Paasche Says Progress

When economists debate economic stagnation, I routinely recall my undergraduate macroeconomics textbook, Dornbusch and Fischer’s Macroeconomics (5th edition). In Appendix 2-1, these famed economists introduce readers to two main contrasting price indices: the Laspeyres, or base-weighted, and the Paasche, or current-weighted:

While this may seem technical, much is at stake. Suppose a stagnationist belittles the economic importance of the internet. “So we get some free stuff. How much can it possibly shift official GDP calculations?” The answer: Tremendously.  Why?  Because calculations of real GDP use the GDP deflator, and the GDP deflator uses a Paasche price index.

Let’s set our base year to 1990 – the very year my old textbook was published. Now consider Youtube. Its measured annual contribution to GDP is about $15 billion. Relative to GDP, that’s a pittance, right? But Youtube consumption is about 1.5 billion hours per day. Back in 1990, a typical video rental cost $2.49. So even ignoring the massive increase in consumer choice and convenience, the annual contribution of Youtube measured in base year prices is 1.5B*$2.49*365.  That’s roughly $1.4 trillion dollars.  Paasche power!

The results for Google are even more dramatic. People run an average of 3.5 billion searches a day. Back in 1990, you would have been lucky to get comparable service for $20 – perhaps by hiring someone to spend a couple hours pouring through the Reader’s Guide to Periodical Literature. So while the value of Google’s services in current prices is about $100B a year, the value in base year prices comes to over $25 trillion dollars.

You can see where this is going. If we sum the current revenue of the top internet companies, it’s probably well under $1T per year. However, if we sum the value in 1990 prices of the cornucopia they provide, it easily exceeds $50 trillion a year. Yes, much of this consumption happens abroad, increasing Gross World Product rather than U.S. Gross Domestic Product.  Yet using a Paasche price index, there’s still no doubt that the GDP deflator has sharply fallen since 1990. That means decades of non-stop deflation. This in turn implies that real GDP has risen far more than almost any respectable economist will admit.

Switching to the Laspeyres price index naturally makes this stunning result go away. If we take 1990 output at today’s prices and divide it by 1990 output at 1990 prices, we’ll only see modest progress. A few sectors – like video rental – will basically vanish from the numerator, but they’re only a small component of the denominator.  For example, using a base-weighted index, the value of video rentals in 1990 at today’s prices is roughly zero because video is now virtually free.  But the value of video rentals in 1990 prices is also modest, because when video was $2.49 a pop, total consumption was modest.

So which method of price indexation is correct?  Once they understand what’s at stake, dogmatic optimists will say, “Paasche!” Dogmatic pessimists will naturally answer, “Laspeyres, of course.” I say both sides should be more broad-minded.  Yes, there is a sense in which progress since 1990 has been modest. However, there is another important sense in which progress since 1990 has been astoundingly awesome.

If you don’t remember 1990, the modern world is easy to take for granted. The rest of us, however, know – or at least ought to know – that modernity is a living miracle. Though we don’t own fifty cars each, we still enjoy fabulous luxuries beyond of the budget of the richest residents of 1990. Stagnationists live to belittle these gains, but that’s not science; it’s perspective. Paasche points the way to a radically different yet equally scientific conclusion. The judicious approach, though, is not to pick a side, but to triangulate. Economic progress is complex. In some major ways, it’s been slow; in other major ways, it’s supersonic. And overall? Seems speedy to me – and not because I don’t know the numbers.

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The Depression Preference

When I describe mental illness as “an extreme, socially disapproved preference,” the most convincing counter-example people offer is depression.  Do I really think people “want to be depressed” or choose depression as a bizarre alternative lifestyle?

My quick answer: These objections confuse preferences with meta-preferences.

No one chooses to have the gene for cilantro aversion.  Yet people with the cilantro aversion gene are perfectly able to eat this vegetable.  They just strongly prefer not to.

Similarly, when I say that alcoholics are people who value heavy consumption of alcoholic beverages more than family harmony, this doesn’t mean that they like having these priorities.  If they could press a button which would eliminate their craving for alcohol, I bet many alcoholics would press it.  But given their actual cravings, they prefer to keep drinking heavily despite the suffering of their families.

The same holds even more strongly for the typical person diagnosed with clinical depression.  Most people with loving families and successful careers are happy.  Clinically depressed people, however, often have both loving families and successful careers, yet still want to kill themselves.  Their preference is so extreme that it confuses the rest of us.  They’d almost surely rather have a different preference.  But it is their preference nonetheless.

Not convinced?  Think back to the early 1970s, when psychiatrists still classified homosexuality as a mental disorder.  I object, “Mental disorder?  No, it’s just an extreme, socially disapproved preference.”  When critics incredulously respond, “Do you really think people choose to be gay?,” I say they’re confusing preferences with meta-preferences.  To be gay is to sexually prefer people of your own gender.  This doesn’t mean that gays want to feel this way.  If a gay-to-straight conversion button existed in the intolerant world of 1960, I bet that most gays would have gladly pushed it for themselves.  Even today, I think many gay teens would press the conversion button to fit in and avoid conflict.  But so what?  Hypothetical buttons can’t transform a preference into a disorder.

Is this all just a word game?  No.  The economic distinction between preferences and constraints that I’m drawing upon has three big substantive implications here.

First, people with extreme preferences could make different choices.  People with cilantro aversion are able to eat cilantro.  Alcoholics are able to stop drinking.  The depressed can refrain from suicide.  And so on.  This is fundamentally different from my inability to bench press 300 pounds – or live to be 150 years old.

Second, as a corollary, people with extreme preferences can – and routinely do – respond to incentives.  People with cilantro aversion are more likely to eat cilantro if other foods are expensive or inconvenient.  Alcoholics respond to alcohol taxes – and family pressure.  Depressed parents may delay suicide until their kids are grown.  Even in a tragic situation, incentives matter.*

Third, as a further corollary, people with extreme preferences can – and routinely do – find better ways to cope.  People reshape their own preferences all the time; perhaps you can do the same.  Failing that, perhaps you can discover more constructive ways to satisfy the preferences that you’re stuck with.  For example, if you’re extremely depressed despite great career success, you really should try some experiments in living.  Perhaps you’ll be miserable whatever you do.  But if you’ve only experienced one narrow lifestyle, how do you know?  Maybe you’d feel better if you tried putting friendship or hobbies above “achievement.”

It’s tempting to insist that there’s something pathological about having conflicting preferences and meta-preferences.  On reflection, however, these conflicts are a ubiquitous feature of human existence.  Almost everyone would like to feel differently in some important dimension.  Almost everyone reading this probably wishes they were less lazy, more patient, more outgoing, more loving, more ambitious, or more persistent.  But you still are the preferences you really have.  There’s plenty of room for improvement, but that doesn’t mean you’re sick.

* I’m well-aware that many physical symptoms also respond to incentives.  You can pressure a diabetic to lose weight, which in turn reverses his diabetes.  But all of these incentive effects require time to work.  The symptoms of mental illness, in contrast, can and often do respond to incentives instantly, because they are choices that are always within your grasp.  “I’m divorcing you unless you stop drinking right now” is a viable threat.  “I’m divorcing you unless you stop being diabetic right now” is silly one.

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Reviewing Paranoia

We often hear about “movies that are better than the book,” but rarely of “book reviews that are better than the book.” Cato’s Alex Nowrasteh has just published one such book review.  Here’s Nowrasteh on Reihan Salam’s Melting Pot or Civil War? A Son of Immigrants Makes the Case Against Open Borders:

The gap in quality between the book described by reviewers above and the actual book Melting Pot or Civil War? is wider than in any other book that I can remember reading. Descriptions of “calm” and “reasonable” are the most perplexing. True, he appeals to Americans “who are willing to meet others halfway” to solve the problems that he’s identified. On the other hand, he also argues that we need to follow his policy recommendations or face a racialized civil war. That is the very opposite of a “calm” or “reasonable” argument. A better description would be “hysterical” or “paranoid.”

Hysteria and paranoia aside, what’s wrong with the book?  Salam engages in extreme reverse engineering, where even the most favorable facts about immigration somehow become extra reasons to oppose it:

For example, Salam disagrees with himself over whether the goal of immigration policy should be to increase wages and employment for low-skilled immigrants and their descendants, or per capita productivity growth in small sectors of the economy. He rightly claims that immigration barely affects wages in the United States, but then argues that a major benefit of stopping low-skilled immigration is higher wages for native-born and immigrant dropouts. Salam correctly points out that low-skilled immigrants today compete mostly against other low-skilled immigrants, so he wants to help low-skilled immigrants here by stopping more from immigrating in the first place.

Much of the book, moreover, is simply odd:

Forgetting everything that he wrote about labor markets, Salam praises a science fiction-esque scenario of “virtual immigration” where workers would work remotely by operating robots in the United States from their home countries — even though the labor market effects of that would at best be economically identical to allowing them to immigrate and work here. Salam argues that “virtual immigration will do more good than harm for U.S. workers, provided we have the right safeguards in place [emphasis added].” Salam does not explain what those safeguards are, how they would prevent competition in labor markets, and why the government couldn’t just apply those same safeguards to prevent labor market competition between low-skilled immigrants and low-skilled natives.


Salam mentions the enormous economic cost to those foreigners who would be locked out of the United States under his preferred immigration policy. He proposes a package of U.S. foreign aid to bribe foreign governments to establish charter cities so that low-skilled immigrants can go there instead of the United States. Oddly, he predicts those charter cities will become “fonts of entrepreneurship and public policy solutions” and that excellent new ideas developed there will enrich America. If low-skilled immigrants are entrepreneurs who will create fantastic new ideas in these charter cities that will eventually make it to America, why not just let them come here in the first place? Why spill so much ink supporting a utopian scheme of charter cities as a solution to global poverty when immigration is a tried and true method?

You might think the “civil war” stuff is just hyperbole on the book cover, but no:

To his credit, Salam does admit that there is no private political violence in American today that is comparable to the chaos before the Civil War, but that “it is hard to shake the feeling that our luck might soon run out.” Civil war is a deadly serious topic and perhaps this reviewer is being too nitpicky, but I require more than Salam’s difficultly in “shaking a feeling” to take his worry seriously. He should have done more to show that the choice is really between his “melting pot” or a “civil war.”

Better yet, Salam should have proposed a bet.  I say that America – indeed, the entire First World – is not only too rich, but too electronically sedated, to physically fight about much of anything.  The risk of civil war in the First World is small enough to make even the trivial danger of terrorism look big by comparison.

If you think me naive, come take my money.

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The Dissident Ambassador

In a new paper, Greg Mankiw shares some thoughtful reflections on teaching and heterodoxy:

I have always thought that instructors, especially in introductory courses, are like ambassadors for the economics profession. The role of ambassadors is not to represent their own views but to act as agents for their principal. Just as ambassadors are supposed to faithfully represent the perspective of their nations, the instructor in an introductory course (and intermediate courses as well) should faithfully represent the views shared by the majority of professional economists.


This perspective of instructor as ambassador raises the question of what instructors should do if they hold views far from the mainstream of the economics profession. If you are an Austrian or Marxist economist, for example, what should you do if asked to teach an introductory course? In my view, there are only two responsible courses of action. One is to sublimate your own views and spend most of the course teaching what the mainstream believes, even if you disagree with it. Because many introductory students will take only one or two courses in economics throughout their educations, it would be pedagogical malpractice, in my judgment, to focus on an idiosyncratic minority viewpoint. The other responsible course of action is to avoid teaching introductory (and even intermediate) courses entirely. In a more advanced elective, there is nothing wrong with teaching an idiosyncratic minority viewpoint, as long as students know what they are getting.

Mankiw’s view definitely resonates with me, but my position – and my practice – is rather different.  I say that a professor’s fundamental fiduciary duty is to teach their students about the world – not what his peers think about the world.  As long as your discipline is fundamentally sound, fortunately, these two goals closely overlap.  If your discipline is a corrupt pseudo-science, however, your obligations to your students require you to teach heterodoxy.  Sure, you’ll have to explain the normal view in the process of debunking it.   Yet it’s a dereliction of duty to teach nonsense as fact.

Analogously, by the way, it’s fine to act as a loyal ambassador for a fundamentally virtuous organization.  But if you’re the ambassador for North Korea, you have not only the right but the obligation to be a traitor.  “I’m just promoting my client’s interests” is as flimsy a defense as “I’m just following orders.”  See Mike Huemer on legal ethics for further discussion.

Since I am a professional economist, I’m happy to say that I don’t consider my discipline a corrupt pseudo-science.  However, economics is also far from “fundamentally sound.”  When I teach, then, I try to split the difference.  I spend about half of the time as Mankiw recommends: neutrally describing the economic consensus.  When the consensus is far from the truth, though, I go out of my way to amend it.

Yes, I try to plainly disclose whether I’m describing the research consensus or just telling them what’s actually reasonable to believe.  And no, I don’t penalize students for arguing that the consensus is right and Caplan is wrong.  Some of my exams even require students to disagree with me!  Still, my primary goal is to teach students how the economy works, not what most economists happen to believe.

Furthermore, the only economics students who really need to understand the current conventional wisdom of economics are… graduate students!  After all, no matter how misguided the research consensus happens to be, you can’t be a successful researcher unless you understand it.  Most Econ 1 students, in stark contrast, will never take another economics class.  So the sole economics instructor they’re ever going to have should rigidly focus on economic reality.  Thus, I essentially reverse Mankiw’s advice to confine “idiosyncratic minority viewpoints” to advanced students.  No matter what you think about Keynesianism, you have a fiduciary responsibility to teach your grad students all about it.  Otherwise, they’ll be at a severe professional handicap.  For undergrads, in contrast, the truth of Keynesianism is pivotal.  If your students’ lifetime commitment to economics comes to fifteen weeks, it would be silly to spend five weeks on an intellectual dead-end.

Am I saying that professors should teach whatever they feel is true?  No; a thousand times no.  If you use your “feelings” to form beliefs, you shouldn’t be a professor at all.  The first fiduciary duty of every intellectual is to set emotions aside, and calmly and patiently study a wide range of arguments and evidence.  Once you’ve done that, however, you owe it to your students to share the fruits of your labors.  And if, along the way, you discover that your discipline is misguided, you should let your students know that, too.

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The Missing Planks

Prominent presidential candidates are advancing proposals that frankly horrify me.  Should we dismember big tech firms?  Or just give every American adult $1000 a month?  Rather than critique these awful ideas, I’d rather ponder the Dog that Did Not Bark – moderate, common-sense proposals that no major candidate is likely to advocate.  Just a few that have been on my mind lately…

1. Stop REAL ID before it inconveniences tens of millions of American travelers.  Also, order the TSA to stop asking to see your boarding pass twice just to board a plane.

2. Let students fulfill their foreign language requirement with a computer language.  For both high school graduation and public college admission.

3. Charge higher interest rates on student loans for borrowers who are unlikely to successfully finish their degree.  And tell the borrowers why you’re doing this!

4. When someone applies for a building permit, don’t say Yes or No.  Name a price – and make it public.

5. The same goes for health and safety regulation.  Don’t tell firms how to avoid harm.  Charge them for the harms they cause.  If the downside risk is catastrophic, make them buy insurance or post a bond.

6. While we’re at it, why not sell foreigners portable work visas, with an upcharge for dependents?

7. Electronic road pricing!

8. Means-test Social Security and Medicare.

9. Identify the clearest annual waste of $100B in the federal budget.  Advocate the immediate abolition of this waste, with all savings going toward deficit reduction, not new programs.

10. Loudly and graciously thank taxpayers for their service.

Yes, I know that some of these proposals aren’t even in the hands of the federal government, but the same applies to a great deal of what presidential candidates say.  And on reflection, it’s hardly crazy for candidates to make such proposals.  The bully pulpit aside, they can use federal funding to reward state and local governments that move in welcome directions.

So why are all of these planks likely to remain political orphans?  Half are doomed by demagoguery, and the rest by apathy.  Most people hate ideas like #5, #7, and #8; and if they don’t feel the hate spontaneously, any halfway skilled politician can readily kindle it.  In stark contrast, #1 and #2 are probably already popular.  But they fail to inspire passion, so they’re stillborn.

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Some Men Just Want to Watch Mexico Burn

In the introduction to La Vida, famed anthropologist Oscar Lewis unfavorably compares Puerto Rico to Mexico:

But perhaps the crucial difference in the history of the two countries was the development of a great revolutionary tradition in Mexico and its absence in Puerto Rico.  Puerto Ricans sought greater autonomy from Spain during the nineteenth century, but they were never able to organize a revolutionary struggle for their freedom, and the single attempt along this line, at Lares, was short-lived and never received mass support.  By contrast the Mexicans fought for their independence from Spain between 1810 and 1821, drove out the French in 1866 and later produced the great revolution of 1910-20 with its glorious ideals of social justice.  In the course of these struggles great heroes emerged, men who have become symbols of the Mexican spirit of revolution and independence.

La Vida was published in 1965, just 45 years after the end of the Mexican Revolution.  Lewis personally knew many Mexicans who lived through it.  But what actually happened during this “great revolution” with its “glorious ideals of social justice”?  The best paper I could find on the topic is Robert McCaa’s 2003 paper “Missing Millions: The Demographic Costs of the Mexican Revolution” (Mexican Studies 19, pp.367-400).  After a detailed review of earlier estimates, McCaa deploys new techniques to reach a grim conclusion:

The human cost of the Revolution was paid mainly in blood. Of a total demographic cost of 2.1 million, excess deaths accounted for two-thirds,  lost births one-fourth, and emigration considerably less than one-tenth of the total… The best two-sex inverse projection to 1930, taking into account the age and sex distribution of the population in that year,  points to some 3 million missing as of 1921. Census error in the 1921 enumeration reduces this figure by 1 million. Two-thirds of the remainder was due to one factor: excess mortality (1.4 million deaths), with 350,000 more male deaths than female. Lost births were substantially less at 550 thousand. Smaller still, at less than 10 percent of the total loss, was emigration to the United States, with the persisting number of male “refugees,” generously defined, slightly more than 100,000, and females about three-fourths of this figure.

The basic history of the Mexican Revolution, moreover, was hardly “heroic”:

[O]nly six months passed between Francisco I. Madero’s pronouncement of revolution (November 20, 1910) and the overthrow of the old dictator Porfirio Díaz. The resignation of Díaz came in late spring 1911 and was accomplished with little violence or destruction. The fighting scarcely began until 1911… Victory at Ciudad Juárez came to the revolutionaries on May 10, 1911, after a siege lasting only a couple of days… Although the fall of Díaz was achieved due to uprisings throughout the republic, the cost of the Revolution, to this point, was probably only a few thousand deaths.

The real fighting began as the revolutionaries trained their weapons on one another over the course of the following six years… Zapata, having waited four months to rebel against the hated Díaz, did not allow four weeks to pass before rebelling against the enormously popular Madero. In late November 1911, Zapata, “tired of waiting” for Madero to carry through an agrarian revolution, according to the conventional view, denounced Mexico’s first democratically elected president by proclaiming the Plan of Ayala. Yet, until 1912, Zapatistas did not pose a serious threat to the Madero government. Elsewhere regional bands (and bandits), some with plans, others without, escalated the plundering of the countryside, hamlets, and towns. As is well known, within two years of Díaz’s resignation the nation slid into chaos…

With the assassination of Madero on February 21, 1913 –- probably on the order of the Madero-appointed commander in chief of the federal army, Victoriano Huerta—civil war erupted. The usurper proved incapable of suppressing the many revolts… [A]fter the failure of the Convention of Aguascalientes to resolve the differences of regional warlords, an even bloodier phase of the Revolution began, as, once again, the victors turned on one another.The year 1915 was the year of hunger. Marauding bands destroyed the few crops that were sown, many before they could be harvested. Destruction continued into 1916, although with the defeat of the northern chieftain Pancho Villa at the Battle of Celaya in April 1915, the violence began to wane, however slowly. Devastation was made worse by the Spanish influenza epidemic of 1918/19, to be examined in detail below.

McCaa thoughtfully concludes:

Given the magnitude of the human losses caused by the Mexican Revolution, the silence of some scholars and disbelief by others is surprising…

For the Americas, both North and South, the Mexican Revolution was the greatest demographic catastrophe of the twentieth century. From a millennial perspective,the human cost of the Mexican Revolution was exceeded only by the devastation of Christian conquest, colonization, and accompanying epidemics, nearly four centuries earlier.

How then could as knowledgeable a scholar as Lewis credulously praise the sordid bloodbath that was the Mexican Revolution?  As a Marxist, he was obviously predisposed to positivity.  His gushing, however, would probably resonate with many non-Marxists, too.

What possesses anyone to so gush?  One could say, “You can’t make huevos rancheros without breaking eggs.  The war was tragic, but the results were great.”  Since we’re talking about Mexico, though, this seems absurd.  Sure, it’s a middle-income country, but violence remains a grave problem to this day.  And given its proximity to the U.S., gravity alone should have turned it into a peaceful, First World country by now.  The legacy of the Mexican Revolution is one of the better explanations for why this transformation has yet to happen.

In any case, people who admire revolutions rarely bother with counterfactual history.  What excites them is revolution itself.  Revolution is romantic.  The vision of tearing down the wickedness of the world, serving wrong-doers their just deserts, charging barricades with our brave leaders, and building a better world on top of the ashes is a thrilling story.  Counting corpses and asking, “What was it all for?,” in contrast, is a real downer.

If you share this romantic vision, you might even welcome my analysis: “Yes, I’m inspired by revolutionary idealism.  At least they tried.”  Yet calmly considered, this romantic vision is inexcusable.  Launching a bloody war without even asking, “How likely is this war to improve the world?” is as “romantic” as drunk driving at a playground.  Giving revolutionaries credit for “trying” is ridiculous.  If you combine brutality with wishful thinking about the consequences, your real goal isn’t to make those consequences a reality.  Your real goal is just to exercise brutality.

So why did Lewis gush over the Mexican Revolution?  Batman’s butler got it right: “Well, because he thought it was good sport. Because some men aren’t looking for anything logical, like money. They can’t be bought, bullied, reasoned, or negotiated with. Some men just want to watch the world burn.”  I’ve learned a lot from Lewis, but the less real-world influence people like him have, the better.

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