Category: Economics
Is anyone worth a billion dollars?
That is the topic of my latest Free Press column. Excerpt:
…in recent years they [Meta] have moved into AI in a big way. Over that same time period, the valuation of the company has risen from about $236 billion in November 2022 to almost $2 trillion at the end of this July.
The reasons for share price movements are not always transparent, but it is common consensus that AI investments are a significant reason why Meta is now worth much more. The original metaverse plans did not take off, and Facebook and Instagram are relatively mature products and they have not changed much as of late.
So the market, responding to Meta’s promises about AI, expects that it will deliver on that $2 trillion value. Yet their current Llama models are not state of the art. Meta needs something better and more competitive.
Meta thus has to justify an extra $1.8 trillion in its valuation, which of course they could lose if markets decide they are not up to the task. Spending some billions on top-quality AI personnel is easy to justify when viewed in terms of the value gain Meta already has been reaping.
And it is not just about justifying the current $2 trillion valuation. Meta possibly could be worth more yet. It probably has not escaped their attention that as of late, both Nvidia and Microsoft have had valuations of about $4 trillion. So the possibility of further upside enters the equation as well.
Keep in mind that better AI also will boost the profits Meta can receive from ads on Facebook and Instagram. Click-through rates on ads typically are small, so even a modest increase in targeting ability can mean a lot more profit. Meta does not have to achieve superintelligence to get its money back on these investments; they just need better AI. There is also a plan to put more ads on WhatsApp (currently the user experience is mostly ad-free), and that too can benefit from better AI and better ad targeting.
The general principle is that top talent is typically undervalued, if only because of egalitarian norms in pay structures.
Did the Minnesota housing reform lower housing costs?
Yes:
In December 2018, Minneapolis became the first U.S. city to eliminate single-family zoning through the Minneapolis 2040 Plan, a landmark reform with a central focus on improving housing affordability. This paper estimates the effect of the Minneapolis 2040 Plan on home values and rental prices. Using a synthetic control approach we find that the reform lowered housing cost growth in the five years following implementation: home prices were 16% to 34% lower, while rents were 17.5% to 34% lower relative to a counterfactual Minneapolis constructed from similar metro areas. Placebo tests document these housing cost trajectories were the lowest of 83 donor cities (p=0.012). The results remain consistent and robust to a series of subset analyses and controls. We explore the possible mechanism of these impacts and find that the reform did not trigger a construction boom or an immediate increase in the housing supply. Instead, the observed price reductions appear to stem from a softening of housing demand, likely driven by altered expectations about the housing market.
That is from a new paper by Helena Gu and David Munro. Via the excellent Kevin Lewis.
The Sri Lankan economic recovery (from my email)
Hi,
I’m a macroconsultant/analyst based in Sri Lanka. Was suddenly reminded of your 2023 MR piece on Sri Lanka – soon after the depth of the crisis locally.
Since then, Sri Lanka has seen what I think to many is a remarkable turnaround on both the macro fundamentals and the social indicators (admittedly data is very divergent on social).
A few specific points on the macro –
– 2 years of twin surpluses (after 70+ years of twin deficits)
– Looks in line to do a 3rd year of twin surpluses alongside 5% growth
– Income tax collections growing 20%+ YoY without any text increases
– 4% of GDP in net government LCY balances vs historic deficits
– Gross capital formation rising dramatically without government capex spending
– Credit recovery without government spending to support private income
– Remittances (possibly cyclical), oil imports (massive distributed solar), and net port services (ME diversion+new capacity) overperforming IMF numbers by 1-2% of GDP
– Net foreign assets of banking system at ~2% of GDP
– Currency appreciated and stable from crisis peaks
– Inflation averaging 0% 3 years after crisis (+ energy driven deflation spots)
TC again: thanks to Chayu Damsinghe from Frontier Research. A true reversal of fortune, at least for the time being…
Peter Temin, RIP…
Alas…one of the greats in economic history…
Regulatory Complexity and Rents
Luis Garicano on the EU-US trade deal.
…The growing regulatory complexity and arbitrariness of the tariff regime provides rents to those connected with power, not to innovators. It is a recipe for the biggest enemy of growth: regulatory overkill and crony capitalism. Consider the example of importing a can of beer from Belgium into the US. There is a 10% country-specific tariff on the entire value of the product. On top of this, the aluminium can itself is treated as a completely separate product, subject to its own additional tariff of up to 50%. The level of this tariff is based on the nearly untraceable origin of the raw metal—the country where the aluminium was “smelted and cast.” The tariff rises to 200% if the country is unknown. This forces an importer to research the obscure global supply chain of a minor component and apply multiple, overlapping tax rates to a single, everyday item.
Many other interesting comments.
Genius, Rejected: Emergent Ventures Versus the System
Quanta Magazine has a good piece on a 17-year-old student who disproved a long-standing conjecture in harmonic analysis:
Yet a paper posted on February 10(opens a new tab) left the math world by turns stunned, delighted and ready to welcome a bold new talent into its midst. Its author was Hannah Cairo(opens a new tab), just 17 at the time. She had solved a 40-year-old mystery about how functions behave, called the Mizohata-Takeuchi conjecture.
“We were all shocked, absolutely. I don’t remember ever seeing anything like that,” said Itamar Oliveira (opens aof the University of Birmingham, who has spent the past two years trying to prove that the conjecture was true. In her paper, Cairo showed that it’s false. The result defies mathematicians’ usual intuitions about what functions can and cannot do.
…The proof, and its unlikely author, have energized the math community since Cairo posted it in February. “I was absolutely, ‘Wow.’ This has been my favorite problem for nigh on 40 years, and I was completely blown away,” Carbery said.
Here is the abstract to the paper:
I can’t speak to the mathematics but this is Quanta Magazine not People Magazine and Cairo is not coming out of nowhere. As the article discusses, she has been taking graduate classes in mathematics at Berkeley from people like Ruixiang Zhang. So what is the problem?
I was enraged by the following:
After completing the proof, she decided to apply straight to graduate school, skipping college (and a high school diploma) altogether. As she saw it, she was already living the life of a graduate student. Cairo applied to 10 graduate programs. Six rejected her because she didn’t have a college degree. Two admitted her, but then higher-ups in those universities’ administrations overrode those decisions.
Only the University of Maryland and Johns Hopkins University were willing to welcome her straight into a doctoral program.
Kudos to UMD and JHU! But what is going on at those other universities?!! Their sole mission is to identify and nurture talent. They have armies of admissions staff and tout their “holistic” approach to recognizing creativity and intellectual promise even when it follows an unconventional path. Yet they can’t make room for a genius who has been vetted by some of the top mathematicians in the world? This is institutional failure.
We saw similar failures during COVID: researchers at Yale’s School of Public Health, working on new tests, couldn’t get funding from their own billion-dollar institution and would have stalled without Tyler’s Fast Grants. But the problem isn’t just speed. Emergent Ventures isn’t about speed but about discovering talent. If you wonder why EV has been so successful look to Tyler and people like Shruti Rajagopalan and to the noble funders but look also to the fact that their competitors are so bureaucratic that they can’t recognize talent even when it is thrust upon them.
It’s a very good thing EV exists. But you know your city is broken when you need Batman to fight crime. EV will have truly succeeded when the rest of the system is inspired into raising its game.
Why the tariffs are bad
I am delighted to see this excellent analysis in the NYT:
Mr. Tedeschi said that future leaders in Washington, whether Republican or Democrat, may be hesitant to roll back the tariffs if that would mean a further addition to the federal debt load, which is already raising alarms on Wall Street. And replacing the tariff revenue with another type of tax increase would require Congress to act, while the tariffs would be a legacy decision made by a previous president.
“Congress may not be excited about taking such a politically risky vote when they didn’t have to vote on tariffs in the first place,” Mr. Tedeschi said.
Some in Washington are already starting to think about how they could spend the tariff revenue. Mr. Trump recently floated the possibility of sending Americans a cash rebate for the tariffs, and Senator Josh Hawley, Republican of Missouri, recently introduced legislation to send $600 to many Americans. “We have so much money coming in, we’re thinking about a little rebate, but the big thing we want to do is pay down debt,” Mr. Trump said last month of the tariffs.
Democrats, once they return to power, may face a similar temptation to use the tariff revenue to fund a new social program, especially if raising taxes in Congress proves as challenging as it has in the past. As it is, Democrats have been divided over tariffs. Maintaining the status quo may be an easier political option than changing trade policy.
“That’s a hefty chunk of change,” Tyson Brody, a Democratic strategist, said of the tariffs. “The way that Democrats are starting to think about it is not that ‘these will be impossible to withdraw.’ It’s: ‘Oh look, there’s now going to be a large pot of money to use and reprogram.’”
That is from Andrew Duehren, bravo.
Time Theft at the Terminal
Travel expert Gary Leff on the billions in wasted time spent at airports:
Maybe the biggest failure in air travel is something we don’t talk about at all. How is it possible that people are being told to show up at the airport 2.5 to 3 hours before their flight, and that isn’t considered a failure of massive proportions?
As Gary points out airport delay wipes out many technological advancements:
The lengthened times for showing up at the airport mean that it no longer even makes sense for many people to take shorter flights, but aircraft technology (electric, short and vertical takeoff) is changing and becoming far more viable in the coming years…The FAA is considering standards for vertiports but are we thinking creatively enough or will that conversation be too status quo-focused either because of regulator bias or because it’s entrenched interests most involved?
More and smaller airports are needed. Streamlined security, that doesn’t wait for nationwide universal rollout, is needed. We need runways and taxiways and air traffic capacity to increase throughput without stacking delays. Most of all, we need to avoid complacency that accepts the status quo as given.
By the way, Washington Dulles (IAD) has ~10.5 min security waits, among the best in the nation and the world for a big airport but it is terrible at inbound passport control. (Also, I am not a fan of the people movers.)
The economics of the U.S. auto industry, a brief history
The economic value of the cars being made has climbed substantially through the years. As a result, real value added and industrial production — two different ways of measuring actual output — are now at all-time highs.
And this:
What about jobs? The auto industry today employs 1 million workers. Between 1950 and the signing of NAFTA in 1993, it averaged 1.1 million workers, just slightly higher.
And this:
The deindustrialization of Detroit is typically understood as a phenomenon of the 1970s and 1980s, and it is therefore blamed on the growth of trade during this period. But the fact is that auto investment and employment had started moving out of Detroit decades earlier.
I pieced together data from a variety of sources, which shows that auto manufacturing employment in the City of Detroit had already peaked in 1950, at just over 220,000 workers.
By 1970 the biggest declines had already occurred, with employment falling by more than half, to fewer than 100,000 jobs.
An important nuance is that many of these lost jobs migrated to other parts of Michigan, at least for a while. So while auto employment was collapsing in Detroit, the rest of Michigan managed to hold auto employment stable for another five decades until the 2000s, when it started falling everywhere in the state.
And:
Michigan now has about 280,000 fewer auto jobs than it did in the 1950s, a decline of roughly 60 percent. For the United States as a whole, auto employment is only down 4.7 percent — further showing that the struggles of Detroit and Michigan are less about the decline of the American auto industry and more about its relocation elsewhere.
Another way of understanding the trend: If Michigan had simply maintained the same share of American auto jobs as it had in the 1950s, meaning it did not lose any production to other states, then it would only have lost 21,000 auto jobs since then, not the 280,000 it actually did lose.
An excellent piece, recommended.
The Tragedy of India’s Government-Job Prep Towns
In Massive Rent-Seeking in India’s Government Job Examination System I argued that the high value of government jobs has distorted India’s entire labor market and educational system.
India’s most educated young people—precisely those it needs in the workforce—are devoting years of their life cramming for government exams instead of working productively. These exams cultivate no real-world skills; they are pure sorting mechanisms, not tools of human capital development. But beyond the staggering economic waste, there is a deeper, more corrosive human cost. As Rajagopalan and I have argued, India suffers from premature imitation: In this case, India is producing Western-educated youth without the economic structure to employ them. In one survey, 88% of grade 12 students preferred a government job to a private sector job. But these jobs do not and cannot exist. The result is disillusioned cohorts trained to expect a middle-class, white-collar lifestyle, convinced that only a government job can deliver it. India is thus creating large numbers of educated young people who are inevitably disillusioned–that is not a sustainable equilibrium.
The Economist has an excellent piece on the lives of the students including Kumar who is studying in “Musallahpur Haat, a suburb of Patna where dozens of coaching centers were concentrated, and the rent was cheap.”
…About half a million students are currently preparing for government exams in Musallahpur….For most government departments the initial tests are similar, and have little direct bearing on the job in question. Would-be ticket inspectors and train-drivers must answer multiple-choice questions on current affairs, logic, maths and science. They might be asked who invented JavaScript, or which element is most abundant in the Earth’s crust, or the smallest whole number for a if a456 is divisible by 11. Students have no idea when their preparations might be put to use; exams are not held on a fixed schedule.
…Kumar made his way to the bare, windowless room his friend had arranged for him to rent and started working. Every few days, he’d check the Ministry of Railways website to see if a date had been set for the exams. The days turned into weeks, then months. When the covid pandemic erupted he adjusted his expectations – obviously there would be delays. The syllabus felt infinite and he kept studying, shuttling between libraries, revision tutorials and mock test sessions. Before he knew it he’d been in Musallahpur nearly six years.
As his 30s approached, Kumar began to worry about running out of time. There is an upper age limit for the railway exams – for the ones Kumar was doing it was set at 30. As a lower-caste applicant he was allowed to extend this deadline by three years. His parents urged him to start thinking about alternative careers, but he convinced them to be patient. His father, who was struggling to keep up the allowance, reluctantly sold some of the family’s land to help support him, and Kumar studied harder and longer.
In my post, I emphasized the above-average wages and privileges, which is true enough, but even by Indian standards many of the jobs aren’t great and The Economist puts more focus on respectability and prestige (the sad premature imitation I discussed):
Indian society accords public-sector jobs a special respect. Grooms who have them are able to ask for higher dowries from their brides’ families. “If you are at a wedding and say you have a government job, people will look at you differently,” said Abhishek Singh, an exam tutor in Musallahpur.
Railway jobs in particular still have a vestigial glow of prestige.
…[Kumar] had been preparing for junior engineer and assistant train-driver jobs, but decided to apply for the lowest rung of positions too, the Group D roles, to increase his chance of getting something. An undergraduate degree and six years studying in Patna could lead to him becoming a track-maintenance worker. “I never imagined it would come to this,” he said sadly.
And yet he wouldn’t trade it. A short drive from his room in Musallahpur, a glitzy mall has just been built. There are jobs going there which pay close to what he might earn in a Group D role. But Kumar baulked at the suggestion he might become a barista. “I am educated with a technical degree,” he said. “My family hasn’t sacrificed so much for me to work in a coffee shop. People only work there if they have no other choice.” No one from his parents’ generation would respect a barista. But they admired, or at least understood, a job on the railways.
India’s government job system squanders talent, feeds on obsolete and socially-inefficient prestige hierarchies, and rewards years of sterile preparation with diminishing returns. It’s inefficient, of course, but behind the scenes it’s devastating to the young.
Hat tip: Samir Varma.
Taxes and tariffs
Here is an NBER paper from May that I do not think I covered:
We evaluate the aggregate effects of a change in tariffs on the US and world economies when tariff revenue is used to enact fiscal reform. Our model combines a standard international model of fiscal policy with taxes and a dynamic model of trade participation and tariffs that allows for uncertainty and transitions. We consider effects of permanent and temporary tariffs–with and without retaliation–when tariff revenue is used to reduce taxes on capital or labor or to subsidize investment. Compared to a lump sum redistribution, using tariff revenue for these reforms always boosts economic activity. Key to our analysis is the effect of trade dynamics on import substitution, such that tariff revenue after an increase in tariffs is higher in the short run than in the long run. When increasing the tariff by 20 percentage points, the revenue raised is largest when tariffs are temporary, unilateral, and used to subsidize investment, increasing by about 2 percent of GDP. This case also yields a large temporary increase in the trade balance. We find the welfare-maximizing unilateral tariff is close to 18 percent when tariff revenue is used to subsidize investment compared to 0 percent under a lump sum redistribution. We also find cutting capital taxes does not generate as much growth as introducing an investment subsidy since tariffs raise the price of investment substantially.
That is from
I’ll say it again: tariffs bad, bad, bad! But they are bad because they are a revenue grab, which will lead to consumption taxes being a new and major source of enhancement of government power and influence. Current policy may well evolve into some sick, distorted version of a VAT, with larger government to boot. But from a normal “Democratic Party, economics PhD view of government,” there is nothing so especially terrible about tariffs, at least not compared to other modes of taxation.
What does consulting do?
It is actually pretty useful:
This paper provides the first systematic and comprehensive empirical study of management and strategy consulting. We unveil the workings of this opaque industry by drawing on universal administrative business-to-business transaction data based on value-added tax links from Belgium (2002-2023). These data permit us to document the nature of consulting engagements, take-up patterns, and the effects on client firms. We document that consulting take-up is concentrated among large, high-labor-productivity firms. For TFP and profitability, we find a U-shaped pattern: both high and low performers hire consultants. New clients spend on average 3% of payroll on consulting, typically in episodic engagements lasting less than one year. Using difference-in-differences designs exploiting these sharp consulting events, we find positive effects on labor productivity of 3.6% over five years, driven by modest employment reductions alongside stable or growing revenue. Average wages rise by 2.7% with no decline in labor’s share of value added, suggesting productivity gains do not come at workers’ expense through rent-shifting. We do observe organizational restructuring with small increases in dismissal rates, and higher services procurement but reduced labor outsourcing. Our heterogeneity analysis reveals larger productivity gains for initially less productive firms, suggesting improvements in allocative efficiency. Our findings broadly align with ex-ante predictions from surveyed academic economists and consulting professionals, validating the productivity-enhancing view of consulting endorsed by most practitioners though only half of academics, while lending less support to a rent-shifting view favored by many economists.
That is from a new NBER working paper by
Indonesia monkey markets in everything
At a cliff-side temple on the tropical island of Bali, an unexpected group of criminals is running one of the world’s most sophisticated scam operations.
Every week, they steal dozens of phones, wallets and other valuables from tourists in broad daylight and exchange them for handsome rewards. It’s been going on for decades and nobody’s been able to stop it.
The culprits? Long-tailed macaques.
“The monkeys have taken over the temple,” said Jonathan Hammé, a tourist from London whose sunglasses were stolen by a monkey during a visit last year. “They’re running a scam.”
Here is more from the WSJ.
A household expenditure approach to measuring AI progress
Often researchers focus on the capabilities of AI models, for instance what kinds of problems they might solve. Or how they might boost productivity growth rates. But a different question is to ask how they might lower cost of living for ordinary Americans. And while I am optimistic about the future prospects and powers of AI models, on that particular question I think progress will be slow, mostly though through no fault of the AIs.
If you consider a typical household budget, some of the major categories might be:
A. Rent and home purchase
B. Food
C. Health care
D. Education
Let us consider each in turn. Do note that in the longer run AI will do a lot to accelerate and advance science. But in the next five years, most of those advances may not be so visible or available. And so I will focus on some budgetary items in the short run:
A. When it comes to rent, a lot of the constraints are on the supply side. So even very powerful AI will not alleviate those problems. In fact strong AI could make it more profitable to live near other talented people, which could raise a lot of rents. Real wages for the talented would go up too, still I would not expect rents to fall per se.
Strong AI might make it easier to live say in Maine, which would involve a de facto lowering of rents, even if no single rental price falls. Again, maybe.
B. When it comes to food, in some long run AI will genetically engineer better and stronger crops, which in time will be cheaper. We will develop better methods of irrigation, better systems for trading land, better systems for predicting the weather and protecting against storms, and so on. Still, I observe that agricultural improvements (whether AI-rooted or not) can spread very slowly. A lot of rural Mexico still does not use tractors, for instance.
So I can see AI lowering the price of food in twenty years, but in the meantime a lot of real world, institutional, legal, and supply side constraints and bottlenecks will bind. In the short run, greater energy demands could well make food more expensive.
C. When it comes to health care, I expect all sorts of fabulous new discoveries. I am not sure how rapidly they will arrive, but at some point most Americans will die of old age, if they survive accidents, and of course driverless vehicles will limit some of those too. Imagine most people living to the age of 97, or something like that.
In terms of human welfare, that is a wonderful outcome. Still, there will be a lot more treatments, maybe some of them customized for you, as is the case with some of the new cancer treatments. Living to 97, your overall health care expenses probably will go up. It will be worth it, by far, but I cannot say this will alleviate cost of living concerns. It might even make them worse. Your total expenditures on health care are likely to rise.
D. When it comes to education, the highly motivated and curious already learn a lot more from AI and are more productive. (Much of those gains, though, translate into more leisure time at work, at least until institutions adjust more systematically.). I am not sure when AI will truly help to motivate the less motivated learners. But I expect not right away, and maybe not for a long time. That said, a good deal of education is much cheaper right now, and also more effective. But the kinds of learning associated with the lower school grades are not cheaper at all, and for the higher levels you still will have to pay for credentialing for the foreseeable future.
In sum, I think it will take a good while before AI significantly lowers the cost of living, at least for most people. We have a lot of other constraints in the system. So perhaps AI will not be that popular. So the AIs could be just tremendous in terms of their intrinsic quality (as I expect and indeed already is true), and yet living costs would not fall all that much, and could even go up.
The EU-USA trade deal
Sorry people, but you can fill in the links with Perplexity and Grok, both great for this purpose.
Olivier Blanchard is upset that Europe got such a raw deal, various people in the FT agree. I would say that is itself data about broader European economic and security policies, and needs to be taken very seriously. The Europeans are not stupid negotiators by any means, rather they are in a weak negotiating position for reasons that are largely their own fault and reflect underlying weaknesses of their basic economic and political model.
You can hate what Trump did, but for a “stupid” administration they, by their own standards at least, did a remarkably good job of it.
Justin Wolfers seems upset that Trump is raising taxes on Americans. (I am too!) But that feels kind of weird to me. And it is nice to see that Europeans get somewhat lower taxes, though many European leaders are upset about that. They should in fact buy more from the United States, and their non-tariff barriers are significant.
Conor Sen notes that the USA has come up with a multi-trillion revenue source that does not seem to diminish corporate profitability, https://x.com/conorsen/status/1949785522567549283?s=61, and he is wondering how exactly people will react to that.
We can all agree that negative externalities are what should be taxed!
But those policies typically are unpopular, so in some instances you will understand public affairs more clearly by switching to the “what will be done?” perspective, rather than the “what should be done?” stance.
My best guess is that these tariffs will stick for the most part, and that you are seeing some early major steps for how the U.S. will resolve its fiscal position. Higher inflation will come too, and fiscally we will muddle through, albeit with notably lower real wages.
(To be clear, for a long time I have stated that I prefer to cut back on government-subsidized health care, rather than to lower real wages through these other means. You can always use the extra money and try to buy back some health! But I also never have thought I was going to get my way. When Matt Yglesias tells you that “health care polls well,” you should take that seriously and Matt also should realize a bit that puts him in more of the pro-Trump, pro-tariff camp than he might like to think.)
I think a Democratic administration, whenever we get one next, would rather spend the revenue from the tariffs than repeal them. By then the tariffs also will be what I call “emotionally internalized.” And the Democrats have not loved free trade for a long time anyway, despite their current rhetorical moves toward criticizing the Trumpers.
So most of all we need to revise our estimates of what the political equilibrium looks like here. We are receiving major pieces of information, and we must update our vision of the world to come.