Economics

Here is the audio and transcript, Charles was in superb form.  We talked about air pollution (carbon and otherwise), environmental pessimism, whether millions will ever starve and are there ultimate limits to growth, how the Spaniards took over the Aztecs, where is the best food in Mexico, whether hunter-gatherer society is overrated, Jackie Chan, topsoil, Emily Dickinson, James C. Scott, the most underrated trip in the Americas, Zardoz, and much much more.

Here is one excerpt:

COWEN: But if you had to pick a leading candidate to be the fixed factor, I’m not saying you have to endorse it, but what’s the most likely fixed factor if there is one?

MANN: Well, water is certainly a big candidate. There just really isn’t that much fresh water.

COWEN: But we can price it more, and since we have growing wealth — global economy grows at 4 percent a year — we can subsidize those who need subsidies…

MANN: You’re right. But water’s obviously one of them. But hovering over it is these questions about whether these natural cycles . . . is kind of a fundamental question about life itself. Is an ecosystem an actual system with an integrity of its own, with rules of its own that you violate at your peril? Which is the fundamental premise of the environmental movement. Or is an ecosystem more like an apartment building in which it is just a bunch of people who happen to live in the same space and share a few common necessities?

I don’t think ecology really has settled on this. There’s a guy in Florida, Dan Simberloff, who is a wonderful ecologist who has kind of made a career out of destroying all these models, these elegant models, one after another. So that’s the fundamental guess.

If it turns out that it’s just a collection of factors that we can shift around, that nature’s purely instrumental and we can do with it what we want, then we have a lot more breathing room. If it turns out that there really are these overarching cycles, which seems to be the intuition of the ecologists who study this, then we have less room than we think.

And:

COWEN:  Jared Diamond.

MANN: I think an interesting guy who really should learn more about social sciences.

COWEN: Economics in particular.

MANN: Yes.

COWEN: Theory of common property resources.

MANN: Yeah.

And finally:

MANN: …What I think is the underrated factor is that Cortez was much less a military genius than he was a political genius. He was quite a remarkable politician, really deft. And what he did is . . . The Aztecs were an empire, the Triple Alliance, and they were not nice people. They were rough customers. And there was a lot of people whom they had subjugated, and people whom they were warring on who really detested them. And Cortez was able to knit them together into an enormous army, lead that army in there, have all these people do all that, and then hijack the result. This is an act of political genius worthy of Napoleon.

Self-recommending, and I am delighted to again express my enthusiasm for Charles’s new The Wizard and the Prophet: Two Remarkable Scientists and Their Dueling Visions to Shape Tomorrow’s World.  Here is Bill Easterly’s enthusiastic WSJ review of the book.

Rent control is not the only problem plaguing housing in Mumbai, India. Mumbai also makes it very costly to build skyscrapers. In this video, I discuss the floor space index (FSI), a regulatory tool used around the world to tradeoff plot size and height. Higher FSI lets builders economize on land, reduces sprawl, and increases the value of public transportation. The lessons in urban economics go well beyond Mumbai. Check out the video. It’s one of the best in MRUniversity‘s India series.

My personal moonshot

by on January 31, 2018 at 12:03 am in Economics, Education, Philosophy, Web/Tech | Permalink

That is a short piece I wrote for the inauguration of a new Mercatus website The Bridge.  The focus of the piece is how I think about my own career and “moat”, excerpt:

My view, or at least hope, is that these diverse outputs [listed at the link] exploit two synergies.  First, my work in any one of these areas publicizes what I am doing in the others.  Second, what I learn from each task boosts my productivity in the others.  Overall, I think of these activities as a kind of collective intellectual blitzkrieg.

I will step out of my modest demeanor for a moment and suggest that relatively few people can construct and manage such a broad portfolio, and so this gives me some kind of competitive advantage or “moat” in the world of ideas.  My moonshoot, in essence, is trying to push as hard as possible on that advantage with this blitzkrieg.

And:

By the way, I love it when people describe writing a blog, or writing on the internet, as “popularizing” economics or something similar.  That is a sign they don’t understand what is going on, that they don’t understand there is such a thing as “internet economics,” and also a sign they will not be effective competition.  It’s really about “the internet way of writing and communicating” vs. non-internet methods.  The internet methods may or may not be popular, and may or may not be geared toward a wide audience, so they are not the same as popularizing.  One point of the internet is to find an outlet for super-unpopular material.  What’s important right now is to develop internet methods of thinking and communicating, and not to obsess over reaching the largest possible numbers of people.

I would note that tylercowensethnicdiningguide.com fits into the picture too, although this essay was too short to explain the larger schema with that one.

In Police Union Privileges I explained how union contracts and police bill of rights give police officers privileges not afforded to regular people. What differences do these privileges make? A new paper, The Effect of Collective Bargaining Rights on Law Enforcement: Evidence from Florida, suggests that police union privileges significantly increase the rate of officer misconduct:

Growing controversy surrounds the impact of labor unions on law enforcement behavior. Critics
allege that unions impede organizational reform and insulate officers from discipline for
misconduct. The only evidence of these effects, however, is anecdotal. We exploit a quasi-experiment in Florida to estimate the effects of collective bargaining rights on law enforcement
misconduct and other outcomes of public concern. In 2003, the Florida Supreme Court’s
Williams
decision extended to county deputy sheriffs collective bargaining rights that municipal police
officers had possessed for decades. We construct a comprehensive panel dataset of Florida law
enforcement agencies starting in 1997, and employ a difference-in-difference approach that
compares sheriffs’ offices and police departments before and after
Williams. Our primary result is
that collective bargaining rights lead to about a 27% increase in complaints of officer misconduct
for the typical sheriff’s office. This result is robust to the inclusion of a variety of controls. The
time pattern of the estimated effect, along with an analysis using agency-specific trends, suggests
that it is not attributable to preexisting trends. The estimated effect of
Williams is not robustly
significant for other potential outcomes of interest, however, including the racial and gender
composition of agencies and training and educational requirements.

This is important research but although I’m not surprised that collective bargaining rights lead to more misconduct I do find the size of the effect implausibly large. One reason is that police union privileges are only one brick in the blue wall. Juries, for example, often fail to convict police even when faced with video evidence that would be overwhelming in any other context [e.g. Philando Castile]. Police union privileges are unjust and should be abolished but solving the problems with policing requires more than a change in naked incentives.

To solve this problem we need to adopt the same kind of systems wide thinking that has led to large reductions in fatal accidents in anesthesiology, airplane crashes, and nuclear accidents. Criminologist Lawrence Sherman writes:

The central point Perrow (1984) made in defining the concept of system accidents is that the
urge to blame individuals often obstructs the search for organizational solutions. If a system-crash
perspective can help build a consensus that many dimensions of police systems need to be changed
to reduce unnecessary deaths (not just but certainly including firing or prosecuting culpable shooting officers), police and their constituencies might start a dialog over the details of which system
changes to make. That dialog could begin by describing Perrow’s central hypothesis that the interactive complexity of modern systems is the main target for reform. From the 1979 nuclear power
plant near-meltdown at Three Mile Island in Pennsylvania to airplane and shipping accidents,
Perrow shows how the post-incident reviews rarely identify the true culprit: It is the complexity of
the high-risk systems that causes extreme harm. Similarly, fatal police shootings shine the spotlight
on the shooter rather than on the complex organizational processes that recruited, hired, trained,
supervised, disciplined, assigned, and dispatched the shooter before anyone faced a split-second
decision to shoot.

Hi Tyler, one point you didn’t mention in your talent optimization post was career path dependence. Getting an assistant professorship might require some of the skills required to being a great professor, but it absolutely does not require any degree of interest in or talent at management, even though (at least in STEM) managing a lab, including people management, attraction of talent, administration, etc., is the critical skill.

One generalization is that any sort of administrative job that selects among a highly filtered group (senior medical administration at a hospital that mostly fall to MDs, executives within technical organizations such as CTOs) is likely forced to ignore the best talent.

Nick_L in the comment section provides another interesting example: “Talent selection in the Armed Forces is in an interesting category. The only way to achieve the rank of General (in G7 forces, at least), is by entry as a 2nd lieutenant. Due to the (understandable) narrowing of opportunities the higher you go in the armed forces, the best talent frequently leaves around the time they make Colonel.” Note that that comment assumes that the skills that make a great 2nd lieutenant or colonel are the same skills that make a great general.

That is from an email by John McDonnell.

(3) Implications of US Tax Policy for House Prices, Rents, and Homeownership

Kamila Sommer and Paul Sullivan

This paper studies the impact of the mortgage interest tax deduction on equilibrium house prices, rents, homeownership, and welfare. We build a dynamic model of the housing market that features a realistic progressive tax system in which owner-occupied housing services are tax-exempt and mortgage interest payments are tax-deductible. We simulate the effect of tax reform on the housing market. Eliminating the mortgage interest deduction causes house prices to decline, increases homeownership, decreases mortgage debt, and improves welfare. Our findings challenge the widely held view that repealing the preferential tax treatment of mortgages would depress homeownership.

Here is the link to the AER piece.

The Return of Henry George?

by on January 29, 2018 at 10:16 am in Economics | Permalink

NYTimes: Today, with the subway in precipitous decline and the city enjoying an economic boom, some policymakers think the time has come for the subway to profit from the financial benefits it provides, including its considerable contribution to property values.

…In Manhattan’s main business corridors, from 60th Street south, the benefit of being near a subway adds $3.85 per square foot to the value of commercial property, according to calculations by two New York University economists.

The notion that property owners should pay extra for their proximity to the subway is called “value capture” and has long been debated in urban planning circles. Now Gov. Andrew M. Cuomo, a Democrat, has made value capture a prominent part of his plan to salvage the subway system by proposing to give the Metropolitan Transportation Authority the power to designate “transit improvement subdistricts” and impose taxes.

..The Cuomo proposal calls for before and after assessments in neighborhoods where a new transportation project, like the extension of a subway line, raises property values. Officials would determine the difference between the previous assessment and the new, higher one.

Of the tax on that difference, 75 percent would go to the transit agency and 25 percent to the city.

Surgery (and many medical specialties, esp. highly compensated ones) should be on the list of ‘Bad at finding best talent.’ There’s no way to show aptitude for a surgical specialty before medical school, and there is no mechanism for good surgeons to rise to the top, and bad surgeons to be identified and punished. If you make it into a surgical residency, you will succeed, even if you faked your way into med school and your surgical success rate is terrible. There is essentially no mechanisms to make sure aging surgeons learn the newest techniques, and no checks on waning competency. It is only because the training is so long and difficult that it isn’t a complete disaster.

Policing should also be on the list. It’s another job where, like being a surgeon, once you’ve made it into the profession, you have to fail spectacularly to be kicked out. At least half the police officers I know shouldn’t be allowed to carry firearms, much less have the power of life and death over ordinary citizens.

That is from Kevin, based on my earlier post on this question.

Trained as an anthropologist and medical doctor, Mr. Kim now says that the world of high finance is “some of the coolest stuff I have ever looked at.”

And:

Mr. Kim is, by nature, a cheery person, but there was no mistaking the edge to his voice when he started talking about the World Bank economists whose pay is tied to how many loans they churn out. In his view, the bank needs to reward staff, Wall Street-style, for devising innovative financial solutions.

“One of the most difficult things to do in a large bureaucracy is to change incentives,” Mr. Kim told the financiers. “And if you have a large bureaucracy full of economists it is especially hard, because it turns out that economists really hate it when you change the incentives.”

That is from Landon Thomas Jr. at the NYT, there is much more in the story.  And in case you hadn’t heard, Paul Romer is no longer working there.

Diversity versus Equality

by on January 28, 2018 at 10:56 am in Economics, Law | Permalink

The Australian Behavioural Economics Team conducted a randomized trial of hiring in which applications for senior positions in the Australian Public Service were reviewed and ranked. By comparing outcomes in treatments in which gender, minority status and indigenous status could be inferred with outcomes using de-identifyed applications the researchers were able to test for bias and the effect of de-identification.

We found that the public servants engaged in positive (not negative) discrimination towards female and minority candidates:

Participants were 2.9%
more likely to shortlist female candidates and 3.2%
less likely to shortlist male applicants when they were identifiable, compared with when they were de-identified.

Minority males were 5.8%
more likely to be shortlisted and minority females were 8.6%
more likely to be
shortlisted when identifiable compared to when applications were de-identified.

The positive discrimination was strongest for Indigenous female candidates who were 22.2% more likely to be
shortlisted when identifiable compared to when the applications were de-identified.

Interestingly, male reviewers displayed markedly more positive discrimination in favour of minority candidates than
did female counterparts, and reviewers aged 40+ displayed much stronger affirmative action in favour for both
women and minorities than did younger ones.

The study was small and the participants knew they were in a study (although not what the study was studying).

This reminds me of the important Williams and Ceci paper which also found positive gender discrimination in academic hiring (with one notable exception of equal treatment):

The underrepresentation of women in academic science is typically attributed, both in scientific literature and in the media, to sexist hiring. Here we report five hiring experiments in which faculty evaluated hypothetical female and male applicants, using systematically varied profiles disguising identical scholarship, for assistant professorships in biology, engineering, economics, and psychology. Contrary to prevailing assumptions, men and women faculty members from all four fields preferred female applicants 2:1 over identically qualified males with matching lifestyles (single, married, divorced), with the exception of male economists, who showed no gender preference.

Hat tip: Phil Magness.

You can certainly add having bought the right properties in the right cities in the 1970s and 1980s to the list of drivers of inequality, but I don’t think it is a big piece of the puzzle. Instead, I think it is more accurate to point out that one of the first and most valuable amenities people purchase when they become wealthier is wealthier neighbors. Wealthy people self-segregate, and the places to which they self-segregate become valuable, because the way you get a place limited to wealthy people is by bidding up the price of being in that place. The community, or the city, is gated for a reason.

Here is much more by Steve Randy Waldman.  So given this not so ideal preference is in place, might building restrictions be a relatively efficient way to satisfy it?  Compare to violence, racism, or more direct interference with individual mobility?

U.S.A. fact of the day

by on January 27, 2018 at 2:20 am in Economics, Uncategorized | Permalink

“Over the last five years a new Dollar General opened every four-and-a-half hours…”

That is from The Economist.  The article attributes much of the success of the chain to its location decisions, such as opening near churches, schools, highways, and post offices.

Madhav Nandipati writes to me:

Hi Professor Cowen, I’ve been a follower of MR for many years.  I have a question that you may have some insights on: in what industry do you think the professional talent is closest to the best/optimal talent, and why?  Similarly, what industry do you think the professional talent has the furthest gap from the best/optimal talent?
For example, if you consider cooking, the best chefs of Indian cuisine may actually be mothers cooking for their families at home; the professional talent is not as good as it could be.  My guess where the professional talent is closest to optimal is in an industry that:
1) is relatively open (along different demographic dimensions)
2) is somewhat lucrative (to attract people to that industry)
3) uses a filtering mechanism (interviews, grades, etc.) that properly identifies talent
Maybe surgery (and to a lesser extent) acting fit those criteria?

I don’t have a way of using or citing evidence to resolve this question, but here are my intuitions:

Good at finding the best talent:

1. Highly paid professional sports (those who care can play them in high school)

2. Finance and management consulting (lots of people from top schools consider these careers, and we get enough, even if non-elites are somewhat “locked out”)

3. Nerdy tech stuff (so many people are exposed to this at a young age and can be autodidactic)

4. Real estate agents (not as smart as Bill Gates, but as good as they need to be)

In these areas very often performance can be measured fairly readily.

Bad at finding the best talent:

4. Education and teaching and religious leaders

5. Humanities scholars

6. Journalists

In general think about areas where performance is hard to measure, good producers are underpaid, and getting a start requires early social connections and mentoring.  I wonder also if “management” fits into this category.

You could take the separate tack of focusing on women and minorities, and asking in which sectors they are most likely to be unjustly excluded, and also in which sectors further talent might be needed.  (Perhaps they are excluded from some segments of finance, but perhaps also we have enough of that.)  This will mean that swimming and tennis attract the best talent less than many other sports do, because you need to have attended a high school with the proper facilities.  Or try running an art gallery or being a museum curator or writing an etiquette guide.  National politics strikes me as one area where quite a bit of talent is unjustly excluded, both women and minorities, but there are many others, including leadership positions more generally across many different sectors.

Tax Design

by on January 26, 2018 at 12:31 pm in Economics, History, Law | Permalink

Dutch canal houses are another classic example of how rules and regulations can shape structures. Taxed on their canal frontage rather than height or depth, these buildings grew in tall and thin. In turn, this typology evolved narrower staircases, necessitating exterior hoist systems to move furniture and goods into and out of upper floors.

That’s from an excellent post by Kurt Kohlstedt at 99% Invisible who gives many other examples of taxes having long-lasting effects on the built environment.

Hat tip: Devon Zuegel.

Using several novel empirical facts from business microdata, we infer that the pervasive post-2000 decline in reallocation reflects weaker responsiveness in a manner consistent with rising adjustment frictions and not lower dispersion of shocks. The within-industry dispersion of TFP and output per worker has risen, while the marginal responsiveness of employment growth to business-level productivity has weakened. The responsiveness in the post-2000 period for young firms in the high-tech sector is only about half (in manufacturing) to two thirds (economy wide) of the peak in the 1990s. Counterfactuals show that weakening productivity responsiveness since 2000 accounts for a significant drag on aggregate productivity.

That is from Ryan A. Decker, John C. Haltiwanger, Ron S. Jarmin, and Javier Miranda.