Category: Economics

Allende, Pinochet, and the stock market

We document the impact of Allende’s election and subsequent coup on share prices.

A rare natural experiment to identify impacts of institutions on economic outcomes.

The unexpected socialist victory in 1970 reduced share prices by one half.

The 1973 coup launching a business-friendly dictatorship raised share prices by 80%.

These effects reflect Allende’s systemic challenge to private property rights.

That is from Daniele Girardi and Samuel Bowles, here is an ungated version.

What are the problems with the intellectual left?

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

Paul Krugman recently made a splash in a New York Times column by suggesting there are no “serious, honest, conservative intellectuals with real influence,” referring to the “unicorns of the intellectual right.” I largely agree with his criticisms, but I would like to offer a very different perspective. This column is my corresponding warning to the left, like when somebody tells you your shirt is not properly tucked in.

Here is one passage, but there is much more:

Religion has been a major force in world history, and today is no exception. The popular intellectual who probably has made the biggest splash this year, Jordan Peterson, describes himself as a Christian. Right-wing intellectuals, overall, aren’t nearly as religious as is the broader right-wing electorate. Still, I find they are much better suited to understand the role of religion in life than are left-wing intellectuals. For intellectuals on the left, the primary emotional reaction to religion is to see it as a force standing in the way of social liberalism, feel awkward about how many Americans are still religious, and then prefer to change the topic.

I see the main victims of the political correctness movement as standing in the center or center-left. In fact, some intellectual superstars, such as Peterson or Steven Pinker, have thrived and received enormous attention by attacking political correctness. But if you don’t have a big public audience, you work in a university, and you wish to make a point about race or gender that isn’t entirely along “proper” lines, you will probably keep your mouth shut or suffer the consequences. Those intellectual victims are not mainly on the right, and it means the left has ended up somewhat blind on these issues. This underlying dysfunction is a big reason the left was so surprised by the election of President Donald Trump.

Do read the whole thing.

The Great Leland Yeager has Passed

Leland Yeager has passed at the age of 93. Yeager was the last of that remarkable group of scholars–including Buchanan, Tullock, Coase, Nutter–that made Virginia political economy. Yeager was a polymath perhaps best illustrated by The Yeager Mystique an appreciation by William Breit, Kenneth G. Elzinga and Thomas D. Willett written some twenty years ago (quoted below). His work on monetary theory and international monetary relations remain of great value today.

His facility with languages was legendary:

Another doctoral student, the president of the Graduate Economics Club, was working with Yeager (in Yeager’s capacity as Director of Graduate Studies) to bring Maurice Allais to the University of Virginia for a colloquium. Yeager passed any correspondence from Aliáis on to the club’s president for a response. The correspondence was in French.

Nonplussed by what he mistakenly considered Yeager’s challenge to him, the club’s president decided to retaliate. With the aid of a graduate student in another department, he responded to Yeager with a letter written in Sanskrit. Yeager was oblivious to the ruse. Innocently, he replied in Sanskrit, saying how pleased he was that the club’s president knew this language.

In a faculty of great teachers he was regarded as primus inter pares:

Sometimes he would invite students for a weekend at his Charlottesville residence, where he provided excellent cuisine and wine and conversations which could sometimes lead to a publishable manuscript. A fascinating instance is provided by this lucky house guest: “I happened to ask him some questions on a topic in monetary theory. Well, Leland immediately brought out his tape recorder, and for the next several hours I proceeded to ask him questions, which we then discussed fully. Every few minutes he would summarize the discussion on his tape recorder. Very early the next morning I could hear Leland typing away at his typewriter. When I got up, he presented me with 23 pages of transcript – he had typed up all that we had recorded the night before. We eventually converted that transcript into an article which was published by a major journal. I don’t think I will ever be able to duplicate the excitement I felt during that discussion with Leland into the wee hours of the night.

See Tyler’s personal remembrance below.

Leland B. Yeager has passed away at age 93

Leland was a great monetary economist, a wonderful economist outright, an important early member of the Virginia School, one of the best read people I’ve met, and he could speak and read eight languages, including Swedish.  He was also a wonderful expositor, and a fine gentleman altogether.  He was either an early or a late proponent of market monetarism, depending on how you wish to mark the calendar.  Most memorably to me, he would entertain my pesky questions about economics, without tiring, even when I was at a young age.  I am sorry to see him go.  Here is Leland on Wikipedia and other entries.

How much do schools mediate the international transmission of income?

Not that much.  From Jesse Rothstein:

Chetty et al. (2014b) show that children from low-income families achieve higher adult incomes, relative to those from higher income families, in some commuting zones (CZs) than in others. I investigate whether children’s educational outcomes help to explain the between-CZ differences. I find little evidence that the quality of schools is a key mechanism driving variation in intergenerational mobility. While CZs with stronger intergenerational income transmission have somewhat stronger transmission of parental income to children’s educational attainment and achievement, on average, neither can explain a large share of the between-CZ variation. Marriage patterns explain two-fifths of the variation in income transmission, human capital accumulation and returns to human capital each explain only one-ninth, and the remainder of the variation (about one-third) reflects differences in earnings between children from high- and low-income families that are not mediated by human capital. This points to job networks and the structure of local labor and marriage markets, rather than the education system, as likely factors influencing intergenerational economic mobility.

Here is the NBER working paper.

The role of ideological change in India’s economic liberalization

In an interesting paper, Nimish Adhia argues that in the 1980s Bollywood films began to shift from emphasizing collectivist duty towards individual happiness.

The injunction of performing one’s duty without regard to outcomes has been the basis of much of the Indian philosophical and religious discourse.

The dilemma is recurrent in Indian films…. From the 1950s to the 1980s, the dilemmas invariably resolve in favor of duty. The mother in Mother India (1956) shoots and kills her wayward son as he attempts to kidnap a woman—an action that would have been shameful for the village. “I am the mother of the entire village,” she says as she picks up the gun. As the son collapses to the ground, she wails and rushes to his side, and is shown to lament his death for the rest of her life, but the film valorizes her as “Mother India.”

But then starting with Ram Teri Ganga Maili (1986) there is a spate of films that celebrate the assertion of one’s desire. The assertion commonly takes the form of falling in love—an audacious act in a society where the sexual mores are conservative and a majority of marriages are arranged on basis of familial and community criteria. The young lovers in the big hit Qayamat se Qayamat tak (Doomsday to Doomsday, 1988) elope and endure enormous hardships on account of their families’ opposition. The families had a falling out in the past when they were neighboring landlords in the country. The demands of familial loyalty, shown to arise in this way from a feudal setup and concluding in the death of the young lovers, are condemned by the film as savage and outdated. “We are not the property of our parents,” the young man once counsels his beloved. “We need not be carriers of their legacy of hate.”

At the same time, the treatment of businessmen becomes more positive, wealth is shown as being earned rather than simply given, and the pursuit and achievement of wealth is shown to lead to happiness and pride rather than misery and spiritual death. Adhia argues that these changes helped to cause the liberalization reform beginning in the 1990s.

the ideological change is visible in the films of the 1980s, preceding the wave of liberalization starting in 1991. It lends support to the notion that the ideological change, reflected in the films as early as 1980, was a cause rather than a consequence of liberalization.

Guru, which I have called the most important free market film ever made, comes after liberalization but can be understood as in many ways the apex of these trends.

Hat tip: Prateek Raj.

Defensive Gun Use and the Difficult Statistics of Rare Events

In the mid-1990s, Kleck and Gertz (1995) estimated that in a typical year about 1.3% of US adults used a gun for self-defense against another person. Kleck and Gertz’s estimate, which came from a survey of nearly 5000 people, implied that there were millions of defensive gun uses every year.

Following Kleck and Gertz’s 1995 paper, the CDC added a question about defensive gun use to their Behavioral Risk Factor Surveillance System (BRFSS). In 1996, 1997, and 1998 the CDC asked:

“During the last 12 months, have you confronted another person with a fire arm, even if you did not fire it, to protect yourself, your property, or someone else?”

But here is the surprise. The CDC buried the question and the results. Only recently was the data discovered and made public by Kleck in a new paper.*(see addendum) So what were the results? You will perhaps now not be too surprised that the CDC’s survey supports Kleck and Gertz’s original finding, about 1% of survey respondents reported a defensive gun use, implying millions of such uses over a year.

The case isn’t closed on defensive gun use, however, because of a statistical conundrum.

The CDC asked 12,870 individuals about defensive gun use over the three samples.That’s a relatively large sample but note that this means that just 117 people reported a defensive gun use, i.e. ~1%. In comparison, 12,656 people (98.33%) reported no use, 11 people (0.09%) said they didn’t know and 86 people (0.67%) refused to answer. People answering surveys can be mistaken and some lie and the reasons go both ways. Some people might be unwilling to answer because a defensive gun use might have been illegal (Would these people refuse to answer?). On the other hand, mischievous responders might report a defensive gun use just because that makes them sound cool.

The deep problem, however, is not miscodings per se but that miscodings of rare events are likely to be asymmetric. Since defensive gun use is relatively uncommon under any reasonable scenario there are many more opportunities to miscode in a way that inflates defensive gun use than there are ways to miscode in a way that deflates defensive gun use.

Imagine, for example, that the true rate of defensive gun use is not 1% but .1%. At the same time, imagine that 1% of all people are liars. Thus, in a survey of 10,000 people, there will be 100 liars. On average, 99.9 (~100) of the liars will say that they used a gun defensively when they did not and .1 of the liars will say that they did not use a gun defensively when they did. Of the 9900 people who report truthfully, approximately 10 will report a defensive gun use and 9890 will report no defensive gun use. Adding it up, the survey will find a defensive gun use rate of approximately (100+10)/10000=1.1%, i.e. more than ten times higher than the actual rate of .1%! Those numbers are, of course, approximately what the CDC survey found which doesn’t prove that Kleck’s interpretation is wrong only that very different interpretations are also plausible.

The bottom line is that it’s good to know that the original Kleck and Gertz survey replicated–approximately 1% of adult Americans did report a defensive gun use in the 1990s–but the real issue is the interpretation of the survey and for that a replication doesn’t help.

Addendum: The paper has since been taken down perhaps because in addition to the issue of interpretation that I raised the survey may not have been national. Robert VerBruggen has further details.

Superstars in the NBA playoffs, and the heightening of income inequality

Perhaps you have noticed that the sixth-seeded New Orleans Pelicans swept the third-seeded Portland Trail Blazers in four games straight.  A month or two ago, it was not entirely obvious that the Pelicans would make the playoffs at all.  And all 22 ESPN analysts picked the Pelicans to lose the series.

The simplest theory about the Pelicans performance is that they have two superstars, Anthony Davis and Jrue Holiday.  But while Portland was thought of as the superior team, they don’t have any player with the power and dynamism of Anthony Davis, whom I and many others consider to be a transcendent superstar.

One possible theory is this: an NBA series today is very well scouted and analyzed, and the players watch lots of tape.  Adjustments are made each game or even each quarter, based on a quantitative analysis of what is working and what is not.  This neutralizes many of the strategies of the lesser players, and furthermore having a good bench is worth less when it is easier to concentrate more of the minutes in the very best players.  It is not however possible to neutralize the impact of a transcendental superstar, even with lots of advance planning.  Those truly top players can improvise around any defenses thrown at them, or on the defensive end they can rapidly adjust to counter a new offensive attack.

Furthermore, in the playoffs effort is more or less equalized, as suddenly everyone is trying, even the bench players on the road.  That too raises the relative return to top talent.

In the playoffs, it is thus plausible that the quality and value of the transcendent superstars goes up.

As more and more of contemporary business becomes regularized and measured and motivated and based on well-ordered cooperating teams, might the same be true for the transcendent superstars of that world as well?  In essence, we’re always in the business “playoffs” these days, at least in Manhattan and Silicon Valley, and their transcendent superstars also become the difference-makers.

I do not seek to argue that is the main cause behind rising income inequaliity, but might it be one factor?

Of course my dream series for the finals is New Orleans vs. Philadelphia (Ben Simmons, Joel “built for…playoff basketball” Embiid.  That is hardly the most likely outcome, but it is now looking a lot more possible than one might have thought.  Philly, by the way, is the “all time hottest team entering the NBA playoffs,” at least by one measure.

Economists don’t like admitting to publishing in lower-quality outlets

The symphony orchestra and the Industrial Revolution

I heard Mozart’s 39th symphony in concert last night, and it occurred to me (once again) that I also was witnessing one of mankind’s greatest technological achievements.  Think about what went into the activity: each instrument, developed eventually to perfection and coordinated with the other instruments.  The system of tuning and the underlying principles of the music.  The acoustics of the music hall.  The sheet music on paper and the musical notation.  All of those features extremely well coordinated with the kind of compositional talent being produced in Central and Western Europe from say 1710 to 1920.  And by the mid-18th century most of the key features of this system were in place and by the early 19th century they were more or less perfected.

Sometimes I think of the Industrial Revolution as fundamentally a Cultural Revolution.  The first instantiation of this Cultural Revolution maybe was the rise of early Renaissance Art in Italy and in the Low Countries.  That too was based on a series of technological developments, including improved quality tempera paint, the development of oil painting, the resumption of bronze and marble techniques for sculpture, and the reintroduction of paper into Europe, which enabled artists’ sketches and drawings.

As with classical music, this unfolding of quality production was all based on extreme experimentation, a kind of scientific method, urbanization, and competing city-states.  There was also the rediscovery of knowledge from antiquity, and the importation or reimportation of science from China and the Arabic world, including the afore-mentioned knowledge of paper-making.

The creation of a book culture, and a culture of experimental science, could be cited as well.

Perhaps the only [sic] difference with the Industrial Revolution proper is that it came to sectors — energy, transport, and textiles — that boosted living standards immensely.  But arguably it was just another of a series of Cultural Revolutions that had their roots in late medieval times, with even classical music deriving ultimately from Franco-Flemish polyphony.  One of these Cultural Revolutions just happened to be Industrial.

Of course the earliest parts of Revolutions are often the best, as we’ve surpassed the steam engines of the 19th century but Mozart and Leonardo are still with us.

A Fine Theorem on Parag Pathak, the recent Clark winner

This award strikes me as the last remaining award, at least in the near term, from the matching/market design boom of the past 20 years. As Becker took economics out of pure market transactions and into a wider world of rational choice under constraints, the work of Al Roth and his descendants, including Parag Pathak, has greatly expanded our ability to take advantage of choice and local knowledge in situations like education and health where, for many reasons, we do not use the price mechanism. That said, there remains quite a bit to do on understanding how to get the benefits of decentralization without price – I am deeply interested in this question when it comes to innovation policy – and I don’t doubt that two decades from now, continued inquiry along these lines will have fruitfully exploited the methods and careful technique that Parag Pathak embodies.

The post is excellent throughout.

Parag Pathak wins the John Bates Clark Award

Parag Pathak, a Massachusetts Institute of Technology professor whose research suggests that school choice can lead to improved student performance, won the John Bates Clark award for contributions from a young economist.

Pathak, 37, was honored for his work on market design and education policy, the Nashville, Tennessee-based American Economic Association said Friday in a statement on its website. It said his work “blends institutional knowledge, theoretical sophistication, and careful empirical analysis to provide insights that are of immediate value to important public-policy issues.”

That is from Bloomberg.  Here is scholar.google.com.  There is lots on his home page.  Only 808 Twitter followers!  His Wikipedia page is good.  He is a protege of Al Roth, and overall this prize is a victory for the notion of market design.

The value of Facebook and other digital services

Women seem to value Facebook more than men do.

Older consumers value Facebook more.

Education and US region do not seem to be significant.

The median compensation for giving up Facebook is in the range of $40 to $50 a month, based mostly on surveys, though some people do actually have to give up Facebook.

I find it hard to believe the survey-based estimate that search engines are worth over 17k a year.

Email is worth 8.4k, and digital maps 3.6k, and video streaming at 1.1k, again all at the median and based on surveys.  Personally, I value digital maps at close to zero, mostly because I do not know how to use them.

That is all from a new NBER paper by Erik Brynjolfsson, Felix Eggers, and Avinash Gannamaneni.

Models as indexing, and the value of Google

There are many arguments for the use of models in economics, including notions of rigor and transparency, or that models can help you to see relationships you otherwise might not have expected.  I don’t wish to gainsay those, but I thought of another argument yesterday.  Models are a way of indexing your thoughts.  A model can tell you which are the core features of your argument and force you to give them names.  You then can use those names to find what others have written about your topic and your mechanisms.  In essence, you are expanding the division of labor in science more effectively by using models.

This mechanism of course requires that models are a more efficient means of indexing thoughts than pure words or propositions alone.  In this view, it is often topic names or book indexes or card catalogs that models are competing with, not verbal economics per se.

The existence of Google therefore may have lowered the relative return to models.  First, Google searches by words best of all.  Second and relatedly, if you have written only words Google will help you find the related work you need, scholar.google.com kicks in too.  In essence, there is a new and very powerful way of finding related ideas, and you need not rely on the communities that get built around particular models (though those communities largely will continue).

It is notable that open access, on-line economics writing doesn’t use models very much and is mostly content to rely on words and propositions.  There are several reasons for this, but this productivity shock to differing methods of indexing may be one factor.

Still, it is not always easy to search by words.  Many phrases — consider say “free will” — do not through search engines discriminate very well on the basis of IQ or rigor.

How big are the buyer and renter gains from SB 827?

This article considers a counterfactual thought experiment: how would California’s housing market be different today if a policy currently under consideration in the California Senate—SB 827, which would allow new residential building along public transit corridors—had been implemented six years ago? I estimate that rent would be 5.8 percent lower in San Francisco, a savings of $266 per month on the median home, and 4.2 percent lower in Los Angeles County, savings of $124 per month.

That is from Salim Furth at Mercatus, here is much more.  You will note those numbers do not include the higher output and innovation from a more efficient allocation of talent.

Here is Salim’s podcast with Matt Yglesias and Emily Hamilton.