Sound Money

Philadelphia Society Address on Oct 14, 2017

Introduction

Sound money is a necessary but not a sufficient condition for a healthy economy. How can we best achieve and maintain it?

For almost two hundred years the gold standard did a good job of producing sound money but its weaknesses ultimately led to its abandonment and exchange rates were allowed to float.

The movement in the 1980s to independent central banks with a stable price level mandate, such as an inflation target, delivered several decades of sound money—this was called the great moderation. But is came at the expense of increased exchange rate volatility and asset bubbles.

We need to return to a monetary regime with a hard anchor. But money fixed in price to a single commodity, such as gold, will not provide as stable a value as a price fixed to a larger basket of goods.

The discretion of the central bank to control the supply of money should be replaced with market determination of the money supply. To achieve this money should be issued under currency board rules. Specifically the public should be able to buy all of the currency they want at the currency’s official prices and redeem any of it they no longer want at the same price.

The Gold Standard

The essence of the gold standard was the obligation of the issuer of gold backed money to redeem it for gold at an officially fixed price. This limited the amount of money that could be issued.  The United States set the price of fine gold at $19.49 per ounce in 1791 and raised it to $20.69 in 1834. The Gold Standard Act of 1900 lowered it slightly to $20.67.  In 1934, Congress passed the Gold Reserve Act, which raised the price of gold to $35 an ounce and prohibited private ownership of gold in the United States.  Lyndon Johnson’s guns and butter deficit spending over heated the U.S. economy, which raised doubts about the U.S.’s ability to honor its gold commitments. By late 1971 the U.S. no longer had enough gold to honor its redemption commitment, and President Richard Nixon suspended the U.S. commitment to buy and sell gold at its official price. Yet, an official price remained, and was raised to $38.00 per ounce in 1971 and to $42.22 in 1972. In 1974, President Ford abolished controls on and freed the price of gold, which rose to a high of $1,895 in September 2011 before falling back to $1,304 this morning (October 14, 2017). More importantly, as gold has never been very representative of prices in general, prices of goods and services on average in the U.S. rose 500% over the 45 years since Nixon closed the gold window.

Floating Exchange Rates and Inflation Targets

When Nixon closed the gold window he also imposed wage and price controls, which lasted for three years. The dollar no longer had a “hard” anchor. It was no longer redeemable for anything and new policies were needed to regulate its supply. Over this period the Fed implemented monetary policy via adjustments in the overnight interbank lending rate (the Fed funds rate) in light of, among other things, its objectives for the growth of monetary aggregates. When wage and price controls were finally lifted the CPI increased a staggering 12% in 1974.

In the face of the Fed’s persistent over shooting of its narrow and broad money target ranges and the entrenching of higher and higher inflation expectations in wage and price increases, Federal Reserve Board Chairman Paul Volcker led the Board and the Federal Open Market Committee (FOMC) on October 6, 1979 in a dramatic change in the Fed’s approach to implementing monetary policy by shifting to an intermediate, narrow money target, operationally implemented via a target for non-borrowed reserves. The new approach required the Fed to relax its Fed funds rate targets and it increased the band set by the FOMC for the Fed funds rate from 0.5% to 4%. However, the fed funds rate rose temporarily to over 22% and GDP fell by over 2% in 1982—actual and expected inflation were reversed and fell below 2.5% by 1983. The new approach had defeated inflation but it was not easy to implement and by the end of 1989 the Fed abandoned it for the more traditional fed funds rate targeting.

At about the same time radical innovations in the development of monetary policy rules were launched by the Reserve Bank of New Zealand, which came to be known as explicit inflation targeting. An inflation target provides a clear and explicit rule that permits flexible operational approaches to its achievement. Given Friedman’s long and variable lags in the effect of monetary policy on prices, setting monetary operational targets (almost always the equivalent of a fed funds rate) must be based on the best model assisted forecast of its consistency with the inflation target one to two years in the future. A longer target horizon provided more scope for smoothing any output gap (employment). Full transparency of the policy and the data and reasoning underlying policy settings is required to gain the benefits of the alignment of market inflation expectations with the policy target.

The RBNZ’s development and adoption of inflation targeting was an important development in the pursuit of rule based monetary policy with floating exchange rates that accommodated flexible implementation. It swept the world of central banking. While the Fed did not adopt explicit inflation targets until 2012, it clearly pursued an implicit inflation target long before that.

Monetary stability, defined as price level stability, improved significantly, but exchange rate volatility increased. The Great Moderation of the 1990s and early 2000s that resulted from more stable domestic prices was followed by the Great Recession. The Great Recession of December 2007 to June 2009 highlighted the failure of inflation targeting to take account of asset price bubbles and “inappropriate responses to supply shocks and terms-of trade shocks”.[1]

What followed can only be described as a nightmare (largely because of the over leverage and other weaknesses in the U.S. financial system). After properly and successfully performing its function of a lender of last resort and thus preventing a liquidity-induced collapse of the banking system, the Fed went on to undertake ever more desperate measures to reflate the economy. These Quantitative Easings (QEs)—quasi-fiscal activities—have been widely discussed and have contributed little to economic recovery.[2]

The conclusion from the above history is that monetary policy is being asked to deliver more than it is capable of delivering. Central banks are generally staffed by very capable people, but they can never know all that they need to know to keep the economy at full employment as employers and jobs keep changing. The quality of forecasting models has greatly improved in recent years, but they remain unreliable. The policy strategy and intentions of the Fed and other inflation targeting central banks have become admirably transparent, but given the uncertainty of its next policy actions, markets remain spooked by every new data release and speech by Fed officials. Yet inflation in the U.S. and Europe remain below the 2% targets of the Fed and of the ECB.

Despite the huge increase in the Fed’s balance sheet, which banks are largely holding as excess reserves at the Fed, monetary growth in the U.S. averaged only about 5.5 to 6% over the past four years or about the same as its long run average (for M2). My assessment of the slow pace and modest size of the economic recovery in the U.S. is that regulatory burdens have discouraged investment while many internet related investments continue to drive down costs of many economic activity (a sort of unrecorded productivity increase).  Easy money is once again inflating asset prices (stocks and to a lesser extend again real estate).  But who knows for sure?

The idea that central banks can micro-manage monetary conditions to smooth business cycles is a conceit. In my opinion, central banks have given their price stability mandates their best shot and failed. The successful, countercyclical management of the money supply with floating exchange rates is simply beyond the capacity of mortals.

Return to a Hard Anchor

The Fed should give up its management of the money supply and return to a system of money redeemable for something of fixed value – a so-called hard anchor for monetary policy. This means linking the value of money to something real and managing its supply consistent with that value (exchange rate). Such regimes do not magically overcome an economy’s many and continuous resource allocation and coordination challenges, but by providing a stable unit in which to value goods and services and to evaluate investment options, and sufficient liquidity with which to transact, such regimes facilitate the continuous adjustments private actors need to make for an economy to remain fully employed and to grow.

But fixed exchange rate regimes, including the gold standard in one of its forms or another, have historically had their problems as well. These problems generally reflected one or the other of two factors. The first was the failure of the monetary authorities to play by the rules of a hard anchor, which is to keep the supply of money at the level demanded by the public at money’s fixed value. The pressure to depart from the rules of fixed exchange rates generally came from fiscal imbalances or mistaken Keynesian notions of aggregate demand management. However, even when central banks aimed actively to match the supply of its currency to the market’s demand with stable prices it proved beyond their capacity to do so.

The second source of failure came from fixing the value of money to an inappropriate anchor. When the exchange rate of a currency is fixed to another currency or to a commodity whose value changes in ways that are inappropriate for the economy, domestic price adjustments can become difficult and disruptive. Fixing the exchange rate to a single commodity, as with the gold standard, transmitted changes in the relative price of gold to prices in general, which imposed costly adjustments on the public.

These historical weaknesses of monetary regimes with hard anchors can be overcome by choosing better anchors and by replacing central bank management of the money supply with market control via currency board rules.

Currency board rules give control of the money supply to the market—to the public. As an example, a strict gold standard operated under currency board rules would increase the money supply whenever the public wanted more and was willing to buy it with gold at the fixed gold price of a dollar. If the public found it held more money than it wanted it would redeem the excess for gold at the same price.

I led the IMF teams that established the Central Bank of Bosnia and Herzegovina with currency board rules, and it functions in exactly this way. It has no monetary policy other than issuing or redeeming its currency for Euro at a fixed exchange rate in passive response to market demand. It has worked very well. I was also involved in establishing currency board rules for the Central Bank of Bulgaria, which has also enjoyed stable money ever since.

The hard anchor should not be just one thing. The relative price of any individual good or commodity will vary relative to prices in general. Thus a small representative basket of goods should be chosen for the anchor. Earlier proposals for broader baskets suffered from the assumption that buying and redeeming the currency should be against all of the items in the basket. That would be cumbersome and storage and security would be costly. Currency board rules should provide for indirect redeemability, by which the currency would be purchased with or redeemed for designated AAA securities (e.g., U.S. Treasury bills) at their current market value.

Exchange Rate Volatility or a Global Currency

A major cost of the current system of floating exchange rates with inflation or other targets is the uncertainly and wide swings of exchange rates. Over the last decade the USD/Euro exchange rate varied over 40 percent. The classical gold standard was associated with a flourishing of foreign trade in part because the gold standard was a world currency, which there for eliminated exchange rate risk. There would be considerable benefit to world trade, economic efficiency, and growth if all or most countries adopted the same hard anchor for their currencies. The International Monetary Fund’s SDR already exists for this purpose but would need to be modified in several important ways in order to operate under currency board rules and to change its valuation basket from a basket of currencies to a basket of goods.

Conclusion

Experience with monetary regimes with floating exchange rates has been mixed. Almost all major currencies have become more stable in the last three decades but at the expense of increased exchange rate and asset price volatility. The United State, as well as most other countries, would benefit from a return to a monetary system with a hard anchor, but fixed to the value of a small basket of goods rather than to just one, and whose supply is determined by the public’s demand via issuing and redeeming it indirectly for a liquid asset of comparable value according to currency board rules. The benefits of such a system would be increased the more widely it was adopted. One of the virtues of the gold standard was that it was global.

Reference

Warren Coats, “Real SDR Currency Board”, Central Banking Journal XXII.2 (2011), also available at http://works.bepress.com/warren_coats/25

________________, “What’s Wrong with the International Monetary System and How to Fix it?” April 20, 2017. https://works.bepress.com/warren_coats/38/

Jeffrey Frankel. “The Death of Inflation Targeting”. Project Syndicate, May 16, 2012.

_____________________________________________

[1] Jeffrey Frankel. “The Death of Inflation Targeting”. Project Syndicate, May 16, 2012.

[2] See for example, Warren Coats, “US Monetary Policy–QE3” Cayman Financial Review January 2013.

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Abuses of Government regulation

Government is essential for a vibrant, growing economy. It provides and enforces the property rights and rules of the game (e.g., contract enforcement) within which entrepreneurs operate. It is, or should be, the referee of the game rather than a player.

There is often pressure from established firms for government regulations to have a role beyond establishing a transparent and level playing field in order to favor or protect these firms from unwanted (by them) competition. Requiring the U.S. government to buy what it needs from American firms is such an example. If the products and services of American firms were better and cheaper than those of foreign firms, there would be no need for such a law. As it is, it often means that taxpayers must pay more for their government than would be the case if it procured on a purely competitive basis. The extra cost must either divert government spending from other things or divert household incomes via an increase in taxes.

Two examples of such abuse are currently in the news—the Jones Act and the Boeing dispute with Bombardier.

The Jones Act, adopted in 1920, requires that all goods shipped between American ports must “be carried on ships built, owned and operated by Americans…. A 2012 study from the New York Federal Reserve found that shipping a container from the US East Coast to Puerto Rico cost $3,063. But shipping the same container on a foreign ship to the Dominican Republic nearby cost only $1,504. More broadly, the island loses $537 million per year as a result of the Jones Act.” “Jones-Act-hurts Puerto-Rico”

The Jones Act, formally called the Merchant Marine Act of 1920, was adopted to protect our merchant marine industry—thousands of sailors, ship builders, and their owners and operators. They were not competitive with foreign shippers without such protection. So Puerto Rico and all of the rest of us buying the goods shipped pay higher prices than necessary. If American cargo ships were forced to compete with foreign operators, then some—but not necessarily all—of them would fail and take jobs producing things that were competitive. Those that survived such competition would be the better for it, as would we. Senator John McCain introduced a bill in 2015 to repeal the Jones Act permanently, which we should all support. Buy American is a loose, loose, requirement. “Buy-American-hire-American”

“Mr. Trump’s big mistake has been his handling of the Jones Act.… First he said he would not suspend it as he did for Texas after Harvey and Florida after Irma. ‘A lot of people that work in the shipping industry . . . don’t want [it] lifted,’ he said. Well, duh. A lot of people don’t like competition. But that’s hardly a good argument for blocking it.

“Under pressure, he finally said he would suspend the Jones Act for Puerto Rico—but only for 10 days, a meaningless gesture.” Mary A. O’Grady FEMA’s-foul-up-in-Puerto-Rico

Boeing’s claim that Bombardier’s C Series CS100 commercial jet, built in Canada and Ireland and being purchased by Delta in the U.S., is competing unfairly because of government subsidies is murkier than the Jones Act case and raises a different issue for the renegotiation of NAFTA, which is now underway. While it is undeniable that Bombardier receives financial assistance from the Canadian government in a variety of ways, so does Boeing (from the U.S. government). Boeing is the single largest beneficiary of the loan subsidies provided by the U.S. Import-Export Bank (nicknamed in Washington the “Bank of Boeing”) to help foreign airlines finance their purchases of Boeing aircraft. “Boeing-took-a-foreign-firm-to-task-over-subsidies-critics-say-boeing-gets-help-too”

In response to Boeing’s complaint, the Commerce Department has announced that it intends to impose a staggering 219% tariff on the Canadian plane. Strangely Boeing did not even compete for Delta’s business and has no aircraft that competes with the Bombardier plane. Sorting out the claims and counter claims will be complicated. Which plane builder has benefited more from their governments’ help? What would constitute a level playing field in the international competition to sell these airplanes?

Canadian Prime Minister Justin Trudeau threatened that “his government might cancel a previous proposal to buy Boeing F-18 Super Hornet fighter jets.” In addition, “Bombardier employs about 4,000 people in Belfast, many of whom work on the CS100.” Britain’s, Prime Minister Theresa May “tweeted that it was ‘bitterly disappointed’ by the proposed tariff….   British Defense Secretary Michael Fallon said that he would not cancel an existing deal to buy eight spy planes and 50 Apache helicopters from Boeing but that the slight would hurt Boeing in future competitions.”

These are the sorts of tit for tat trade wars can grow out of, to the detriment of everyone. Like most other trade agreements, the NAFTA (North American Free Trade Agreement) has established a dispute resolution mechanism to evaluate and settle such disputes. Bombardier-vs-Boeing-skip-to-chapter-19. Such disputes are adjudicated by independent dispute resolution panels. “Chapter 19 [of NAFTA] offers exporters and domestic producers an effective and direct route to make their case and appeal the results of trade-remedy investigations before an independent and objective binational panel. This process is an alternative to judicial review of such decisions before domestic courts.” http://www.naftanow.org/dispute/default_en.asp

The Trump administration is now renegotiating NAFTA with Canada and Mexico. “U.S. Trade Representative Robert Lighthizer has… suggested having the nation’s own courts hearing the disputes.” Canada-says-hard-no-on-Trump-change-to-nafta-dispute-resolution.

Take a deep breath and step back. We want Canada’s challenge to our proposed 219% tariff on Canadian airplanes adjudicated in our own courts? How can we imagine that this would be acceptable? Would we agree to our challenge to a Mexican tariff on American cars sold in Mexico being settled in a Mexican court? Have we become such big bullies that we can even suggest such an outrageous approach? Trade should be as fair as possible within the terms of any trade agreement and disputes should be resolved as impartially as possible. We and the rest of the world benefit from the increase in trade that results.

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Taxing the Wealthy

The administration has “backed a tax plan that analysts say would greatly benefit the wealthy.” I want to unpack that and take a closer look at what it might mean.

“The Trump tax plan drops the top bracket from 39.6 to 35 percent, and allows for the possibility of a 25 percent top rate through a pass-through entity.” The Washington Post Fact Checker

I want to explore two questions. Would the proposed income tax changes reduce the taxes paid by the average wealthy tax payer (say the top ten percent, who in 2016 paid 80% of all income taxes)? Would that be a good thing or a bad thing and in what ways should we judge that question?

To evaluate the impact on taxes paid by dropping the marginal tax rate from 39.5 to 35 percent we must also take into account the increase in taxable income resulting from broadening the tax base (eliminating some of the existing deductions from taxable income such as State and Local Taxes and interest paid on other than mortgage debt, etc). The conventional wisdom of tax reform is to lower the rates and broaden the base. This can be done in amounts that leave tax revenue unchanged (revenue neutral). Whether the wealthy pay more or less from the proposed modest drop in the tax rate will depend on how successful congress is in fighting off the special interest groups that will try to preserve their special interest deductions.

There are two other important considerations when evaluating the revenue impact of a rate cut. To the extent that lower marginal tax rates encourage greater investment, the economy will grow more than otherwise. This is an additional way in which the tax base is increased and with it the tax revenue generated from whatever the tax rate might be. While there is no case in which the economy grew fast enough to recover all of the revenue lost from cutting the rate, faster growth generally recovered some of it. But a bigger revenue boost can also come from the wealthy repatriating more of their income held abroad to be taxed in the U.S.

But let’s assume, all things considered, that lowering the marginal tax rate for the wealthy reduces the taxes they pay. Is that a good or a bad thing? Leaving aside the point above about increasing economic activity in the U.S., what should the standard of judgment be of what is fair? Obviously people with more income should pay more taxes but how much more? If current tax rates (and deductions) are unfairly high for the wealthy, then lowering them is a good thing. If they are unfairly low, they should be raised. In short, it is not necessarily appropriate to say that something that lowers the taxes paid by the wealthy is a bad thing. The core question is thus: what is our standard of fairness?

Tax burdens are generally discussed in relation to the share of ones income paid in taxes. Rather than comparing the fairness of a millionaire with an income of $5,000,000 paying $1,000,000 in taxes with the average American family income of $50,000 paying $10,000, we look at the tax burden in relation to the share of ones income paid in taxes. In the preceding example, both the millionaire and the average family are paying 20% of their incomes in taxes. In fact, the average share of income paid in taxes of the top 10% of income earners was almost 20% in 2012 while the bottom 50% (most of whom paid no federal income taxes) was 3.3%. A flat tax rate (same marginal rate for everyone), which means that a person with twice the income pays twice the tax, is my standard of fairness. Many others believe that it is fair for the rates to be progressive (higher marginal rate for higher incomes).

My point is that it is wrong to conclude that any reduction in the taxes paid by the wealthy is good or bad unless we have first agreed on the standard of fairness and whether existing tax payments exceed or fall below that standard.

It is important to note also that there are many other taxes that people pay. While most America families pay no federal income taxes, they do generally pay wage (social security) taxes, sales taxes, property taxes and other taxes. “The Principles of Tax Reform”

 

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Trump’s Real Job

President Trump should give up his childish feud with the NFL and attend to his real job. His frequent attacks on the press, the intelligence community, so called rapists from south of the border, among many other things, in addition to being incredibly stupid, seem a tactic to deliberately divert public attention from failures of his administration. And the NFL players should think again about how most effectively to make their political points.

During the campaign the President promised a more restrained use of our military around the world, which is a view I share. However, he has failed to appoint the State Department officials needed to develop and oversee the diplomacy that could replace excessive reliance on our solders. Almost a quarter of our ambassadorships remain vacant, including to Germany and France. The ambassadors to the UK and Italy were only appointed last month. When I attended the American Embassy’s Independence Day celebration at the Ambassador’s residence in Rome in July, there was still no Ambassador.

According to Wikipedia: “The Washington Post has identified 601 key positions requiring U.S. Senate confirmation. As of September 22, 2017, 122 of Trump’s nominees have been confirmed for those key positions, 157 are awaiting confirmation, and 18 have been announced but not yet formally nominated.” In other words Trump has not even appointed half of his administration.

Our indefensible assistance to Saudi Arabia’s indefensible war in Yemen needs the POTUS’s urgent attention. As Russia and our allies in Syria finish off ISIS, what is our strategy for the future of the region and Iran’s role in it? What about Afghanistan and Iraq, where I worked extensively for the last 15 years? Our objectives re our relationship with China (not to mention Russia) need to be clarified and our strategy for achieving them better articulated.

And then there is the mess that is the DPRK (North Korea). School boy taunts that threats from Kim Jung Un “will be met with fire and fury like the world has never seen,” is not a credible or wise strategy. Even without a full deck at the State Department, Trump’s senior advisors repeatedly warned him not to attack the North Korean leader personally:

“Trump’s derisive description of Kim Jong Un as ‘Little Rocket Man’ on ‘a suicide mission’ and his threat to ‘totally destroy’ North Korea were not in a speech draft that several senior officials reviewed and vetted Monday, the day before Trump gave his first address to the U.N. General Assembly…. Some of Trump’s top aides, including national security advisor H.R. McMaster, had argued for months against making the attacks on North Korea’s leader personal, warning it could backfire.” http://www.latimes.com/politics/la-fg-trump-northkorea-20170922-story.html

And then there is Trump’s domestic agenda (Obama care, Tax Reform, etc.). How is that doing? He should cancel his twitter account, finish appointing his government and listen to what his cabinet and advisors have to say and get on with his job as the President of the United States. And by the way, the campaign is over. It is time to stop further dividing the country and to reunite us to the extent possible.

 

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A Basic Human Right

Hunter-gatherers freely traded what they produced (gathered) for what they needed but did not produce. The story is well known (except by Peter Navarro, an energy and environmental policy analyst masquerading as Trump’s trade expert). By specializing in what they did best (hunting) and trading their bounty with those better at producing the other things hunters needed, total output was greater and every one was better off. The right to sell what we produce for what we need/want but don’t produce is, or should be, a pretty fundamental right. It is called free trade.

Historically governments have interfered with this right to protect the markets of special groups otherwise unable to compete. These trade restrictions and tariffs reduced total output making everyone (except those protected) worse off. Recognizing the general harm done by trade restrictions, most countries have negotiated mutual reductions in these restrictions. These have taken the form of bilateral and regional and global multilateral trade agreements.

The Trans-Pacific Partnership (TPP) was one of the most recent efforts to expand trade and its income rising benefits. It was negotiated over an eight year period among 13 Pacific Rim countries and in addition to expanding trade would have deepened U.S. leadership in setting trade standards in the region. Steve Bannon rejoiced when President Trump withdrew the United States from the agreement, claiming that all future agreements would be bilateral. President Trump thereby potentially gave standard setting leadership in the area to China. Not very smart.

Candidate Trump had also promised to scrap the North American Free Trade Agreement (NAFTA) with Canada and Mexico, calling it the worst trade deal of all times (a rather crowded category). President Trump wisely decided to renegotiate it instead. It has been updated several times since it was originally signed and another round can potentially make it better still. In fact, many of the good features of the now discarded TPP are being incorporated.

If we remove existing restrictions on purchasing Canadian lumber and millwork products, for example, fewer trees will be cut down in Washington and Oregon. In exchange Canada will reduce its tariffs and other restrictions on American cars, equipment, and food product sales to Canada. Production will be more efficient and incomes will rise both here and there.

As competitive advantages shift with freer trade and product and manufacturing innovations, some workers will need to shift to new areas of work and may need new skills. Public policy should facilitate and ease the adjustment burdens of these shifts, but it is important to recognize that these shifts arise mainly from improving productivity and not from increases in cross border trade. Most of us export our labor to a domestic company (our employer) and import everything we need (paid for by our labor export). But most of those imports are from domestic companies and service providers not from so called foreign trade. The era of the self sufficient farm families ended long, long ago. https://wcoats.wordpress.com/2017/07/23/the-balance-of-trade/

President Trump may well oversee the negotiation of a better NAFTA (better for all three countries involved). Unfortunately his style of leadership in this area—baseless claims of great harm to American workers from existing trade agreements—provides a very misleading message to the American worker and public in general. He creates a negative atmosphere around the right of each of us to sell what we make to whom ever we choose and to buy what we need from whomever we choose. The world has benefited enormously from freer trade and the increases in worker productivity it has made posible. This is a huge understatement. President Trump does us all a great disservice by characterizing trade in negative terms.

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Do we really need Free Speech?

James Damore was fired by Google for a memo he posted at work giving his views on why there are so few women at his workplace. Basically, he argued, fewer women are interested in math and science than men and thus Google’s hiring policies designed to attract and hire more women are misguided. In this note I make two points: First, we lose a great deal of first order importance if we counter erroneous or offensive speech by repressing it—FREE SPEECH is protected by the First Amendment for good reason. Second, it is more effective to counter false ideas with correct or better ideas than to repress them.

Damore went further than Larry Summers did twelve years ago. Summers, who was President of Harvard University at the time, noted the fact that there were so few women at Harvard in the hard sciences and asked why that might be so. He explored several possible explanations without endorsing any of them. He was, in fact, raising a serious question for serious discussion. Many of his colleagues found his question so offensive that he was forced to resign his Harvard presidency. This is what I wrote about it at the time: “Science-discrimination-and-Larry-Summers”

One of the possible factors in the underrepresentation of women in the sciences not raised by Summer is the fact that the approach to teaching math and science has been designed by man and best suits the ways men generally learn. Considerable research indicates that men and women tend to learn differently. A pedagogy best suited to men might discourage otherwise potentially interested women from perusing science.

Damore went further by concluding that Google’s hiring practices were discriminatory to men and thus illegal. In a Wall Street Journal oped Damore stated that:  “I committed heresy against the Google creed by stating that not all disparities between men and women that we see in the world are the result of discriminatory treatment…. I suggested that at least some of the male-female disparity in tech could be attributed to biological differences (and, yes, I said that bias against women was a factor too).” “Why-I-was-fired-by-Google” None of us needs to be convinced that there are biological differences between men and women (hopefully), so why not with regard to tastes in employment?

I have not read Damore’s ten page memo and don’t intend to take sides on the points he makes, over than to agree with his statement that Google will have a better Human Resources policy if it is based on fact rather than ideological presumptions of the facts. Open discussion of the issue—of Damore’s biological claims—is one of the best ways to sort out what is scientifically supportable from what is ideological fiction.

Opening public discourse to the views and comments of anyone wishing to say something, i.e., “free speech,” potentially exposes us to some pretty nasty stuff. There is a fundamental and critical difference between addressing rudeness—bad manners—via inculcating cultural values of mutual respect (good manners) and via government suppression. Today’s millennials seem to have been raised to expect protection from anything unpleasant (shame on you helicopter moms). Rather than take responsibility for their own good behavior and the encouragement of the same in others, they seek and demand protection imposed by the “authorities” with “safe zones” and the like. In my view this is on the “Road to Serfdom.” I have shared my views on the emergence of state imposed political correctness on several earlier occasions: “What-is-wrong-with-PC”

To my second point, suppression of speech is also an inefficient way of countering falsehoods or doubtful or “bad” principles. If such views cannot be aired openly and publically, they are very likely to live on and survive within social or ideological bubbles where they are not challenged. The Internet facilitates living within a bubble or reaching beyond it and we need to encourage everyone, and especially each new generation to reach beyond their echo chamber in order to confront their beliefs with other views.

In an interview with Bloomberg on August 10, Damore stated that: “There are simply fewer women that want to get into these fields,” he said. “If you’re a girl and you’re interested in technology, that’s great…. If anyone is interested in technology they should just pursue it,” he added. “It’s a great field.” “Fired-google-engineer-says-company-execs-shamed-and-smeared-him.” This doesn’t sound much like a bigot to me.

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Science, Discrimination, and Larry Summers

It is clear that Harvard President Larry Summers has hit a nerve, yet again. It is far less clear why reactions have been so strong and often so disappointing to those of us who believe in science. Let us know the truth, whatever it is. If women have less “intrinsic aptitude” for science than men, and no one—not even Larry Summers—is arguing that such a fact has been established, then we should know about it. Choices are better made on the basis of facts than ignorance or fiction. To my mind, the key overlooked point is that such a fact would have almost no relevance to the values most of us believe in.

Equal treatment under the law and in public policy has nothing to do with whether the average intelligence or other indicators of aptitude or virtue of women is the same as men, or whether the same is true for blacks, whites, Asians, Jews, Arabs, Christians, Moslems, etc, or for gays or straights. We are each individuals, not averages. Our public policy and the personal beliefs of most of us are based upon the morality and advantage of dealing with individuals rather than classes of one sort or another. Whatever the averages might turn out to be—and why should we be afraid to know?—currently available evidence clearly establishes a very large dispersion of traits within each group and a very large overlap with all other groups.

Such principles are expressed and upheld by governments only when they are broadly believed by the governed (in democracies), or by enlightened rulers, or, as in our case of a constitutional democracy, when enlightened leaders in the contemplative environment of a constitutional convention imbed such principles in a constitution that limits what majorities may do. Fortunately, in free market economies self-interest works in favor of such principles. Profit minded employers want the best employees for the least cost.

It is human nature to economize and conserve in various ways. It is part of being efficient. Economizing on the gathering of information is but one of the many ways we prioritize the use of our time. We often develop impressions of people or groups of people (say Southern Baptists) on the basis of partial information. We often rely on the views of others we trust. It would take more of our time than it is worth to gather ALL of the facts. Biases and prejudices are perpetrated for some time for these reasons even among the good hearted.

If women are being discriminated against in the market place, presumably because of incorrect perceptions of their productivity, they will tend to earn less for the same work. If this is the case, it is economically advantageous for an employer to hire them. Thus there is an economic incentive for firms to look beyond the stereotypes (or averages) for individuals whose talents may not be fully appreciated yet in the market place. Not all employers will bother to do so, but those who do so will profit at the expense of those who discriminate. Over time more profitable firms tend to grow more rapidly than less profitable ones. If employers are forced to pay women the same wages as men when they believe they are less productive, fewer women will be hired until such time as broadly held prejudices are over come.

Open and honest debate about such issues is another way of advancing the truth and overcoming prejudice. In my opinion Larry Summers has contributed to that goal and the sometimes hysterical reactions to his raising legitimate scientific questions have not.

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