Month: October 2017

My dialogue with Matt Levine on the future of finance

Here is the back and forth, it is more Matt than I, but plenty of both of us.  Here is one excerpt:

Matt: …I think the possible surprise here lies in the connection between finance and identity. People are sort of inchoately aware of it now; we use the term “identity theft” to mean “someone using your name and Social Security number to get a credit card.” But most people don’t really think of their credit report as being central to their identity. Really ambitious proponents of blockchain technology, though, envision a world in which a lot of identity information — your citizenship and marital status and college degrees and employment and certifications and whatnot, maybe your fingerprints and retinas and DNA, as well as of course your credit information — are encoded on a blockchain and used in every aspect of your life. (India has a governmental system a little bit like this, and China is building one, though the blockchain vision usually involves decentralized non-governmental systems.)

I think that the idea that financial intermediaries should be the keepers of identity is pretty uncomfortable, but then, the idea that Facebook would be the keeper of identity seems like it would be uncomfortable, and in fact Facebook has quickly taken over a lot of the work of verifying identity, at least online. One thing that we might see in the next 20 years is a fight between financial institutions and social networks and decentralized blockchain builders over who gets to be the keeper and verifier of everyone’s identity.


Prostitution Reduces Rape

A new paper in the American Economic Journal: Economic Policy by Bisschop, Kastoryano, and van der Klaauw looks at the opening and closing of prostitution zones (tippelzones) in 25 Dutch cities.

Our empirical results show that opening a tippelzone reduces sexual abuse and
rape. These results are mainly driven by a 30–40 percent reduction in the first two
years after opening the tippelzone.
For tippelzones with a licensing system, we
additionally find long-term decreases in sexual assaults and a 25 percent decrease
in drug-related crime, which persists in the medium to long run.

Cunningham and Shah studied decriminalization of indoor prostitution in Rhode Island and found very similar results.

We exploit the fact that a Rhode Island District Court
judge unexpectedly decriminalized indoor prostitution in 2003 to provide the first causal estimates
of the impact of decriminalization on the composition of the sex market, rape offenses, and sexually
transmitted infection outcomes. Not surprisingly, we find that decriminalization increased the size
of the indoor market. However, we also find that decriminalization caused both forcible rape offenses
and gonorrhea incidence to decline for the overall population. Our synthetic control model finds 824
fewer reported rape offenses (31 percent decrease) and 1,035 fewer cases of female gonorrhea (39
percent decrease) from 2004 to 2009.

In addition a working paper by Riccardo Ciacci and María Micaela Sviatschi studies prostitution in New York and also finds that prostitution significantly reduces sex crimes such as rape:

We use a unique data set to study the effect of indoor prostitution establishments on sex
crimes. We built a daily panel from January 1, 2004 to June 30, 2012 with the exact location of
police stops for sex crimes and the day of opening and location of indoor prostitution establishments.
We find that indoor prostitution decreases sex crime with no effect on other types
of crime. We argue that the reduction is mostly driven by potential sex offenders that become
customers of indoor prostitution establishments. We also rule out other mechanisms such as
an increase in the number of police officers and a reduction of potential victims in areas where
these businesses opened. In addition, results are robust to different data sources and measures
of sex crimes apart from police stops.

It’s become common to think that rape is about power and not about sex. No doubt. But some of it is about sex. Quoting Ciacci and Sviatschi again:

We find evidence consistent with the fact that potential perpetrators substitute
towards indoor prostitution establishments instead of engaging in sex crimes….This mechanism is in line with a survey of men who had purchased sex from women in London.
About 54% of these men stated that if prostitution did not exist then they would be more
likely to rape women who were not prostitutes. This belief was clearly held by one man who even
stated: “Sometimes you might rape someone: you can go to a prostitute instead” (Farley et al.,

In short, a wide variety of evidence from different authors, times and places, and experiments shows clearly and credibly that prostitution reduces rape. This finding is of great importance in considering how prostitution should be rationally regulated.

There is no great startup stagnation crow average is over

The winners of the Dutch Accenture Innovation Awards, the Crowbar (Crowded Cities) startup offers a smart machine that trains crows to pick up cigarette butts from the street, The Next Web reports.

The incentives work like this:

The machine is designed to autonomously train crows to pick up change and bring it back in exchange for peanuts.

The first step presents the crow with food and a butt on a tray in the machine. The food is always there, next to the butt, so the crow learns to come back for more.

The second step takes away the food, and only drops it just after the crow arrives. “So the crow gets used to the machine doing things,” Bob says.

“The third step is crucial,” the authors say. In this step, the food is completely removed, leaving only the butt on the tray. The crow, used to getting food only for being there, will start to nose around, eventually knocking the butt off the tray into the butt receptacle. The food drops when that happens.

Here is the full story, via the excellent Mark Thorson.

Montesquieu’s *Persian Letters*

There is a new edition out, edited and translated by Stuart Warner and Stéphane Douard.  This eighteenth century bestseller could hardly be more relevant today.  Is it possible to lead a philosophic life?  How do political leadership and wisdom intersect?  How do Christianity and Islam differ politically?  How does politics reflect gender relations in a society?  Is there a case for optimism in modernity?  I still am not sure we have improved on Montesquieu’s investigations, although I cannot claim he gives us final answers.  This is a volume of polyphony, with travel as a source of learning and liberation as a major theme throughout.

Harems play a role too, here are the final paragraphs from Roxane to her sultan master Usbek:

You were astonished not to find in me the ecstasies of love.  If you had known me well, you would have found in me all the violence of hatred.

But you have had for a long time the advantage of believing that a heart such as mine was submissive to you.  We were both happy you believed me deceived, and I was deceiving you.

This language, without doubt, appears new to you.  Could it be possible that after having overwhelmed you with grief, I could still force you to admire my courage?  But it is done: poison consumes me; my strength abandons me; the pen falls from my hand; I feel even my hatred weaken; I am dying.

The introduction and notes are outstanding, and also of interest for those of you who are piqued by Straussianism.  You will note that the book was first published anonymously.

“Jokes in a serious work are acceptable on the condition that they hide a profound sense beneath a trivial form. It is in this way that Montesquieu, in his novel, Persian Letters, has written one of the most philosophical books of the eighteenth century.” – Alexis de Tocqueville [link]

I am pleased, by the way, to have once had the chance to spend two days with co-editor Stuart Warner discussing Persian Letters and nothing but (thank you again Liberty Fund!).  I cannot think of any person more qualified to have undertaken this endeavor.

You can order the volume here.

Monday assorted links

1. Virginia gets serious about congestion pricing on Rt.66, some tolls $30 or maybe higher?

2. Union Square chess hustling, circa 2017.  Those old service sector jobs, but updated.

3. China Titanic markets in everything: “For a premium price of 200,000 yuan ($30,000), a guest can play the role of Rose, one of the movie’s star-crossed protagonists.”

4. Profile of Rod Dreher.

5. “…☺ does not necessarily look smiling to everyone.”

6. Claims about Industrial Revolution wages.

7. Some written-out summary points from my podcast with David Perell.

Fed and Circuses

That is my latest Bloomberg column, here is one paragraph:

Enter Trump, master impresario and provocateur. By thinking out loud about the post and the candidates so much, polling both a group of assembled senators and TV anchor Lou Dobbs, and by teasing the audience with the final pick, Trump is removing that elevated air from the Fed. I am reminded not only of today’s reality TV, but also the older show “The Dating Game” and the 1987 Arnold Schwarzenegger movie “The Running Man.” Whether we are consciously aware of the shift in our perspective or not, we are likely to think of the future Fed with less of that mysterious aura surrounding it. It will instead seem like the result of an undignified competition for victory and status.

…he’ll let social media and the public debate do his dirty work of politicization for him, with perhaps a jab of his own thrown in from Twitter. Because the Fed will no longer be above the fray.

Do read the whole thing, and by the way here is Arnie’s 1973 appearance on The Dating Game.

The Great Moderation and Leverage

In response to my earlier post, The Great Moderation Never Ended,  the perceptive Kevin Drum noted that the moderation seems to have been asymmetric–the booms have moderated more than the busts. That’s correct but it’s more than lower economic growth–expansions also last longer. It’s as if the booms have been smoothed over a longer period of time but not the busts.

Søren Hove Ravn points me to a paper of his with co-authors, Leverage and Deepening: Business Cycle Skewness that documents this fact and also proposes a theory.

The authors argue that financial innovation made credit more easily accessible and easier credit led to more leverage. Leverage, however, has an asymmetric feature. When asset prices are up everything is golden, wealth is high and credit is easy because lenders are happy to lend to the rich. When asset prices decline, however, the economy takes a double hit, wealth is low and credit is tight. The net result is that booms are smoothed but busts become, if anything, even more violent.

The theory is promising because it explains both the negative skewness and the great moderation. It’s also important because higher leverage, longer expansions and greater negative skew are new features of business cycles that appear across many developed economies as shown by Jorda, Schularick and Taylor in Macrofinancial History and the New Business Cycle Facts. In this paper Jorda et al. create new data series using over 150 years of data from 17 economies and conclude:

…leverage is associated with dampened business cycle volatility, but more spectacular crashes.

and more generally:

We find that rates of growth, volatility, skewness, and
tail events all seem to depend on the ratio of private credit to income. Moreover, key
correlations and international cross-correlations appear to also depend quite importantly
on this leverage measure. Business cycle properties have changed with the financialization
of economies, especially in the postwar upswing of the financial hockey stick. The manner
in which macroeconomic aggregates correlate with each other has evolved as leverage
has risen. Credit plays a critical role in understanding aggregate economic dynamics.

That was then, this is now, Soviet-Russian media subsidies edition

This is the week of hearings on Facebook ads, as well as Twitter and Google promotion of pro-Putin or sometimes pro-Trump or disruptive ideas.  So far we know that Russia-linked ads on Facebook cost about $100,000, a laughably low number.  Maybe there is much more hidden, but so far I don’t see it.

$100,000 is exactly the amount the Comintern gave in the 1920s to organize a campaign against John L. Lewis leading the mine union.  No, I am not adjusting for inflation, so in real terms the sum in the 20s was much higher.  The Comintern also gave at least $35,000 to start the Daily Worker, again that is a nominal figure from the 1920s.  The American Communist Party received subsidies too.  Many other communist subsidies, media and otherwise, remain hidden or at least uncertain.

Furthermore, those earlier expenditures helped convert a large number of Americans and American intellectuals to actual belief in communism, or at least fellow traveler sympathies.  And consider this (NYT):

The C.P.U.S.A.’s vulnerability had a great deal to do with its dependence on Moscow. For much of its existence, the party could not have functioned without Moscow gold. One of its first leaders, the journalist John Reed, was given more than a million rubles’ worth of czarist jewels and diamonds to smuggle into America to support the fledgling American movement. In the 1920s, Armand Hammer, the future head of Occidental Petroleum, used money derived from Soviet concessions to underwrite The Daily Worker and fund communist operations in Europe. Without Soviet money, the C.P.U.S.A. would not have been able to hire the hundreds of full-time organizers and support an array of front groups and publications that enabled it to outspend and out-organize its left-wing rivals.

So I’m just not that “impressed” by the Facebook revelations to date.  If you want to worry about Facebook, the much bigger problems are abroad (NYT).

Rereading *The Moon is a Harsh Mistress*

Yes, by Robert A. Heinlein.  I wasn’t expecting too much from this one, which I last read at age 13.  Published in 1966, it nonetheless holds up very well and in fact has aged gracefully.  It is surprisingly feminist, not at all dewey-eyed about actual rebellion, does not sound antiquated in its tech issues (e.g., malicious AI), has China as central to geopolitics and circa 2076 Greater China controls most of southeast Asia, and the book is full of economics and public choice.  TANSTAAFL is coined, but when understood as a section heading it is actually a Burkean slogan, not a libertarian or Friedmanite idea.  The lunar rebellion does not achieve independence easily or by keeping its previous friendly nature, nor does Earth receive those “grain shipments” gratis, so to speak.  Burke is the Straussian upshot of the whole book — beware societies based on new principles!  This is also perhaps the best novel for understanding the logic of a future conflict with North Korea, furthermore Catalonians should read it too.  Most of all, I recall upon my reread that this book was my very first exposure to game-theoretic reasoning.

NB: The “character” of Adam Selene is poking fun at H.G. Wells’s lunar Selenites, from The First Man in the Moon, arguably suggesting they descended from earlier human settlers.

Lights On, Lights Off

You can learn a lot from satellite pictures of the earth at night; the famous picture of North and South Korea, which Tyler and I feature in Modern Principles, is just one such example.

ESRI has an interesting picture-story illustrating the lights that have turned on and those that have turned off between 2012 and 2016. It’s remarkable how much North India literally turns on in this short space of time. Lights have also turned off around the globe. Not only in places like Syria but also in much of the United States and Northern Europe. In the latter two cases, as the surprising result of more efficient lighting and campaigns to reduce light pollution. Check it out.

More John Cochrane on the corporate tax burden

Here is a long and very interesting post with many distinct points.  Here is one of them:

So the entire corporate tax is pre-paid, or borne, by the stockholders who are unfortunate enough to be around when the corporate tax is announced.  Anyone who buys shares after the corporate tax is imposed gets the shares at a lower price, so his or her return is entirely unaffected by the corporate tax.

People who buy shares after the corporate tax is imposed bear no burden of the tax. The corporate tax does not affect the rate of return received by current owners at all, because they got to buy at low prices.

So much for corporate taxes soaking the rich. This is an important fact, missing in all the distributional analysis I have seen.

Here is another:

Pietro Peretto reminds me there is an active literature on optimal taxation in endogenous-growth economies, including his Corporate taxes, growth and welfare in a Schumpeterian economy , Schumpeterian Growth with Productive Public Spending and Distortionary TaxationThe Growth and Welfare Effects of Deficit-Financed Dividend Tax Cuts and Implications of Tax Policy for Innovation and Aggregate Productivity Growth.  Nir Javinovich and Sergio Rebelo have a nice recent “Nonlinear effects of taxation on growth,” in the JPE, Nancy Stokey and Sergio have “Growth effects of flat-rate taxes” also in the JPE, and I have inside information that Chad Jones is working on it too. So, there is no lack of academic literature on the question just which kinds of taxes reduce growth, which of course leads to huge distortions.

Worth a full read.