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

Alt coins may be effective hedges for at least two reasons. First, the value of the coin may depend on how well the original rules for the coin were written, or how well it is governed in the case of managed coins like Ethereum or Ripple. Those factors may be fairly independent of what’s driving returns in traditional stocks and bonds, which in turn creates an opportunity for diversification.

Under these scenarios, alt coins are primarily stores of value rather than media of exchange. There is a notable tendency for exchange media to consolidate into a dominant currency in a given geographic region. But the very large number of financial assets in the world shows that thousands of stores of value can coexist and compete without much consolidation.

Second, alt coins to some extent are used for money laundering. If you think the world might be moving toward greater authoritarianism, the demand for money laundering could go up, to evade capital controls or asset restrictions. The value of alt coins would rise in turn, and that means alt coins would provide partial insurance against this very possible but unpleasant future path.

There is much more at the link.  Overall I believe it is a mistake to focus too much on the medium of exchange function of such coins (“Can I use it in the store?  I heard there are some food trucks taking Bitcoin!”, etc.).  Instead think of them in terms of services offered.  A new coin also may back, complement, and introduce a new protocol, though I didn’t have space to cover that in the column.

A few of you have asked me about the recent Bitcoin fork, here is one technical look at the issues.

I am struck by the notion that, of the two forked assets, the old-style, slow, and “immutable” Bitcoin retained most of the market value and trading interest.  While that happened for a few reasons, I wonder if the market isn’t telling us that, at least when it comes to selecting the most dominant asset, it prefers a “rigid coin” to a coin managed by a company such as Ethereum or Ripple, or to a coin “managed” by votes and forks.  In other words, the governance problems with coins may be larger than we had thought, and voting may deepen rather than solve those problems.  The market seems to like fairly rigid constitutions.  And for all the pledges made by company-run coins, is there really no way for those companies — in their post-founder futures if not now — to pursue their own interests over those of other coin holders and users?  Since Benjamin Klein (1974) or earlier, we have known that is a classic problem with non-convertible private monies.

To what extent does the market prefer the “dogmatism” of classic Bitcoin to the discretion of private management?  Not long ago, I had edged toward the view that Ethereum and its neat properties will displace Bitcoin, but now I suspect both kinds of coins will persist.

The brilliant Matt Levine will make your head spin.

Moral hazard from Sicilian volunteers

by on August 10, 2017 at 12:58 am in Economics, Law | Permalink

Fifteen volunteer firefighters have been arrested in Sicily on suspicion of starting wildfires and reporting non-existent blazes so they could earn €10 (£9) an hour for putting them out.

Police in Ragusa province, in the south of the Mediterranean island, said the fire department became suspicious when it emerged that the auxiliary brigade had responded to 120 incidents compared with just 40 tackled by other volunteer teams over the same period.

The brigade commander, a refrigeration technician identified as DDV, was deemed dangerous enough to be held under house arrest, the Ansa news agency reported, because he was suspected off continuing to start fires after others had stopped.

Most of the remaining team members, whose private phone calls were recorded as part of the investigation, have since admitted calling the 115 emergency number or getting friends or relatives to do so.

Here is the full story.

In West Virginia, the median hourly wage is just $14.79; in Arkansas, it’s $14.48; and in Mississippi, it’s a depressingly low $14.22.

That is from an excellent column by Catherine Rampell, do read the whole thing.

Hayek argued that support for redistribution was driven by emotions that had been optimally evolved for small, hunter-gatherer societies but that were now at tension with the rules necessary to create an extended social order such as under capitalism.

Support for Hayek’s hypothesis is given in a new paper by Sznycer et al. (et al. including Cosmides and Tooby). The authors use surveys to measure an individual’s disposition to compassion and envy. For example, for compassion there are 11 items such as “I suffer from others sorrows,” or (negative) “I tend to dislike soft-hearted people,” and for envy there are questions like “It is so frustrating to see some people succeed so easily”. In each case there is a scale from strongly disagree to strongly agree. The authors also ask whether the respondents think a tax on the wealthy would benefit them (measured on a 1 to 5 scale).

What makes these three items–compassion, envy and self-interest– interesting is that each of these can be understood as having evolved for functional reasons in the ancestral environment (see the paper for cites and arguments.)

In contrast, “fairness” is a much more abstract and difficult to define concept and because it is based on groups rather than on interpersonal relations it is not clear how it would have evolved in the ancestral environment. The authors measure the demand for distributional fairness by asking a variety of questions about hypothetical distributions and they use survey questions such as “the law of the land should apply to everyone in the same way” to measure support for procedural fairness.

The main things to be explained are support for redistribution (again measured via a questionnaire) and private giving to charity. The authors have just over six thousand participants over four countries (the U.S., India, the UK and Israel).

A key finding:

Compassion, envy, and self-interest independently predict support for redistribution in four countries with different economic histories and distributional policies. This is consistent with an evolutionary-psychological approach…the effects of fairness as a group-wide concern is unreliable and of far smaller magnitude than the effect of the emotion/motivational triplet.

A scary/sad finding:

Respondents were given two scenarios, a 10% tax on the rich that led to X dollars for the poor or a 50% tax on the rich that because it reduced incentives led to X/2 dollars for the poor. This experiment was run in America, India and the UK.

Fourteen percent to 18% of the…participants indicated a preference for the scenario featuring a higher tax rate for the rich even though it produced less money for the poor.

It’s easy to be skeptical of survey answers (I prefer measured actions) but answers on questions like this have been shown to be predictive for a variety of behaviors and there is an internal logic among the answers that suggests real motivations and behaviors are being measured. Most notably, compassion and envy both predict support for redistribution but only compassion predicts private giving to charity.

Addendum: It is a scandal that so few of Hayek’s works are available online. I believe this is a serious detriment to Hayek research.

Thanks to a little-noticed auction sale, a South Bay couple are the proud owners of one of the most exclusive streets in San Francisco — and they’re looking for ways to make their purchase pay.

Tina Lam and Michael Cheng snatched up Presidio Terrace — the block-long, private oval street lined by 35 megamillion-dollar mansions — for $90,000 and change in a city-run auction stemming from an unpaid tax bill. They outlasted several other bidders.

Now they’re looking to cash in — maybe by charging the residents of those mansions to park on their own private street.

Here is the full story, via Mike Tamada and Elmar Nubbemeyer.

Here is the podcast and partial transcript.  Russ describes it as follows:

Tyler Cowen of George Mason University and the co-host of the blog Marginal Revolution talks with EconTalk host Russ Roberts about Stubborn Attachments, his book-length treatment of how to think about public policy. Cowen argues that economic growth–properly defined–is the moral key to maintaining civilization and promoting human well-being. Along the way, the conversation also deals with inequality, environmental issues, and education.


The new NBER paper is “Consumption and Income Inequality in the U.S. Since the 1960s,” by Bruce D. Meyer and James X. Sullivan.  Here is the abstract:

Official income inequality statistics indicate a sharp rise in inequality over the past five decades. These statistics do not accurately reflect inequality because income is poorly measured, particularly in the tails of the distribution, and current income differs from permanent income, failing to capture the consumption paid for through borrowing and dissaving and the consumption of durables such as houses and cars. We examine income inequality between 1963 and 2014 using the Current Population Survey and consumption inequality between 1960 and 2014 using the Consumer Expenditure Survey. We construct improved measures of consumption, focusing on its well-measured components that are reported at a high and stable rate relative to national accounts. While overall income inequality (as measured by the 90/10 ratio) rose over the past five decades, the rise in overall consumption inequality was small. The patterns for the two measures differ by decade, and they moved in opposite directions after 2006. Income inequality rose in both the top and bottom halves of the distribution, but increases in consumption inequality are only evident in the top half. The differences are also concentrated in single parent families and single individuals. Although changing demographics can account for some of the changes in consumption inequality, they account for little of the changes in income inequality. Consumption smoothing cannot explain the differences between income and consumption at the very bottom, but the declining quality of income data can. Asset price changes likely account for some of the differences between the measures in recent years for the top half of the distribution.

This is one big reason why you can believe income inequality is high and/or rising, and not see it as the most significant normative issue.

The economics of brideprice

by on August 6, 2017 at 12:08 am in Economics, Law | Permalink

There is a newly published article on that topic, by and , here is the abstract:

Approximately seventy-five percent of the world’s population lives in countries where asset exchange upon marriage is obligatory. Rising brideprice—money or gifts provided to a woman’s family by the groom and his family as part of marriage arrangements—is a common if overlooked catalyst of violent conflict. In patrilineal (and some matrilineal) societies where brideprice is practiced, a man’s social status is directly connected to his marital status. Brideprice acts as a flat tax that is prone to sudden and swift increases. As a result, rising brideprice can create serious marriage market distortions that prevent young men, especially those who are poor or otherwise marginalized, from marrying. This phenomenon is especially evident in polygamous societies, where wealthy men can afford more than one bride. These distortions incentivize extra-legal asset accumulation, whether through ad hoc raiding or organized violence. In such situations, rebel and terror groups may offer to pay brideprice—or even provide brides—to recruit new members. Descriptive case studies of Boko Haram in Nigeria and various armed groups in South Sudan demonstrate these linkages, while an examination of Saudi Arabia’s cap on brideprice and its efforts to arrange low-cost mass weddings illustrates the ways in which governments can intervene in marriage markets to help prevent brideprice-related instability. The trajectory of brideprice is an important but neglected early indicator of societal instability and violent conflict, underscoring that the situation and security of women tangibly affect national security.

For the pointer I thank the excellent Kevin Lewis.

In 2005, I thought housing prices were rising above the fundamentals and I said so. In 2008, as the fall in housing prices was well under way, I wrote a blog post and later a NYTimes op-ed saying that the housing price bubble was not nearly as big as people thought. I wrote:

I think that housing prices went beyond the fundamentals sometime around 2004…but 2004 levels are still well above long run trend.

…Prices will probably drop some more but personally I don’t expect to ever again see index values around 110.  Do you?  If we don’t see the massive drop back to “normal” levels then the run up in prices should be described as a shift to a new equilibrium…[with some overshooting, rather than as a bubble.]

To put it mildly, not everyone agreed with my argument. I certainly got the timing wrong–I didn’t think the recession would be as long or as deep as it was. Nevertheless, some people are coming round to my point of view. Karl Smith, for example, has a new post Was There Ever a Bubble in Housing Prices? which concludes more or less, as I did nearly ten years earlier, that the answer is no. What happened was greater liquidity which made housing prices gyrate more like stock prices but “the fundamental driver isn’t irrational bubble behavior. It is competition over a scarce resource.”

Let’s go back to the Shiller graph, now updated to 2017. Over the entire 20th century real home prices averaged an index value of about 110 (and were quite close to this value over the the entire 1950-1997 period). Over the entire 20th century, housing prices never once roce above 131, the 1989 peak. But beginning around 2000 house prices seemed to reach for an entirely new equilibrium. In fact, even given the financial crisis, prices since 2000 fell below the 20th century peak for only a few months in late 2011. Real prices today are now back to 2004 levels and rising. As I predicted in 2008, prices never returned to their long-run 20th century levels.

Now one might argue that there is still a bubble or perhaps another bubble in housing prices. But the United States does not look anomalous compared to other countries. In fact, in many other countries prices have risen more than in the United States. Here is the Economist’s Global Price Index of real house prices for a variety of countries. (Do note that some countries not shown, such as Germany, haven’t seen big increases in prices.) Are all these countries experiencing bubbles? Or has the equilibrium changed?

Understanding why the equilibrium has changed is a fundamental issue that I don’t think we yet have a good handle on. My view, is that it’s a combination of expected long-run lower interest rates, greater liquidity, and supply constraints on land. Lower interest rates, for example, mean that durable assets increase sharply in price, all the more so if the rates are expected to stay low. Combine this with greater liquidity (see Smith’s post) and supply restrictions and you can explain most of what is going on in the United States. What I don’t know is if the same explanations work worldwide and can the same factors also be used to explain why land prices haven’t risen in Germany, Japan or Switzerland?

Hat tip: Nathaniel Bechhofer.

That is the topic of my latest Bloomberg column.  Electric cars, insofar as they limit climate change, are an example of defensive innovation.  Here is further explanation:

Defensive innovation is when you create a new product or capability to protect yourself against an impending disaster, such as the worst scenarios for climate change. It’s important, of course, to practice defensive innovation, but don’t confuse it with progress. The defense only stops your living standards from falling.

The military response to foreign threats is another example of defensive innovation. The risk and potential costs of cyberwarfare are escalating rapidly, and terrorist threats seem worse than they did in the 1980s or 1990s. The best case scenario is that we come up with better means of tracking and hindering cyber and terrorist attacks — by cutting off funding or by tracing and halting potential perpetrators. Those too will be defensive innovations, aimed mostly at preserving capabilities we already have.

The American military might someday develop better protection against the new threat of North Korean intercontinental ballistic missiles, which might be capable of delivering nuclear weapons to U.S. cities, possibly even New York and Washington. Imagine something akin to Israel’s “Iron Dome,” but protecting a broader geographic area against a greater diversity of weapons. That would be an impressive achievement, but would be an essentially defensive innovation.

Here is the uh-oh sentences:

Note that in the earlier stages of economic growth, there is usually less defensive innovation, if only because there is less to defend.

Do read the whole thing.

The South’s enormous economic stake in slavery far outweighed the impact of protective tariffs on its income.  In 1860, the aggregate value of slaves as property was $3 billion, nearly 20 percent of the nation’s wealth.  The value of slaves was more than 50 percent greater than the capital invested in railroads and manufacturing combined, a calculation that excludes the value of land in southern plantations.  Slavery generated a stream of income that enable overall white per capita income in the south to approximate that of northern whites.  In the seven cotton states, nearly a third of white income came from slave labor.

That is from the new Douglas A. Irwin book on trade policy, Clashing Over Commerce: A History of US Trade Policy.

Gancia, Ponzetto, Ventura provide a precis to their very interesting theory about the size and number of nations.

Before 1950, more than one third of all territorial disputes were decided by war, while after that date diplomacy prevailed in almost 90% of cases.

Why did the first wave of globalisation lead to political concentration and conflict? Why did the second wave of globalisation lead instead to political fragmentation, resolved in a more peaceful way? To answer these questions, in a new paper we develop a model to study the interaction between globalisation and political structure (Gancia et al. 2017). A key premise of our theory is that borders hamper trade and globalisation make borders more costly. We show that political structure adapts to expanding trade opportunities in a non-monotonic way. In early stages, borders are removed by increasing the size of countries. In later stages, the cost of borders is removed by creating economic unions, and this leads to a reduction in the size of countries. Moreover, while the incentive to conquer markets through aggression increases with globalisation, international economic unions remove this incentive, thereby paving the way to the rule of diplomacy.

This point is very good:

Since the size of markets grows rapidly while political borders tend to change slowly, it suggests that globalisation is likely to put more pressure on the world’s political structure. Designing political institutions that can optimally adapt may become one of the major challenges faced by modern societies.

The full paper is here.

When I was in India, I visited the High Court of Bombay. It’s surprisingly easy to get in. Wandering around the halls and offices, upstairs and downstairs, I was surprised to see stacks and stacks of papers piled up against walls all bound with….red tape.

In an excellent piece in the WSJ, Niharika Mandhana and Vibhuti Agarwal, describe a similar court in Allahabad.

Tattered stacks of case paper were piled on racks, tables, chairs and the floor. Towers of folders spilled into corridors where passersby toppled smaller stacks. Files from 2015 mixed with ones from 2016 and 2017, creating a nightmare for officers struggling to locate hundreds of them every day.

On a stuffy third floor, Amit Kumar Yadav, age 35, squeezed sideways through dust-laden stacks, then pulled himself up on his toes and vaulted over the paperwork that carpeted the floor.

After an eight-hour hunt, he was still missing 17 of 65 files for the next day’s hearings. Those cases won’t be heard.

In my review of the Marathi movie Court, I said

Court not only shows the mundane production of injustice it structures itself around that theme. Scenes drift on for longer than expected. The movie builds tension like a conversation with uncomfortable pauses. The audience begins to fidget and think “when will this be over.” That’s intentional. In a two-hour movie Tamhane makes you feel a little like what the people in Indian court must feel, trapped.

That’s not a great advertisement for a movie but you watch Court not for the watching but for the experience of having watched. Even now the tension and the feel of the movie are with me and add color to observations like this:

Waiting anxiously in the back of a nearby courtroom, Mohammad Aqeel Hasan, a 27-year-old farmer, has lost count of the number of court trips he has made from his village. He said he was sure it was fewer than his father had made in the 1983 lawsuit against their neighbor. Each side claims ownership of land between their properties.

His father had won a swift victory in a lower court, but the decision was overturned on appeal. His father’s appeal of that decision has been pending since 1986. A few years ago, when his father could no longer travel, Mr. Hasan took over.

“At this rate, the case will go on for hundred years,” Mr. Hasan said. Court appearances require a 10-hour journey by train from his village.

Mr. Hasan’s case came and went in a heartbeat. The other side’s lawyer had sent an illness slip, forcing a delay.

“Not well again?” the judge said, and he moved the hearing to another month.

Mr. Hasan was crestfallen. “Coming to court is not easy,” he said, heading to the railway station for his trip home.

See also my piece, A Twisted Tale of Rent Control in the Maximum City.

That is the new, magisterial, and comprehensive history by Douglas A. Irwin, just arrived in my hands and due out November 27.  It is likely the best history of trade policy to be written, 821 pp., the questions it covers include:

How did Jefferson’s trade embargo in 1808 affect the economy?  Did high tariffs promote America’s industrialization in the nineteenth century?  Did the Hawley-Smoot tariff of 1930 exacerbate or ameliorate the Great Depression?  Were liberal trade policies after World War II responsible for the economic prosperity experienced in the postwar period?  Did trade with China in the early 2000s destroy jobs in manufacturing?

Most of all, this book focuses on the determinants of US trade policy.  I am just starting to make my way through it, highly recommended, readable too, and of course all of these issues matter more than you thought they were going to.  You can pre-order here.

Shashi Tharoor, former Under-Secretary-General at the United Nations, bestselling author, Indian politician and current member of the Indian parliament has written a powerful brief against the British in An Era of Darkness: The British Empire in India (also published as Inglorious Empire). It’s an enjoyable read but some of the economic history is wrong and a number of the social arguments implausible.

I offer no defense of the British empire which was cruel, rapacious and racist but I do correct the record in my long-form review at the Indian journal Pragati.

Here is one bit:

Hindu and Muslim divisions run deeper than the ink marks of colonial census takers. Emperor Aurangzeb killed his brother Dara Shikoh for apostasy in 1659 and the echoes of that fratricide travel down the centuries to Partition. Aurangzeb’s tax on non-Muslims, the jizya tax, abolished in the 16th century by his great-grandfather, the third Mughal emperor Akbar, but re-imposed a hundred years later is another sign of deteriorating interreligious relations. Even some events outside of India, such as the rise of the Wahhabi branch of Sunni Islam in the 19th century, were clearly more important for Hindu-Muslim relations than were the census takers (Allen 2005, Dalrymple 2008). The rise of Wahhabism and the decline of Sufism were bound to upset Hindu-Muslim relations no matter what the British did. 

Read the whole thing.