Category: Economics

Quadratic Voting in the Field

The Democratic caucus in the Colorado state legislature wanted to get their member’s feedback on the bills most important to them. That’s hard to do because each member has an incentive to claim that their pet bill is by far the most important bill to them. Thus, Chris Hansen, the chair of the House Appropriations Committee, who also happens to have a PhD in economics, decided to use a modified form of quadratic voting. Each voter was given 100 tokens to vote and the price of x votes for a policy was x^2 so you could buy 10 votes on your favorite policy for 100 but you could also buy 5 votes on each of your four favorite policies (5^2+5^2+5^2+5^2=100).

Wired: So in mid-April, the representatives voted. Sure, each one could have put ten tokens on their pet project. But consider the or: Nine votes on one (cost: 81 tokens) but then three votes on another (cost: nine tokens). Or five votes each (25 tokens) on four different bills!

In Colorado at least, it worked, kind of. “There was a pretty clear signal on which items, which bills, were the most important for the caucus to fund,” Hansen says. The winner was Senate Bill 85, the Equal Pay for Equal Work Act, with 60 votes. “And then there’s kind of a long tail,” Hansen says. “The difference was much more clear with quadratic voting.”

Is the IT Revolution Over? An Asset Pricing View

I develop a method that structures financial market data to forecast economic outcomes. I use it to study the IT sector’s transition to its long-run share in the US economy. The method uses a model which links economy-wide growth with IT’s market valuation to match transition data on macroeconomic quantities, the sector’s life cycle patterns, and, importantly, market valuation ratios. My central estimates indicate that the revolution ends between 2028 and 2034 and that future average labor productivity growth will fall to 1.7 percent from the 2.7 recorded over 1974–2015. I show empirically the IT sector’s price-dividend ratio univariately explains over half of the variation in future productivity growth.

By Colin Ward.  Speculative, as they say!  Still, interesting to see someone go through the exercise.  Via the excellent Kevin Lewis.

The ferry subsidy culture that is New York City

One of the new routes Mr. de Blasio announced this year — between Coney Island and Wall Street — is projected to require a subsidy from the city of $24.75 for every passenger, according to a report from the Citizens Budget Commission, a nonpartisan, nonprofit civic organization.

The commission said that the average subsidy for each passenger in the system’s first year of operation was $10.73, far more than the $6.60 subsidy the de Blasio administration originally estimated.

…Although it would cost $27.50 per person to ride the ferry from Coney Island to Wall Street, according to the Citizens Budget Commission’s report, the estimated 1,100 commuters will only pay $2.75.

Those are some high costs for a boat that sits on the water…here is the full story by Patrick McGeehan (NYT).

Susceptibility-based growth predictions

Modern macroeconomic theories were unable to foresee the last Great Recession and could neither predict its prolonged duration nor the recovery rate. They are based on supply−demand equilibria that do not exist during recessionary shocks. Here we focus on resilience as a nonequilibrium property of networked production systems and develop a linear response theory for input−output economics. By calibrating the framework to data from 56 industrial sectors in 43 countries between 2000 and 2014, we find that the susceptibility of individual industrial sectors to economic shocks varies greatly across countries, sectors, and time. We show that susceptibility-based growth predictions that take sector- and country-specific recovery into account, outperform—by far—standard econometric models. Our results are analytically rigorous, empirically testable, and flexible enough to address policy-relevant scenarios. We illustrate the latter by estimating the impact of recently imposed tariffs on US imports (steel and aluminum) on specific sectors across European countries.

That is the abstract of a new piece by Peter Klimek, Sebastian Poledna, and Stefan Thurner in Nature Communications.  Via the excellent Charles Klingman.

Will China capture the main benefits from Belt and Road?

Maybe not, that is the topic of my latest Bloomberg column.  Here is one excerpt:

I was struck by a recent deal between China and Montenegro that gave China the right to access land in Montenegro as collateral, in case Montenegro does not repay certain loans. This has upset people in Montenegro, and it makes China seem like an imperialist country with territorial designs. But there’s also a more benign interpretation: China is demanding land as collateral because it knows Montenegro is not creditworthy. The loan sent Montenegro’s ratio of debt to gross domestic product to almost 80 percent, from 63 percent in 2012.

To put that in context, let’s say you heard of a loan shark who threatened to break the fingers of borrowers who did not repay. You would sooner infer that was a risky, so-so investment rather than a sure winner.

In essence, China is playing the role of loan shark, and that is not obviously the way to get ahead in today’s world. If China did claim some land in Montenegro as recompense for a bad loan, it might find holding the asset to be more trouble than it’s worth, much as Amazon decided to depart from a deal with New York because of hostility in parts of the city and state governments. If China tried to sell the land, a potential new buyer could never be sure of having enforceable title to the property.

Another problem with Belt and Road, at least from a Chinese point of view, is that China is dealing with many countries that are much smaller in terms of their GDP. There’s a tendency for small countries to renege on deals in hopes that big creditors won’t bother to make an example of them. You might think that smaller countries are easier for China to push around, and there is some truth to that. At the same time, both China and the small countries know that the small countries are not entirely masters of their fates, and so punishment strategies can be counterproductive or occasion more resentment than it is worth. Has the U.S. found it so easy to induce Honduras and Guatemala to stem the flow of migrants toward the border?

And this:

China has proven remarkably poor at supplementing Belt and Road with soft power persuasive techniques using diplomatic and cultural influence. This is no accident, nor does it reflect some kind of stubborn unwillingness of the Chinese to learn to wield soft power tools. Rather, the problem is structural. Since the Chinese government does not derive legitimacy through normal democratic channels, much of its diplomacy and foreign policy have to be channeled to please domestic audiences, whether the citizens or coalitions within the Communist Party. The necessary internal presentation shapes incentives for Chinese foreign policy, and that in turn alienate the other countries China is dealing with.

There is much more at the link.

Enraging dinosaur bone markets in everything

For sale on eBay: what’s claimed to be “maybe the only” young Tyrannosaurus rex ever discovered for $2.95 million. Paleontologists decried the sale, saying that the specimen’s cost was artificially inflating the cost of other valuable fossils. “Only casts and other replicas of vertebrate fossils should be traded, not the fossils themselves,” an open letter from the Society of Vertebrate Paleontology in Bethesda, Maryland. read. “Scientifically important fossils like the juvenile tyrannosaur are clues to our collective natural heritage and deserve to be held in public trust.”

…“The asking price is just absurd,” one researcher said.

Here is the full story, via Ze’ev.  Might this increase the incentive to find such fossils?

The Effect of Economic Vulnerability on Protest Participation in the National Football League

Also known as “Incentives matter”:

What distinguishes between National Football League (NFL) players who participated in protests during the National Anthem and those who did not? Does the finding of a personal vulnerability constraint in high‐risk activism apply to this relatively elite population?

Protest participation during 2017 was determined for every NFL player, along with several variables pertaining to their performance, compensation, and the political atmosphere of their team.

Bivariate and multivariate tests both reveal that protest participation was far greater among players with large guaranteed contracts and among players who were well regarded for their performance.

Economic vulnerability ranges widely within the NFL such that players hold contracts offering guaranteed payments of anywhere between $92 million and nothing at all. The data here suggest that the personal vulnerability constraint documented in protest participation research also applies to this unique population of high‐profile people engaged in a most high‐profile protest. Documenting the existence of these constraints helps offer a more systematic foundation to our understanding of political activism behavior among athletes.

That is from a newly published article by David Niven.

Tax returns should not be made public information

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

This idea has been suggested recently by Binyamin Appelbaum of The New York Times and also Matt Yglesias of Vox. In Norway it has been policy since 1814 and Finland does something similar.

I’m afraid, though, that universal tax transparency would boost U.S. economic inequality, take away second chances and devastate privacy.

And:

Or think about the dating market. Tax transparency would give high-earning men and women a bigger advantage and hurt their lower-earning competitors. Do we really wish to do that in an age of growing income inequality and diminished upward mobility?

Is it better if your parents and all your friends can see how well your new job is going or how much in royalties your last book earned? As it stands, we exist in a slightly more comfortable social equilibrium where your close associates assume the best or at least give you the benefit of the doubt. Transparency of earnings would increase stress and make failure and disappointment all too publicly evident. Or entrepreneurs with long-term projects which are going to make it — but not right away — might face too many social or family pressures to quit.

Snooping through the tax system would definitely happen. Evidence from Norway indicates that in 2007, 40 percent of Norwegian adults checked somebody’s tax information online, higher than the penetration of Facebook in Norway. Anonymity of the snooper was removed in 2014, and visits fell dramatically (88 percent by one measure), but still you can imagine paying others to snoop for you or the information eventually getting out over time.

The result of tax-record publication was that “this game of income comparisons negatively affected the well-being of poorer Norwegians while at the same time boosting the self-esteem of the rich,” according to Ricardo Perez-Truglia, a UCLA economics professor writing last week in VoxEU. There’s even a smartphone app that creates income leaderboards from the data on your Facebook friends.

Just as personal freedom and economic freedom are not so easily separable, the same is true for personal privacy and financial privacy.  Are there actually people out there worried about Facebook privacy violations who wish to make all tax returns public and on-line?

The cost of Parisian Gothic cathedrals

This thesis examines the implicit costs of building the Gothic churches of the Paris Basin built between 1100-1250, and attempts to estimate the percentage of the regional economy that was devoted to build them. I estimate that over this 150-year period, on average, 21.5 percent of the regional economy was devoted to the construction of these Gothic churches, 1.5 percent of which is directly related to the implicit cost of labor.

That is from an honors thesis by Amy Denning, joint work with Keith Jakee.

New results on the China shock, furthermore the China shock is largely over

Using Census micro data we find that the impact of Chinese import competition on US manufacturing had a striking regional variation. In high-human capital areas (for example, much of the West Coast or New England) most manufacturing job losses came from establishments industry switching to services. The establishment remained open but changed to research, design, management or wholesale. In the low human-capital areas (for example, much of the South and mid-West) manufacturing job-losses came from plant closure without much offsetting gain in service employment. Offshoring appears to drive these manufacturing job losses – the Chinese trade impact arose primarily in large importing firms that were simultaneously expanding service sector employment. Hence, our data suggest Chinese trade redistributed jobs from manufacturing in lower income areas to services in higher income areas. Finally, the impact of Chinese imports appear to have disappeared after 2007 – we find strong employment impacts from 2000 to 2007, but nothing since from 2008 to 2015.

That is from a new paper by Nicholas Bloom, Kyle Handley, André Kurmann, and Philip Luck.  Via Bryan Caplan.

The Disconnect Between Biological Time and Standard Time Reduces Health

In Poor Sleep Makes People Poor I discussed an important paper by Maulik Jagnani showing how India’s single time zone creates a big disconnect between biological time as given by light cues and clock time. The disconnects impedes sleep patterns and reduces human capital for those most effected.

In a new paper in the Journal of Health Economics, Sunset Time and the Economic Effects of Social Jetlag Giuntella and Mazzonna show that the same types of effects can be observed in the United States.

The rapid evolution into a 24h society challenges individuals’ ability to conciliate work schedules and biological needs. Epidemiological research suggests that social and biological time are increasingly drifting apart (“social jetlag”). This study uses a spatial regression discontinuity design to estimate the economic cost of the misalignment between social and biological rhythms arising at the border of a time-zone in the presence of relatively rigid social schedules (e.g., work and school schedules). Exploiting the discontinuity in the timing of natural light at a time-zone boundary, we find that an extra hour of natural light in the evening reduces sleep duration by an average of 19 minutes and increases the likelihood of reporting insufficient sleep. Using data drawn from the Centers for Disease Control and Prevention and the US Census, we find that the discontinuity in the timing of natural light has significant effects on health outcomes typically associated with circadian rhythms disruptions (e.g., obesity, diabetes, cardiovascular diseases, and breast cancer) and economic performance (per capita income). We provide a lower bound estimate of the health care costs and productivity losses associated with these effects.

Hat tip: Kevin Lewis.

Automation and Top Income Inequality

For almost 40 years, inequality within the top percentile of the income distribution, measured as the ratio of income share of top 0:1% to the income share of top 1%, has been increasing in the US. The income of super-rich people increased more than the income of rich people. In this paper, we show that improvements in automation technology (the number of tasks for which capital can be used) is an important factor contributing to this inequality. We consider a model in which labor has a convex cost and capital has a linear cost. This leads to a decreasing returns to scale profit function for entrepreneurs. As capital replaces labor in more and more tasks, the severity of diseconomies of scale diminishes, hence the market share of top-skilled entrepreneurs increases. If entrepreneurial skill is distributed according to a Pareto distribution, then top income distribution can be approximated by a Pareto distribution. We show that the shape parameter of this distribution is inversely related to the level of automation. Finally, we rationalize convex cost of labor using the theory of efficiency wage.

That is from a new paper by Omer Faruk Koru, via the excellent Kevin Lewis.

Should we break up the big tech companies?

That is my piece in the Globe and Mail, excerpted with edits from my new Big Business: A Love Letter to an American Anti-Hero, here is one excerpt:

Furthermore, it is striking just how effective the major tech companies have been as innovators. Other than providing the best free search in the world, Alphabet – the umbrella corporation under which Google is a subsidiary – gave us Gmail, one of the best and biggest e-mail services in the world, for free. Google Maps, which is also free, is pretty neat, too.

Then, despite the risks identified by critics of the deal – that YouTube appeared to be a bottomless pit for copyright-violation suits and nasty comments – Google bought the streaming-video service for US$1.65 billion, and dramatically upgraded it. Google cleaned up the legal issues, using its advanced software capabilities to spot copyright violations while enforcing takedown requests, improving search and heavily investing in the technology that has helped make video so widely used on the internet today.

In 2005, Google purchased Android and elevated the company’s open-source system to the most commonly used cellphone software in the entire world. Because of the Google-Android combination, hundreds of millions of people have enjoyed better and cheaper smartphones. More generally, Google has made most of its software open-source, enabling others to build upon it with additional advances, with entire companies now devoted to helping other companies build upon that infrastructure – meaning Google has not likely been the major beneficiary of its own actions.

Google, by way of Alphabet, has taken a lead role in developing self-driving vehicles and the underlying artificial intelligence, now being developed through Waymo; by throwing its weight behind this, Alphabet made the concept more publicly acceptable, and it could potentially save many lives on the road. After Hurricane Maria devastated Puerto Rico, Alphabet also stepped in to do good, deploying its work-in-progress Project Loon to restore internet access, which may eventually be integral for remote areas in Africa. It’s a bold attempt to create a better and more connected living situation for some of the world’s more vulnerable people.

All that from a company that is just a little more than 20 years old. Is this really the kind of company we should be punishing?

There are other points of interest at the link.

An Interview with Preston McAfee

Here’s a good interview by the Richmond Fed of Preston McAfee. McAfee was one of the designers of the FCC’s spectrum auctions and used that experience to move from academia to technology firms. He has held top positions at Yahoo, Google and Microsoft. Here’s one issue that I have discussed before, tacit collusion among AIs..

EF: What are the implications of machine learning, if any, for regulators?

McAfee: It is likely to get a lot harder to say why a firm made a particular decision when that decision was driven by machine learning. As companies come more and more to be run by what amount to black box mechanisms, the government needs more capability to deconstruct what those black box mechanisms are doing. Are they illegally colluding? Are they engaging in predatory pricing? Are they committing illegal discrimination and redlining?

So the government’s going to have to develop the capability to take some of those black box mechanisms and simulate them. This, by the way, is a nontrivial thing. It’s not like a flight recorder; it’s distributed among potentially thousands of machines, it could be hundreds of interacting algorithms, and there might be hidden places where thumbs can be put on the scale.

I think another interesting issue now is that price-fixing historically has been the making of an agreement. In fact, what’s specifically illegal is the agreement. You don’t have to actually succeed in rigging the prices, you just have to agree to rig the prices.

The courts have recognized that a wink and a nod is an agreement. That is, we can agree without writing out a contract. So what’s the wink and a nod equivalent for machines? I think this is going somewhat into uncharted territory.