Month: November 2017
The show so far, a continuing series
1. The situation with North Korea has moved to one of open confrontation. That said, there are stronger commercial sanctions on North Korea than before, and the attitude of the Chinese does seem to have shifted toward recognizing North Korea as a problem needing to be solved. For the time being, both the missile tests and the jawboning have stopped, for unknown reasons. Note that the South Korean and Japanese markets remain high, of course the U.S. market is strong too.
2. Trump has spent a great deal of time with Prime Minister Abe, the real “pivot toward Asia.” Abe is being treated like the most important leader of the free world — is that crazy? Merkel is now teetering.
3. The Trump administration has recognized and encouraged a much more explicit semi-military alliance between America and India, also part of the pivot. China-India relations could be the world’s number one issue moving forward.
4. The apparent “green light” from the Trump administration probably raised the likelihood and extremity of the Saudi purge/coup. I give this a 20% chance of working out well, though with a big upside if it does. Whether you like it or not, so far it appears to me this is Trump’s most important initiative.
Just to interject, much of your assessment of the Trump administration should depend on #1-4, and I am worried that is hardly ever the case for those I see around me. While I do not view the current administration as “good executors” on foreign policy, the remaining variance on #1-4 is still very high and it is not all on the down side.
5. The Trump administration seems to think that keeping production clusters within this nation’s borders is of higher value than shaping the next generation of the world’s trade architecture. I don’t think they will get much in return for this supposed trade-off, but there you go.
6. I am seeing deeply biased assessments of tax reform, from both sides. I don’t favor raising the deficit by $1.5 trillion (or possibly more), I do favor cutting corporate rates and targeting some of the most egregious deductions. I am disappointed that there is not more celebration of the very good features of the plan on the table, that said big changes in the proposed legislation still are needed.
7. In terms of regulatory reform (WSJ), the administration has done better than my most optimistic scenario. In their worst area, carbon, progress on solar and electric cars is bigger good news than the bad policy news. And for all practical purposes, the carbon policy of Trump is not much different from that of say Angela Merkel.
8. The suburbs are rebelling against the Republican Party. There is a decent chance the Republicans will lose the House in 2018, as well as numerous governorships. Soon we may get a window of a very different Trump, plus more investigations.
9. Various people connected to Trump will be nabbed for crimes and perjuries.
10. Trump has personally “gone after” many political and social norms, but it is not yet clear if they will end up weaker or stronger as a result. His “grab them…” tape for instance seems, in the final analysis, to have empowered a major rebellion in the opposite direction. #10 is a major reason why many commentators hate Trump as a person and president, and I can understand that response, but I am myself more focused on what the final outcomes will be and there we do not know.
11. The cultural and intellectual force of liberalism — broadly defined — has been greatly weakened by a mix of Trump and Trump-related forces. I find this tragic and a major source of despair.
12. I do not favor “a decline in the dignity of the presidency” in the manner we are seeing, but I find many of these criticisms are stand-ins for not liking the substance of what is happening. I don’t think we know what are the costs (or benefits) are from this transformation of the presidential image. I could readily imagine those costs are high, but as a sociological matter I am seeing “the dignity of the office of the president has been insulted” as a stand-in for “my dignity has been insulted.”
13. The quality of discourse continues to decline.
Sunday assorted links
1. On-line dating in China (NYT).
2. In economics, time demands are endogenous.
4. TLS books of the year, always one of the best lists.
5. Claims about hypersonic weapons, speculative. And micro assassination drones. The State of the Union.
6. David Brooks on the siege mentality (NYT). And Ross Douthat on Kenneth Starr (NYT). They’re both right.
Thrasher and Gaus on the Calculus of Consent
Writing for the The Oxford Handbook of Classics in Contemporary Political Theory, political philosophers John Thrasher and Gerald Gaus review Buchanan and Tullock’s The Calculus of Consent:
Calculus advances new methods in an attempt to solve an old problem: the problem of
democratic justification. While democracy claims to be the “rule of the people” in any
actual democratic system we actually find the rule of some people over others. More
formally, the winning coalition in any election is able to impose its authority on the losers.
This is true however large the majority happens to be, and however small the minority is,
unless the vote is unanimous; and even then, there may be an excluded minority of those
who did not or could not vote. Yet at the heart of the democratic ideal is the principle that
all are inherently free and equal, with no natural authority to rule over one another. How
odd then to start from freedom and equality and end with majority coalitions imposing
their policies on minorities merely because they have the numbers to do so. Once we see
this oddity we are confronted with the question: how could the authority of democratic
assemblies over free and equal persons be justified? This is the problem of democratic
justification, a problem that animates Calculus.…A feature of Calculus typically missed is its optimism. Public choice theory is commonly
characterized as anti-democratic, or as undermining faith in the democratic process
(Barry 1989; Christiano 1996, 2004). Rightly understood though, Calculus is an almost
giddy endorsement of democracy (of a specific form) in the face of what looked like dire
prospects for democratic theory.
How to fix racial bias in policing
We estimate the degree to which individual police officers practice racial discrimination. Traffic police regularly discount the charged speed on drivers’ tickets to avoid a discrete jump in the fine schedule. This behavior leads to an excess mass in the distribution of charged speeds just below the jump. Using a bunching estimation design and data from the Florida Highway Patrol, we show that minorities are less likely to receive this break than white drivers. We disaggregate to the individual police officer level and find significant heterogeneity across officers in their degree of discrimination, with 40% of officers explaining the entirety of the aggregate discrimination. Our measure of discrimination is easy to calculate and can be used by police departments as part of an early warning system. Using a simple personnel policy that reassigns officers across locations based on their lenience, departments can effectively reduce the aggregate disparity in treatment.
While 40% is a high number, overall I find that reassuring. That is from the job market paper of Felipe Goncalves, of Princeton University.
This seems whacky, yet I cannot refute it (from the comments), tax incidence department
Here is an unrelated topic, but part of the general topic of tax incidence. Do federal employees pay income tax on their wages? I know they do nominally, but that tax goes back to their employer, the federal government. So, doesn’t that mean that, while their actual salary may be lower than their official nominal salary, they actually don’t pay any tax? (NB: this is quite different from a private sector employee whose after-tax salary is less than the pre-tax salary. In that case, the difference between the two does *not* go to the employer, creating a gap between what the employer pays and what the employee receives.)
For example, suppose a private firm and the federal government both value a worker’s output at $100k/yr and the tax rate is 20%. The private firm offers the worker $100k and the worker receives $80k after paying taxes. The federal government, however, can offer the worker $125k in nominal salary, *knowing that it will receive $25k back in income tax*. The net result is that the federal government pays $100k and the worker receives $100k after taxes, i.e., the worker earns $100k tax free, $20k more than he or she would earn at the private firm. Another way of seeing this is to note that taxes paid by employees are economically equivalent to taxes paid by employers. So, if employers received rebates for income taxes paid by employees, then the net income tax would be zero. Well, the federal government *does* receive a rebate for all income taxes paid by employees!
Doesn’t this mean that taxes are doubly distortive? Not only do they discourage employment by creating a gap between what (private) employers pay and what workers receive — the usual cited distortion — they also distort the *composition* of the workforce by allowing the federal government to crowd out other employers.
That is from BC.
Saturday assorted links
1. Does grade inflation boost home prices? I am pretty sure that is the wrong framing, but still a result of interest.
2. Are there momentum-based excess returns from monetary policy shocks?
3. Forty percent of the buildings in Manhattan could not be built today (NYT). #zoning
4. “This is not a pig.”
5. Blind triplets see through others’ eyes with the help of an iPhone, GMU angle too.
When does caste integration bring greater understanding?
It should be collaborative rather than adversarial:
Integration is a common policy used to reduce discrimination, but different types of integration may have different effects. This paper estimates the effects of two types of integration: collaborative and adversarial. I recruited 1,261 young Indian men from different castes and randomly assigned them either to participate in month-long cricket leagues or to serve as a control group. Players faced variation in collaborative contact, through random assignment to homogeneous-caste or mixed-caste teams, and adversarial contact, through random assignment of opponents. Collaborative contact reduces discrimination, leading to more cross-caste friendships and 33% less own-caste favoritism when voting to allocate cricket rewards. These effects have efficiency consequences, increasing both the quality of teammates chosen for a future match, and cross-caste trade and payouts in a real-stakes trading exercise. In contrast, adversarial contact generally has no, or even harmful, effects. Together these findings show that the economic effects of integration depend on the type of contact.
That is from a new paper by Matt Lowe, and Matt is a job market candidate coming out of MIT.
And here is a recent paper by Devesh Kapur, Chandra Bhan Prasad, Lant Pritchett and D. Shyam Babu, on the benefits of modernity for Dalits, here is one short bit of the abstract:
The survey results show substantial changes in a wide variety of social practices affecting Dalit well-being—increased personal consumption patterns of status goods (e.g. grooming, eating), widespread adoption of ―elite‖ practices around social events (e.g. weddings, births), less stigmatising personal relations of individuals across castes (e.g. economic and social interactions), and more expansion into nontraditional economic activities and occupations.
That said, please do not confuse “big improvements” with “no serious problem.”
The gains from cutting corporate tax rates
Here is a recent paper by Stephen Bond and Jing Xing:
We present new empirical evidence that sector-level capital–output ratios are strongly influenced by corporate tax incentives, as summarised by the tax component of a standard user cost of capital measure. We use sectoral panel data for the USA, Japan, Australia and eleven EU countries over the period 1982–2007. Our panel combines internationally consistent data on capital stocks, value-added and relative prices from the EU KLEMS database with corporate tax measures from the Oxford University Centre for Business Taxation. Our results for equipment investment are particularly robust, and strikingly consistent with the basic economic theory of corporate investment.
Via Henry Curr. Here is a piece by Fuest, Piechl, and Siegloch, forthcoming in the American Economic Review:
This paper estimates the incidence of corporate taxes on wages using a 20-year panel of German municipalities. Administrative linked employer-employee data allows estimating heterogeneous worker and firrm effects. We set up a general theoretical framework showing that corporate taxes can have a negative effect on wages in various labor market models. Using an event study design, we test the predictions of the theory. Our results indicate that workers bear about 40% of the total tax burden. Empirically, we confirm the importance of both labor market institutions and profit shifting possibilities for the incidence of corporate taxes on wages.
Via Dina D. Pomeranz. I’ve been reading in this area on and off since the 1980s, and I really don’t think these are phony results.
Friday assorted links
1. “…broccoli, Brussels sprouts, cauliflower, kale, cabbage, and collard greens are all technically the same species, Brassica oleracea.” Link here.
2. “Our bland, featureless Midwest—on some level, it is a fantasy.”
3. Does a study of Twitch.tv indicate net neutrality is a bad idea?
4. A dozen business lessons from Waffle House.
5. Tweetstorm on Cheesecake Factory design.
6. “Jones’ choice of hosiery proved most offensive, according to the editor. For the occasion, Jones had chosen a pair of tights — not in a neutral black or gray as is common in the halls of Vogue — but rather a pair covered with illustrated, cartoon foxes.” Link here.
The Uber Tipping Equilibrium
What is the effect of tipping on the take-home pay of Uber drivers? Economic theory offers a clear answer. Tipping has no effect on take home pay. The supply of Uber driver-hours is very elastic. Drivers can easily work more hours when the payment per ride increases and since every person with a decent car is a potential Uber driver it’s also easy for the number of drivers to expand when payments increase. As a good approximation, we can think of the supply of driver-hours as being perfectly elastic at a fixed market wage. What this means is that take home pay must stay constant even when tipping increases.
But how is the equilibrium maintained? One possibility is that as riders tip more, Uber can reduce fares so that the net hourly wage remains constant. Since take home pay doesn’t change we will have just as many drivers as before tipping. Under the tipping equilibrium the only change will be that instead of the riders paying Uber and then Uber paying the drivers, the riders will also pay something to the drivers directly and Uber will pay the drivers a little bit less. The drivers end up with the same take home pay.
But suppose that Uber doesn’t want to reduce fares or is somehow constrained from doing so. Does the model break down? Sorry, but the laws and supply and demand cannot be so easily ignored. If Uber holds fares constant, the higher net wage (tips plus fares) will attract more drivers but as the number of drivers increases their probability of finding a rider will fall. The drivers will earn more when driving but spend less time driving and more time idling. In other words, tipping will increase the “driving wage,” but reduce paid driving-time until the net hourly wage is pushed back down to the market wage.
At this point many readers will object that I am a horrible person and this is all theory using unrealistic “Econ 101” assumptions of perfectly competitive markets, rationality, full information etc etc. To which my response is that the first claim is plausible but irrelevant while the second is false. A new paper, Labor Market Equilibration: Evidence from Uber, from John Horton at NYU-Stern and Jonathan Hall and Daniel Knoepfle, two economists at Uber, looks at what happens when Uber increases base fares:
We find that when Uber raises the base fare
in a city, the driver hourly earnings rate rises immediately, but then begins
to decline shortly thereafter. After about 8 weeks, there is no detectable
difference in the average hourly earnings rate compared to before the fare
increase. With a higher fare, drivers earn more when driving passengers, and
so how do drivers make the same amount per hour? The main reason is that
driver utilization falls; drivers spend a smaller fraction of their working hours
on trips with paying passengers when fares are higher.
My conclusion is that increases in Uber fares are a very bad idea. Why? Increases in Uber fares–i.e. increases beyond those required to have enough drivers so that pick-up times are reasonably short–have two negative effects. First, and most obviously, higher fares increase the price to riders. Second, higher fares don’t result in higher driver earnings but do result in drivers wasting time.
The situation is very similar to the inefficient market for realtors. When realtors earn a fixed percentage of a home’s sales price, higher home prices encourage more entry into the realtor market. But we don’t need more realtors just because home prices have increased! When home prices are high, a realtor can earn enough selling a handful of homes a year to make it worthwhile to stay in the industry even though most of the realtor’s time is spent unproductively finding customers rather than actually helping customers to buy and sell homes. It would be better if commission rates fell when home prices rose but even after many years of online entry that typically doesn’t happen which is the mystery of realtor rent-seeking.
Uber is a great service for riders and it’s also great for people who need a source of flexible earnings. The fact that Uber drivers earn less than some people think is appropriate is a function of the wider job market and not of Uber policy. Indeed, Uber can’t increase take-home pay by raising fares and if we require them to do so we will simply hurt consumers and waste resources without improving the welfare of drivers.
Let them sell the Norman Rockwells
The Berkshire Museum, yes. They were going to sell 40 paintings at Sotheby’s, including two very special Norman Rockwells, but at the last minute a court decision halted the sale, claiming (with only thin justification) that the sale would violate the museum’s trusts. That is the setting of my latest Bloomberg column, here is one bit:
The sad truth is that the people running the Berkshire Museum just don’t care that much about American art any more, at least not from an institutional point of view. Given that reality, it’s actually better if they are not entrusted with important artworks.
The court’s decision now means it will be hard to pull off the sale with fully clear rights to the titles, although the court’s judgment will be re-examined in December. Both the uncertainty and the surrounding negative publicity will scare off buyers and may spoil the market for a long time to come.
There is much more at the link. The argument against selling, of course, is that in a world of frequent sales all museums will find it hard to make credibly binding commitments to their donors, who often do not want their donated works recycled in the marketplace. But the equilibrium of zero selling is one that will destroy a great deal of value in the art world. Note that this problem will become increasingly relevant as the clock ticks and the number and inappropriateness of past museum commitments piles up. If nothing else, sooner or later insolvency sets in. Rust never sleeps. And so on.
Should churches really own all that land in the downturns of major American cities?
My favorite or most influential Spanish-language works
Greg Irving emails me:
Hello Prof. Cowen,
I wonder if you might be tempted to create a blog post, at your convenience, of Spanish language works, ideally read in the original, that have most impacted either a) your appreciation for some till then unknown nuance or beauty in the language or b) your knowledge of/appreciation for some aspect of life in general. Might you?
Quizás obviamente, soy alguien que va aprendiendo el idioma poco a poco sólo de interés y no de necesidad. Si usted se digna a crear una respuesta por este correo electrónico, o en su blog, me alegraría mucho. Gracias por todo el conocimiento que nos da en sus escritos y por leer mi nota.
My Spanish-language reading is slow, but these are the works I found it profitable to devote a great deal of time to. They have influenced me significantly, and mostly I found the English-language version a poor substitute. Here goes:
1. Jorge Luis Borges, Ficciones. This was super-slow going, but it is one of my favorite books of all time, philosophical and conceptual and in Spanish deeply hilarious. OK in English, but this book alone is almost reason enough to study Spanish.
2. Juan Rulfo, Pedro Paramo. Imagine redoing parts of Dante, with more narrative, in rural Mexico and with lots of comedy. The English-language version does not come close.
3. Julio Cortázar, Rayuela [Hopscotch]. One of my very favorite 20th century novels, again unsatisfying to me in English, I would not recommend that you try at all. Also try his short stories, most of all Bestiario and Historias de cronopios y de famas.
4. Jose Donoso, El obsceno pájaro de la noche [The Obscene Bird of Night]. A masterpiece, quite neglected in the U.S., I found this one so hard I often had to juxtapose it with the English-language text to read it at all.
5. Gabriel Garcia Marquez, Noticia de un Secuestro [Notice of a Kidnapping], and Vivir para contarla [Living in Order to Tell It]. Oddly, I think his greatest works are the non-fiction. But these are at least pretty good in English too, unlike what is listed above.
6. Pablo Neruda. Non-Spanish readers certainly have heard of him, or maybe like him, but don’t really have a sense of how he is one of the very greatest poets of all time. It is Canto General, a book-length narrative poem retelling of the story of the New World, that influenced me most, but I love all the classic Neruda poems.
I don’t find it so profitable to read 17th century Cervantes in Spanish, though the defect is likely mine. The Savage Detectives and One Hundred Years of Solitude I find as good in English as in Spanish; Marquez himself suggested that was true for this work. Vargas Llosa is “good enough” in English, except perhaps for the inscrutable Conversation in the Cathedral, which I cannot follow in either language. Javier Marías I find “good enough” in English. The Goytisolo brothers are often too hard for me, not fun in English but I can’t quite manage the Spanish, perhaps in my dotage. Fuentes has never clicked for me, period. Hombres de maíz, by Asturias, is especially good in Spanish and pretty much neglected in the English-speaking world.
What else?
My review of Edward Balleisen’s book *Fraud*
It is in the new issue of the Times Literary Supplement (a wonderful periodical of course), right now this link is ungated, for how long I do not know. I thought the book was very well-written and especially impressively researched. But on the side of economics and conceptual framework, I found it too biased. Here is one excerpt from my review:
In a book with almost 400 pages of text, it is striking that government fraud is not seriously discussed, with the exception of the critical take on the Comstock movement, under which the Post Office took up a moral crusade against mail fraud, directed by the evangelical Anthony Comstock. Yet if consumers are so impetuous and ill-informed as to be frequent victims of business fraud, might not voters and even activist citizens be prone to similar manipulations? Balleisen mentions that such a view was held by the nineteenth-century Spencerian Edward Youmans, but he doesn’t do much more than mock it and then move on. Yet arguably the biggest fraud of the early part of the twentieth century was the selling of the First World War to the American public on mostly false pretences. Progressives led this sales pitch, through spokesmen such as Herbert Croly, and of course the President Woodrow Wilson, telling the American people that war was a noble cause that would revitalize the nation and save the world.
In Balleisen’s narrative, however, the Progressives show up only as critics of fraud.
And is corporate fraud really going up these days?:
Take lives lost in the workplace. An employer more or less promises that a job is relatively safe, and if it turns out to be dangerous that may reflect a kind of fraud or at the very least a major disappointment. Yet jobs in America have never been as safe as today, and furthermore the rate at which job safety increases does not seem to have been affected by the creation of the Occupational Safety and Hazard Administration (OSHA). Or what about food poisoning, which you also might take as a sign of a fraudulent transaction? Again, overall, the opportunity to buy truly transparently safe food supplies seems greater than ever before, notwithstanding the fact that more consumers are voluntarily taking chances with sushi, non-pasteurized cheeses and home-made raw milk. The nice thing about mortality statistics is that a death pretty much always reflects a disappointment with the transaction, but for most metrics (opioid markets being one significant exception) mortality is down over the past few decades.
Do read the whole thing.
Thursday assorted links
1. Eleven recommended documentaries from 2017.
2. The continuing presence of Elliott Carter, by Eric Lyon.
4. Longform podcast with me, Aaron Lammer is the interviewer.
5. How exactly dumping the mandate would play out.
Hacking the Nazis
Some resisters fought the Nazis in the streets while others fought them from within by hacking some of the world’s first information technology systems. Ava Ex Machina has a fascinating post discussing some of these unheralded hackers. Here is one:
René Carmille — was a punch card computer expert and comptroller general of the French Army, who later would head up the Demographics Department of the French National Statistics Service. As quickly as IBM worked with the Nazis to enable them to use their punch card computer systems to update census data to find and round up Jewish citizens, Rene and his team of double-agents worked just as fast to manipulate their data to undermine their efforts.
The IEEE newspaper, The Institute, describes Carmille as being an early ethical hacker: “Over the course of two years, Carmille and his group purposely delayed the process by mishandling the punch cards. He also hacked his own machines, reprogramming them so that they’d never punch information from Column 11 [which indicated religion] onto any census card.” His work to identify and build in this exploit saved thousands of Jews from being rounded up and deported to death camps.
Rene was arrested in Lyon in 1944. He was interrogated for two days by Klaus Barbie, a cruel and brutal SS and Gestapo officer called “the Butcher of Lyon,” but he still did not break under torture. Rene was caught by the Nazis and sent to the Dachau concentration camp, where he died in 1945.
Hat tip: Tim Harford.