Economics

That is a request from Christina, a loyal MR reader.  It sounds like a huge question, and maybe it is, but my answer is pretty simple, which is not to say the problem is simple to solve.

Let’s say you are in Germany.  People engage in rule-following behavior, and they become quite emotionally stressed if you suggest you might break the rules in especially inappropriate ways.

Alternatively, in Naples there is more garbage in the streets, and flexibility and rigidity across a very different set of social variables.  I call that a difference in “culture,” and I am ready to accept culture as an ill-defined, question-begging term.

Now, how do differences of culture — however defined — interact with traditional economic mechanisms involving prices, incomes, and simple comparative statics?  Are those competing explanations, namely cultural vs. economic?  Ought they to dovetail nicely in some kind of broader explanation?  Or might the cultural factors in some manner be “reduced” to questions of more traditional economics?  Some combination of the above?  Something else altogether?  And, from among these and other options, what principles of differentiation rule how “culture” and “economics” will be related in a particular problem?

That to me is the most important unsolved problem in economics and indeed in social science more broadly.

feynman

The Seasteading Institute has signed an MOU with French Polynesia.

[French Polynesian and the Seasteading Institute will].. pool their efforts for the implementation of a pilot project
for floating islands in French Polynesia. The development of this project involves various studies addressing the technical and legal feasibility of the project in French Polynesia as well as the preparation of the special governing framework allowing the creation of the Floating Island Project located in an innovative special economic zone…..

Seasteading1

The Floating Island Project will develop innovative and sustainable floating platforms. It will promote the development of new technologies in the terrestrial Anchor Zone and in the Floating Islands Zone. The Floating Island Project will respect the environmental standards defined by French Polynesia. It will use renewable energies. It will welcome the development of innovative technologies for the protection of the environment. It will not be interested in any land or ocean mineral resource. The platforms aim to attract direct and indirect investments in French Polynesia and host numerous businesses and research projects. The project will allow international experts to collaborate in French Polynesia to develop platforms capable of minimizing the effects of rising sea levels. It will have to have a favorable and significant impact on the local economy with the establishment of a special economic zone that will facilitate the creation and management of companies.

The focus of the project is on building new communities to deal with rising sea levels but will also include a special governing framework to allow for greater experimentation with the rules of social organization. The technology, of course, my also scale.

Peter Thiel was an early backer of the Seasteading idea, although he is no longer involved. More than one of his unlikely bets has paid off recently.

Here are previous MR posts on Seasteading from both Tyler and myself.

Austrian hermit edition:

An Austrian town is looking to employ someone to live in a hermitage that has no heating nor running water in what appears to be one of the worst jobs in the world.

Saalfelden in the state of Salzburg is looking for a candidate to move into a 350-year-old building, that is built into a cliff-face, to meet and greet Christian pilgrims who frequent the site’s chapel for prayer and self reflection.

Local resident Alois Moser and Saalfelden’s mayor Erich Rohrmoser, will select the new hermit and have told a radio station the traits they are looking for in their new employee.

Moser told state broadcaster ORF that they want ‘a self-sufficient person who is at peace with their self, and willing to talk to people, but not to impose’.

He also said the successful candidate should have a Christian outlook and be ready to greet visiting pilgrims and locals who make their way up the steep cliff face to the house.

The chosen candidate will be selected more on the basis of personality than training and professional experience but will need to be prepared to live without a computer and television, job specifications say.

The parish have stressed the position, which runs from April to November each year, is unpaid despite the sacrifices one would have to make when accepting the post.

Although it appears to be an unattractive proposition the role was has been widely coveted in the past.

Here is the full story, via the excellent Mark Thorson.

I especially enjoyed the part about his interior decorating, this segment was fun too:

Hart’s appetite for complex contract negotiations has also served him well at home. He and his wife embarked on a major renovation of their house several years ago, adding new rooms to the ground floor and expanding the kitchen and backyard. Though he admits that his wife spearheaded the design, which included an open kitchen and new sitting room just off the main entrance, Hart says he negotiated the contract with the builders. “You learn right away that nothing will be completed when they say it will,” he adds with a wry smile. “So there are lessons that even I can learn.”

Here is the full FT story.  Here is The Economist covering Rita Goldberg’s second-generation Holocaust memoir; she is Hart’s wife.

Bruce Caldwell emails me:

The Center for the History of Political Economy at Duke University will be hosting another Summer Institute on the History of Economics this summer from June 4 – 16, 2017. The program is designed for students in graduate programs in economics, though students in graduate school in other fields as well as newly minted PhD’s will also be considered. Students will be competitively selected and successful applicants will receive free housing and reading materials. The deadline for applying is March 3. Travel stipends for those coming from afar will be considered on a case by case basis.

We are very excited about this year’s two week program, which has a somewhat different format from other years. The first week Bruce Caldwell will be the sole lecturer, and will present a mini-history of economic thought class, providing both content and tips on how to set up such a course. The second week is thematic. Steve Medema will present a history of the concept of market failure, and Kevin Hoover will present a history of macroeconomics. Applicants may sigh up for either week, or both. More information on the Summer Institute is available at our website, http://hope.econ.duke.edu/

Washington Post: The cyberattack struck Los Angeles Valley College late last month, disrupting email, voice mail and computer systems at the public community college in Southern California. Then, school officials found a ransom note.

The missive advised the college that its electronic files had been encrypted and that the files could only be unlocked with a “private key.” The attackers would supply the key after receiving payment in the valuable digital currency known as bitcoin, which can be used anonymously without a centralized bank.

“You have just 7 days to send us the BitCoin after 7 days we will remove your private keys and it’s impossible to recover your files,” the attackers warned, according to a copy of the note obtained by The Washington Post.

Leaders of the Los Angeles Community College District decided to pay the ransom.

The college paid $28,000 and the files were restored.

ArsTechnica: According to the FBI, ransomware payouts in the United States jumped from $25 million in all of 2015 to over $209 million in just the first quarter of 2016.

Clearly, this is just the beginning.

In my latest Bloomberg column I consider William F. Buckley’s old conundrum:

William F. Buckley famously said he would rather be ruled by the first 2,000 people listed in the Boston telephone directory than by the faculty of Harvard University.

Here is part of my take:

For better or worse, direct rule by Buckley’s 2,000 American citizens probably would mean a slower pace of immigration, less emphasis on free trade, more law and order politics, and a blunter form of nationalism in foreign policy.

Those don’t match my policy preferences (I am more of a globalist, and also a professional academic), but I fear what the Harvard faculty could bring. I can imagine an America closer to Bernie Sanders’s vision, with single-payer health insurance, levels of taxation exceeding 50 percent of GDP, levels of immigration unsustainable with a large welfare state, too many aggressive attempts to legislate equal treatment for various groups, excessive fondness for a universal basic income, and too many humanitarian interventions abroad.

Don’t forget:

It’s a good rule of governance that policy cannot race too far ahead of the citizenry, and I don’t view faculty as a class of people well-suited for that kind of humility.

But for the Fed and the EPA, among other areas, I very much want Harvard.  My conclusion is this:

The real issue here isn’t intellectuals versus populism writ large. There is a time and place for populist sentiment, but an excess can be counterproductive on its own terms. As expertise is pushed out the door, the citizenry itself gets a bad name, precisely when we most need it to step up to the plate and demand some excellence.

Do read the whole thing.

I should note that on this topic I have been very much influenced by my colleague David Levy and also his work with Sandra J. Peart, see for instance their newly arrived book Escape from Democracy: The Role of Experts and the Public in Economic Policy.

Martin Feldstein had a recent piece in the WSJ that defended the idea of a border tax adjustment, which would be a part of the proposed corporate tax reform. He points out that if imports were no longer deductible, and exports received a subsidy, then the border adjustment would not distort trade. Rather the effect would be exactly offset by a 25% appreciation of the dollar. I certainly understand that this would be true of a perfect across-the-board border tax system. But is that what we will have?

1. Will the subsidy apply to service exports? (Recall that services are a huge strength of the US trade sector.) Let’s take Disney World, which makes lots of money exporting services to European, Canadian, Asian and Latin American tourists visiting Orlando. Exactly how will Disney determine the amount of export subsidy it gets? Do they ask each tourist what country they are from, every time they buy a Coke? That seems far fetched—what am I missing? If Disney doesn’t get the export subsidy, then the 25% dollar appreciation would hammer them, and indeed the entire US service export sector.

2. What about all those corporate earnings that are supposed to be repatriated? (And future earnings as well.) If the dollar appreciates by 25%, then doesn’t this hurt multinationals? Or am I missing something?

Update: It just occurred to me that corporate cash stuffed overseas is probably held in dollars. But future overseas earnings may still be in local currency.

Keep in mind that the prediction of 25% dollar appreciation is from the supporters of the plan, like Martin Feldstein. If you did this sort of adjustment without any dollar appreciation, the impact would be devastating on companies like Walmart. Given the Fed’s 2% inflation target, how could they pass along a (effective) 25% tariff on almost everything they sell?

There are other points of value at the link.  I agree with Scott’s most general claim that the case for this tax has not yet been made.

A few years ago I wrote this about Bolivia:

It is much debated in Bolivia whether corruption is going up or down.  I believe it is going up, but partially for good reasons.  For instance the construction sector is doing well, and construction tends to be corrupt in many countries, for reasons intrinsic to the activity itself (e.g., lots of big contracts, easy to claim invisible expenses, etc.).  That means higher corruption but also a better corruption than the penny ante bribes of a shrinking economy.

I still think that is correct, and at the time it didn’t meet up with mass moral opprobrium, even though with some very very small chance I may have condemned the citizenry of Bolivia to corrupt, exploitative rule for ever and ever.  I should add that such points are standard fare in the literature, see for instance the book on corruption by Susan Rose-Ackerman.

Now, these days, with more American status relationships on the line, everyone is up in arms because Peter Thiel had the following exchange with Maureen Dowd:

When I remark that President Obama had eight years without any ethical shadiness, Mr. Thiel flips it, noting: “But there’s a point where no corruption can be a bad thing. It can mean that things are too boring.”

As I interpret Peter, he is not saying it would have been good to have an exogenous increase in the corruption of Obama the individual.  Rather, had some other conditions been different/better, the overall level of corruption in government would have been higher and that combination might very well have been a net plus.  If you would like a “left wing example,” had the fiscal stimulus been twice as large, corruption in government probably would have been higher too (pointing out “the stimulus wasn’t very corrupt” is missing the point and in fact is a sign that you are a rampant mood affiliator, determined to restore the mood you feel is just, rather than tracing the analytic point at hand).  In other words, Peter’s point is entirely defensible and probably correct.  He’s not saying that “corruption is good.”

Now, to be sure, there is another dimension here.  The incoming Trump administration is showing too many signs of being corrupt, and many people are condemning it on these grounds.  Peter’s remark does not fit into that narrative and Peter has been a significant Trump supporter.  But let’s think about this a little more.   First, is there a role for some outsiders who eschew the dominant moral choruses of approbation and condemnation, in favor of making other, different points?  I certainly hope so, because often I try to be one of them (though unlike Peter I have not supported Trump).  Second, Peter is not an outsider in this process, rather he has taken on an important position on the Trump transition team.  Given that reality, you can’t expect him to produce a quotation here condemning Trump.  So he instead makes some other (valid) outsider-like point about corruption.  Now, you might object to Peter’s role on the transition team, but that is old news at this point.  You shouldn’t be holding any extra grudge against him for his corruption answer.  And above all, keep in mind these are reporter-chosen excerpts from a four-hour dinner/interview, and so we don’t know the surrounding context and qualifications and possibly accompanying off the record statements.

People, you need to pick your targets.  Get upset about the things worth getting upset about, such as the absence of a sustained foreign policy plan to head off imminent volatility in global relations.

RMB accounted for 98% global bitcoin trading volume over past six months

Here is the link, picture, and source.  Of course that is all about capital controls, and a capital control-evading mechanism is what Bitcoin has evolved into.  I wonder how it will evolve further, especially if the Chinese crack down on the practice, which they are more than capable of doing.

That is the topic of my latest Bloomberg column, I know that so many of you are full of excuses.  Here is one part of the column:

If we’re really headed off the cliff, selling all equities has to be better than doing nothing. Buying nonleveraged puts would be a possible Step 2, and most of the people in my Twitter feed have the smarts to figure out the mechanics. If it’s geopolitical and indeed market volatility you expect, deal in VIX options instead; VIX measures of volatility are lower than a few years ago, giving you a juicy target if you are sure volatility will rise. I get that this is somewhat hard, but if you’re right about Trump you can make a fantastic rate of return by acting on your worries. If you’re capable of getting an MBA at a good school, this learning should not be off-limits to you.

It is true that stock markets don’t typically predict “black swan”-style political catastrophes, but that is like saying sports betting markets don’t usually predict upsets. The point remains that upsets are not the norm, and if markets don’t predict them probably you should not expect them. But if you do nonetheless, go ahead and bet (or invest) accordingly.

What about the notion that market timing is a bad idea for amateurs, and how would you know when to come back into the market with your funds? That’s a fair worry, but not if you think the U.S. is headed for fascist catastrophe or rule by a KGB cabal.

I do give an answer at the end, and it is all the more worrying.

So if people have bifurcated mental modes, and their behavior is ruled so often by inertia, opposing the worst aspects of a Trump administration is going to be all the harder for most of us.

Which is all the more reason to short the market.

By now I’ve queried quite a few people, and I’ve yet to hear of anyone being short.  You might argue that stock markets don’t reflect social welfare, which is fair enough.  But then what market prices would you propose we look at?  Consumer durables for instance are doing fine.  Or is there no market discipline on your view at all?

Roger Barris emails me:

I am not sure that this is a suitable subject for a blog post, probably more a project for an aspiring PhD student, but with all the discussion of conflicts of interest in the Trump cabinet, it strikes me that the most glaring conflict in the public sector is ignored: The CoI between state and local politicians elected with the support of public sector unions who then participate in compensation negotiations for the members of those unions.  Here the temptation of the politicians to buy the support of the unions with public money is overwhelming.  The impact of this is potentially trillions when public pension liabilities are included.

This is such an obvious conflict that I have looked to see if there are laws preventing this, but my initial research shows nothing.

It would be interesting to see if there is a statistical relationship between union support and subsequent pay rises.  I would expect this relationship to be especially strong with deferred compensation (such as pensions) since this is very difficult for voters to monitor and can be easily gamed with unrealistic assumptions about, for example, investment returns.

Are you aware of any work that has been done in this field?  I think that the looming disaster with underfunded public pension funds is one of the biggest financial risks in the economy, with ZIRP making it even worse.

Can any of you direct Roger to the appropriate secondary literature on this question?  A related question is whether this conflict of interest makes you more or less upset than the more corporate-connected conflicts of interest found in the incoming Trump administration.

From Simcha Barkai at the University of Chicago (pdf):

This paper shows that the decline in the labor share over the last 30 years was not offset by an increase in the capital share. I calculate payments to capital as the product of the required rate of return on capital and the value of the capital stock. I document a large decline in the capital share and a large increase in the profit share in the U.S. non-financial corporate sector over the last 30 years. I show that the decline in the capital share is robust to many calculations of the required rate of return and is unlikely to be driven by unobserved capital. I interpret these results through the lens of a standard general equilibrium model, and I show that only an increase in markups can generate a simultaneous decline in the shares of both labor and capital. I provide reduced form empirical evidence that an increase in markups plays a significant role in the decline in the labor share. These results suggest that the decline in the shares of labor and capital are due to an increase in markups and call into question the conclusion that the decline in the labor share is an efficient outcome.

For the pointer I thank David Levey.

The non-deductibility of imports is simply crazy. It will immediately increase inflation. Take IKEA, for example, they cannot source locally, they will increase prices immediately by 20%, or whatever the tax will be. At all effects, it is a flat tariff of 20% on every import. This guy seems to want to transform the US into North Korea. And think about the distortions: Boeing will become a purchasing company, making more money using the tax-credit to buy prosciutto and Camembert to sell to retailers at prices lower than the marginal cost, than producing planes.

That is Coasean reasoning from Massimo, there are other good comments as well.  For instance Bob noted:

There will be a huge move to asset based leasing. So Wal-mart, instead of borrowing money will sell thier real estate to a REIT and lease it back. They essentially can keep the deduction.

…as pricing systems become ever more autonomous, aspiring monopolists like Mr Topkins eventually will not even need to speak to their competitors to fix prices. Computers will do the colluding for them, either by using the same algorithm or learning from their interactions with other machines — all without leaving behind trails of incriminating emails or voicemails.

“Finding ways to prevent collusion between self-learning algorithms might be one of the biggest challenges that competition law enforcers have ever faced,” said a recent paper by the OECD, the Paris-based club of mostly rich nations.

These digital tools automatically calculate prices based on instantaneous assessments of supply and demand and a seller’s own instructions, such as specific profit or price targets.

…It [the OECD] added: “Particularly in the case of artificial intelligence, there is no legal basis to attribute liability to a computer engineer for having programmed a machine that eventually ‘self-learned’ to co-ordinate prices with other machines.”

That is from David J. Lynch at the FT.  Will this prove more or less stable than traditional, human-based collusion?  Here are comments from Henry.  Can the bots send buyers “we are breaking the collusion now” alerts?  Will monitoring third party bots perform that function?  Or will collusion reign supreme?