Economics

Crime Imprisons and Kills

by on January 15, 2018 at 7:26 am in Economics, Law, Medicine | Permalink

…the most disadvantaged people have gained the most from the reduction in violent crime.

Though homicide is not a common cause of death for most of the United States population, for African-American men between the ages of 15 and 34 it is the leading cause, which means that any change in the homicide rate has a disproportionate impact on them. The sociologist Michael Friedson and I calculated what the life expectancy would be today for blacks and whites had the homicide rate never shifted from its level in 1991. We found that the national decline in the homicide rate since then has increased the life expectancy of black men by roughly nine months.

…The everyday lived experience of urban poverty has also been transformed. Analyzing rates of violent victimization over time, I found that the poorest Americans today are victimized at about the same rate as the richest Americans were at the start of the 1990s. That means that a poor, unemployed city resident walking the streets of an average city today has about the same chance of being robbed, beaten up, stabbed or shot as a well-off urbanite in 1993. Living in poverty used to mean living with the constant threat of violence. In most of the country, that is no longer true.

That’s Patrick Sharkey writing in the New York Times.

More police on the street is one cause, among many, of lower crime. It’s important in the debate over better policing that we not lose sight of the value of policing. Given the benefits of reduced crime and the cost of police, it’s clear that U.S. cities are under policed (e.g. here and here). We need better policing–including changes in laws–so that we can all be comfortable with more policing.

Claims about Bitcoin

by on January 14, 2018 at 3:22 pm in Data Source, Economics | Permalink

A single actor likely drove the USD/BTC exchange rate from $150 to $1000 in 2 months.

That is from the JME, via the excellent Kevin Lewis.  It is worth noting that the single actor was right!

I, Pencil Revisited

by on January 14, 2018 at 12:10 pm in Economics, The Arts | Permalink

Leonard Read’s essay I, Pencil showed how even simple objects like a pencil were produced only through the cooperation and coordination of many thousands of people all over the world who often knew neither one another nor even what their actions ultimately produced. Milton Friedman made the pencil metaphor famous in Free To Choose when he said that “There’s not a single person in the world who could make this pencil.” Tyler and I illustrate the same idea with a romantic twist in our I, Rose video.

The NYTimes doesn’t seem aware of the history but, as if guided by an invisible hand, has a lovingly produced series of photos from a pencil factory showing that even the proximate steps are charmingly esoteric.

It took Dr. Edward Taylor’s inside perceptions to say, on publication: “It is not merely an American book, but a California book.  We do not mean merely that it is a book written in California by a Californian, but that it is distinctively and peculiarly Californian, for not only are its illustrations drawn from this coast, but the freshness of its views bespeak the novel and suggestive circumstances that have been presented in California.”

That is from Charles Albro Barker’s Henry George, still a useful biography.  Barker points out, by the way, that the notion of a “single tax” on land barely appears in Progress and Poverty, as at that time George was more focused on land nationalization.  The single tax idea became more prominent a bit later in the 1880s.

The World Bank repeatedly changed the methodology of one of its flagship economic reports over several years in ways it now says were unfair and misleading.

The World Bank’s chief economist, Paul Romer, told The Wall Street Journal on Friday he would correct and recalculate national rankings of business competitiveness in the report called “Doing Business” going back at least four years.

The revisions could be particularly relevant to Chile, whose standings in the rankings have been especially volatile in recent years and potentially tainted by the political motivations of World Bank staff, Mr. Romer said.

…Over time, World Bank staff put a heavy thumb on the scales of its report by repeatedly changing the methodology that was used to calculate the country rankings, Mr. Romer said.

The focus of the World Bank’s corrections will be changes that had the effect of sharply penalizing the ranking of Chile under the most recent term of Chile’s outgoing president, Michelle Bachelet.

“I want to make a personal apology to Chile, and to any other country where we conveyed the wrong impression,” Mr. Romer said. The problems with the report, he said, were “my fault because we did not make things clear enough.”

That is by Josh Zumbrun and Ian Talley at the (gated) WSJ.

Scott Alexander at SlateStarCodex riffs off my post on how we laugh at Oregonians afraid to pump their own gas while not looking at our own absurd restrictions on cutting hair, for example, and adds a few of his own:

There are way too many discrepancies in approved medications between countries to discuss every one of them, but did you know melatonin is banned in most of Europe? (Europeans: did you know melatonin is sold like candy in the United States?) Did you know most European countries have no such thing as “medical school”, but just have college students major in medicine, and then become doctors once they graduate from college? (Europeans: did you know Americans have to major in some random subject in college, and then go to a separate place called “medical school” for four years to even start learning medicine?) Did you know that in Puerto Rico, you can just walk into a pharmacy and get any non-scheduled drug you want without a doctor’s prescription? (source: my father; I have never heard anyone else talk about this, and nobody else even seems to think it is interesting enough to be worth noting).

Scott then strikes at the heart of the issue:

So maybe the scary thing about Oregon is how strongly we rely on intuitions about absurdity. If something doesn’t immediately strike us as absurd, then we have to go through the same plodding motions of debate that we do with everything else – and over short time scales, debate is interminable and doesn’t work. Having a notion strike us as absurd short-circuits that and gets the job done – but the Oregon/everyone-else divide shows that intuitions about absurdity are artificial and don’t even survive state borders, let alone genuinely different cultures and value systems.

This is part of what I meant by collective action kills innovation. I wasn’t saying that DARPA can’t work but rather that by subjecting everything to collective action we subject it to debate. discussion and legislation and that slows down innovation, in part because our notions of what is normal are so time and culture bound.

Maybe not, as I argue in my latest Bloomberg column:

The numbers instead indicate that lobbying hurts the underlying capital values of the corporations. Lobbying doesn’t increase the chance that favored bills are passed by Congress, and it isn’t associated with the company receiving more government contracts.

Those are the key results from a new study by Zhiyan Cao, Guy D. Fernando, Arindam Tripathy and Arun Upadhyay, published in the Journal of Corporate Finance and considering 1,500 S&P companies over the period 1998 to 2016. Neither spending money at all on lobbying nor spending more money on lobbying over those years seem to help companies, and for that matter contributions to political action committees don’t work either.

And:

If corporate lobbying is an unprofitable use of money, why does it happen? One possibility is that corporate leaders are using company resources to indulge their own ideological preferences. Other researchers have found that companies with weaker governance and more entrenched management are those more likely to spend on lobbying. This study finds that lobbying expenditures are higher when the percentage of CEO perks is higher and when the board of the company is larger.

It’s also possible lobbyists are ripping off companies with slick sales pitches, or that incompetent CEOs are spending money on lobbying so they seem to be doing something constructive.

Do read the whole thing, I also consider under what kind of hypothesis the lobbying actually might be paying off.

Dolphin Capital Theory

by on January 10, 2018 at 7:27 am in Economics, Science | Permalink

The Guardian…Kelly the dolphin has built up quite a reputation. All the dolphins at the institute are trained to hold onto any litter that falls into their pools until they see a trainer, when they can trade the litter for fish. In this way, the dolphins help to keep their pools clean.

Kelly has taken this task one step further. When people drop paper into the water she hides it under a rock at the bottom of the pool. The next time a trainer passes, she goes down to the rock and tears off a piece of paper to give to the trainer. After a fish reward, she goes back down, tears off another piece of paper, gets another fish, and so on.

…Her cunning has not stopped there. One day, when a gull flew into her pool, she grabbed it, waited for the trainers and then gave it to them. It was a large bird and so the trainers gave her lots of fish. This seemed to give Kelly a new idea. The next time she was fed, instead of eating the last fish, she took it to the bottom of the pool and hid it under the rock where she had been hiding the paper. When no trainers were present, she brought the fish to the surface and used it to lure the gulls, which she would catch to get even more fish. After mastering this lucrative strategy, she taught her calf, who taught other calves, and so gull-baiting has become a hot game among the dolphins.

The dolphins are not only gaming the system they are saving and using a capital structure to increase total output.

The more we learn, the smaller appears the gap between humans and other animals. Over twenty years ago, I read When Elephants Weep: The Emotional Lives of Animals. I was convinced. But at that time it was a controversial book. Today, with thousands of youtube videos of animals clearly having fun or exhibiting other emotions, it seems obvious.

Animal consciousness is still controversial but the gap between other minds and other non-human minds appears to me to be very small. If I can believe in the first, I can easily believe in the second. As the Cambridge Declaration put it:

Convergent evidence indicates that non-human animals have the neuroanatomical, neurochemical, and neurophysiological substrates of conscious states along with the capacity to exhibit intentional behaviors. Consequently, the weight of evidence indicates that humans are not unique in possessing the neurological substrates that generate consciousness. Nonhuman animals, including all mammals and birds, and many other creatures, including octopuses, also possess these neurological substrates.

Here in the land of technology leadership and free-market enterprise, American regulation has more than doubled the cost of solar.

The regulation comes in three un-American guises: permitting, code and tariffs — and together they are killing the U.S. residential market. Modernizing these regulations, primarily at the local and state level, is the greatest opportunity for U.S. solar policy in 2018.

To highlight the opportunity, let’s look at Australia, where nearly 2 million solar systems have been successfully and safely installed.

As of early December, installed costs in the main Australian markets were at $1.34 per watt, compared to $3.25 per watt in the U.S. What does that difference stem from?

In Australia, there is no permitting process. You simply lodge your request for interconnection online and go install it. The figure below highlights the relative mass of valueless work required to satisfy current city-level bureaucracy in the U.S., which adds between two and six months to delivery time and 47 cents per watt of cost directly to the installed system. That’s more than the cost of the panels themselves!

…the U.S. National Electrical Code dictates a best practice that more than doubles the installation time relative to Australia, and adds incremental hardware expense — together adding 49 cents per watt to the cost of solar. There is no discernable difference in the quality and safety of solar installations overseas relative to the U.S.

…There are no tariffs on imported hardware in Australia because it’s obvious to all that the jobs in solar are in sales and installation, not in manufacturing. That’s another 21 cents per watt in the Australians’ pocket — and a thousand dollars back into the economy per system sold.

And because solar is so much cheaper, as well as faster and easier to buy, it’s also much cheaper, faster and easier to sell. Acquisition costs in Australia average $400 per installed customer, compared to $2,500 in the U.S.

At lower cost and without the two- to six-month wait time and all of the permitting complexity, cancellation rates are minimal, compared to an average of about 30 percent for reputable U.S. companies. How many other electronics purchases do you know of that take up to half a year to be installed? That’s another 42 cents per watt of lower solar costs.

From Andrew Birch, there is much more at the link, read it and weep.  Via Felix Yates.

The future of blockchains?

by on January 9, 2018 at 2:38 pm in Economics, Web/Tech | Permalink

I also think it is noteworthy that actual cryptocurrency exchanges exist to get around the limitations of blockchain-based settlement. It’s hard to short bitcoins or buy bitcoins on margin, which is why exchanges exist and use off-blockchain methods (lending you money, keeping custody of your bitcoins, etc.) to allow you to do those things. (Sometimes that’s a mess!) It’s not like you’re using the blockchain to buy bitcoins with dollars on a cryptocurrency exchange; you’re using your credit card. If you want to rebuild the regular financial system along blockchain principles, you have to wrestle with the fact that even the bitcoin financial system doesn’t really operate on blockchain principles.

That is from Matt Levine.

For Georgescu-Roegen, the ultimate fixed factor is the laws of physics, due to entropy.  Economic systems cannot receive an ongoing influx of both energy and matter indefinitely, and so eventually they reach limits to growth.  At that margin substitutability breaks down and catastrophe ensues.  To check this outcome, we must find a way to live with slower rates of economic growth, and eventually a zero or negative rate of economic growth.  For him this is as much a criticism of Marxism as of capitalism, and he wrote about making do with agrarianism.  Consistent with this view, his consumer theory portrayed wants as hierarchical rather than smoothly substitutable.  He would have liked this Alex post on not all gdp being created equal.

For Henry George, the ultimate fixed factor is land, due to the nature of space.  There is always enough energy, due to Julian Simon-like arguments that allow capital and ingenuity to be substituted for all other fixed resources, except for  land.  Economic systems cannot create or activate more land indefinitely, and thus the marginal benefits of growth are captured mostly by landowners, to the detriment of social welfare.  At this final margin substitutability breaks down and widespread poverty ensues.  To check this outcome, the returns to land must be redistributed to the rest of society, ideally through a single tax.  Unlike many environmentalists, he wasn’t worried about soil erosion because land is land.

For 19th century colonial theorist Edward Gibbon Wakefield, human beings and the positive externalities from human contact are the ultimate scarcity.  If you let people settle the countryside, you will have an underpopulated republic of deplorables — there is no substitute for city life!  So the price of external farm land has to be kept high, so that settlers cluster in the city and as wage laborers contribute to ongoing innovation, urbanity, and economic growth.  Wakefield worked in New Zealand — did they listen?  If Wakefield were around today, maybe he would want to cut off broadband to large swathes of the Midwest and Appalachia.  Justly or not, he cited rural French Canadians as an example of what he was worried about, whereas Georgescu-Roegen might have appreciated their agrarianism.

For Robert Solow, ultimate fixed factors do not come into play and substitutability reigns at all relevant margins.  If some resources become scarce, just substitute in more capital.  Growth continues forever, though it can be accelerated by investing more in the ultimate growth driver, namely new ideas.  Georgescu-Roegen argued that Solow did not incorporate the idea of entropy or insights from science.

Is it proper that Solow’s model should have so dominated in the economics profession?

You cannot understand or evaluate environmentalism without revisiting these debates.  One reason many environmental critiques do not seem so strong is that they are trying to measure costs in a Solow-like framework, when in fact the underlying model might involve core non-substitutabilities, a’la the other thinkers.  Unless you stress how not all gdp is created equal, the costs of bad environmental outcomes won’t show up as very high, not relative to total wealth.  It will appear as if you always can substitute away from bearing those costs full on, even though perhaps you cannot.

My own view is that the ultimate scarcity in today’s system comes from what the political economy of our societies and polities can bear, but that must await another day.

Our estimates suggest that teacher collective bargaining worsens the future labor market outcomes of students: living in a state that has a duty-to-bargain law for all 12 grade-school years reduces earnings by $800 (or 2%) per year and decreases hours worked by 0.50 hours per week. The earnings estimate indicates that teacher collective bargaining reduces earnings by $199.6 billion in the US annually. We also find evidence of lower employment rates, which is driven by lower labor force participation, as well as reductions in the skill levels of the occupations into which workers sort. The effects are driven by men and nonwhites, who experience larger relative declines in long-run outcomes.

That is from a new paper by Michael Lovenheim and Alexander Willen, via Noah Smith.

I will be doing a Conversation with Charles (no public event), what should I ask him?  Charles is one of my favorite writers, as he is the author of 1491, 1493, and the new and excellent The Wizard and the Prophet: Two Remarkable Scientists and Their Dueling Visions to Shape Tomorrow’s World.

Here is yet another excerpt from the latter book:

Rodale died in 1971 — bizarrely, on a television talk show, suffering a heart attack minutes after declaring “I never felt better in my life!” and offering his host his special asparagus boiled in urine.

I thank you all in advance for your wisdom and inspiration.  Here is Charles’s home page, he also has many excellent magazine articles.

From Amanda Y. Agan and Michael D. Makowsky, here is an new and important approach:

For recently released prisoners, the minimum wage and the availability of state Earned Income Tax Credits (EITCs) can influence both their ability to find employment and their potential legal wages relative to illegal sources of income, in turn affecting the probability they return to prison. Using administrative prison release records from nearly six million offenders released between 2000 and 2014, we use a difference-in-differences strategy to identify the effect of over two hundred state and federal minimum wage increases, as well as 21 state EITC programs, on recidivism. We find that the average minimum wage increase of 8% reduces the probability that men and women return to prison within 1 year by 2%. This implies that on average the wage effect, drawing at least some ex-offenders into the legal labor market, dominates any reduced employment in this population due to the minimum wage. These reductions in re-convictions are observed for the potentially revenue generating crime categories of property and drug crimes; prison reentry for violent crimes are unchanged, supporting our framing that minimum wages affect crime that serves as a source of income. The availability of state EITCs also reduces recidivism, but only for women. Given that state EITCs are predominantly available to custodial parents of minor children, this asymmetry is not surprising. Framed within a simple model where earnings from criminal endeavors serve as a reservation wage for ex-offenders, our results suggest that the wages of crime are on average higher than comparable opportunities for low-skilled labor in the legal labor market.

But two days ago I ran into Amanda and family at Penang restaurant in Philadelphia…

Benjamin Zycher on solar power

by on January 5, 2018 at 12:47 am in Economics, Science | Permalink

From my email, if you would like to read a more negative than usual take:

“A couple of observations on your Bloomberg column on solar power:

  • There is nothing “clean” about solar (or wind) electricity, primarily because of its intermittent nature.  Because it is unreliable, it cannot be scheduled (it is not dispatchable), and so must be backed up with conventional (usually gas, sometimes coal) plants.  The latter units must be cycled up and down depending on whether the sun is shining or not, which means that they must be operated inefficiently (they experience rising heat rates), increasing their emissions of conventional effluents and greenhouse gases.  Engineering studies for Colorado and Texas, for example, estimate that this adverse effect becomes important when the market share in terms of capacity reaches around 10 percent (combined with the guaranteed market shares and must-take regulations enforced by many states).  I have been beating on this drum for years, but the press and many others continue to describe solar and wind power as “clean.”  No, it is not.
  • That emissions pattern is separate from the problem of solar panel disposal, vastly underpublicized in my view, in a world in which solid-waste disposal is priced inefficiently.
  • The Independent System Operators generally are forced to take renewable power when it is available, and the PUCs are forced to roll their high costs into the rate bases, spreading the costs across all consumers.  (The same is true for the high transmission costs attendant upon renewables.)  There has been some reform around the margins in a few states, as the PUCs have trimmed the net metering subsidies for rooftop solar systems, but this is a minor adjustment in a system characterized by vast inefficiency, cronyism and interest-group rent-seeking, upward transfers of income, feathering of bureaucratic nests, and increased pollution.  Such are the fruits of government wisdom.”