Category: Economics

Is the bilateral approach to trade liberalization really so bad?

That is my latest Bloomberg column, here is one excerpt:

It seems we are bureaucratizing trade as much as liberating it. Perhaps that is no surprise. If you wish to induce numerous nations to sign on to a deal, you will have to offer exceptions, clauses and conditions for them. The eventual result is that a free-trade treaty morphs into a managed-trade treaty. I still believe that the various trade agreements that have been passed or drawn up are for the better, but I also can’t help being disappointed by them. Note also that progress through the World Trade Organization had ground to a halt even before the election of Trump.

We are now in a setting where the world’s No. 2 economy — China, on its way to being No. 1 — is strongly opposed to free-trade ideals and free flows of information, especially for its own home market.

Enter bilateralism. The smartest case for trade bilateralism is that trade in many goods is already fairly free, but some egregious examples of tariffs and trade barriers remain. Look at agriculture, European restrictions on beef hormones in beef, and the Chinese unwillingness to allow in foreign companies. Targeted strategic bargaining, backed by concrete threats emanating from a relatively powerful nation — in this case the U.S. — could demand removal of those restrictions. Furthermore, the negotiating process would be more directly transactional and less cartelized and bureaucratic.

My colleague John Nye, an economist at George Mason University, has argued that the free-trade revolution of the 19th century came about because of a major trade agreement between Britain and France in 1860. Other European nations were fearful of being locked out of subsequent deals, and they hurried to sign bilateral trade treaties with Britain and France. There was a competition to make deals rather than cartelization of the process.

That said, our current pursuit of this approach does not seem to have enough allies on our side, and thus I doubt if it will work.  There is much more in the rest of the column.

FRED now has crypto data

Via David Siegel:

Not much, but it’s a start. The individual series are:

Coinbase Index https://fred.stlouisfed.org/series/CBCCIND

Coinbase Bitcoin https://fred.stlouisfed.org/series/CBBTCUSD

Coinbase Bitcoin Cash https://fred.stlouisfed.org/series/CBBCHUSD

Coinbase Ethereum https://fred.stlouisfed.org/series/CBETHUSD

Coinbase Litecoin https://fred.stlouisfed.org/series/CBLTCUSD

*High Growth Handbook: Scaling startups from 10 to 10,000 people*

Edited, produced, and partly written by Elad Gil, the book is also a series of interviews with Marc Andreessen, Sam Altman, Patrick Collison, Reid Hoffman, Keith Rabois, Naval Ravikant, and others.

Marc Andreessen says:

If you don’t start layering in HR once you’ve passed 50 people on your way to 150, something is going to go badly wrong.

Claire Hughes Johnson (COO of Stripe) says:

When I came into Stripe, I had a similar document.  I wrote a document back when I was at Google called, “Working with Claire.”  And when I first got to Stripe, I adapted it slightly, but it was pretty relevant.  I shared it with everyone who was working with me closely, but I have made it an open document.  It spread quite quickly through the organization…I think that founders should write a guide to working with them.

Patrick Collison says:

..the CEO ultimately does not have that many jobs, but I think culture is among them.  And it ought not be delegated.  Briefly speaking, I think there are five top responsibilities of a CEO: being the steward of and final arbiter of the senior management; being the chief strategist; being the primary external face for the company, at least in the early days; almost certainly being the chief product officer, although that can change when you’re bigger; and then taking responsibility and accountability for culture.

Self-recommending, you can order it here.

Madagascar fact of the day

President Hery Rajaonarimampianina is weathering the latest in a series of political crises that have debilitated his nation since independence in 1960. In that period, Madagascar is the world’s only non-conflict country to have become poorer, according to the World Bank. Its income per head has nearly halved, to about $400.

That is from the excellent David Pilling at the FT.  According to one estimate, almost one out of two children is stunted through malnutrition.

*Empire of Guns*

The author is Priya Satia, and the subtitle is The Violent Making of the Industrial Revolution.  Here is one good bit:

In fact, there were so many transitions between peace and war that it is difficult to establish what “normal” economic conditions were.  Eighteenth-century Europeans accepted war as “inevitable, an ordinary fact of human existence.”  It was an utterly unexceptional state of affairs.  For Britons in particular, war was something that happened abroad and that kept truly damaging disruption — invasion or rebellion — at bay.  Wars that were disruptive elsewhere were understood as preservationist in Britain…Adam Smith’s complaints about the costs of war, about the “ruinous expedient” of perpetual funding and high public debt in peacetime, staked out a contrarian position; The Wealth of Nations (1776) was a work of persuasion.  His and other voices in favor of pacific development grew louder from the margins.  By denormalizing war, liberal political economy raised the stakes of the century’s long final wars from 1793 to 1815, which could be stomached only as an exceptional, apocalyptic stage on the way to permanent peace.

In their wake, nineteenth-century Britain packaged their empire as a primarily civilian enterprise focused on liberty, forgetting the earlier collective investment in and profit from the wars that had produced it..

The book offers many points of interest.

Spatial Competition, the Industrial Revolution and the Great Divergence

There is a new NBER working paper on those topics by Klaus Desmet, Avner Greif, and Stephen Parente:

A market-size-only theory of industrialization cannot explain why England developed nearly two centuries before China. One shortcoming of such a theory is its exclusive focus on producers. We show that once we incorporate the incentives of factor suppliers’ organizations such as craft guilds, industrialization no longer depends on market size, but on spatial competition between the guilds’ jurisdictions. We substantiate our theory (i) by providing historical and empirical evidence on the relation between spatial competition, craft guilds and innovation, and (ii) by showing the calibrated model correctly predicts the timings of the Industrial Revolution and the Great Divergence.

From the body of the paper, I found these two sentences especially useful:

First, using city size and location data, we quantify how spatial competition increased in England between 1600 and 1800.  Using the same metric, we show that China at the end of the nineteenth century was about 200 years behind England.

Economists in the Media

I am quoted on how economists are portrayed in the media:

It is the best of times. It is the worst of times. It is not uncommon, for example, to see critiques of economics in the media which are about as sophisticated as saying “look at those silly physicists who think that a bowling ball and a feather fall at the same rate.” Even people who should know better like David Suzuki say ridiculously, obtuse things when it comes to economics–perhaps for ideological reasons.

At the same time, the quality of the coverage of economics in the media is often excellent and has never been better. Greg Ip, David Leonhardt, Catherine Rampell, Adam Davidson, Stacey Vanek Smith, Cardiff Garcia, Megan McArdle all do superb economic commentary and reporting not just about the economy but about economics. And those are only the people off the top of my head, I could name many more.

The public also has access to top economists through the blogs and social media. I would count Paul Krugman, Tyler Cowen, John Cochrane, and Jeniffer Doleac in this category.

While some people claim that economics is out of touch or obsolete, economics passes the market test. Economists have never been more in demand. Designing new types of markets is a big part of the internet economy and computer scientists, followed by economists, are the leaders in this field. Google and Facebook run billions of dollars of auctions using what was once an obscure economic theory (Vickey-Clarke-Groves auctions). Google, Facebook, Uber and Airbnb all hire economists to better understand data and design new economic mechanisms. Even some online games like Eve Online are hiring economists to help to run virtual economies–one such economist, Yanis Varoufakis, went from a virtual economy to a real economy when he became Greece’s Minster of Finance.

If you want to understand the world and make it a better place there is no better degree than an economics degree because it is so versatile.

Has the wage-education locus for women been worsening?

That question is the focus of some recent research by Chen Huang.

Women’s labor force participation rate has moved from 61% in 2000, to 57% today.  It seems two-thirds of this change has been due to demographics, namely the aging of the adult female population.  What about the rest?  It seems that, relative to education levels, wages for women have not been rising since 2000:

I discover that the apparent increase in women’s real wages is more than accounted for by the large increase in women’s educational attainment. Once I condition on education, U.S. women’s real wages have not increased since 2000 and may even have decreased by a few percentage points. Thus, the locus of wage/education opportunities faced by U.S. women has not improved since 2000 and may have worsened. Viewed in that light, the LFPR decrease for women under age 55 becomes less surprising.

You can consider that another indicator of the Great Stagnation.

Raj Chetty is returning to Harvard

That is the word on Twitter.  Does he want grandchildren more than he used to?  You may remember my Conversation with him, a short while after he moved to Stanford:

CHETTY: So if you’re in your mid-30s, only something like a quarter or less of girls growing up in the Bay Area are married, and we show in our paper that every extra year you spend growing up in the Bay Area, you’re less likely to get married. I remember telling my wife, “I don’t think we need to worry. Our daughter will be fine in terms of earnings. It’s just that she might not be married if we move to California.”
COWEN: So, you’ve lowered your expectations for grandchildren?
CHETTY: Yes. [laughs]

*Blockchain and the Law*

The authors are Primavera De Filipp and Aaron Wright, and the subtitle is The Rule of Code and it is published by Harvard University Press.  I am sent many books on crypto and blockchains, but this is the one I feel is useful to an educated readership.  It’s not for specialists, but if you have a good general economics and also law background, as one would expect from MR readers, but don’t “get” crypto, this is the book-length treatment for you.  It sees merit and potential in crypto, without buying into any particular claim just for the sake of hype.

It is striking that crypto learning and debate really has not occurred through books much at all, nor in the mainstream media.  It has been through white and yellow papers, various on-line fora, Medium essays, Twitter, Reddit threads, and a variety of other venues.  I believe this is a paradigmatic example of how knowledge spreads these days and it should be studied very seriously as such, because it is the most extreme case of the new methods I know.

Towards An International Court of Smart Contract Arbitration

Firms involved in international commerce routinely contract that disputes are to be resolved by private courts of arbitration such as the International Court of Arbitration, the London Court of International Arbitration or the Singapore International Arbitration Center. These courts of arbitration compete for clients and thus have an incentive to resolve disputes fairly, quickly and inexpensively. Courts compete, for example, to provide arbiters who are experts not simply in the law but in the relevant area of commerce. The New York Convention of 1958 says that private arbitration decisions will be enforced by the national courts of any of the 159 signatories; thus private arbitration leverages national enforcement but is otherwise not tethered to national law (e.g. in US see, Mitsubishi v. Soler Chrysler, National Oil v. Libyan Sun). Over time private courts of international arbitration have developed a system of law that transcends nations, an anational law–this is the new lex mercatoria.

I propose that courts analogous to the courts of arbitration that govern international commerce be created to govern smart contracts in virtual space. Arbitration of smart contracts will develop a new private law that will evolve to meet the needs of virtual commerce, a true lex cryptographia. At first, it might seem contradictory to advocate for courts of smart contracts and the development of lex cryptographia. Isn’t the whole point of smart contracts that no courts or lawyers are needed? Similarly, lex cryptographia is usually understood to refer to the smart contracts themselves–code is law–rather than to law governing such contracts. In fact, it is neither desirable nor possible to divorce smart contracts from law.

Smart contracts execute automatically but only simple contracts such as those involving escrow are really self-enforcing. Most contracts, smart or dumb, involve touchstones with the real world. Canonical examples such as the smart contract that lets you use an automobile so long as the rent has been paid illustrate the potential for disputes. Bugs in the code? Disputes over the quality of the car? What happens when a data feed is disputed or internet service is disrupted? Smart contracts applied to the real world are a kind of digital rights management with all of DRMs problems and annoyances.

Some of these problems can be dealt with online using decentralized mechanisms. But we don’t yet know which decentralized mechanisms are robust or cost-effective. Moreover, when marveling at the wisdom of crowds we should not forget the wisdom of experts. Nick Szabo once remarked that if contract law was suddenly forgotten it would take hundreds of years to recover the embedded wisdom. Contract law, for example, is filled with concepts like mistake, misrepresentation, duress, negligence and intention that are not easily formalized in code. Contract law is a human enterprise. And the humans who write contracts want law with terms like negligence precisely because these terms fill in for gaps which cannot be filled in and formalized in contracts let alone in code.

I am enthusiastic about smart contracts on blockchains. Smart contracts will significantly reduce transaction costs and thus let people create valuable, new private orderings. But it will be more profitable to integrate law and code than to try to replace law with code. Integration will require new ways of thinking. The natural language version of a contract–what the parties intend to agree to–may not map precisely to the coded version. Arbiters will be called in to adjudicate and thus will have to be experts in code as well as in law. Smart contracts can be made by anonymous parties who may want a dispute resolved not just privately but anonymously. Smart contracts can be designed with escrow and multisignatory authority so arbiters will also become decision enforcers. All of these issues and many more will have to be understood and new procedures and understandings developed. The competitive market process will discover novel uses for smart contracts and the competitive market process among arbiters will discover novel law. Law will adjust to business practice and business practice to law.

In short, the best way to create a vital new lex cryptographia is through competitive, private arbitration built on the model that already governs international commerce.

Yale Politic interview with me

I enjoyed this one, lots of real questions from Eric Wallach, not “tell us about your book” and the usual snoozefest.  Here is one bit:

So you like the idea of pardons– how do you work through that one?

I don’t even firmly believe that punishment is justified morally. Maybe it’s necessary, maybe you just can’t do without it.  But the mere fact that someone has wronged another, I don’t think causes them to forfeit their rights in the way that was claimed in classic, early modern political philosophy. Once you think wrongdoers still have their human rights, on what grounds do you punish them? Could be that you simply have to– either the public won’t accept another option and they would overthrow your non-punishment regime and bring in fascism, and something with a lot more punishment would come about.

I get that– I’m not saying you can just toss away the keys to all these jails. But insofar as you have options of not punishing people – who in the cases I’ve read about it seems they’re not going to go out there and continue their serial killing sprees – I think we just simply ought not to punish them. Martha Stewart, again, that seems to me a very clear case. Undo the wrong. If I were a president, I’d consider just only pardoning people and then resigning. I know I couldn’t get away with it forever, but it’s one way to think about the job.

There are other points of interest, new and interesting throughout.

Washington Metro Qatar markets in everything

Metro significantly relaxed its policies on extended hours for the Washington Capitals’ run to the Stanley Cup Final, including extending service for Thursday night’s series win without ever planning for any cash to change hands, WTOP has learned.

Since last summer, Metro has required a $100,000 deposit for each additional hour of service, and Metro suggested Wednesday that the Capitals’ parent company, Monumental Sports and Entertainment, would cover those costs for Thursday night’s game.

In fact, Thursday night’s extended service was part of a trade between the Caps and Metro that Metro valued at $100,000, Metro spokesman Dan Stessel said in an email…

Revised requirements issued last year normally call for the $100,000 deposit two weeks ahead of an event for each extra hour of service. Instead, Metro is billing each of the other groups that agreed to pay for the extended service for Capitals playoff games after the fact, Stessel said…

The bills being sent to those other groups — Qatar (via the Downtown BID), Comcast and Uber — will already include the discount for any fares paid during extended hours of service.

Here is the bizarre story, via Bruce Arthur.  For those of you who don’t get the joke, the D.C. Metro system shuts down too early relative to when many sporting events are likely to end.