It’s happening, economic science edition

Our contribution is to demonstrate that it is possible to create a system without human input at any step – to simulate the entire social science process.”  We’ve created a whole new method for doing economics, and a whole new way to model human behavior.  How often does that happen?  We don’t yet know how useful it will prove, but at the moment how many people even are noticing!?  That is from Benjamin S. Manning, Kehang Zhu, and John J. Horton, of MIT, Harvard, and MIT.  Worth a ponder, at the very least.

Which U.S. firms have grown in profitability?

China’s admission into the WTO in 2001 heralded a new era of globalization, increasing both import competition in domestic markets and foreign opportunities for US firms. In the aggregate, the average annual profitability of US public firms during the post globalization period (2003-2019) increased by 11.5% of the corresponding pre-globalization period (1984-2002) profitability. This increase in overall aggregate profitability was primarily driven by foreign profitability increasing by 47.4% for firms in the S&P 500 index, which are larger and have more intangible assets created by R&D and SG&A expenditures. In contrast, following globalization, the average aggregate domestic profitability of US firms remained flat, and firms employed more capital to generate sales. Firms with higher intangible assets benefited more from globalization.

That is from a new NBER working paper by Bullipe R. Chintha, Ravi Jagannathan, and Sri S. Sridhard.  When Average is Over was published about eleven years ago, in talks and media appearances I used to commonly draw a distinction between people/firms who are exporting their products — yes economists too — and those who are not.  Which category do you belong to?

What are the exact elasticity assumptions behind the terms of trade argument [for tariffs]?

“The terms of trade argument for protectionism relies on specific assumptions about the elasticities of demand and supply for a country’s exports and imports. The key elasticity assumptions are:

  1. Inelastic foreign demand for the country’s exports: This means that when the price of the country’s exports increases, the quantity demanded by foreign countries does not decrease much. In other words, the percentage change in quantity demanded is smaller than the percentage change in price.
  2. Elastic domestic demand for imports: This means that when the price of imports increases (due to a tariff), the quantity of imports demanded by the domestic country decreases significantly. In other words, the percentage change in quantity demanded is larger than the percentage change in price.

Under these elasticity assumptions, a country can improve its terms of trade by imposing a tariff on its imports. Here’s how it works:

  1. The tariff raises the domestic price of imports, leading to a decrease in the quantity of imports demanded due to the elastic domestic demand for imports.
  2. The decrease in import demand leads to a decrease in the world price of the imported goods (assuming the country has a significant share of world import demand).
  3. The country’s exports are not affected much by the tariff because foreign demand for the country’s exports is inelastic.
  4. As a result, the country experiences an improvement in its terms of trade: the price of its exports relative to the price of its imports increases.

However, it’s important to note that these elasticity assumptions are not always met in the real world. The elasticities of demand and supply can vary depending on the specific goods being traded, the time horizon, and other market conditions. Moreover, even if a country can improve its terms of trade through tariffs, this does not necessarily imply that the tariffs are beneficial for the country’s overall economic welfare, as they can lead to distortions in production and consumption, as well as potential retaliation from trading partners.”

That is from Claude 3 Opus.

The Irish reject a “Woke” constitutional change

Ireland’s effort to remove old-fashioned family values from its constitution suffered a double defeat Saturday as voters rejected the amendments on offer as maddeningly vague and threatening to property rights…

In final results announced Saturday night, the amendment to change the constitutional definition of family was rejected by 67.7 percent of voters. The proposed changes on family care took an even harsher drubbing, with 73.9 percent against — the greatest defeat of an amendment in Irish constitutional history…

The outcome means that the 1937 constitution, the legal bedrock for the Irish state, will continue to declare marriage a requirement for any family, while women’s value to society comes from delivering “duties in the home.”

Those notions from a bygone era contrast starkly with the reality of Ireland today, where two-fifths of children are born out of wedlock and most women work outside the home.

The government, with support from all the main opposition parties, had wanted the public to accept two amendments.

Here is the full story, via Rich D.

Saturday assorted links

1. Why high drug prices are good for Americans.

2. Open access Sanford Ikeda  book on Jane Jacobs.

3. “He’s just a complete parliamentary obsessive and savant, really like no one I’ve ever met, even people in the parliamentarian’s office…”  He is a twenty-year-old economics student from Britain, born in Poland.  Good piece.

4. OpenAI review is completed.

5. Taylor Swift tour prompts economists to upgrade Singapore growth forecast (Bloomberg).

6. John Cochrane on increasing the number of women in economics.

7. The Economist on new city projects.

As it should be

The next time you send your doctor an email, don’t be surprised if they charge you a fee to answer.

More healthcare groups are charging fees to answer patients’ electronic messages, often the ones you exchange via their portal. Doctors say it’s only fair if they’re spending time on the messages and note that an email discussion can often save you the time of having to come in.

The typical cost of an email message claim was $39 in 2021, including both the portion paid by insurance and by the patient, according to a Peterson-KFF Health System Tracker analysis.

Some patients have been taken aback by the charges. They are surprised at the notifications on portals about the change, and irritated at the idea of a new fee.

Dr. Lauren Oshman, a family physician and associate professor at the University of Michigan Medical School, says she initially experienced some patient resistance and anger about the prospect of being billed for emails.

Now, she says, patients are typically pleased that they are able to get a direct response from her through a portal message.

“They’re thrilled when they get me directly,” she says.

Here is more from the WSJ, via the excellent Daniel Lippman.

The new UAPs report

You will find it here, 45 pp. of text plus lots of footnotes.  Overall it is a nothing burger.  You’ll find plenty of (justifiable) claims that there are no dead bodies, no alien spacecraft have been recovered, no technology is being reverse engineered, there is nothing to Roswell, and so on.  Here is from the executive summary:

AARO found no evidence that any USG investigation, academic-sponsored research, or official review panel has confirmed that any sighting of a UAP represented extraterrestrial technology.

That is certainly true.  What you won’t find in this report is any mention of Nimitz, Gimbal, or any of the other more puzzling cases about observed objects — on multiple sensors with independent verifications — that defy current explanation.  No real discussion of the more serious pilot eyewitness reports (and no, these pilots are not saying they saw aliens, they are reporting they cannot explain what they saw).  On p.26 you will find the concession: “A small percentage of cases have potentially anomalous characteristics or concerning characteristics.  AARO has kept Congress fully and currently informed of its findings.  AARO’s research continues on these cases.

So overall there is no reason to revise whatever your current views might be, at least provided those views were not the crazy ones in the first place.  If anything, perhaps you should do a slight Bayesian update toward believing in a real puzzle, given that in a 45 pp. report the government is not willing to directly explain or even confront the most anomalous cases.

Austin Vernon on utilities (from my email)

I agree with the anonymous email, and I’ve written about customers going off-grid or doing microgrids because I think customers will find them more appealing than existing utilities. It seems obvious that a lot of data centers will directly source their power. It’s not insurmountable now that there is a robust industry of independent power producers and financiers. Also, it is easier to build a reliable system with today’s power plants, batteries, etc. The days of 60% capacity factor nuclear and coal plants are over.And in these news articles, like the WAPO one, people like to lump Texas in with these other places without mentioning they’ve already been seeing load growth and are handling it well so far. Texas will add more grid batteries this year than the entire US did in 2023. ERCOT set peak demand records last year at 85 GW (up from 80 GW in 2022 and just 69 GW in 2018), so their adding 6 GW/~12 GWh of batteries this year is pretty substantial, on top of 12 GW of utility-scale solar, etc.I suspect it will soon be undeniable that a relatively freewheeling energy-only market with competitive bidding for new transmission is the way to go. And that the staid vertical utilities and subpar regulations are a liability for the rest of the Sunbelt and the coasts.

A different perspective on power grid YIMBY and NIMBY (from my email)

Just flagging that while YIMBY is important…it’s only part of the solution. And it’s unclear just how important it is compared to the issues below because so few projects are even proposed and most that are do in fact get built without too much NIMBY delay (though it certainly does happen and as an attorney I’ve had clients on both sides of those fights).

A major cause of the decline in transmission miles built is that transmission owners (typically incumbent utilities often with some amount of government granted monopoly power) have chosen not to build the kind of high voltage transmission lines that bring power from generation, largely in an effort to avoid competition and construction risk. In short, they make more money building smaller projects that maintain reliability but don’t increase the transmission capacity of the system because those smaller projects are immune from planning scrutiny and competition.

FERC is currently sitting on a new rule that will attempt to improve this, though in my opinion should go much further than I suspect it will. Eg, FERC should significantly roll back the rate of return and assumption of prudence for small projects that are increasingly making up the bulk of transmission investments as well as forcing transmission planners to fully incorporate multiple benefits of projects when deciding what projects get priority (similar to what the Midcontinent Independent System Operator does for its Long Range Transmission Planning portfolios).

Hope that context is helpful. NIMBY is all the talk in transmission right now, but it is in reality not the main source of drag on development in my experience. In some ways I’d love for NIMBY to be the biggest hurdle because it would at least mean we’d be trying to build ambitious new projects.

From Anonymous.

Small countries, big firms

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

From both a biomedical and economic point of view, the success of the new class of weight-loss drugs is something to behold. Not only are they a remarkable scientific achievement, but — in the case of Ozempic and Wegovy, both made by Novo Nordisk — they are a huge boon to the Danish economy. The Danish pharmaceutical industry kept Denmark from falling into a recession last year.

The dependence of some mid-sized economies on a single commodity, often related to oil or natural gas, is a familiar story. The new twist, which may become increasingly common, is a national economy dependent on a single company — not a natural resource. This will lead to some fundamentally new economic and political dynamics.

And:

Government attempts to manage a biomedical company, or a major AI company for that matter, would probably not work. Private-sector management thus becomes ever more important for the economic growth of these small to mid-sized countries.

And while it is better for a country to have one big, successful company than not, such a company — such as Nokia in Finland — does put the domestic economy in a somewhat precarious position. Politically as well, that company will have a fair amount of leverage over domestic decisions. It is noteworthy that Novo Nordisk has a very large philanthropic fund, worth more than $100 billion by one estimate. The mere option of spending some of that money in Denmark gives the company further influence over politics and public opinion.

The net result might be more “crony capitalism” — which, to be clear, is preferable to socialism — in mid-sized countries.

Abroad, as the demand for these weight-loss drugs continues to grow, people may start identifying Denmark with pharmaceuticals — just as many people identify France with wine or cheese. The longer-run image of Denmark may shift at home as well, perhaps in a manner that encourages further successes in the biomedical sector.

Worth a ponder, there is more at the link.

We need YIMBY for the U.S. power grid

The amount of new transmission line installed in the United States has dropped sharply since 2013, when 4,000 miles were added. Now, the nation struggles to bring online even 1,000 new miles a year. The slowdown has real consequences not just for companies but for the climate. A group of scientists led by Princeton University professor Jesse Jenkins warned in a report that by 2030 the United States risks losing out on 80 percent of the potential emission reductions from President Biden’s signature climate law, the Inflation Reduction Act, if the pace of transmission construction does not pick up dramatically now.

I had not know this:

To answer the call, some states have passed laws to protect crypto mining’s access to huge amounts of power.

Or that this had come so far:

Northern Virginia needs the equivalent of several large nuclear power plants to serve all the new data centers planned and under construction. Texas, where electricity shortages are already routine on hot summer days, faces the same dilemma.

Here is the full WaPo article by Evan Halper.

My excellent Conversation with Marc Rowan

Here is the video, audio, and transcript, taped in his Apollo office in NYC.  Here is the episode summary:

Marc Rowan, co-founder and CEO of Apollo Global Management, joined Tyler to discuss why rising interest rates won’t hurt Apollo’s profitability, why liabilities have traditionally been the weak spot in insurance, why the concept of liquidity needs a rethink, the meaninglessness of the term “private credit”, what role crypto will play in American finance, why Marc bought a brutalist apartment, which country has beautiful new neighborhoods, what motivated Apollo’s office redesign, what he looks for in young hires, the different kind of decision-making required in debt versus private equity, the biggest obstacle to doing business in India, how university governance can be improved, what he’s learned from running restaurants, the next thing he’ll learn, and more.

And an excerpt:

COWEN: Now, how stable is all this as a political equilibrium? If you think about the four major banks, as you well know, there are very serious stress tests applied to them, capital requirements. The Fed is a major regulator. At least for insurance, it tends to be at the state level. One can reinsure through Bermuda. Capital requirements are very different. Competence of the state regulators arguably is lower than that of the Fed. Whether or not one wants more regulation — and generally, I don’t — but is this a stable situation? How’s it going to evolve?

ROWAN: First, I would have to correct almost everything you’ve said along the way to set the table for what I’m going to talk about. First, the difference between not so much the banking system and insurance, but the banking system and the investment marketplace. Let’s start with this — there are plenty of ways for investors to lose money. Investors can buy speculative stocks. They could buy the S&P. They can speculate in almost anything.

The making or losing of money is not, in and of itself, a systemically risky activity because, for good reason, we allow speculative investing every single day. Things go up, things go down. You can lose money in credit as well as in equity.

Now we come to mutual funds. If a mutual fund, which is daily liquid, owns credit, and investors want to get their money back, you’re right, price just adjusts. Mutual funds are not price guarantors. Are they regulated? Mutual funds are regulated. Are they disclosed and transparent? Yes, they’re disclosed and transparent. The holdings of a mutual fund are completely visible and they’re de-levered. Is that a risky activity because it moved out of the banking system and into a mutual fund? I don’t think so; I actually think it has de-risked. It’s made our economy and our financial system more resilient.

Now I’ll come to your question on political equilibrium. Insurance — if you just focus on insurance — has no federal guarantee, does not borrow short and lend long, has no access to the Fed, and does not do liquidity transformation or maturity mismatch, and they are forced to hold amounts of capital.

If you look — and I’ll give you a comparison just for us, not for the whole industry — who holds more capital, Athene our insurer as a percentage of assets or the typical bank? You would think the typical bank, but you would be wrong. We hold more capital per dollar of assets than anyone else. Who holds more investment-grade assets? Ninety percent of our book is investment-grade, the typical bank is two-thirds investment-grade.

COWEN: Sure, but that’s all time-sliced—

ROWAN: Let’s keep going.

COWEN: Money market funds have been a source of systemic risk, AIG has been —

ROWAN: I can’t tell you there’s not risks in the economy. We have a choice. We can have risk dispersed among lots of institutions, or we can have it concentrated in the government-backed, borrow-short, lend-long, government-guaranteed banking system.

Every time we disperse that risk, we make the system more resilient. If you want to focus on insurance, which is your question on political equilibrium, there’s more capital, there’s no ALM mismatch, there’s more investment-grade, and there is appropriate state-based regulation for institutions that do not have government guarantees or borrow from the Fed or do anything else.

Insurance is very slow-moving. We’re talking about, on average, 10-year assets. This is a very slow-moving process. Again, most of the issues that have happened in the insurance industry have not been asset issues. They’ve been liability issues, exactly the kind of thing that insurance-specialist regulation is designed to detect.

Recommended, and of course we talk about Marc’s higher ed campaign as well.