Category: Economics

What does the stock market tell us about the T-Mobile/Sprint merger?

Here is an excellent post by Alec Stapp, easy to read but a bit hard to excerpt but here are the closing bits:

As a few others pointed out, these relatively small moves in AT&T and Verizon (less than 3 percent in either direction) may just be noise. That’s certainly possible given the magnitude of the changes. Contra Philippon, I think the methodology in question is too weak to rule out the pro-competitive theory of the case, i.e., that the new merged entity would be a stronger competitor to take on industry leaders AT&T and Verizon. We need much more robust and varied evidence before we call anything “bogus.” Of course, that means this event study is not sufficient to prove the pro-competitive theory of the case, either.

Olivier Blanchard, the former chief economist of the IMF, shared Philippon’s thread on Twitter and added this comment above: “The beauty of the argument. Simple hypothesis, simple test, clear conclusion.”

If only things were so simple.

Recommended.  Addendum: Philippon comments.

Why Didn’t Ancient Rome have Dungeons and Dragons?

Why didn’t ancient Rome have Dungeons and Dragons? I am talking, of course, about the game. Anton Howes presents the general problem:

A theme I keep coming back to is that a lot of inventions could have been invented centuries, if not millennia, before they actually were. My favourite example is John Kay’s flying shuttle, one of the most famous inventions of the British Industrial Revolution. It radically increased the productivity of weaving in the 1730s, but involved simply attaching a little extra wood and string. It involved no new materials, was applied to the weaving of wool — England’s age-old industry — and required no special skill or science. Weaving had been “performed for upwards of five thousand years, by millions of skilled workmen, without any improvement being made to expedite the operation, until the year 1733”, was how Bennet Woodcroft — one of the nineteenth century’s most important historians of technology — put it. (Lest you doubt that description of Woodcroft, he was, in addition to being an inventor himself, the man who compiled and categorised England’s entire patent record up to 1852, and who collected the inventions that would later form the basis of London’s Science Museum, particularly some of the earliest steam engines — among the most important machines in human history — that grace its engine hall today. My hero!) Weavers had been around for millennia, as had shuttles: one is even mentioned in the Old Testament (“My days are swifter than a weaver’s shuttle, And are spent without hope”). As a labour-saving invention, Kay’s flying shuttle was even technically illegal.

I keep coming back to this example, because it goes against so many common notions about the causes of innovation. When it comes to skill, materials, science, institutions, or incentives, none of them quite seem to fit. But I keep seeing more and more such cases. There’s the classic example, of course, of suitcases with wheels – why so late? Was the bicycle another candidate?

…The economist Alex Tabarrok calls these cases “ideas behind their time”. I tend to just call them low-hanging fruit. Hanging so low, and for so long, that the fruit are fermenting on the ground. I now see them everywhere, not just in history, but today — probably at least one per week. And I now have a new favourite example, suggested yesterday on Twitter by Jordan Chase-Young: tabletop role-playing games.

Was it lack of the right the bureaucratic mindset? Lack of numeracy? Lower population densitie? Were such games invented but then lost to history? Ultimately Howes rejects these explanations, I think correctly.

Physically, there was nothing that actually stopped the invention of such games centuries or even millennia earlier. It required no special level of science, skill, or materials. So why did it take so long? Rather than there being any constraints, soft or otherwise, I think it’s simply because innovation in general is so extremely rare. It’s a matter of absence, rather than of barriers. The reason we have had so many low-hanging fruit throughout history is just because very few people ever bother to think of how to do things differently. We are, most of us, quite set in our ways. So even today, when there are many more inventors alive than at any previous point in human history, the fermenting fruit still abound.

Innovation doesn’t happen very often. How many people have ever invented a new way of doing anything? If stasis is the norm, then we should expect that many great ideas are routinely overlooked. For an economist this is an uncomfortable thought because we tend to think that profit opportunities are quickly exploited (no $500 bills on the ground). But while that is certainly true for choices within constraints it may not be true for choices that change constraints. This is also consistent with Paul Romer’s views on the combinatorial space of possible innovations—when the combinatorial space is vast and the explorers few, the innovations will be few and far between. What times, places and institutions generate more explorers?

Jason Crawford on twitter has more background and thoughts.

Penny Goldberg resigns as Chief Economist at the World Bank

When autocratic, oil-rich nations enjoy a windfall from higher crude prices, where does the money go? One place to look is Swiss bank accounts. Sure enough, an increase in oil prices is followed by a spike in deposits held by these countries in financial havens, according to a 2017 paper by Jorgen Juel Andersen of Norwegian Business School, Niels Johannesen of the University of Copenhagen and their co-authors.

When Mr Johannesen presented this result at the World Bank in 2015, the audience included Bob Rijkers, a member of the bank’s research group. The two of them joined forces with Mr Andersen to investigate if something similar happened after another kind of windfall: infusions of aid from foreign donors. Their conclusion was dispiriting. World Bank payouts to 22 aid-dependent countries during 1990-2010 were followed by a jump in their deposits in foreign financial havens. The leaks averaged about 5% of the bank’s aid to these countries.

It seems the World Bank would not publish the paper — the reasons are disputed — and Goldberg resigned her post as chief economist — again the reasons are disputed.  Here is the full story from The Economist.

Is the world fortunate that the coronavirus hit China first?

Is the world fortunate that the coronavirus hit China first? China’s government has totalitarian impulses but that–for the most part– is working to its favor in combating the virus. What other country in the world could quarantine a city of 11 million people on the basis of (at the time) 17 reported deaths?

CNN: Across China, 15 cities with a combined population of over 57 million people — more than the entire population of South Korea — have been placed under full or partial lockdown.

Wuhan itself has been effectively quarantined, with all routes in and out of the city closed or highly regulated. The government announced it is sending an additional 1,200 health workers — along with 135 People’s Liberation Army medical personnel — to help the city’s stretched hospital staff.

China’s response to the virus has been unprecedented and one cannot help but be a little bit impressed.

I was in India recently and if the coronavirus hits India it could spread very rapidly and millions could die not just in India but around the world. India does not have a strong public health system (it has invested instead in sickness treatment, another example of premature imitation), it also has plenty of other opportunistic diseases and bacteria which would magnify viral sickness and overwhelm the public health system, and India does not have a state strong enough to effectively lock down cities. India’s only big advantage versus China is that it’s relatively free press and communication system could make an outbreak more quickly spotted. China, in contrast, tried to hide the initial outbreak. This does, however, cut both ways. India’s 1994 outbreak of the plague quickly became news, which led to official action, but hundreds of thousands of people quickly left the epicenter in Surat–smart action at the time but deadly if those fleeing are infectious.

We need a Manhattan Project to research, develop and produce new vaccines at a faster pace; the US is best placed to be the world leader in this regard. On other actions, the United States stands somewhere in between China and India. US quarantine action would certainly be slower than in China but it could happen, probably through the military, as we are seeing now.

The US approach of slow but eventually decisive action is probably best but how slow is too slow? Right now most people assume that the coronavirus is a blow to China but if does create a serious pandemic then China may be the first to recover and stabilize.

Hat tip: Lunch discussions with Robin, John and Ajay.

Why are people getting worse at The Price is Right?

Americans are worse at The Price Is Right than they used to be. On the game show, which has been running since 1972, four contestants are asked to guess the price of consumer products, like washing machines, microwaves, or jumbo packs of paper towels. The person who gets closest to the actual price, without going over, gets to keep playing and the chance to win prizes like a new car. In the 1970s, the typical guess was about 8% below the actual price. People underestimate the price by more than 20% in the 2010s.

This finding comes from recently released research by Jonathan Hartley, a data analyst currently studying public policy at Harvard University. A longtime fan of the show, Hartley was inspired to conduct his research after reading a research paper from 1996 that reveals contestants don’t use optimal bidding strategies—they too rarely bid just a dollar over the highest previous bid—and is one of the early economics papers to show how people could be irrational. Hartley wondered what else the data might show. He found that the accuracy of  people’s guesses sharply decreased from the 1970s to the 2000s, and then stabilized in the 2010s.

And why? There are three main hypotheses:

First, inflation in the US was much higher and much less stable in the 1970s and 80s. When inflation is high and variable, people become more attentive to prices, noticing they are paying more for goods than before.

Second, the rise of e-commerce may have made people less sensitive to price. Research by the economist Alberto Cavallo finds that online competition has made prices more similar across sellers, both online and off. As a result, people may feel less of a need to do price comparisons.

Third, there are more products than ever. There are 50 times as many products at a grocery store than 80 years ago, according to the economist James Bessen.

Here is the full 2019 piece by Dan Kopf, via Rasool Somji.

My Conversation with Tim Harford

Here is the transcript and audio, here is part of the summary:

Tim joined Tyler to discuss the role of popular economics in a politicized world, the puzzling polarization behind Brexit, why good feedback is necessary (and rare), the limits of fact-checking, the “tremendously British” encouragement he received from Prince Charles, playing poker with Steve Levitt, messiness in music, the underrated aspect of formal debate, whether introverts are better at public speaking, the three things he can’t live without, and more.

Here is one bit near the opening:

COWEN: These are all easy questions. Let’s think about public speaking, which you’ve done quite a bit of. On average, do you think extroverts or introverts are better public speakers?

HARFORD: I am an introvert. I’ve never seen any research into this, so it should be something that one could test empirically. But as an introvert, I love public speaking because I like being alone, and you’re never more alone than when you’re on the stage. No one is going to bother you when you’re up there. I find it a great way to interact with people because they don’t talk back.

COWEN: What other non-obvious traits do you think predict being good at public speaking?

HARFORD: Hmmm. You need to be willing to rehearse and also willing to improvise and make stuff up as you go along. And I think it’s hard for somebody to be willing to do both. I think the people who like to rehearse end up rehearsing too much and being too stiff and not being willing to adapt to circumstances, whereas the people who are happy to improvise don’t rehearse enough, and so their comments are ill formed and ill considered. You need that capacity to do both.

And another segment:

HARFORD: …Brian Eno actually asked me a slightly different question, which I found interesting, which was, “If you were transported back in time to the year 700, what piece of technology would you take — or knowledge or whatever — what would you take with you from the present day that would lead people to think that you were useful, but would also not cause you to be burned as a witch?”

COWEN: A hat, perhaps.

HARFORD: A hat?

COWEN: If it’s the British Isles.

HARFORD: Well, a hat is useful. I suggested the Langstroth beehive. The Langstroth beehive was invented in about 1850. It’s an enormously important technology in the domestication of bees. It’s a vast improvement on pre-Langstroth beehives, vast improvement on medieval beehives. Yet, it’s fairly straightforward to make and to explain to people how it works and why it works. I think people would appreciate it, and everybody likes honey, and people have valued bees for a long time. So that would have been my answer.

And:

COWEN: I’ve read all of your books. I’ve read close to all of your columns, maybe all of them in fact, and I’m going to ask you a question I also asked Reid Hoffman. You know the truths of economics, plenty of empirical papers. Why aren’t you weirder? I’ve read things by you that I disagreed with, but I’ve never once read anything by you that I thought was outrageous. Why aren’t you weirder?

The conversation has many fine segments, definitely recommended, Tim was in top form.  I very much enjoyed our “Brexit debate” as well, too long to reproduce here, but I made what I thought was the best case for Brexit possible and Tim responded.

Emi Nakamura, 2019 John Bates Clark award winner

From a new JEP appreciation by Janice Eberly and Michael Woodford:

Emi’s exposure to economics began early in life. Her grandfather, Guy Orcutt, was a distinguished econometrician (Watts 1991). Both of her parents, Alice and Masao Nakamura, were academic economists; her mother, Alice Orcutt Naka-mura, is a past President of the Canadian Economic Association. In addition to an early exposure to economic ideas, Emi credits her parents with instilling in her “a deep sense of the importance of testing theories empirically” (Ng 2015). Emi attended academic conferences with her mother and began taking economics classes at the University of British Columbia as a high school student. She credits one of these early classes, a master’s class on economic measurement and index number theory taught by Erwin Diewert, with making an early mark in her drive for clarity in measurement. In a similar vein, Emi watched the film “The Race for the Double Helix” about the discovery of the structure of DNA with her parents. They emphasized the role of the empiricist Rosalind Franklin and the notion that “there is nothing worse than a wrong fact.”

Perhaps one lesson here is the importance of mobilizing talent from very early ages.  Here is previous MR coverage of Emi Nakamura.

Directed Innovation in the Artificial Limb Industry

A. A. Marks advertising card, showing a customer holding and wearing his artificial legs, late 1800s Courtesy Warshaw Collection, Archives Center, National Museum of American History. http://www.civilwarmed.org/prosthetics/

Innovation responds to both demand and supply. New scientific discoveries can arise exogenously and lower the cost of some types of innovation. Innovation, however, also responds to demand. The patenting of new energy devices increases as the price of oil increases. Similarly, new pharmaceuticals to treat diseases of old age increase as the number of elderly increase.

Similarly, the Civil War and World War I created a boom in the demand for artificial limbs and that in turn created a boom in innovation that led to better artificial limbs. The demand for new prosthetics was in some cases personal, as MacRae writes:

…the person who launched the era of modern prosthetics was also the first documented amputee of the Civil War–Confederate soldier James Edward Hanger. Hanger, who lost his leg above the knee to a cannon ball, was first fitted with a wooden peg leg by Yankee surgeons. Unhappy with the cumbersome appendage, Hanger eventually designed and built a new, lightweight leg from whittled barrel staves. Hanger’s innovative leg had hinges at the knee and foot, which helped him to sit more comfortably and to walk with a more natural gait. Hangar won the contract to make limbs for Confederate veterans. The company he founded–Hanger, Inc.–remains a key player in prosthetics and orthotics today.

In a highly original paper, Jeffrey Clemens and Parker Rogers document the increase in patents during the war eras but they also show that the type of innovation not just the quantity also responded to economic incentives.

In the Civil War era, the quantity of limbs demanded increased but the government was quite stingy in paying for artificial limbs. As a result, innovators focused on process innovations that enabled the production of more limbs at lower cost. In contrast, WWI payments were more generous and the government emphasized reintegrated soldiers into society which made appearance a more dominant feature in limb patenting.

More generally, Clemens and Rogers show how the type of procurement contracts directs not just the quantity but the form of innovation. The lessons are relevant for modern health care costs. Many people, for example, have wondered why innovation tends to lower costs in most fields but raise costs in health care. Clemens and Rogers point to the nature of procurement contracts as a possible important influence.

Coronavirus markets in everything

Government officials across Hubei province, the epicenter of the coronavirus outbreak, are desperate to find ways to stop the spread of the infection.

In Hubei’s Fangxian County, officials are trying a different approach — paying sick people.

According to an official Fangxian County notice, anyone who is sick and reports themselves to a hospital can expect to be paid.

Patients who have a fever and turn themselves in will receive 1,000 yuan ($142).

But officials and other interested parties are also being offered cash incentives if they catch anyone with a fever. For each person with a fever who is reported by an official or citizen, there is a reward of 500 yuan ($71).

The notice said that the offer is only valid from today until February 18.

Here is the link (nothing extra there, except a noisy video and you have to scroll down a lot).  Via Neville.

Coronavirus multilateral insurance markets in everything

As financial markets fretted over the spread of a coronavirus outbreak in China this week, one security was in the firing line more directly than any other. Holders of the World Bank’s pandemic bond will lose principal if the disease spreads by a sufficient amount, writes Jasper Cox.

The World Bank’s pandemic bond, issued in 2017, provides funding for the development bank’s Pandemic Emergency Financing Facility (PEF) if an outbreak of one of six viruses meets certain conditions.

Here is the link (gated), here is a more detailed John Dizard FT story:

The event triggers were calculated on a complex formula based on deaths in the country of origin, a smaller number of deaths in neighbouring countries, and a relatively rapid increase in infection and mortality. Interest charges were assumed by rich-country donors including Germany and Japan. The riskier bonds pay 11.5 per cent over Libor, since they required only 250 deaths to reach the trigger. Not bad, considering the “expected loss” for the tranche was only 7.74 per cent. The less risky tranche required 2,500 deaths, so only paid 6.9 per cent over Libor, compared with an expected loss of 3.57 per cent.

Here is a pre-coronavirus discussion of the bonds, mostly with reference to Ebola.

Pollution in India and the World

I spoke on the negative effects of air pollution on health and GDP at Brookings India in Delhi. The talk was covered by Indian media. The Print had a good overview:

The long-held belief that pollution is the cost a country has to pay for development is no longer true as bad air quality has a measurable detrimental impact on human productivity that could in turn reduce GDP, Canadian-American economist Alex Tabarrok said.

…“There is this old story that pollution is bad, but it increases GDP… When the United States and Japan were developing, they were polluted. So India and China also have to go through that stage of pollution — so that they get rich, and then they can afford to reduce pollution,” Tabarrok said.

“I want to say that that story is wrong. What I want to argue is that a lot of the new research indicates that we may be in a situation where we could be both healthier and wealthier at the same time by reducing pollution,” he said.

…At the seminar, Tabarrok pointed out that expecting people to make sacrifices for the sake of future generations is not a politically fruitful way to deal with pollution.

Citing the issue of crop burning in India, he said farmers are not going to be inclined to change their behaviour if they are told to stop stubble burning for the sake of Delhi residents.

“However, if these farmers are made aware of how the crop burning harms them and their families and affects their soil quality, they are more likely to participate in mitigation measures,” he said.

I was pretty tough on government policy as Business Today India reported:

More than half of India’s population lives in highly polluted areas. Research by Greenstone et al (2015) proves that 660 million people live in areas that exceed the Indian Ambient Air Quality Standard (NAAQS) for fine particulate pollution. In this context, having measures such as banning e-cigarettes and having odd-even days for vehicles to solve the problem of air pollution seems ridiculous, says Alex Tabarrok, Professor of Economics at the George Mason University and Research Fellow with the Mercatus Centre. “These are not appropriate solutions to the scale and the dimensions of the problem,” he says.

Is (productive) big business taking over services?

From today’s WSJ, by Chang-Tai Hsieh and Esteban Rossi-Hansberg:

If you live in a midsize American city, you’ve probably noticed that an increasing share of local services are provided by chain establishments such as the Cheesecake Factory and Wegmans. Why? It’s because the industrial revolution that transformed U.S. manufacturing more than a century ago is finally reaching many local services, which had long resisted standardization.

…Locals sometimes lament when a new chain in town bears down on a mom-and-pop shop. But in the past four decades industries in which top firms have grown in share have created many more jobs than ones where market share is dispersed among small peers. Companies that have taken advantage of the industrial revolution in services grow by expanding into smaller cities or exurbs, and provide competition to previously dominant local monopolists. This brings jobs, as well as cheaper and higher quality services from groceries to health care, to areas that need them most.

In contrast, employment has shrunk in sectors still dominated by small independent operators, such as plumbing and electrical wiring. Over the past four decades, the growth of the top 10% of firms in local services in a given year has accounted for 80% of the cumulative wage and employment growth in the U.S.

Might this also someday mean that services will become easier to export?  I am also happy to recommend the authors’ underlying piece The Industrial Revolution in Services.

DIY Pancreas?

People suffering from diabetes have turned to sophisticated do-it-yourself technologies. Here’s the abstract to an excellent article on these developments by Crabtree, McLay and Wilmot:

Diabetes technology has been advancing rapidly over recent years. While some of this is driven by medical technology companies, a lot of the driving force for these developments comes from people living with diabetes (#WeAreNotWaiting) who have developed their own ‘do-it-yourself’ artificial pancreas systems (DIY APS) using continuous glucose monitoring, insulin pumps and smartphone technology to run algorithms shared freely with the intent of improving quality of life and glycaemic control. Existing evidence, although observational, seems promising but more robust data are required to establish the safety and outcomes. This is unregulated technology and the off-label use of interstitial glucose monitors and insulin pumps can be disconcerting for people living with diabetes, health care professionals, organisations, and diabetes technology companies alike.

Here we discuss the principles of DIY APS, the outcomes observed so far and the feedback from users, and debate the ethical issues which arise before looking to the future and newer technologies on the horizon.

Hat tip: Dennis Sheehan.

An anonymous reader on talent misallocation and bureaucratization

Building upon my recent Bloomberg column on old people getting the interesting jobs, a reader writes the following on his blog:

I do not think that the main explanation for this is the increasing age requirements for America’s best jobs. Instead, I contend that this sorting is an efficient response to the standardization of entry-level jobs and bureaucratization of hierarchies . Most firms are not well-equipped to efficiently utilize the top tier of smart, talented but raw new employees. Sending them off to consulting firms is a rational response from the point of view of both the young employees as well as the companies.

(Since the number of startup founders and scientists is relatively small, the real cost of this talent allocation is to Fortune 500 companies. I will therefore focus on large companies. I will also just focus on consulting, though I believe the arguments apply equally to law, finance, and perhaps big tech.)

Most corporate entry-level programs do not offer much stratification between the smart, highly motivated individual and the more average performer. Fifty years ago a bright, ambitious new college graduate had no choice but to pay one’s dues by starting at the bottom like everyone else and then work one’s way to the top–albeit at a faster rate than today. Today that same graduate can select into the fast track via consulting.

Moreover, this is an equilibrium that–at least in the short- to medium-term–makes sense for all players. The ambitious young graduate receives a wage premium in exchange for higher productivity. The consulting firm gets to hire the smart people it needs to build its pyramid. And even the Fortune 500 company gets to gain from the intelligence of the new graduate when it hires the consulting firm; arguably this company is a loser on net compared to fifty years ago (when it received access to the talent but did not have to pay the consulting firm to act as a middleman), but the equilibrium is still tenable.

My own experience at GE and a top management consulting firm is a good example of this in action. I joined GE through one of its leadership development programs but found my peers to be less talented and hard-working than I had hoped. Unsurprisingly, I also found the roles to be uninspiring and poor uses of my time. After less than two years, I left to join a top consulting firm. I was challenged from day one and at times was not sure if I would make it. My bosses asked much more of me, but they also better resourced me. My productivity was an order of magnitude higher than at GE, and I was accordingly paid nearly twice as much.

For further evidence, consider that 90% of US companies have predefined pay bands based on experience. Given one’s experience level, it is difficult to make considerably more than one’s peers in the first few years (which is the purpose of pay bands). Contrast that with consulting: an average graduate with an engineering degree (the highest earning of all degrees) earns $69k but a new associate at McKinsey earns $105k. The disparity only widens for lower-earning degrees.

One counterargument is that the sorting done by consulting firms is based mostly on the prestige of one’s university education (whether undergraduate or graduate). Obviously all the smart people did not go to the Ivy League, and besides, don’t those schools screen for a narrow type of excellence anyways?

Yes, this is certainly true. However, I think it is also true that most people who can gain admission into one of these schools and pass the rigorous battery of consulting interviews are, by most reasonable measures, smart. Their willingness to self-select into consulting indicates their work ethic. It is far from a perfect screen, but it is a relatively effective one given how easy it is to utilize.

Thus, it is rational (at least in this narrow sense) for young people to self-select into consulting…

There is a bit more at the link.