Could the Fed Save Obama?

Using daily data for the first 5 months or so of 2012, I ran some regressions with the dependent variable being Obama's re-election closing prices on Intrade (i.e. what the Intrade market predicts Obama's chances are to be re-elected.)  There were 105 observations, and here are some results:

When I regress Obama's closing price on the daily  adjusted closing price of the S&P 500 and a time variable, I find Obama's re-election odds and the S&P 500 are positively correlated, and the correlation coefficient is highly significant.  You can also see the R-squared is quite high.


regress obamaclose spadjclose time

      Source |       SS       df       MS              Number of obs =     105
-------------+------------------------------           F(  2,   102) =  165.51
       Model |  750.217165     2  375.108582           Prob > F      =  0.0000
    Residual |  231.172684   102  2.26639886           R-squared     =  0.7644
-------------+------------------------------           Adj R-squared =  0.7598
       Total |  981.389849   104  9.43644085           Root MSE      =  1.5055

------------------------------------------------------------------------------
  obamaclose |      Coef.   Std. Err.      t    P>|t|     [95% Conf. Interval]
-------------+----------------------------------------------------------------
  spadjclose |   .0552766   .0040307    13.71   0.000     .0472816    .0632716
        time |   .0329881   .0051778     6.37   0.000     .0227178    .0432583
       _cons |  -18.34905   5.368125    -3.42   0.001     -28.9967     -7.7014
------------------------------------------------------------------------------

That's something of a dog bites man result, since it just says voters want a good economy.  Now I regress Obama's closing prices on inflation expectations (as measured by 5-year TIPS spreads) and a time variable.  The correlation is positive and highly significant.  This result is not shocking, but it does suggest that perhaps Obama should favor more expansionary monetary policy.

regress obamaclose inflex time

      Source |       SS       df       MS              Number of obs =     105

-------------+------------------------------           F(  2,   102) =  151.93

       Model |  734.747095     2  367.373548           Prob > F      =  0.0000

    Residual |  246.642753   102  2.41806621           R-squared     =  0.7487

-------------+------------------------------           Adj R-squared =  0.7438

       Total |  981.389849   104  9.43644085           Root MSE      =   1.555

------------------------------------------------------------------------------

  obamaclose |      Coef.   Std. Err.      t    P>|t|     [95% Conf. Interval]

-------------+----------------------------------------------------------------

      inflex |   16.75131   1.285248    13.03   0.000     14.20203    19.30059

        time |   .0411078    .005171     7.95   0.000     .0308512    .0513643

       _cons |   23.92947   2.415287     9.91   0.000     19.13876    28.72018

------------------------------------------------------------------------------

Now I regress Obama's re-election odds on the S&P and inflation expectations and a time variable.  Both S&P and inflation expectations have positive coefficients and are highly significant.  I think this result is interesting, because it says that even controlling for the value of the stock market, monetary expansion helps Obama's re-election chances.  The explanation might be that expansionary monetary policy (in our current circumstances) helps the economy more than just by making us wealthier, but it also improves the employment situation, and though those two outcomes are related they are not identical.

 regress obamaclose spadjclose inflex time

      Source |       SS       df       MS              Number of obs =     105

-------------+------------------------------           F(  3,   101) =  123.57

       Model |  771.255054     3  257.085018           Prob > F      =  0.0000

    Residual |  210.134794   101  2.08054252           R-squared     =  0.7859

-------------+------------------------------           Adj R-squared =  0.7795

       Total |  981.389849   104  9.43644085           Root MSE      =  1.4424

------------------------------------------------------------------------------

  obamaclose |      Coef.   Std. Err.      t    P>|t|     [95% Conf. Interval]

-------------+----------------------------------------------------------------

  spadjclose |   .0332366   .0079343     4.19   0.000      .017497    .0489762

      inflex |   7.788602   2.449327     3.18   0.002     2.929797    12.64741

        time |   .0351098   .0050057     7.01   0.000     .0251799    .0450397

       _cons |   -3.55992   6.934249    -0.51   0.609     -17.3156    10.19576

------------------------------------------------------------------------------

In conclusion, Obama should be listening to the Sumners of the world and seek more expansionary monetary policy.

Here's a scatter plot of Obama's closing prices and inflation expectations: 

(Data from Intrade, Yahoo Finance, and Treasury.gov.)

UPDATE: Justin Murphy has a different take on this data.

UPDATE 2: Since this post has gotten some attention, I updated the data a bit.  The graph below shows a scatter plot of Obama's closing % on intrade vs. inflation expectations (as measured by 5 year Treasury rates minus 5 year TIPS) for all of 2012 up to and including September 14, 2012.  It's the same as the graph in the previous post, but it has about 9 and a half months of data instead of 6 months of data.

Krugman Doesn't Understand Micro

...or pretends not to.

"Yet textbook economics says that in a competitive economy, the contribution any individual (or for that matter any factor of production) makes to the economy at the margin is what that individual earns — period. What a worker contributes to GDP with an additional hour of work is that worker’s hourly wage, whether that hourly wage is $6 or $60,000 an hour. This in turn means that the effect on everyone else’s income if a worker chooses to work one hour less is precisely zero. If a hedge fund manager gets $60,000 an hour, and he works one hour less, he reduces GDP by $60,000 — but he also reduces his pay by $60,000, so the net effect on other peoples’ incomes is zip."
http://krugman.blogs.nytimes.com/2011/11/22/taxing-job-creators/

Further down he implies that this idea (that wage=value of marginal product) is some sort of bedrock principle of free-market economics.

Two problems with this:
1)Even if we were to use the perfect competition model that he's referring to (which I'm not sure any economists actually regard as an accurate description of reality), there is such a thing as consumer surplus. So, a producer does not capture all of the value that he creates.

2)There's no remotely good reason for free-market types to be wedded to the perfect competition model. It's easy to come up with sensible reasons why wage might not equal the value of marginal product. There could be transaction costs (e.g. maybe the worker will not search around until he finds someone who will pay him his marginal product. Maybe he ends the job search earlier and accepts a reasonably good wage that is lower than his marginal product.) One could also discuss the idea that some firms have market power (this can have some relation to the transaction cost idea mentioned above.) Lastly, whether we talk about perfect competition or not, there can be externalities. Does anyone really think Isaac Newton captured all the value he created? His wage was not billions or trillions of dollars.

Yglesias advocates price controls?

That's what it looks like. Read the last sentence.

Why when it comes to health care do policy analysts lose their minds? If prices are high, perhaps we should have more supply rather than the imposition of price controls. Also, when you subsidize demand, as we currently do, of course prices will be high.

Let's move to a different system.

Stephen Fry and Irony

I recently came across this clip in which Stephen Fry repeats the canard that Aristotle thought that flies only had 4 legs. And then Fry basically claims that the Western intellectual world was so unscientific at one point that no one bothered to count flies' legs and prove Aristotle wrong.

To anyone with an even weak b.s. detector, this claim about Aristotle and his followers is clearly very unlikely, and as it turns out, it is indeed untrue. The irony is that Fry is well-educated and probably considers himself pro-science and pro-empirical knowledge, yet when he comes across a ridiculous claim he seems not to have bothered to perform adequate fact-checking.

I don't want to pick on Fry too much. I think this is a common problem: even educated, enlightened people seem to rarely question the things they hear and attempt to think critically about things. I've long thought our supposedly "skeptical" society to be perhaps just as gullible as the "superstitious" society of the Middle Ages.

You might notice that famous scientists or economists or other intellectuals will routinely say crazy or outrageous things when they leave their own narrow specialization. Or perhaps they will be empiricists from 9 to 5, but when it comes to leisure time and their personal lives loose thinking sets in.

Instead of just ranting, I'll attempt an explanation:
a) Knowledge has become so technical and detailed that it is just too costly for us to be generally educated. We specialize more and, on most subjects, we leave the thinking to the experts. E.g. The scientist or historian or journalist will likely get his economics from his favorite newspaper columnist, assuming that this columnist will not lead him astray.
b) Government has become large and so it basically concerns itself with everything. Hence, almost any subject can be regarded as a political subject. This or that economist is defined by whether he is on the left or right, not by whether or not he is sensible. Even popes are described in this way.

Matt Yglesias's Odd Political Economy

Matt Yglesias often makes intelligent points, but this post might be too cute by a half. He says the goal of monetary policy in the last few years has been "has been to do just enough to stabilize financial asset prices without going far enough to produce catch-up growth in the labor market." This isn't so crazy, but then he goes on to say: "What’s more, from the point of view of capital maybe it’s better not to catch up. As long as growth is positive and unemployment isn’t rising then maintaining a large 8-9% of the labor force out of work could be a useful tool of wage restraint."

How does "capital" benefit from high unemployment? There are some people who are primarily investing in bonds, or who have fixed incomes, and such people may like the idea of zero inflation or even deflation. Maybe lenders like this as well in some cases, though I'm not completely convinced. But generally, holders of financial assets, perhaps especially the wealthy among them, will be owners of stocks, real estate, etc. Why would such people oppose a little inflation? And why would a business owner want 8-9% unemployment, which is presumably coupled with unimpressive sales? I've never heard of someone who preferred a weak economy to a strong economy so that he could "restrain" wages. Basically, both employees and employers are fighting over the same pie (the revenue of their company), but presumably they want that pie to grow. Allowing the size of the pie to shrink or not to grow and then hoping you can consistently out-bargain your employees for a larger share of the pie does not seem like a reasonable or sustainable strategy for employers. Eventually, the employees leave.

Scott Sumner has a good take down of this sort of thinking.

Conservative Philosophers

Bryan Caplan asks: "Can you name a post-1900 conservative economist as well-known as Milton Friedman, or a post-1900 conservative philosopher as well-known as Robert Nozick?"

I don't know whether or not he means well-known inside academia or well-known in general. I'll assume he means in general. If we interpret the words conservative and philosopher somewhat broadly, then I'll throw these names out there:
Elizabeth Anscombe
Reinhold Niebuhr
John Courtney Murray
Jacques Maritain
Alasdair MacIntyre
Pope John Paul II
Joseph Cardinal Ratzinger
C.S. Lewis
G.K. Chesterton

As for conservative economists comparable in fame to Friedman, I'll throw in the towel. However, I will say that considered himself "a libertarian with a small 'l' and a Republican with a capital 'R.'" He also called himself a classical liberal. But these descriptions are not so different from what many contemporary conservatives would apply to themselves. And maintaining a long-term connection to the Republican Party, as Friedman did, is something many libertarians would find too distasteful to attempt.

Also, Hayek, though he denied being a conservative, actually was quite conservative in his philosophical views (e.g. a reluctance to tinker with institutions which had presumably evolved that way for a reason.)

Inflation Target

It's nice to see this. It's amazing that the Fed doesn't already have some sort of explicit target (inflation, price level, NGDP, whatever.) How can we know whether it is effective or not if we don't even know what it's goal is? If the Fed wants to create expectations of price stability, why not tell us what that means so that can know what we should be expecting? This could be one of those cases where being more mysterious gives one more prestige. But I think a predictable Fed is better than a prestigious Fed.

Our country desperately needs more intelligence in the debate over monetary policy. Once in a while, it's good to step back from the newspapers and talk shows and think deeply about these issues.

Contra John Cochrane on QEII

U.Chicago economist John Cochrane recently argued (in a Bloomberg article entitled "Is QE2 a Savior, Inflator, or a Dud?: Business Class") that the Fed is basically impotent, and the evidence for this is that: "QE2 doesn't seem to have lowered any interest rates." For students of Scott Sumner and Milton Friedman, interest rates are known to be quite misleading indicators. Also, interest rates are not the only way to measure the effectiveness of monetary policy. Why not look at inflation expectations themselves? After all, what is monetary policy about if not inflation expectations?

He does mention inflation expectations, but oddly he says: "Expected inflation could explain the sharp rise in long-term yields starting in November. But the rate for 10-year Treasury Inflation Protected Securities, or TIPS, rose in parallel, contradicting that interpretation." Why not look at the TIPS spreads? Look at graph of TIPS spreads above. You can see the 5 and 10-year TIPS spreads rose sharply from August 2010 to late April. Notice also that in that period the S&P rose as well (top graph.) I'm not an expert Fed watcher, but wasn't August around the time Bernanke signaled that he was open to more monetary expansion if needed? Could the decrease seen in both graphs since late April 2011 be partially due to market participants realizing that QEIII would not be coming any time soon?

I'm quite open to correction, but why doesn't Cochrane talk about the most relevant indicators, such as TIPS spreads?

(Sources: TIPS graph made using data from http://www.stlouisfed.org/ and S&P graph from Google Finance.)

Employment Policy Follies

It's almost like South Africa is begging economists (or anyone with common sense) to lampoon it when it does stuff like this.

The Barrington Moore Problematic and more

Brad DeLong recently gave an interesting talk about the "Social Studies" major at Harvard. It seems that this concentration is a hodgepodge of humanities and social science subjects, including history, economics, and political science. It seems a little like the "Philosophy, Politics, and Economics" concentration that some universities have. It seems to also be related to the "Great Books" concentrations, but with perhaps more emphasis on social science and less on the humanities. DeLong says that the major has been focused on the study of the Big Question of the 20th century: totalitarianism vs. freedom, tyranny vs. tolerance, etc., what he calls the Barrington Moore Problematic. In the 20th century, especially the middle of the 20th century, this seemed to be the main problem at hand. However, the Nazis and Soviets are gone now, so what should we study? DeLong points out that we actually don't even have a consensus that the Lockean principles of liberalism (freedom of religion, etc.) are correct. So in a sense the new Social Studies students maybe will be studying the post-Barrington Problems, but also perhaps pre-Barrington problems, since the Problematic basically takes for granted a Lockean consensus that doesn't exist.

I agree with the bulk of what he says, but I have two comments.

1) The period we are in looks a bit like the 1815 to 1914 period: relatively peace, prosperity, advancement of science and civil liberties. But that period was followed by the age of totalitarianism. How do we know ours won't be followed by something similarly monstrous? Or maybe the monstrosity will look a lot different. Maybe our dystopia won't look like "1984," but rather like "Brave New World." Maybe that dystopia is already here to a large degree. Even if we grant that our current political arrangement is fairly good, are we really in a stable equilibrium? I take it that we may actually be in fairly uncharted waters. For example, it seems that religious unbelief is more widespread among non-intellectuals than it was in just about any previous period. This is true especially of Europe and China. Can we know with much confidence that this won't lead to catastrophic outcomes?

2) Perhaps the students of Harvard need to go deeper than Locke. I think the Enlightenment consensus of live and let live made a certain amount of sense, but it was in some ways a bit ad hoc. We didn't know why we should stop killing each other, but we agreed to stop killing if the other side did as well. It was a contract more than an actual intellectual consensus. I think the same is true, and maybe even more so, of the post WWII consensus. We talk a lot about human rights, but we don't really agree on why slavery and murder are so wrong. I actually think that Aristotle and Aquinas had a coherent worldview in a way that the liberals of, say, 1776 or 1945 did not. Are our current problems more matters of philosophy than of social science?

I think Mr. DeLong would do well in reading "After Virtue" by Alasdair MacIntyre, if he has not done so already. In some ways I am closer to the liberals than to MacIntyre, but I think he does a great job of explaining how unsatisfying the current "consensus" is.

Lastly, a minor point: It seems that Locke had some hesitations, to say the least, about tolerating Catholics and atheists. So, in being intolerant towards Muslims, perhaps Peretz is not quite so un-Lockean after all.

Genteel professions

David Brooks has a provocative column about the debased values of contemporary. One example he gives is that: "America’s brightest minds have been abandoning industry and technical enterprise in favor of more prestigious but less productive fields like law, finance, consulting and nonprofit activism."

I think the validity of that statement is less obvious than Brooks may think. He seems to view the economy the way many (maybe most) people do. There are the "real" jobs that actually matter where people make things (manufacturing, etc.) or think of better ways to make things (engineering, science, etc.) or do something else with obvious tangible benefits (mechanics, doctors, farmers, etc.) And then there are the soft, cushy, basically unimportant, unproductive jobs in law, finance, entertainment, etc., where people just move paper around or leech off productive people or whatever.

There's obviously some grain of truth here. We need the farmer and the manufacturer on a more basic biological level than we need the talk show host or columnist(!) or ambulance chaser. And surely the world wouldn't be all that worse off if management consultants didn't exist.

However, what does he mean by the word "productive"? Economists say that people are by and large paid according to their marginal productivity, i.e. usually the more productive you are the more income you get. A lot of people are attracted to fields like law and finance and consulting, because they pay well. Therefore, they appear to be fields with high productivity, at least in some economic sense of the word. They seem to be producing something that someone somewhere values. So, is this the pursuit of gentility or the pursuit of income? And if society doesn't need these lawyers and financial analysts, why are we paying them so much?

Well, maybe some of them are gaming the political/economic system in some way that doesn't actually increase GDP through "rent-seeking" or what have you. Maybe some of them impose some large cost on society that the market isn't taking into account ("negative externalities"). You could imagine this to be the case with, say, a pornographer. But I don't think all of the lawyers and financiers are significantly hurting society in these ways, not by a long shot. Brooks should've fleshed out his argument a bit more.

If the US had half the lawyers/bankers it has now and twice the engineers and scientists, would it be better off? Maybe, but I think it's a pretty open question.

Which Classes to Take

Greg Mankiw wrote a slightly surprising article recently, in which he advises students to take at least a class in economics, statistics, finance, and psychology. If you follow Mankiw's blog, you'll know that he tends to take fairly safe positions rather than bolder positions that might turn out to be wrong later. Maybe if you came out in favor of protectionism, he'd lash out at you. But on issues where the economics profession is more evenly divided he can be fairly meek. (By the way, I'm sometimes like that myself.)

What made the article a little surprising is that he seems to imply that those four areas of knowledge are more likely to be worth one's time and effort than the alternatives. It's possible that he's right, but this is not exactly an iron-clad proposition he's putting forward (and he basically admits as much towards the end of the article.) There's something very unMankiw about it.

Anyway, here's my take. When it comes to choosing classes, there are at least two things to keep in mind. There are practical classes, which might be helpful in one's career later. E.g. Of Mankiw's choices, statistics, finance, and perhaps economics fall into this category. I might also add accounting, computer science, and others as well. Yes, psychology could conceivably be of us in one's job, but I don't know that such a class is really much more important than many other alternatives, such as, say, learning a language or taking calculus or creative writing. So, I found that suggestion to be slightly odd.

Then, there are classes which might enrich one as a person, improving the way one thinks about the world, etc. Many courses could do this, but in my experience courses such as philosophy, history, and theology or some hybrid such as literature/philosophy can be great at this. I don't advocate all such classes. But a really good humanities class can really blow your mind. Maybe a history of Western Civilization or a study of philosophical classics such as Plato, Aristotle, Augustine, Descartes, etc. They can be rather thought provoking. You start to think about the grand questions. I think biology and economics can be interesting in that they can be used to study human affairs with analytical rigor. Also, anthropology and psychology (especially with a more biological focus) can be helpful as well. Often people see some common human behavior and just marvel at it, confounded. But sometimes it makes a lot of sense from an economic or evolutionary perspective.

E.g. I remember someone remarking in a philosophy class that she didn't understand why she felt like she always had to buy nice new things, even though from a rational perspective she knew she didn't really "need" such things for happiness. My answer was that such overly powerful acquisitiveness and gluttony can be thought of as vestigial traits. So, when you feel a strong craving to eat sweets all the time, it makes sense if you realize that your distant ancestors in the plains of Africa didn't see such things so often and it made sense for them to have a great love of sugar so that they would eat it when they found it. Such analysis can be easily taken too far and can be too reductionist (I think C.S. Lewis called it "nothing buttery.") But I think in moderate doses it is extremely helpful.

I haven't worked out in my own mind how much one should emphasize practical classes in college and how much one should emphasize the grand-questions-classes. But definitely take several of each.

The 21st Century

Tyler Cowen has a post about What is emblematic of the 21st century.

It's a pretty sensible list for the most part. Probably the most obvious answer is the rise of information technology/social networking: smartphones, youtube, google, facebook, twitter, blogging, etc. The internet was already important in the 1990s, but think about the fact that people can now do a day's work from an IPad. I would add to this the rise of online universities and telecommuting. Also, taking into account online grocery shopping and ebay, the 21st century is probably the best time ever to be a recluse.

Another interesting trend is the increasing unsexed-ness of our society. I mean this in the Lady Macbeth sense, rather than the Steve Carell sense. The idea that the differences between the sexes are trivial has become more widespread. Some radicals asserted this in the 60s and 70s, and there was something of a push back in some ways. However, the idea stayed alive, and by 2010 this idea of a sexless society has become almost taken for granted by large swathes of the population. Maybe in a few crazy Red States, the sex differences live on. But in the land of yuppies that I live in, the idea that one's sex has anything to do with one career choice or roles within a family seems rather archaic. An example is how uncontroversial gay adoption is now. I imagine the idea was considered radical even 20 years ago. The sex-based division of labor appears to have been a central facet of human existence ever since the species began. It'll be interesting to see what happens if and when this arrangement dies.

Something could perhaps also be said about the rise of "smart", irreverent, no-holds-barred humor of the sort found in Arrested Development, The Office, 30 Rock, Judd Apatow movies, South Park, Curb Your Enthusiasm, etc. (Maybe this isn't so different from SNL, which goes back to the 1970s, or Seinfeld.) I don't know of a smart way to analyze, so I'll leave it to someone else.

I also wonder what the big religious stories of the century will be, other than the rise of the "Global South." Maybe the thawing of China?

Good-Bye Michael Scott

I've heard that this upcoming season of The Office, season 7, will be the last for Steve Carell's character Michael Scott. This is clearly a very sensible career move for Steve Carell. In movies like "40 Year Old Virgin", "Dan in Real Life", and "Despicable Me", he has shown himself to be a compelling leading man. Contrarily, The Office of the last three seasons were clearly inferior to the first three seasons. Some of the late episodes of Season 5, those dealing with The Michael Scott Paper Company, were some of the best in the show's history. But Season 6 was fairly lackluster. The Jim and Pam story is pretty boring these days, Ryan's character isn't particularly interesting either. Michael and Dwight basically carry the show, and I would say that Michael carries more of the load than Dwight. I don't know if the show will go off the air after Michael leaves, but I think it should. It's already lost a lot, and it's hard to see how it would be even reasonably good without Michael (unless something crazy happens, like they hire Tracy Morgan).

I hope The Office ends on a high note, with a great Season 7. And I hope Carell goes on to a great movie career and avoids a Will Farrell/Adam Sandler style I-don't-give-a-crap-anymore mid-life period.

Law school starting salaries

This is a pretty scary chart for those considering law school.

It would be nice to see a chart that is the same except that it includes only the top 14 or so schools. In that case perhaps the two humps would be a little closer together.

I'd also like to a see a chart for salaries 5 or 10 years after law school. I don't know what that would look like, but it might look a little less bimodal as people at the high-end start dropping out of their lucrative jobs due to a desire for more work-life balance and people at the low-end get raises.

One bright-side: it looks like something like 1/5 of the new lawyers were making between $75k and $125k. So those are fairly lucrative jobs, many of which might not be quite so hellacious as the Big Law jobs in terms of time and stress.

What happens when the poor get richer?

I was recently discussing with some friends the issue of increased wages in the developing world. I may be misremembering the conversation, but I think the idea was brought up that higher wages in the developing world could be worrisome for Americans, because we'd have to pay more for the goods we purchase from those countries (whether as final goods or inputs, I suppose). I've heard this sort of argument before. It is related to the idea that we rich nations rely on the labor of poor nations, and without them the whole global capitalist edifice might come crashing down. Once one area becomes rich we "need" to find another poor area. (Taiwan becomes rich, so China starts making plastic toys. China becomes less poor, so Vietnam starts making cheap goods.) This view is actually fallacious, even when stated in less dramatic terms. It is true that a poor country will have a comparative advantage in something vis-a-vis the US, so we will find it worthwhile to trade with them. However, we'd benefit even more if they were richer (almost always, but maybe there's some exception I can't think of).

First of all, higher wages in China does not automatically imply that goods bought from China will be more expensive. Higher wages usually means there has been some productivity gain. The worker gets paid more than before, because he produces more than before. E.g. Maybe he's making twice as many cars per hour as had been before. He might get paid twice as much per hour, and in that case, he's getting the same payment per car. So, the labor cost of building the car has not increased, even though the laborer is getting paid more per hour than before. (Why is he twice as productive now? Maybe he works harder than before. Or maybe he has better tools or knows more.) A simple example can illustrate this. If we should worry about wage increases abroad, we should also worry about them at home. So, someone might say, "Yeah, I'm making ten times more than my great grandfather, but almost everyone else is also making way more than he did. So, I'll just be paying 10 times higher prices. So, I've made no progress." The situation described just now would be true if the entire gain in income were due to inflation (i.e. more dollars chasing the same number of goods.) But in real life, much of the change in income since your great grandfather's time has been due to productivity gains (i.e. is "real" rather than merely "nominal.") In other words, there are more goods being produced per person, and thus there is a higher standard of living and not just higher price levels. I don't mean to say that higher wages never means higher prices, but I think it's generally not a big worry in the long-run.
See the fascinating chart about 40% down the page for historical evidence: http://www.econlib.org/library/Enc/StandardsofLivingandModernEconomicGrowth.html
You can see that even though wages have gone up, we can still buy things more cheaply than before. (I'm assuming most of these goods are produced in large part in high income countries such as the US. It's possible that this is incorrect, but I think my point would hold if you stuck to American goods. If you are skeptical, look up average US income in 1908 and divide it by the price of a Model T. Then divide the average income now by the price of a typical American car--which, in any case, is a way better product than the Model T. You'll get basically the same result the above chart got.)

Second, as people in China get richer, they can buy more of our goods. So, our exports increase, which leads to a higher GDP for the US.

Lastly, as they become wealthier, we can likely expect them to produce more scientific research and more inventions, both of which could benefit us greatly.

Here's an excellent essay on this topic: http://www.economist.com/economics/by-invitation/guest-contributions/important_thing_chinese_productivity_rising

What's the difference?

I recently attended a debate between libertarian students and conservative students. They were supposed to argue in general about why their respective sides had the better political philosophy, but they tended to get bogged down in the "weeds" of drug policy (pun intended) and other overly superficial issues. Not that drugs are unimportant, but you can find conservatives who are against the war on drugs (e.g. some folks at National Review). And I don't think the debaters did a good job explaining why this issue really illustrates a fundamental divide between their ideologies (if indeed they thought so). Litmus tests may not be the best way to look at this divide. I've trying to think of a way to understand the difference between the two philosophies, and it's not so easy to come up with a concise, satisfying answer. I haven't fully thought through this question, but I think a good starting point is to say that American conservatives and libertarians often do not come up with radically different policy proscription, but they have pretty different intellectual approaches when considering a problem. Libertarians tend to be very into casuistry: i.e. find a general principle and then apply it to a specific problem. So, there's a "correct" libertarian answer on drug policy, immigration, etc., and this answer would be correct in almost any time or place. [As a side note, I would say that I find it puzzling that, based on anecdotal evidence, that libertarians are in many cases atheistic/agnostic (and hence probably materialists.) So, it's not clear exactly how it is that so many of them believe in universal, objective truths. For that matter, how can they believe in liberty? After all, matter is not free. I will concede that there are some libertarians who will say things along the lines of: "I don't know what a good policy is and neither do you. So, let's just live and let live." But they seem to either be a minority of libertarians or a silent majority that is too lazy to leave the basement long enough to become political activists.]

In contrast, conservatives are less doctrinaire. Russell Kirk said that "conservatism is the negation of ideology." That might be too strong, but it does have a kernel of truth. Sometimes people say that conservatism is more of a temperament than a philosophy. There's also the famous Lionel Trilling quote that conservatives tend to express themselves with "irritable mental gestures which seek to resemble ideas." Again, I wouldn't fully endorse that notion, but it does strike a chord. If you're a conservative and it doesn't strike a chord, maybe you need to think about yourself and your friends a little more carefully. Now, most conservatives do embrace some doctrines, as any sane person would. But I think that, at least in the political realm, they do so about far fewer issues than libertarians do. For example, I can imagine circumstances in which I'd support fairly strict immigration laws. I could also imagine situations in which I basically support open borders. There are probably circumstances in which I'd take a laissez-faire political stance towards drugs, but there are also situations where I'd crack down hard. Conservatism is largely about prudence and judgment. We ought to seek to serve the common good, and there are many ways to do that.

Lastly, I'll say that it sometimes seems that American conservatives are not even all that conservative. I think they in many ways resemble some of the classical liberals and Whigs of old. After all, Edmund Burke was a Whig and Hayek called himself a Whig as well. Who is cited more often as an influence among conservatives in America? Burke, Locke, Smith, Madison, and Friedman? Or, say, Disraeli, Evelyn Waugh, T.S. Eliot, and Christopher Dawson? For better or worse, doesn't it sometimes seem that we are long on Whigs and short on Tories? Yes, some of this is semantics, but not all of it. Does this idiosyncrasy make us incoherent? Should we be citing Aristotle more and Jefferson less?

Mankiw: Do two rights make a wrong?

Greg Mankiw has a very interesting post today about kidney donations and quid pro quo.

I'd like to think he's making a common sense point, but I don't know how common his view is. According to one Dutch survey, most people (in the Netherlands presumably) seem not to like the idea of compensating kidney donors. Oddly, they were more comfortable if the donor were compensated with health insurance than if he were compensated with cash.

One objection would be from egalitarians: the rich would keep both of their kidneys, while the poor would be more likely to donate one (and undergo a potential dangerous surgery). But they are freely taking this risk and feel that they are better off taking the risk than not taking it (they get money and they have saved a life). The counter-counteragument is that they may be making the choice under duress, so it's not completely free. But this seems like it's something that could be quite difficult for us to know. And trying to prevent people from making transactions for the wrong reasons is a little bit too much micromanagement in my opinion. By similar logic we could ban unemployed people from going to law school. They didn't really want to take on all that debt. They were just desperate.

It's not intrinsically wrong, as far as I can see, to donate a kidney to make money. So, I'm willing let many thousands of people do it, knowing that maybe a few will do it without having completely pure intentions or without fully thinking the decision through, if we can save many thousands of lives in the process.

Are too many people going to college?

Something I've wondered about as well.

a) It's not really fair to the person who is not inclined towards academics that college is--or at least is often considered to be--the only reliable way to "get ahead." It would make sense for there to be more alternatives, like apprenticeship programs at corporations that the article describes (or unions or vo-tech schools or whatever else). Our system of one-size-fits-all higher education is clearly a social injustice of some sort.
b) It does degrade the world of higher education to some extent when the majority of students are in college primarily for the resume-padding/diploma rather than the learning itself. Of course, our system also means a lot of $$$ for the world of higher education, and so I imagine not much will change in the near future.

SCOTUS no-brainer

I've argued for term-limits for SCOTUS justices in the past, and I'm glad to see advocacy for it on the left (Yglesias) and the right (Douthat).

My reasoning is not the same as Yglesias's. I hope that term limits would lead to a little more humility on the court. It could also allow disastrous justices to be only short-term disasters.

I think term-limits in Congress would do a lot to cut down on the arrogance and the b.s. that follows from careerism. We could use a few more people like Cincinnatus and fewer unprincipled, self-aggrandizing bags of bones. (95% of the Senate, you know who you are.)