Economics

It was created by Josh Hendrickson, here is the whole thing.  I excerpt one part of it, I’ve done no additional indent but all of this following is from Hendrickson:

Institutions and Public Choice
 
In the 1970s, Earl Thompson started down a path of research that would continue through his career. This research represented the intertwining of institutions and public choice.
  • Taxation and National Defense“, Journal of Political Economy, Vol. 82, No. 4, p. 755 – 782, (1974). In this paper Thompson argues that the optimal tax structure for a country should be one that is structured around national defense. He presents evidence that the U.S. tax system is the approximately optimal tax system using this criteria.
  • An Economic Basis for the `National Defense Argument’ for Aiding Certain Industries,” Journal of Political Economy, Vol. 87, No. 1, (1979). This paper is essentially an extension of the previous paper in that Thompson argues that many protectionist policies are optimal when considered in the context of national defense. He again shows that U.S. policy is approximately optimal in this context.
  • On Labor’s Right to Strike“, Economic Inquiry, Vol. 28, p. 640 – 653, (1980). In this paper Thompson argues that under certain conditions a strike by workers will actually benefit capital owners. He argues that the right of labor to strike and the existence of strikes are often explained by the profitability of the strike to capital owners.
  • Characteristics of Worlds with Perfect Strategic Communication“, Journal of Economic Theory, Vol. 23, No. 1, p. 111 – 119, (1980). This paper as well as the one that follows are designed to discuss how institutions emerge in society. Thompson posits the idea of a hierarchical structure in society in which each group commits to a reaction function. The resulting institutions are Pareto optimal, given those reaction functions. This model pops up throughout Thompson’s subsequent work to explain why we get efficient institutions (like the defense-based tax system) despite the fact that very few people would be able to articulate its purpose. The paper below is a more popular extension of this paper.
  • A Pure Theory of Strategic Behavior and Social Institutions” (with Roger Faith), American Economic Review, Vol. 71, No. 3, p. 366 – 380, (1981).
  • Ideology and the Evolution of Vital Economic Institutions: Guilds, The Gold Standard and Modern International Cooperation. (with Charles Hickson). Kluwer Academic Publishers, 2000. This book is an attempt to summarize and extend Thompson’s work on institutions, growth collapses, and globalization. The book is exploding with ideas. Some of them you will find convincing. Others you might find crazy. However, the book will make you think. You won’t get these types of arguments or this type of thinking from any other economist.
  • What Globalization is Really All About.” This was a keynote address that Thompson gave at a conference. It is a short summary of Thompson’s career and his perspective on globalization.
Other Work
 
This is far from an exhaustive account of Thompson’s work. For a summary of his work, see “A tribute to Earl A. Thompson and, in his own words, a summary of his general economic and social theory” by Don Allison Jr. and Thomas Borcherding in Public Choice, (2013).

Markets in everything?

by on August 18, 2017 at 7:10 am in Economics, Law, Religion | Permalink

I cannot tell whether this tale should count as confirmed:

As awful as that may sound, a number of religious scholars are offering themselves up for one-night stands with divorced Muslim women trying to save their marriages under a disputable Islamic law, an India Today investigation has found.

They charge anywhere between Rs 20,000 and Rs 1.5 lakh to participate in nikah halala, a controversial practice that requires a woman to marry someone else, sleep with him and get a divorce again in order to be able to remarry her first husband under personal laws, the probe discovered.

India Today’s investigative team has blown the lid off the taboo tradition that has remained largely unnoticed amid intense debates over triple talaq on the media and in the country’s top court.

The probe found many Islamic scholars putting themselves up on sale for women desperate to restore their broken marriages.

Here is the full article, via Raj.  I am surprised that the equilibrium price is that high.

This very nice article covers “…a line of people wrapped around the block outside a newly opened restaurant”:

…Surkus, an emerging app that allowed the restaurant to quickly manufacture its ideal crowd and pay the people to stand in place like extras on a movie set. They’ve even been hand-picked by a casting agent of sorts, an algorithmic one that selects each person according to age, location, style and Facebook “likes.”

They may look excited, but that could also be part of the production. Acting disengaged while they idle in line could tarnish their “reputation score,” an identifier that influences whether they’ll be “cast” again. Nobody is forcing the participants to stay, of course, but if they leave, they won’t be paid — their movements are being tracked with geolocation.

Here is the WaPo Peter Holley piece, interesting throughout.  Note that women are often paid more than men, and comedians are starting to use it to fill seats in the nightclub.

Here is the piece (pdf), here is the broader symposium, with other notable contributors, including Bill Easterly, Charles Kenny, and Brandon Fuller.  Here is one excerpt from my essay:

…we should keep in mind the strictures of Dani Rodrik that every country, or sometimes every region, is different. Nonetheless this reorientation of measures of progress would have some implications for policy analysis. In particular, high levels of inequality, inequality of opportunity, and relative income mobility would not be seen as problems per se.

Furthermore, the frequent appearance of those concepts in political and also scholarly rhetoric would be seen as misleading and a distraction. The focus instead would be on expanding the absolute size of opportunities for the poor. To make this more concrete, consider a policy change which benefitted both the rich and the poor. Many of the equality metrics would have to struggle with such a policy, which might increase inequality in some manner, whereas the approach recommended in this paper could endorse it wholeheartedly.

It is interesting to note the recent visit of Thomas Piketty to South Africa. He called for a national minimum wage, greater worker participation in company boards, and land reform. Those are all attempts to provide equalizing measures across one dimension or another. Although some parts of those ideas may have merit, they do not seem overall focused on incentivizing wealth creation and opportunity. Piketty even stated: “I think it’s fair to say that black economic empowerment strategies, which were mostly based on voluntary market transactions […] were not that successful in spreading wealth.” It perhaps would have been more appropriate to note South Africa remains a highly regulated, highly legally privileged, and indeed mercantilist economy; the country ranked only number 72 on the 2015 Heritage Foundation Index of Economic Freedom. So perhaps empowerment based on voluntary market transactions has not yet really been tried.

The absolute opportunities approach also suggests a different emphasis for a topic such as land reform. Many arguments for land reform focus on the difference in the land holdings between the rich and the poor, yet perhaps those are not the relevant numbers. A better focus would be the following question: “by how much would receiving more land elevate the opportunities of the poor?” If indeed the answer to that question is optimistic, the case for land reform will be stronger.

Do read the whole thing.

President Donald Trump named Tomas Philipson, an economist at the University of Chicago who has specialized in health-care policy, to the three-member Council of Economic Advisers on Monday.

Mr. Philipson briefly served as an adviser to the Trump transition team last fall on health-care matters and was a senior economic adviser to the head of the Food and Drug Administration and the Centers for Medicare and Medicaid Services during the George W. Bush administration. Mr. Philipson is the co-founder of Precision Health Economics, a consultancy. He is professor of public policy at the University of Chicago’s Harris School of Public Policy and a director of the Health Economics Program at the university’s Becker Friedman Institute for economic research.

Mr. Trump’s nominee to lead the CEA, Kevin Hassett, hasn’t been confirmed by the Senate. His nomination cleared the Senate Banking Committee with only one lawmaker, Sen. Elizabeth Warren (D., Mass.), voting against him in June.

The two other members of the CEA aren’t subject to Senate confirmation and typically serve for around two years. Mr. Trump hasn’t announced the third member of the council, which has advised presidents for over seven decades on the economic impact of their policies.

That is from the WSJ.

Are U.S. Cities Underpoliced?

by on August 15, 2017 at 7:25 am in Economics, Law | Permalink

Aaron Chalfin and Justin McCrary have a forthcoming paper in the Review of Economics and Statistics that takes a new approach to estimate the effect of police on crime. If you run an ordinary regression using the number of police to explain the number of crimes you typically find small or even positive coefficients, i.e. the police appear to have no effect on crime or maybe even a positive effect. The usual explanation is endogeneity. The number of police influence the number of crimes but the number of crimes also influences the number of police. The recent literature has focused on breaking this endogeneity circle by finding a change in the number of police that is exogenous, i.e. random with respect to crime. My paper with Jon Klick, for example, uses random movements in the terror alert level combined with the fact that the police go on double shifts when the terror alert level rises to estimate the effect of police on crime in Washington, DC. If the assumption of exogeneity is satisfied then you have pulled a random experiment out of natural data, hence a natural experiment. Obviously, if the exogeneity assumption isn’t satisfied the technique doesn’t work. But even if the exogeneity assumption is satisfied there is another problem–by focusing only on changes in police and crime when the terror alert level changes you are throwing out most of the variation in the data so the estimates are going to be less precise than if you used more of the variation in the data.

Chalfin and McCrary acknowledge the endogeneity problem but they suggest that a more important reason why ordinary regression gives you poor results is that the number of police is poorly measured. Suppose the number of police jumps up and down in the data even when the true number stays constant. Fake variation obviously can’t influence real crime so when your regression “sees” a lot of (fake) variation in police which is not associated with variation in crime it’s naturally going to conclude that the effect of police on crime is small, i.e. attenuation bias.

By comparing two different measures of the number of police, Chalfin and McCrary show that a surprising amount of the ups and downs in the number of police is measurement error. Using their two measures, however, Chalfin and McCrary produce a third measure which is better than either alone. Using this cleaned-up estimate, they find that ordinary regression (with controls) gives you estimates of the effect of police on crime which are plausible and similar to those found using other techniques like natural experiments. Chalfin and McCrary’s estimates, however, are more precise since they use much more of the variation in the data.

Using these new estimates of the effect of police and crime along with estimates of the social cost of crime they conclude (as I have argued before) that U.S. cities are substantially under-policed.

Hat tip Kevin Lewis.

Addendum: After writing this post I discovered that I had covered the Chalfin and McCrary paper when it was a working paper, five years ago! This tells you something about how long it can take to get an economics paper published.

It is long, and thus below the fold… Read More →

That is the topic of my latest Bloomberg column.  Excerpt:

Virginia is the location of the Pentagon, and military and national intelligence establishment have been a cash cow for the state. That has boosted prosperity and minimized cyclical downturns, two factors that help alleviate racial and interethnic tensions, in turn raising upward mobility for immigrants. The state has also encouraged real estate growth and created a favorable environment for small and midsize businesses. For all the criticism of ugly strip malls, they are an ideal place for immigrants to start a new business.

The result has been a strong upper middle class rather than a playground for billionaires. That offers immigrants a good chance to move up the social and income ladders fairly quickly.

Almost 70 percent of Virginia immigrants have settled in Northern Virginia, very close to Washington and Maryland. The D.C. metropolitan area, due to the primacy of politics, has attracted migrants and temporary residents for a long time, including American-born citizens from other states. There is little stigma to being an outsider or new arrival.

When I first moved to Northern Virginia in 1980, it was common to see Confederate flags and to hear “good ol’ boys” talk with racist overtones. Today the region is a multicultural success, has some of the best schools in the country, and is renowned for its globe-spanning ethnic food.

Another big part of the Virginia economy has been the significant naval presence in the Norfolk area. In addition to creating lots of jobs, the U.S. military long has been one of the most successfully integrated and tolerant institutions in the country, setting a good workplace and cultural precedent.

It also helps that Virginia’s immigrants are a mix of nationalities, with no one dominant ethnic group. That has encouraged broad-based assimilation, and prevented any single, easily identifiable group from being a source of social tensions.

Do read the whole thing.

Remember the fiduciary rule, the one that “requires brokers to act in the best interests of savers and went into partial effect in June”?  Who could be opposed to such a thing?  But of course when a regulation sounds so very good, there is usually some other consideration around the corner, perhaps involving secondary consequences.  And, as some of us had predicted, it is not working out so well:

The rule requires brokers to act in the best interests of retirement savers, rather than sell products that are merely suitable but could make brokers more money. Financial firms decried the restriction, which began to take effect in June, as limiting consumer choice while raising their compliance costs and potential liability.

But adherence is proving a positive. Firms are pushing customers toward accounts that charge an annual fee on their assets, rather than commissions which can violate the rule, and such fee-based accounts have long been more lucrative for the industry. In earnings calls, executives are citing the Department of Labor rule, known varyingly as the DOL or fiduciary rule, as a boon.

“Primarily because of DOL” and market appreciation, assets are growing in fee-based accounts, said Stifel Financial Corp. SF 0.40% Chief Executive Ronald Kruszewski, on a call in July. In an interview, he said such accounts can be twice as costly for clients.

That is from Lisa Beilfuss at the WSJ.  Allison Schraeger is one who saw this coming.

The Economist has a lengthy and very informative article on this, here is one bit:

Another candidate to be the first ZEDE is a public-private partnership with Canadian investors to create an “energy district” in Olancho department, where wood would be harvested for fuel. The ZEDE itself would be confined at first to a 1.6 square km (0.6 square mile) patch, which will be occupied by a power station. But it could eventually expand to an area covering 8% of Honduras’s territory and including 380,000 people. HOI, a Christian NGO based in the United States, is to provide health care and education from the outset in this “area of influence”.

…Even now, just how ZEDEs will work is a matter of argument among their supporters. The law places effective control in the hands of investors and a “technical secretary” who will administer each zone (and must be a Honduran citizen). They are answerable to an independent “commission for best practices” (CAMP). Civil and criminal cases will be adjudicated by special ZEDE courts, though it is not clear whether each zone will have its own or whether they will join a single parallel system. They could employ foreign judges to hear civil and criminal cases, just as Honduran football teams hire foreign players, suggests Mr Díaz. A “tribunal of individual rights”, guided by international conventions, will protect residents. Its decisions can be appealed to international courts.

But this governance structure is not settled; participants do not agree on what has been decided or even on who is part of it. The original CAMP, appointed by Mr Lobo, had 21 members, including Grover Norquist, an American anti-tax campaigner, Richard Rahn, then of the libertarian Cato Institute in Washington, DC, and Mark Klugmann, a former speechwriter for Ronald Reagan. This body met just once, in March 2015, on the resort island of Roatán.

In short, the prognosis is still unclear, which I take to be bad news.  In any case, there is much more at the link.

If the probability of nuclear war just went up why isn’t the stock market down? The stock market also didn’t fall during the Cuban Missile Crisis, as Lars Christensen points out:

If indeed we were on the brink of a nuclear exchange, one would certainly have expected the stock market to drop like a stone. Nothing of the sort happened. Instead, the S&P500 was little changed during the 13-day standoff between the United States and the Soviet Union.

Lars argues that the market must have figured out that MAD was a brilliant policy and thus the nuclear risk wasn’t anywhere near as large as most people thought (and nuclear war didn’t happen so the markets were right, right?)

Historian Arthur M. Schlesinger Jr., who was in the White House at the time, thought the Cuban Missile Crisis was the “most dangerous moment in human history.” None of the participants thought it was a yawn. I am inclined to accept their judgment. So why didn’t the market drop like a stone? It’s not so obvious that the apocalypse is priced into the stock market.

Let’s remember why markets are good at forecasting events. If you think IBM’s dividends are going to fall then you sell IBM stock and the fall in price signals the future event. But what do you do with the proceeds from the sale of IBM stock? You buy some other asset. Since IBM is only a small share of the market there are lots of other assets to buy.

If you think a nuclear war is likely, and you sell your stocks, what do you buy? It’s pointless to buy other assets like bonds–the bond markets probably won’t exist. You could buy land but who will enforce your property right? Even cash might be useless following a nuclear war. Maybe some gold coins and canned goods would be useful but you may not be around to enjoy them.

If the apocalypse really is coming your best bet is to cash out and spend it all now. But really how much fun would that be? Sure, you could have a great week of hookers and coke but I suspect a lot of people might prefer the cheaper option of a walk in the forest.

If the apocalypse were coming, I would have a second helping of chocolate cake and maybe a third helping but utility diminishes. Since utility diminishes you get a lot less enjoyment by consuming all your wealth now than by spreading it over a lifetime.

Diminishing marginal utility means that the optimal strategy to meet the apocalypse is very costly. Suppose you expect IBM dividends to fall and so you sell your IBM stock and use the proceeds to buy something else. If IBM dividends don’t fall, you haven’t lost much. But if you expect a nuclear war, cash out and blow it all, then you’ve lost a lifetime of consumption in return for a momentary buzz.

The bottom line is that selling stock doesn’t really help you to deal with a nuclear war or even to improve your life much before the nuclear war happens. The problem isn’t markets. An information market could still be used to produce information about the probability of a nuclear war it’s just that I wouldn’t necessarily expect that probability to correlate with the broader markets. Since any actions you might take in the broader markets are fruitless or very high cost, knowing that the probability of a nuclear war has increased is mostly useless information. You might as well ignore useless information and proceed to buy and sell stock as if the information didn’t exist.

You can’t short the apocalypse. As a result, I am not much comforted by the fact that markets appear steady in the face of apocalyptic risk.

From Levy and Rodrik:

What is striking is that this dualism has worsened during the period of Mexico’s liberalizing reforms. Research by one of us (Levy) shows that informal firms have absorbed a growing share of the economy’s resources. The cumulative growth of employment between 1998 and 2013 in the informal sector was a whopping 115%, compared to 6% in the formal economy. For capital, cumulative growth was 134% for the informal sector and 9% for the formal sector.

The short article is interesting throughout.

Not from The Onion

by on August 11, 2017 at 2:27 pm in Economics, Religion | Permalink

‘BitCoen’ to become first electronic currency specifically for Jews

And this:

While anyone can purchase tokens, the company will be managed by a ‘Council of Six’ made up solely of Jewish representatives. The representatives will likely be prominent leaders in both public and private sectors, though there is no word yet as to the planned demography of the leaders.

As the currency is aimed specifically at Jewish communities, there will be an automation option so that trading operations may take place on Shabbat, when the handling of money is prohibited by Jewish law.

Just to be clear, I don’t think that all or even most of these new coins are viable entities…

Hat tip goes to Irrelevant Investor.

That is the topic of my latest Bloomberg column, here is one excerpt:

Alt coins may be effective hedges for at least two reasons. First, the value of the coin may depend on how well the original rules for the coin were written, or how well it is governed in the case of managed coins like Ethereum or Ripple. Those factors may be fairly independent of what’s driving returns in traditional stocks and bonds, which in turn creates an opportunity for diversification.

Under these scenarios, alt coins are primarily stores of value rather than media of exchange. There is a notable tendency for exchange media to consolidate into a dominant currency in a given geographic region. But the very large number of financial assets in the world shows that thousands of stores of value can coexist and compete without much consolidation.

Second, alt coins to some extent are used for money laundering. If you think the world might be moving toward greater authoritarianism, the demand for money laundering could go up, to evade capital controls or asset restrictions. The value of alt coins would rise in turn, and that means alt coins would provide partial insurance against this very possible but unpleasant future path.

There is much more at the link.  Overall I believe it is a mistake to focus too much on the medium of exchange function of such coins (“Can I use it in the store?  I heard there are some food trucks taking Bitcoin!”, etc.).  Instead think of them in terms of services offered.  A new coin also may back, complement, and introduce a new protocol, though I didn’t have space to cover that in the column.

A few of you have asked me about the recent Bitcoin fork, here is one technical look at the issues.

I am struck by the notion that, of the two forked assets, the old-style, slow, and “immutable” Bitcoin retained most of the market value and trading interest.  While that happened for a few reasons, I wonder if the market isn’t telling us that, at least when it comes to selecting the most dominant asset, it prefers a “rigid coin” to a coin managed by a company such as Ethereum or Ripple, or to a coin “managed” by votes and forks.  In other words, the governance problems with coins may be larger than we had thought, and voting may deepen rather than solve those problems.  The market seems to like fairly rigid constitutions.  And for all the pledges made by company-run coins, is there really no way for those companies — in their post-founder futures if not now — to pursue their own interests over those of other coin holders and users?  Since Benjamin Klein (1974) or earlier, we have known that is a classic problem with non-convertible private monies.

To what extent does the market prefer the “dogmatism” of classic Bitcoin to the discretion of private management?  Not long ago, I had edged toward the view that Ethereum and its neat properties will displace Bitcoin, but now I suspect both kinds of coins will persist.

The brilliant Matt Levine will make your head spin.

Moral hazard from Sicilian volunteers

by on August 10, 2017 at 12:58 am in Economics, Law | Permalink

Fifteen volunteer firefighters have been arrested in Sicily on suspicion of starting wildfires and reporting non-existent blazes so they could earn €10 (£9) an hour for putting them out.

Police in Ragusa province, in the south of the Mediterranean island, said the fire department became suspicious when it emerged that the auxiliary brigade had responded to 120 incidents compared with just 40 tackled by other volunteer teams over the same period.

The brigade commander, a refrigeration technician identified as DDV, was deemed dangerous enough to be held under house arrest, the Ansa news agency reported, because he was suspected off continuing to start fires after others had stopped.

Most of the remaining team members, whose private phone calls were recorded as part of the investigation, have since admitted calling the 115 emergency number or getting friends or relatives to do so.

Here is the full story.