Month: June 2020

Monday assorted links

Inflation is higher than you think

The Covid-19 Pandemic has led to changes in consumer expenditure patterns that can introduce significant bias in the measurement of inflation. I use data collected from credit and debit transactions in the US to update the official basket weights and estimate the impact on the Consumer Price Index (CPI). I find that the Covid inflation rate is higher than the official CPI in the US, for both headline and core indices. I also find similar results with Covid baskets in 10 out of 16 additional countries. The difference is significant and growing over time, as social-distancing rules and behaviors are making consumers spend relatively more on food and other categories with rising inflation, and relatively less on transportation and other categories experiencing significant deflation.

That is from Alberto Cavallo, and as for concrete numbers: “The Covid Core deflation in April was only half of that in the Core CPI, while theannual inflation rate is at 1.73% compared to the 1.43% in the official Core index.”  And that is not accounting for the disappearing goods bias: “For example, the share of products with missing prices in the US CPI rose from 14% in April 2019 to 34% in April 2020.”

Of course this also has implications for those insisting we should think of this primarily as a demand shock.

Claims about equities (and gamblers)

Mr. Young, 30, has only about $2,500 invested, making him a guppy among whales. But some Wall Street analysts see people who used to bet on sports as playing a big role in the market’s recent surge, which has largely erased its losses for the year.

“There’s zero doubt in my mind that it is a factor,” said Julian Emanuel, chief equity and derivatives strategist at the brokerage firm BTIG. “Zero doubt.”

Millions of small-time investors have opened trading accounts in recent months, a flood of new buyers unlike anything the market had seen in years, just as lockdown orders halted entire sectors of the economy and sent unemployment soaring.

It’s not clear how many of the new arrivals are sports bettors, but some are behaving like aggressive gamblers. There has been a jump in small bets in the stock options market, where wagers on the direction of share prices can produce thrilling scores and gut-wrenching losses. And transactions that make little economic sense, like buying up the nearly valueless shares of bankrupt companies, are off the charts.

File under “speculative,” here is the full NYT story.

Contingent Wage Subsidies

Robertas Zubricka has a clever idea, Contingent Wage Subsidies. Many macroeconomic problems are caused by a coordination failure–you don’t spend because I’m not spending and vice-versa and so the economy becomes trapped in a low-spending, low-employment equilibrium. Zubrickas shows how to solve these coordination problems. The government announces a contingent wage subsidy, a subsidy that is paid only if hiring is low. If a firm hires and others do not they get the subsidy. If a firm hires and others do hire they get the demand. A no-lose proposition. Hence, all firms hire and the subsidy never has to be paid. Instead of a big push, a zero push! Here’s Zubrickas:

New hiring by one firm is a reason for new hiring by other firms because of employment externalities related to additional aggregate demand, new trading opportunities, or production synergies. Without a coordinated action, however, the virtuous hiring cycle may not start, stranding the economy in a low‐employment, low‐spending equilibrium as in the aftermath of the 2007–2009 financial crisis (OECD, 2016). The traditional approach to this problem emphasizes a “big push,” when one large player like the government spends enough to convince others to spend. In this paper, we show how a “zero push” can achieve the same results.

With the economy in a low‐employment equilibrium, we propose a policy that offers firms wage subsidies for new hires payable only if the total number of new hires made in the economy does not exceed a prespecified threshold. An example would be a promise to cover all new labor costs contingent on that less than, say, 100,000 new jobs are created in total. From a firm’s perspective two outcomes can occur from this policy. One outcome is when the number of new jobs is less than the threshold, in which case the firm has its additional labor costs covered while keeping all the additional revenue. The second outcome is when the threshold is met and no subsidies are paid. The firm then benefits from employment spillovers generated by a substantial increase in total employment which makes hiring profitable even without any subsidies. With hiring profitable in both scenarios and, thus, all firms hiring, the threshold for new hires is reached, bringing the economy to high‐employment equilibrium without any subsidies paid.

Attentive readers will note that the idea has the same structure as my dominant assurance contract (which Zubrickas notes was an inspiration).

Read the whole thing.

Delivery service price cap regulations

Ben emails me:

Could you please consider and comment on some of the unseen consequences of local price caps on restaurant delivery services?  (Politico article describing the phenomenon in SF, NYC, etc.)  A highly competitive market for such services exists between GrubHub, DoorDash, Uber Eats, etc.  Moreover, patrons can always pickup and restaurants can always hire their own drivers.  That dynamic market will keep prices down and improve service quality and value.  As reported 2 days ago, 5/13/2020, in the Wall Street Journal, “America is stuck at Home, but Food Delivery Companies Still Struggle to Profit.”  Yet many locals are considering regulating and limiting the prices that such delivery services can charge.

Here is a NYT article on the same phenomenon, claiming that some apps charge up to 40% of the restaurant’s take.

My first question is why the restaurants do not charge higher prices for customers using the app.  That might be illegal in some localities, but surely that is not the general answer to the question.  Rather the restaurants are afraid of losing customer good will  — “what!? I have to pay 30% more just because I bought it with my phone?”  [Plus the apps do not allow it, see the comments, though I do no think the apps could prevent restaurants from giving “extras” and thus lower prices to those who show up for service in the restaurant.]

In this setting, restaurants are losing potential revenue to avoid a reputational hit, and staying in business (rather than closing up) because they believe the value of their future reputational franchise is high.  In other words, in both channels the restaurants perceive the value of their future reputational franchise to be pretty high.

That is the good news, although you might wonder how it squares with the generally low returns to running a restaurant.  I suspect some restaurants simply know they are good and profitable because they are skilled, and the losers are overconfident and less well-informed.

One efficiency advantage of the apps is that they will put the unprofitable restaurants out of business more quickly.

The next question is whether some surplus from the profitable restaurants should, in the short run (and maybe in the longer run too?) be redistributed to the app company.

The apps should increase the demand for the food from the good restaurants (easier to order and arrange delivery), but lower the profit margin on selling more of that food.  If those ingredients and kitchen capacity otherwise would go to complete waste, overall that seems like an acceptable bargain.  Kitchens are kept active, which is an efficiency gain, even if some profit is redistributed to the app company.

In this scenario, you can think of the app as doing some of the selling, rather than the restaurant doing that selling, and reaping surplus from that effort.  In essence, the business of the restaurant has become more specialized, toward pure food production and away from selling, that latter service now being performed by the app company.

Restaurants that were great at selling in the first place might be worse off.  But it is far from obvious that these apps and their prices should be decreasing efficiency.  Some other restaurants might be worse off because it is harder for them to carve up or segment the market, but that change likely is efficiency-enhancing.

And if the apps do indeed speed the bankruptcy of the lesser restaurants (presumably what the critics have to believe), over the longer haul prices will indeed go up and the good restaurants will earn back some of what they lost up front.

On net, consumers will have better services, better marketing, pay higher prices, and have a better selection of restaurants.  That just doesn’t sound so terrible, or so necessitating government intervention to cap app prices.

Note that informed customers probably need the app least, so they are least likely to see its value, just as “critics” as a class, including restaurant critics, are also least likely to see the value of the app in marketing the restaurants.  Of course this class of “critics” are exactly those who are most likely to be writing about the apps.

Political and social correlates of Covid-19 mortality

Do political and social features of states help explain the evolving distribution of reported Covid-19 deaths? We identify national-level political and social characteristics that past research suggests may help explain variation in a society’s ability to respond to adverse shocks. We highlight four sets of arguments—focusing on (1) state capacity, (2) political institutions, (3) political priorities, and (4) social structures—and report on their evolving association with cumulative Covid-19 deaths. After accounting for a simple set of Lasso-chosen controls, we find that measures of government effectiveness, interpersonal and institutional trust, bureaucratic corruption and ethnic fragmentation are currently associated in theory-consistent directions. We do not, however, find associations between deaths and many other political and social variables that have received attention in public discussions, such as populist governments or women-led governments. Currently, the results suggest that state capacity is more important for explaining Covid-19 mortality than government responsiveness, with potential implications for how the disease progresses in high-income versus low-income countries. These patterns may change over time with the evolution of the pandemic, however. A dashboard with daily updates, extensions, and code is provided at https://wzb-ipi.github.io/corona/

That is from a new paper by Constantin Manuel Bosancianu, et.al., via Alex Scacco.

Coronavirus imaginary travel markets in everything

When you’ve been cooped up for months, you start to miss aspects of life you used to dread. Remember airport security lines? Remember 3.4-fluid-ounce bottles? Remember taking off your shoes and then scrambling to put them back on at the end of a conveyor belt? What we wouldn’t give for those experiences now.

For travelers longing for the days of yore, Taipei’s Songshan Airport is offering 90 people the chance to pretend they’re going on vacation.

The airport is hosting a tour that will allow people to go to the airport, without actually going anywhere. The half-day experience will include a tour of the airport, a mock immigration experience and finally, the chance to board and then disembark an airplane.

Here is the full article, via Shaffin Shariff.

China-U.S. fact of the day

Some 54 scientists have resigned or been fired as a result of an ongoing investigation by the National Institutes of Health into the failure of NIH grantees to disclose financial ties to foreign governments. In 93% of those cases, the hidden funding came from a Chinese institution.

The new numbers come from Michael Lauer, NIH’s head of extramural research. Lauer had previously provided some information on the scope of NIH’s investigation, which had targeted 189 scientists at 87 institutions. But his presentation today to a senior advisory panel offered by far the most detailed breakout of an effort NIH launched in August 2018 that has roiled the U.S. biomedical community, and resulted in criminal charges against some prominent researchers, including Charles Lieber, chair of Harvard University’s department of chemistry and chemical biology.

“It’s not what we had hoped, and it’s not a fun task,” NIH Director Francis Collins said in characterizing the ongoing investigation. He called the data “sobering.”

Here is the full story, and there are further points of interest at the link.

Saturday assorted links

1. Revision of the Correia, Luck, and Verner paper on the 1918 flu, with response to critics.

2. Tim Harford update.  And Tim Harford on whether the pandemic will help fix our innovation problem.

3. Why was New York State so badly hit by Covid-19?

4. “Even when controlling for density, counties with a high proportion of #Trump voters have lower cases and deaths.”  Link here.  And an argument that the protests increased net stay at home behavior.

5. Toto song played on TESLA coils.  Or maybe this link works better.

6. “Plastics.

7. Uhlig placed on leave as editor of JPE.

8. Possible evidence of different Covid-19 strains?  Not yet confirmed, use with care, but at least appears that it might be serious work.

Tim Harford on Catastrophe and Innovation

Tim Harford has an excellent piece in the Financial Times that covers my work with the Kremer team on accelerating vaccines but weaves it into a larger panorama on the innovation slowdown and how barriers to innovation can sometimes break down with catastrophes.

There is no guarantee that a crisis always brings fresh ideas; sometimes a catastrophe is just a catastrophe. Still, there is no shortage of examples for when necessity proved the mother of invention, sometimes many times over.

The Economist points to the case of Karl von Drais, who invented an early model of the bicycle in the shadow of “the year without a summer” — when in 1816 European harvests were devastated by the after-effects of the gargantuan eruption of Mount Tambora in Indonesia. Horses were starved of oats; von Drais’s “mechanical horse” needed no food. It is a good example. But one might equally point to infant formula and beef extract, both developed by Justus von Liebig in response to the horrifying hunger he had witnessed in Germany as a teenager in 1816.

Read the whole thing. I also highly recommend, Tim’s new book, The Next Fifty on how seemingly simple things like the brick changed the world.

Racial disparity in federal criminal sentences

Using rich data linking federal cases from arrest through to sentencing, we find that initial case and defendant characteristics, including arrest offense and criminal history, can explain most of the large raw racial disparity in federal sentences, but significant gaps remain. Across the distribution, blacks receive sentences that are almost 10 percent longer than those of comparable whites arrested for the same crimes. Most of this disparity can be explained by prosecutors’ initial charging decisions, particularly the filing of charges carrying mandatory minimum sentences. Ceteris paribus, the odds of black arrestees facing such a charge are 1.75 times higher than those of white arrestees.

That is by M. Marit Rehavi and Sonja B. Starr in the 2014 Journal of Political Economy.  Via Andreas.

The Spanish Inquisition and the learning curve

Empirical evidence on contemporary torture is sparse. The archives of the Spanish Inquisition provide a detailed historical source of quantitative and qualitative information about interrogational torture. The inquisition tortured brutally and systematically, willing to torment all who it deemed as withholding evidence. This torture yielded information that was often reliable: witnesses in the torture chamber and witnesses that were not tortured provided corresponding information about collaborators, locations, events, and practices. Nonetheless, inquisitors treated the results of interrogations in the torture chamber with skepticism. This bureaucratized torture stands in stark contrast to the “ticking bomb” philosophy that has motivated US torture policy in the aftermath of 9/11. Evidence from the archives of the Spanish Inquisition suggests torture affords no middle ground: one cannot improvise quick, amateurish, and half-hearted torture sessions, motivated by anger and fear, and hope to extract reliable intelligence.

Here is the full piece by Ron E. Hassner, via the excellent Kevin Lewis.

Simplicity itself

3. Academics almost never say things so offensive that they deserve to be fired.

I don’t ever recall hearing an academic saying things as offensive as the garbage Trump spews out. And yet 42% of Americans support Trump. I’m not comfortable with speech codes that say 42% of Americans cannot hold certain jobs unless they keep their mouths shut.

That is from Scott Sumner.  And here are further thoughts by Scott.