Category: Economics

One reason why a global carbon tax is impossible

Consequently, from a regional perspective, there are large disagreements about the welfare effects of carbon taxes: when a uniform carbon tax is imposed across all regions, with revenues redistributed locally as a lump sum so that there are no interregional transfers, some regions gain and others lose, often by large amounts that swamp the globally-averaged benefits of carbon taxes.

The microfoundations of that claim are interesting:

At the regional level, the optimal annual average temperature (at which the calibrated inverse U -shape governing how labor productivity varies with temperature reaches its peak) is approximately 12 degrees Celsius (C); an increase of regional temperature from 10 C to 12 C increases a region’s total factor productivity (TFP) by about 1%, while a further increase in annual average temperature from 12 C to 14 C reduces its TFP by about 2%.

Here are some bottom-line numbers on the global costs of climate change, with and without a carbon tax regime:

Without taxes global GDP reaches its nadir (relative to trend) just after 2190, when it is about 7.3% below the trend that would have obtained starting in 1990 without further global warming. With taxes, global GDP reaches its nadir just before 2190, at about 5.5% below trend.

Again, the costs of climate change are a few years of global economic growth.  That is a big deal, and worth attending to, but far from an existential risk.

Here is the 160 pp. NBER working paper by Per Krusell and Anthony A. Smith Jr.

A better way to think about wage pressures than the Phillips curve

Most economists maintain that the labor market in the United States is ‘tight’ because unemployment rates are low. They infer from this that there is potential for wage-push inflation. However, real wages are falling rapidly at present and, prior to that, real wages had been stagnant for some time. We show that unemployment is not key to understanding wage formation in the USA and hasn’t been since the Great Recession. Instead, we show rates of under-employment (the percentage of workers with part-time hours who would prefer more hours) and the rate of non-employment which includes both the unemployed and those out of the labor force who are not working significantly reduce wage pressures in the United States. This finding holds in panel data with state and year fixed effects and is supportive of a wage curve which fits the data much better than a Phillips Curve. We find no role for vacancies; the V:U ratio is negatively not positively associated with wage growth since 2020. The implication is that the reserve army of labor which acts as a brake on wage growth extends beyond the unemployed and operates from within and outside the firm.

We are the reserve army of the unemployed!  Here is the full paper from David G. Blanchflower, Alex Bryson, and Jackson Spurling.  The results also suggest that getting inflation under control will be easy than some alternative accounts might indicate, and in that sense this is mild cause for macroeconomic optimism, relatively speaking that is.

These ten veteran ex-Lakers from the 2021-2022 season, however, are still unemployed (ESPN).

Pharmaceutical drugs redux

In 2019 I presented this excerpt:

Humans are living longer, better lives thanks to innovations in prescription drugs over the past three decades, according to several new studies by Frank Lichtenberg, the Courtney C. Brown Professor of Business.

Every year, according to Lichtenberg’s research, drugs launched since 1982 are adding 150 million life-years to the lifespans of people in 22 countries that he analyzed. He calculated the average pharmaceutical expenditure per life-year saved at $2,837 — a bargain, he says.

“According to most health economists and policymakers, if you could extend someone’s life by a year for less than $3,000, that is highly cost effective,” says Lichtenberg, who gathered new data for these studies to cast a never-before seen view of the econometrics of prescription drugs. “People might be surprised by how cost-effective drugs appear to be in general.”

…To tease out the answer, the professor gathered data on drug launches and the age-standardized premature mortality rate by country, disease, and year. Drawing on data from the World Health Organization, the United Nations, consulting company IQVIA, and French database Theriaque, Lichtenberg was able to identify the role that pharmaceutical innovation played in reducing the number of years of life lost due to 66 diseases in 27 countries. (“Years of life lost” is an estimate of the average years a person would have lived if he or she had not died prematurely.)

OK, now a simple economics question: given such numbers, should we be spending more on pharmaceutical drugs, or less?  I might add that biomedicine has made some spectacular advances as of late, so the notion that these are average costs, and the marginal cost slants sharply upward, probably is not true.

Here are further MR posts on this line of research.  Here are Lichtenberg’s NBER working papers.

How many of you got the simple economics question right?

Ireland facts of the day

The republic is enjoying a €8bn corporate tax windfall after bumper pandemic-enhanced revenues from tech and pharmaceutical companies. The tax take from companies attracted by Ireland’s 12.5 per cent corporate rate has soared since 2015 and leapt a further 30 per cent last year compared with 2020.

Ireland’s economy expanded by 6.3 per cent over the second quarter, against an EU average of just 0.6 per cent. So great was the impact from multinationals that Ireland’s numbers distorted EU figures, despite the nation of 5.1mn making up less than 3 per cent of the region’s economy.

Here is more from the FT.

The tax provisions of the new climate and taxes bill

I can’t quite bring myself to call it the Inflation Reduction Act.  One thing I have learned from experience is how hard it is to judge such bills upfront.  For instance, I just learned that the electric vehicle tax credits do not currently apply to any electric vehicle whatsoever, nor will they obviously apply to any electric vehicle to be produced in the near future.  Now the United States might take a larger role in battery production, or perhaps the law/regulation will be modified — don’t assume these standards will collapse.  Still, the provisions are going to evolve.  Or maybe there is a modest chance that provision of the bill simply will never kick in.

I don’t know.

How about the corporate minimum tax provisions?  It sounds so simple to address unfairness in this way, and how much opposition will there be to a provision that might cover only 150 or so companies?  But a lot of the incentives for new investment will be taken away, including new investment by highly successful companies.  (You can get your tax bill down by making new investments, for instance, and that is why Amazon has paid relatively low taxes in many years.)  Most of the companies covered are expected to be manufacturing, and didn’t we hear from the Democratic Party (and indeed many others) some while ago that manufacturing jobs possess special economic virtues?  Furthermore, some of the tax incentives for green energy investments will be taken away.  Has anyone done and published a cost-benefit analysis here?  That is a serious question (comments are open!), not a rhetorical one.

Here are some other concerns (NYT):

“The evidence from the studies of outcomes around the Tax Reform Act of 1986 suggest that companies responded to such a policy by altering how they report financial accounting income — companies deferred more income into future years,” Michelle Hanlon, an accounting professor at the Sloan School of Management at the Massachusetts Institute of Technology, told the Senate Finance Committee last year. “This behavioral response poses serious risks for financial accounting and the capital markets.”

Other opponents of the new tax have expressed concerns that it would give more control over the U.S. tax base to the Financial Accounting Standards Board, an independent organization that sets accounting rules.

“The potential politicization of the F.A.S.B. will likely lead to lower-quality financial accounting standards and lower-quality financial accounting earnings,” Ms. Hanlon and Jeffrey L. Hoopes, a University of North Carolina professor, wrote in a letter to members of Congress last year that was signed by more than 260 accounting academics.

How bad is that?  I do not know.  Do you?  My intuition is that the book profits concept cannot handle so much stress.  By the way, kudos to NYT and Alan Rappeport for doing that piece.  It is balanced but does not hold back on the skeptical side.

And here’s one matter I haven’t seen anyone mention: the climate part of the bill, and indeed most of the accompanying science and chips bill, assume in a big way that private sector investment is deficient in solving various social problems and needs some serious subsidy and direction.

Now the direction of that investment is a separate matter, but when it comes to the subsidy do you recall Kenneth Arrow’s classic argument that the private sector does not invest enough in risk-taking?  Private investors see their private risk as higher than the actual social risk of the investment.  This argument implies subsidies for investments, as much of the rest of the bill and its companion bill provide, not additional taxes on investment.  This same kind of argument lies behind Operation Warp Speed, which most people supported, right?

And yet I see everyone presenting the new taxes on investment in an entirely blithe manner, ignoring the fact that the rest of the bill(s) implies private investment needs to be subsidized or at least taxed less.

Overall the ratio of mood affiliation and also politics in this discussion, to actual content, makes me nervous.  The bills went through a good deal of uncertainty, and so a significant portion of the intelligentsia has been talking them up.  Biden after all needs some victories, right?  And at some point the green energy movement needs some major legislative trophies, right?  What I’d like to see instead is a more open and frank discussion of the actual analytics.

It is very good when a top economist such as Larry Summers has real policy influence, in this case on Joe Manchin.  But part of that equilibrium is that other economists start watching their words, knowing some other Democratic Senator might fall off the bandwagon.  There is Sinema, Bernie Sanders has been making noise and complaining, someone else might have tried to extract some additional rents, and so on.

The net result is that you are not getting a very honest and open discussion of what is likely to prove a major piece of legislation.

The new class of “insider” trader?

Then, crucially, the government stepped in with covid-relief funds, which were somehow granted to prisoners. (Congress did not bar us from getting stimulus cheques, though the Internal Revenue Service tried to.) That windfall came as a total shock…

Stimulus payments meant people habituated to scarcity suddenly had $1,200 in their hands (then $2,000 more as the government approved two additional payouts). And rather than splurge on items we usually go without – honey buns ($1.10 each), king-size chocolate bars ($2.40) or high-end toothpaste ($5.28) – more than a few of us chose to invest.

Cryptocurrencies have been popular too.  Here is the full Economist/1843 story.  And get this:

The perverse incentive structure of prisoner accounts makes things worse. The prison does not touch account balances below $25, the threshold at which a prisoner is considered indigent. But for those with more than $25, the prison deducts onerous fees totalling 55% of incoming transfers. “Every week I have to max out my commissary order and zero out my account,” Steve said. Prisoners are being conditioned to live pay cheque to pay cheque.

The authors are themselves incarcerated in Washington state.  Via Mike Rosenwald.

Dose Stretching for the Monkeypox Vaccine

Photo Credit: NIAD. https://www.flickr.com/photos/niaid/52103767506/

We are making all the same errors with monkeypox policy that we made with Covid but we are correcting the errors more rapidly. (It remains to be seen whether we are correcting rapidly enough.) I’ve already mentioned the rapid movement of some organizations to first doses first for the monkeypox vaccine. Another example is dose stretching. I argued on the basis of immunological evidence that A Half Dose of Moderna is More Effective Than a Full Dose of AstraZeneca and with Witold Wiecek, Michael Kremer, Chris Snyder and others wrote a paper simulating the effect of dose stretching for COVID in an SIER model. We even worked with a number of groups to accelerate clinical trials on dose stretching. Yet, the idea was slow to take off. On the other hand, the NIH has already announced a dose stretching trial for monkeypox.

Scientists at the National Institutes of Health are getting ready to explore a possible work-around. They are putting the finishing touches on the design of a clinical trial to assess two methods of stretching available doses of Jynneos, the only vaccine in the United States approved for vaccination against monkeypox.

They plan to test whether fractional dosing — using one-fifth of the regular amount of vaccine per person — would provide as much protection as the current regimen of two full doses of the vaccine given 28 days apart. They will also test whether using a single dose might be enough to protect against infection.

The first approach would allow roughly five times as many people to be vaccinated as the current licensed approach, and the latter would mean twice as many people could be vaccinated with existing vaccine supplies.

…The answers the study will generate, hopefully by late November or early December, could significantly aid efforts to bring this unprecedented monkeypox outbreak under control.

Another interesting aspect of the dose stretching protocol is that the vaccine will be applied to the skin, i.e. intradermally, which is known to often create a stronger immune response. Again, the idea isn’t new, I mentioned it in passing a couple of times on MR. But we just weren’t prepared to take these step for COVID. Nevertheless, COVID got these ideas into the public square and now that the pump has been primed we appear to be moving more rapidly on monkeypox.

Addendum: Jonathan Nankivell asked on the prediction market, Manifold Markets, ‘whether a 1/5 dose of the monkey pox vaccine would provide at least 50% the protection of the full dose?’ which is now running at a 67% chance. Well worth doing the clinical trial! Especially if we think that the supply of the vaccine will not expand soon.

The new tax on stock buybacks

Democrats opted to seek a new 1 percent tax on corporate stock buybacks, a move that would make up at least some of the revenue that might have lost as a result of the [Sinema-driven] changes.

Here is further detail.  Something has to be taxed, and I don’t pretend to have a comprehensive ranking of tax options from best to worst.  I can’t tell you where this might rank on the list.  I can however tell you these three things:

1. This is flat out a new tax on capital, akin to a tax on dividends.

2. Are you worried about corporations being too big and monopolistic?  This makes it harder for them to shrink!  Think of it also as a tax on the reallocation of capital to new and growing endeavors.

3. The real reason this is being proposed is because so many Democratic and left-leaning public intellectuals have written “flat out wrong, doesn’t matter what your partisan stance is” pieces on stock buybacks.

And there you go.

The rise and fall of empires

The last two centuries witnessed the rise and fall of empires. We construct a model which rationalises this in terms of the changing trade gains from empires. In the model, empires are arrangements that reduce trade cost between an industrial metropole and the agricultural periphery. During early industrialisation, the value of such bilateral trade increases, and so does the value of empires. As industrialisation diffuses, and as manufactures become more differentiated, trade becomes more multilateral and intra-industry, reducing the value of empires. Our results are consistent with long-term changes in income distribution and trade patterns, and with previous historical arguments.

That is from a new NBER working paper by Roberto Bonfatti and Kerem Coşar.

There is No Such Thing as Development Economics

I used to think there was such a thing as development economics. There are still richer and poorer countries, of course, but is there a “development economics,” a special type of economics for poor countries? I don’t think so. Maybe there once was. In the twentieth century, divergence in per-capita GDP increased big time and it was a burning question why poor countries weren’t on the same development path as the developed nations. Starting around 1990-2000, however, we have seen convergence. Most countries are now on the same path. Poorer countries and richer countries are becoming more alike, sometimes for good and sometimes for bad. I tweeted the following news headline recently:

Image

Notice the commentary on NYC infrastructure but also the man bites dog angle. In Pakistan people on social media are apparently sharing videos of flooding in the New York subway to complain about the poor state of infrastructure in Pakistan!

My own anecdote fit the pattern. This week I am in Delhi and due to a series of unfortunate supply chain shocks at my house-build in the US, for the first time in 3 weeks I have running hot water and reliable internet access!  Not only that but although India has sadly fallen for the paper straw nonsense the top hotels remain free from flow constrictors so the water gushes out of the shower with elan just as God intended. Civilization is  truly moving back east.

More generally, poorer and richer countries face many of the same problems today: infrastructure, low-skill workers and technological change, climate adaption and so forth. Is the latest paper on cash transfers, pollution, or corruption about a poor country or a rich country? It’s hard to tell. Poor countries still have their own unique problems, of course, but those problems are best analyzed by country rather than by income category. India is not the same as Thailand or Peru. I see little that unites poor countries under the rubric development economics.

My charitable giving advice from 2007

I had a chapter on this topic in my 2007 book Discover Your Inner Economist, with much of the material based on blog posts from 2004-2006 or so.  No, I was not recommending particular charities, but rather considering how to think about giving more generally.  Since that time there has been so much discussion of the topic in EA communities, I thought it would be interesting to see how well my earlier recommendations have held up.

I argued for the following:

1. Do not give money to beggars, it only encourages rent-seeking for further transfers.

2. Accordingly, many donations should be surprise donations.  In the meantime, limit the ability of people to invest resources in donation-seeking.

3. Give to causes where your giving will have a positive contagion effect upon others.

4. The promise of matching grants is not always very effective in stimulating larger donations.

5. Many forms of ostensible charity in fact have negative effectiveness.  For instance parachuting for charity can lead to a good number of injuries and not bring much positive attention to the charitable cause, at least not relevant to alternatives.

6. I endorse cash transfers, provided you don’t encourage people to work too hard to receive them.

7. There is a cautious endorsement of micro-credit.

8. A fundamental problem is that a lot of giving is driven by motives of affiliation rather than effectiveness.

#8 seems more true than ever before and it is now widely recognized.  #3, while discussed in the current literature, still seems an undervalued point.

On the revisions, microcredit has lost some status since that time, though it still seems modestly effective and it has the further virtue of being self-sustaining.  Cash transfers remain a popular and reasonably effective option, although a) sometimes they are much more effective with mentoring, b) some recent Chris Blattman results suggest they may wash out in the longer run, and c) sometimes cash transfers raise expectations without making the recipients happier in the longer run (a recent paper measures this, does anyone have the link handy?  From Ariella, link is here).

Overall I overrated the dangers of charitable rent-seeking, and underrated the dangers of the bureaucratization of altruism?  In any case, it was interesting to go back and read my earlier thoughts on the question.

Taxing Top Incomes in a World of Ideas

We’ve covered this before, but now it is out in the JPE and worthy of a repeat, because you won’t see its lessons promulgated in too many other places.  From Charles Jones:

This paper considers top income taxation when (i) new ideas drive economic growth, (ii) the reward for successful innovation is a top income, and (iii) innovation cannot be perfectly targeted by a research subsidy—think about the business methods of Walmart, the creation of Uber, or the “idea” of Amazon. These conditions lead to a new force affecting the optimal top tax rate: by slowing the creation of new ideas that drive aggregate GDP, top income taxation reduces everyone’s income, not just income at the top. This force sharply constrains both revenue-maximizing and welfare-maximizing top tax rates.

In other words, we should be very cautious about raising taxes on top earners.