Current Affairs

Transport for London is preparing to launch a crackdown on Uber, proposing a series of new rules that will hit the popular minicab-hailing app in one of its most popular cities.

…The proposals include a minimum five-minute wait time between ordering a private hire vehicle and it arriving, and banning operators from showing cars for hire within a smartphone app – a hallmark of the American company’s service.

No, this is not from an Ayn Rand novel.

These proposed rules so nakedly protect rent-seekers and make life worse for consumers that I don’t think they will succeed. Even if the rules fail, however, we shouldn’t be complacent about the dangers to innovation.

What made Uber different and controversial is that their Ayn Rand loving CEO followed the adage that it’s better to ask for forgiveness than permission. Uber skirted the law and went to consumers directly about whether they wanted transportation innovation. Consumers around the world responded with a resounding Yes to the Uber-referendum so regulators and rent-seekers who want to control Uber now must also fight Uber-consumers. That genie won’t go back into the bottle.

In the usual scenario, however, innovation can be quashed before consumers have a chance to know what they are missing. Had the taxi companies had an inkling of what was coming it would have been easy to to pass stricter laws in advance that would have made Uber impossible to get off the ground. Of course, in many industries today the old guard does have an inkling of what is coming and that should frighten anyone who wants to see greater innovation.

Brink Lindsey is the editor, and I am one of the experts (is anyone an expert on economic growth?), here are the other contributors, and that is also a link to the underlying on-line symposium.  It is a $6.99 ebook on Amazon.  Here is Cato’s home page for the ebook.

China fact of the day

by on September 28, 2015 at 3:16 pm in Current Affairs, Data Source | Permalink

Financial services accounted for a whopping 20 per cent of China’s economic growth in the second quarter of 2015, according to a recently released breakdown of GDP data by the Chinese National Bureau of Statistics.

Of course that is not a good sign for third quarter gdp, or fourth quarter gdp for that matter.  The FT article is here.

Slate has an interesting interview with Leon Nayfakh speaking to John Pfaff, here is the critical excerpt from Pfaff:

What appears to happen during this time—the years I look at are 1994 to 2008, just based on the data that’s available—is that the probability that a district attorney files a felony charge against an arrestee goes from about 1 in 3, to 2 in 3. So over the course of the ’90s and 2000s, district attorneys just got much more aggressive in how they filed charges. Defendants who they would not have filed felony charges against before, they now are charging with felonies. I can’t tell you why they’re doing that. No one’s really got an answer to that yet. But it does seem that the number of felony cases filed shoots up very strongly, even as the number of arrests goes down.

You will note that district attorneys are relatively politically independent at this level.  And this:

But just letting people out of prison—decarcerating drug offenders—will not reduce the prison population by as much as people think. If you released every person in prison on a drug charge today, our state prison population would drop from about 1.5 million to 1.2 million. So we’d still be the world’s largest incarcerating country; we’d still have an enormous prison population.

Keep in mind that some in prison on drug charges are actually violent offenders who did a plea bargain down to a drug charge.

The interview also offers evidence against alternative explanations of the boom in the prison population, such as putting the blame on longer sentences.  Here is Pfaff’s home page and his related papers.

Not so well:

…the time when the country was able to make economically unprofitable investments on the basis of political motives is long gone. Beijing had intended to invest more than $900 billion in infrastructure expansion in Eurasia. However, the money is now needed to stabilize its stagnating economy and nervous financial markets. China‘s currency reserves decreased drastically in August.

Due to financing difficulties a number of infrastructure projects have come to a standstill. For example, the gas pipeline known as “Power of Siberia,” the subject of an agreement signed by Russia and China in May last year, is in danger of flopping. In addition to this, the release of funds for the construction of the Altai gas pipeline to connect western Siberia and China has been delayed indefinitely.

At a more basic level, the OBOR represents an economic step backwards: instead of placing more emphasis on domestic demand, Beijing is speculating on new export markets in unstable regions such as Pakistan. The overcapacity of Chinese state-owned enterprises are not addressed but simply exported abroad. In this way the leadership is hampering its own ability to overcome the structural crisis of the Chinese growth model.

For the time being, OBOR remains a speculative bubble…

At the same time, there is a lack of partners for the OBOR initiative: China is virtually on its own. The Chinese leadership has until now only been able to reach a handful of vague cooperation agreements, such as those with Russia and Hungary. But none of those states (and maybe not even China itself) know what OBOR really means. Xi Jinping wants to promote the idea of a “community of common destiny”. He has, however, not been able to convey what this term signifies and he has failed to convince other states why the OBOR should be attractive for other countries.

The full story is here, and here is my earlier post on The New Silk Road.

Claims about cars

by on September 27, 2015 at 2:21 pm in Current Affairs, Economics, Law, Science, Web/Tech | Permalink

New high-end cars are among the most sophisticated machines on the planet, containing 100 million or more lines of code. Compare that with about 60 million lines of code in all of Facebook or 50 million in the Large Hadron Collider.

The Gelles, Tabuchi, and Dolan NYT piece is interesting throughout.  I thought of a parallel with empirical research in economics.  In the 1980s, often you could pick up a research paper and know rather quickly how good it was, if only by glancing at the basic technique and source of data.  These days the model, estimation, and data collection are so complicated and non-transparent that the errors, however large or small they be, are very difficult to find.

You’ll find a list of skeptical worries here from Chris Buckley, most of them justified.  In a nutshell, if you can’t believe their gdp numbers you also can’t believe their cap and trade plan.  I am nonetheless more optimistic about this recent development.  It signals a few things:

1. The Chinese have decided to make “doing something about carbon” a potential source of soft power in the international arena.  They are giving themselves an option on this path, and in the meantime trying to minimize the reputational deficit they face from being the world’s largest source of carbon.

2. The Chinese plan to cut pollution in at least some of their major cities soon, and they want to claim credit for that action in advance.  (In fact they are surprised how rapidly some of those days of blue skies have appeared in Beijing, whether that be the added regulation or the economic slowdown.)  “Carbon emissions” and “pollution” are hardly identical, but still the government is repositioning itself rapidly on the issue of pollution more generally.  This is one welcome part of that broader shift, so don’t worry if not all the details add up.

3. The Chinese leadership expects the domestic economy to be weak for a while, so they can announce a semi-serious carbon cap and meet it, without actually giving up any economic growth.  Of course this #3 isn’t good news on the economic front, but maybe the Chinese government first does need a period of time where such a policy has zero economic cost.

The evidence from the European Union is that their cap and trade program hasn’t worked well, mostly because of time consistency problems, namely that more and more permits are issued and the cap ends up weak over time.  That same problem may or may not apply to China.  But even a strong pessimist about cap and trade can be modestly optimistic about the new Chinese announcement.

…it makes sense to look beyond inflation—and to consider targeting nominal GDP (NGDP) instead…

A target for nominal GDP (or the sum of all money earned in an economy each year, before accounting for inflation) is less radical than it sounds. It was a plausible alternative when inflation targets became common in the 1990s. A target for NGDP growth (ie, growth in cash income) copes better with cheap imports, which boost growth, but depress prices, pulling today’s central banks in two directions at once. Nominal income is also more important to debtors’ economic health than either inflation or growth, because debts are fixed in cash terms. Critics fret that NGDP is hard to measure, subject to revision, and mind-bogglingly unfamiliar to the public. Yet if NGDP sounds off-putting, growth in income does not. And although inflation can be measured easily enough, central banks now rely nearly as much on estimates of labour-market “slack”, an impossibly hazy number. Most important, an NGDP target would free central banks from the confusion caused by the broken inflation gauge. To set policy today central banks must work out how they think inflation will respond to falling unemployment, and markets must guess at their thinking. An NGDP target would not require the distinction between forecasts for growth (and hence employment) and forecasts for inflation.

There is more here, congratulations to Scott Sumner and others…

Japan Times reports:

Consumer prices excluding fresh food fell 0.1 percent in August from a year earlier, the first drop since April 2013, the same month Kuroda embarked on a campaign of record asset purchases to rid Japan of its “deflationary mindset.”

My goodness is economics a difficult subject.  (Scott Sumner is implicitly surprised too.)  So why is this happening?

Many of you might be tempted to utter some version of the words “liquidity trap.”  Even if this is one of the more reasonable versions of the liquidity trap arguments, there remains a problem.

Liquidity trap arguments imply that someone’s marginal utility of holding money is basically flat, whether that be the banks, the bank shareholders, the customers — someone.  And the flatness holds for a bunch of relevant someones, not just a few people.  (Or is that a flat marginal utility curve for “money plus safe short-term bonds“?  Whatever.)  With a flat marginal utility curve of money there are multiple equilibria, just as multiple equilibria more generally plague liquidity trap models.  Velocity could be something other than what it is, because at higher or lower levels of cash balance holdings the rate of return on those holdings still would be the same.

Institutional frictions may play a role in setting the equilibrium.  So why an equilibrium with falling prices?  Prices are sticky to some extent, which tends to militate against those of the multiple equilibria where prices are falling.  One might expect the equilibrium where the aggregate of prices rises, if only slowly.  But then why would a slightly higher rate of price inflation turn back down to a lower rate?

A second view is that the money supply/credit supply is endogenous, a’ la Fischer Black, Basil Moore, and others.  Until the real economy does better, the force of M times V will be weak.  This view involves no particular commitment to the slope of the marginal utility of money schedule.  Post 2013, prices went up for a while, because people thought Abenomics might work, but now that they see it doesn’t prices are sliding back down again.

Yet a third view is that the Japanese simply haven’t tried hard enough yet to debase their currency, see for instance Krugman on credibility or various Scott Sumner posts.  In this context I would myself cite gerontocracy rather than credibility issues.

My best guess is that some version of #3 makes #2 true at the relevant margin, but I don’t think such matters are well understood.

Addendum: Scott Sumner comments, for any plausible measurement I still say the rate of price inflation is relatively low in a puzzling manner, relative to asset purchases.  Large increases in money are in principle capable of offsetting relative small declines in food and energy prices, and if they do not that is simply another way of restating the puzzle.

I have a few points:

1. There is decent evidence that many other car companies have done something similar.  Read this too.  Besides, Volkswagen committed a related crime in 1973.  When I was a teenager (maybe still?), it was commonly known that New Jersey service stations would help your car pass the emissions test if you slipped them a small amount of money.  So we shouldn’t be shocked by the new story.  The incentive of the agencies is to get the regulations out the door and to avoid subsequent bad publicity, not to actually solve the problem.  So yes, there is a “regulation ought to be tougher” framing, but there is also a “we’ve been overestimating the benefits of regulation” framing too.  Don’t let your moral outrage, which leads you to the former lesson, distract you from absorbing some of the latter lesson too.

2. We are more outraged by deliberate attempts to break the law, compared to stochastic sloppiness leading to mistakes and accidents.  But it is far from obvious that the egregious violations should be punished more severely in a Beckerian framework.  In fact, if they are harder to pull off, compared to sheer neglect, perhaps they should be punished less severely, at least from a utilitarian point of view.  I am not saying we should discard our intuitions about relative outrage, but we ought to look at them more closely rather than just riding them to a quick conclusion.  I’ve seen it noted rather frequently that the head of the supervisory committee at Volkswagen is named Olaf Lies.

3. Don’t think this is just market failure, it springs from a rather large government subsidy program.  Clive Crook makes a good point:

Remember that “clean diesel” was a government-led initiative, brought to you courtesy of Europe’s taxpayers. And, by the way, the policy had proved a massively expensive failure on its own terms even before the VW scandal broke.

…At best, the clean-diesel strategy lowered carbon emissions much less than hoped, and at ridiculous cost; at worst, as one study concludes, the policy added to global warming.

4. One back of the envelope estimate is that the added pollution killed 5 to 23 Americans each year.  Now I don’t myself think we should always or even mostly use economic methods to value human lives.  But if you wish to play that cost-benefit game, maybe here we have $25 million to $100 million in economic value a year destroyed.  It’s not uncommon to spend $100 million marketing a bad Hollywood movie.  So in economic terms (an important caveat), this is a small event.  Most of the car pollution problem comes from older vehicles with poor maintenance, not fraud on the newer tests.  It also seems (same link) that diesel engines are 95% cleaner since the 1980s.

5. The German automobile sector exported about $225 billion in 2014.  That’s almost as big as Greek gdp.

6. Manipulated data will be one of the big, big stories of the next twenty years, or longer.

7. It is worth citing Glazer’s Law, which is designed to classify explanations for microeconomic puzzles: “It’s either taxes or fraud”

This one isn’t taxes.

China fact of the day

by on September 24, 2015 at 2:54 pm in Current Affairs, Economics | Permalink

The country’s stocks listed in Hong Kong are trading below book value…

The full FT story by James Mackintosh is here.

Visits to medical institutions, hospital visits, and primary medical facilities are growing at 2.98%, 5.40%, and 1.56% respectively.

That is from Christopher Balding, read the whole post.  And that is for an aging population and in a setting where the demand for health care is for structural reasons growing rapidly.  Furthermore the use of traditional Chinese medicine is declining rapidly, fifteen percent this year from Balding’s citation.

Now let’s say the Chinese economy is about fifty percent services, though the exact number can be debated.  And we know that manufacturing PMI is down seven months in a row.

What is your estimate of the overall rate of economic growth in China?  The overall rate of growth six months or a year from now?

In the middle of this post you will find Scott Sumner on China’s growth.

Here is Krugman’s excellent post on how large China spillovers will be.  I say watch for who is exposed to the sudden weekend ten to fifteen percent devaluation.  Lots of other EM currencies have gone down by about that amount, why should China be so different or immune?  The Chinese government isn’t going to spend trillions of dollars on fighting a losing battle in the currency wars, they are simply waiting for the right time for this to happen.  Don’t be caught off-guard.

Here is Mark Pauly, with Adam Leive and Scott Harrington (NBER), this is part of the abstract:

We find that the average financial burden will increase for all income levels once insured. Subsidy-eligible persons with incomes below 250 percent of the poverty threshold likely experience welfare improvements that offset the higher financial burden, depending on assumptions about risk aversion and the value of additional consumption of medical care. However, even under the most optimistic assumptions, close to half of the formerly uninsured (especially those with higher incomes) experience both higher financial burden and lower estimated welfare; indicating a positive “price of responsibility” for complying with the individual mandate. The percentage of the sample with estimated welfare increases is close to matching observed take-up rates by the previously uninsured in the exchanges.

I’ve read so many blog posts taking victory laps on Obamacare, but surely something is wrong when our most scientific study of the question rather effortlessly coughs up phrases such as “but most uninsured will lose” and also “Average welfare for the uninsured population would be estimated to decline after the ACA if all members of that population obtained coverage.”  The simple point is that people still have to pay some part of the cost for this health insurance and a) they were getting some health care to begin with, and b) the value of the policy to them is often worth less than its subsidized price.

You will note that unlike say the calculation of the multiplier in macroeconomics, the exercises in this paper are relatively straightforward.  They also show that people exhibit a fairly high degree of economic rationality when it comes to who signs up and who does not.

It has become clearer what has happened: members of various upper classes have achieved some notion of “universal [near universal] coverage,” while insulating their own medical care from most of the costs of this advance.  Those costs largely have been placed on the welfare of…the other members of the previously uninsured.  So we’ve moved from being a country which doesn’t care so much about its uninsured to being…a country which doesn’t care so much about its (previously) uninsured.  I guess countries just don’t change that rapidly, do they?

I fully understand that Obamacare has survived the ravages of the Republican Party, and it was barely attacked in the recent series of debates, and thus it is permanently ensconced, and that no better politically feasible alternative has been proposed.  At this point, the best thing to do is to improve it from within.  Still, there are good reasons why it will never be so incredibly popular.

Imagine a deal where America and Russia agree on combating ISIS in Syria, admittedly through the sad means of supporting or at least tolerating Assad.  After all, we were all able to agree on Iran, right?

Russia also will agree to keep Snowden away from the embarrassment of a trial and conviction in the United States.  Easier for Obama to let sleeping dogs lie.

America and China could agree on how close American planes and ships could come to the artificial islands.  The Philippines could be part of that deal.

We know which two nations need to lead a climate change agreement.

Toss in a U.S.-China bilateral investment treaty.

Then there’s the arms control agreement for cyberspace, for all three nations, maybe someday Iran too.

Up to forty different U.S.-Chinese agreements have been predicted — after all, Uncle Xi has to come home with something.

It all seems so easy, and logical too.  But, unfortunately, international politics is rarely so straightforwardly Coasian.  Maybe the bilateral investment treaty will come to pass!

For a useful conversation I thank J.

A good rule of thumb is that if a policy is going to happen, it is better to have that policy sooner rather than later.  Here is the latest from the land of fesenjan:

With hopes high that Tehran’s nuclear accord with world powers could lead to the lifting of international sanctions, consumers are holding back on spending in the expectation of price drops and the arrival of better quality imported goods. The motor industry has been badly hit, with sales of domestically produced cars dropping by 15 per cent over the past five months, according to official figures.

Officials warn the carmakers’ crisis is having knock-on effects across the economy, hitting sectors from parts-makers to the critical steel industry, the second-biggest non-oil sector, which is already struggling amid a housing slowdown.


The centrist government of President Hassan Rouhani has managed to cut inflation from about 40 per cent to 12.6 per cent over the past two years and end three successive years of economic contraction, with growth of 3 per cent in the year to March. But economists believe the economy has now stopped growing and may even be contracting.

Of course some of that is an oil price effect.  The full FT story by Najmeh Bozorgmehr is here.