Month: February 2015
Greg Mankiw writes:
The Economic Report of the President was released today. A friend draws my attention to Table 1-3 on page 34, which presents several historical counterfactuals. It finds:
1. If productivity growth had not slowed after 1973, the median household would have $30,000 of additional income today.
2. If income inequality had not increased after 1973, the median household would have $9,000 of additional income today.
So, which is the bigger problem?
The Department of Economics at the University of Chicago announces the first annual Summer Institute on Field Experiments for scholars, to be held the summer of 2015 at the Saieh Hall for Economics. The Summer Institute will train the brightest young researchers to partner with key stakeholders in government, industry, and the not-for-profit sector to solve the unique problems faced in society through applying economic theory and rigorous field experiment methods.
The German army has faced a shortage of equipment for years, but the situation has recently become so precarious that some soldiers took matters into their own hands.
On Tuesday, German broadcaster ARD revealed that German soldiers tried to hide the lack of arms by replacing heavy machine guns with broomsticks during a NATO exercise last year. After painting the wooden sticks black, the German soldiers swiftly attached them to the top of armored vehicles, according to a confidential army report which was leaked to ARD.
…To make matters worse, the broom-equipped German soldiers belong to a crucial, joint NATO task force and would be the first to be deployed in case of an attack.
There is more here.
How quickly are negative nominal interest rates self-correcting? Izabella Kaminska at the FT serves up part of an answer here:
Yet, in a globalised FX market, it’s arguably not until all carry is exhausted that excess funds can lead to a commodity-style liquidation effect that corrects the price of money against a basket of goods and services, by means of actual consumption.
Quick: true, false, or uncertain? Show your work. The rest of the post will make your head hurt, in the best sense of course.
Via Craig Richardson, here is a story about a parmesan cheese bank.
That is the topic of my new column for The Upshot. Here is one excerpt:
Higher prices also skew the customer mix toward wealthier and thus older people, who exert less influence over the purchasing decisions of their peers. They are less likely to text about a concert, put it on their Facebook pages or talk up its reputation to dozens of friends at parties. The younger buyers are usually the ones who make places trendy, thus many sellers use lower prices, with lines if need be, to lure in those individuals and cultivate their loyalties.
The next time you are waiting in line, take consolation in the fact that otherwise you might not have heard of the opportunity in the first place. If we see a line at a club, restaurant or movie, we figure something interesting is going on there, and so lines have become a driver of publicity.
Income inequality also may be encouraging sellers to use lines to better segment the market. The rich line-jump by buying Museum of Modern Art memberships, to see special exhibits before they open, while others line up. Restaurateurs give regular customers prime tables, especially if they are good tippers and order expensive wines, while others can’t get a reservation after 5:30 or before 11 p.m. This may seem unfair, but it extracts higher prices from those able to pay the most for New York’s cultural institutions and restaurants. In fact, the inconvenience of the line helps sell the more expensive line-jumping package to those who don’t have the time or the patience to wait.
Do read the whole thing. There is also this part:
Waiting a bit can also make people more patient, by removing their attention from the immediate here and now and stretching out their time horizons. Some of these positive effects of waiting have been studied by Professors Xianchi Dai of the Chinese University of Hong Kong and Ayelet Fishbach of the University of Chicago in their paper “When Waiting to Choose Increases Patience.”
There’s also evidence that people value some things more if they have to wait for them. Provided it does not dominate your daily life, a bit of waiting can help create a special experience or memory. The people who wait in line for new iPhones rarely need the product immediately. Waiting in line binds them to a community and demonstrates their commitment.
The waiting also heightens the value of anticipation and makes the product seem more exciting. A world where there is nothing to wait in line for is arguably a less interesting place.
That is a new and provocative paper by James Edward Mahon Jr. of Williams College, the abstract is here:
This paper explores the relationship between government size and economic freedom, relating these patterns to theories of fiscal politics. In order to address current political controversies, it uses data on pre-1990 OECD members (minus Norway) for central government tax revenues and spending, as well as indicators of economic freedom derived from the Fraser Institute, ICRG, Heritage Foundation, and the World Bank. It finds that it matters a great deal whether we define size as expenditures or taxation. Spending has no relationship with freedom, or a negative one, across this data set. Initial tax revenue levels, however, positively predict subsequent changes in economic freedom. We find similar patterns using different measures of economic freedom and whether we use annual data (1995-2010) or overlapping six-year averages going back to 1970-75. These results challenge the common preconception that taxes and economic freedom are negatively related. In addition, the divergence between tax revenue and spending in this regard is more consistent with a “fiscal contract” model of the state, in which taxation and economic freedom go together, as governments attend to their legitimacy and the health of the private sector in order to increase revenue, but flag in these efforts when they enjoy sources of income other than taxes.
For the pointer I thank the excellent Kevin Lewis.
3. Shipping the good lobster out? (China fact of the day) — “Chinese New Year is on the verge of becoming Maine’s second-biggest lobster shipping week of the year, behind Christmas week, according to industry officials.”
Here is a piece by Tomala, Jia, and Norton:
When people seek to impress others, they often do so by highlighting individual achievements. Despite the intuitive appeal of this strategy, we demonstrate that people often prefer potential rather than achievement when evaluating others. Indeed, compared with references to achievement (e.g., “this person has won an award for his work”), references to potential (e.g., “this person could win an award for his work”) appear to stimulate greater interest and processing, which can translate into more favorable reactions. This tendency creates a phenomenon whereby the potential to be good at something can be preferred over actually being good at that very same thing. We document this preference for potential in laboratory and field experiments, using targets ranging from athletes to comedians to graduate school applicants and measures ranging from salary allocations to online ad clicks to admission decisions.
In 1971 — when the North Sea oil was just beginning to flow — the average Norwegian was about as poor as the average Greek…
Addendum: See the comments, it is not obvious this is true, I will look into the matter (but must teach shortly). You can see in this OECD data source that, in 1971, Finland is only barely richer than Greece per capita, ppp-adjusted. Via Klein on Twitter, here is the original source, from Norges Bank through BIS, but it seems to run counter to the other numbers. Matt has some follow-up tweets here.
The US economy has been one of the most dynamic economies in the world but recent research suggests that US dynamism is in decline. The startup, job creation, and job destruction rates have all declined over the past three decades with a possible increase in the rate of decline in the past decade. The dynamism decline is robust, appearing in a variety of data. Moreover because startups and the movement of resources from low to high productivity firms are closely associated with improvements in productivity, the decline of dynamism may reduce real wages and the standard of living.
Could regulation be increasing barriers to entry, raising the costs of reallocation, and slowing the diffusion of productivity innovations? To test the hypothesis that regulation is reducing dynamism Nathan Goldschlag and I combined data on dynamism with an industry level measure of regulation. Our measure of regulation is produced by an innovative technique that combs the Code of Federal Regulations (CFR) for restrictive terms or phrases such as “shall,” “must,” “may not,” “prohibited,” and “required”. The count of restrictive words in each section is then associated to industries via a machine learning algorithm that recognizes similarities between the language in that CFR section and industry language (e.g. a section of the text with words such as “pipeline” would be associated with the oil and gas industry). In this way, we can associate each industry with an index of regulation derived from the entire CFR.
The following figure shows the startup rate against the regulatory stringency index (both averaged by industry over the period 1999-2011). Contrary to expectation, there is a slight positive relationship; industries with greater regulatory stringency have higher startup rates. We find a similar relationship with job creation rates.
Of course, it could be the case that more dynamic industries attract greater regulation so the apparent positive relationship in our graph would not reflect a causal connection and could even be masking a negative causal connection. Thus, to further test the relationship, we statistically test whether increased regulatory stringency is associated with reduced dynamism within an industry over time (we give each industry a “fixed effect”). After subjecting the data to a number of different tests we find no statistically significant relationships between dynamism and regulatory stringency (see the paper for details).
One simple test divides manufacturing industries into those that experienced a large increase in regulation (+50% or more) during our time period and those where regulation hardly changed at all (+10%-to -10%). If regulation were the cause of changes in dynamism we would expect to see big differences between these groups. The figure below, however, shows that startup rates, for example, track similarly across the two types of groups suggesting that regulation is not a primary cause of declining startup rates (the same is true for job creation and destruction rates).
It’s important to note that regulation could have large negative (or positive) effects without having a big effect on dynamism. A tax, for example, could reduce the size of the industry without have a big effect on the startup rate or how well the industry responds to shocks by reallocating labor from low to high productivity firms. In short, regulation can have significant effects on levels without necessarily having large effects on growth rates.
If regulation is not responsible for the decline in dynamism then what is? We offer some suggestive hypotheses in another paper. First, it could be the case that we are mis-measuring entrepreneurship. If entrepreneurship is measured as new firm creation, for example, we miss the entrepreneurship inherent in rebuilding and revitalizing larger and older firms. Since most workers work for larger and older firms, revitalizing these firms may be a more important use of entrepreneurship than starting new firms. In an increasingly global economy we may also miss some of the outsourcing of dynamism that has occurred in recent decades. Apple, for example, is measured in US data as a relatively stable firm but the Apple ecosystem from which Apple sources its product is a maelstrom of entry and exit as Apple hires and fires new firms with each new iteration of the iPhone.
Even if dynamism has declined is this necessarily a bad thing? We should not let word associations influence our evaluations of underlying realities. Dynamism as measured by, for example, job reallocation rates might equally well be called churn. Declining churn doesn’t sound as bad as declining dynamism. Moreover, combining the last two points, perhaps the reason for some of the declining dynamism as measured in the US statistics is that we have outsourced some of our churn. A very different way of describing the same data.
More generally, information technology may allow us to reduce churn while still allowing adaption and innovation. Creative destruction is necessary for a growing economy but if we can boost the ratio of creation to destruction that counts as an improvement in welfare.
Reallocation of labor and capital is an important force driving the American economy forward. We don’t fully understand, however, what the causes of declining dynamism are or exactly how our measures of dynamism relate to entrepreneurship, growth and improvements in the standard of living.
Syriza will deal. As with the “troika,” there’ll be a change in vocabulary so they can minimize loss of face, but they’ll deal. They simply don’t have a choice if they plan to remain in power very long.
Not only do most Greeks oppose Grexit, but the sympathies of far too much of the Greek army and law enforcement agencies are, frankly, not with Syriza. Nobody knows if they’ll acquiesce to being paid in drachmae and not deutschmarks by the grandsons of “anarcho-communists.”
Neither, incidentally, do the rest of the EU gain anything from another failed state and/or Russian client in the Balkans.
By now, they’ll have told Varoufakis, in some form, formally (during discussions) and informally (during networking breaks):
“Yanis. We get it. You’ve made your point. Greece is a miserable place right now. There’s a lot of it going around. Listen to us. Please. We secretly care about Greece enough not to want another 1967 or Balkan war. You don’t have to believe that, but it’s true.
“We may have overdone it. Fine. We’re flexible. But seriously—if you walk away we’re looking at another 1967 when you run out of cash. Greece will become an even more miserable place real fast. Do you want our help or not?”
That is from Richard Besserer.
Michael T. Heaney and Fabio Rojas, Party in the Street: The Antiwar Movement and the Democratic Party after 9/11.
Gernot Wagner and Martin L. Weitzman, Climate Shock: The Economic Consequences of a Hotter Planet.
3. I say it is cruel to kick your robotic dog. (Please note that the associated video is disturbing, though safe for work.)
5. Is it hard to reform disability insurance? I say wanting to do so is step one.
6. Via Greg Mankiw, a Kuznets heir is selling his Nobel Prize.
7. Six Straussian readings of Fifty Shades of Grey: “Grace’s name is clearly a nod to Alec Trevelyan, James Bond’s antagonist in GoldenEye and the defining cultural representation of post-Cold War Russian treachery in the Anglo-American mind.”
The 1943 Bengal famine has been cited by Amartya Sen and others as a classic example of market failure. But in his new (and excellent) book Eating Dead People is Wrong, and Other Essays on Famine, Its Past, and Its Future, Cormac Ó Gráda devotes an entire chapter to that episode and comes away with a different impression. Here is a summary sentence:
The 1943-44 famine has become paradigmatic as an “entitlements famine,” whereby speculation born of greed and panic produced an “artificial” shortage of rice, the staple food. Here I have argued that the lack of political will to divert foodstuffs from the war effort rather than speculation in the sense outlined was mainly responsible for the famine.
I will add to that price controls were imposed once the famine was underway, and campaigns were conducted against hoarders.
In the book I also very much enjoyed the discussion of the 1946-47 famine in Moldova, which apparently involved a good deal of cannibalism.