Economics

That is the title of a new paper by Christopher McConnell, Yotam Margalit, and Neil Malhotra.  The main (and sad) point is that even in non-political settings we trust other people less if they have different political views than ours:

With growing affective polarization in the United States, partisanship is increasingly an impediment to cooperation in political settings. But does partisanship also affect behavior in non-political settings? We show evidence that it does, demonstrating its effect on economic outcomes across a range of experiments in real-world environments. A field experiment in an online labor market indicates that workers request systematically lower reservation wages when the employer shares their political stance, reflecting a preference to work for co-partisans. We conduct two field experiments with consumers, and find a preference for dealing with co-partisans, especially among those with strong partisan attachments. Finally, via a population-based, incentivized survey experiment, we find that the influence of political considerations on economic choices extends also to weaker partisans. Whereas earlier studies show the political consequences of polarization in American politics, our findings suggest that partisanship spills over beyond the political, shaping cooperation in everyday economic behavior.

For the pointer I thank Daniel Klein.

Mishpacha Magazine featured an article by Philanthropist, Shlomo Yehuda Rechnitz of Los Angeles California discussing his view and approach to the age gap problem in frum circles and calling the current situation a Shidduch Catastrophe. In the article he discussed an idea to help solve the age gap and offered an incentive to marry off older girls for the upcoming year…

INCENTIVE: Subsidize money paid to the matchmaker:

For the upcoming calendar year of 5775, Mr. Rechnitz is offering to supplement the shadchanus of anyone successful in marrying off a girl age 25 or older, to a boy her age or younger, so that they receive a total compensation of $10,000. Certain minor conditions apply. This offer isn’t only for professional shadchanim. It applies to anyone and everyone, every age, race, or gender who makes a successful Shidduch that meets the criteria.

Shlomo Yehuda Rechnitz has approached the mission of marrying off all the girls in Los Angeles with the same intensity as he does for his own daughters. All the major shadchanim are aware that when any Los Angeles girl doesn’t have the funds for plane fare for a date, the shadchan can — without asking — automatically book the tickets and rental car, if necessary, for either the boy or girl, on the Rechnitz account. In addition, any shadchan who marries off a Los Angeles girl has his shadchanus supplemented to $4,000. If the shadchan can get a couple to date at least four times, they receive $500.

There is video at the link, and the comments offer several points of interest as well.  I am told by one reader that the 19k bounty has been discontinued.  Here is related coverage from Time, with an extensive discussion of the Mormon dating crisis as well.  Here is a very interesting article on Orthodox dating in Jerusalem.

For the pointers I thank Yehuda S.

(By the way, if you’re feeling superior and taking comfort that Europe will go first off the cliff, Kotlikoff disagrees. Europe’s debts are larger, but their social programs are better funded, so their fiscal gaps are much lower than ours. The winner, it turns out, is Italy with a negative fiscal gap. Answering the obvious question, Kotlikoff offers

“What explains Italy’s negative fiscal gap? The answer is tight projected control of government- paid health expenditures plus two major pension reforms that have reduced future pension benefits by close to 40 percent.”Don’t get sick or old in Italy, but perhaps buying their bonds is not such a bad idea.)

That is from John Cochrane, with many more interesting points at the link, most of all about debt monetization and why these days it won’t prove very effective.

Lim had told me that Singapore holds a strategic sand reserve, for emergencies.  It lies somewhere near the area called Bedok, I said.  I spotted it one day as I rode past in a taxi.  The site was strewn with No Trespassing signs, installed by the Housing and Development Board, a government agency.  Fenced off from the public, the giant trapezoidal dunes shone bone-white in the sun and caramel in the shade, as the sand waited to be summoned.

That is from an excellent piece by Samanth Subramanian (NYT), about Singapore, land, and preparing for climate change.  The Singaporean constitution also devotes several pages to outlining how the government will manage its investments.

Dennis was actually the first stagnation theorist I read, at about the age of eighteen, due to a recommendation from Walter Grinder.  His strength is to tie stagnationist claims into the political economy of war.  This is from 1940 (book link here), I hope it is no longer relevant:

The importance of clearly understanding the dynamic and purely unmoral function of change cannot be exaggerated at a time like this when the major problem is stagnation.  America’s problem of unemployment could be solved by rebuilding America or going to war with Japan.  The war with Japan is more likely.  Why?  The answer is that our social philosophy recognizes a need for national defense but not for social dynamism.

And:

…stagnation in any culture is far more normal or usual than what we have been accustomed to think of as progress.

I found this interesting:

A civilization must exalt a tradition of heroism.  This it may do in war or pyramid building.  Liberalism never glorified heroism in theory but, in its frontier empire-building days, it exemplified heroism in its practice.

You can read Dennis as an extension of the Henry George model, except he is more bullish about population growth and adds the variable of war.  In the George model, there are increasing returns and so city life becomes crowded and the scarce factor of land captures the social surplus.  Think San Francisco or Singapore.  Dennis assumes diminishing returns, and so the frontier is usually more potent than the city, if only a frontier can be kept open and alive.  But that is hard to do because it runs against the natural desire of so many human beings for stasis, and thus capitalism tends to evolve into a kind of socialistic fascism.

Dennis, by the way, had an interesting life.  Unlike most “alt right” writers, he was half black, but his skin was pale so he was able to pass for white.  (In fact he started life as a child preacher, touring the south, accompanied by his African-American mother.)  He spent some of his energies trying to convince his “fellow travelers” to support civil rights for blacks, but without much success, and he also was desperately afraid of being unmasked.

Early in his career, he was accepted into mainstream American intellectual life and hung out with elites, rising to the top through the State Department and Wall Street.  As the 1930s passed, he became more extreme and the center became more hostile to fascist and semi-fascist ideas, especially if bundled with tolerance for potentially hostile foreign powers.  His career had a long downward trajectory, and during World War II he was tried for sedition, though he got off and later died in obscurity, after a final gig as a critic of the Cold War.  Gerald Horne wrote a very interesting biography of Dennis.

In general, I am skeptical of such results and their typical interpretations, still economics plays a role in this paper and perhaps it is worth at least a casual ponder:

The Dark Triad traits (i.e., narcissism, psychopathy, and Machiavellianism) have been associated with the desire for power, status, and social dominance in the workplace, and these desires have been hypothesized to draw Dark Triad individuals towards occupations affording such outcomes. Following this reasoning, the Dark Triad may also influence educational choices. Research in other personality traits has shown that Big Five traits impact educational choices: Students in different academic majors differ on Big Five traits at enrollment. The aim of the present study was to explore whether there are also pre-existing Dark Triad differences across academic majors. Accordingly, the Big Five and the Dark Triad traits were measured in a sample of newly enrolled students (N = 487) in different academic majors (psychology, economics/business, law, and political science), and mean scores were compared. Group differences in the Big Five personality traits largely replicated previous findings. Group differences in the Dark Triad traits were also found and included medium and large effect sizes with the largest differences being between economics/business students (having high Dark Triad scores) and psychology students (having low Dark Triad scores). These findings indicate that Dark Triad as well as Big Five traits may influence educational choices.

That is from Anna Vedel and Dorthe K. Thomsen, via Rolf Degen.

So which group is more rational?

When Labor is Cheap

by on April 22, 2017 at 4:24 am in Current Affairs, Economics | Permalink

Labor is cheap in India which leads to some differences from the United States.

The first couple of times I took a taxi to a restaurant I was surprised when the driver asked if I wanted him to wait. A waiting taxi would be an unthinkable expense for me in the United States but in India the drivers are happy to wait for $1.50 an hour. It still feels odd.

The cars, the physical capital, in India and the United States are similar so the low cost of transportation illustrates just how much of the cost of a taxi is the cost of the driver and just how much driverless cars are going to lower the cost of travel.

Everything can be delivered.

Every mall, hotel, apartment and upscale store has security. It’s all security theatre–India is less dangerous than the United States–but when security theatre can be bought for $1-$2 an hour, why not?

Offices are sometimes open 24 hours a day, 7 days a week. Not that anyone is in the office, just that with 24 hour security there is no reason to lock up, so the office physically stays open.

Every store has an abundance of staff. This one is puzzling since it results in worse service. Even in a tiny store, for example, it’s common to have one person tabulate the bill and then hand it to another person to ring you up. My guess is that this is an anti-theft procedure for the owner as it then requires two to collude to rip the owner off.

At offices, cleaning staff are on permanent hire so they come not once or twice a week but once or twice an hour. The excessive (?) cleanliness of the private spaces makes the contrast between private cleanliness and public squalor all the more striking.

Portugal slashed its public sector deficit by more than half in a single year, when measured as a proportion of GDP, the national statistics bureau has said, taking the shortfall comfortably below euro zone limits.

The deficit dropped to 2.1%  of gross domestic product in 2016, a staggering reduction from its 4.4%  level a year earlier.

This confirms Finance Minister Mario Centeno’s prediction last month that the deficit would be “not more than 2.1%”, its lowest share of GDP since the advent of democracy in 1974.

Euro zone members are required to keep their public deficits to below 3% of GDP, but some are struggling to do so.

Portugal’s public deficit shot up into the double digits during the global economic crisis, and despite an international bailout it had difficulty bringing it back down to 4.4% in 2015.

Portugal’s economy expanded by 1.4% in 2016, the national statistics institute said in February, after growing by 1.6% the previous year on the back of stronger exports and private consumption.

Here is the full piece, here is a useful Bloomberg piece on Portugal.  Furthermore, by one estimate:

Greek gov’t makes a 6.8%/GDP fiscal adjustment in a single year, without any decline in country’s GDP.

You can quibble over those numbers, and yes I do agree this is bad and also not sustainable, but still people this is not exactly the Keynesian model at work.

German police arrested a man on Friday suspected of detonating three bombs that targeted the Borussia Dortmund soccer team bus in the hope of sending the club’s shares plummeting and making a profit on an investment, prosecutors said.

In a statement, the federal chief prosecutor said the 28-year old man, a dual German and Russian national identified as Sergei V., had bought options on Borussia Dortmund’s stock before the attack.

The team bus was heading to the club’s stadium for a Champions League match against AS Monaco on April 11 when the explosions went off, wounding Spanish defender Marc Bartra and delaying the match by a day.

Prosecutors last week expressed doubts about the authenticity of three letters left at the site of the attack that suggested that Islamist militants had carried it out.

The prosecutor’s office said the suspect had bought 15,000 put options, or contracts giving him the right to sell Borussia Dortmund’s shares at a pre-determined price, on the day of the attack, using a consumer loan he had signed a week earlier.

Here is the full story at Reuters.

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

One possibility is that a lot of talk about inequality gives the audience the impression that it is inevitable, and thereby renders potential remedies less urgent. Another speculation is that human beings are constantly evaluating the status of others. To the extent analysts reiterate that some group of citizens doesn’t have as much, maybe they’re actually reminding us that those citizens hold a lower social status. Perhaps subconsciously, we then respond by thinking those citizens deserve less, or by downgrading the urgency of their needs.

Another possibility is that talk about economic inequality increases political polarization, which lowers the chance of effective action. Or that criticizing American society may cause us to feel less virtuous, which in turn may cause us to act with less virtue. Perhaps if critics of inequality praised this nation more for what is has done to redress inequality, rather than criticizing it for the gaps, that might cement a self-image of Americans who are capable of tackling this problem, and thus spur interest in additional progress. That mechanism shouldn’t sound so strange to anyone who has tried to raise children.

When I bring up such points in dialogue, I’ve found that a lot of my fellow academicians retreat to the moral platitude that the “good guys” simply need to fight harder against the special interest groups. Maybe so, or maybe that response is just another way of digging in deeper to what so far has been a losing battle. The reality is that income inequality has gone up a great deal since the early 1980s, and we haven’t done so much to reverse the basic trend. The potentially egalitarian effects of  tax increases under the past two Democratic presidents and Obamacare have been outweighed by globalization, which benefits most those individuals who can access global markets, and by increases in the returns to highly skilled labor. The reality is that government expenditures have not become radically more poverty-reducing over the last few decades, although we do send more resources to the elderly.

Do read the whole thing, the various biting comments about other academics are in other parts of the piece.

Two years later, the quota of imported movies permitted into China was raised to 34 from 20 in a deal negotiated between then-Vice President Joe Biden and then-Vice President Xi. The deal all but guaranteed that most big-budget Hollywood features—except those with content deemed objectionable—would be shown in China.

“I prefer to watch Hollywood films because the chance of a domestic film being crappy is much bigger than a Hollywood film,” said Liu Jing, a 25-year-old postgraduate student studying finance policy in Beijing.

Ms. Jing said she became a fan of superhero films from Marvel Studios as a high-school student and now goes to movie theaters at least once a month.

Hollywood executives can rattle off the rules for getting a movie approved by Chinese censors: no sex (too unseemly); no ghosts (too spiritual). Among 10 prohibited plot elements are “disrupts the social order” and “jeopardizes social morality.” Time travel is frowned upon because of its premise that individuals can change history.

U.S. filmmakers sometimes anticipate Chinese censors and alter movies before their release. The Oscar-winning alien-invasion drama “Arrival” was edited to make a Chinese general appear less antagonistic before the film’s debut in China this year.

The superhero hit “Logan” was 14 minutes shorter in China after Chinese censors cut scenes of beheading and impalement.

For “Passengers,” the space adventure starring Chris Pratt and Jennifer Lawrence, a scene showing Mr. Pratt’s bare backside was removed, and a scene of Mr. Pratt chatting in Mandarin with a robot bartender was added.

Here is the full Eric Schwartzel WSJ piece.

From Erik Hembre:

State- and local-income tax rates differ across locations, giving low-tax teams a competitive advantage when bidding for players. I investigate the effect of income tax rates on professional team performance between 1977 and 2014 using data from professional baseball, basketball, football, and hockey in the United States. Regressing income tax rates on winning percentage, I find little evidence of income tax effects prior to 1994, but since then a ten percent increase in income taxes is associated with a three percent decline in winning percentage. A robustness check using within state variation in income taxes affirms this result. The income tax rate effect varies by league, with the largest effect in professional basketball, where teams in states without income tax win 4.5 more games each year relative to high-tax states. The income tax effect is smallest in major league baseball, which could be explained by greater team payroll disparity. Placebo tests using college team performance find no evidence of an income tax effect.

The pointer is from the excellent Kevin Lewis.

Now operators have started scrutinizing complimentary drinks, introducing new technology at bars that track how much someone has gambled—and rewards them accordingly with alcohol. It’s a shift from decades of more-informal interplay between bartenders and gamblers.

Sports books have capitalized on big events, too. During March Madness, a five-person booth at the Harrah’s Las Vegas sports book cost $375 per person, which included five Miller Lite or Coors Light beers a person. In the past, seating at most sports books was free and first-come, first-served, even during big events. Placing a small bet or two could get you free drinks.

“The number-crunchers, the bean-counters have ruined Las Vegas,” said Brad Johnson, who lives in North Carolina and has come to Las Vegas almost every year since the early 1970s. “There’s no value to it; there’s no benefit.”

Casinos on the Strip now derive a smaller share of revenue from gambling. In 1996, more than half of annual casino revenue on the Strip came from gambling. Last year, the share was down to about a third, according to the University of Nevada-Las Vegas. More of the revenue comes from hotels, restaurants and bars.

That is from Chris Kirkham at the WSJ, via Annie Lowrey.

Nigel, a loyal MR reader, asks me:

Is it possible for the US to abuse the dollar’s privileged position, and do you expect a monetary conference to take place in the future that would alter the post-Bretton Woods arrangement in ways less favorable to the US?

A good question, but at current margins I don’t see many directions for movement.  I don’t know whether such a monetary conference will take place, but it is unlikely to be a decisive event for shaping actual outcomes.  I see these as the relevant questions:

1. Will China move to a true “free float”?  And if so, what is the collateral damage along the way?

2. Will some countries leave the eurozone? (and if they do, it is a big deal for them, but probably not a big deal for the global monetary order, unless it is Italy or France)

3. Will more countries attach to the euro (Iceland?) or to the U.S. dollar (additional parts of Latin America?)

4. How many additional countries will institute capital controls?

For the most part, those questions will be decided at the national level, although for potential euro leavers the nature of the proposed EU alternative (another bailout?) will be significant.

The most likely outcome is that more countries will institute partial capital controls, and in that regard we will move closer to some aspects of the initial Bretton Woods 1.0, in which capital controls were an integral feature.  Capital controls may come to keep a euro peg (already happened in Cyprus), to try to keep domestic jobs (ha, but recall Trump and Carrier), to prevent an imminent explosive capital outflow (China), to strengthen or preserve a banking system, to limit wild currency swings, or simply because governments will try all kinds of policies before admitting they have failed.  Other forms of “capital controls” may come through tax reforms and regulatory barriers designed to keep capital at home.

My best guess on China is that capital outflow pressures eventually will force a free float, but only briefly, and then they will return to capital controls in some form.

So my forecast for the future is much more in the way of capital controls, but without the hegemonic/cooperative international architecture that characterized Bretton Woods 1.0.

Hedging FDA Risk?

by on April 19, 2017 at 6:09 am in Economics, Law, Medicine | Permalink

In the words of a recent article, the FDA’s rejection of a recent drug application was a stunning setback. Stunning setbacks are by definition unpredictable and unpredictable risks aren’t correlated with other risks which means that they can be easily priced and bought and sold. The all-star team of Adam Jørring, Andrew W. Lo, Tomas J. Philipson, Manita Singh and Richard T. Thakor propose just this in Sharing R&D Risk in Healthcare via FDA Hedges.

The idea is to create FDA Hedges that pay out a fixed fee if a drug fails to be approved and zero otherwise. Pharmaceutical firms could then buy some of these contracts and reduce their risk exposure which in turn would increase their incentive to invest in R&D.

The idea is clever but firms and even more so firm owners already have many ways to diversify and its not clear what the value of an additional source of diversification is, even one that is more closely tuned to the firm’s profits. It’s also not clear how much additional R&D would be driven by offloading these risks. Pharmaceutical R&D is valuable, however, so even small increases in R&D are welcome even if more fundamental changes would be better. Prices in these markets would also provide useful information.

I also worry that we are asking a lot of FDA reviewers and firm insiders to keep their inside information private. Information about FDA approval decisions is already very valuable and there have been a few cases where insiders trade on their information or leak it to make millions. FDA Hedges might make this problem worse which should be balanced against the possible gains.