Category: Economics

“The purchasing power of money is the same everywhere”

Didn’t Mises insist on that proposition in his Theory of Money and Credit?  The claim always bugged me, as it is true only tautologically.  Here is one counterexample:

In a remote area of Papua’s Pegunungan Bintang regency, purchasing staple commodities will put a far bigger dent in your wallet than in most other areas of Indonesia.

For a sack of rice, typically weighing 10 kilograms, people in the traditional gold mining area of Korowai have to spend at least Rp 2 million (US$138.5), similar to the cost of a low-end smartphone.

For comparison, in Jakarta, 1 kilogram of rice costs Rp 10,000 to Rp 11,000, meaning 10 kg of rice costs people in the capital around Rp 110,000.

The massive price discrepancies are not limited to rice. A box of instant noodles costs Rp 1 million in Korowai. Sometimes, people even pay with two grams of gold.

“A pack of instant noodles costs Rp 25,000,” said Hengki Yaluwo, an administrator of a cooperative in Korowai’s Mining Area 33 on Wednesday.

“Ten kilograms of rice costs four grams of gold. If you pay with cash, you need Rp 2 million,” he said.

One can of fish typically costs Rp 150,000, while a cell phone could cost 10 to 25 grams of gold, Hengki said.

As for arbitrage:

Reaching Korowai is difficult. People must take a helicopter from Bovel Digoel regency, and then continue by longboat, traveling along the Boven Digoel river for one day. After this, they must travel by foot for two days before finally arriving at the Korowai mining area.

Here is the full story, via Shaffin Shariff.  Here are photos of the Korowai people, ignore the text.  Here is a more sober and probably more accurate Wikipedia article.

What should I ask Nicholas Bloom?

I will be doing a Conversation with him, so what should I ask?  Here is part of his official bio:

Nicholas (Nick) Bloom is the William Eberle Professor of Economics at Stanford University, a Senior Fellow of SIEPR, and the Co-Director of the Productivity, Innovation and Entrepreneurship program at the National Bureau of Economic Research. His research focuses on management practices and uncertainty. He previously worked at the UK Treasury and McKinsey & Company.

Is there anyone whose name is on more important/interesting papers over the last ten years?  Here is a sampling.

So what should I ask him?

Deconvexifying the car, car feature markets in everything

…BMW is planning to move some features of its new cars to a subscription model, something it announced on Wednesday during a briefing for the press on the company’s digital plans.

…now the Bavarian carmaker has plans to apply that model to features like heated seats. BMW says that owners can “benefit in advance from the opportunity to try out the products for a trial period of one month, after which they can book the respective service for one or three years.” The company also says that it could allow the second owner of a BMW to activate features that the original purchaser declined.

In fact, BMW has already started implementing this idea in some markets, allowing software unlocking of features like adaptive cruise control or high-beam assist (in the United States, those options are usually standard equipment). Other features are more whimsical, like having a Hans Zimmer-designed sound package for your electric BMW or adaptive suspension for your M-car. Indeed, the company says that its forthcoming iNext will “expand the opportunities for personalization.” I’m sure y’all can’t wait.

Here is the full story, via the excellent Samir Varma.  In the standard theory of bundling, bundling enables more price discrimination, as for instance with the cable TV bundle.  But if most consumers really don’t value the add-ons at all, which perhaps is the case here, a’la carte may maximize revenue after all.

Combining life insurance and health insurance

Why not internalize the relevant externalities by bringing the two together?:

We estimate the benefit of life-extending medical treatments to life insurance companies. Our main insight is that life insurance companies have a direct benefit from such treatments because they lower the insurer’s liabilities by pushing the death benefit further into the future and raising future premium income. We apply this insight to immunotherapy, treatments associated with durable gains in survival rates for a growing number of cancer patients. We estimate that the life insurance sector’s aggregate benefit from FDA-approved immunotherapies is $9.8 billion a year. Such life-extending treatments are often prohibitively expensive for patients and governments alike. Exploiting this value creation, we explore various ways life insurers could improve stress-free access to treatment. We discuss potential barriers to integration and the long-run implications for the industrial organization of life and health insurance markets, as well as the broader implications for medical innovation and long-term care insurance markets.

That is from a recent article by Ralph S J Koijen and Stijn Van Nieuwerburgh in the May 2020 QJE.  Here are ungated versions of the same paper.  And here is Robin’s related idea from 1994.

My Conversation with Annie Duke

Here is the transcript and audio, here is the opening summary:

Annie joined Tyler to explore how payoffs aren’t always monetary, the benefits and costs of probabilistic thinking, the “magical thinking” behind why people buy fire insurance but usually don’t get prenups, the psychology behind betting on shark migrations, how her most famous linguistics paper took on Steven Pinker, how public policy would change if only the top 500 poker players voted, why she wasn’t surprised to lose Celebrity Apprentice to Joan Rivers, whether Trump has a tell, the number one trait of top poker players, and more.

Here is one bit from Annie:

DUKE: So when I went on my first date with my husband, my brother and brother-in-law immediately decided to make a market, and it was whether we were going to get married. Now to be fair, my husband and I — before we went on our first date, we’d been friends. Both my brother and my brother-in-law knew my eventual husband, but this is when we’re going on our first date. They make a market. I think that my brother-in-law ended up bidding 23.

My brother then called me up, cracking up, that my brother-in-law had bid 23 when we hadn’t been on a first date yet. And I then started laughing at my brother, said, “Well, that means you had to bid 22. Why are you laughing at him? You somehow bid 22. It’s our first date.” Now, that’s because we’re all people who sort of think this way. And so this sort of becomes the fun of the friendship, but there are other people . . .

And this from Annie:

DUKE: My suspicion is that if only the top 500 poker players voted, people would be thinking a lot more about edge cases — where things could go wrong, for sure, because poker players just are obsessed with that. I think that there would be more long-termism as opposed to short-termism, again, because you have to be obsessed with that as a concept. I think that people would be thinking about “What are the unintended consequences? How does this look?”

Another thing that’s really important that poker players think about is, “If I put this policy in that looks like it’s awesome, how can someone come in and find the cracks in it so that it can turn into something bad?” I feel like the top 500 players would definitely be thinking in that way more.

You will have to read or hear the dialogue to take in my many good questions.

Let’s stop calling it “voodoo economics”

I have lived in Haiti my whole life, there is no demonic energy. Instead i believe Haiti is filled with mystical energy and its clear with the vibrant culture we hold dear to our hearts. ALSO Voodoo is not a demonic religion. To give thanks to your ancestors is beautiful

That is from Aurélie Wulff.  And here are Vodou Sacred Sites of Haiti.

The Long-Term Belief-Scarring Effects of COVID-19

The largest economic cost of the COVID-19 pandemic could arise from changes in behavior long after the immediate health crisis is resolved. A potential source of such a long-lived change is scarring of beliefs, a persistent change in the perceived probability of an extreme, negative shock in the future. We show how to quantify the extent of such belief changes and determine their impact on future economic outcomes. We find that the long-run costs for the U.S. economy from this channel is many times higher than the estimates of the short-run losses in output. This suggests that, even if a vaccine cures everyone in a year, the Covid-19 crisis will leave its mark on the US economy for many years to come.

That is from a new NBER working paper by Julian Kozlowski, Laura Veldkamp, and Venky Venkateswaran.

Covid-19 India prize (post with fixed links)

It goes to the COVIN Working Group for their paper “Adaptive control of COVID: Local, gradual, and trigger-based exit from lockdown in India.”

As India ends its lockdown, the team, led by Anup Malani, has developed a strategy to inform state policy using what is called an adaptive control strategy.  This adaptive control strategy has three parts.  First, introduction of activity should be done gradually.  States are still learning how people respond to policy and how COVID responds to behavior.  Small changes will allow states to avoid big mistakes.  Second, states should set and track epidemiological targets, such as reducing the reproductive rate below 1, and adjust social distancing every week or two to meet those targets.  Third, states should adopt different policies in different districts or city wards depending on the local conditions.

This project provides a path that allows states to contain epidemics in local areas and open up more of the economy.  Going forward the team plans to help address shocks such as recent flows of laborers out of cities and estimate how effective different social distancing policies are at reducing mobility and contact rates.

This project has 14 authors (Anup MalaniSatej SomanSam AsherClement ImbertVaidehi TandelAnish AgarwalAbdullah AlomarArnab Sarker, Devavrat ShahDennis Shen, Jonathan GruberStuti SachdevaDavid Kaiser, and Luis Bettencourt) across five institutions (University of Chicago Law School and Mansueto Institute, MIT Economics Department and Institute for Data Systems and SocietyIDFC InstituteJohn Hopkins University SAIS, and University of Warwick Economics Department). 

Draft of the full paper is here. And for the visualizations see their website https://www.adaptivecontrol.org

Congrats to all the authors of the paper and their institutions.  And here are links to the previous Emergent Ventures anti-Covid prize winners.

And I thank Shruti for her help with this.

What should I ask Nathan Nunn?

I will be doing a Conversation with him, he is an economist at Harvard, you could call much of his work economic history and economic development.  Wikipedia notes:

A recurrent theme in Nunn’s research is the long-term impact of historical processes on economic development, often mediated through institutions, culture, knowledge and technology.

Key findings of his research include the following:

  • Countries’ ability to enforce contracts is possibly a more important determinant of their comparative advantage than skilled labour and physical capital combined.
  • A substantial part of Africa’s current underdevelopment appears to be caused by the long-term effects of the Atlantic and Arab slave trades.
  • Current differences in trust levels within Africa are attributable to the impact of the Atlantic and Arab slave trades, which have caused the emergence of low-trust cultural norms, beliefs, and values in ethnic groups heavily affected by slavery (with Leonard Wantchekon).
  • By impeding not only trade and technological diffusion but also the depredations of slave traders, the ruggedness of certain African regions’ terrain had a significant positive impact on these regions’ development (with Diego Puga).
  • The introduction of the potato within the Columbian exchange may have been responsible for at least a quarter of the population and urbanisation growth observed in the Old World between 1700 and 1900 (with Nancy Qian).
  • In line with Boserup’s hypothesis, the introduction and historical use of plough agriculture appears to have given men a comparative advantage and made gender norms less equal, with historical differences in the plough use of immigrants’ ancestral communities predicting their attitudes regarding gender equality (with Alberto Alesina and Paolo Giuliano).
  • U.S. Food Aid is driven by U.S. objectives and can lead to increased conflict in recipient countries (with Nancy Qian).

So what should I ask him?

Average is Over, installment #1437

Over the past few decades, we find that about 80% of the widening residual wage inequality to be within jobs.

Furthermore, performance-pay incidence is the single largest factor behind that, accounting for 42% of those changes.  Of course this brings us back to the least popular explanation for growing income inequality, namely that we measure productivity better than before, and reward it accordingly.

That is all from a new NBER working paper by Rongsheng Tang, Yang Tang, and Ping Wang.

Claims about American economic growth

From Naomi R. Lamoreaux and John Joseph Wallis:

Before the middle of the nineteenth century most laws enacted in the United States were special bills that granted favors to specific individuals, groups, or localities. This fundamentally inegalitarian system provided political elites with important tools that they could use to reward supporters, and as a result, they were only willing to modify it under very special circumstances. In the early 1840s, however, a major fiscal crisis forced a number of states to default on their bonded debt, unleashing a political earthquake that swept this system away. Starting with Indiana in 1851, states revised their constitutions to ban the most common types of special legislation and, at the same time, mandate that all laws be general in their application. These provisions dramatically changed the way government and the economy worked and interacted, giving rise to the modern regulatory state, interest-group politics, and a more dynamic form of capitalism.

Here is the NBER working paper, titled “Economic Crisis, General Laws, and the Mid-Nineteenth-Century Transformation of American Political Economy,” via Ilya Novak.

Big tech and universal telecommuting

It has gone great so far, but I don’t think it is socially optimal to be doing this forever.  Here is my latest Bloomberg column on that topic, 2x the usual length, excerpt:

If Twitter, Facebook and other tech companies shift toward everyone working from home, it will mean less reliance on esprit de corps and morale to ensure performance, and more management using direct financial incentives and project- and output-based monitoring. Virtual tools can help organize teams, but they simply can’t replicate the intellectual frisson of “gathering the smart people” together, and this could damage performance and innovation.

And:

There is some evidence that when employees work at a distance, they don’t put in extra hours or extend themselves for the benefit of co-workers. That probably means a better work-life balance for many people, but perhaps also inferior performance from a lot of companies over the longer haul.

This move away from workplace morale as a motivator will help self-starter employees, but it may not be good for tech labor overall. In essence, without a local workplace ethos, it is easier to commoditize labor, view workers as interchangeable and fire people. The distinction between protected full-time employees and outsourced, freelance and contract workers weakens. A company can make the offer of, “If you hand in your project, we pay you,” to virtually any worker around the world, many of whom might accept lower wages for remote roles.

Bringing new workers on board is an especially difficult problem for this model.  In the short run, of course, that is a minor concern but over time it grows.