Comedian John Oliver last month dedicated a 22-minute segment of his weekly HBO late-night show to a deep dive on housing policy and rising rents.

In the segment, which has garnered more than 4.6 million views on YouTube, he points out that “rent is skyrocketing” — explaining that it’s “up 15% since the same time last year, well above the rate of inflation. And it’s up over 30% in cities like Cincinnati, Seattle, and Nashville, and nearly 50% in Austin.” This is a significant problem because, as Mr. Oliver mentions, over a third of American households rent.

More difficult than pointing out the problem of high rents, though, is figuring out why they are so high. Mr. Oliver says that it “is partially true” that “high rents are a supply and demand issue: basically, too many renters, not enough units.”

However, he posits that this explanation is not sufficient. He believes that the status-quo can be more accurately attributed to 1) greedy landlords that will “take any opportunity to push rents higher” and 2) deeply-rooted structural issues that give landlords significant power in their relationships with tenants, such that tenants are left without any real options.

This is an explanation that has been embraced by many, including national figures such as Vermont Senator Bernie Sanders and Rep. Ilhan Omar (D-MN). But how reflective of reality is it? And what can be done to fundamentally change the landscape of the rental market?

Let’s take a closer look.

The Incomplete Narrative of ‘Greedy Landlords’

Mr. Oliver’s contention about “greedy landlords” is not without some merit. After all, one would be hard-pressed to argue that self-interest — a synonym for greed, to some — is not a part of human nature. Therefore, if a landlord is able to charge high prices, he will naturally do it because it helps him and his business.

On its face, this seems like a pessimistic proposition. Who wants to live in a society where success is zero-sum and people will squeeze every cent they can out of customers? Well, almost nobody. For this reason — and because we cannot change our predisposition towards self-interest — it is our job to create systems that channel human self-interest for good.

This is where the free market comes in.

In the current market — where demand is far greater than supply — landlords have significantly more bargaining leverage than tenants. Potential tenants do not have many options, which allows landlords to charge high prices and, in some cases, be careless with the quality of the product they are providing. These high prices reduce the number of people who are actually able to afford the rent. This is clearly not an ideal situation.

However, in a true free market — where new housing supply is not hindered by the government — the landlord-tenant power dynamic would be far different. Even though landlords may still want to charge high rents and provide less service, it is no longer in their self-interest to do so, unless they want to lose tenants. The landlord’s “greed” is checked in a market where there are many competing firms because, if he charges too much, most people would simply do business elsewhere. So, if the landlord wants to make money, he must be in tune with the needs of the tenant. Moreover, the price would naturally go down due to the increased supply — therefore also helping tenants.

This is how the natural drive towards self-interest is harnessed for good in a free market. It is still there, but the incentives have changed in a way that benefits consumers.

In his segment, Mr. Oliver includes a video of a prominent landlord talking about how there is currently an “unprecedented opportunity” to “press rents.” The reason? Well, he points out that “the country is highly occupied. We’re 97.5%. And so, where are people going to go? They can’t go anywhere.” Mr. Oliver’s takeaway is to blame landlord heartlessness. But the real implication is clear: if the tenants had somewhere else to go, then landlords would not be raising rent.

Why Are Rents So High?

If the skyrocketing rents cannot be chalked up to “greed,” then what can they be attributed to? The answer is surprisingly simple: there is a shortage of housing.

Why is there a shortage of housing? Again, the answer is surprisingly simple: it can be attributed to housing policies that discourage new construction, thus constraining supply and driving up prices.

Let’s take each part of that in turn.

First, in order for people to have access to housing, there must be adequate supply. But that supply of housing does not simply appear out of thin air. Rather, as I have written before in FEE, “Individuals or businesses must conclude that it is in their financial self-interest prior to adding units to the market.” The issue is that, over the years, policies across the country have been put in place that disincentivize — and in many cases prohibit — individuals and businesses from putting new units on the market.

In many communities, there are strict zoning laws that prohibit, or severely limit, the construction of high-density, multi-family units. Additionally, even in places that may allow construction of such units, public hearings are often required before the project is able to be approved. This not only puts extra regulatory roadblocks in place, but those projects also “are more likely to be rejected.” This, combined with restrictions such as “minimum parking and maximum building height requirements and prescriptions regarding lot size, lot coverage or floor-to-area ratio,” make the process to build new housing for an increasing population an absolute nightmare. This is not to say that repealing all laws that regulate building is the proper solution, but a critical second look at many of the policies currently in place is surely needed.

We can also look at a few examples of policies instituted over the past year or so that have kept housing supply down. For most of 2021, in response to the Covid-19 pandemic, the Centers for Disease Control and Prevention (CDC) imposed an eviction moratorium. The stated intention was to ensure housing for millions who were in terrible circumstances. However, it ended up backfiring in numerous ways. It created the possibility that the landlords — who were often middle-class individuals just trying to get by — would not get paid and would consequently be forced to pay for other people to occupy and use their privately owned land and property. This likely led many to take their units off the rental market, as they didn’t perceive the risk to be worth it.

In many cases, public policy has also discouraged the construction of new housing.

Last November, for example, residents in St. Paul, Minnesota, passed a city ordinance to institute rent stabilization, which is a type of rent control. In the six months after it passed, the number of building permits issued for housing decreased by 84% — from 2,180 permits down to 352 — relative to the same period during the prior year. This makes sense because even though the policy had not yet gone into place, producer expectations are a crucial determinant of supply. When considering how many municipalities across the country have some form of rent control, it is hard to argue that it is not contributing in real ways to the issue of housing supply.

The primary consequence of these policies is a housing shortage — which is present in most American cities today. According to Realtor Magazine, the gap between the current number of housing units and how many we need is 5.5 million. And econ 101 tells us that when some factor — in this case, restrictive housing policy — leads to a decrease in supply, prices rise and quantity goes down. This is precisely what we have seen in practice across the country.

A decrease in supply leads to higher prices.

As for the many other issues that Mr. Oliver pointed out with the current rental market — such as many landlords’ refusal to accept Section 8 housing vouchers or rent to people who had been evicted in the past — research cited in Reason suggests that “landlords would likely be willing to take a chance” on such tenants “in a world of housing abundance” (i.e. in a more competitive housing market in which landlords didn’t have the luxury of being picky).

And regarding the solutions Mr. Oliver puts forward — such as expanded funding for Section 8 housing vouchers — they cannot work unless the supply issue is solved first. As Christian Britschgi writes in Reason:

“Dumping a bunch of housing vouchers into supply-constrained housing markets will only raise prices. If there are not enough units already, and it’s difficult to build more, landlords can easily raise prices to capture the value of the new vouchers without fear that they’ll lose customers. People that don’t receive a housing voucher will see their housing costs go up. The government will have to perpetually increase voucher funding to try and stay ahead of the higher prices they’re causing.”

So, Mr. Oliver’s interventionist “solutions” to the real problem of skyrocketing rent are not solutions at all. Rather, they will raise prices even further, which likely will only prompt calls for more intervention.

This is a phenomenon we’ve seen repeatedly throughout history.

Ludwig Von Mises described the dynamic in his book Bureaucracy:

“Economic interventionism is a self-defeating policy. The individual measures that it applies do not achieve the results sought. They bring about a state of affairs, which — from the viewpoint of its advocates themselves — is much more undesirable than the previous state they intended to alter.”

“As a remedy for the undesirable effects of interventionism,” Mises says elsewhere, “they ask for still more interventionism.”

This is why Mises believed that “middle of the road” policies were a pathway to socialism. He wrote: “If the government, in order to eliminate these inevitable but unwelcome consequences, pursues its course further and further, it finally transforms the system of capitalism and free enterprise into socialism.”

Mises’s warning is especially applicable to today’s housing market. Intervention leads to less affordable housing, which leads to more intervention, which leads to less affordable housing, ad infinitum. . And the cycle will continue as long as politicians and the John Olivers of the world continue to champion government “solutions” instead of simply getting out of the way and allowing housing markets to function.

The solution to high housing prices isn’t more subsidies or price controls. The solution is more housing.

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Delta Air Lines made headlines this month for offering passengers $10,000 to leave their flight. Several customers heading to Minnesota reported being offered $10,000 (in dollars, not flight credits) to voluntarily deboard an overbooked flight.

“On Delta flight from GRR to MSP and they just offered $10,000 for people to give up their seats,” tweeted Inc. tech columnist Jason Aten. “Ten. Thousand. Dollars.”

A different passenger on the flight, Todd McCrumb, told Fortune magazine it was no joke.

“It’s a true story,” McCrumb tweeted. “I was on that flight!”

It’s a true story. I was on that flight! Unfortunately, I could not take advance the offer, as I was flying with my wife who has very limited eyesight. She has to have me nearby when traveling

— Todd McCrumb (@ToddMccrumb) June 28, 2022

When flights are overbooked, it means airlines have more passengers with tickets for a flight than there are seats. And, as I previously reported, complaints about oversold flights have increased relative to pre-pandemic times.

And while you might think airlines offering to pay customers for overbooked flights represents a bug in the airline industry, it’s actually the opposite. Airline overbooking payments are an intentional strategy by companies, and they are a great case study on the power of markets.

To see why, let’s look at the history of airline overbooking.

Involuntary Bumping

Prior to 1978, the airline industry dealt with a consistent bug: oversold flights. Oversold flights occurred as a means for airlines to deal with the fact that passengers frequently skip flights. This would lead to several empty seats on flights that could have otherwise been sold to other willing fliers.

While one or two empty seats in a flight may not seem like a big deal, this adds up when you consider the thousands of flights airlines offer every year. Each empty seat represents a lost opportunity to fly passengers at a lower cost.

So airlines solved this problem by selling more tickets than there were seats. Oversold flights were in a gray area for federal regulations, but this didn’t stop companies. They simply claimed this was sometimes done unintentionally. The American Airlines handbook for 1974-1975 stated:

American Airlines never deliberately causes a passenger to be oversold. We tolerate only a limited number of oversold and inconvenienced passengers only because we must allow some margin of error in our operation.

Despite this claim, it was an open secret in the industry that airlines overbooked to increase sales.

And before 1978, there was no good solution to an overbooked flight. The previously mentioned handbook gave crews some guidance for these situations such as:

Reservations will select for removal, the most recently sold locally boarding passenger, whenever good judgment dictates that this passenger will be less inconvenienced than some other passenger, except when undue hardship will be incurred.

In extreme cases the handbook said, “it may be necessary to cancel the flight until all passengers have deplaned.”

Lastly, the handbook is clear that employees should “[n]ever give an oversold passenger anything in writing which admits an error on the part of American Airlines.”

So volunteers were solicited, and, if none could be found, employees arbitrarily selected passengers according to ambiguous perceptions of inconvenience.

So, airlines oversold their flights to the detriment of involuntarily bumped passengers.

An Economist Upheaves the Airline Industry

All of this changed after economist Julian Simon proposed a solution. In 1968, Simon, a professor of business administration at the University of Maryland, published an article cheekily titled “An Almost Practical Solution to Airline Overbooking.” His solution was simple—introduce a market.

Specifically, Simon proposed a reverse auction system. In this system, passengers would write down the minimum amount they would need to be paid to give up their seat. The person with the lowest amount would win the auction and receive money to give up the right to a seat.

It took nearly a decade for regulators and the industry to implement Simon’s solution in 1978— but it had many perks.

This market, like all markets, introduced a win-win scenario. Passengers who win the auction get an amount of money they value more than the seat. Other passengers don’t have to fear losing their seats. Airlines retain the ability to overbook flights. Everyone wins.

If you’re skeptical that airlines are made better off here, consider the data below.

As you can see from the graph, airlines massively increased overbooking when the reverse auction system was implemented in 1978. This suggests the system was profitable for airlines. If it wasn’t, airlines simply could have suspended overbooking.

The total oversales per 10,000 passengers continued to be higher than 1978 until in 2017, when the infamous United Express Flight 3411 incident occurred which led to major decreases in airlines utilizing overbooking.

The Flight 3411 incident infamously involved Dr. David Dao who was involuntarily selected to deboard his flight. After refusing, an officer forced Dao off the plane leading to a broken nose and concussion. Before the incident, United tried to offer vouchers to incentivize volunteers, but they refused to offer more than $800.

After the incident, United and several airlines began to severely cut oversales, but post pandemic those numbers seem to be rising again.

‘Pareto Improvement’

This sort of situation, where a change leads to all parties being better off, is known by economists as a Pareto improvement.

The market had other advantages as well. Unlike the prior system, the passenger who gives up a seat is not chosen arbitrarily. Instead, the person who loses the seat is someone who doesn’t value it very much anyways. This is another advantage of markets. Resources tend to be allocated to the people who value them most.

These valuable features should come as no surprise. Simon’s solution was for airlines to create markets, and inherent in market systems are the upsides of mutually beneficial exchange and resources being allocated to highest valued uses.

So a $10,000 offer to incentivize someone to deboard a plane isn’t a failure of markets—it’s the beauty of markets in action. I can only hope to someday be on a flight that offers me $10,000 to make new plans.

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The federal government has received withering criticism from various quarters for its pandemic response. Now hits are coming from the government’s own economists.

A new study published by the Federal Reserve Bank of St. Louis analyzed the government’s Paycheck Protection Program (PPP), a $800 billion program that distributed forgivable loans to small businesses.

The authors of the study—William R. Emmons and Drew Dahl, economists at the Federal Reserve Bank of St. Louis—concluded that though PPP was timely, it was poorly targeted, expensive, and regressive.

Nearly 75 percent of the beneficiaries were unintended recipients, the economists wrote, and funds primarily benefited wealthy households.

“Due to differences in the typical incomes of those varied constituencies,” Emmons and Dahl write, the program “ended up being quite regressive compared with other major COVID-19 relief programs, as it benefited high-income households much more.”

While the program managed to save three million jobs, the authors point to an MIT study—led by economist David Autor and written with nine co-authors—that showed the job savings came at extreme expense.

“The study found that, depending on the assumptions, the cost per job saved for one year was $169,000 to $258,000, which was much higher than the average amount—$58,200—paid in wages and benefits to small-business employees in 2020,” Emmons and Dahl write. “The authors concluded that the PPP cost taxpayers roughly $4 for every $1 of wages and benefits received by workers in “saved” jobs. The ‘leakage’—$3 out of every $4 distributed through the program—went to small-business owners.”

MIT’s study also found PPP was “highly regressive,” with roughly 75 percent of benefits gobbled up by earners in the top quintile—or the top 20 percent.

‘The Largest Wealth Transfer in History’

A year ago, I noted that the top 1 percent of income earners hold a record amount of wealth in the US.

It’s no mystery how this happened. Federal Reserve data show US households added $13.5 trillion in wealth in 2020, largely from government “stimulus” spending that flooded the system with money.

This new wealth was not evenly distributed, however. Nearly $10 trillion of it went to households in the top quintile. This is no coincidence.

Carol Roth, a financial expert and the author of The War on Small Business, noted that CARES Act spending clearly favored those closest to power.

“The ‘relief’ efforts related to Covid by the government and the Federal Reserve at every turn favored the already wealthy and well-connected,” Roth told me. “They enabled the largest, most historic transfer of wealth the world has ever seen—trillions of dollars going to Wall Street at the expense of Main Street.”

The average American may have benefited relatively little from this flood of spending—maybe a few stimulus checks—but he continues to pay for it, quite literally, as a result of the policies, which triggered historic inflation.

With the US economy likely already in recession and consumers struggling with 40-year high inflation, the partisans and politicians will seek to find convenient scapegoats to explain the pain.

Just remember it was not “capitalism” that brought lockdowns or printed trillions of dollars out of thin air. It was central planners and central banks.

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“Free traders are trapped in a public policy version of Groundhog Day,” Julian Sanchez wrote in 2003, “forced to refute the same fallacious arguments over and over again, decade after decade.” It’s been almost another decade since then, and Sanchez’s point is just as relevant.

Blake Masters, a Trump-endorsed businessman who’s now running for the U.S. Senate in Arizona, recently held a Q&A session on his Instagram page where he announced his support for tariffs on Chinese goods.

He follows the Trump Administration’s reasoning that the Chinese government’s interventions, like subsidies for some exporters, give their products an unfair advantage over American goods in international trade. The only sensible policy for America, they say, is to hit back with tariffs of its own.

The idea of tit-for-tat tariffs goes back at least to Thomas Jefferson in American politics. But when Masters claims that “free trade” can’t even exist unless nobody intervenes in their trade policies at all, he misses how economists never let tariffs in some countries change their support for getting rid of trade restrictions at home. Free trade doesn’t need total freedom to still be a good idea.

Make Trade Easier, Not Harder

Adam Smith, whose 1776 book The Wealth of Nations is considered one of the most important attacks on protectionism ever written, was perfectly aware that a world with total free trade could only ever be a “utopia.” And yet to Smith, a country that stops itself from trading with others “would obstruct instead of promot[e] the progress of their country towards real wealth and greatness.” Contra Masters, Smith did not see any economic reason for tariffs in the realistic case for free trade.

One reason why, as economic journalist Frédéric Bastiat would put it years after Smith, is because “reciprocal obstacles could only be reciprocally hurtful.” Trade is a two way street, after all. If you make it harder for people to buy your product, you’ll also have a harder time selling it.

Modern economists like Leland Yeager have also tried to drive home the idea that “foreign trade barriers deprive foreigners and us alike of potential gains from trade, just as our own barriers do.” The best thing to do is to lower those barriers as much as we can, not raise them even higher.

Saying that economists mostly agree on anything can be very dangerous, but it isn’t an exaggeration to say that they mostly support the freedom to trade regardless of other countries’ tariffs. Economist Don Boudreaux is even willing to put his own money on it. And Paul Krugman, who won the Nobel Prize for his work in trade theory, goes so far as to say that “the economist’s” case for free trade is about no domestic tariffs, no matter what. When Masters claims that free trade with China is an impossible dream, he misunderstands what it means—and has always meant—to be a free trader.

How “Free Trade” Misleads

Why have trade economists had to make the same exact argument over and over again, year after year? I suspect that one overlooked reason (among many others) is because the rhetoric they use puts them at a disadvantage right from the get-go, and it comes down to the phrase “free trade.” The two sides often find themselves arguing about two very different things.

As economic historian Deirdre McCloskey stresses, the way people say things matters a lot. For example, she believes that calling the West’s economic system “capitalism” tricks people into thinking that getting more capital is what drives the economy forward, while it should really be innovative ideas that get most of the attention. But why stop at just critiquing one word if there are rhetorical problems hiding in others?

Masters’ argument about free trade reveals that the same misstep is happening in the trade debate, too. If you haven’t read the classics from Smith and Bastiat, it makes sense to believe that supporting “free trade” only means supporting a completely open world economy; that’s exactly what those words mean.

“Trade” means that there’s more than one party involved, since you can’t exchange something with yourself. So if we call trade “free,” then we imply that all the traders should be completely free of any government meddling. The average economist would agree that that’s the end goal, even if they know we’ll never get there. But if they only argued for that sort of free trade, then Masters’ idea that free trade with communist China can’t exist would be a very good point.

Economists actually argue for “freer-than-it-otherwise-would-be” trade, which doesn’t have the oomph it needs to justify taking up space in newspapers and debates. Neither does the usual substitute, “unilateral free trade.” But if free traders want to stop repeating themselves to people like Masters, then it’s time to be clearer about what they mean when they argue for “free trade.”

The answer might be as simple as calling it the “freedom to trade” instead, which puts the emphasis more on letting people make their own choices about what they buy. Those choices might not come from free governments abroad, but citizens are still allowed to make them if they’d like. That’s what it really means to support “free trade.”

No matter what the best term might be, the stakes here aren’t just semantics. They could be peoples’ livelihoods. If somebody in office (like Blake Masters) comes across the well-researched idea that free trade helps lift the poor out of poverty, and thinks that “free trade” only means trade that’s equally free on all sides, then they’ll probably have a much different policy prescription than the economists who studied the issue. Like Masters and Trump, they might try to “balance” trade with more tariffs, making it equally unfree for everyone.

Today’s free traders are the latest debaters in a rich tradition, and they won’t be the last to argue for it. But by changing the rhetoric they use, they might just give those who come after them an easier time convincing everyone of a simple truth: letting people choose for themselves is a good thing.

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If you ever find yourself on the business section of CNN’s website, you’ll notice a peculiar thing on the top of your screen. There you’ll find a small ticker labeled “Fear and Greed Index.”

The ticker invites a simple question. “What emotion is driving the market now?”

As an economist, I was very interested in the underlying theory and methodology CNN business was using to determine what was driving the market. Presumably, anyone who understands what drives the stock market better than anyone else is making a lot of money on it. So I looked into the details.

On the index explanation page, a detailed explanation is given.

“The Fear & Greed Index is a way to gauge stock market movements and whether stocks are fairly priced. The theory is based on the logic that excessive fear tends to drive down share prices, and too much greed tends to have the opposite effect.”

So we have the theory now. What about the application? Well the site says, “the Fear & Greed Index is a compilation of seven different indicators” and “tracks how much these individual indicators deviate from their averages compared to how much they normally diverge.”

Unfortunately, armed with this information, it’s clear that the Fear and Greed Index isn’t any good for understanding markets at all. There are fundamental problems with both the underlying theory and the measurement of the index.

Theory: Animal Spirits Reanimated

The theory behind the CNN Fear & Greed Index is not new. In fact, it’s just a new way to talk about one of the most discussed ideas in macroeconomics—animal spirits.

The idea of “animals spirits” working in investment was created by mathematician John Maynard Keynes. Keynes was convinced that irrational waves of optimism and pessimism seized control of investors and drove them to make poor investment decisions. He referred to these forces as “animal spirits.”

Have you heard of bear and bull markets? These are Keynes’ “animal spirits.”

Keynes’ thinking on this topic has so permeated culture, that most of my students come into my macro class as default Keynesians without even knowing who Keynes is. I like to start my first day macro class with a quiz which asks students what they think causes recessions. Some variation of “fear” always tops the list.

In Keynes’ own words,

“There is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions … can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction”.

So what’s wrong with the animal spirits idea? Well, there are many issues. I’ll discuss four.

First, and most importantly, the explanation isn’t an explanation at all. It’s more of a label.

Consider that instead of saying waves of optimism and pessimism seize investors randomly, we could say that the universe generates good vibes and bad vibes that seize investors randomly. Or perhaps real spirits randomly control investors. How does this change the Keynesian animal spirits story?

It doesn’t. And that’s the problem with the idea. Keynes’ animal spirits explanation is essentially saying that something random (in the mathematical sense of the word) and beyond further explanation grabs hold of people and makes them do things. In other words, the explanation is something unexplainable. Fear and greed. Bear and bull. Unicorns and gargoyles.

Second, the animal spirits explanation displaces other explanations about what drives investment behavior. Before Keynes, the economics profession had a strong explanation for changing investment behaviors.

The idea is simple, and it follows the logic that undergirds all of microeconomics. As it becomes more expensive to borrow money over time, investors will borrow less money and take on more short term projects. When it becomes less expensive, investors borrow more and take on more long term projects.

The price of borrowing is called the interest rate, and interest rates are affected by savings. If people save more and increase the supply of funds available to borrow, that drives interest rates down making borrowing cheaper. Businesses make long term expensive projects while consumers save for them.

Although Keynes was unclear about his belief about saving and investment (in some places he says savings equals investment and other places he says it does not) the effect of animal spirits was to break the theoretical linkage between the two among economists. Basic economics was out and animal spirits were in. “Macroeconomics” was born.

Third, Keynes’ theory of random fear and greed leads to an underdeveloped view of how expectations are formed. In the quote above, Keynes argues investors won’t be “mathematical” about expectations. In other words, they aren’t acting in an internally consistent way given different probabilities and uncertainties.

This may sound reasonable at first. Economists who believe people do not consistently make the same mistake over and over (sometimes called rational expectations) are often derided because some think it implies people make their decisions by doing mathematical equations.

But this is a straw man. These economists do not believe people actually run sets of equations in their head. They believe that human behavior happens in a way that looks like they do.

For example, I don’t believe mountain goats calculate their jumps down to determine if the distance is fatal or not. But I do believe they act like they do that. Mountain goats who consistently misjudge jumps will literally die out. Similar channels operate in investment.

This under-developed expectations theory led to problems for Keynesian economists in the 1970s. These Keynesians wrongly believed they could consistently lower unemployment by printing money and tricking workers into taking jobs which seemed to be high paying. However, when inflation hit, workers’ expectations changed and unemployment soared. This was the first instance of “stagflation”—a situation involving high inflation and slow or negative economic growth—in US history.

So what is a good theory of expectations in place of Keynes? My position on this is with economist Ludwig von Mises who quotes Lincoln’s law (which may not have been said by Lincoln) in saying, “you can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time.”

Fourth, Keynes applied his theory of animal spirits inconsistently. In investment markets, irrational pessimism and optimism reigned, but, as economist Murray Rothbard points out, Keynes excluded the possibility of animal spirits for the class of politicians and technocrats. As Rothbard highlights,

“this class, this deus ex machina external to the market, is of course the state apparatus, as headed by its natural ruling elite and guided by the modern, scientific version of Platonic philosopher kings. In short, government leaders, guided firmly and wisely by Keynesian economists and social scientists (naturally headed by the great man himself), would save the day.”

While this asymmetry in Keynes’ work does not undermine the explanation of animal spirits like the above three arguments do, it does undermine any application of the idea to policy-making unless a good reason for the asymmetry can be explained.

Measurement: The Past is Not the Present

I’ve done my best to provide a list of fundamental issues with the theory of animal spirits. But, CNN’s Fear and Greed Index suffers from application too.

Even if Keynes was completely right about animal spirits, the index would still not be much good.

Remember the methodology. The index tracks today’s deviations in asset values and compares them to historical averages of past deviations. But there is a fundamental problem here. Historical averages have nothing to do with modern valuations, and historical deviations tell us nothing about what modern deviations should be.

Imagine you built your house in 1970 and put in shag carpets. Now you’re selling the house and buyers tell you the shag carpets are something that takes away from the value of the house. You reply, “but I spent $300 on this carpeting!”

Alas, it doesn’t matter what shag carpets were worth in the 70s. It matters what people value them at today. The same hold for deviations of value. If hardwood floors are still popular in 2050, the shag carpet seller can’t argue that shag carpets shouldn’t deviate in value since hardwood floors didn’t. It simply does not follow.

There are plenty of good reasons why modern assets should deviate further below average than usual. For example, natural disasters and weather patterns could cause assets to fall below their average more than usual. Also, even if investors don’t systemically error, they can still error. Bad policies could drive investors to make bad investments which, when realized, cause the value of assets to fall further from average than usual.

In other words, an asset falling further in value than usual does not imply the market is responding to “fear.” These assets could be responding to real changes or discovered facts about the economy.

To use an extreme example, imagine an earthquake destroyed the headquarters of most major companies in the US and they all temporarily suspended operations. This would certainly take stocks to historic lows.

The CNN Fear and Greed Index would measure this drop and say that fear is driving the market. But it’s obvious that fear isn’t the cause of this drop—the earthquake is. The fact that people may feel afraid is irrelevant to the cause.

Perhaps not coincidentally, this measurement of “fear and greed” makes the same fundamental mistake of the animal spirits. The index observes when asset prices are further down than usual and simply names the phenomena “fear.”

But labeling a market change “fear” does not mean fear is driving the market. It means you named something.

The index simply assumes what has yet to be proved. A bust by any other name is just as sour. And calling the bust fear doesn’t make us any more informed about it.

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Originally Appeared Here

Another day, another disturbing price inflation metric.

The federal government just released the latest Producer Price Index (PPI), an index that tracks the prices of a basket of the typical inputs businesses rely on, like energy, warehousing, etc. It finds that prices rose 0.8% from April to May, and a whopping 10.8% from May 2021 to May 2022. The PPI is the Federal Reserve’s preferred metric of price inflation, and this latest update keeps it near a 40-year high.

To see just how extreme this trend continues to be, just check out this graph from Fox Business:

Of course, this latest update comes just one day after another alarming inflation update. Released Monday, the latest Consumer Price Index (CPI) showed an 8.6% year-over-year increase in consumer prices. That metric imperfectly measures prices for a basket of consumer goods a typical US household might buy, and it too remains near 40-year highs. 

What’s the significance?

Well, these updates offer more proof that rising prices are hurting American families, eroding paychecks, and bursting budgets. But we already knew that. 

The really interesting insight here comes from comparing the producer price data to the consumer price data. Contrasting the two undercuts the progressive “greedflation” narrative that argues rising prices are in large part due to corporate greed.

“Inflation first rose because of other factors, like Covid and economic stimulus bills,” the New York Times writes in an article explaining what “greedflation” advocates believe. “But companies raised prices more than necessary to net higher profits. They knew they could get away with it because consumers no longer had a benchmark for what prices should be. And they did not face enough competition to keep prices down.”

Or, as Senator Elizabeth Warren argues, “profiteering” and “price-gouging” have driven higher prices because “they [can] get away with it because our markets lack competition.”

But this narrative has never made any sense. For one thing, corporations are no more “greedy,” aka profit-seeking, than they were 5 years ago or 10 years ago, when inflation wasn’t surging. What’s more, some sectors have seen much bigger price hikes than others. Are companies in some industries just less greedy than in other sectors?

“Greedflation” conspiracy theorists cite market concentration, i.e. monopoly power, as why companies can supposedly be what’s driving this. But, as MIT economist David Autor notes, market concentration hasn’t meaningfully shifted in the last two years… while inflation most certainly has!

That’s why a survey of top economists found that the vast majority reject the “greedflation” narrative out of hand. 

What’s this have to do with PPI, CPI, and other inflation metrics? 

The new data set put the nail in the coffin for the “greedflation” narrative.

Why?

Well, if companies were truly being greedy and just jacking up prices to make money, we would expect them to be hiking prices for consumers at a rate higher than their own production costs are going up. But these data sets actually reveal the opposite: consumer prices rose 8.6% while producer prices rose 10.8%—suggesting that, roughly estimating, companies haven’t jacked up prices to even fully match the increase in their costs, let alone exceed them.

Where’s the evidence of this rampant special surge in “greed” we keep hearing about? 

It’s nowhere to be seen, of course, because the “greedflation” narrative was always a political talking point simply meant to deflect blame away from the federal government and onto Big Business, a popular boogeyman. 

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Senator Elizabeth Warren made a name for herself in 2020 as the progressive Democrat who “has a plan” for everything. But her plans are often not very well thought through, and the Massachusetts Senator’s latest “price-gouging” initiative is a similarly bad idea. 

The Context 

Warren is one of the many progressive politicians who has pushed the bogus narrative that “corporate greed” is to blame for our ongoing surge in inflation. (As I explain here, this isn’t the case). In response, she proposed an anti-“price-gouging” law that would outlaw “unconscionably excessive price increases” at large companies “during all abnormal market disruptions.”

Corporations are bragging about jacking up prices. And they get away with it because our markets lack competition. My Price Gouging Prevention Act would give the @FTC more power to go after price-gougers so we can lower costs for families.https://t.co/b5YHNOj02I

— Elizabeth Warren (@SenWarren) May 15, 2022

What’s an “unconscionable excessive” price increase? What constitutes an “abnormal market disruption?” And how could federal bureaucrats huddled in an office in Washington, DC possibly make these determinations for all the different industries in America and the literal millions of factors that influence market prices? 

Warren’s legislation offers no satisfying answers to these simple questions, which may be why an overwhelming majority of prominent economists just rejected a very similar concept out of hand. 

What Economists Think 

IGM Chicago recently surveyed a group of top economists, including many from the Ivy League, and asked them whether “it would serve the US economy well to make it unlawful for companies with revenues over $1 billion to offer goods or services for sale at an ‘unconscionably excessive price’ during an exceptional market shock.”

(Notice the language is very similar to Warren’s proposal). 

Weighted for confidence, an astounding 84 percent disagreed with the notion that such a plan would be good for the economy. As anyone who has spent time around economists can tell you, they’re a fickle bunch with a wide range of ideological influences, so this kind of consensus on an issue is quite unusual. 

The specific feedback individual economists offered was also illuminating. 

“This just seems unenforceable at every level,” said MIT economist David Autor. “What is unconscionable? Why only companies above $1 [billion]?”

“Totally impractical!” responded Stanford’s Robert Hall.

In my personal favorite, University of Chicago economist Austan Goolsbee, who previously served under President Obama, simply responded, “How are we back on this again?”

Why is Banning High Prices Such an Economically Foolish Idea? 

Of course, appealing to expertise alone is not much of an argument. We also need to understand why economists so resoundingly rejected this proposal and why banning “price gouging” runs afoul of basic economic principles. 

Well, high prices, even—no, especially—during times of crisis, actually serve several important economic functions.

As I’ve previously explained: 

“When resources are scarce and demand is outstripping supply, companies naturally raise prices. This encourages those who don’t truly need the resource or have an easy alternative not to buy it all up, reserving the resources for those who need them the most.

Think of gas prices, for example. When we’re experiencing serious fuel shortages — like we are right now — gas prices might rise as high as $4. With prices that high, people who could bike to work but prefer to drive might still bike to save money. But those who have to drive to work and have no other option will pay the higher price. This is an imperfect mechanism, to be sure, but it’s still one that mostly ensures the scarce fuel ends up with those who need it most.

Yet if ‘anti-price-gouging’ laws keep the price set at $2 because $4 is deemed ‘unconscionably excessive,’ gas stations will quickly run out of it. Who gets it versus who doesn’t will simply be a matter of chance.

What’s more, high prices during periods of high demand for a product are the force that attracts more businesses to come in and provide more of the good or service, which eventually alleviates the shortage and lowers the price again over time. But if the price is kept capped low, there’s no market force naturally bringing in more investment to boost the supply to keep up with increased demand.”

So, it’s not just experts telling us that anti-“price-gouging” laws are such a bad idea—basic economists and common sense alike confirm this reality. 

Here’s hoping policymakers in Washington heed these warnings. If they don’t, everyday Americans will suffer the economic consequences.

WATCH: 

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