Current Affairs

Here is one paragraph:

Although America is said to be — and many Americans are — seething about economic grievances, Tyler Cowen thinks a bigger problem is complacency. In his latest book, “The Complacent Class: The Self-Defeating Quest for the American Dream,” Cowen, professor of almost everything (economics, law, literature) at George Mason University and co-author of the Marginal Revolution blog, argues that the complacent class, although a minority, is skillful at entrenching itself in ways detrimental to the majority.

Here is the whole review.

Failing to stem the tide of refugees arriving Europe, Italy and the rest of the European Union have agreed to pay Libya’s Government of National Accord (GNA), the UN-backed interim government that is struggling hold control of the country, to keep them from arriving in Italy and instead put them into detention camps in Libya.

The accord signed Feb. 3, provides for Italy to pay €220 million ($236 million) to the Libyan coastal guard and provide training to help them catch the vessels—primarily rubber dinghies. The Libyan coast guard will be charged with sending the boats back to Libya and putting people into camps. The political instability of Libya is such that there would be little guarantee of the conditions in which the migrants would be kept, according to Arjan Hehenkamp, general director of Médicins Sans Frontières (MSF).

Here is one story.  In Libya they understand the Coase theorem:

A security source in Libya spoke to Associated Press late last month saying: “Yesterday’s traffickers are today’s anti-trafficking force.”

I believe the size of the Coasean payments will rise.  If Libya is paid to halt migrants, and finds this a satisfactory or indeed even profitable arrangement, they also will act to…boost the supply of potential migrants.  “Producing potential migrants” will at some point become one of their more significant economic sectors.  And the larger the number of bottled up would-be migrants, the more Italy and/or the EU will pay to stop them.

Yet what is Italy otherwise to do?  I find it striking how underreported this story has been.

1. The Democrats were debating single payer while this bill, which they dread, nearly passed (and still has some chance of passing).  This was not a random mistake, rather it reflects a more general tendency of the Democratic Party to focus on the wrong kind of expressive values, in a manner which does not seem remediable.  We need to re-model what they are, and build this kind of un-educability into the new model.

2. One lesson of Graham-Cassidy failure is that American health care, at the state level, is a race to the bottom not to the top.  Recall that the Canadian health care system also leaves key decisions to the provinces + block grants, but American Progressives love the results.  Most observers know the American states would not copy the Canadian provinces in their policies, and it is not only because fiscal equalization is weaker to the south.  The reality is that spending much more on health care would not make most American states much more desirable places for most people to live in.  If it did, Graham-Cassidy would be a better idea than in fact it is and a race to the top would ensue.  Better health care would brighten up states all around, attract more population, and increase the revenue going into governor’s coffers.

Democrats and Republicans both find this inadequacy of state-level outcomes difficult to accept, though for opposing reasons.  Democrats hate having to recognize that all the extra health care spending might be mainly redistribution rather than remedying a market failure or providing a broad-based social public good.  Republicans hate to see that giving states control over health care policy, and allowing them to revise Obamacare, won’t improve those states and probably would make most of them worse.

Of course my points #1 and #2 relate.  I agree Graham-Cassidy is a bad idea, but every time I hear the critics say it is heartless, or would “take away” people’s health insurance, or “kill people,” what I really hear is “If we let everyone vote again on Obamacare, with a real time balanced budget constraint, they wouldn’t vote for nearly as much health care next time around.”

Which is why you should not be obsessing over single-payer systems.

Across the board, pondering Graham-Cassidy, including its failure, should make you more pessimistic about economic and social processes.

That is the title given to my latest Bloomberg column.  Excerpt:

The new Britain appears to be a nationalistic, job-protecting, quasi-mercantilist entity, as evidenced by the desire to preserve the work and pay of London’s traditional cabbies. That’s hardly the right signal to send to a world considering new trade deals or possibly foreign investment in the U.K. Uber, of course, is an American company, and it did sink capital into setting up in London — and its reputational capital is on the line in what is still Europe’s most economically important city. This kind of slap in the face won’t exactly encourage other market entrants, including in the dynamic tech sector that London so desperately seeking.

I should note that I prefer London cabs, because of their higher quality service, noting that the people most hurt by this ban are from lower-income groups.

…the greatest winners in 2026 would be Mississippi and Kansas, where federal health-care funding would more than triple and double, respectively. On the other hand, Connecticut’s aid would be cut by just over half.


…the Kaiser Family Foundation…concluded that 35 states would lose $160 billion under the bill. The Kaiser study, like two earlier this week, looked at the cumulative effect from 2020 to 2026.

Here is the Amy Goldstein and Juliet Eilperin piece at WaPo.

Brazil fact of the day

by on September 22, 2017 at 2:03 am in Current Affairs, Law | Permalink

Brazil, for example, has only 1/14th the number of guns per person that the U.S. does, but many more murders.

That is from Noah Smith, mostly about how to reduce crime.

That is the theme and title of my latest Bloomberg column.

Larry was in superb form, and we talked about mentoring, innovation in higher education, monopoly in the American economy, the optimal rate of capital income taxation, philanthropy, Hermann Melville, the benefits of labor unions, Mexico, Russia, and China, Fed undershooting on the inflation target, and Larry’s table tennis adventure in the summer Jewish Olympics. Here is the podcast, video, and transcript.

Here is one excerpt:

SUMMERS: Second, the VIX — people tend to underappreciate this. The volatility of the market moves very much with the level of the market. The reason is that if a company has $100 of debt and $100 of equity, and then the stock market goes up, it’s 50/50 levered.

If the stock market goes up by $100, then it has $100 of debt and $200 of equity and it’s only one-third levered. So when the stock market goes up, its volatility naturally goes down. And the stock market has gone way up over the last 10 months. That’s a factor operating to make its volatility go significantly down.

It’s also the case if you look at surprises. The magnitude of errors in the consensus estimates of company profits or the consensus estimates of industrial production or what have you, numbers have been coming in close to consensus to an unusual degree over the last few months.

I think all those things contribute to the relatively low level of the VIX, but those are more in the way of ex post explanations. If you had told me everything that was going on in the world and asked me to guess where the VIX would be, I would expect it to have been a little higher than it is right now.


COWEN: If there’s an ongoing demand shortfall, as is suggested by many secular stagnation approaches, does that mean monopoly cannot be a major economic problem because that’s from the supply side, and that the supply side constraint isn’t really binding if you think of there as being multiple Lagrangians. Forgive me for getting technical for a moment. Do you see what I’m saying?

SUMMERS: That wouldn’t have been the way I’d have thought about it, Tyler, but what you’re saying might be right. I think I’d be inclined to say that, if there’s more monopoly, there’s more money going to monopoly firms where there’s a low propensity to spend it, both because the firms don’t invest and because the owners of the firms tend to be rich or endowments that have a low propensity to spend.

So the greater monopoly power, to the extent that it exists, is one factor operating to raise savings and reduce investment which contributes to demand shortfalls and secular stagnation.

I also think that there’s likely to be less entry in competition in markets that aren’t growing rapidly than there is in markets that are growing rapidly. There’s a sense in which less demand over time creates its own lack of supply.


COWEN: What mental qualities make for a good table tennis player?

SUMMERS: Judging by my performance, qualities that I do not possess.


SUMMERS: I think a deft wrist, a certain capacity for concentration, and a great deal of practice. While I practiced intensely in the run-up to the activity, there were other participants who had been practicing intensely for decades. And that gave them a substantial advantage.


If you think you know someone who is very smart, Larry is almost certainly smarter.

…teenagers are increasingly delaying activities that had long been seen as rites of passage into adulthood. The study, published Tuesday in the journal Child Development, found that the percentage of adolescents in the U.S. who have a driver’s license, who have tried alcohol, who date, and who work for pay has plummeted since 1976, with the most precipitous decreases in the past decade.

The declines appeared across race, geographic, and socioeconomic lines, and in rural, urban, and suburban areas.

…Between 1976 and 1979, 86 percent of high school seniors had gone on a date; between 2010 and 2015 only 63 percent had, the study found. During the same period, the portion who had ever earned money from working plunged from 76 to 55 percent. And the portion who had tried alcohol plummeted from 93 percent between 1976 and 1979 to 67 percent between 2010 and 2016.

Teens have also reported a steady decline in sexual activity in recent decades, as the portion of high school students who have had sex fell from 54 percent in 1991 to 41 percent in 2015, according to Centers for Disease Control statistics.

Teens have also reported a steady decline in sexual activity in recent decades, as the portion of high school students who have had sex fell from 54 percent in 1991 to 41 percent in 2015, according to Centers for Disease Control statistics.

Here is the Tarah Barampour WaPo story.  Is it evolutionary psychology pushing us more into a more stable mode of behavior for safe circumstances, or perhaps teens being more aware of the need to build their resumes?  Or something else altogether different?

These developments are mostly positive, both as symptoms and as active causal agents, and yet…

Somewhere along the line there is a positive social payoff from risk-taking, including sometimes from teenagers.  How would rock and roll evolved in such a world?   Who is to help undo unjust social structures?  The graybeards?

This is from a job market paper at Stockholm University, by Sirus Dehdari:

This paper studies the effects of economic distress on support for far-right parties. Using Swedish election data, I show that shocks to unemployment risk among unskilled native-born workers account for 5 to 7 percent of the increased vote share for the Swedish far-right party Sweden Democrats. In areas with an influx of unskilled immigrants equal to a one standard deviation larger than the average influx, the effect of the unemployment risk shock to unskilled native-born workers is exacerbated by almost 140 percent. These findings are in line with theories suggesting that voters attribute their impaired economic status to immigration. Furthermore, I find no effects on voting for other anti-EU and anti-globalization parties, challenging the notion that economic distress increases anti-globalization sentiment. Using detailed survey data, I present suggestive evidence of how increased salience of political issues related to immigration channels economic distress into support for far-right parties, consistent with theories on political opportunity structure and salience of sociocultural political issues.

Here is Dehdari’s cv, all via Matt Yglesias.

Possibly so, though some more good years would be nice, to say the least.  To some extent this could be noise, or delayed catch-up growth.  Still, there seems to be a break in the previous trend:

In 2015, median household incomes rose by 5.2 percent. That was the fastest surge in percentage terms since the Census Bureau began keeping records in the 1960s. Women living alone saw their incomes rise by 8.7 percent. Median incomes for Hispanics rose by 6.1 percent. Immigrants’ incomes, excluding naturalized citizens, jumped by over 10 percent.

The news was especially good for the poor. The share of overall income that went to the poorest fifth increased by 3 percent, while the share that went to the affluent groups did not change. In that year, the poverty rate fell by 1.2 percentage points, the steepest decline since 1999.

…The numbers for 2016 have just been released by the Census Bureau, and the trends are pretty much the same. Median household income rose another 3.2 percent, after inflation, to its highest level ever. The poverty rate fell some more. The share of national income going to labor is now rising, while the share going to capital is falling.

That is from the new David Brooks column.

I say no, in my latest Bloomberg column.  For some of the arguments here, I am indebted to earlier work by Megan McArdle.

The People’s Republic of China is preparing to carry through with plans to invest a massive US$30 billion in developing Haiti’s infrastructure, including power plants, sanitation works, water systems, railways, affordable housing, and marketplaces, in an agreement that is expected to have a major social, economic, and developmental impact.

This week, workers have started to be contacted for the approximately 20,000 jobs needed to carry out the ambitious initiative, Haitian press has reported.

Here is further information.  To put the sum in perspective, Haitian gdp is about $8 billion at market exchange rates.

Vipin Narang says yes:

The strategy turns on Kim’s main calculation that the United States will say it’s not worth losing a major American city to get rid of him.

Of course he could not knock out a major American or allied target, but he could use them somewhere.  And the use would boost his, uh…credibility.  In fact Charles Murray is worried.

I think of the model this way.  If Kim is irrational, we have obvious reason to worry, and of course a first strike could not be ruled out.  Remember Pearl Harbor?  (Or is that “Remember Pearl Harbor!”)

Alternatively, say all involved parties are fully rational in the selfish sense.  Fully rational agents make purely forward-looking calculations.  So if Kim used a nuke to kill a sparrow in North Korea, we would not attack because fear of losing an American city would far outweigh desire to retaliate for the loss of the sparrow.

How about one sparrow in the DMZ?  In Japan?  In the Arctic?  In a Malaysian airport?  Or maybe one sparrow, three sled dogs, and thirty Inuit?

At what point do we give it a go, and risk a poorly aimed North Korean ICBM being shot off into the sky?

What if Kim uses “only” a biological or chemical weapon, designed for minimum but noticeable impact, on a nearby country?  You should think of Kim’s strategy space as a continuous variable, with some noise added of course.

Is the space of “boosts his credibility and domestic stature, but without too much upping the risk of massive American retaliation” really the empty set?

Maybe.  Maybe not.  I give it about one percent, which in expected value terms is still a real worry.

TechCrunch: Tesla has pushed an over-the-air update to some of its vehicles in Florida that lets those cars go just a liiiittle bit farther, thus helping their owners get that much farther away from the devastation of Hurricane Irma.

Tesla owners in Florida may be grateful for this mileage boost as they escape the ravages of Irma but I suspect that some of them will be upset when they have more time to reflect. How could Tesla increase the mileage at the flick of a switch? The answer is that owners of the Tesla 60kWh version of its Model S and Model X actually have the same battery as the 75kWh vehicles but the battery has been purposely limited or “damaged” to provide only 60KWh of mileage. But why would Tesla damage its own vehicles?

The answer to the second question is price discrimination! Tesla knows that some of its customers are willing to pay more for a Tesla than others. But Tesla can’t just ask its customers their willingness to pay and price accordingly. High willing-to-pay customers would simply lie to get a lower price. Thus, Tesla must find some characteristic of buyers that is correlated with high willingness-to-pay and charge more to customers with that characteristic. Airlines, for example, price more for the same seat if you book at the last minute on the theory that last minute buyers are probably business-people with high willingness-to-pay as opposed to vacationers who have more options and a lower willingness-to-pay. Tesla uses a slightly different strategy; it offers two versions of the same good, the low and high mileage versions, and it prices the high-mileage version considerably higher on the theory that buyers willing to pay for more mileage are also more likely to be high willingness-to-pay buyers in general. Thus, the high-mileage group pay a higher price-to-cost margin than the low-mileage group. A familiar example is software companies that offer a discounted or “student” version of the product with fewer features. Since the software firm’s costs are mostly sunk R&D costs, the firm can make money selling a low-price version so long as doing so doesn’t cannibalize its high willingness-to-pay customers–and the firm can avoid cannibalization by carefully choosing to disable the features most valuable to high willingness-to-pay customers.

The classic paper in this literature is Damaged Goods by Deneckere and  McAfee who write:

Manufacturers may intentionally damage a portion of their goods in order to
price discriminate. Many instances of this phenomenon are observed. It may
result in a Pareto improvement.

Note the last sentence–damaging goods can be beneficial to everyone! Consider: Without selling to the high willingness-to-pay customers at the high price the good might not be produced at all because the profit from customers who are only willing to buy at a discount aren’t enough to support the R&D. Thus, the high willingness-to-pay customers aren’t worse off from the existence of a discounted version and the low willingness to pay customers and the firm are clearly better off.

Unfortunately, I fear that Tesla may have made a marketing faux-pas. When it turns off the extra mileage boost are Tesla customers going to say “thanks for temporarily making my car better!” Or are they going to complain, “why are you making MY car worse than it has to be?”

Hat tip: Monique van Hoek.