Month: September 2019
The political business cycle, China style
He has pledged to achieve “national rejuvenation”, a goal that is supposed to include getting Taiwan under Chinese control by 2049, the centenary of the founding of the People’s Republic of China. But analysts have warned that Mr Xi could be under pressure to demonstrate “progress” on Taiwan much earlier — in 2022, when the Communist party leadership is due to confirm whether to allow him to stay on beyond the end of his second term.
That is from Kathrin Hille at the FT.
Another difference between Pakistan and India
Observing India tends to make people more libertarian. At least parts of the private sector are quite vibrant, and the heavy hand of government can be seen in many places. Plus you might think “the country is too big in the first place,” so you will be thinking in terms of decentralization, and devolving power to the states and union territories, rather than strengthening the central authority.
Observing Pakistan tends to make people more statist. The private sector has fewer well-known successes. The central authority appears too weak, and problems with insufficient tax revenue are extreme, even for a developing economy. As for federal income tax, there are only about 1.2 million active taxpayers, in a country of over 200 million people. The very pleasant Islamabad aside, urban public goods seem underprovided, even relative to Indian cities.
It is an interesting question which countries at least seem to provide evidence for which sets of political views.
Karachi, and the greater violence of New World cities
I like to ask some CWT guests (Charles Mann, Juan Pablo Villarino, and Alain Bertaud) why New World cities are so often so much more violent than Old World cities, including in Europe and Asia. In the case of Asia, wartime episodes aside, it does seem that so many Asian cities are remarkably safe, especially for men but often for women too.
Recall one of the key principles of reasoning: look for the cross-sectional variation.
While Karachi is relatively safe now, before 2013 it had at least two decades of fairly extreme violence.
And what are some special features of Karachi history, relative to many other Old World and Asian cities?
The city had a very large “new” population, with Hindus (formerly the majority inhabitants) having left and migrants having come from many other parts of Pakistan, Afghanistan and Myanmar too.
The city was hit by a major wave of drug trafficking, heroin in particular.
The city was hit by a major wave of arms trafficking, run by thugs and mafias, often related to the wars in Afghanistan.
This is only one data point, but it supports hypotheses that higher levels of New World violence stem from relatively recent population shifts, drug trafficking, and arms trafficking. When Old World cities have that blend, they too become quite violent.
Philip K. Dick predicts the future
From 1981:
1995: Computer use by ordinary citizens (already available in 1980) will transform the public from passive viewers of TV into mentally alert, highly trained, information-processing experts
2010: Using tachyons (particles that move backward in time) as a carrier, the Soviet Union will attempt to alter the past with scientific information.
That is from The Shifting Realities of Philip K. Dick: Selected Literary and Philosophical Writings, edited by Lawrence Sutin.
Thursday assorted links
1. Is there too much surveillance in public housing? (NYT)
2. “Der Bundesrat will die Verunglimpfung der Europäischen Union und ihrer Symbole unter Strafe stellen.”
3. “Is there an example of a notable late-in-life (after 70?) ideological pivot among a powerful person?”
4. Very good post on what we have learned from Snowden.
More me on Harvard admissions
Now consider that America’s top universities are among the most ideologically “left-wing” institutions in the country. At Harvard, for instance, 84% of faculty donations to political parties and political action committees from 2011 to 2014 went in the Democratic direction. The Democrats, of course, are supposed to be the party opposed to income inequality. So what has gone wrong here? Why should these elites be trusted?
If any institution should be able to buck social trends, it is Harvard. It has an endowment of about $39 billion (circa 2018), its top administrators are employable elsewhere, and most of its significant faculty hold tenured positions. It might also have the world’s best academic reputation, and it could fill its entering class with top students even after taking a big reputational or financial hit.
Here is the rest of my Bloomberg column, some parts in full mood affiliation mode.
My trip to Karachi
Most recently, the city has been beset by a plague of flies — a “bullying force,” says the New York Times, “sparing no one.” The swarm of flies, which I was fortunate enough to miss, was the result of monsoon season, malfunctioning drainage systems clogged with solid waste, and slaughtered animals from the Muslim celebration of Eid. (The same monsoon season, by the way, led to power blackouts of up to 60 hours.) On a livability index, Karachi ranks near the bottom, just ahead of Damascus, Lagos, Dhaka and Tripoli.
There is no subway, and a typical street scene blends cars, auto-rickshaws, motorbikes and the occasional donkey pulling a cart. It’s fun for the visitor, but I wouldn’t call transportation easy.
And yet to see only those negatives is to miss the point. Markets speak more loudly than anecdotes, and the population of Karachi continues to rise — a mark of the city’s success. This market test is more important than the aesthetic test, and Karachi unambiguously passes it.
And:
Most of all, I am impressed by the tenacity of Pakistan. Before going there, I was very familiar with the cliched claim that Pakistan is a fragile tinderbox, barely a proper country, liable to fall apart any moment and collapse into civil war. Neither my visit nor my more focused reading has provided any support for that view, and perhaps it is time to retire it. Pakistan’s national identity may be strongly contested but it is pretty secure, backed by the growing use of Urdu as a national language — and cricket to boot. It has come through the Afghan wars battered but intact.
That is all from my longer than usual Bloomberg column, all about Karachi.
What I’ve been reading
Thomas J. Campanella, Brooklyn: The Once and Future City. More detailed than what I am looking for on this topic at 552 pp., but some of you will find this an interesting resource.
Nicholas Lemann, Transaction Man: The Rise of the Deal and the Decline of the American Dream. Lots of mood affiliation in this one, but the chapter on finance economist Michael Jensen and his longstanding connection with “guru” Werner Erhard is excellent material you cannot find elsewhere.
Tom Segev, A State At Any Cost: The Life of David Ben-Gurion. I read about one-third of this one. A fine book, beautifully written, but somehow too much of the material felt familiar given other accounts I had consumed.
Joshua Gans and Andrew Leigh, Innovation and Equality: How to Create a Future That is More Star Trek and Less Terminator. A very useful 131 pp. introduction to those issues, most of all arguing that a future full of innovation does not have to push inequality to untenable levels.
Matthew Gale and Natalia Sidlina, Natalia Goncharova. The images in this book I found mind-blowing, claiming a place for Goncharova as one of the very best artists of her time (and what a time for the visual arts it was).
Edward Snowden, Permanent Record. Starts slow, but an interesting read no matter what you think of him, most of all of how one can step by step be led to actions one did not originally intend. I thought his own case for what he did was weaker than I had been expecting. Embedding it in an “the internet used to be so much better” narrative doesn’t help. Nonetheless, I read through to the end eagerly.
Wednesday assorted links
2. What’s up with the new quantum supremacy breakthrough? And a useful Twitter thread.
3. Markets in everything: the anti-Krugman cruise.
4. Lululemon Athletica combines Ayn Rand and yoga (NYT).
5. Ugandan Indian tax revenue fact of the day.
6. Psychology of serial killer movies, recommended.
My Conversation with Alain Bertaud
Excellent throughout, Alain put on an amazing performance for the live audience at the top floor of the Observatory at the old World Trade Center site. Here is the audio and transcript, most of all we talked about cities. Here is one excerpt:
COWEN: Will America create any new cities in the next century? Or are we just done?
BERTAUD: Cities need a good location. This is a debate I had with Paul Romer when he was interested in charter cities. He had decided that he could create 50 charter cities around the world. And my reaction — maybe I’m wrong — but my reaction is that there are not 50 very good locations for cities around the world. There are not many left. Maybe with Belt and Road, maybe the opening of Central Asia. Maybe the opening of the ocean route on the northern, following the pole, will create the potential for new cities.
But cities like Singapore, Malacca, Mumbai are there for a good reason. And I don’t think there’s that many very good locations.
COWEN: Or Greenland, right?
[laughter]
BERTAUD: Yes. Yes, yes.
COWEN: What is your favorite movie about a city? You mentioned a work of fiction. Movie — I’ll nominate Escape from New York.
[laughter]
BERTAUD: Casablanca.
Here is more:
COWEN: Your own background, coming from Marseille rather than from Paris —
BERTAUD: I would not brag about it normally.
[laughter]
COWEN: But no, maybe you should brag about it. How has that changed how you understand cities?
BERTAUD: I’m very tolerant of messy cities.
COWEN: Messy cities.
BERTAUD: Yes.
COWEN: Why might that be, coming from Marseille?
BERTAUD: When we were schoolchildren in Marseille, we were used to a city which has a . . . There’s only one big avenue. The rest are streets which were created locally. You know, the vernacular architecture.
In our geography book, we had this map of Manhattan. Our first reaction was, the people in Manhattan must have a hard time finding their way because all the streets are exactly the same.
[laughter]
BERTAUD: In Marseille we oriented ourselves by the angle that a street made with another. Some were very narrow, some very, very wide. One not so wide. But some were curved, some were . . . And that’s the way we oriented ourselves. We thought Manhattan must be a terrible place. We must be lost all the time.
Finally:
COWEN: And what’s your best Le Corbusier story?
BERTAUD: I met Le Corbusier at a conference in Paris twice. Two conferences. At the time, he was at the top of his fame, and he started the conference by saying, “People ask me all the time, what do you think? How do you feel being the most well-known architect in the world?” He was not a very modest man.
[laughter]
BERTAUD: And he said, “You know what it feels? It feels that my ass has been kicked all my life.” That’s the way he started this. He was a very bitter man in spite of his success, and I think that his bitterness is shown in his planning and some of his architecture.
COWEN: Port-au-Prince, Haiti — overrated or underrated?
Strongly recommended, and note that Bertaud is eighty years old and just coming off a major course of chemotherapy, a remarkable performance.
Again, I am very happy to recommend Alain’s superb book Order Without Design: How Markets Shape Cities.
The Danger of Reusing Natural Experiments
I recently wrote a post, Short Selling Reduces Crashes about a paper which used an unusual random experiment by the SEC, Regulation SHO (which temporarily lifted short-sale constraints for randomly designated stocks), as a natural experiment. A correspondent writes to ask whether I was aware that Regulation SHO has been used by more than fifty other studies to test a variety of hypotheses. I was not! The problem is obvious. If the same experiment is used multiple times we should be imposing multiple hypothesis standards to avoid the green jelly bean problem, otherwise known as the false positive problem. Heath, Ringgenberg, Samadi and Werner make this point and test for false positives in the extant literature:
Natural experiments have become an important tool for identifying the causal relationships between variables. While the use of natural experiments has increased the credibility of empirical economics in many dimensions (Angrist & Pischke, 2010), we show that the repeated reuse of a natural experiment significantly increases the number of false discoveries. As a result, the reuse of natural experiments, without correcting for multiple testing, is undermining the credibility of empirical research.
.. To demonstrate the practical importance of the issues we raise, we examine two extensively studied real-world examples: business combination laws and Regulation SHO. Combined, these two natural experiments have been used in well over 100 different academic studies. We re-evaluate 46 outcome variables that were found to be significantly affected by these experiments, using common data frequency and observation window. Our analysis suggests that many of the existing findings in these studies may be false positives.
There is a second more subtle problem. If more than one of the effects are real it calls into question the exclusion restriction.To identify the effect of X on Y1 we need to assume that X influences Y1 along only one path. But if X also influences Y2 that suggests that there might be multiple paths from X to Y1. Morck and Young made this point many years ago, likening the reuse of the same instrumental variables to a tragedy of the commons.
Solving these problems is made especially difficult because they are collective action problems with a time dimension. A referee that sees a paper throw the dice multiple times may demand multiple hypothesis and exclusion test corrections. But if the problem is that there are many papers each running a single test, the burden on the referee to know the literature is much larger. Moreover, do we give the first and second papers a pass and only demand multiple hypothesis corrections for the 100th paper? That seems odd, although in practice it is what happens as more original papers can get published with weaker methods (collider bias!).
As I wrote in Why Most Published Research Findings are False we need to address these problems with a variety of approaches:
1) In evaluating any study try to take into account the amount of background noise. That is, remember that the more hypotheses which are tested and the less selection [this is one reason why theory is important it strengthens selection, AT] which goes into choosing hypotheses the more likely it is that you are looking at noise.
2) Bigger samples are better. (But note that even big samples won’t help to solve the problems of observational studies which is a whole other problem).
3) Small effects are to be distrusted.
4) Multiple sources and types of evidence are desirable.
5) Evaluate literatures not individual papers.
6) Trust empirical papers which test other people’s theories more than empirical papers which test the author’s theory.
7) As an editor or referee, don’t reject papers that fail to reject the null.
Very real progress on the market concentration debate
As you might expect, it is coming from Chang Tsai-Hsieh and Esteban Rossi-Hansberg, here is their abstract:
The rise in national industry concentration in the US between 1977 and 2013 is driven by a new industrial revolution in three broad non-traded sectors: services, retail, and wholesale. Sectors where national concentration is rising have increased their share of employment, and the expansion is entirely driven by the number of local markets served by firms. Firm employment per market has either increased slightly at the MSA level, or decreased substantially at the county or establishment levels. In industries with increasing concentration, the expansion into more markets is more pronounced for the top 10% firms, but is present for the bottom 90% as well. These trends have not been accompanied by economy-wide concentration. Top U.S. firms are increasingly specialized in sectors with rising industry concentration, but their aggregate employment share has remained roughly stable. We argue that these facts are consistent with the availability of a new set of fixed-cost technologies that enable adopters to produce at lower marginal costs in all markets. We present a simple model of firm size and market entry to describe the menu of new technologies and trace its implications.
This is likely to prove one of the most important papers of the year, here is the pdf link. The authors open with the example of The Cheesecake Factory, and also health care:
The standardization of production over a large number of establishments that has taken place in sit-down restaurant meals due to companies such as the Cheesecake Factory has taken place in many non-traded sectors. Take hospitals as another example. Four decades ago, about 85% of hospitals were single establishment non-profits. Today, more than 60% of hospitals are owned by forprofit chains or are part of a large network of hospitals owned by an academic institution (such as the University of Chicago Hospitals).
And:
…rising concentration in these sectors is entirely driven by an increase the number of local markets served by the top firms.
Here is a key point:
…we find that total employment rises substantially in industries with rising concentration. This is true even when we look at total employment of the smaller firms in these industries. This evidence is consistent with our view that increasing concentration is driven by new ICT-enabled technologies that ultimately raise aggregate industry TFP. It is not consistent with the view that concentration is due to declining competition or entry barriers, as suggested by Gutierrez and Philippon (2017) and Furman and Orszag (2018), as these forces will result in a decline in industry employment.
This is interesting too, and it departs from say what Amazon is doing:
…we show that the top firms in the economy as a whole have become increasingly specialized in narrow set of sectors, and these are precisely the non-traded sectors that have undergone an industrial revolution. At the same time, top firms have exited many sectors. The net effect is that there is essentially no change in concentration by the top firms in the economy as a whole. The “super-star” firms of today’s economy are larger in their chosen sectors and have unleashed productivity growth in these sectors, but they are not any larger as a share of the aggregate economy.
The paper is titled “The Industrial Revolution in Services.“
From the comments, on the Coase theorem
#1 on prefiguring of the so-called Coase theorem, consider also p. 396-7 of W.H. Hutt, “Co-ordination and the Size of the Firm,” South African Journal of Economics 2(4), December 1934:
“Now, under one ownership, their relations would, given competitive institutions, be exactly the same, provided that both methods were equally efficient from the social standpoint. There is no reason why the spreading of the lines of responsibility back to several sources should lead to less effective planning than subordinacy to an authority emanating from one source, given the equal availability of relevant knowledge to the managers who devise the plans…The most important significant difference between the two cases is that, in practice, in the one case there may not be the availability of relevant knowledge that there is in the other.”
That is from Daniel B. Klein. And:
For a still earlier ‘discovery’ with transaction costs and all see my former colleague Yehoshua Liebermann’s “The Coase Theorem in Jewish Law,” Journal of Legal Studies, Vol. 10, No. 2 (Jun., 1981), pp. 293-303
That is from Moshe Syrquin, link for both here.
Tuesday assorted links
Do workers discriminate against female bosses?
Yes, it seems:
I hire 2,700 workers for a transcription job, randomly assigning the gender of their (fictitious) manager and provision of performance feedback. While praise from a manager has no effect, criticism negatively impacts workers’ job satisfaction and perception of the task’s importance. When female managers, rather than male, deliver this feedback, the negative effects double in magnitude. Having a critical female manager does not affect effort provision but it does lower workers’ interest in working for the firm in the future. These findings hold for both female and male workers. I show that results are consistent with gendered expectations of feedback among workers. By contrast, I find no evidence for the role of either attention discrimination or implicit gender bias.
That is from a new paper by Martin Abel.