Category: Economics

Thinking at the margin

So why don’t poor Arkansas people currently living in homes move there [California]? Because they’d be homeless. But homeless people in Arkansas are already homeless, so they benefit from all of the positive factors that make LA a desirable place to live, without the drawback of paying high prices for an apartment.

That is from Scott Sumner, with much more at the link.  Now can Scott explain why do so many LA apartments come without a fridge? 

*21st Century Monetary Policy*

I am pleased to have received an autographed copy of this very carefully done work.  I think it is (by far) the best treatment of what the Fed has been up to since the 1970s, at least on the monetary policy front.  There really isn’t anyone who would know better than Ben, keeping in mind he was not only Fed chair but also a top, possibly Nobel-quality monetary economist and also economic historian.  The clarity and writing quality are high.

In one way, however, this is an unusual book — there is remarkably little “of Ben” in the book.  To be clear, Ben already has published his personal memoir.  Still, if most of this book had been written by someone else, I would not have known.  Or maybe that is what it means to “put Ben in this book.”  Imagine Elon Musk writing a book on rocketry and focusing on the rockets.

In any case recommended.  Here is a good David Leonhardt NYT review.  It is striking to me how few reviews there are so far — why?  Therein lies a lesson too, though I have yet to figure out what it is.

Job security is not getting worse

There is a widespread belief that work is less secure than in the past, that an increasing share of workers are part of the “pprecariat”. It is hard to find much evidence for this in objective measures of job security, but perhaps subjective measures show different trends. This paper shows that in the US, UK, and Germany workers feel as secure as they ever have in the last thirty years. This is partly because job insecurity is very cyclical and (pre-COVID) unemployment rates very low, but there is also no clear underlying trend towards increased subjective measures of job insecurity. This conclusion seems robust to controlling for the changing mix of the labor force, and is true for specific sub-sets of workers.

That is from Alan Manning and Graham Mazeine, forthcoming in the Review of Economics and Statistics.  Via the excellent Kevin Lewis.

Testing Freedom

I did a podcast with Brink Lindsey of the Niskanen Center. Here’s one bit on the FDA’s long-history of banning home tests:

Brink Lindsey: …it’s on the rapid testing that we had inexplicable delays. Rapid tests, home tests were ubiquitous in Europe and Asia months before they were in the United States. What was going on?

Alex Tabarrok: So I think it’s not actually inexplicable because the FDA has a long, long history of just hating people testing themselves. So the FDA was against pregnancy tests, they didn’t like that, they said women they need to consult with a doctor, only the physician can do the test because literally women could become hysterical if they were pregnant or if they weren’t pregnant, this was a safety issue. There was no question that the test itself was safe or worked. Instead what the FDA said, “We can regulate this because the user using it, this could create safety issues because they could commit suicide or they could do something crazy.” So they totally expanded the meaning of safety from is the test safe to can somebody be trusted to use a pregnancy test?

Then we had exactly the same thing with AIDS testing. So we delayed personal at-home tests for AIDS for literally 25 years. 25 years these tests were unavailable because the FDA again said, “Well, they’re dangerous.” And why are they dangerous? “Well, we don’t know what people will do with this knowledge about their own bodies.” Now, of course, you can get an HIV test from Amazon and the world hasn’t collapsed. They did the same thing with genetic tests from companies like 23andMe. So I said, “Our bodies ourselves, our DNA ourselves.” That people have a right to know about the functioning of their own bodies. This to me is a very clear violation of the Constitutions on multiple respects. It just stuns me, it just stuns me that anybody could think that you don’t have a right to know, we’re going to prevent you from learning something about the operation of your own body.

Again, the issue here was never does the test work. In fact, the labs which produce these tests, those labs are regulated outside of the FDA. So whether the test actually works, whether yes, it identifies this gene, all issues of that nature, what is the sensitivity and the specificity, are the tests produced in a proper laboratory, I don’t have a lot of problem with that because that’s all something which the consumers themselves would want. What I do have a problem with is then the FDA saying, “No, you can’t have access to this test because we don’t know what you’re going to do about it, what you’re going to think about it.” And that to me is outrageous.

Here’s the full transcript and video.

The Demand and Supply of Misinformation

Bryan Caplan reminds us that misinformation wouldn’t work well if people weren’t so irrational.

The [standard misinformation] story focuses exclusively on the flaws of speakers, without acknowledging the flaws of the listeners. Misinformation won’t work unless the listeners are themselves naive, dogmatic, emotional, or otherwise intellectually defective. In economic jargon, the problem is that the story mistakes an information problem for a rationality problem.

The motivation for this crucial omission is fairly obvious. Blaming listeners for their epistemic vices sounds bad. It makes the accuser sound elitist, if not arrogant. Blaming a few high-status liars for the world’s problems is a lot more compatible with Social Desirability Bias than blaming billions of low-status fools who fail to choose to exercise their common sense.

I agree but it’s an equilibrium process. The demand and supply of misinformation both matter. Moreover, it’s not implausible that social media has increased the supply of misinformation, essentially because it has greatly accelerated the evolution of memes. As Dawkins taught us, memes evolve like genes but in the past memes evolved like rabbits, more rapidly than human beings but not so rapid that we couldn’t keep up. Now memes evolve like viruses, mind viruses. Even worse we have made improving memes profitable so we have capitalist energy added to faster random mutation.

I am somewhat hopeful that social media hit us hard because it was novel. A generation raised on social media may have more natural immunity–assuming we survive the infection. I also encourage (as does Bryan) institutions like betting markets to raise the price of misinformation (a bet is a tax on bullshit). Betting markets and expert aggregation markets like Metacuulus can help. We should invest more in the support and prestige of tools for developing rational consensus. More generally, if we can’t raise the cost of misinformation, better tools to aid our limited rationality could reduce the demand.

Problems with indirect convertibility

Tether a few times has been bouncing well below a dollar in value, even though it is supposed to be backed by plenty of high-quality assets.

I am reminded of some of my monetary theory writings with Kroszner in the late 1980s.  He and I wrote one essay, later published in our book, on how indirect convertibility may not be entirely stabilizing.  Let’s say you peg an asset at the value of one dollar, but redeem that asset in terms of gold bars rather than dollars.  You offer the redeemer enough gold bars to be equal in value to a dollar.

But what if the price of gold falls below its equilibrium value, if only temporarily?  To honor your peg strictly, you now have to make your dollar worth all the more gold bars.  But that in effect is “pegging” the value of gold at its new, temporarily wrong and distorted market price.  Your pegged price and the medium-term market value of gold will conflict.  If the pegged price wins out and itself drives the market price, you have to offer excess gold to meet the peg (that equilibrium seems unlikely to me, though you might also add redemption charges and fees).  In essence you are offering too much gold to a redeemer.  If the true medium-term value of gold is going to win out over the temporary distortion, for some modest while your peg is not complete and fully valid.  You are offering the same amount of gold you used to, but at least temporarily it is not enough for you to be promising full and complete convertibility.  The market may or may not mind this, to varying degrees.

It is not transparent to me what is going on with Tether at this moment, but I wonder if some version of this logic might apply.  That is, Tether could be, by all reasonable standards “adequately backed,” yet in a time of volatile and sometimes disequilibrium market prices for the backing assets, Tether won’t always be equal in value to a dollar either.

Of course gold is just an example, the backing assets could be different altogether.  To the extent they are heterogeneous, perhaps this problem is amplified somewhat?

Is there a place where the crypto community discusses these issues?  They gave Kroszner and me big headaches many years ago.


The crypto market is up! The crypto market is down! The roller coaster can be fearfully thrilling but as thoughtful academics and people interested in ideas let’s look away from the daily ups and downs and focus on the big picture. What is crypto? What is cryptoeconomics?

Tyler and I have written a new chapter for our textbook, Modern Principles. In Cryptoeconomics we explain just enough cryptography–namely cryptographic hash functions and public-private keys–to understand what new forms of communication and organization have been made possible by these breakthroughs. We then use these fundamentals to explain NFTs, blockchains, Bitcoin, smart contracts and decentralized finance–all in a crisp, compact format accessible to everyone.

Not everyone wants to teach crypteconomics, of course, or has the time (scarcity!) so this chapter will be available as an option to anyone using our book and the Achieve online course management system (in fact, it’s available now). Tyler and I have found, however, that our students, colleagues, even people at dinner parties ask us about crypto. Probably your students and friends will ask you as well. Plus our textbook is called Modern Principles so we thought we were obligated to teach these new ideas!

Cryptoeconomics is a good guide to some fundamentally new ways of trading, communicating, and cooperating.

Addendum: If you want to learn more about DeFi, my talk goes into greater depth.

Remote work and home prices

What explains record U.S. house price growth since late 2019? We show that the shift to remote work explains over one half of the 23.8 percent national house price increase over this period. Using variation in remote work exposure across U.S. metropolitan areas we estimate that an additional percentage point of remote work causes a 0.93 percent increase in house prices after controlling for negative spillovers from migration. This cross-sectional estimate combined with the aggregate shift to remote work implies that remote work raised aggregate U.S. house prices by 15.1 percent.

Here is more from John A. Mondragon and Johannes Wieland.

The State of Public Transit in the Nation’s Capital

The mismanagement of the metro system in the nation’s capitol is astounding.

WashPost: Metro’s train delays are projected to worsen as the agency abruptly yanks from service more than 70 operators who have been working without undergoing a mandatory retraining process for at least a year, officials announced Sunday.

The agency pledged corrective action in a release acknowledging that nearly half of the agency’s 500 train operators lack required recertification testing and training, while warning that staffing issues would lengthen wait times on the Green and Yellow lines from 15 to 20 minutes until the end of the month.

…Metro’s latest predicament coincides with a train shortage that has forced the agency to operate at reduced service with longer-than-normal wait times since mid-October. The safety commission ordered about 60 percent of its fleet out of service after a federal investigation into a Blue Line derailment found a defect affecting the wheels of the 7000 series, Metro’s latest and most advanced model of trains and rail cars.

Without the series’ 748 cars, Metro has been forced to rely on older models, some 40 years old and nearing retirement. The smaller, older cars, coupled with lower frequencies, have driven many passengers away because of crowding and social distancing concerns as coronavirus case numbers continue to fluctuate. Those concerns will only grow with longer wait times and fewer trains in service.

You may recall that in 2015 there was a deadly fire on the Metro which I wrote about in 2016.  (post repeated below).

WTOP: A Metro worker blamed for falsifying records about the tunnel fans that failed during last year’s deadly smoke incident near L’Enfant Plaza has been granted his job back by an arbitration panel — and Metro’s largest union has just filed a lawsuit against Metro because the worker hasn’t been reinstated yet.

The union’s defense is that everyone was doing it so no one is to blame. The Union is probably right that the WMTA suffers from a culture of poor safety and responsibility but you can’t fix that culture without clear signals that the incentives have changed.

I had to take the Metro to DC earlier this week and due to track closings for safety improvements it was miserable, at least 45 minutes of delays for the roundtrip. Some 700,000 people ride the metro every day and if each is delayed by just 15 minutes total (7.5 minutes each way) then at $15 an hour that’s 2.6 million dollars worth of delay every day.

Before traveling on the DC Metro I recommend checking the twitter account @IsMetroOnFire.

Addendum: At least this time heads are rolling.

Infant Formula, Price Controls, and the Misallocation of Resources

For the week of April 3, at least 12 states faced out of stock rates higher than 40 percent, including Connecticut, Delaware, Montana, New Jersey, Rhode IslandI’ve been reluctant to write about the shortage of infant formula simply because it’s so tiring to say the same thing over and over again. Obviously, this is a classic case where the FDA should allow imports of any food or baby formula approved by a stringent authority. (Here’s the US Customs and Border Patrol bragging about how they nabbed 588 cases of infant formula from Germany and the Netherlands as if it were cocaine.) Scott Lincicome has an excellent run down which covers not just the FDA but the problems caused by trade regulation and the WIC program as well.

What I want to do is focus on something less discussed: Why does the shortage vary across the country and even city by city?

I believe one reason is implicit price controls, either due to fear of regulatory backlash, regulatory constraints through other programs, or a misplaced desire not to upset consumers.

Price controls create shortages–that much is well known–but they also create a misallocation of goods. No doubt you have seen pictures from the 1970s of long lines of cars waiting to get gasoline. But there weren’t lineups everywhere at all times–rather we had the strange situation where there were shortage of gasoline in some places while, just a hundred miles away, there was plenty. Or shortages one day and surpluses the next.

Prices rationally allocate goods across space and time in response to shifts in demand and supply. If demand increases in one place, for example, prices rise, creating an incentive to bring in supplies from elsewhere. A rising price signals where supplies are needed and creates an incentive to deliver. Or, as Tyler and I put it, A price is a signal wrapped up in an incentive. A price controlled below the market price creates a shortage and it also kills the signaling and incentive function of prices. The result is allocational chaos: Shortages in some places and times and excess supply in other places and times.

In fact, price controls in a capitalist economy give you a window onto a planned economy. If you think of communism as a system of universal price controls this allocation chaos is the essence of why a communist state cannot rationally allocate resources.

Tyler and I discuss allocational chaos in our chapter on price controls in Modern Principles of Economics. See also this excellent video.

Russia fact of the day

Russia has stopped publishing detailed monthly trade statistics. But figures from its trading partners can be used to work out what is going on. They suggest that, as imports slide and exports hold up, Russia is running a record trade surplus.

On May 9th China reported that its goods exports to Russia fell by over a quarter in April, compared with a year earlier, while its imports from Russia rose by more than 56%. Germany reported a 62% monthly drop in exports to Russia in March, and its imports fell by 3%. Adding up such flows across eight of Russia’s biggest trading partners, we estimate that Russian imports have fallen by about 44% since the invasion of Ukraine, while its exports have risen by roughly 8%.

Here is more from The Economist, and that is why the ruble has maintained its value:

As a result, analysts expect Russia’s trade surplus to hit record highs in the coming months.

ESG Versus Innovation

Some wise words on ESG and innovation from the excellent Bart Madden:

Excessive focus on looking good in the short term via ESG metrics can be at cross-purposes with a long-term planning horizon keyed to innovation. A sizable portion of a firm’s major innovations may not move the needle much as to ESG metrics but may score high in the eyes of customers as to value creation (and quite possibly improve their customers’ ESG performance). Recent research reveals a tendency during quarterly earnings conference calls for those managements who have reported weaker-than-expected profits to talk less about financial results and more about their ESG progress.31 Keep in mind that innovation is the key to sustainable progress that jointly delivers on financial performance and taking care of future generations through environmental improvements.

Addendum: Bart has a history of smart investing.

I favor bird consequentialism

We have to be more willing to disrupt current animal habitats when building wind or hydroelectric power. That means, to put it bluntly, that we have to be more willing to kill animals. Erecting wind turbines, for instance, often leads to the death of some number of birds. To favor more wind turbines is not to support the death of more birds; it is to support a more robust long-term supply of green energy — which would benefit birds (and of course humans too)…

I favor a much more proactive policy agenda to boost the welfare of animals. That could include subsidies to new “artificial meat” technologies, more research into animal diseases and pandemics, even research into the possibility of bringing back extinct animals through genetic engineering. The US should also have more consistent enforcement of animal cruelty laws.

Protecting birds by limiting wind power is about the most damaging way to try to serve nature and the environment. It is a way of pretending to care about birds. It is also an illustration of how so many institutions are so dedicated to protecting entrenched interests — whether they are in the political or natural world.

Here is the rest of my Bloomberg column.  Bell the cat!  You should be the one who gets to kill the bird.  And while we’re at it, let’s ban octopus farms too.

Systemic Bias versus Concentrated Bias

Discrimination exists but rather than being systemic Campbell and Brauer argue it’s due to a small number of prejudiced individuals.

Discrimination has persisted in our society despite steady improvements in explicit attitudes toward marginalized social groups. The most common explanation for this apparent paradox is that due to implicit biases, most individuals behave in slightly discriminatory ways outside of their own awareness (the dispersed discrimination account). Another explanation holds that a numerical minority of individuals who are moderately or highly biased are responsible for most observed discriminatory behaviors (the concentrated discrimination account). We tested these 2 accounts against each other in a series of studies at a large, public university (total N = 16,600). In 4 large-scale surveys, students from marginalized groups reported that they generally felt welcome and respected on campus (albeit less so than nonmarginalized students) and that a numerical minority of their peers (around 20%) engage in subtle or explicit forms of discrimination. In 5 field experiments with 8 different samples, we manipulated the social group membership of trained confederates and measured the behaviors of naïve bystanders. The results showed that between 5% and 20% of the participants treated the confederates belonging to marginalized groups more negatively than nonmarginalized confederates. Our findings are inconsistent with the dispersed discrimination account but support the concentrated discrimination account. The Pareto principle states that, for many events, roughly 80% of the effects come from 20% of the causes. Our results suggest that the Pareto principle also applies to discrimination, at least at the large, public university where the studies were conducted. We discuss implications for prodiversity initiatives.

The cause of discrimination matters because as Hambrick notes writing about this paper in Scientific American:

 In recent years, the view that most people engage in discriminatory acts because of implicit biases has gained widespread public acceptance. In a 2016 presidential debate, Hillary Clinton commented that “implicit bias is a problem for everyone.” Campbell and Brauer’s findings suggest it’s still not clear the extent to which implicit biases explain discriminatory conduct. (Other work has called into question the validity of implicit bias measures for predicting real-world discrimination.) Research aimed at answering this fundamental question will inform the design of interventions that may one day meaningfully reduce levels of discrimination.

….If, for example, a small number of explicitly prejudiced people are responsible for most or all of the discrimination occurring in a company, an intervention that requires all employees to undergo implicit bias training will probably fail to address the problem. Research suggests that interventions that convey the message that nearly everyone engages in discriminatory behavior may even make the workplace atmosphere worse for marginalized employees, because after the training, nonmarginalized employees may avoid interacting with them out of fear of unwittingly discriminating.

How to make talent scouts work for you

With Daniel Gross, here is a (very much) shortened bit from Talent: How to Identify Energizers, Creators, and Winners Around the World, published at a16z, excerpt from the chapter on when to use talent scouts:

It is worth thinking about why the scouting model works in this context [finding supermodels]. First, the relevant talent could come from many different parts of the world, and the number of people to be scouted is very large. It is hard to imagine a centralized process getting the job done. Second, many of the scouts plausibly have a decent sense of who might make a good model. Looks are hardly the only factor behind modeling success, but they are a kind of “first stop,” and expecting the scouts to judge looks well from first impressions is more plausible than expecting the scouts to use first impressions to judge talent well for skill in, say, quantum mechanics. Third, a follow-up investigation to judge the modeling talent of the chosen candidates is not extremely costly. You can have them in for a photo shoot and see how popular they prove in the market without having to invest millions of dollars right away…

Scouting is also becoming more important as the options for self-education are rising. With more people trying their hand at various avocations than ever before, that places more and more burden on talent search. We need to be more open to the accomplishments of self-taught individuals without traditional training, and that holds all the more true for the tech world, where many of the most important founders have eschewed the institutions of traditional education.

There is much more at the link, we also consider when scouting models fail relative to centralized evaluation, and which kinds of incentives should be given to scouts.