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David Henderson, writing in the Wall Street Journal, remembers the late Nobel-laureate economist Robert Lucas [2]. Two slices:
Lucas extended this thinking in a 1976 article that came to be called “the Lucas critique” of macro models. He argued that because these models were from periods when people had one set of expectations, the models would be useless for later periods when expectations had changed. While this might sound disheartening for policy makers, there was a silver lining. It meant, as Lucas’s colleague Thomas Sargent pointed out, that if a government could credibly commit to cutting inflation, it could do so without a large increase in unemployment. Why? Because people would quickly adjust their expectations to match the promised lower inflation rate. To be sure, the key is government credibility, often in short supply.
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Lucas was willing to change his mind when the evidence demanded it. In the early 1960s, he thought that taxing capital gains like ordinary income was “the single most desirable change in the U.S. tax structure.” By 1990 he had concluded that “neither capital gains nor any of the income from capital should be taxed at all.” He estimated that cutting the tax rate to zero would increase the capital stock by about 35%.
Also remembering Robert Lucas is GMU Econ alum Dominic Pino [3]. Two slices:
“That [Keynesian] predictions were wildly incorrect and that the doctrine on which they were based is fundamentally flawed are now simple matters of fact involving no novelties in economic theory,” Lucas and Sargent wrote. The days of hydraulic Keynesianism, where the economy was a giant machine with buttons and levers that policy-makers could press with predictable outcomes, were over. In its place, equilibrium models of the business cycle would arise. Lucas and [Thomas] Sargent wrote that the way macroeconomists think about policy would shift away from designing the right intervention to focusing on “the need to think of policy as the choice of stable rules of the game, well understood by economic agents.”
In what became known as the “Lucas critique,” Lucas described the shortcoming that plagues macroeconomic modeling of policy changes. People adjust their behavior and expectations in response to policy changes, so the policy change alters the parameters of the model itself. The just-plug-in-the-numbers approach to macroeconomics was dealt a devastating blow. People aren’t particles in a laboratory; they’re living, thinking beings that adjust to new circumstances.
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If there’s one work by Lucas everyone should read, it’s his 1988 lecture [4] “What Economists Do.” It’s short, 100 percent white-meat prose, and certified equation-free. “We are basically story-tellers,” said Lucas of economists. He proceeds to tell a story about an amusement park, which serves as a model for the U.S. economy, complete with a currency (tickets), a central bank (the cashier’s office), goods and services (concessions and rides), and consumers and producers (park attendees and park employees). He demonstrates how by increasing or decreasing the rate at which dollars are exchanged for tickets, he could create a boom or bust in the park’s economy.
Economists have to be story-tellers, Lucas says. “We do not find that the realm of imagination and ideas is an alternative to, or a retreat from, practical reality. On the contrary, it is the only way we have found to think seriously about reality.”
Few people thought more seriously, or with greater effect, about economic reality than Robert Lucas. R.I.P.
“You use the roads, don’t you? [6]”
Jordan McGillis makes the case for greater freedom of trade in U.S. commercial aviation [7]. A slice:
Air cabotage laws [8] stemming from the Civil Aeronautics Act of 1938 [9] ban foreign airlines from operating routes between U.S. airports. An impressive carrier like Japan Airlines can fly from Tokyo Narita to LAX, but it cannot fly passengers from Los Angeles to Seattle, Dallas, or anywhere else within the United States. As a result, U.S. airlines are insulated from the healthy competition that has generated a better air travel experience in other parts of the world.
Despite having the world’s highest-revenue domestic air travel market, U.S. domestic flyers are limited to mediocre carriers. The first U.S. airline to appear on the Skytrax global airline rankings [10], Delta, is all the way down at number 24. According to AirHelp’s on-time performance metric [11]—the specific aspect of air travel the Biden plan targets—Delta is again the best domestically, but nine foreign airlines do better.
Rather than add to the complexity of domestic fare pricing with the threat of compelled cash payments, wouldn’t U.S. air travelers benefit more from having a wider array of airlines to choose among?
The Editorial Board of the Wall Street Journal reports on just how very insidious is the mania for ESG ‘investing.’ [12] A slice:
Sunshine is what this ESG business demands. Pensioners and investors want a good return. What they don’t want, to pick one example, is for companies that sell paint or hamburgers to undertake costly external audits so that they can self-flagellate about the ills of the world.
From Britain, Steve Davies warns that “the Tories are on course for a shattering defeat.” [13] A slice:
Now, however, politics is realigning around a different set of issues, to do with identity and particularly the divide between nationalism (and the power of national electorates) and supranational cosmopolitanism (and the rule of trans-national laws and agreements). Another emerging issue is divisions over the implications of new technologies and environmental questions. In this new world, conservatism is increasingly defined as being support of national identity and sovereignty against supranational globalism, along with scepticism about global capitalism and free movement of labour, goods, and capital, with a revival of mercantilist economics (such as industrial policy). The other element is one of asserting traditional identities against the challenges of new technologies and the body of radical left-liberal ideas commonly labelled as “woke”.
Some business models just aren’t very sound [14].
Michael P Senger tweets [15]: (HT Jay Bhattacharya [16])
The purpose of COVID mandates was simultaneously to frighten the public into compliance, while also partially allaying that fear with a false sense of control contingent upon compliance. Demonization of the non-compliant was inevitable, if not intended.