Economics

This excellent book is titled Hoover: An Extraordinary Life in Extraordinary Times.  Here is one good bit:

Knowing that he could not manage what he could not measure, Hooover made Commerce botha producer and a clearinghouse of relevant information on the U.S. economy.  Once again, he turned to like-minded experts, this time primarily in the academic community.  Hoover announced the Advisory Committee on Statistics and recruited to it such luminaries as Edwin Gay, the first dean of the new Harvard Business School; Edwin Seligman, the Columbia economist and a founder and past president of the American Economic Association; and Cornell’s Walter Willco, a past president of the American Statistical Association and a former co-director of the U.S. Census.  Another eminence, Julius Klein, the Harvard economist and historian, was recruited to head Hoover’s Bureau of Foreign and Domestic Commerce and allowed to increase its budget by a factor and six and its personnel by a factor of five.  In short time, these and other initiatives turned Commerce into a vast reservoir of information on every aspect of economic life from steel to motion pictures…

The scope of Hoover’s activities in Commerce was stupendous.  Singlehandedly doing enough work for an entire cabinet, he was said to be “Secretary of Commerce and Undersecretary of Everything Else.”

Recommended, note that Hoover was in fact one of the most qualified men ever to have become president.

The Trump administration is demanding the World Bank allocate less capital toward Chinese projects:

“The bottom line here is right now we’ve got too high a percentage of the World Bank’s balance sheet that’s going to countries and to projects that already have ample borrowing capacity,” a senior Treasury official told Reuters, which noted that China is the IBRD’s biggest recipient of development loans, totaling $2.4 billion.

As I understand it, the World Bank makes money on these loans and there is a cross-subsidy of other Bank activities, most of all aid.  A World Bank that stopped such loans would be poorer and less skilled, and over time could devolve into one of the poorer, less effective poverty-fighting parts of the United Nations, without much of a political power base at that.

Yet China has several trillion dollars worth of reserves.  They seem to like, and be willing to pay for, World Bank infrastructure expertise when bundled with the loans.  Given the overall Chinese record in this area, it is hard to argue they don’t know how to build up an infrastructure.  So why do they borrow then?  I think of the Chinese leadership as like a university president who doesn’t want to spend down the endowment to boost immediate consumption.

It is bad if/when the current equilibrium goes away.  Yet it also is unlikely that the United States will continue to underwrite the building up of its major geopolitical rival.  We (in essence) guarantee some loans to them so they in turn can make loans to us, also guaranteed by us.  That’s a lot of guaranteeing.  In return we receive an out-sized role running and staffing the World Bank, which you can think of as a “soft power” endowment of sorts.  In return the Chinese can hold onto a larger foreign currency endowment and receive some expertise.

That American lead WB role is worth less over time as multilateral capital flows continue to decline relative to private sector flows, and as more emerging economies require less aid.  Furthermore China has set up its own development bank for Asia, namely the AIIB.  More generally, we seem less interested in helping the Chinese maintain the size of their endowment, and perhaps they are not so favorably inclined toward our soft power endowment either.  On top of that, receiving the infrastructure expertise continues to decline in value for the Chinese, as they develop more and more of their own expertise.  At this point, they should be telling us how to build infrastructure.

And so the arrangement is likely to unravel.  I don’t approve of Trump pulling the plug on this one, but more realistically that was the underlying trend in any case.

The biggest losers probably are the aid-receiving poorest African countries who currently free-ride upon the Bank’s indirectly American-guaranteed, China-funded staffing, higher expertise, and higher prestige.

China and America probably lose too, as each country will find it harder to maintain its chosen kind of endowment.  And the pretense of cooperation will fade, which has good and bad effects but mostly bad.

The subtitle is A History of U.S. Federal Entitlement Programs, and the author of this new and excellent book is John F. Cogan of Stanford University and the Hoover Institution.  It is the single best history of what it covers, and thus one of the best books to read on the history of U.S. government or for that matter American economic history more generally.

How did the American entitlement state get built?  In multiple, discrete pieces:

The House and Senate overwhelmingly approved a modified version of President Truman’s Social Security proposals in June 1950.  The Social Security Amendments provided a mammoth across-the-board increase in monthly benefits.  The law’s sliding scale of benefits…averaged 77 percent per recipient…The 1950 Act also rewrote Social Security’s eligibility rules to enable hundreds of thousands of workers with little history of contributing payroll taxes to begin collecting benefits.

And:

…from 1969 to 1975, inflation-adjusted federal entitlements pending grew annually at a remarkable 10 percent, registering an 86 percent increase in six years…Total annual inflation-adjusted entitlement expenditures grew 20 percent faster under President Nixon than they had under President Johnson.

And:

The eligibility liberalizations from 1997 to 2008 produced sharp increases in the food stamp and Medicaid rolls.  From 1998 to 2008, the food stamp rolls increased to 28 million people from 20 million and the Medicaid rolls increased to 59 million from 40 million people.  The liberalizations enacted during the Great Recession have lasted well beyond the recession’s end in 2010.  In 2016, the number of food stamp recipients ballooned to 44 million, and the number of Medicaid recipients rose to 73 million in 2016.

Here is a good sentence:

In 2015, 41 percent of the nation’s nonelderly-headed households received entitlement benefits.

This book is well-written and has useful and important information on virtually every page.

  • The Puerto Rico Electric Power Authority (PREPA) declined to ask for help from mainland electric utilities in the days after Hurricane Maria, instead turning to a small Montana-based contractor to carry out grid restoration practices.
  • Earlier this week, PREPA CEO Ricardo Ramos told E&E News that his bankrupt utility did not reach out to munis on the continental U.S. because he was unsure it could pay them back for assistance. About 90% of the island remains without power weeks after the storm hit.
  • The American Public Power Association (APPA), the trade group for U.S. munis, confirmed that mutual assistance programs were not activated, but said PREPA had already contracted with Whitefish Energy by the time the trade group convened a conference call to coordinate aid. PREPA did not respond to requests for comment.

Here is the full story, and here is a related piece, via Brian S.

Vaping Saves Lives

by on October 13, 2017 at 7:25 am in Economics, Law, Medicine | Permalink

E-cigarettes are less dangerous than cigarettes but are equally effective at delivering nicotine. Levy et al. estimate that if smokers switched to e-cigarettes millions of life-years would be saved, even taking into account plausible rates of non-smokers who start to vape. (It’s worth noting that the authors are all cancer researchers, statisticians and epidemiologists concerned with reducing cancer deaths.)

A Status Quo Scenario, developed to project smoking rates and health outcomes in the absence of vaping, is compared with Substitution models, whereby cigarette use is largely replaced by vaping over a 10-year period. We test an Optimistic and a Pessimistic Scenario, differing in terms of the relative harms of e-cigarettes compared with cigarettes and the impact on overall initiation, cessation and switching. Projected mortality outcomes by age and sex under the Status Quo and E-Cigarette Substitution Scenarios are compared from 2016 to 2100 to determine public health impacts.

Compared with the Status Quo, replacement of cigarette by e-cigarette use over a 10-year period yields 6.6 million fewer premature deaths with 86.7 million fewer life years lost in the Optimistic Scenario. Under the Pessimistic Scenario, 1.6 million premature deaths are averted with 20.8 million fewer life years lost. The largest gains are among younger cohorts, with a 0.5 gain in average life expectancy projected for the age 15 years cohort in 2016.

Vaping saves lives but the FDA has in the past tried to impose severe regulations on the industry and to make vaping less pleasurable. (Aside: It’s interesting that liberals tend to favor other risk-reducing devices such as condoms in the classroom but disfavor vaping while conservatives often take the opposite sides. I don’t think either group is basing their choices on the elasticities.)

The FDA, for example, has tried to ban flavored e-cigarettes. In a new NBER paper, Buckell, Marti and Sindelar calculate that:

…a ban on flavored e-cigarettes would drive smokers to combustible cigarettes, which have been
found to be the more harmful way of getting nicotine (Goniewicz et al., 2017; Shahab et al., 2017).
In addition, such a ban reduces the appeal of e-cigarettes to those who are seeking to quit; ecigarettes
have proven useful as a cessation device for these individuals (Hartmann-Boyce et al.,
2016; Zhu et al., 2017), and we find that quitters have a preference for flavored e-cigarettes.

Fortunately, the new FDA commissioner Scott Gottlieb has signaled a more liberal attitude towards vaping. It could be the most consequential decision of his tenure.

Hat tip: The excellent Robert Wilbin from 80,000 Hours.

I am not sure I trust any TFP measures (what if innovation is simply embodied in investment?), but this paper by Gerben Bakker, Nicholas Crafts, and Pieter Woltjer is worth a ponder:

We develop new aggregate and sectoral Total Factor Productivity (TFP) estimates for the United States between 1899 and 1941 through better coverage of sectors and better-measured labor quality, and find TFP-growth was lower than previously thought, broadly based across sectors, and strongly variant intertemporally. We then test and reject three prominent claims. First, the 1930s did not have the highest TFP-growth of the twentieth century. Second, TFP-growth was not predominantly caused by four ‘great inventions’. Third, TFP-growth was not driven indirectly by spillovers from great inventions such as electricity. Instead, the creative-destruction -friendly American innovation system was the main productivity driver.

For the pointer I thank David Levey.

From Lisa Abramowicz on Twitter:

“We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping:” Thaler [link]

Alex on Twitter:

It’s funny that the behavioral critique of the market is now that it is not volatile enough!

USA fact of the day

by on October 12, 2017 at 7:24 am in Current Affairs, Economics, Law | Permalink

The top 0.1 percent of earners projected to pay more to the IRS than the bottom 80 percent combined. This year, official government data show, the top 20 percent will pay 95 percent of all income taxes.

And:

Not just that: It’s hard to cut tax rates on moderate-income people without simultaneously benefiting the rich. That’s because everyone pays the same marginal tax rates on, say, their first $50,000 in income, regardless of how much they make in total. So cutting, for example, the 15 percent tax bracket helps the poor and rich alike.

That is all from Brian Faler at Politico.

You too can now relax

by on October 12, 2017 at 1:21 am in Economics | Permalink

People have stopped worrying about covered interest parity.

This worry has expired along with the cross-currency basis. Here’s Matt Klein at Alphaville explaining that for much of 2016, it was much cheaper to borrow dollars in the U.S. and hedge them into yen than it was to borrow yen in Japan, creating an obvious arbitrage that nonetheless didn’t go away. But then it did, due to declining dollar strength or the full phasing-in of money-market-fund reform or changes in Federal Reserve balance-sheet policy. I look forward to other recurring Money Stuff worries being so fully and satisfactorily resolved.

That is from the “no one else could do what he does” Matt Levine at Bloomberg.  And Matt points out that Stephen Curry is reading Ray Dalio’s Principles.

Those who fail to repay a bank loan will be blacklisted, and they will have their name, ID number, photograph, home address and the amount they owe published or announced through various channels – including in newspapers, online, on radio and television, and on screens in buses and public lifts.

…In the southern city of Guangzhou, the personal details of some 141 debt defaulters have so far been displayed on screens in buses, commercial buildings and on media platforms at the request of local courts.

Meanwhile in Jiangsu, Henan and Sichuan provinces, the courts have teamed up with telecoms operators to create a recorded message – played every time someone calls – for those who fail to repay their loans. The message tells the caller: “The person you are calling has been put on a blacklist by the courts for failing to repay their debts. Please urge this person to honour their legal obligations.”

That is from SCMP, via Viking.

Elsewhere in the Middle Kingdom, Shanghai adopts a facial recognition system to name and shame jaywalkers.

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

The internet has been another equalizer. You can enjoy texting and social media from just about anywhere, and our near obsession with these activities is equalizing urban and suburban experiences, possibly for the worse.

Arguably, sex and alcohol were once more prominent in some American cities than in American suburbs. But the new generation of American youth seems less interested in these activities anyway.

As American travel infrastructure decays, and traffic congestion worsens, what we used to call cities and suburbs won’t be able to rely on each other so much, as trips become too exhausting and time-consuming. That too will encourage cities and suburbs each have their own mix of jobs, retail and cultural opportunities.

There is much more at the link.

Today about a third of all new marriages are between couples who met online. Online dating has an interesting property–you are likely to be matched with a total stranger. Other matching methods, like meeting through friends, at church or even in a local bar are more likely to match people who are already tied in a network. Thus, the rise of online dating is likely to significantly change how people connect and are connected to one another in networks. Ortega and Hergovich consider a simple model:

We consider a Gale-Shapley marriage problem, in which agents may belong
to different races or communities. All agents from all races are randomly
located on the same unit square. Agents want to marry the person who is
closest to them, but they can only marry people who they know, i.e. to whom
they are connected. As in real life, agents are highly connected with agents
of their own race, but only poorly so with people from other races.

Using theory and random simulations they find that online dating rapidly increases interracial marriage. The result happens not simply because a person of one race might be matched online to a person of another race but also because once this first match occurs the friends of each of the matched couples are now more likely to meet and marry one another through traditional methods. The strength of weak ties is such that it doesn’t take too many weak ties to better connect formerly disparate networks.

Interracial marriage, defined to include those between between White, Black, Hispanic, Asian, American Indian or multiracial persons, has been increasing since at least the 1960s but using the graph at right the authors argue that the rate of growth increased with the introduction and popularization of online dating. Note the big increase in interracial marriage shortly after the introduction of Tinder in 2009!

(The authors convincingly argue that this not due to a composition effect.)

Since online dating increases the number of potential marriage partners it leads to marriages which are on average “closer” in preference space to those in a model without online dating. Thus, the model predicts that online dating should reduce the divorce rate and there is some evidence for this hypothesis:

Cacioppo et al. (2013) find that marriages created online were less likely to
break up and reveal a higher marital satisfaction, using a sample of 19,131
Americans who married between 2005 and 2012. They write: “Meeting a
spouse on-line is on average associated with slightly higher marital satisfaction
and lower rates of marital break-up than meeting a spouse through
traditional (off-line) venues”

The model also applies to many other potential networks.

Hat tip: MIT Technology Review.

Celebrity Misbehavior

by on October 11, 2017 at 2:26 am in Economics, Law, Sports, Television | Permalink

From Todd D. Kendall:

Casual empiricism suggests that celebrities engage in more anti-social and other socially unapproved behavior than non-celebrities. I consider a number of reasons for this stylized fact, including one new theory, in which workers who are less substitutable in production are enabled to engage in greater levels of misbehavior because their employers cannot substitute away from them. Looking empirically at a particular class of celebrities – NBA basketball players – I find that misbehavior on the court is due to several factors, including prominently this substitutability effect, though income effects and youthful immaturity also may be important.

Elsewhere, here is a Kaushik Basu micro piece on the law and economics of sexual harassment.  And a more recent piece from the sociology literature.  The practice increases quits and separations, with some of the costs borne by harassment victims and not firms; given imperfect transparency, recruitment incentives may not internalize this externality.  On other issues, here is a relevant AER article.  And this piece applies an insider-outsider model.  Here is Posner (1999), perhaps he has changed his mind.  Here is work by Elizabeth Walls, from Stanford.

I see negative externalities to sexual harassment across firms and sectors, and so, contra Posner (1999) and Walls, the most just and also efficient outcome is to tolerate one explicit and transparent form of the practice in the sector of formal prostitution and otherwise to keep it away from normal business activity.  I believe such a ban boosts womens’ human capital investment, investment in firm-specific skills, aids the optimal production of status, and limits one particular kind of uninsurable risk, with all of those benefits correspondingly higher in an O-Ring or Garett Jones model of productivity.

He has a forthcoming JET paper with Jorge Lemus, here is the abstract:

We construct a tractable general model of the direction of innovation. Competition leads firms to pursue inefficient research lines, because firms both race toward easy projects and do not fully appropriate the value of their inventions. This dual distortion will imply that any directionally efficient policy must condition on the properties of hypothetical inventions which are not discovered in equilibrium, hence common R&D policies like patents and prizes generate suboptimal innovation direction and may even generate lower welfare than laissez faire. We apply this theory to radical versus incremental innovation, patent pools, and the effect of trade on R&D.

Here is a slightly different version of the abstract, along with other research papers.  Here is Kevin on travel.  Kevin is at the University of Toronto, and also is author of the excellent blog A Fine Theorem.

Here is Kevin’s reading list on innovation, recommended.

That is a new NBER Working Paper by Atila Abdulkadiroglu, Parag A. Pathak, Jonathan Schellenberg, and Christopher R. Walters, on a much understudied topic.  Here are their main results:

School choice may lead to improvements in school productivity if parents’ choices reward effective schools and punish ineffective ones. This mechanism requires parents to choose schools based on causal effectiveness rather than peer characteristics. We study relationships among parent preferences, peer quality, and causal effects on outcomes for applicants to New York City’s centralized high school assignment mechanism. We use applicants’ rank-ordered choice lists to measure preferences and to construct selection-corrected estimates of treatment effects on test scores and high school graduation. We also estimate impacts on college attendance and college quality. Parents prefer schools that enroll high-achieving peers, and these schools generate larger improvements in short- and long-run student outcomes. We find no relationship between preferences and school effectiveness after controlling for peer quality.

You can read that as the parents either being super-smart about what helps their kids — better peers — or the parents being snobby per se.  Either way, they don’t seem to care so much about value-added from the side of the school.  Or is peer quality actually also the best practical-for-parents measure of value-added, when all is said and done?

So I say this is an inconclusive result from the final normative point of view, but a highly significant result in terms of cementing in some knowledge close to what I already expected was the case.