Category: Economics
Is an Economic Growth Explosion Imminent?
On the road, I haven’t had a chance to read this paper yet, but I pass it along as a matter of interest:
Theory predicts that global economic growth will stagnate and even come to an end due to slower and eventually negative growth in population. It has been claimed, however, that Artificial Intelligence (AI) may counter this and even cause an economic growth explosion. In this paper, we critically analyse this claim. We clarify how AI affects the ideas production function (IPF) and propose three models relating innovation, AI and population: AI as a research-augmenting technology; AI as researcher scale enhancing technology; and AI as a facilitator of innovation. We show, performing model simulations calibrated on USA data, that AI on its own may not be sufficient to accelerate the growth rate of ideas production indefinitely. Overall, our simulations suggests that an economic growth explosion would only be possible under very specific and perhaps unlikely combinations of parameter values. Hence we conclude that it is not imminent.
*Build, Baby, Build*, by Bryan Caplan
Here is my blurb for the book:
“Bryan Caplan is a pioneer in the use of graphic novels to expound economic concepts. His new book Build, Baby, Build is thus a landmark in economic education, how to present economic ideas, and the integration of economic analysis and graphic visuals. If you want to learn the economics, ethics, and political economy of YIMBY— namely the freedom to build this is the very best place to start.”
And from Bryan:
Please forgive my laughable arrogance, but I assure you that BBB is the most fascinating book on housing regulation ever written. In fact, I assure you that there will never be a more fascinating book on housing regulation!
While objective self-interest impels you to buy the book as soon as it releases, it would be a huge favor to me if you would take the extra step of pre-ordering right away from Amazon, Barnes and Noble, Bookshop, Apple Books, or anywhere else. Why? Because all pre-orders count as “first-week sales” for national best-seller lists — and I’m aiming high.
Here is the book’s home page. It is really very good.
The Puzzling Law and Economics of Out-of-State Tuition
Bryan Caplan has a good post on out-of-state tuition:
[State schools] almost always charge students from their own state much lower tuition. In the most recent data, average out-of-state tuition for four-year colleges was $26,382, versus $9,212 for in-state — roughly a 3:1 ratio.
I’ve argued for a long time that an enterprising lawyer ought to sue on the grounds that this is a violation of the constitution’s Privileges and Immunities Clause (Article IV, Section 2): “The Citizens of each State shall be entitled to all Privileges and Immunities of Citizens in the several States.” Indeed, in Toomer v. Witsell the Supreme Court noted that
“…without some provision of the kind removing from the citizens of each State the disabilities of alienage in the other States, and giving them equality of privilege with citizens of those States, the Republic would have constituted little more than a league of States; it would not have constituted the Union which now exists.
and they ruled that it was unconstitutional to charge out-of-state fisherman a much higher price for a fishing license than in-state fishermen.
Thus, we hold that commercial shrimping in the marginal sea, like other common callings, is within the purview of the privileges and immunities clause. And since we have previously concluded that the reasons advanced in support of the statute do not bear a reasonable relationship to the high degree of discrimination practiced upon citizens of other States, it follows that § 3379 violates Art. IV, § 2, of the Constitution.
Appellants maintain that by a parity of reasoning the statute also contravenes the equal protection clause of the Fourteenth Amendment. That may well be true, but we do not pass on this argument, since it is unnecessary to disposition of the present case.
Education is more important than fishing licenses, especially in creating a Union, the purpose Article IV, S.2, thus I suggest the case for the unconstitutionality of out-of-state tuition is high.
Caplan’s article is about the economics, not the legality, of out-state-tuition. although the two issues have some bearing. Caplan asks how are we to think about the out-state fee. Is the out–of-state fee the monopoly price and the in-state fee the competitive price? Or is the out-of-state fee the competitive price and the in-state fee a highly subsidized price?
If the out-of-state fee represents a monopoly price, it is surprising that there isn’t more competition to attract out-of-state students. Given the potential profitability of out-of-state fees, it’s also curious why sought-after institutions such as UVA limit out-of-state enrollment! Moreover, out-of-state students are likely to have a more elastic demand than in-state students. After all, the out-of-state students have 49 states from which to choose while the in-state students may prefer to live closer to home. Thus, theory suggests that it’s the in-state students who should be charged the higher price not the out-of-state students.
Caplan instead argues that we should think of the out-of-state fee as the competitive (close to cost) price and the in-state fee as highly subsidized. But if we do that then state subsidies are much, much higher than is commonly considered. Indeed, so much so, that we have to start thinking about “dark subsidies” (like dark matter) to account for the differences (Caplan suggests such things as the implicit land subsidy).
My view is that the in-state fee is close to costs (after the obvious subsidies are taken into account) and the out-state fee is well above cost but that it’s not a “monopoly” price per se because the state-schools are not profit-maximizers. Instead, some in-state schools are able to attract some out-state students and earn a bit of cream to spread the fixed costs but they can do so only under a political constraint not to let to many out-of-state students in because the voting public thinks every out-of-state student in the “good” school could have been their in-state kid (this may well be false, the out-of-state kids allow the university to expand but it’s how the voters think.)
I agree with Caplan, however, that the economics of out-of-state and in-state tuition are sorely under researched and not well understood. Moreover, the economics connect to the constitutional issues, because subsidies for in-state students (i.e. with taxpaying parents) are more likely to be constitutionally acceptable than naked discrimination against out-of-state students simply because they are residents of another state of the union.
Scenarios for the Transition to AGI
By Anton Korinek and Donghyun Suh, in a new NBER working paper:
We analyze how output and wages behave under different scenarios for technological progress that may culminate in Artificial General Intelligence (AGI), defined as the ability of AI systems to perform all tasks that humans can perform. We assume that human work can be decomposed into atomistic tasks that differ in their complexity. Advances in technology make ever more complex tasks amenable to automation. The effects on wages depend on a race between automation and capital accumulation. If automation proceeds sufficiently slowly, then there is always enough work for humans, and wages may rise forever. By contrast, if the complexity of tasks that humans can perform is bounded and full automation is reached, then wages collapse. But declines may occur even before if large-scale automation outpaces capital accumulation and makes labor too abundant. Automating productivity growth may lead to broad-based gains in the returns to all factors. By contrast, bottlenecks to growth from irreproducible scarce factors may exacerbate the decline in wages.
The best paper on these topics so far? And here is a recent Noah Smith piece on employment as AI proceeds. And a recent Belle Lin WSJ piece, via Frank Gullo, “Tech Job Seekers Without AI Skills Face a New Reality: Lower Salaries and Fewer Roles.” And here is a proposal for free journalism school for everybody (NYT, okie-dokie!).
My interview with Sam Matey
He is a podcaster who mainly does transcripts. Our discussion was largely but by no means entirely about climate change, here is one excerpt:
Sam: And India also is building huge amounts of new renewable and other electricity generating capacity. They’re building electric rail networks. They seem to be hitting their stride in a way that China was in about 2000 or 2005. I’m feeling optimistic about the rise of a new broadly-speaking-democratic powerful country in global markets and geopolitics.
Tyler: I would add the cautionary note that hardly anyone in India cares about climate change. Now, you may think they care about correlates to climate change, such as high temperatures in Delhi in the difficult months. But it’s very far from a national priority with any party that I’m aware of or any segment of the electorate. Air pollution is a major issue. But if there’s a way to fix air pollution, say through natural gas, that doesn’t, to a comparable degree, fix climate change, it could prove very popular in India.
So truly green energy has to be very cheap with the intermittency problem truly solved for India to make the transition, because there is not ideological momentum there at all.
And:
Sam: I agree that there’s not going to be a huge ideological drive to solve climate change in China or India, but I suspect that they will be doing a lot of the stuff that would have been considered a really ambitious climate change solving program 10 years ago, nonetheless, just for other reasons. Does that make sense?
Tyler: It makes sense, but keep in mind there’s also going to be technological progress for fossil fuels. And there has been; fracking was a big, big increase in productivity. It could spread to more parts of the world quite easily. The energy demands of the world, over some period of time, they could go up by 3x or 4x. And to think green energy will absorb all of that and cut into the current flows, I think it’s a bigger requirement than is often imagined.
Again, I wouldn’t say I’m pessimistic, but I’m not optimistic either. I’m genuinely uncertain.
And this:
Tyler: Maybe, but there’s two sources of quite green energy that have been declining. Nuclear we’ve already mentioned, but also hydroelectric. So some things are leaving the scene. And I would just say in general, looking at history, I’m very cautious about extrapolating either positive or negative trends. There’s so many efforts to do so. So in the 70s, there’s this great fear of overpopulation. Right now, there’s this great fear of a fertility crisis and underpopulation.
I’m not saying we shouldn’t think about either one of those, but it could well be neither comes to pass. Extrapolating current trends can rather rapidly lead us astray because of the power of the exponent. But maybe the world is just messy and not all that exponential.
In the latter part of the dialogue we talk about Morocco, Kenya, Mexico, Ethiopia, and the productivity crisis in Canada, among other issues. Will Buddhism rise or fall in influence? And what does it mean to suggest that books are overrated?
New results on intergenerational progress
The full paper title is “Has Intergenerational Progress Stalled? Income Growth Over Five Generations of Americans,” by Kevin Corrinth and Jeff Larrimore. Here is the abstract:
We find that each of the past four generations of Americans was better off than the previous one, using a post-tax, post-transfer income measure constructed annually from 1963-2022 based on the Current Population Survey Annual Social and Economic Supplement. At age 36–40, Millennials had a real median household income that was 18 percent higher than that of the previous generation at the same age. This rate of intergenerational progress was slower than that experienced by the Silent Generation (34 percent) and Baby Boomers (27 percent), but similar to that experienced by Generation X (16 percent). Slower progress for Generation X and Millennials is due to their stalled growth in work hours—holding work hours constant, they experienced a greater intergenerational increase in real market income than Baby Boomers. Intergenerational progress for Millennials under age 30 has remained robust as well, although their income growth largely results from higher reliance on their parents. We also find that the higher educational costs incurred by younger generations is far outweighed by their lifetime income gains.
The emphasis added is from me, not from the authors. Via the excellent Kevin Lewis.
Haiti vs. the Dominican Republic
I am setting aside most of the cultural and “macro” issues, and just considering policy, in my latest Bloomberg column. Excerpt:
Consider agriculture. If you fly over Hispaniola, you can see a notable difference between the Haitian and Dominican sides of the border. The Dominican side has plenty of trees, whereas the Haitian side is denuded. Much of that can be explained by Haiti’s history of weaker property rights. A “tragedy of the commons” has led to systematic exploitation of Haitian land.
The deforestation of Haiti dates from at least 1730, when French colonial policies, timber exports and the clearing of the land for coffee production all did damage. That hurt the prospects for Haitian agriculture, but much of the tree-clearing took place in the middle of the 20th century. Haitians have long used charcoal as an energy source, which led to unchecked deforestation, soil erosion and desertification. Thus, despite its beautiful natural setting, most of Haiti does not appear green and sparkling.
In the Dominican Republic, deforestation is also a problem — but not nearly on the scale of Haiti. Forests still cover about 40% of the country’s land (estimates for Haiti have ranged as low as 2%). The Dominican Republic has some national parks and reforestation programs, and developed alternative energy sources to reduce the demand for charcoal. Forest cover, and the quality of the soil, made a comeback. The country is also working toward selling its reforestation for carbon credits, giving it further economic incentive to protect its land.
To the extent that the Dominican Republic still experiences deforestation, it often comes from livestock cultivation, a far more economically productive activity than gathering wood for charcoal.
To citizens of wealthy countries, these differences may not sound enormous. But agriculture is an important driver of early economic development. Surpluses from agriculture enable the accumulation of savings, which finances broader commercial investment and helps people start small businesses. The economy obtains a base for diversifying into manufacturing, as happened in East Asia. Ethiopia’s double-digit growth spurt, before the recent tragic civil wars, also was rooted in agricultural productivity gains.
Today the Dominican Republic is essentially self-sufficient in food, including rice. According to the US government, Haiti now relies on imports for “a significant portion of the agricultural products it consumes,” including 80% of its rice. In 1981, by contrast, food imports were only 18% of the Haitian diet.
There are further arguments at the link.
Gatekeeping is Apple’s Brand Promise
Steve Sinofsky, former president of Microsoft’s Windows division and now a VC, has an excellent deep dive on the EU’s Digital Markets Act (DMA). The Act is very squarely aimed at Apple, despite the fact that Apple is not a monopoly and has a significantly smaller share of the phone market than Android. Apple’s history is well known, in contrast with Microsoft it went for a closed system in which Apple controlled entry to a much greater extent. The same was true with iPhone versus Android.
iPhone was successful but it was not as successful as Android that came shortly after because of the constraints Steve put in place to be the best, not the highest share or the greatest number of units. Android was to smartphones just as Microsoft was to personal computers. Android sought out the highest share, greatest variety of hardware at the lowest prices, and most open platform for both phone makers and developers. By making Android open source, Google even out-Microsofted Microsoft by providing what hardware makers had always wanted—complete control. A lot more manufacturers, people, and companies appreciated that approach more than Apple’s. That’s why something like 7 out of 10 smartphones in the world run Android.
Android has the kind of success Microsoft would envy, but not Apple, primarily because with that success came most all the same issues that Microsoft sees (still) with the Windows PC. The security, privacy, abuse, fragility, and other problems of the PC show up on Android at a rate like the PC compared to Macintosh and iPhone. Only this time it is not the lack of motivation bad actors have to exploit iPhone, rather it is the foresight of the Steve Jobs vision for computing. He pushed to have a new kind of computer that further encapsulated and abstracted the computer to make it safer, more reliable, more private, and secure, great battery life, more accessible, more consistent, always easier to use, and so on. These attributes did not happen by accident. They were the process of design and architecture from the very start. These attributes are the brand promise of iPhone as much as the brand promise of Android is openness, ubiquity, low price, choice.
The lesson of the first two decades of the PC and the first almost two decades of smartphones are that these ends of a spectrum are not accidental. These choices are not mutually compatible. You don’t get both. I know this is horrible to say and everyone believes that there is somehow malicious intent to lock people into a closed environment or an unintentional incompetence that permits bad software to invade an ecosystem. Neither of those would be the case. Quite simply, there’s a choice between engineering and architecting for one or the other and once you start you can’t go back. More importantly, the market values and demands both.
That is unless you’re a regulator in Brussels. Then you sit in an amazing government building and decide that it is entirely possible to just by fiat declare that the iPhone should have all the attributes of openness.
Apple’s promise to iPhone users is that it will be a gatekeeper. Gatekeeping is what allows Apple to promise greater security, privacy, usability and reliability. Gatekeeping is Apple’s brand promise. Gatekeeping is what the consumer’s are buying. The EU’s DMA is an attempt to make Apple more “open” but it can only do so at the expense of turning Apple into Android, devaluating the brand promise and ironically reducing competition.
Read the whole thing for more details and history including useful comparisons with the US antitrust trial against Microsoft.
My podcast with Thomas Burnett
Thomas is at the Templeton Foundation, here is the link (with transcript), here is one bit:
Tyler: Well, when I was very small, my favorite books were about animals and dinosaurs. A bit later, I liked books about codes and ciphers. I loved baseball books. I loved Jerry Kramer’s Instant Replay. Chess books, of course, when I was a chess player. Maybe when I was 11, I started reading science fiction. So, Isaac Asimov, Arthur C. Clarke, a little later, Robert Heinlein. Those were many of the first things I read.
And this:
Thomas: …if I’m very well informed about something? Why shouldn’t I go marching to Capitol Hill and shout from the top of my lungs that things must be this way to have a better future?
Tyler: Well, I’m not sure how much being well informed predicts you being right. That’s an interesting question, Now, clearly, society relies on the fact that many people will go out and march for things, even when they’re not well informed. So, I don’t want to talk everyone out of that. But it still seems to me the wisest people, or people who are trying to be the wisest people, should be much more careful, and do more to listen, and set an example toward humility. While recognizing you need a lot of dogmatists fighting for a bunch of things to keep society sustainable.
Many further topics are discussed, interesting throughout.
Thomas Saving, RIP
Here is an appreciation from Texas A&M.
Some triumphs of 19th century liberalism
Here is an outline of part of my lecture. I presented “free trade” (NB: it wasn’t totally free), the classical gold standard, and some modicum of free immigration (not everywhere) as three successful and mostly stable pillars of 19th century classical liberal achievement. Of course that was for limited parts of Western Europe and North America only, and with major exceptions for women, blacks, and more. Nonetheless, something in that formula worked, at least when it was actually appplied. Here is the outline:
Extreme trade protectionism after Napoleonic Wars
Later sliding scale for tariffs, maybe 50% rate of effective protection?
Complete free trade for Corn [wheat] during the 1840s, Cobden and Bright and Anti-Corn Law League
Terms of trade arguments: Robert Torrens, J.S. Mill
Protectionism does best when inelastic demand for your exports, elastic demand for your imports (two-country model)
The tariff in essence helps your buyers collude as one
That can outweigh the efficiency losses from the tariff
Removing labor from the corn sector also can boost British manufactures
What were terms of trade for GB then?
Jeffrey Williamson paper 1990 – Repeal helped the working class, hurt the landlords
Doug Irwin (EJ, 2021) – Efficiency-neutral but broadly egalitarian
American farmers were big winners
Greatest liberal triumph of the 19th century?
The other great triumph – the classical gold standard – dating from 1815-1914
Price-specie flow mechanism
Overvalued exchange rate – 1815, 1920s for Britain
Nassau Senior, Four Lectures on the Transmission of Precious Metals, 1827
Henry Thornton, An Enquiry into the Nature and Effects of the Paper Credit of Great Britain, 1802 – prices, interest rates, exchange rates
Steve Levitt on the future of economics
It’s really, right now, I think the profession is very inward-looking. It’s rewarding people who do things that are seen as hard. It’s really blurring the lines between theory and empirics was structural in a way that it is an experiment that I personally don’t think has worked out very well. And so, I think that it’s not that, I mean, the great ideas you’re talking about like Black-Scholes are few and far between anyway. But the rewards are not there for people who have practical insights are not rewarded greatly in the profession. The rewards come to people who make innovations, theoretical innovations, right? Who come up with new techniques, who do hard stuff that other people can’t do. So, I think in that sense, economics is going to become, my prediction is that economics is going to become less and less relevant, more and more inwardly focused. And honestly, I wouldn’t be that surprised if economics ends up going the way of anthropology or sociology, which works prominent and thought to be very promising and important disciplines, but have fallen dramatically in their stature because they ended up being more arcane and more focused inwardly. So, I have a really bad feeling about the future of economics, and I don’t see an easy way to change it.”
That is from Jon Hartley’s podcast with him, transcript included.
Milei update
The shock therapy administered by Milei and his economy czar Luis Caputo right after the Dec. 10 inauguration is showing results. In a severely recessionary context, inflation is slowing down (February prices rose 13.2% in monthly terms compared with 25.5% in December) while foreign reserves grew by more than $7 billion despite debt repayments. Deposits on local dollar-denominated bank accounts have also recovered. Last week, Argentina’s sovereign spread (a measure of country risk) dropped to the lowest in more than two years and the nation has received the enthusiastic backing of the International Monetary Fund, its single largest creditor.
The exchange rate — historically the Argentine economy’s key indicator — has recently appreciated in parallel markets and now trades at just 15%-20% over the official peso, opening the door for authorities to consider unifying the currency market. As local economists have argued, it’s time to start dismantling the byzantine currency controls that have long strangled Argentina.
The flipside of the government’s deep spending cuts, however, is a near-collapse in economic activity, with industrial production falling more than 12% year-on-year in January and construction retreating even more.
And:
At the same time, the parallel peso’s appreciation in a context of high inflation is leading to a loss of competitiveness, with Argentina fast becoming expensive when measured in dollars. The result adds to speculation that a new devaluation will soon be unavoidable, reversing gains in the fight on inflation. “Our base scenario considers a correction of the exchange framework in May,” Buenos Aires-based consultant Equilibra said in a recent report. Monday night’s measures by the country’s central bank can be seen as an attempt to tame this appreciation.
The government’s gamble is that, by the second quarter, a strong crop from Argentina’s high-powered farmlands spurs a rebound in activity that helps contain some of the social discontent produced by the measures.
Here is more from Juan Pablo Spinetto at Bloomberg. And from the FT:
Argentina’s Senate has rejected President Javier Milei’s sweeping emergency decree to deregulate the economy, in a major blow to the libertarian leader and his attempt to deliver reforms for the crisis-stricken country. Senators voted 42 to 25 to reject the decree, with four abstentions. Issued in December it modifies or eliminates more than 300 regulations affecting the housing rental market, food retailers, air travel, land ownership, and more.
So further progress on the libertarian front may be tough. Also from the piece:
“This is a worry for the market because the president is on the verge of losing . . . the only set of substantial economic reforms he has been able to introduce so far,” he said. Milei already opted to withdraw the other plank of his legislative agenda — a multipronged omnibus bill aiming to overhaul the Argentine state — from the floor of the lower house last month after lawmakers rejected several key articles.
Things could be better.
Jon Hartley podcast episode with Steve Levitt
Steve Levitt anecdote: economics has found its Bill Laimbeer. Other excellent anecdotes in the thread. And Levitt on publishing and academia, recommended. This superb podcast episode is a real coup for Jon Hartley, transcript also at the link. File under “too good to excerpt,” this is quite simply one of the best podcasts ever.
Indigenous Charter Cities
A charter city is a special zone with a charter granting significant autonomy from the host country’s regulations. Hong Kong, a succesful Chinese city operating under British law, was one early inspiration. Examples like this fueled criticisms that charter cities were “neo-colonial”. But Charter cities do not inherently require foreign legal frameworks. The fundamental purpose of a charter city is to serve as a discovery platform, a way to explore governance models allowing more people to select from the succesful.
An important case in point are the charter cities being created by indigenous Americans in Canada and the United States. In Vancouver, for example, indigenous people have asserted their rights under various treaties to control their own land.
Sen̓áḵw [an 11-tower development on 10 acres in heart of Vancouver, AT] is big, ambitious and undeniably urban—and undeniably Indigenous. It’s being built on reserve land owned by the Squamish First Nation, and it’s spearheaded by the Squamish Nation itself, in partnership with the private real estate developer Westbank. Because the project is on First Nations land, not city land, it’s under Squamish authority, free of Vancouver’s zoning rules. And the Nation has chosen to build bigger, denser and taller than any development on city property would be allowed.
Amusingly, some on the progressive left are crestfallen that the indigeneous are behaving like evil capitalist developers and not the back-to-the-land people they had imagined.
Predictably, not everyone has been happy about it. Critics have included local planners, politicians and, especially, residents of Kitsilano Point, a rarified beachfront neighbourhood bordering the reserve. And there’s been an extra edge to their critiques that’s gone beyond standard-issue NIMBYism about too-tall buildings and preserving neighbourhood character. There’s also been a persistent sense of disbelief that Indigenous people could be responsible for this futuristic version of urban living. In 2022, Gordon Price, a prominent Vancouver urban planner and a former city councillor, told Gitxsan reporter Angela Sterritt, “When you’re building 30, 40-storey high rises out of concrete, there’s a big gap between that and an Indigenous way of building.”
…. In 2022, city councillor Colleen Hardwick said of [a similar development], “How do you reconcile Indigenous ways of being with 18-storey high-rises?” (Hardwick, it goes without saying, is not Indigenous.)
…What chafes critics, even those who might consider themselves progressive, is that they expect reconciliation to instead look like a kind of reversal, rewinding the tape of history to some museum-diorama past. Coalitions of neighbours near Iy̓álmexw and Sen̓áḵw have offered their own counter-proposals for developing the sites, featuring smaller, shorter buildings and other changes. At the January hearing for Iy̓álmexw, one resident called on the First Nations to build entirely with selectively logged B.C. timber, in accord with what she claimed were their cultural values…That attitude can cast Indigenous people in the role of glorified park rangers.
There are also some interesting developments in the United States. The Catawba Indian Nation, for example, established the Catawba Digital Economic Zone (CDEZ), where I serve as an advisor. The CDEZ is based on US law but tailored for digital entrepreneurs, freelancers, FinTech, digital assets, Web3, and other exponential digital technologies. The progressive left probably isn’t happy about that either. Personally I am delighted to support initiatives that empower indigenous communities through capitalist ventures. More broadly, however, I support the introduction of new governance models to encourage competition in governance—bring on a new era of discovery and Tiebout competition!