I may not follow any of your suggestions, but just thought I should ask for advice, for my dialogue with Peter next week.  I am the interviewer, he is the interviewee, more or less.  #CowenThiel

One of the most remarkable discoveries of economics is that under the right conditions competitive markets allocate production across firms in just that way that minimizes the total costs of production. (You can find a discussion of this remarkable property in Modern Principles. See also this MRU video.)

One of the necessary conditions for this result is that firms must face the same input and output prices. If one firm is subsidized and another taxed, for example, then resources will be misallocated and total costs will increase. In a pioneering paper, Klenow and Hsieh measure misallocation across firms in China, India and the United States and they find that micro misallocations can have large, macroeconomic effects. In particular, if capital and labor were allocated as well in China and India as they are in the United States then output in those countries would double.

We can get some intuition for the costs of resource misallocation by looking at water in California. As you may have noticed at the grocery store, almonds are in demand right now whether raw or in almond milk. Asian demand for almonds is also up. As a result, in the last 10 years almond production in California has doubled. That’s great, except for the fact that almond production uses a huge amount of water and water in CA is severely mispriced and thus misallocated.

In my previous post, I pointed out that agriculture uses 80% of the water in California but accounts for less than 2% of the economy. So how much water does almond production alone use? More water is used in almond production than is used by all the residents and businesses of San Francisco and Los Angeles combined. Here’s a chart from Mother Jones:

(Aside: Some of this water is naturally recycled so net use is likely somewhat lower but a lot of water in California is now being pumped from the aquifer and that water isn’t being replenished.)

At the same time as farmers are watering their almonds, San Diego is investing in an energy-intensive billion-dollar desalination plant which will produce water at a much higher cost than the price the farmer are paying.  That is a massive and costly misallocation of water.

In short, we are spending thousands of dollars worth of water to grow hundreds of dollars worth of almonds and that is truly nuts.

Hat tip: Walter Olson.

China under Mao

by on March 26, 2015 at 2:37 am in Books, History, Law, Political Science | Permalink

That is the new and excellent book by Andrew G. Walder.  Here is one excerpt:

The Communists’ contribution to the war effort was extremely modest.  According to a December 1944 Soviet Comintern report, a total of more than 1 million Nationalist troops had been killed in battle, compared to 103,186 in the CCP’s Eighth Route Army and another several thousand in the New Fourth Army.  The Communists suffered only 10 percent of total Chinese military casualties.  One author has called Mao’s famous doctrine of people’s war one of the “great myths” about the period: “people’s war was hardly used in the conflict against the Japanese.”

Definitely recommended.

China sentence of the day

by on March 25, 2015 at 2:59 pm in Current Affairs, Law | Permalink

It is also possible that the MEP [Ministry of Environmental Protection] will be given law enforcement authority for the first time, for example, the authority of forced inspection, search, sequestration, fines, recall and closure.

There is more here, a good and interesting piece by Wu Qiang on the changing politics of smog in China.

The problem of liens on Bitcoin

by on March 25, 2015 at 9:16 am in Economics, Law | Permalink

Izabella Kaminska writes:

George K Fogg at law firm Perkins Coie has been thinking about the problem of past claims (or liens) on bitcoins for nearly 14 months now.

His conclusion: under the United States’ UCC code (uniform commercial code) as long as bitcoins are treated as general intangibles, no high value investor can be sure that an angry Tony Soprano won’t show up one day to claim the bitcoins they thought they received in a completely unencumbered manner are in fact his. In fact, it’s only if and when Tony Soprano publicly renounces his claim to the underlying bitcoin collateral he is owed that the bitcoins stand a chance of being treated as unencumbered. Until then, a hot potato claim risk exists for every future acquirer of Soprano’s bitcoin.

Indeed, given the high volume of fraud and default in the bitcoin network, chances are most bitcoins have competing claims over them by now. Put another way, there are probably more people with legitimate claims over bitcoins than there are bitcoins [emphasis added]. And if they can prove the trail, they can make a legal case for reclamation.

This contrasts considerably with government cash. In the eyes of the UCC code, cash doesn’t take its claim history with it upon transfer. To the contrary, anyone who acquires cash starts off with a clean slate as far as previous claims are concerned. It is assumed, basically, that previous claims on cash are untraceable throughout the system. Though, liens it must be stressed can still be exercised over bank accounts or people.

There is more at the FT link here.  And I have a simple question for all you Bitcoin partisans out there: how large is the largest private sector transaction on Bitcoin to date?  I’m not “anti-Bitcoin,” and I am glad the regulators have allowed the experiment to proceed, still I’m not persuaded by the arguments that it is going to be a big deal.

You will find a Qanta primer here.  Here is an excerpt:

In the same month, separate teams of scientists at Harvard University and the Broad Institute reported similar success with the gene-editing tool. A scientific stampede commenced, and in just the past two years, researchers have performed hundreds of experiments on CRISPR. Their results hint that the technique may fundamentally change both medicine and agriculture.

Some scientists have repaired defective DNA in mice, for example, curing them of genetic disorders. Plant scientists have used CRISPR to edit genes in crops, raising hopes that they can engineer a better food supply. Some researchers are trying to rewrite the genomes of elephants, with the ultimate goal of re-creating a woolly mammoth. Writing last year in the journal Reproductive Biology and Endocrinology, Motoko Araki and Tetsuya Ishii of Hokkaido University in Japan predicted that doctors will be able to use CRISPR to alter the genes of human embryos “in the immediate future.”

Thanks to the speed of CRISPR research, the accolades have come quickly. Last year MIT Technology Review called CRISPR “the biggest biotech discovery of the century.” The Breakthrough Prize is just one of several prominent awards Doudna has won in recent months for her work on CRISPR; National Public Radio recently reported whispers of a possible Nobel in her future.

Even the pharmaceutical industry, which is often slow to embrace new scientific advances, is rushing to get in on the act. New companies developing CRISPR-based medicine are opening their doors. In January, the pharmaceutical giant Novartis announced that it would be using Doudna’s CRISPR technology for its research into cancer treatments. It plans to edit the genes of immune cells so that they will attack tumors.

How immediately will this come for ordinary use?  Here is the big package of articles from Science.  The Chinese already have done it with monkeys.

Here are my earlier remarks on eugenics.  Here is a group of scientists calling for a moratorium on the technique, at least until rules can be established.  Here are further articles on CRISPR.  There are further comments here.

I believe the implications of all this — and its nearness to actual realization — have not yet hit either economics or the world of ideas more generally.  This is probably big, big news.

New arguments on a carbon tax

by on March 24, 2015 at 12:34 am in Economics, Law | Permalink

From Adam Ozimek, here are some very good points, which I had not previously pondered:

…what a carbon tax does is push the required cost threshold up. This would allow solar to become the more profitable source of energy in the US sooner and increase the speed of its dominance here.

However, a carbon tax would raise the threshold in the US relative to the threshold for developing countries.  In other words, the race for solar companies in the U.S. becomes to be cheaper than dirty energy + a carbon tax, which is a higher threshold than being cheaper than dirty energy alone, which is the threshold in many developing countries.

It is easy to see how this could cause downward march in solar costs to slow, and as a result solar would reach the threshold for China, India, and other developing countries perhaps much much later.

If this is true, it would suggest that for clean energy to become globally dominant faster it’s better for the U.S. to just subsidize solar innovation and let the untaxed U.S. market price of dirty energy stand as a strong incentive for solar to drive costs lower.

To see this, consider a world where solar was already dominant in the U.S. with current technology and costs, perhaps via a total ban of dirty energy. The supply curve of the installed base of solar technology would be much more price inelastic than the supply curve of today’s installed base of dirty energy due to higher fixed costs and lower marginal costs.  This means a steeper residual demand curve for marginal innovators that provides less market share rewards for marginal declines in price, and therefore lower rewards for marginal cost cutting.

In this way, a carbon tax could make global warming worse.

From Jerry Taylor at the new Niskanan Center, here is a paper on the conservative case for a carbon tax.

This is from his Polemics book:

43. In point of truth, the headscarf law expresses only one thing: fear.  Westerners in general, and the French in particular, are no more than a bunch of shivering cowards.  What are they afraid of?  Barbarians, as usual.  Barbarians both at home, the ‘suburban youths’, and abroad the ‘Islamic terrorists’.  Why are they afraid?  Because they are guilty, but claim to be innocent.  Guilty from the 1980s onward of having renounced and tried to dismantle every politics of emancipation, every revolutionary form of reason, every true assertion of something other than what is.  Guilty of clinging to their miserable privileges.  Guilty of being no more than grown-up kids who play with their many purchases.  Yes, indeed, ‘after a long childhood, they have been made to grow up’.  They are thus afraid of whatever is a little less old than they are, such as, for example, a stubborn young lady.

44. But most of all, Westerners in general, and the French in particular, are afraid of death.  They can no longer even imagine that an idea is something worth taking risks for.  ‘Zero deaths’ is their most important desire.  Well, they see millions of people throughout the world who have no reason to be afraid of death.  And among them, many die for an idea nearly every day.  For the ‘civilized’, that is a source of intimate terror.

I’ve tried a few other Badiou books, but I find this to be the one easiest to make sense of.  Here is Wikipedia on Badiou.  Here is a Guardian article on him.

The highly esteemed and extremely proficient Thomas MaCurdy has a new piece in the JPE (jstor) on exactly that question.  The news does not surprise me:

This study investigated the antipoverty efficacy of minimum wage policies.  Proponents of these policies contend that employment impacts are negligible and suggest that consumers pay for higher labor costs through imperceptible increases in goods prices.  Adopting this empirical scenario, the analysis demonstrates that an increase in the national minimum wage produces a value-added tax effect on consumer prices that is more regressive than a typical state sales tax and allocates benefits as higher earnings nearly evenly across the income distribution.  These income-transfer outcomes sharply contradict portraying an increase in the minimum wage as an antipoverty initiative.

MaCurdy also writes:

About 35 percent of the total increase in after-tax benefits goes to families with income less than two times the poverty threshold, a common definition of the working poor or near-poor; nearly 13 percent goes to families principally supported by low-wage workers defined as earning wages at or below 117 percent…of the new 1996 minimum wage; and only about 14 percent goes to families with children on welfare.

Unlike most public income support programs, increased earnings from the minimum wage are taxable.  Over 25 percent of the increased earnings are collected back as income and payroll taxes…Even after taxes, 27.6 percent of increased earnings go to families in the top 40 percent of the income distribution.

File under “Scream it From the Rooftops!”  I do not see an ungated copy, but here is an earlier 2000 paper (pdf) by MaCurdy, with O’Brien-Strain, with broadly similar conclusions.

From that same JPE issue, cream skimming effects seem to be pretty small when it comes to school choice.

When it comes to taxes, elasticity pessimism has become way too popular these days.  Here are some results pushing back in the opposite direction:

This paper studies the effect of top tax rates on inventors’ mobility since 1977. We put special emphasis on “superstar” inventors, those with the most and most valuable patents. We use panel data on inventors from the United States and European Patent Offices to track inventors’ locations over time and combine it with international effective top tax rate data. We construct a detailed set of proxies for inventors’ counterfactual incomes in each possible destination country including, among others, measures of patent quality and technological fit with each potential destination. We find that superstar top 1% inventors are significantly affected by top tax rates when deciding where to locate. The elasticity of the number of domestic inventors to the net-of-tax rate is relatively small, between 0.04 and 0.06, while the elasticity of the number of foreign inventors is much larger, around 1.3. The elasticities to top net-of-tax rates decline as one moves down the quality distribution of inventors. Inventors who work in multinational companies are more likely to take advantage of tax differentials. On the other hand, if the company of an inventor has a higher share of its research activity in a given country, the inventor is less sensitive to the tax rate in that country.

That is from Akcigit, Stantcheva, and Baslandze, and the NBER link is here.  Inventors as a whole migrate at a rate of about eight percent.  By the way, you sometimes hear it argued that markets today are more “winner take all.”  From a national point of view, that actually could indicate in favor of lower rather than higher rates of taxation, given this inventor mobility effect.

The Return of Halfway Houses?

by on March 18, 2015 at 1:29 pm in Economics, Law | Permalink

Mark Kleiman, Angela Hawken and Ross Halperin argue for the return of a technological halfway house. The “house” would be any apartment but monitored:

For the transition from prison to life outside to be successful, it needs to be gradual. If someone needed to be locked up yesterday, he shouldn’t be completely at liberty today. And he shouldn’t be asked to go from utter dependency to total self-sufficiency in one flying leap. He needs both more control and more support. Neither alone is likely to do the job.

Of course, both control and support cost money. But so does prison. The trick is to start the re-entry process before what would otherwise have been the release date, so the money you spend in the community is balanced by the money you’re not spending on a cell.

…Start with housing. A substantial fraction of prison releasees go from a cellblock to living under a bridge: not a good way to start free life. Spend some of the money that would otherwise have financed a prison cell to rent a small, sparsely furnished efficiency apartment. In some ways, that apartment is still a cell and the offender still a prisoner. He can’t leave it or have visitors except as specifically permitted. The unit has cameras inside and is subject to search. But he doesn’t need guards, and doesn’t have to worry about prison gangs or inmate-on-inmate assault.

Drug testing and sanctions can avoid relapse to problem drug use; GPS monitoring can show where the re-entrant is all the time, which in turn makes it easy to know whether he’s at work when he’s supposed to be at work and at home when he’s supposed to be at home. This makes curfews enforceable and keeps him away from personal “no-go” zones (the street corner where he used to deal, the vicinity of his victim’s residence). GPS would also place him at the scene of any new crime he might commit, thus drastically reducing his chances of getting away with it and therefore his willingness to take the gamble.

The apartment functions as a prison without bars.

I appreciate the idea but worry about how many people will end up monitored and for how long. In one way, the problem today is too much monitoring. The easier access to online databases, for example, means that today an arrest record follows one for life. Ten percent of all non-incarcerated men have a felony conviction (even larger numbers have an arrest record). Among blacks, 25% of non-incarcerated men have a felony conviction. Most importantly, an arrest, let alone a felony conviction, makes it very difficult to get a job or in some cases even an apartment.

Ban the box laws, which restrict some kinds of background checks, may be useful. There is a kind of prisoner’s dilemma for background checks. It makes sense for every firm to do a background check (especially when they are so cheap) but when all firms do background checks former felons cannot reintegrate into society and crime ends up being higher than it would be if fewer firms did background checks.

NEW YORK — The world is building more cities, faster than ever before. China used more cement in the last three years than the United States used in the entire 20th century. By 2050, India will need new urban infrastructure to house an additional 404 million people — a task comparable to building every city in the United States in just 35 years. The global urban population is expected to rise to well over six billion by 2050 from 3.9 billion today.

The world needs more cities. The task, however, is not simply to build new cities but to design them for today, tomorrow and the next century.

Jane Jacobs taught us that a city is a complex dance of top-down and bottom-up planning. Too much of one or the other and a city fails to meet the needs of its residents.

As the world urbanizes, we need to experiment with new urban forms and new forms of urban planning, and privately designed and operated cities — proprietary cities — like Jamshedpur, India, or Reston, Va., may provide answers.

That is the opening to an op-ed in the New York Times written by me and Shruti Rajagopolan, do read the whole thing.

Addendum: The op-ed is a precis to our paper, Lessons from Gurgaon, India’s Private City in the book Cities and Private Planning. You can also listen to my EconTalk with Russ Roberts on these issues.

The Open Borders Manifesto

by on March 16, 2015 at 7:30 am in Economics, Education, Law | Permalink

In honor of March 16, Open Borders Day, here is the Open Borders Manifesto to which I am a signatory.

Freedom of movement is a basic liberty that governments should respect and protect unless justified by extenuating circumstances. This extends to movement across international boundaries.

International law and many domestic laws already recognise the right of any individual to leave his or her country. This right may only be circumscribed in extreme circumstances, where threats to public safety or order are imminent.

We believe international and domestic law should similarly extend such protections to individuals seeking to enter another country. Although there may be times when governments should treat foreign nationals differently from domestic citizens, freedom of movement and residence are fundamental rights that should only be circumscribed when the situation absolutely warrants.

The border enforcement status quo is both morally unconscionable and economically destructive. Border controls predominantly restrict the movement of people who bear no ill intentions. Most of the people legally-barred from moving across international borders today are fleeing persecution or poverty, desire a better job or home, or simply want to see the city lights.

The border status quo bars ordinary people from pursuing the life and opportunity they desire, not because they lack merit or because they pose a danger to others. Billions of people are legally barred from realising their full potential and ambitions purely on the basis of an accident of birth: where they were born. This is both a drain on the economic and innovative potential of human societies across the world, and indefensible in any order that recognises the moral worth and dignity of every human being.

We seek legal and policy reforms that will reduce and eventually remove these bars to movement for billions of ordinary people around the world. The economic toll of the modern restrictive border regime is vast, the human toll incalculable. To end this, we do not need a philosopher’s utopia or a world government. As citizens and human beings, we only demand accountability from our own governments for the senseless immigration laws that they enact in our name. Border controls should be minimised to only the extent required to protect public health and security. International borders should be open for all to cross, in both directions.

See here to join as a signatory.

Houston versus California

by on March 14, 2015 at 11:54 am in Data Source, Economics, Law | Permalink

In my Econ Talk with Russ Roberts on private cities I said this about Houston:

If we think about, what are the best cities in the United States, particularly for the poor, it’s places like Houston, which have no zoning and which have very easy regulatory systems in which you can build. You can get a permit to build within a matter of days, compared to New York where you’ve got to go through a dozen different permitting processes and you have to hire specialized people whose only job is really to stand in line to help you get through the process….So, people of modest means can still buy a house in Houston. And they can’t do that in many other places in the United States because of zoning and not-in-my-backyard rules, a kind of secession of the rich, not in terms of gated communities but in terms of adding on rules and restrictions on how large your lot has to be in order to build a house, how many people can live in the house etc. All of these things have made it extremely expensive to buy in any of these cities, which use more top down planning.

The Economist illustrates with a remarkable statistic comparing Houston with all of California:

Unlike most other big cities in America, Houston has no zoning code, so it is quick to respond to demand for housing and office space. Last year authorities in the Houston metropolitan area, with a population of 6.2m, issued permits to build 64,000 homes. The entire state of California, with a population of 39m, issued just 83,000.

Here is Ezra on TPP:

5. Here’s how the White House sees it: there will either be a trade deal with America at the core of it that forces countries like Vietnam and Malaysia to live up to labor and environmental standards the Obama administration finds acceptable, or there will be a trade deal with China at the core of it that forces countries like Vietnam and Malaysia to live up to labor and environmental standards China finds acceptable. Which would you prefer?

6. There’s also a bigger foreign policy objective here. TPP is central to the Obama administration’s long-heralded “pivot to Asia.”…

Do read the whole thing, to not pursue some version of TPP is basically to turn our backs on much of Asia.  Or think of TPP as an attempt to cartelize ASEAN nations and others in the region against Chinese one-by-one bilateral bargaining, most of all on geopolitical issues, not just labor and environmental standards.

Matt Yglesias comments, he says beware of economists (i.e., me) bearing foreign policy arguments.  And here are Autor, Dorn, and Hanson on TPP, as Dani Rodrik pointed on on Twitter they offer a relatively mercantilist argument in favor of the agreement.