Why Are the Prices So D*MN High?

Why have some prices increased since 1950 by a factor of four while other prices have decreased by a factor of four? Technology is making so many goods and services much cheaper than in the past–that seems to be the normal situation–so why do some industries seem not only to be not progressing but actually retrogessing? As Scott Alexander put it, why are some industries so weird?

Those are the questions that motivated my latest piece, a short book with Eric Helland just released by the Mercatus Center titled, Why are the Prices so D*mn High?

In approaching this question I had some ideas in mind. I assumed that regulation, bloat and bureaucracy, monopoly power and the Baumol effect would each explain some of what is going on. After looking at this in depth, however, my conclusion is that it’s almost all Baumol effect. That conclusion radically changes one’s evaluation of price increases and decreases over the long run and it changes what, if anything, one might try to do to address such price changes.

Next week I will examine some of the evidence that pushes me towards this verdict. I’ll also take a closer look at the Baumol effect, which is mistakenly called the cost disease.

Let’s note here, however, what we need to explain. For the most part, we don’t see quick, big changes in prices that then level off. That in itself is interesting since policy tends to be discontinuous. We might expect a big regulation, for example, to cause a big increase in prices as industries adjust but then growth should return to normal. Instead, what we see and need to explain is slow, steady rising relative prices that happens over decades. Indeed, in some cases, such as education, prices have been increasing faster than average for more than a century! Puzzle over that over the long weekend. More next week!

Maciej Cegłowski on gdpr

The plain language of the GDPR is so plainly at odds with the business model of surveillance advertising that contorting the real-time ad brokerages into something resembling compliance has required acrobatics that have left essentially everybody unhappy.

The leading ad networks in the European Union have chosen to respond to the GDPR by stitching together a sort of Frankenstein’s monster of consent,a mechanism whereby a user wishing to visit, say, a weather forecast page 4 is first prompted to agree to share data with a consortium of 119 entities, including the aptly named “A Million Ads”network. The user can scroll through this list of intermediaries one by one, or give or withhold consent en bloc, but either way she must wait a further two minutes for the consent collection process to terminate before she is allowed to find out whether or it is going to rain.

This majestically baroque consent mechanism also hinders Europeans from using the privacy preserving features built into their web browsers, or from turning off invasive tracking technologies like third-party cookies,since the mechanism depends on their being present.

For the average EU citizen,therefore, the immediate effect of the GDPR has been to add friction to their internet browsing experience along the lines of the infamous 2011 EU Privacy Directive (“EU cookie law”) that added consent dialogs to nearly every site on the internet.

The GDPR roll out has also demonstrated to what extent the European ad market depends on Google, who has assumed the role of de facto technical regulatory authority due to its overwhelming market share. Google waited until the night before the regulation went into effect to announce its intentions, leaving ad networks scrambling.

It is significant that Google and Facebook also took advantage of the US-EU privacy shield to move 1.5billion non-EU user records out of EU jurisdiction to servers in the United States. Overall, the GDPR has significantly strengthened Facebook and Google at the expense of smaller players in the surveillance economy.

The data protection provisions of the GDPR, particularly the right to erase, imposed significant compliance costs on internet companies. In some cases,these compliance costs just show the legislation working as intended. Companies who were not keeping adequate track of personal data were forced to retrofit costly controls, and that date is now safer for it.

But in other cases, companies with a strong commitment to privacy also found themselves expending significant resources on retooling. Personally identifying information has a way of seeping into odd corners of computer systems (for example, users will sometimes accidentally paste their password into a search box), and tracking down all of these special cases can be challenging in a complex system.The requirements around erasure, particularly as they interact with backups, also impose a special burden, as most computer systems are designed with a bias to never losing data,rather than making it easy to expunge.

Here is the full Senate testimony, there are many interesting points in the piece.  I thank an MR reader for the pointer.

Shipping the good economists out?

How many of you even get that reference these days?  Here is the latest from DOA, from Liz Crampton at Politico:

The Agriculture Department is moving nearly all its researchers into the economic effects of climate change, trade policy and food stamps – subjects of controversial Trump administration initiatives – outside of Washington, part of what employees claim is a political crackdown on economists whose assessments have raised questions about the president’s policies.

Since last year, employees in the department’s Economic Research Service have awaited news of which members of their agency would be forced to relocate, after Agriculture Secretary Sonny Perdue stunned them by declaring he was moving most of the agency to a location outside the capital. The announcement sparked claims that Perdue was trying to pressure economists into leaving the agency rather than move their families.

On March 5, the department began notifying people who were allowed to stay in Washington, but didn’t provide a comprehensive list, only telling employees in person if they made the cut.

But current and former employees compiled one anyway, covering all 279 people on staff, 76 of whom are being allowed to stay in Washington…

A USDA spokesman declined to directly address the employees’ allegation of political bias, but provided a written statement from Perdue saying that the moves were not prompted by the work being done by ERS.

In general I am reluctant to post this kind of report, because I find it difficult to know what is truly going on here, so do read this with an open mind.  Still, it seemed newsworthy.

I thank John Chamberlin for the pointer.

*Range: Why Generalists Triumph in a Specialized World*

That is the new book by David Epstein, the author of the excellent The Sports Gene.  I sometimes say that generalists are the most specialized people of them all, so specialized they can’t in fact do anything.  Except make observations of that nature.  Excerpt:

In an impressively insightful image, Tetlock described the very best forecasters as foxes with dragonfly eyes.  Dragonfly eyes are composed of tens of thousands of lenses, each with a different perspective, which are then synthesized in the dragonfly’s brain.

I am not sure Epstein figures out what a generalist really is (and how does a generalist differ from a polymath, by the way?), but this book is the best place to start for thinking about the relevant issues.

State and local policy is the real immigration policy

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

State and local governments are making immigration policy all the time, mostly for the worse, and often Democrats are more restrictionist than Republicans.

Obviously the law can deter potential illegal migrants from entering the U.S. But so can the high cost of living. Even though there are much higher wages in the U.S. than in its neighbors to the South, a lot of those higher wages are eaten up by much higher rents — especially if the immigrant moves to a major city, as is often the case. I once wrote a book based on fieldwork in rural Mexico, and I found that, for those who had migrated temporarily to the U.S., high rent was typically their biggest complaint. It therefore follows that policies which raise rents tend to discourage immigrants, particularly poorer immigrants.

And:

The minimum wage is another tool of anti-immigration policy, at least for less skilled immigrants. Say a city sets a minimum wage of $15 an hour. That means a potential migrant whose work is worth only $12 an hour won’t be able to get a legal job in that city. That will deter migration, both legal and illegal. Furthermore, a worker in, say, Honduras may not find it possible to improve his or her skills to be worth $15 an hour, at least not without arriving in the U.S.

Thursday assorted links

1. Negative emotional contagion in ravens.

2. “As it turns out, NBA players make only 40 percent of their shots between 8 and 9 feet from the rim, and that number drops to only 35 percent between 25 and 26 feet from the rim. When it comes to field-goal percentage on jump shots, the effect of shot distance is pretty minor.”  Link here.

3. Claims about Fortnite.

4. How making chocolate is like mixing cement (NYT).

5. Victor Shih’s public choice theory of Xi’s China.

6. “Goats are glamorous, and super popular on social media now…

America’s Cities Are Unlivable. Blame Wealthy Liberals

Farhad Manjoo writing in the New York Times brings the fire:

Then there is the refusal on the part of wealthy progressives to live by the values they profess to support at the national level. Creating dense, economically and socially diverse urban environments ought to be a paramount goal of progressivism. Cities are the standard geographical unit of the global economy. Dense urban areas are quite literally the “real America” — the cities are where two-thirds of Americans live, and they account for almost all national economic output. Urban areas are the most environmentally friendly way we know of housing lots of people. We can’t solve the climate crisis without vastly improving public transportation and increasing urban density. More than that, metropolises are good for the psyche and the soul; density fosters tolerance, diversity, creativity and progress.

Yet where progressives argue for openness and inclusion as a cudgel against President Trump, they abandon it on Nob Hill and in Beverly Hills. This explains the opposition to SB 50, which aimed to address the housing shortage in a very straightforward way: by building more housing. The bill would have erased single-family zoning in populous areas near transit locations. Areas zoned for homes housing a handful of people could have been redeveloped to include duplexes and apartment buildings that housed hundreds.

…Reading opposition to SB 50 and other efforts at increasing density, I’m struck by an unsettling thought: What Republicans want to do with I.C.E. and border walls, wealthy progressive Democrats are doing with zoning and Nimbyism. Preserving “local character,” maintaining “local control,” keeping housing scarce and inaccessible — the goals of both sides are really the same: to keep people out.

I applaud the fire, although it’s amusing to me that Manjoo treat this as big discovery (“I am struck by an unsettling thought.”). Look, this isn’t new! Progressives created zoning and other housing regulations to exclude people they didn’t like from “their” neighborhoods. Nor, by the way, is the desire to exclude limited to “wealthy” liberals (Manjoo surely knows this but is afraid of punching down). It’s also amusing that Steve Sailer has been making exactly the same point about hypocritical Malibu liberals for years, the only difference being that Manjoo wishes to shame liberals into giving up NIMBYism while Sailer wants to shame them into giving up national diversity. I call a pox on both their houses and support individual property rights at both the local and national levels.

Incentives matter, installment #1437

A US jury has found that a former Uber driver living in Virginia committed acts of torture during Somalia’s civil war in the late 1980s.

Somali citizen Farhan Tani Warfaa testified last week in the Washington DC suburbs that ex-Somali colonel Yusuf Abdi Ali shot and tortured him.

Ali was a commander in the national army and supporter of dictator Mohamed Siad Barre, say court documents.

Until this month, Ali drove for Uber, with a high 4.89 rating.

Here is the full story by Holly Honderich, via Ian Bremmer.

Raj Chetty’s empirical restructuring of Harvard’s undergraduate economics

Here is good coverage from Dylan Matthews, here is one excerpt:

[Chetty’s] Ec 1152 is an introduction to that kind of economics. There’s little discussion of supply and demand curves, of producer or consumer surplus, or other elementary concepts introduced in classes like Ec 10. There is no textbook, only a set of empirical papers. The material is relatively cutting-edge. Of the 12 papers students are required to read, 11 were released in 2010 or after. Half of the assigned papers were released in 2017 or 2018. Chetty co-authored a third of them.

Why not excerpt the cameo of me?:

…fellow traditionalist Tyler Cowen…told me he’s excited about the class. “I am for experimentation, and more of it in academia, and for that reason I approve,” he writes. “Of course it was not what I do, which is more traditional micro, more theory, less overlap with sociology. If the instructor is great, that is really what matters.”

There is much more at the link.  And here is Daniel Simonsen, Norwegian comic.

My Conversation with Ezekiel Emanuel

Very much a fun one, here is the audio and transcript, here is part of the opening summary:

Do we overrate the importance of doctors? What’s the importance of IQ versus EQ in the practice of medicine? What are the prospect for venture capital in biotech? How should medical training be changed? Why does he think the conventional wisdom about a problem tends to be wrong? Would immortality be boring? What would happen if we let parents genetically engineer their kids?

Tyler questions Emanuel on these topics and more, including the smartest thing his parents did while raising him, whether we have right to medical self-defense, healthcare in low- versus high-trust institutions, and much more.

Here is one excerpt:

COWEN: How can we improve medical education?

EMANUEL: Cut it down. Make it shorter.

COWEN: Cut it down? Why does that make it better? Or does it just make it cheaper?

EMANUEL: No, I think it will make it better. So, we have a lot of memorization, a lot of . . . So, let’s go back to the start. The four years of medical school: two years of preclinical in the classroom learning about biochemistry, genetics, anatomy, microbiology; and the two years of clinical time in the hospital, on the wards.

That dates from 1910. We haven’t really updated it much, except in this one way: we’ve cut down the preclinical time because — less of it — and it changes so fast, by the time you learn it in medical school, get out as a doctor, it’s out of date, A; and B, it’s more or less irrelevant to managing most patients…

And then, by the way, in med school, spending your time in a hospital is not the future. The future of American medicine is out of the hospital. So we need more rotations, more experiences for students out of the hospital.

No med school has made that big shift, and those are the shifts that are going to have to happen over the next 15 or so years.

And:

COWEN: Is there a right to medical self-defense that should override FDA bans on drugs and medical devices? I want to try something that’s not approved —

EMANUEL: No. I don’t like that.

COWEN: I’m saying it’s my body. But why don’t you like it?

EMANUEL: No, no, no, no, no, no, no, no, no, Tyler.

Finally:

COWEN: Now, you’ve written a much-misunderstood article about how hard you would try yourself to live past the age of 75. Would not the suspense of world and national history always keep you wanting a bit more extra time?

So, say I’m 75. I’ve decided I agree with you, but the NBA Finals aren’t over yet. I want to see game seven. I want the Mueller report to come out. Isn’t there always something?

And then, it’s kind of intransitivity of indifference. Every day there’s something, and you just keep on hanging on, even if one accepts your arguments in the abstract. Can you talk me out of that?

EMANUEL: No, no, Tyler, I think you’re exactly right. That’s why people do hang on. It’s because . . . you know, so I talked to my father, who — he says, “Zeke, you’re absolutely right. I’ve become slower, physically slower, mentally slower. My life” . . . what ends up happening is your life cones down, and you begin to overvalue certain small things. Like the NBA Finals. Like what’s in the Mueller report.

We all know, from any cosmic standpoint — even not a cosmic standpoint, just a 2,000-foot standpoint — most of those things are not irrelevant. It’s really cool to know.

You often ask — and this happens to me all the time. I teach undergraduates. Pretty smart undergraduates. Very smart undergraduates. MBA students, nurses, doctors, right? They have no understanding of history. So, whoever finishes in the NBA Finals, in five years, people have forgotten.

Recommended, interesting throughout.

One of the Greatest Environmental Crimes of the 20th Century

It was one of the fastest decimations of an animal population in world history—and it had happened almost entirely in secret. The Soviet Union was a party to the International Convention for the Regulation of Whaling, a 1946 treaty that limited countries to a set quota of whales each year. By the time a ban on commercial whaling went into effect, in 1986, the Soviets had reported killing a total of 2,710 humpback whales in the Southern Hemisphere. In fact, the country’s fleets had killed nearly 18 times that many, along with thousands of unreported whales of other species. It had been an elaborate and audacious deception: Soviet captains had disguised ships, tampered with scientific data, and misled international authorities for decades. In the estimation of the marine biologists Yulia Ivashchenko, Phillip Clapham, and Robert Brownell, it was “arguably one of the greatest environmental crimes of the 20th century.”

That’s from an excellent piece by Charles Homans in the Pacific Standard. The Soviets killed some 180,000 whales illegally, driving several species to the brink of extinction. But why? The obvious answer Is wrong:

…the Soviet Union had little real demand for whale products. Once the blubber was cut away for conversion into oil, the rest of the animal, as often as not, was left in the sea to rot or was thrown into a furnace and reduced to bone meal—a low-value material used for agricultural fertilizer, made from the few animal byproducts that slaughterhouses and fish canneries can’t put to more profitable use….Why did a country with so little use for whales kill so many of them?

The actual answer has a lot to say about the impossibility of rational economic calculation under socialism (and also the lesser but still important problem under capitalism of mispricing in the presence of externalities and the difficulty of aligning private and social incentives.) The answer did not appear until 2008 when, long after his death, the memoir of Alfred Berzin, a Soviet-era fisheries scientist, was translated and published. Homans summarizes:

The Soviet whalers, Berzin wrote, had been sent forth to kill whales for little reason other than to say they had killed them. They were motivated by an obligation to satisfy obscure line items in the five-year plans that drove the Soviet economy, which had been set with little regard for the Soviet Union’s actual demand for whale products. “Whalers knew that no matter what, the plan must be met!” Berzin wrote. The Sovetskaya Rossiya seemed to contain in microcosm everything Berzin believed to be wrong about the Soviet system: its irrationality, its brutality, its inclination toward crime.

You can find Bezin’s memoir here. It’s bitter, sardonic, sad and funny.

Whalers knew that no matter what, the plan must be met! Looking for whales they would go farther and farther from the islands and bring rotten baleen whales to the stations, those which could not be used for food. This was not regarded as a problem by anybody. The plan—at any price! And whalers were killing everything.

Why bring in rotten whales? Without prices the Soviets had to calculate in very crude terms, most notably gross output. In the famous cartoon, the nail factory is supposed to produce X tons of nails and finds the easiest way to do this is to produce a single large nail. The cartoon illustrated a real problem in the Soviet economy which many have documented including Bezin.

Another concept—no less frightening, ugly, and absurd—was that of “gross output.” This was a typical creation of socialism and would be impossible in any other system. Gross output: this is when nobody is interested in a living object itself, and the only thing they care about is the size of the catch. It is reports giving figures in tsentner [100 kilos, AT] and metric tons, even if it is fish that were thrown out, or rotten whales.

The whalers were paid well but it wasn’t just positive incentives. The history of the industry was never far from mind. Quoting Homans again:

Whaling fleets that met or exceeded targets were rewarded handsomely, their triumphs celebrated in the Soviet press and the crews given large bonuses. But failure to meet targets came with harsh consequences. Captains would be demoted and crew members fired; reports to the fisheries ministry would sometimes identify responsible parties by name.

Soviet ships’ officers would have been familiar with the story of Aleksandr Dudnik, the captain of the Aleut, the only factory ship the Soviets owned before World War II. Dudnik was a celebrated pioneer in the Soviet whaling industry, and had received the Order of Lenin—the Communist Party’s highest honor—in 1936. The following year, however, his fleet failed to meet its production targets. When the Aleut fleet docked in Vladivostok in 1938, Dudnik was arrested by the secret police and thrown in jail, where he was interrogated on charges of being a Japanese agent. If his downfall was of a piece with the unique paranoia of the Stalin years, it was also an indelible reminder to captains in the decades that followed.

Bezin, a scientist, writes about who got to the top in the Soviet system:

..As a rule, the people who became commissars were the ones who couldn’t find another job. They were not very smart but were very conceited, self important individuals, especially after they had been given a taste of power, and especially over other people. Those who were thinking about a career in the party system, who could speak loudly and authoritatively from a podium, and who curried favor with the boss, these people could climb the party ladder quickly, and high up.

…Russian people have a good sense of humor, and even when they should be crying they laugh…Here is [a Russian joke]: On the counter of a store there are different types of brains. Among them are commissar brains, which are being sold for a price many times higher than those of farm animals. “Why are the commissar brains so expensive?” asks a customer. The assistant replies, “Do you know how many commissars we have to slaughter to get one kilo of brains?”

The whole system was built on lies and had to be built on lies:

For seventy Soviet years the industry of lies was created, shaped, and perfected in the country. Lies were encouraged and cultivated, and people were forced to lie. Lies in art, lies in movies, on TV, on the radio, and in newspapers. One of my colleagues was saying: “Why do I need Crocodile? When I go to work I buy the newspaper Pravda and all the way to the institute I am dying from laughter.” Lies in the numbers of the Central Statistics Department. And facts about Chernobyl were lies, dreadful and inhumane, deserving of damnation. Lies about the history of our country, which the leaders of the country changed to suit their needs. To the latter, people reacted with a wicked grin: “An institute of experimental history has been created!”

…People were lying whether they needed to or not, and I would say that the lying was pathological and at all levels. From the most blatant lie at the international level…to naïve but proud lies like: “Soviet means the best.” Sometimes they were self-assured but silly, as for example in this poetic sentence: “As it’s known, the earth begins with the Kremlin”; or they were absolutely idiotic: “The whole Soviet country is song and dance all day long.” Just think of the meaning of these words! You could hear on radio and at concerts singing like: “Like an owner, a person walks through the boundless native land,” or “How wonderful it is to live in the Soviet country. . .” And all of these were promulgated in the 1930’s when the country was surrounded by the barbed wire of fearful GULAG’s . . .

Hat tip: The Browser.

Addendum: See the HBO series Chernobyl, brilliant cinematography and compelling storytelling, for a closely related story.