Month: October 2021

Further evidence that mobility shocks are positive

This time the work is from Emi Nakamura, Jósef Sigurdsson, Jón Steinsson, in the Review of Economic Studies:

We exploit a volcanic “experiment” to study the costs and benefits of geographic mobility. In our experiment, a third of the houses in a town were covered by lava. People living in these houses were much more likely to move away permanently. For the dependents in a household (children), our estimates suggest that being induced to move by the “lava shock” dramatically raised lifetime earnings and education. While large, these estimates come with a substantial amount of statistical uncertainty. The benefits of moving were very unequally distributed across generations: the household heads (parents) were made slightly worse off by the shock. These results suggest large barriers to moving for the children, which imply that labour does not flow to locations where it earns the highest returns. The large gains from moving for the young are surprising in light of the fact that the town affected by our volcanic experiment was (and is) a relatively high income town. We interpret our findings as evidence of the importance of comparative advantage: the gains to moving may be very large for those badly matched to the location they happened to be born in, even if differences in average income are small.

And here are some earlier mobility results related to Hurricane Katrina, another exogenous shock that forced many people out.  Make that change in your life!  Now!

Via Paul Novosad.

Why I remain on Team Transitory

That is the topic of my latest Bloomberg column, here is one excerpt:

The case for Team Transitory is not about whether the next pending inflation numbers will come in high or low. Instead it consists of the following two propositions:

  • The Federal Reserve can control the rate of price inflation.
  • The Federal Reserve does not want inflation to be very high.

And:

Perhaps most important, there is the market’s perspective — and the market expects the Fed to bring down inflation rates. As I write, the 10-year Treasury yield is 1.64%. That yield has been rising, but it hardly seems to predict hyperinflation, or even 5% inflation for the next 10 years. The most negative piece of evidence so far is from the TIPS market, which is predicting inflation of about 3% over the next five years.

You might be wondering whether “the market” understands inflation and the Fed. Well, investors are obsessed with the Fed and study it closely. When I encounter Team Transitory skeptics, I ask them: “What is it that you understand about the Fed that the broader market does not?” I have yet to receive a compelling answer.

As an add-on note, properly interpreted those TIPS data probably are suggesting expected inflation rates of less than three percent, perhaps even closer to two percent looking forward.

The religious polity that is Iceland

A proposal to ban clergy from charging or accepting fees for funerals, weddings and baptisms has prompted threats of industrial action by the clergy union of the Church of Iceland (Þjóðkirkjan).

The Church of Iceland is the established Lutheran church of the island nation, and its clergy are paid by the state. Clerical salaries and parochial responsibilities are laid out in a contract negotiated by the Association of Icelandic Clergy and the state. Funerals, baptisms, weddings and confirmations are considered extra work and are governed by a set fee schedule.

On 19 Oct 2022 the Kirkjuráð, the Church of Iceland’s executive council, proposed ending the practice of charging fees. An announcement from the Kirkjuráð said the church would ban priests from charging fees. It believed clergy were sufficiently remunerated for their work, and further stated they believed the ministrations of the church should be available to all, and no one by dint of lack of funds should be denied services. “It is outdated and alienating for the services of the church that priests, who are serving people in moments of joy and sorrow, later send these people a bill for the services. This greatly undermines the credibility of the services of the church,” the Kirkjuráð wrote.

The president of the clergy union, Ninna Sif Svavarsdóttir, issued a statement decrying the proposal and took issue with the tone of Kirkjuráð’s announcement. “It is highly distasteful and indecent for a church council to warn pastors about a lack of Christian love when they exercise their clear fundamental right to collect fees for extra work.”

Ms.Svavarsdóttir stated a collective bargaining agreement had been reached in July 2021, and if the church hierarchy was going to abrogate the contract, the clergy might be compelled to exercise their rights under law and strike.

Here is the full story, via Evan.

Wednesday assorted links

1. Larry Katz on the Great Resignation.

2. Paul Krugman reviews Dune and Foundation (NYT).

3. Do carbon offsets offset carbon?

4. Meaningless correlations.  Risque terms at the link.  And p.A15 in WaPo: “Iran’s role in attack on U.S. troops in Syria signals new escalation.”  Who cares!?

5. Is China cracking down on vanity skyscrapers?

6. Four of the top ten songs on Itunes.

Clement and Tribe Predicted the FDA Catastrophe

Paul Clement and Laurence Tribe

Laboratory developed tests are not FDA regulated–never have been–instead the labs are regulated under the Clinical Laboratory Improvement Amendments (CLIA) as overseen by the CMS. Laboratory developed tests are the kind your doctor orders, they are a service not a product and are not sold directly to patients. Labs develop new tests routinely and they do not apply to the FDA for approval. Despite this long history, the FDA has claimed that it has the right to regulate lab tests and they have merely chosen not to exercise this right for forty years. In 2015, Paul Clement the former US Solicitor General under George W. Bush and Laurence Tribe, considered by many to be the leading constitutional lawyer in the United States, wrote an article that rejected the FDA’s claims writing that the “FDA’s assertion of authority over laboratory-developed testing services is clearly foreclosed by the FDA’s own authorizing statute” and “by the broader statutory context.”

Despite lacking statutory authority, the FDA has continued to claim it is authorized to regulate laboratory tests. Indeed, a key failure in the pandemic happened when the FDA issued so-called “guidance documents” saying that any SARS-CoV-II test had to be pre-approved by the FDA. Thus, the FDA reversed the logic of emergency. In ordinary times, pre-approval was not necessary but when speed was of the essence it became necessary to get FDA pre-approval. The FDA’s pre-approval process slowed down testing in the United States and it wasn’t until after the FDA lifted its restrictions in March that tests from the big labs became available.

Clement and Tribe rejected the FDA claims of regulatory authority over laboratory developed tests on historical, statutory, and legal grounds but they also argued that letting the FDA regulate laboratory tests was a dangerous idea. In a remarkably prescient passage, Clement and Tribe (2015, p. 18) warned:

The FDA approval process is protracted and not designed for the rapid clearance of tests. Many clinical laboratories track world trends regarding infectious diseases ranging from SARS to H1N1 and Avian Influenza. In these fast-moving, life-or-death situations, awaiting the development of manufactured test kits and the completion of FDA’s clearance procedures could entail potentially catastrophic delays, with disastrous consequences for patient care.

Clement and Tribe nailed it. Catastrophic delays, with disastrous consequences for patient care is exactly what happened.

Addendum: See also my pre-pandemic piece on this issue, Our DNA, Our Selves.

Sequoia to go more long-term

Sequoia Capital, one of Silicon Valley’s oldest and largest venture capital firms, has launched a bold restructuring to create a single overarching fund.

The Sequoia Fund will take in capital from investors and funnel it to Sequoia’s traditional venture funds, which invest in US and European start-ups. It will also hold Sequoia’s stakes in publicly listed companies, such as Airbnb. It will also charge a management fee of under 1 per cent, and potential performance fees, adding an extra layer of fees on top of its existing venture funds, a person briefed on the changes said.

Sequoia hopes that the ambitious plan will give it and its investors more flexibility. Its investors will not have to commit their money to a specific VC fund for several years while Sequoia will be able to hold on to its investments for longer than other VC funds, which typically aim to return money to investors within a decade. “Investments will no longer have ‘expiration dates’,” wrote Sequoia partner Roelof Botha in a blog post. “Our sole focus will be to grow value for our companies and limited partners over the long run.”

Sequoia also said it would file with the US Securities and Exchange Commission to become a registered investment adviser, allowing it to invest more money in cryptocurrencies, public stocks and private shares that it does not purchase directly from companies.

It seems we are headed toward a future where the larger, more successful players move closer to being full-service investment houses.  Here is the FT story.  What is the best way to think about which assets they are building upon as the scarce factors behind their successes?  And what are the limits to exploiting those scarce factors?  Which culture clashes need to be overcome for this to work?

This kind of number is not very reliable, but in broad terms it tells you something:

The median US venture capital fund rose by 88.1 per cent in the 12 months through June this year, according to estimates from the investment firm Cambridge Associates.

Here is a useful short Medium essay from Sequoia itself.

Don’t overpredict a negative future

That is the topic of my latest Bloomberg column, here is one bit:

A second question would be whether there is evidence to support the contention that Americans have become more negative overall. I am doubtful. Do fans of the Boston Red Sox hate the New York Yankees more than they used to? It’s not obvious that the answer is yes. What about animosity between, say, Protestants and Catholics? That’s probably a good deal weaker. There is almost certainly less homophobia, too, in addition to many other forms of prejudice. There are other indicators of progress; the surge in the number of Americans starting new businesses, for example, is hardly a sign of pessimism.

And:

The good news is that shifts in national moods come relatively frequently, and they are difficult to forecast. In the 1990s, for instance, few people forecast our current predicament of such an extreme polarized emotional opposition. Negative moods do not necessarily feed upon each other and become worse, as shown by the broader currents of history. Civilization has been around for thousands of years, and the U.S. for a few hundred years, in both cases with many ups and downs. If negative moods inevitably lead to nothing more than further collapse or destruction, it is hard to see how we would have come so far.

It is even possible that national moods are characterized by mean-reversion — namely, that negative moods tend to turn more positive, and vice versa. That would imply we could look forward to better moods ahead. That is hardly gospel, but I haven’t seen anyone with a better theory.

And:

So, to sum up a few of the basic facts under this worldview: Americans are more negative and more oppositional in some important ways, especially around politics. This is not a good development. Yet — especially when you look beyond politics — the national mood is by no means entirely sour or hopeless. National moods also change frequently, and in unpredictable ways. There will be many positive developments in coming decades, most of all in biotechnology.

The negativity, in other words, is contained, and it could change swiftly and without notice. I don’t know about you, but I find this outlook liberating — or even, dare I say, a reason for some modest optimism.

The mention of MR commentators, however, is behind the paywall.

Further points on the tax on unrealized capital gains

Put simply, this proposal is biased towards people with inherited wealth, invested in non-traded assets and mature businesses, and against people invested in publicly traded equities in growth companies, many of which they have started and built up. If that is the message that the tax law writers want to send, they should at least have the decency to be up front about that message, and to defend it.

Here is much more from Aswath Damodaran, devastating throughout.  And here is Alan Auerbach on retrospective capital gains taxation, not my favorite but a much better idea than what is being put forward.

On the persistence of the China Shock

Here are new results from Autor, Dorn, and Hanson:

We evaluate the duration of the China trade shock and its impact on a wide range of outcomes over the period 2000 to 2019. The shock plateaued in 2010, enabling analysis of its effects for nearly a decade past its culmination. Adverse impacts of import competition on manufacturing employment, overall employment-population ratios, and income per capita in more trade-exposed U.S. commuting zones are present out to 2019. Over the full study period, greater import competition implies a reduction in the manufacturing employment-population ratio of 1.54 percentage points, which is 55% of the observed change in the value, and the absorption of 86% of this net job loss via a corresponding decrease in the overall employment rate. Reductions in population headcounts, which indicate net out-migration, register only for foreign-born workers and the native-born 25-39 years old, implying that exit from work is a primary means of adjustment to trade-induced contractions in labor demand. More negatively affected regions see modest increases in the uptake of government transfers, but these transfers primarily take the form of Social Security and Medicare benefits. Adverse outcomes are more acute in regions that initially had fewer college-educated workers and were more industrially specialized. Impacts are qualitatively—but not quantitatively—similar to those caused by the decline of employment in coal production since the 1980s, indicating that the China trade shock holds lessons for other episodes of localized job loss. Import competition from China induced changes in income per capita across local labor markets that are much larger than the spatial heterogeneity of income effects predicted by standard quantitative trade models. Even using higher-end estimates of the consumer benefits of rising trade with China, a substantial fraction of commuting zones appears to have suffered absolute declines in average real incomes.

The economic consequences of the Opium War

That is a new NBER working paper by Wolfgang Keller and Caroline H. Shiue, here is the abstract:

This paper studies the economic consequences of the West’s foray into China after the Opium War (1839-42), when Western colonial influence was introduced in dozens of so-called treaty ports. We document a turnaround during the 19th century in the nature of China’s capital markets. Whereas before the Opium War, coastal cities were of relatively minor importance, the treaty port system of the West transformed China into an economy focused on coastal areas and on international trade that aligned with the trading interests of the West. We show, first, that the West had a positive impact on China’s economy during the 19th century. It brought down local interest rates, and regions under Western influence exhibited both higher rates of industry growth and technology adoption. Second, the geographic scope of influence went far beyond the ports, impacting most of China. Interest rates fell by more than a quarter in the immediate vicinity of the ports and still by almost ten percent at distances of 450 kilometers from treaty ports. The development of China was not simply propelled by its own pre-1800 history, or by post-1978 reforms. The nearly 100 years of semi-colonization have shaped China’s economy today as one focused on the coastal areas.

As both Alex and I have said before, economics is still a discipline where you can put forward non-PC results without being destroyed for it.

Monday assorted links

1. Jodi Ettenberg interview.  Recommended.

2. “No evidence for cumulating socioeconomic advantage. Ability explains increasing SES effects with age on children’s domain test scores.

3. Unite America, for ranked choice voting.  And the sugar lobby is alive and well.

4. “We find that access to a plasma donation center reduces demand (inquiries) for payday and installment loans by 6.5% and 8.1%, respectively, with larger effects (13.1% and 15.7%, respectively) on younger borrowers. Moreover, foot traffic increases by 7-10% at essential and non-essential goods establishments when a new plasma center opens nearby. Our findings suggest that plasma donation helps households smooth consumption without appealing to high-cost debt.”  Link here.

5. “Thus, six-year-olds appear to more flexibly use multiple sources of information than both younger children and adults…

6. “An additional study (N = 2,172) shows that both Democrats and Republicans perceived the social network Facebook to be biased against their side.

7. “License plate readers are rapidly reshaping private security in American neighborhoods, bringing police surveillance tools to the masses with an automated watchdog that records 24 hours a day.

The tax on unrealized capital gains

Maybe I don’t understand how the supposed plan is supposed to work.  There is no tax credit for unrealized capital losses, right?  So you won’t want to hold volatile asset classes any more, right?  Imagine the value going up, you pay some tax, and then the value falls and you move into loss territory.  You still paid the tax!  You get nothing back.  By exactly how much do the prices of these assets have to fall, ex ante, so that holding them is a good idea in the first place?  Or maybe the wealthy investors subject to this tax are not significant enough to on their own move market prices, in which cases they are just pushed out of these very risk asset classes?

If you can deduct unrealized losses, just how much revenue will the bill raise?  Might the wealthy be incentized to hold ever yet riskier assets in that case?  And how will debt assets be treated?  What exactly is equity anyway?  Do all options and derivatives positions have to be considered as well?  (If not there is a massive arbitrage opportunity, hold some assets with a big chance to take losses but hedge your position with derivatives.)

Has anyone estimated all this and figured it out?  Should we pass such a tax bill without such estimates and public debate?  Isn’t that kind of democracy “good”?  What would The Party of Science say?

What am I missing here?