Category: Economics

Haiti vs. the Dominican Republic

I am setting aside most of the cultural and “macro” issues, and just considering policy, in my latest Bloomberg column.  Excerpt:

Consider agriculture. If you fly over Hispaniola, you can see a notable difference between the Haitian and Dominican sides of the border. The Dominican side has plenty of trees, whereas the Haitian side is denuded. Much of that can be explained by Haiti’s history of weaker property rights. A “tragedy of the commons” has led to systematic exploitation of Haitian land.

The deforestation of Haiti dates from at least 1730, when French colonial policies, timber exports and the clearing of the land for coffee production all did damage. That hurt the prospects for Haitian agriculture, but much of the tree-clearing took place in the middle of the 20th century. Haitians have long used charcoal as an energy source, which led to unchecked deforestation, soil erosion and desertification. Thus, despite its beautiful natural setting, most of Haiti does not appear green and sparkling.

In the Dominican Republic, deforestation is also a problem — but not nearly on the scale of Haiti. Forests still cover about 40% of the country’s land (estimates for Haiti have ranged as low as 2%). The Dominican Republic has some national parks and reforestation programs, and developed alternative energy sources to reduce the demand for charcoal. Forest cover, and the quality of the soil, made a comeback. The country is also working toward selling its reforestation for carbon credits, giving it further economic incentive to protect its land.

To the extent that the Dominican Republic still experiences deforestation, it often comes from livestock cultivation, a far more economically productive activity than gathering wood for charcoal.

To citizens of wealthy countries, these differences may not sound enormous. But agriculture is an important driver of early economic development. Surpluses from agriculture enable the accumulation of savings, which finances broader commercial investment and helps people start small businesses. The economy obtains a base for diversifying into manufacturing, as happened in East Asia. Ethiopia’s double-digit growth spurt, before the recent tragic civil wars, also was rooted in agricultural productivity gains.

Today the Dominican Republic is essentially self-sufficient in food, including rice. According to the US government, Haiti now relies on imports for “a significant portion of the agricultural products it consumes,” including 80% of its rice. In 1981, by contrast, food imports were only 18% of the Haitian diet.

There are further arguments at the link.

Gatekeeping is Apple’s Brand Promise

Steve Sinofsky, former president of Microsoft’s Windows division and now a VC, has an excellent deep dive on the EU’s Digital Markets Act (DMA). The Act is very squarely aimed at Apple, despite the fact that Apple is not a monopoly and has a significantly smaller share of the phone market than Android. Apple’s history is well known, in contrast with Microsoft it went for a closed system in which Apple controlled entry to a much greater extent. The same was true with iPhone versus Android.

iPhone was successful but it was not as successful as Android that came shortly after because of the constraints Steve put in place to be the best, not the highest share or the greatest number of units. Android was to smartphones just as Microsoft was to personal computers. Android sought out the highest share, greatest variety of hardware at the lowest prices, and most open platform for both phone makers and developers. By making Android open source, Google even out-Microsofted Microsoft by providing what hardware makers had always wanted—complete control. A lot more manufacturers, people, and companies appreciated that approach more than Apple’s. That’s why something like 7 out of 10 smartphones in the world run Android.

Android has the kind of success Microsoft would envy, but not Apple, primarily because with that success came most all the same issues that Microsoft sees (still) with the Windows PC. The security, privacy, abuse, fragility, and other problems of the PC show up on Android at a rate like the PC compared to Macintosh and iPhone. Only this time it is not the lack of motivation bad actors have to exploit iPhone, rather it is the foresight of the Steve Jobs vision for computing. He pushed to have a new kind of computer that further encapsulated and abstracted the computer to make it safer, more reliable, more private, and secure, great battery life, more accessible, more consistent, always easier to use, and so on. These attributes did not happen by accident. They were the process of design and architecture from the very start. These attributes are the brand promise of iPhone as much as the brand promise of Android is openness, ubiquity, low price, choice.

The lesson of the first two decades of the PC and the first almost two decades of smartphones are that these ends of a spectrum are not accidental. These choices are not mutually compatible. You don’t get both. I know this is horrible to say and everyone believes that there is somehow malicious intent to lock people into a closed environment or an unintentional incompetence that permits bad software to invade an ecosystem. Neither of those would be the case. Quite simply, there’s a choice between engineering and architecting for one or the other and once you start you can’t go back. More importantly, the market values and demands both.

That is unless you’re a regulator in Brussels. Then you sit in an amazing government building and decide that it is entirely possible to just by fiat declare that the iPhone should have all the attributes of openness.

Apple’s promise to iPhone users is that it will be a gatekeeper. Gatekeeping is what allows Apple to promise greater security, privacy, usability and reliability. Gatekeeping is Apple’s brand promise. Gatekeeping is what the consumer’s are buying. The EU’s DMA is an attempt to make Apple more “open” but it can only do so at the expense of turning Apple into Android, devaluating the brand promise and ironically reducing competition.

Read the whole thing for more details and history including useful comparisons with the US antitrust trial against Microsoft.

My podcast with Thomas Burnett

Thomas is at the Templeton Foundation, here is the link (with transcript), here is one bit:

Tyler: Well, when I was very small, my favorite books were about animals and dinosaurs. A bit later, I liked books about codes and ciphers. I loved baseball books. I loved Jerry Kramer’s Instant Replay. Chess books, of course, when I was a chess player. Maybe when I was 11, I started reading science fiction. So, Isaac Asimov, Arthur C. Clarke, a little later, Robert Heinlein. Those were many of the first things I read.

And this:

Thomas: …if I’m very well informed about something? Why shouldn’t I go marching to Capitol Hill and shout from the top of my lungs that things must be this way to have a better future?

Tyler: Well, I’m not sure how much being well informed predicts you being right. That’s an interesting question, Now, clearly, society relies on the fact that many people will go out and march for things, even when they’re not well informed. So, I don’t want to talk everyone out of that. But it still seems to me the wisest people, or people who are trying to be the wisest people, should be much more careful, and do more to listen, and set an example toward humility. While recognizing you need a lot of dogmatists fighting for a bunch of things to keep society sustainable.

Many further topics are discussed, interesting throughout.

Some triumphs of 19th century liberalism

Here is an outline of part of my lecture.  I presented “free trade” (NB: it wasn’t totally free), the classical gold standard, and some modicum of free immigration (not everywhere) as three successful and mostly stable pillars of 19th century classical liberal achievement.  Of course that was for limited parts of Western Europe and North America only, and with major exceptions for women, blacks, and more.  Nonetheless, something in that formula worked, at least when it was actually appplied.  Here is the outline:

Extreme trade protectionism after Napoleonic Wars

Later sliding scale for tariffs, maybe 50% rate of effective protection?

Complete free trade for Corn [wheat] during the 1840s, Cobden and Bright and Anti-Corn Law League

Terms of trade arguments: Robert Torrens, J.S. Mill

Protectionism does best when inelastic demand for your exports, elastic demand for your imports (two-country model)

The tariff in essence helps your buyers collude as one

That can outweigh the efficiency losses from the tariff

Removing labor from the corn sector also can boost British manufactures

What were terms of trade for GB then?

Jeffrey Williamson paper 1990 – Repeal helped the working class, hurt the landlords

Doug Irwin (EJ, 2021) – Efficiency-neutral but broadly egalitarian

American farmers were big winners

Greatest liberal triumph of the 19th century?

The other great triumph – the classical gold standard – dating from 1815-1914

Price-specie flow mechanism

Overvalued exchange rate – 1815, 1920s for Britain

Nassau Senior, Four Lectures on the Transmission of Precious Metals, 1827

Henry Thornton, An Enquiry into the Nature and Effects of the Paper Credit of Great Britain, 1802 – prices, interest rates, exchange rates

Steve Levitt on the future of economics

It’s really, right now, I think the profession is very inward-looking. It’s rewarding people who do things that are seen as hard. It’s really blurring the lines between theory and empirics was structural in a way that it is an experiment that I personally don’t think has worked out very well. And so, I think that it’s not that, I mean, the great ideas you’re talking about like Black-Scholes are few and far between anyway. But the rewards are not there for people who have practical insights are not rewarded greatly in the profession. The rewards come to people who make innovations, theoretical innovations, right? Who come up with new techniques, who do hard stuff that other people can’t do. So, I think in that sense, economics is going to become, my prediction is that economics is going to become less and less relevant, more and more inwardly focused. And honestly, I wouldn’t be that surprised if economics ends up going the way of anthropology or sociology, which works prominent and thought to be very promising and important disciplines, but have fallen dramatically in their stature because they ended up being more arcane and more focused inwardly. So, I have a really bad feeling about the future of economics, and I don’t see an easy way to change it.”

That is from Jon Hartley’s podcast with him, transcript included.

Milei update

The shock therapy administered by Milei and his economy czar Luis Caputo right after the Dec. 10 inauguration is showing results. In a severely recessionary context, inflation is slowing down (February prices rose 13.2% in monthly terms compared with 25.5% in December) while foreign reserves grew by more than $7 billion despite debt repayments. Deposits on local dollar-denominated bank accounts have also recovered. Last week, Argentina’s sovereign spread (a measure of country risk) dropped to the lowest in more than two years and the nation has received the enthusiastic backing of the International Monetary Fund, its single largest creditor.

The exchange rate — historically the Argentine economy’s key indicator — has recently appreciated in parallel markets and now trades at just 15%-20% over the official peso, opening the door for authorities to consider unifying the currency market. As local economists have argued, it’s time to start dismantling the byzantine currency controls that have long strangled Argentina.

The flipside of the government’s deep spending cuts, however, is a near-collapse in economic activity, with industrial production falling more than 12% year-on-year in January and construction retreating even more.

And:

At the same time, the parallel peso’s appreciation in a context of high inflation is leading to a loss of competitiveness, with Argentina fast becoming expensive when measured in dollars. The result adds to speculation that a new devaluation will soon be unavoidable, reversing gains in the fight on inflation. “Our base scenario considers a correction of the exchange framework in May,” Buenos Aires-based consultant Equilibra said in a recent report. Monday night’s measures by the country’s central bank can be seen as an attempt to tame this appreciation.

The government’s gamble is that, by the second quarter, a strong crop from Argentina’s high-powered farmlands spurs a rebound in activity that helps contain some of the social discontent produced by the measures.

Here is more from Juan Pablo Spinetto at Bloomberg.  And from the FT:

Argentina’s Senate has rejected President Javier Milei’s sweeping emergency decree to deregulate the economy, in a major blow to the libertarian leader and his attempt to deliver reforms for the crisis-stricken country. Senators voted 42 to 25 to reject the decree, with four abstentions. Issued in December it modifies or eliminates more than 300 regulations affecting the housing rental market, food retailers, air travel, land ownership, and more.

So further progress on the libertarian front may be tough.  Also from the piece:

“This is a worry for the market because the president is on the verge of losing . . . the only set of substantial economic reforms he has been able to introduce so far,” he said. Milei already opted to withdraw the other plank of his legislative agenda — a multipronged omnibus bill aiming to overhaul the Argentine state — from the floor of the lower house last month after lawmakers rejected several key articles.

Things could be better.

Indigenous Charter Cities

A charter city is a special zone with a charter granting significant autonomy from the host country’s regulations. Hong Kong, a succesful Chinese city operating under British law, was one early inspiration. Examples like this fueled criticisms that charter cities were “neo-colonial”. But Charter cities do not inherently require foreign legal frameworks. The fundamental purpose of a charter city is to serve as a discovery platform, a way to explore governance models allowing more people to select from the succesful.

An important case in point are the charter cities being created by indigenous Americans in Canada and the United States. In Vancouver, for example, indigenous people have asserted their rights under various treaties to control their own land.

Sen̓áḵw [an 11-tower development on 10 acres in heart of Vancouver, AT] is big, ambitious and undeniably urban—and undeniably Indigenous. It’s being built on reserve land owned by the Squamish First Nation, and it’s spearheaded by the Squamish Nation itself, in partnership with the private real estate developer Westbank. Because the project is on First Nations land, not city land, it’s under Squamish authority, free of Vancouver’s zoning rules. And the Nation has chosen to build bigger, denser and taller than any development on city property would be allowed.

Amusingly, some on the progressive left are crestfallen that the indigeneous are behaving like evil capitalist developers and not the back-to-the-land people they had imagined.

Predictably, not everyone has been happy about it. Critics have included local planners, politicians and, especially, residents of Kitsilano Point, a rarified beachfront neighbourhood bordering the reserve. And there’s been an extra edge to their critiques that’s gone beyond standard-issue NIMBYism about too-tall buildings and preserving neighbourhood character. There’s also been a persistent sense of disbelief that Indigenous people could be responsible for this futuristic version of urban living. In 2022, Gordon Price, a prominent Vancouver urban planner and a former city councillor, told Gitxsan reporter Angela Sterritt, “When you’re building 30, 40-storey high rises out of concrete, there’s a big gap between that and an Indigenous way of building.”

…. In 2022, city councillor Colleen Hardwick said of [a similar development], “How do you reconcile Indigenous ways of being with 18-storey high-rises?” (Hardwick, it goes without saying, is not Indigenous.)

What chafes critics, even those who might consider themselves progressive, is that they expect reconciliation to instead look like a kind of reversal, rewinding the tape of history to some museum-diorama past. Coalitions of neighbours near Iy̓álmexw and Sen̓áḵw have offered their own counter-proposals for developing the sites, featuring smaller, shorter buildings and other changes. At the January hearing for Iy̓álmexw, one resident called on the First Nations to build entirely with selectively logged B.C. timber, in accord with what she claimed were their cultural values…That attitude can cast Indigenous people in the role of glorified park rangers.

There are also some interesting developments in the United States. The Catawba Indian Nation, for example, established the Catawba Digital Economic Zone (CDEZ), where I serve as an advisor. The CDEZ is based on US law but tailored for digital entrepreneurs, freelancers, FinTech, digital assets, Web3, and other exponential digital technologies. The progressive left probably isn’t happy about that either. Personally I am delighted to support initiatives that empower indigenous communities through capitalist ventures. More broadly, however, I support the introduction of new governance models to encourage competition in governance—bring on a new era of discovery and Tiebout competition!

The Canadian economy is a worthwhile Canadian initiative

Contrary to some recent claims, the Canadian economy is not falling apart, and now I have a Bloomberg column on that point.  Excerpt:

A chorus of doomsayers is pointing out that by some measures, Canadian per-capita GDP is in decline.

While there is genuine room for concern, the bad news is much overstated. Canada has not altered its fundamental and longstanding position: It is somewhat poorer than the US, but it is progressing at a more or less typical pace.

First, a note on the numbers: Canadian GDP per capita has not regressed to where it was in 2014. That metric deflates incomes by producer prices, whereas for actual living standards economists generally agree that a consumer-prices deflator of some kind is more appropriate. Using that metric, Canadian per-capita GDP mostly has been rising since 2014, the pandemic aside, and currently stands modestly above pre-pandemic levels, albeit with a very recent downturn. Yes, Canadian performance could be better, but there’s no reason to be pressing the panic button.

It is also noteworthy that the Canadian economy, historically, does better when measured by median income trends, which have been steadily positive for almost two decades, including since 2014.

As for concerns:

It is a fair to wonder why the Canadian economy, in relative terms, seems to be slipping behind the US. As a general observation, this is true of most developed economies, and perhaps it says more about American virtues than Canadian defects.

More specifically, though, the nature of the tech economy may suggest this widening gap is inevitable, at least for a while. Canadian contributors to the technology scene are numerous, most of all in artificial intelligence. But with some exceptions, these developments have had the most impact in the US. Canada can certainly be proud of the contributions of the brilliant Canadian-Israeli computer scientist Ilya Sutskever, a co-founder of OpenAI, but of course that means he was not working in Canada.

Think of it as the economic equivalent of the US’s exorbitant privilege in monetary policy: The more other economies become technology-centered, the more likely they will help the major tech clusters in the US, which will continue to attract global talent. So it is possible that the US will increase its relative lead over Canada, and many other economies, no matter what Canada does. Perhaps some Canadians will feel bad about that growing gap, but to the extent their country benefits from those same tech innovations, it is good for most Canadians.

I am looking forward to my next Canada trip, when will that be?  I don’t think I will make it to the Candidates’ tourney, but I am picking Caruana to win.

Claude 3 Opus does Austrian economics

TC: Let’s say you were Peter Boettke, and looking to pen a critique of Kirzner’s theory of entrepreneurship. You come from a slightly different branch of the Austrian school. How would you use that differential background to express your differences with the Kirznerian theory, which emphasizes alertness above all else as an entrepreneurial characteristic?

“If I were Peter Boettke, coming from a slightly different branch of the Austrian school, I would likely emphasize the following points in my critique of Kirzner’s theory of entrepreneurship, which focuses heavily on alertness:

  1. The role of uncertainty: While Kirzner’s theory emphasizes alertness to opportunities, it may not fully capture the fundamental role of uncertainty in entrepreneurship. Drawing on the work of Ludwig von Mises and Friedrich Hayek, I would argue that entrepreneurship is not just about spotting opportunities, but also about bearing uncertainty and making judgments about the future in the face of incomplete information.
  2. The importance of capital and resources: Kirzner’s theory focuses on the cognitive aspect of entrepreneurship (alertness), but it may neglect the importance of access to capital and resources in enabling entrepreneurs to act on their insights. As a Boettke coming from the Rothbardian tradition, I would stress the crucial role of savings, investment, and capital accumulation in facilitating entrepreneurial action.
  3. The institutional context: Kirzner’s theory tends to treat the institutional framework as given, focusing on how entrepreneurs operate within existing market structures. However, as a Boettke influenced by the work of Douglass North and other institutional economists, I would argue that the institutional context (property rights, legal systems, cultural norms, etc.) plays a crucial role in shaping entrepreneurial opportunities and incentives.
  4. The dynamics of competition: While Kirzner emphasizes the equilibrating role of entrepreneurship in driving markets towards efficiency, I would draw on the work of Hayek and others to highlight the dynamic, rivalrous nature of competition. Entrepreneurship is not just about alertness, but also about continuous innovation, experimentation, and adaptation in the face of changing market conditions.
  5. The subjectivity of opportunity: Kirzner’s theory tends to treat entrepreneurial opportunities as objective phenomena waiting to be discovered. However, drawing on the subjectivist tradition in Austrian economics, I would argue that opportunities are ultimately subjective and dependent on the perceptions, beliefs, and creativity of individual entrepreneurs.

In summary, as Peter Boettke, I would acknowledge the important insights of Kirzner’s theory, particularly its emphasis on the central role of entrepreneurship in driving market processes. However, I would also seek to enrich and extend the theory by drawing on other strands of Austrian thought, emphasizing the roles of uncertainty, capital, institutions, competition, and subjectivism in shaping entrepreneurial activity.”

That is from Claude 3 Opus.

DEI vs. the Chips Act

The Hill has a good op-ed by Matt Cole and Chris Nicholson on how labor and DEI regulations are strangling the CHIPS act. It’s somewhat over the top, failure is overdetermined, but this is an important op-ed and directionally correct.

The Biden administration recently promised it will finally loosen the purse strings on $39 billion of CHIPS Act grants to encourage semiconductor fabrication in the U.S. But less than a week later, Intel announced that it’s putting the brakes on its Columbus factory. The Taiwan Semiconductor Manufacturing Company (TSMC) has pushed back production at its second Arizona foundry. The remaining major chipmaker, Samsung, just delayed its first Texas fab.

This is not the way companies typically respond to multi-billion-dollar subsidies. So what explains chipmakers’ apparent ingratitude? In large part, frustration with DEI requirements embedded in the CHIPS Act.

…The law contains 19 sections aimed at helping minority groups, including one creating a Chief Diversity Officer at the National Science Foundation, and several prioritizing scientific cooperation with what it calls “minority-serving institutions.” A section called “Opportunity and Inclusion” instructs the Department of Commerce to work with minority-owned businesses and make sure chipmakers “increase the participation of economically disadvantaged individuals in the semiconductor workforce.”

…Handouts abound. There’s plenty for the left—requirements that chipmakers submit detailed plans to educate, employ, and train lots of women and people of color, as well as “justice-involved individuals,” more commonly known as ex-cons. There’s plenty for the right—veterans and members of rural communities find their way into the typical DEI definition of minorities. There’s even plenty for the planet: Arizona Democrats just bragged they’ve won $15 million in CHIPS funding for an ASU project fighting climate change.

…tired of delays at its first fab, [TSMC]flew in 500 employees from Taiwan. This angered local workers, since the implication was that they weren’t skilled enough. With CHIPS grants at risk, TSMC caved in December, agreeing to rely on those workers and invest more in training them. A month later, it postponed its second Arizona fab.

Now TSMC has revealed plans to build a second fab in Japan. Its first, which broke ground in 2021, is about to begin production. TSMC has learned that when the Japanese promise money, they actually give it, and they allow it to use competent workers. TSMC is also sampling Germany’s chip subsidies, as is Intel.

Intel is also building fabs in Poland and Israel, which means it would rather risk Russian aggression and Hamas rockets over dealing with America’s DEI regime. Samsung is pivoting toward making its South Korean homeland the semiconductor superpower after Taiwan falls.

…The CHIPS Act’s current identity as a jobs program for favored minorities means companies are forced to recruit heavily from every population except white and Asian men already trained in the field.

Remember that there is an Extreme Shortage of High-IQ Workers. The United States is big and rich and can afford to handicap itself in many ways but less so when it comes to high-end semiconductor manufacturing, the most difficult and complicated manufacturing process ever attempted by human beings. For that we want the Dream Team, the very best, chosen on merit alone.

Addendum: Scott Lincicome has a good overview of the problem.

Which U.S. firms have grown in profitability?

China’s admission into the WTO in 2001 heralded a new era of globalization, increasing both import competition in domestic markets and foreign opportunities for US firms. In the aggregate, the average annual profitability of US public firms during the post globalization period (2003-2019) increased by 11.5% of the corresponding pre-globalization period (1984-2002) profitability. This increase in overall aggregate profitability was primarily driven by foreign profitability increasing by 47.4% for firms in the S&P 500 index, which are larger and have more intangible assets created by R&D and SG&A expenditures. In contrast, following globalization, the average aggregate domestic profitability of US firms remained flat, and firms employed more capital to generate sales. Firms with higher intangible assets benefited more from globalization.

That is from a new NBER working paper by Bullipe R. Chintha, Ravi Jagannathan, and Sri S. Sridhard.  When Average is Over was published about eleven years ago, in talks and media appearances I used to commonly draw a distinction between people/firms who are exporting their products — yes economists too — and those who are not.  Which category do you belong to?

What are the exact elasticity assumptions behind the terms of trade argument [for tariffs]?

“The terms of trade argument for protectionism relies on specific assumptions about the elasticities of demand and supply for a country’s exports and imports. The key elasticity assumptions are:

  1. Inelastic foreign demand for the country’s exports: This means that when the price of the country’s exports increases, the quantity demanded by foreign countries does not decrease much. In other words, the percentage change in quantity demanded is smaller than the percentage change in price.
  2. Elastic domestic demand for imports: This means that when the price of imports increases (due to a tariff), the quantity of imports demanded by the domestic country decreases significantly. In other words, the percentage change in quantity demanded is larger than the percentage change in price.

Under these elasticity assumptions, a country can improve its terms of trade by imposing a tariff on its imports. Here’s how it works:

  1. The tariff raises the domestic price of imports, leading to a decrease in the quantity of imports demanded due to the elastic domestic demand for imports.
  2. The decrease in import demand leads to a decrease in the world price of the imported goods (assuming the country has a significant share of world import demand).
  3. The country’s exports are not affected much by the tariff because foreign demand for the country’s exports is inelastic.
  4. As a result, the country experiences an improvement in its terms of trade: the price of its exports relative to the price of its imports increases.

However, it’s important to note that these elasticity assumptions are not always met in the real world. The elasticities of demand and supply can vary depending on the specific goods being traded, the time horizon, and other market conditions. Moreover, even if a country can improve its terms of trade through tariffs, this does not necessarily imply that the tariffs are beneficial for the country’s overall economic welfare, as they can lead to distortions in production and consumption, as well as potential retaliation from trading partners.”

That is from Claude 3 Opus.