Although they might shirk in their duties, members of parliament in an off year would be expected to turn their house of Parliament into a kind of think tank, preparing and thinking through the actions they planned to take in the following year when they would again collectively be in charge. Having to watch the other house of Parliament be in charge during an off year would do a lot to stimulate creativity in putting together a program for the year when their house held imperium. Under this system, the members of parliament could all keep their jobs, as long as the voters kept reelecting them. The fact that the house of Parliament in charge could pass legislation with a simple majority vote but the other house could veto only with an active vote of 55 percent would do a lot to reduce gridlock. The years each house of Parliament would go through having to sit on the sidelines would do a lot to foster deeper deliberation. Italy has not been an easy country to govern. I think prime minister Renzi is trying to make things better, but he chose the wrong model for constitutional reform in Italy. For a better model—one that wouldn’t face the uphill battle of persuading senators to vote their own jobs out of existence—he can turn to the ancient Roman Republic, the source of so many of the world’s key democratic principles and traditions. # Quartz #50—>Odious Wealth: The Outrage is Not So Much Over Inequality but All the Dubious Ways the Rich Got Richer Link to the Column on Quartz Here is the full text of my 50th Quartz column, “Odious Wealth: The Outrage is Not So Much Over Inequality but All the Dubious Ways the Rich Got Richer,” now brought home to supplysideliberal.com. It was first published on June 30, 2014. Links to all my other columns can be found here. If you want to mirror the content of this post on another site, that is possible for a limited time if you read the legal notice at this link and include both a link to the original Quartz column and the following copyright notice: © June 30, 2014: Miles Kimball, as first published on Quartz. Used by permission according to a temporary nonexclusive license expiring June 30, 2017. All rights reserved. Concern about income inequality, and the even more striking inequality in wealth in the United States, is a key theme for the 2014 US congressional elections and has made Thomas Piketty’s book Capital in the Twenty-First Century a surprise bestseller. There are many reasons to be concerned about wealth inequality itself, regardless of the source of that inequality, but it is hard to pursue a discussion on the topic for long before someone makes a claim about whether the wealthy acquired their money in a deserving way. Partisans on the political left and right know which side of this argument they are supposed to emphasize: many who feel the government needs more revenue conveniently argue as if almost all wealth comes from underhanded, unscrupulous skullduggery, while many who feel the government needs less revenue conveniently argue as if almost all wealth were created by the likes of Steve Jobs, who brought us i-everything. But unlike these partisan stories, in every list of 1,500 or so billionaires, many deserve their wealth while others deserve very little of the wealth they have. While in some cases the principles for whether wealth is deserved or not are obvious, in other cases they are quite subtle. To start with an easy category, wealth obtained by deceit is illegitimate. For example, given the way tobacco companies lied about the dangers of smoking,the gigantic legal judgments against them seem appropriate (though it is too bad how big a share of that money went into the pockets of lawyers). And although the magnitude of the crime might not be as great, GM’s recently outed behavior in hiding problems with ignition switches has a disturbing resonance with the earlier behavior of the tobacco companies. As these examples make clear, standard legal principles often make it possible to take away wealth obtained by deceit once that deceit is well established. But a greater hatred of deceit on the part of juries, judges, and legislators would help in further neutralizing this form of wealth. If undeserved wealth always arose in cases where the logic was as simple as that for deceit, and were similarly reprehensible from a criminal or civil law point of view, then the issue of undeserved wealth could be appropriately handled in the courts. In an IMF paper, Harvard Economics professor Michael Kremer and Northwestern University Economics professor Seema Jayachandran make the intriguing proposal that debt incurred by a non-democratic government (after the appropriate international organization has declared that the debt is not in the interests of the people of a country) should be considered “odious debt” that later (and hopefully better) governments of that country need not pay back. We could similarly talk about “odious wealth”—wealth that is hateful in its origin. But our instincts about the merits of different means of acquiring wealth often go astray. Let me take two extreme examples: old songs that people love and the kind of “vulture capitalism” whose reputation helped sink Mitt Romney’s chances in the 2012 presidential election. There is currently a dispute over whether songs recorded before 1972 should continue to earn royalties. By naming their bill to extend royalties to pre-1972 recordings the “Respecting Senior Performers as Essential Cultural Treasures Act or “RESPECT” Act, congressmen George Holdings and John Coyners are using the fact that the musicians who recorded songs before 1972 (that we still listen to 42 years later) inspire feelings of gratitude, since songs of lasting popularity give many listeners much more pleasure than those listeners have paid for the right to listen to those songs. But the prospect of that very gratitude, plus 42 years of royalties, would have provided more than enough motivation for musicians to work hard back in 1971 to make great songs, if they had the ability. Forty-two years is a long time. And money coming in the near future looks (and is) more valuable than money coming in the more distant future. And even songs that last typically get more play in their early years. So at the time a musician is working hard on a song, the prospect of 42 years of royalties and undying fame should, to a surprisingly close approximation, be just as motivating as, say, 80 years of royalties and undying fame. So we don’t need to extend royalties to pre-1972 recordings to bolster the confidence of musicians making songs now that they will be properly rewarded for their efforts. And on the downside, charging royalties for pre-1972 songs has the potential to inhibit the development of internet and satellite radio—and in particular how often people get to listen to the best pre-1972 songs on internet and satellite radio. So there is a lot of downside, not much upside to extending royalties to pre-1972 recordings. But the folks who would earn those royalties, if they are still alive, are attractive recipients of the money, even in cases where they are relatively wealthy. By contrast, few ways of getting wealth seem less attractive than acquiring companies and then making them more profitable by laying off many of the employees. In August 29, 2012, Matt Taibbi wrote in the Rolling Stone essay “Greed and debt: the true story of Mitt Romney and Bain Capital:” A man makes a$250 million fortune loading up companies with debt and then extracting million-dollar fees from those same companies, in exchange for the generous service of telling them who needs to be fired in order to finance the debt payments he saddled them with in the first place. …

Instead of building new companies from the ground up, we took out massive bank loans and used them to acquire existing firms, liquidating every asset in sight and leaving the target companies holding the note.

This is what I am calling “vulture capitalism.” But vultures have an important place in the ecosystem. Just like literal vultures, who help clear away dead carcasses, vulture capitalists help in the difficult process of moving workers from making and doing things that people don’t need as much anymore to making and doing things that people are eager to pay for. For example, Mitt Romney helped unwind K-B Toys, whose toys could no longer compete with video games. This was enormously painful for the employees of K-B Toys, who were ultimately sent on their way in an arduous transition to new jobs (and some to early retirement). But an enormous amount of good work has been accomplished by former employees of K-B Toys in new jobs with efforts that would have been squandered on trying to make unwanted toys if K-B Toys had been kept limping along for a few more years.

Since they are unlikely to get much gratitude from their brutal but useful work, vulture capitalists have to be rewarded with money. Otherwise, who would want to do that task of dismantling companies and letting go of people and other resources that should be devoted to other purposes?

None of this is to say that the incentives for vulture capitalism are precisely right. It is unfortunate when, as is too often the case, the efforts of highly trained professionals are focused on transactions that make sense only because of quirks of the tax law. But the basic idea that the old must sometimes be dismantled to provide the human and non-human building blocks for new things is sound. And if something that painful is going to happen, it sometimes makes sense to say as Jesus said to Judas: “What you are about to do, do quickly.” The wealth earned by vulture capitalists may then look like the 30 pieces of silver Judas was given for betraying Jesus, but it must be considered legitimate, nonetheless, because the job needs to be done.

There are two points to take away. First, it is not right to treat all large fortunes as odious wealth (or as otherwise illegitimate in origin) or to treat all large fortunes as beneficent wealth. Second, without careful analysis, our instincts will often lead us astray about which is which.

Although people complain a lot about wealth and income inequality, I suspect that a great deal of that anger comes from how the rich made their fortunes. An ideal version of capitalism—the version in the economic models taught in introductory economics classes around the world—would make it impossible to get rich without doing great good for society. There are certainly areas where doing great good for society is not understood and therefore not appreciated. But there are also many areas where the wrong things are rewarded because of market distortions, or where the government piles on rewards beyond those that are needed.

Among market distortions, lies and deception are a key category. But it is also a problem that the legal remedies available to deal with lies and deception are not matched by any ability to bring a legal tort claim for, say, raising the planet’s temperature by burning coal.

Among excessive rewards caused by the government, bailouts without increases in equity requirements big enough to prevent future bailouts are especially unfair. But actions by the government to protect the profits and business models of firms already in place by standing in the way of firms doing new things in new ways  can in the long run be just as damaging.  And in the digital age, copyright law is long overdue for reevaluation.

Wealth and income inequality are a topic of perennial fascination. But the heat has been turned up not only by increases in such inequality, but also by the feeling that the 2008 financial crisis and the Great Recession suggest that something is fundamentally wrong with our economic system. Among the many reasons to redesign the monetary plumbing of our economic system to avoid a repeat of the Great Recession, one of the most important is to help us gain clarity on the many long-run issues we face, of which economic inequality is one of the most difficult to deal with.

# Quartz 49—>Will Narendra Modi’s Economic Reforms Put India on the Road to Being a Superpower?

Link to the Column on Quartz

Here is the full text of my 49th Quartz column, “Why you really want India to join the US and China as a superpower" now brought home to supplysideliberal.com. It was first published on June 13, 2014. Links to all my other columns can be found here.

I kept my working title as the title of this companion post, since it better reflects the content of the column.

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

Iraq joined Syria in civil war and Ukraine’s crisis persisted this week. And yet let me argue that this week’s most important geopolitical news is the economic program of India’s new prime minister, Narendra Modi.

Any increase in the chances for a full-scale supply-side transformation of India’s economy is cause to cheer for many reasons. First and foremost, faster economic growth in India would lift hundreds of millions of people out of dire poverty. But its geopolitical significance should not be underestimated. India is the only nation that rivals China in its population–and is on track to surpass China’s population. As I wrote in a previous Quartz piece, “Benjamin Franklin’s strategy to make the US a superpower worked once, why not try it again?”:

The reason China’s economic rise matters for US grand strategy is that China has a much larger population than the United States. … if China has ¼ the per capita GDP, but four times as many people, its total GDP will be the same size. …  Power corrupts. So … it should surprise no one that the US has done some bad things as a superpower. Yet I am convinced that the combination of Chinese nationalism and “Communist” oligarchy—or the combination of Chinese nationalism with some tumultuous future political transition in China—would lead a dominant China to behave much worse than the US has.

I believe a future in which India joins China and the US as a superpower would be a safer world than one in which China and the United States are the only superpowers. News of Chinese saber-rattling over territorial disputes has become a commonplace in the last few years. Here is a recent example. And the 25th anniversary of the Tiananmen Square Massacre is a reminder of the ugliness of China’s politics now and the tough road China has ahead even in the best-case scenario in which it does become more democratic.

Narendra Modi’s own past is a reminder that India has its own political ugliness. He is the only person to ever have been denied a US visa based on a law designed to punish foreign officials for “severe violations of religious freedom,” since as the head of the Indian state of Gujarat, he failed to stop a Hindu vs. Muslim riot that left more than 1,000 people dead.

Yet, India has been a functioning democracy since 1950, with genuine handoffs of power between different political parties since 1977. And both the religious tensions Modi fatally mishandled and the welfare state he now challenges point to the orientation of Indian politics primarily toward domestic issues, rather than territorial disputes with neighboring countries. What ideological gap exists between the Indian electorate and the US electorate would be narrowed further if further economic liberalization in India is successful. So I do not worry about what India might do as a future superpower the way I worry about what China might do.

What does India’s new government plan to do to make the Indian economy as big as possible, as fast as possible? One key element of the policy address by India’s president Pranab Mukherjee earlier this week, reflecting the prime minister’s agenda, is to make making agricultural markets more competitive, so that farmers can get a better price for their crops. The Wall Street Journal explains:

Subsidies and make-work schemes discourage farmers from concentrating on maximizing yields. Under the Agriculture Produce Marketing Committee Act, they are required to sell produce to monopolistic middlemen. As a result, much of India’s harvest rots before it gets to consumers, further driving up food prices.

The policy address outlines the rest of Modi’s agenda:

1. “Minimum government, maximum governance;”
2. “basic infrastructure such as roads, shelter, power and drinking water” in rural areas;
3. helping farmers to farm better in order to raise yields;
4. pursuing irrigation projects;
5. more use of massively open online courses (MOOCs) for education with the most bang for the buck;
6. toilets for everyone;
7. garbage collection;
8. making sure girls receive an education and are protected from violence;
9. encouraging groups of states within India to cooperate on economic development;
10. combating corruption with “transparent systems and timebound delivery of government services;”
11. trying to eliminate “obsolete laws, regulations, administrative structures and practices;”
12. digitization of government records;
13. “Wi-Fi zones in critical public areas” and broad-band in every village;
14. social media as a way of getting feedback about how government is doing;
15. “rationalisation and simplification of the tax regime to make it non-adversarial and conducive to investment, enterprise and growth” including reducing taxation of saving and investment by shifting toward a value added tax;
16. reducing red tape to “enhance the ease of doing business;”
18. creating “dedicated freight corridors and industrial corridors” as attractive destinations for investment;
19. more airports and upgraded seaports;
20. 100 newly developed cities;
21. allowing more foreign investment in making military equipment to make this sector more efficient.

There is always a big gap between government promises and government performance. But this list of initiatives is remarkable for what it doesn’t emphasize. There is not much in the way of direct handouts. By contrast, I learned at a “Cashless Society” workshop, sponsored by New York University’s Urbanization Project, that under the previous Indian government, when government officials came to take the biometric measurements to make it possible to establish identitywithout needing an identity card, people were happy to cooperate because they see government officials coming to town as a sign that some new handout, subsidy, or goody is on the way.

Most of the things Modi’s government is promising are things that, if delivered, will foster the quantity and quality of private economic activity. To give just two examples, more toilets would not only reduce the number of girls who get raped while going out to the fields to relieve themselves, it would save those girls a lot of time every day that they could devote to their schoolwork. And pushing the educational system heavily in the direction of massively open online courses could speed India toward the kind of low-cost, effective education that ace management guru Clay Christensen and his coauthors predict is the future of education everywhere in the world.

The policy address by the new Indian government is also relatively sophisticated in realizing the obstacles to rolling out new policies. It recognizes that, as a practical matter, many things that need to be done for economic development need to be done at the level of Indian states or groups of Indian states, rather than at the national level. If some states are more willing to work with the national government to foster economic development than others, those states can move ahead faster, and hopefully at some point, citizens of the remaining states will insist on policies like the successful policies of neighboring states.

In a previous election, Modi’s Bharatiya Janata Party (BJP) began using the slogan “India Shining.” If the new Indian government is able to implement even half of its policy agenda, and subsequent Indian governments continue to push further along the road of supply-side improvement, it won’t be long before “India Shining” is no longer just a slogan. It will be an accurate description of the world’s newest superpower.

Populations of the Most Populous Nations. I found the population figures in Wikipedia’s “World population” for the most populous countries very interesting.

• China: 1,364,970,000
• India: 1,245,280,000
• United States: 318,201,000
• Indonesia: 247,008,052
• Brazil: 201,032,714
• Pakistan: 186,709,000
• Nigeria: 173,615,000
• Russia: 143,657,134
• Japan: 127,180,000

I hadn’t realized that the US was the third most populous nation. All of Europe, including 110,000,000 in the European part of Russia, is only listed at 742,000,000. The reason it makes sense to focus on population figures is that catch-up economic growth up to the cutting-edge level of income per capita is much easier than the economic goal of the US of pushing income per capita to levels the world has never seen before for any large nation.

I was clued into India being headed for beating out China in overall population by Thomas Piketty’s Capital in the 21st Century. It is a fat enough book that I am only partway through. And I am glad I am reading it on a Kindle.

# Quartz #48—>The Man in the Tank: It’s Time to Honor the Unsung Hero of Tiananmen Square

Link to the Column on Quartz

Here is the full text of my 48th Quartz column, “The Man in the Tank: It’s time to honor the unsung hero of Tiananmen Square," now brought home to supplysideliberal.com. It was first published on June 3, 2014. Links to all my other columns can be found here.

I was deliberate in choosing July 4 to post the full column. The honor of our nation, which moves me deeply, is that it does not send tanks to suppress free speech.

In addition to my editor, Mitra Kalita, I want to thank my father, Edward Kimball, for excellent editorial suggestions in putting together this column.  The Tiananmen Square Massacre is an event well-deserving in its infamy of a two-day memorial. My post the following day also remembered.

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