Economics

There is a new paper on this topic, by Thomas Kim:

To examine whether the recent price patterns and transaction costs of Bitcoin represent a general characteristic of decentralized virtual currencies, we analyze virtual currencies in online games that have been voluntarily managed by individuals since 1990s. We find that matured game currencies have price stability similar to that of small size equities or gold, and their transaction costs are sometimes lower than real currencies. Assuming that virtual currencies with a longer history can provide an estimate for Bitcoin’s prospects, we project that Bitcoin will be less influenced by speculative trades and become a low cost alternative to real currencies.

I remain more skeptical, as I do not see where the significant, non-speculative demand for Bitcoin comes from, outside a game setting.  Imagine a future where the Chinese have removed capital controls and the private clearing houses preempt and take on a version of real time clearing, based on a (partially) publicly available ledger.  Can that be more than five years away?  Maybe less?

For the pointer I thank the excellent Kevin Lewis.

From The Economist:

The ever larger “staffing industry” may be having a similar effect. It is important across a much wider swathe of the economy than is often realised; having started out in the 1960s supplying office temps, today temping companies like Kelly Services, Adecco and Randstad mainly supply light manufacturing and industrial workers. In 2013 Kelly Services was America’s second-largest private-sector employer, after Walmart, with 750,000 staff. America’s 2.9m temps account for 2% of its jobs.

Temping is flourishing across the G7. In Japan, once the land of the shûshin koyô, or job for life, transient employment is ever more common; in 2014 Recruit, the country’s largest temp agency, listed for $19 billion on the Tokyo stock exchange. In Britain everything from the Olympics on down comes with temporary security guards supplied by G4S and temporary caterers provided by Compass, the country’s largest and third-largest private employers, respectively.

The industry provides flexibility for both workers and firms, and its ability to match workers on its databases to jobs may be very helpful: the 2010 Nobel prize was awarded for work showing how better job search and matching could lower unemployment. But labour aggregators that compete for business on the basis of helping lower clients’ staff costs have an incentive to keep pay low. In 2014 a report by Rebecca Smith and Claire McKenna of the National Employment Law Project, an American lobby group, claims that staffing agencies cut temps’ bargaining power.

The feature story is of interest more generally, much of it on when real wages will start to rise again by significant amounts.

Ramez Naam has an opinion, backed up by some reasonable estimates:

For most of the US, this battery isn’t quite cheap enough. But it’s in the right ballpark. And that means a lot. Net Metering plans in the US are filling up. California’s may be full by the end of 2016 or 2017, modulo additional legal changes. That would severely impact the economics of solar. But another factor of 2 price reduction in storage would make it cheap enough that, as Net Metering plans fill up or are reduced around the country, the battery would allow solar owners to save power for the evening or night-time hours in a cost effective way.

That is also a policy tool in debates with utilities. If they see Net Metering reductions as a tool to slow rooftop solar, they’ll be forced to confront the fact that solar owners with cheap batteries are less dependent on Net Metering.

That same factor of 2 price reduction would also make batteries effective for day-night electricity cost arbitrage, wherein customers fill up the battery with cheap grid power at night, and use stored battery power instead of the grid during the day. In California, where there’s a 19 cent gap between middle of the night power and peak-of-day power, those economics look very attractive.

And the cost of batteries is plunging fast. Tesla will get that 2x price reduction within 3-5 years, if not faster.

Read the whole thing, and note the discussion of India too.

“If we are spending a trillion dollars to rebuild Afghanistan’s schools, we can’t, you know, put a little taste Baltimore’s way. It’s crazy.”

–Jon Stewart, “The Daily Show,” April 28, 2015

The Fact Checker column at the Washington Post rightly awards Jon Stewart four Pinocchios for this howler. It’s not close to being true and even as hyperbole it lends support to the common misperception that foreign aid is a large percentage of the Federal budget.

Let’s forget the off-the-cuff comparison to Afghanistan, however, and focus on a more relevant comparison. Is it true, as Stewart suggests, that Baltimore schools are underfunded relative to other American schools? The National Center for Education Statistics reports the following data on Baltimore City Public Schools and Fairfax County Public Schools, the latter considered among the best school districts in the entire country:

school data2

Baltimore schools spend 27% more than Fairfax County schools per student and a majority of the money comes not from the city but from the state and federal government. Thus, when it comes to education spending, Baltimore has not been ignored but is a recipient of significant federal and state aid.

His new book Inequality: What Can Be Done?, is out mid-May but already available in some bookstores.  Here is an interview with Atkinson.  I thought this book did not take sufficient care with some very basic distinctions, such as the difference between a problem of poverty and a problem of inequality.   Nor does it put enough emphasis on wealth creation, or explain why Korean-Americans have done pretty well over the last thirty years, among other possible examples.

The book is dedicated to the NHS workers of Britain.  That’s fine, many of them are very good, but Atkinson doesn’t mention a few key points, namely that a) the British system ranks relatively poorly by European standards, b) the British system probably has too much governmental ownership and provision, and c) bureaucracies usually underpay their best workers and thus do not generate enough initial income inequality.

François Bourguignon has a very good and readable new book on the international dimension of inequality, The Globalization of Inequality.

Martin Wolf has an FT review of both books.

For the pointer to the Atkinson interview I thank Enrico Schaar.

It’s well known that bees dance to convey where useful resources are located but how do bees convey the quality of the resource and what makes this information credible? Rory Sutherland and Glen Weyl argue that the bees have hit upon a key idea, quadratic dancing or as I like to put it, square dancing.

Seeley’s research shows that the time they spend on dances grows not linearly but quadratically in proportion to the attractiveness of the site they encountered. Twice as good a site leads to four times as much wiggling, three times as good a site leads to nine times as lengthy a dance, and so forth.

Quadratic dancing has some useful properties which can be duplicated in humans with quadratic voting.

Under Quadratic Voting (QV), by contrast, individuals have a vote budget that they can spread around different issues that matter to them in proportion to the value those issues hold for them. And just as with Seeley’s bees, it becomes increasingly costly proportionately to acquire the next unit of influence on one issue. This approach highlights not only frequency of preferences but also intensity of preferences, by forcing individuals to decide how they will divide their influence across issues, while penalising the single-issue fanatic’s fussiness of putting all one’s weight on a single issue. It encourages individuals to distribute their points in precise proportion to how much each issue matters to them.

They offer a useful application

Consider a firm that wants to learn whether customers care about particular product attributes: colour, quality, price, and so on. Rather than simply ask people what they care about — which leads to notoriously inaccurate results, often where people affect strong views just to maximise their individual influence — a business, or a public service, could supply customers with budgets of credits which they then used to vote, in quadratic fashion, for the attributes they want. This forces the group of respondents, like the swarm of bees, to allocate more resources to the options they care most about.

Weyl’s paper with Eric Posner is a good introduction to quadratic voting and here are previous MR posts on quadratic voting.

Bart Madden and James Pinkerton suggest a new “free to choose” track for pharmaceuticals. Pharmaceuticals which showed initial effectiveness would be available for early sale but all treatment information under the early-sale program would have to be reported to an open-access database.

After a drug successfully passes safety trials and shows initial effectiveness in clinical trials—that is, the early steps—a drug developer could request that their drug be available for sale on a “free to choose” track (the developer could elect also to continue on the FDA clinical trial track). As a result, patients such as Matt Bellina would be able to access innovative new drugs up to seven years earlier than waiting for a final FDA decision. For patients given only a few years—or months—to live, seven years sooner could spell life, not death.

Under our proposal, a patient’s doctor would be required to submit treatment results and medical information such as a patient’s genetic data to the open-access database. Doctors and patients would get real-time updates about the benefits and side effects of any “free to choose” drug and be able to make informed decisions about an early use of these new drugs versus approved drugs.

We might bear in mind that clinical trials involve patients who are mostly similar. On the other hand, because the “free to choose” option would be available to everyone, new insights would be obtained about how a drug performs for a far broader range of patients. These insights would better inform the biopharmaceutical industry, leading, in turn, to better allocation of research funds and faster innovation.

Bart’s excellent book Free to Choose Medicine has more on the proposal, which I think would speed drugs to patients and increase pharmaceutical research and development. Do note that I hold the Bartley J. Madden chair in economics at Mercatus at GMU and I have my biases.

Me:

Some economic sectors are distributed everywhere, like every city has its dentist[s], and other sectors are quite clustered. Banking is pretty clustered — New York, London, Hong Kong. Tech has been evolving in a pretty clustered way; I don’t mean simple software support, which is more like dentistry, but big, grand projects — the next Google, the next Facebook, Uber. We see those come out of quite a small number of places, so Skype coming from Estonia is quite the exception. Even then, it was improved by people in the clusters.

I think any location, not just Canada, has to ask itself, ‘are we going to be one of those clusters or not’? And the correct answer may be ‘no’. It may also be the sector evolves so it’s less clustered and more like dentistry, and then everywhere including Canada would partake. But maybe the future is Canada will have a knowledge sector doing small-scale things like software design for local projects but not anything like its own Silicon Valley. I guess at this point that seems likely — that Canada will not be a huge innovative part of the knowledge economy.

That is from my interview with the excellent Eva Salinas, mostly about other topics, such as what a great egalitarian age we live in and also where the World Bank and IMF stand, among other issues.  A few of the comments make more sense if you know that the interviewer is Chilean and we were discussing Chile before the formal interview started.

Mood affiliation aside, these clauses do not constitute a significant reason to oppose the treaty, in my view.  Gary Hufbauer has a good discussion:

ISDS provisions enable a foreign investor to seek compensation in an amount determined by an impartial panel of arbitrators, if a host government expropriates its property, or regulates its business in an arbitrary or discriminatory manner. Such protections have been deemed necessary in agreements going back at least to a Germany-Pakistan accord in 1959, and they have successfully protected US investments overseas in many countries.

Often these ISDS provisions are part of bilateral investment treaties (BITs), of which more than 2,200 are now in force worldwide. The United States has 41 BITs with countries near and far, and is actively negotiating a BIT with China, aimed at strengthening the rights of investors in a country that has not always been fair. Starting with the North American Free Trade Agreement (NAFTA) in 1994, the United States has also included ISDS in the investment chapters in nearly all its free trade agreements (FTAs), now numbering 20. Given this rich history, Senator Warren should be able to cite actual examples of the multiple abuses that she claims have occurred. She has not done so, because she cannot. Senator Warren makes a big deal about the hypothetical outcome of the old Methanex case against California’s regulations on gasoline additives, but the case was decided against the Canadian corporation.

The record shows that, far from a record of multinational corporations trampling sovereign states, investors have won fewer than a third of the cases resolved by the ISDS process.1 Arbitration procedures were formalized in 1996, when the World Bank created the International Center for the Settlement of Investment Disputes (ICSID) as a neutral forum to handle ISDS claims. Similar fora are based in London, Paris, and Stockholm, but ICSID oversees the vast majority of claims. To date, ICSID has handled almost 500 cases.2 Of these, 36 percent were settled between the parties before going to arbitration. The arbitrators declined to hear 16 percent of claims for want of jurisdiction. They dismissed 19 percent of claims for lack of merit. Only in 29 percent of cases did the arbitrators uphold some or all of the business claims.

The full post is here.

I was going to write a post on how trolls aren’t the fundamental problem with the patent system but Timothy Lee has it covered:

…trolls aren’t the primary problem with the patent system. They’re just the problem Congress is willing to fix. The primary problem with the patent system is, well, the patent system. The system makes it too easy to get broad, vague patents, and the litigation process is tilted too far toward plaintiffs. But because so many big companies make so much money off of this system, few in Congress are willing to consider broader reforms.

A modern example is Microsoft, which has more than 40,000 patents and reportedly earns billions of dollars per year in patent licensing revenues from companies selling Android phones. That’s not because Google was caught copying Microsoft’s Windows Phone software (which has never been very popular with consumers). Rather, it’s because low standards for patents — especially in software — have allowed Microsoft to amass a huge number of patents on routine characteristics of mobile operating systems. Microsoft’s patent arsenal has become so huge that it’s effectively impossible to create a mobile operating system without infringing some of them. And so Microsoft can demand that smaller, more innovative companies pay them off.

… In effect, the patent system is acting as an innovation tax, transferring wealth from companies that are creating successful technologies today to companies that acquired a lot of patents a decade ago.

A more fundamental change would be to offer patents of varying length, say 3, 7, and 20 years with the understanding that 3 year patents will be approved quickly but 20 year patents will be required to leap a high hurdle on non-obviousness, prior art and so forth. See my paper Patent Theory versus Patent Law.

My video on patents is a quick and fun introduction.

ABC: The Treasury Department recently sold 44,000 one-dollar bills to one person — at a price of $5.95 apiece.

The bills weren’t even all that special — they weren’t very old, and they didn’t have any major flaws that made them valuable to collectors.

What they did have though, was four number eights in a row in their serial numbers — a sign of luck to many people of Asian descent.

And that’s made the bills popular. The Treasury’s Bureau of Engraving and Printing says it has sold over 70,000 such “prosperity notes” to thousands of people around the world — not including the huge sale to one individual.

Now that is a high rate of seigniorage. You can buy your own lucky bills from the Treasury. Westerners may prefer the 777 series. There is a discount for bulk orders, but you will still be paying more than a dollar for a dollar. That doesn’t feel lucky to me.

Hat tip: The Blacklist.

That is the new Keynes biography by the renowned Richard Davenport-Hines.  It’s not like most biographies I know.  The font is fairly large, and the presentation is non-comprehensive and fairly subjective.  It is more like reading the transcript of some very good talks on Keynes, and less of a trudge than many bios.  There is even a chapter on Keynes as lover, but actually quite serious and good, as it helps set the man in context.  For Davenport-Hines, Keynes was most of all a Cambridge Apostle.  This book will help you get inside the mind of Keynes, definitely recommended.

A new Brookings study by Rothwell and Kulkarni attempts to do just that.  The list of ratings for two-year institutions puts NHTI’s-Concord Community College at the top, followed by a large number of institutions you mostly haven’t heard of.  For four-year institutions the list starts with:

1. Caltech

2. Colgate

3. MIT

4. Rose-Hulman Institute of Technology,

with other surprises to follow.  The Colorado School of Mines does better than Princeton, for instance.  Here is the report itself, here is a story on the report.  I am finding the web site for the rankings is still a little glitchy, let’s hope they fix that soon, or maybe it is just the current volume of traffic.

Not for Greece, that is clear, rather for everyone else.  Given bank recapitalization, the introduction of the European Stability Mechanism, European QE, a more general flood of liquidity to European banks, and a burgeoning European economic recovery — by European standards that is — it seems Grexit stands a good chance of being a non-event at the global or even the European level.  After all, Greece is only a small sliver of EU gdp; a few years ago it was only two percent, now presumably it is less.  On top of that, most of the remaining Greek debt is to public sector institutions, not private banks, which ought to limit contagion effects.  Indeed, as Greek bond yields rise, these days the bond yields of the periphery nations do not rise in tandem; some in fact have been falling.

So what’s the problem?

I think 80-20 that Grexit would not become a major macroeconomic problem for other countries, with the possible exception of small Cyprus.  But where does that 20% come from?

If Greek deposit flight forces a form of Grexit, whether whole or partial (capital controls plus scrip?), there is a good chance that markets will in essence “ask” the ECB again just how firmly it stands behind the other troubled eurozone member nations, such as Portugal.  The danger is that the current “creative ambiguity” cannot be disturbed in a useful way.  It might be hard for the ECB to announce that it stands fully behind the other eurozone nations, and in effect promise to monetize any pending default.  The incentive for moral hazard would be too destructive, and besides governments such as that of Spain don’t want to encourage the anti-austerity opposition.  The ECB is therefore likely to make a public commitment less extreme than that.

But neither will “we don’t really stand behind these governments at all” do the trick.  That probably would induce contagion along some other parts of the periphery, maybe more.

The ECB therefore must choose some intermediate point to signal — “we are committed, but member nations still bear fiscal risk.”  In part that is why they have rearranged the ex ante guarantees to fall so firmly upon national central banks, a move which some have compared to turning the euro into a currency board system.  Ex post, of course, the ECB or EU still has the discretionary option of bailing out those central banks, if and when it chooses to do so.  And, following Grexit, they could credibly say “The EU would have bailed out Greece, had an agreement on structural adjustment been reached and previous commitments honored.”  That’s basically a repeat of previous messages and maybe it is good enough.  That is where the 80% comes from.

So which ingredients will shape the new (old) message?: an intelligent but constrained ECB with a highly restrictive charter, a Europe-dedicated and wishing to atone for Grexit but electorally cautious Germany, a bunch of periphery nations which basically want any and all guarantees reserved for themselves and not for opposition parties, and lots of other voices, all mixed into a more or less unprecedented shock surprise in modern financial history.

So will the ECB get the signal right? Did I say 80-20?  Can I change that to…um…70-30?

In a specifically Vietnamese context, there is good evidence that more trade with Vietnam will bring more FDI.  A more general political science study shows the same, namely that joining trade agreements boosts FDI and also growth.

Here is an argument (circa 2005) that Vietnam still has too much trade protection.  Here is a good general piece that trade boosts poverty reduction in poorer nations.  Here is supporting evidence specifically on rural Vietnam.

Those are just a few follow-ups on my earlier post on TPP and Vietnam.  By the way, here is Greg Mankiw showing that TPP is in fact a trade agreement.