Month: September 2023

Mimetic desire and India’s IT growth

by  Tyler Cowen in

We study how US immigration policy and the Internet boom affected not just the US, but also led to a tech boom in India. Students and workers in India acquired computer science skills to join the rapidly growing US IT industry. As the number of US visas was capped, many remained in India, enabling the growth of an Indian IT sector that eventually surpassed the US in IT exports. We leverage variation in immigration quotas and US demand across occupations to show that India experienced a ‘brain gain’ when the probability of migrating to the US was higher. Changes in the US H-1B cap induced changes in fields of study, and occupation choice in India. We then build and estimate a quantitative model incorporating trade, innovation, and dynamic occupation choice in both countries. We find that high-skill migration raised the average welfare of workers in each country, but had distributional consequences. The H-1B program induced Indians to switch to computer science occupations, and helped drive the shift in IT production from the US to India. We show that accounting for endogenous skill acquisition is key for quantifying the gains from migration.

That is from a new paper by Gaurav Khanna and Nicolas Morales.  One implication is that for many countries brain drain is not a problem, rather many people train to go abroad but end up staying home, to the benefit of the home country.

Rewatching *Close Encounters of the Third Kind* (with a few spoilers)

by  Tyler Cowen

I hadn’t seen it in many years, and this time around I know more about demonology.  Much more.  If there were a Second Coming, how would we distinguish it from the Antichrist?  How would we distinguish aliens from either?  The movie explores these questions in considerable depth, so no it’s not Spielberg happy and shiny aliens movie.  I was reminded of Shyamalan’s (excellent) Signs throughout.  There is even a background scene where The Ten Commandments is playing on a TV.  In this movie, who are the Apostles?  Is the notion of “The Chosen” being redefined?  Doesn’t the final scene, where the big ship comes through the clouds, remind you of The Book of Revelation?  And if “the aliens” are so benevolent, why do they kidnap people and return so many of them as frozen zombies?  Or are those the demons?  Or the saved?  Or whatever.

Oh, and from Wikipedia there is this: “The name “Devil’s Tower” originated in 1875 during an expedition led by Colonel Richard Irving Dodge, when his interpreter reportedly misinterpreted a native name to mean “Bad God’s Tower”.”

By the way, did you notice the role of the “Deep State” in this movie?  You don’t see the President, members of Congress, or even generals greeting the aliens.  There is instead some weird French guy who barely speaks English, surrounded by a bunch of bureaucrats.

A Diamond Pricing Puzzle

by  Alex Tabarrok in

In our textbook, Modern Principles of Economics, Tyler and I predicted that lab grown diamonds would break the DeBeers cartel. Well, it’s finally happening.

Bloomberg: One of the world’s most popular types of rough diamonds has plunged into a pricing free fall, as an increasing number of Americans choose engagement rings made from lab-grown stones instead.

…the scale and speed of the pricing collapse of one of the diamond industry’s most important products has left the market reeling.

…De Beers has cut prices in the category by more than 40% in the past year…The impact on De Beers was clear…first half profits plunged more than 60% to just $347 million, with its average selling price falling from $213 per carat to $163 per carat.

The puzzle, however, is why has it taken so long? The diamond market does have some peculiar features. Buyers of engagement rings don’t necessarily benefit from lower-prices per se as a diamond ring is a signal. If the cost of the signal goes down, people need to spend more to send the same message. An inexpensive engagement ring is thus something of a contradiction in terms, so price shopping is less intense. Nevertheless, the early buyers of lab-grown diamond rings should still benefit because the rings can’t be distinguished by the naked eye. Neither the bride, nor her friends, have to know the $10,000 ring only cost $5,000, right? Right?

Well maybe not right. DeBeers also produces lab-grown diamonds and they have a very strange pricing strategy:

De Beers started selling its own lab-grown diamonds in 2018 at a steep discount to the going price, in an attempt to differentiate between the two categories. The company expects lab-grown prices to continue to tumble, in what it sees as a tsunami of more supply coming on to the market, Rowley said. That should create an even bigger delta in prices between natural diamonds and lab grown, helping differentiate the two products, he said.

What? Ordinarily, the bigger the price between a competitor and its substitute the greater pressure on the competitor to lower prices! Yet DeBeers is gambling that the bigger the difference in price between natural and lab grown diamonds the bigger the demand for natural diamonds! Strange. The only way I see this working is if the fiancée knows the price of the ring, which maybe they do! In that case, the buyer still has to spend 10k and doesn’t care whether it’s 10k on synthetic diamonds or 10k on natural grown diamonds. But 10k on synthetic diamonds will get you more carats so we need an equilibrium in which a smaller diamond signals more expensive. But that runs against hundreds of years of expectations! And remember natural and lab grown diamonds are indistinguishable by the naked eye. It’s one thing for the fiancée to know the price of the diamond but surely her friends judge by what they can see, namely the size of the ring. Which signal is the most important to send?

All of this goes to show how peculiar the signaling model can be. Keep diamonds in mind when thinking about the the market for higher-education. Harvard is never going to lower prices and might they even raise prices as state schools lower their price?

Disputes over China and structural imbalances

by  Tyler Cowen in

There has been some pushback on my recent China consumption post, so let me review my initial points:

There exists a view, found most commonly in Michael Pettit (and also Matthew Klein), that suggests economies can have structural shortfalls of consumption in the long run and outside of liquidity traps.

My argument was that this view makes no sense, it is some mix of wrong and “not even wrong,” and it is not supported by a coherent model.  If need be, relative prices will adjust to restore an equilibrium.  If relative prices are prevented from adjusting, the actual problem is not best understood as a shortfall of consumption, and will not be fixed by a mere expansion of consumption.

Note that people who promote this view love the word “absorb,” and generally they are reluctant to talk much about relative price adjustments, or even why those price adjustments might not take place.

You will note Pettis claims Germany suffers from a similar problem, America too though of course the inverse version of it.  So whatever observations you might make about China, the question remains whether this model makes sense more generally.  (And Australia, which ran durable trade deficits from the 1970s to 2017, while putting in a strong performance, is a less popular topic.)

Pettis even has claimed that “US business investment is constrained by weak demand rather than costly capital”, and that is from April 4, 2023 (!).

It would take me a different blog post to explain how someone might arrive at such a point, with historic stops at Hobson, Foster, and Catchings along the way, but for now just realize we’re dealing with a very weird (and incorrect) theory here.  I will note in passing that the afore-cited Pettis thread has other major problems, not to mention a vagueness about monetary policy responses, and that rather simply the main argument for current industrial policy is straightforward externalities, not convoluted claims about how foreign and domestic investment interact.

Pettis also implicates labor exploitation as a (the?) major factor behind trade surpluses, and furthermore he considers this to be a form of “protectionism.”  Now you can play around with scholar.google.com, or ChatGPT, all you want, and you just won’t find this to be the dominant theory of trade surpluses or even close to that.  As a claim, it is far stronger than what a complex literature will support, noting there is a general agreement that lower real wages (ceteris paribus) are one factor — among many — that can help exports.  This point isn’t wrong as a matter of theory, it is simply a considerable overreach on empirical grounds.  Of course, if Pettis has a piece showing statistically that a) there is a meaningful definition of labor exploitation here, and b) it is a much larger determinant of trade surpluses than the rest of the profession seems to think…I would gladly read and review it.  Be very suspicious if you do not see such a link appear!

Another claim from Pettis that would not generate widespread agreement is: “…in an efficient, well-managed, and open trading system, large, persistent trade imbalances are rare and occur in only a very limited number of circumstances.” (see the above link)  That is harder to test because arguably the initial conditions never are satisfied, but it does not represent the general point of view, which among other things, considers persistent differences in time preferences and productivities across nations.

Now, it does not save all of this mess to make a series of good, commonsense observations about China, as Patrick Chovanec has done (Say’s Law does hold in the medium-term, however).  And as Brad Setser has done.

In fact, those threads (and their citation) make me all the more worried.  There is not a general realization that the underlying theory does not make sense, and that the main claim about the determinants of trade surpluses is wrong, and that it requires a funny and under-argued tracing of virtually all trade imbalances to pathology.  And to be clear, this is a theory that only a small minority of economists is putting forward.  I am not the dissident here, rather I am the one delivering the bad news.

So the theory is wrong, and don’t let commonsense, correct observations about China throw you off the scent here.

Why are folk songs such a poor guide to economics?

by  Tyler Cowen

Oliver Anthony (perhaps he should leave his town of per capita income 13k?) is the centerpiece of the column, but I’ll excerpt the bit of Springsteen:

When singers turn to economic issues, who plays the role of victim? Very often it is people who have lost their jobs, such as in Bruce Springsteen’s “My Hometown,” about a textile mill leaving the singer’s hometown. (Springsteen is not generally considered a folk singer, but many of his songs have folk roots and channel folk vibes.) That sounds terrible, and for many former workers it was.

But in fact the mill was relocated further south, where presumably it helped to create other jobs. Was this development an egalitarian way to help spread prosperity to a poorer part of the country? Did it help spur the transition of New Jersey to a service economy? That seems to have worked out: Average household income today in Freehold, Springsteen’s hometown, is more than $133,000. Or were more sinister forces at work? Was the factory closing a form of regulatory arbitrage against trade unions that protect worker interests?

No matter what your view, the song doesn’t clarify the issue very much. Nor should it be expected to.

As a general rule, music and the arts excel at pointing attention toward the seen — that is, identifiable victims or beneficiaries. In contrast, many of the most important insights of economics concern the unseen — that is, people who benefit in non-obvious ways, and sometimes many of them actually are unidentifiable. Automation, for instance, will throw some people out of work, but economics teaches us that in the longer run it usually benefits society, through both lower consumer prices and the creation of jobs in other, less visible sectors of the economy. You don’t hear many songs about that.

Not surprisingly, Bob Dylan is the hero of the story.

Is Bach the greatest achiever of all time?

by  Tyler Cowen in

I’ve been reading and rereading biographies of Bach lately (for some podcast prep), and it strikes me he might count as the greatest achiever of all time.  That is distinct from say regarding him as your favorite composer or artist of all time.  I would include the following metrics as relevant for that designation:

1. Quality of work.

2. How much better he was than his contemporaries.

3. How much he stayed the very best in subsequent centuries.

4. Quantity of work.

5. Peaks.

6. Consistency of work and achievement.

7. How many other problems he had to solve to succeed with his achievement.  For Bach, this might include a) finding musical manuscripts, b) finding organs good enough to play and compose on, c) dealing with various local and church authorities, d) migrating so successfully across jurisdictions, e) composing at an impossibly high level during the four years he was widowed (with kids), before remarrying.

8. Ending up so great that he could learn only from himself.

9. Never experiencing true defeat or setback (rules out Napoleon!).

I see Bach as ranking very, very high in all these categories.  Who else might even be a contender for greatest achiever of all time?  Shakespeare?  Maybe, but Bach seems to beat him for relentlessness and quantity (at a very high quality level).  Beethoven would be high on the list, but he doesn’t seem to quite match up to Bach in all of these categories.  Homer seems relevant, but we are not even sure who or what he was.  Archimedes?  Plato or Aristotle?  Who else?

Addendum: from Lucas, in the comments:

I’m not joking when I say I have thought about Bach in this light every week for the last 20 years.

His family died young, and his day job for much of his life was a school teacher! In addition to the daily demands on him to teach Latin and theology and supervise teenage boys and so on, there was the thousand small practical challenges of life in the eighteenth century. No electric lighting. Crappy parchment and quills. The cold, the disease, the lack of plumbing, the restricted access to information, talented players, and the manual nature of every little thing.

And, perhaps most of all, to continue such a volume of high-quality output when the world seemed not to care. Yes, he had a local reputation among those in the know, but there were never any packed concert halls or grand tours to validate his efforts. He seems to have been entirely internally driven by his genius and his commitment to the eternal and divine.

That was then, this is now, Budapest edition

by  Tyler Cowen in

Trains between the two cities [Budapest and Vienna] were fast — four and a quarter hours in 1896.  In 2022 it was three hours and thirty-five minutes.

And:

Budapest finance caught up and surpassed the growth of agricultural and industrial production.  By 1900 Budapest became the bankming centre of Central and Eastern Europe.  Between 1867, the date of the ‘Compromise’ which created the Dual Monarchy of Austria-Hungary, and 1914 the number of Hungarian banks grew from eleven to 160 and their capitalization increased fivefold.  A few of them — the First Hungarian Commercial Bank and the Hungarian Credit Bank — rivalled the biggest Viennese and German banks in size and prestige, as their palatial headquarter buildings in downtown Budapest, designed by the most renowned European and Hungarian architects, showed.  Their owners, such as the Wolianders, the Wahrmanns, Hatvany-Deutsch and Chorins, joined the European super-rich.

That is all from Victor Sebestyen’s interesting new book, Budapest: Portrait of a City Between East and West.

Sunday assorted links

by  Tyler Cowen

1. Ian Leslie on stories.

2. When and why did French fertility fall so rapidly?

3. Different accents in English.

4. Glimpse inside the Delhi punk scene.

5. Can you blame him?  A story of biryani.

6. Alas, GBD was not about protecting the vulnerable.  Sorry, people.

7. Is the standard model of the universe wrong? (NYT)

8. The invention of a new chess variant? (“Try as hard as you can to lose, and then win when your opponent resigns”?)

Proudhon: To be Governed

by  Alex Tabarrok in

To be GOVERNED is to be watched, inspected, spied upon, directed, law-driven, numbered, regulated, enrolled, indoctrinated, preached at, controlled, checked, estimated, valued, censured, commanded, by creatures who have neither the right nor the wisdom nor the virtue to do so. To be GOVERNED is to be at every operation, at every transaction noted, registered, counted, taxed, stamped, measured, numbered, assessed, licensed, authorized, admonished, prevented, forbidden, reformed, corrected, punished. It is, under pretext of public utility, and in the name of the general interest, to be place under contribution, drilled, fleeced, exploited, monopolized, extorted from, squeezed, hoaxed, robbed; then, at the slightest resistance, the first word of complaint, to be repressed, fined, vilified, harassed, hunted down, abused, clubbed, disarmed, bound, choked, imprisoned, judged, condemned, shot, deported, sacrificed, sold, betrayed; and to crown all, mocked, ridiculed, derided, outraged, dishonored. That is government; that is its justice; that is its morality.

Pierre-Joseph Proudhon, “General Idea of the Revolution in the Nineteenth Century,” first published in French 1851; translated by John Beverly Robinson (1923), pp. 293-294.

Hat tip: Robert Higgs.

The Dominican Republic is underrated

by  Tyler Cowen in

Despite being one of Latin America’s poorest countries in the mid-1960s, the Dominican Republic has made remarkable progress in terms of income convergence…

What is remarkable about the Dominican Republic’s progress is not just the level of convergence but also its speed compared to other countries in the region. By examining the average convergence velocity, or the rate of change in income convergence per decade, it is evident that the Dominican Republic has exhibited the highest average convergence velocity, or “blue shift,” in Latin America over the past 50 years. Panama and Chile have achieved equally meaningful but still lower positive convergence velocities, while the majority of countries in the region have experienced either very low (“green shift”) or negative (“red shift”) convergence velocities.

Here is the full IMF brief, retweeted by Matt Yglesias.  There is much more at the link.  I have been there twice, including as recently as last year (albeit briefly), and this accords with my intuitions.