Month: November 2024

New Zealand’s Regulatory Standards Act

by  Tyler Cowen in

From the Antipodes:

“To lift productivity and wages, ACT’s coalition agreement includes a commitment to pass a Regulatory Standards Act.

“The Bill will codify principles of good regulatory practice for existing and future regulations,” says Mr Seymour.

“It seeks to bring the same level of discipline to regulation that the Public Finance Act brings to public spending, with the Ministry for Regulation playing a role akin to that of Treasury.

“Some regulations operate differently in practice than they do in theory. To make regulators accountable to the New Zealanders they regulate, the Bill contains a recourse mechanism, by establishing a Regulatory Standards Board. The Board will assess complaints and challenges to regulations, issuing non-binding recommendations and public reports.

“If we raise the political cost of making bad laws by allowing New Zealanders to hold regulators accountable, the outcome will be better law-making, higher productivity, and higher wages.

I am pleased to, many years ago, have done preperatory work with Bryce Wilkinson on the ideas behind this legislation.  I am told this is likely to pass, here is more on the bill.

The economic powers of the HHS secretary

by  Tyler Cowen in

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

One of the problems with an RFK Jr. ascendancy is that his core views, which run strongly against vaccines and pharmaceuticals, make it unlikely that any of these reimbursement revisions will be done in a rational or scientific way. The best evidence indicates that pharmaceuticals are a relatively cost-effective ways of saving lives, and conversely that many costly surgical procedures are not very effective. One of the main drawbacks of the US health-care system is often described as overtreatment, yet some vaccines and drugs — the Covid vaccines, GLP-1 medications and HIV-AIDS treatments, to name just a few — are yielding very high returns.

The danger is that, with RFK Jr. at HHS, the US would restrain health-care spending in exactly the wrong areas. The human costs of such a mistake are obvious, but from a more narrow fiscal perspective, a sicker America would lead to even more serious budgetary problems.

In any case, for all the recent talk and speculation about DOGE, the HHS secretary could well have more of an impact on the federal budget, for better or worse.

HHS also oversees liability protection for vaccines…

Worth a very serious ponder.

Do Minimum Wages Reduce Job Opportunities for Blacks?

by  Tyler Cowen in

We provide a comprehensive analysis of the effects of minimum wages on blacks, and on the relative impacts on blacks vs. whites. We study not only teenagers – the focus of much of the minimum wage-employment literature – but also other low-skill groups. We focus primarily on employment, which has been the prime concern with the minimum wage research literature. We find evidence that job loss effects from higher minimum wages are much more evident for blacks, and in contrast not very detectable for whites, and are often large enough to generate adverse effects on earnings. We supplement this work with additional analysis that distinguishes between effects of an individual’s race and the race composition of where they live. The extensive residential segregation by race in the United States raises the question of whether the more adverse effects of minimum wages on blacks are attributable to more adverse effects on black individuals, or more adverse effects on neighborhoods with large black populations. We find relatively little evidence of heterogeneity in effects across areas defined by the share black among residents.

That is from a new NBER working paper by David Neumark and Jyotsana Kala.

The Impact of Divorce Laws on the Equilibrium in the Marriage Market

by  Tyler Cowen in

Does easier divorce affect who marries whom? I exploit time variation in the adoption of unilateral divorce across the United States and show that it increases assortative matching among newlyweds. To unravel the underlying mechanisms, I estimate a novel life-cycle equilibrium model of marriage, labor supply, consumption, and divorce under the baseline mutual consent divorce regime. By solving the model under unilateral divorce, I find that, consistent with the data, assortative matching increases. Effects are largely due to changes in choices when risk sharing and cooperation within marriage decrease, which highlights the importance of considering equilibrium effects when evaluating family policies.

That is from a new JPE piece by Ana Reynoso.

MR Podcast: Insurance!

by  Alex Tabarrok in

In our new Marginal Revolution Podcast Tyler and I talk insurance, the history of insurance, the economics of insurance, the prospects for new types of insurance and more. Did you know that life insurance was once considered repugnant and was often illegal?

Tyler and I were both surprised how little good work there is on insurance. Here’s Tyler:

[Y]ou look at microeconomic theory. You feel all insurance should be a simple thing. There is risk aversion. You buy the contract. You look at the actual history. It’s very hard to make sense of it. The more I learned, I found the more questions I had. I didn’t fall into some, oh, now I understand what was happening kind of pattern. And the second is simply, I had been underrating Charles Ives. He was more than a great composer. Those are my takeaways.

Here’s one more bit:

COWEN: I want to get to the big, big question about insurance and see what you think. This is my worry. My worry is the agency problems behind insurance never have been solved.

….TABARROK: It is a peculiar market in the sense that all of your revenues come early.

COWEN: That’s right.

TABARROK: You’re selling all of this insurance, and everything is great because all of the money is coming in and your costs don’t come until much, much later. Your customers need to be convinced that you’re going to be around for a long time and are going to fulfill these implicit debts. Which is one reason insurance companies like to have big buildings with giant columns, like banks, to make them look solid. How do we guarantee that? I absolutely agree that’s a huge problem. I hate to say, but, there is a lot of insurance regulation which is precisely meant to deal with this problem.

COWEN: At the state level, you can choose the state. There’s reinsurance through Bermuda or other locales….[But] the problem is not just the company, it’s the person buying the insurance. You could have an insurance company. They advertise, we hold only T-bills and you know they’re safe. People don’t want that. It’s not what I would want. I want the riskier life insurance to get a higher return on the package.

The fact that it’s not for me, makes it really easy to spend for something that promises higher return. They don’t pay it all off, or oh, whatever, but I’ll be dead then, and you don’t think that explicitly. But your ability to monitor the true safety is maybe fairly weak. Maybe it’s efficient to have a bunch of these not pay off, and you get the higher yields on average. You don’t want full safety in most spheres of human existence. The real risk is that you die, right?

TABARROK: If anything, the insurance markets have becoming safer over time because as they get larger, law of large numbers does mean that the risk falls.

COWEN: Assets are more and more correlated over time, I would say.

TABARROK: Well, so we have reinsurance…

COWEN: It’s not that everyone’s going to die at once. The problem is the assets all go crazy at the same time. The world’s more globalized, the gains in the S&P 500 have been concentrated in seven or eight stocks lately. There’s a lot of worrying signs on the asset side, this higher correlation and the law of large numbers is working against you. Fewer publicly traded companies. A place like China is not really somewhere you’re going to be investing in. Maybe you would have thought that 15 years ago. It seems to me going in the wrong direction.



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Peter Coy on DOGE

by  Tyler Cowen in

The federal government doesn’t have the people it needs to adequately monitor and vet its enormous streams of payments to defense contractors, hospitals and individuals. For example, administrative expenses account for only half a percent of the budget of the Social Security Administration. Trying to squeeze down that half percent by cutting personnel could lead to misspending of the other 99.5 percent of the budget.

Here is more from the NYT, interesting throughout.  Here is another bit:

To fix such problems, [Brian] Riedl said, “you need G.A.O. and other government experts and others who have done auditing to do most of the legwork.” There is no single easily repeatable fix: “Every program, every program failure and example of mismanagement has its own story.”

You may recall that private health insurance companies have fairly high “overhead,” perhaps a misleading term but nonetheless relevant for these debates.  There are hundreds of billions of “lost” funds at DOD and in Medicare.  Does the plan to improve on that performance involve more staff or less staff?

“The Misery of Diversity”

by  Tyler Cowen in

I am surprised this paper made it through, but I am pleased to see the intellectual diversity it represents:

Evolutionary accounts assert that while diversity may lower subjective well-being (SWB) by creating an evolutionary mismatch between evolved psychological tendencies and the current social environment, human societies can adapt to diversity via intergroup contact under appropriate conditions. Exploiting a novel natural experiment in history, we examine the impact of the social environment, captured by population diversity, on SWB. We find that diversity lowers cognitive and hedonic measures of SWB. Diversity-induced deteriorations in the quality of the macrosocial environment, captured by reduced social cohesion, retarded state capacity, and increased inequality in economic opportunities, emerge as mechanisms explaining our findings. The analysis of first- and second-generation immigrants in Europe and the USA reveals that the misery of home country diversity persists even after neutralizing the role of the social environment. However, these effects diminish among the second generation, suggesting that long-term improvements in the social environment can alleviate the burden of diversity. Finally, in exploring whether human societies can adapt to diversity, we show evidence that diversity causes adopting cultural traits (such as establishing stronger family ties, assigning greater importance to friendships, and adopting a positive attitude towards competition) that can mitigate the misery of diversity. These results survive an exhaustive set of robustness checks.

That is from the NBER series, authored by Resul Cesur & Sadullah Yıldırım.

*Is Inequality the Problem?*

by  Tyler Cowen in

Lane Kenworthy has a book coming out next year, I have read it, and it is superb (rooftops) and also very important.  Here is a brief excerpt:

Rich democratic nations with higher levels of income inequality or larger increases in income inequality haven’t tended to have slower economic growth, lower or slower-growing household income, or worse household balance sheets…

The notion that income inequality is harmful for health has recieved substantial attention from researchers, and some now take it for granted that inequality reduces longevity.  But the country evidence offers very little support for this conclusion.

I will let you know when a pre-order is possible.  In the meantime, it shouldn’t matter, but I can also report that Kenworthy is very much a left-leaning thinker, as you can adduce from his policy recommendations toward the end of the book.

Broad tariffs can be worse than targeted tariffs

by  Tyler Cowen in

From a new and excellent post by the essential Noah Smith:

There are actually two reasons that broad tariffs, like the ones Trump is proposing, have difficulty reducing trade deficits.

The first reason is exchange rate adjustment.

When you trade stuff internationally, you have to swap currencies. As anyone who has traveled overseas knows, to buy Chinese goods, you need yuan.² So if you’re an American, you need to swap your dollars for yuan in order to buy stuff from China. The price at which dollars and yuan get swapped for each other is called the exchange rate.

When the U.S. puts tariffs on China, that reduces U.S. demand for Chinese goods. And that reduces U.S. demand for Chinese yuan, because when Americans don’t need to buy as much Chinese stuff, they don’t need as much yuan.

And when demand for yuan goes down, the price of yuan, in terms of dollars, goes down. This is just basic Econ 101, supply-and-demand stuff. The dollar appreciates in value and the yuan depreciates in value. This is called “exchange rate adjustment”.

Exchange rate adjustment partially cancels out the effect of the tariffs. When tariffs make the yuan get cheaper for Americans, that makes Chinese goods cheaper for American customers. And when tariffs make the dollar get more expensive for Chinese people, that makes American goods get more expensive for Chinese customers.

This doesn’t completely cancel out the effect of tariffs, but it partially cancels it out. It’s like if the government put taxes on pizza, pizza restaurants would cut their prices in response, in order to reduce the number of people who stop eating pizza.

Of course in the real world, there are more than just two currencies, and more than just two countries trading with each other. But if you look at the data, it’s not hard to see the impact of Trump’s tariffs on China in his first term…

And this is not even the only reason broad tariffs struggle to reduce trade imbalances! There’s at least one more. Broad tariffs also raise costs for American manufacturers, without increasing costs for Chinese manufacturers.

Here is the full post.

How badly do humans misjudge AIs?

by  Tyler Cowen in

We study how humans form expectations about the performance of artificial intelligence (AI) and consequences for AI adoption. Our main hypothesis is that people project human-relevant problem features onto AI. People then over-infer from AI failures on human-easy tasks, and from AI successes on human-difficult tasks. Lab experiments provide strong evidence for projection of human difficulty onto AI, predictably distorting subjects’ expectations. Resulting adoption can be sub-optimal, as failing human-easy tasks need not imply poor overall performance in the case of AI. A field experiment with an AI giving parenting advice shows evidence for projection of human textual similarity. Users strongly infer from answers that are equally uninformative but less humanly-similar to expected answers, significantly reducing trust and engagement. Results suggest AI “anthropomorphism” can backfire by increasing projection and de-aligning human expectations and AI performance.

That is from a new paper by Raphael Raux, job market candidate from Harvard.  The piece is co-authored with Bnaya Dreyfuss.