Category: Economics
Some Simple Economics of the Google Antitrust Case
The case is straightforward: Google pays firms like Apple billions of dollars to make its search engine the default. (N.B. I would rephrase this as Apple charges Google billions of dollars to make its search engine the default–a phrasing which matters if you want to understand what is really going on. But set that aside for now.) Consumers, however, can easily switch to other search engines by downloading a different browser or changing their default settings. Why don’t they? Because the minor transaction costs are not worth the effort. Moreover, if Google provides the best search experience, most users have no incentive to switch.
Consequently, any potential harm to consumers is limited to minor switching costs, and any remedies should be proportionate. Proposals such as forcing Google to divest Chrome or Android are vastly disproportionate to the alleged harm and risk being counterproductive. Google’s Android has significantly increased competition in the smartphone market, and ChromeOS has done the same for laptops. Google has invested billions in increasing competition in its complements. Google was able to make these investments because they paid off in revenue to Google Search and Google Ads. Kill the profit center and kill the incentive to invest in competition. Unintended consequences.
I argued above that consumer harm is limited to minor switching costs. The plaintiffs’ counter-argue that Google’s purchase of default-status “forecloses” competitors from achieving the scale necessary to compete effectively. This argument relies on network effects – more searches improve search quality through better data. However, this creates a paradox: on the theory of the plaintiffs, two or three firms each operating at smaller scale is worse than one operating at large scale. For the plaintiffs’ argument to hold, it must be shown that we are at the exact sweet spot where the benefits of increased competition in lowering the price of advertising outweighs the efficiency losses to consumer search quality from reduced scale. Yet, there is no evidence in the case—nor even an attempt—to demonstrate that we are at such a sweet spot.
Or perhaps the argument is that with competition we would get even better search but that argument can’t be right because the costs of switching, as noted above, are bounded by some minor transaction costs. Thus, if a competitor could offer better search, it would easily gain scale (e.g. AI search, see below).
Traditional foreclosure analysis requires showing both substantial market closure and consumer harm. Given the ease of switching and the complex relationship between scale and search quality, proving such harm becomes challenging and my read is that the plaintiffs didn’t prove harm.
In my view, the best analogy to the Google antitrust case is Coke and Pepsi battling for shelf space in the supermarket. Returning to my earlier parenthetical point, Apple is like the supermarket charging for prime shelf placement. Is this a significant concern? Not really. Eye-level placement matters to Coke and Pepsi but by construction they are competing for consumers who don’t much care which sugary, carbonated beverage they consume. For consumers who do care, the inconvenience is limited to reaching to a different shelf.
To add insult to injury, the antitrust case is happening when Google is losing advertising share and is under pressure from a new search technology, Artificial Intelligence. AI search from OpenAI, Anthropic, Meta Llama, and xAI is very well funded and making rapid progress. Somehow AI search did manage to achieve scale! As usual, the market appears more effective than the antitrust authorities at creating competition.
Addendum: Admittedly this is outside the remit of the judge, but the biggest anti-competitive activities in tech are probably government policies that slow the construction of new power generation, new power lines, new data centers, and deals between power generators and data centers. I’d prefer the government take on its own anticompetitive effects before going after extremely succesful tech companies that have clearly made consumers much better off.
A Bird Flu Pandemic Would Be One of the Most Foreseeable Catastrophes in History
Zeynep Tufekci writing in the NYTimes hits the nail on the head:
The H5N1 avian flu, having mutated its way across species, is raging out of control among the nation’s cattle, infecting roughly a third of the dairy herds in California alone. Farmworkers have so far avoided tragedy, as the virus has not yet acquired the genetic tools to spread among humans. But seasonal flu will vastly increase the chances of that outcome. As the colder weather drives us all indoors to our poorly ventilated houses and workplaces, we will be undertaking an extraordinary gamble that the nation is in no way prepared for.
All that would be more than bad enough, but we face these threats gravely hobbled by the Biden administration’s failure — one might even say refusal — to respond adequately to this disease or to prepare us for viral outbreaks that may follow.
…Devastating influenza pandemics arise throughout the ages because the virus is always looking for a way in, shape shifting to jump among species in ever novel forms. Flu viruses have a special trick: If two different types infect the same host — a farmworker with regular flu who also gets H5N1 from a cow — they can swap whole segments of their RNA, potentially creating an entirely new and deadly virus that has the ability to spread among humans. It’s likely that the 1918 influenza pandemic, for example, started as a flu virus of avian origin that passed through a pig in eastern Kansas. From there it likely infected its first human victim before circling the globe on a deadly journey that killed more people than World War I.
And that’s why it’s such a tragedy that the Biden administration didn’t — or couldn’t — do everything necessary to snuff out the U.S. dairy cattle infection when the outbreak was smaller and easier to address.
Will there be a large outbreak among humans? Probably not. But a 9% probabability of a bad event warrants more than a shrug. Bad doesn’t have to be on the scale of COVID-bad to warrant precaution. The 2009 H1N1 flu pandemic, while relatively mild, infected about 61 million people in the U.S., leading to 274,000 hospitalizations, 12,400 deaths, and billions of dollars in economic costs.
H5N1 will likely pass us over—but only the weak rely on luck. Strong civilizations don’t pray for mercy from microbes; they crush them. Each new outbreak should leave us not relieved, but better armed, better trained and better prepared for nature’s next assault.
Debankings
For reasons you can guess at, debanking has been the topic du jour in my Twitter feed.
I will only report the following. On this last Friday, both Alex and I (coincidentally) each wanted to send money through the U.S. banking system. For each of us it was a major pain, and for no good substantive reason. I do understand why the relevant constraints are there, but at some point “justification” is no longer enough. People have to actually want to use the system. And the U.S. banking system — referring to that notion narrowly — is increasingly unattractive. It is also failing various market tests, if you look at its relative import over time.
How innovative is it? How good is it with software? How international is it in scope and potential usage? How necessary is it for lending? Can it integrate with crypto? Why does service quality at my local bank continue to decline? Relative performance is sliding, there is no other way to put it.
Yonas is in fact not a terrorist, and he did eventually get his money, after considerable frustration on my part and probably on his as well.
Ths status quo, relative to alternatives, likely will get worse as the pace of innovation increases. So rather than defend debankings, a better tack is to tell us how you will fix the problems you have created with the status quo. Debankings are simply the canary in the coal mine, no matter what percentage of them you may think are justified, or not.
John Arnold has some good tweets on the topic, start here. Here is Dennis Porter.
Literacy Rates and Simpson’s Paradox
Max T. at Maximum Progress shows that between 1992 and 2003 US literacy rates fell dramatically within every single educational category but the aggregate literacy rate didn’t budge. A great example of Simpson’s Paradox! The easiest way to see how this is possible is just to imagine that no one’s literacy level changes but everyone moves up an educational category. The result is zero increase in literacy but falling literacy rates in each category.
Two interesting things follow. First, this is very suggestive of credentialing and the signaling theory of education. Second, and more originally, Max suggests that total factor productivity is likely to have been mismeasured. Total factor productivity tells us how much more output can we get from the same inputs. If inputs increase, we expect output to increase so to measure TFP we must subtract any increase in output due to greater inputs. It’s common practice, however, to use educational attainment as a (partial) measure of skill or labor quality. If educational attainment is just rising credentialism, however, then this overestimates the increase in output due to labor skill and underestimates the gain to TFP.
This does not imply that we are richer than we actually are–output is what it is–but it does imply that if we want to know why we haven’t grown richer as quickly as we did in the past we should direct less attention to ideas and TFP and more attention to the failure to truly increase human capital.
Unauthorized Immigration and Local Government Finances
This paper examines how unauthorized immigration affects the fiscal health of local governments in the United States. Using detailed data on unauthorized immigrants’ countries of origin and arrival dates from the Syracuse TRAC database, we isolate immigration flows driven by social, economic, and political conditions in source countries. We predict local immigration patterns using a shift-share instrument based on pre-existing foreign-born population distributions. We find that the economic effects of unauthorized immigration depend crucially on local labor market conditions. In areas with structurally tight labor markets—characterized by low unemployment and low labor force participation—unauthorized immigration correlates with lower municipal bond yields. However, areas with typical labor market conditions experience higher yields. Areas with “sanctuary” status also experience higher yields when exposed to unauthorized immigration. These yield effects reflect underlying economic mechanisms: unauthorized immigration predicts loosening of labor markets in areas where they were previously tight, whereas in sanctuary areas, unemployment rates increase by more than twice as much. We find unauthorized immigration explains higher expenditures on local public amenities, including welfare assistance, construction, education, and law enforcement, but these expenditures are not offset by higher tax revenues. Overall, our results provide novel insights into the local economic effects of unauthorized immigration.
That is from a new paper by Jess Cornaggia, Kimberly Cornaggia, and Ryan D. Israelsen. Via the excellent Kevin Lewis.
Does Money Affect Creativity in the History of Western Classical Music?
That is the subtitle of a new paper by Karol J. Borowiecki, Yichu Wang, and Marc T. Law. Here is the abstract:
How do financial constraints affect individual innovation and creativity? Understanding this relationship is essential, especially when innovation and creativity rely on the capacity to take risks. To investigate this, we focus on Western classical composers, a unique group of innovators whose lives offer a rich historical case study. Drawing on biographical data from a large sample of composers who lived between 1750 and 2005, we conduct the first systematic empirical exploration of how composers’ annual incomes correlate with measures of the popularity (as viewed from posterity), significance, and stylistic originality of their music. A key contribution is the development of novel measures of composers’ financial circumstances, derived from their entries within Grove Music Online, a widely used music encyclopedia. We find that financial insecurity is associated with reduced creativity: relative to the sample mean, in low income years, composers’ output is 15.7 percent lower, 50 percent less popular (based on Spotify’s index), and generates 13.9 percent fewer Google search results. These correlations are robust to controlling for factors influencing both income and creativity, with no evidence of pre-trends in creativity prior to low-income years, suggesting that reverse causality is unlikely. Case studies of Mozart, Beethoven, and Liszt show that low income periods coincide with declines in stylistic originality. Notably, the negative impact of low income is concentrated among composers from less privileged backgrounds, implying that financial support is crucial for fostering creativity and innovation. While we cannot make definitive causal claims, the consistency of our findings underscores the importance of financial stability for fostering innovation and risk-taking in creative fields.
Of course those results remind me of my own earlier book In Praise of Commercial Culture. Via the excellent Kevin Lewis.
Germany chart of the day
Here is the link.
Thanksgiving and the Lessons of Political Economy
It’s been a while so time to re-up my 2004 post on thanksgiving and the lessons of political economy. Here it is with no indent:
It’s one of the ironies of American history that when the Pilgrims first arrived at Plymouth rock they promptly set about creating a communist society. Of course, they were soon starving to death.
Fortunately, “after much debate of things,” Governor William Bradford ended corn collectivism, decreeing that each family should keep the corn that it produced. In one of the most insightful statements of political economy ever penned, Bradford described the results of the new and old systems.
[Ending corn collectivism] had very good success, for it made all hands very industrious, so as much more corn was planted than otherwise would have been by any means the Governor or any other could use, and saved him a great deal of trouble, and gave far better content. The women now went willingly into the field, and took their little ones with them to set corn; which before would allege weakness and inability; whom to have compelled would have been thought great tyranny and oppression.
The experience that was had in this common course and condition, tried sundry years and that amongst godly and sober men, may well evince the vanity of that conceit of Plato’s and other ancients applauded by some of later times; that the taking away of property and bringing in community into a commonwealth would make them happy and flourishing; as if they were wiser than God. For this community (so far as it was) was found to breed much confusion and discontent and retard much employment that would have been to their benefit and comfort. For the young men, that were most able and fit for labour and service, did repine that they should spend their time and strength to work for other men’s wives and children without any recompense. The strong, or man of parts, had no more in division of victuals and clothes than he that was weak and not able to do a quarter the other could; this was thought injustice. The aged and graver men to be ranked and equalized in labours and victuals, clothes, etc., with the meaner and younger sort, thought it some indignity and disrespect unto them. And for men’s wives to be commanded to do service for other men, as dressing their meat, washing their clothes, etc., they deemed it a kind of slavery, neither could many husbands well brook it. Upon the point all being to have alike, and all to do alike, they thought themselves in the like condition, and one as good as another; and so, if it did not cut off those relations that God hath set amongst men, yet it did at least much diminish and take off the mutual respects that should be preserved amongst them. And would have been worse if they had been men of another condition. Let none object this is men’s corruption, and nothing to the course itself. I answer, seeing all men have this corruption in them, God in His wisdom saw another course fitter for them.
Among Bradford’s many insights it’s amazing that he saw so clearly how collectivism failed not only as an economic system but that even among godly men “it did at least much diminish and take off the mutual respects that should be preserved amongst them.” And it shocks me to my core when he writes that to make the collectivist system work would have required “great tyranny and oppression.” Can you imagine how much pain the twentieth century could have avoided if Bradford’s insights been more widely recognized?
Environmental “Justice” Recreates Redlining
It’s been said that the radical left often ends up duplicating the policies of the radical right, just under different names and justifications, e.g. separate but equal, scientific thinking is “white” thinking and so forth. Here’s another example from Salim Furth: the re-creation of redlining. Redlining was the practice of making it more difficult to access financial products such as mortgages by grading some neighborhoods as “hazardous” for investment. Either by design or result, redlining was often associated with minority populations.
Salim shows that Massachusetts has created a modern redlining system.
In Massachusetts, the context is that MEPA (its mini-NEPA) requires projects of a certain size to go through either a moderately-expensive or a quite-expensive process. Some types of projects automatically [require] the quite-expensive Environmental Impact Review process. The #maleg passed a 2021 “Environmental Justice” law, which defined certain people – oh euphemism treadmill! – as “Environmental Justice populations.”…So any housing (or other) project that requires a permit from a state agency and is within 1 mile of a “Environmental Justice population” now automatically triggers the expensive EIR process….How expensive? I was told it can run from $150k to $1m, and take 6 to 12 months. That’s a lot of additional delay in a state where delays are already extreme.
If there’s a, uh, silver lining here, it’s that “EJ Population” is defined so capaciously that it includes super-rich areas of Lexington (32% Asian, $206k median hh income), because all “minorities” are automatically disadvantaged. So it’s much less targeted to disinvested places than the original redlining. But the downside is that it’s *extremely well targeted* to discourage investment anywhere near transit or jobs. The non-EJ places are the sprawly exurbs. So maybe they *tried* to reinvent redlining, but all they really accomplished was reinventing subsidies for sprawl and raising housing costs along the way!
…This is a good, sobering reminder that for every 1 step forward by pro-housing advocacy, the blue states can manage 2 steps backward via wokery, proceduralism and anti-market ideas…
The Consequences of Limiting the Tax Deductibility of R&D
We study the tax payment and innovation consequences of limiting the tax deductibility of research and development (“R&D”) expenditures. Beginning in 2022, U.S. companies are required to capitalize and amortize R&D rather than immediately deduct these expenditures. We utilize variation in U.S. firms’ fiscal year ends to test the effects of the R&D tax change in a difference-indifferences framework. We first document that affected U.S. firms’ cash effective tax rates increase by 11.9 percentage points (62%), on average. We then test and find decreases in R&D investment among domestic-only, research-intensive, and constrained firms. In aggregate, these estimates translate to a reduction in R&D of $12.2 billion in the first year among the most research-intensive firms. Further, we observe decreased capital expenditures and share repurchases among affected companies, suggesting that firms also reduced other types of investment and shareholder payout to meet the increased cash tax liability. The paper provides policy-relevant evidence about the significant real effects of limiting innovation tax incentives.
That is from a new paper by Mary Cowx, Rebecca Lester, and Michelle L. Nessa. Via the excellent Kevin Lewis.
Kevin Hassett to lead the NEC?
Bloomberg says so, a very good pick.
Regulating Sausages
In the comments on Sunstein on DOGE many people argued that regulations were mostly about safety. Well, maybe. It’s best to think about this in the context of a real example. Here is a tiny bit of the Federal Meat Inspection Act regulating sausage production:
In the preparation of sausage, one of the following methods may be used:
Method No. 1. The meat shall be ground or chopped into pieces not exceeding three fourths of an inch in diameter. A dry-curing mixture containing not less than 3 1⁄3 pounds of salt to each hundredweight of the unstuffed sausage shall be thoroughly mixed with the ground or chopped meat. After being stuffed, sausage having a diameter not exceeding 3 1⁄2 inches, measured at the time of stuffing, shall be held in a drying room not less than 20 days at a temperature not lower than 45 °F., except that in sausage of the variety known as pepperoni, if in casings not exceeding 1 3⁄8 inches in diameter measured at the time of stuffing, the period of drying may be reduced to 15 days. In no case, however, shall the sausage be released from the drying room in less than 25 days from the time the curing materials are added, except that sausage of the variety known as pepperoni, if in casings not exceeding the size specified, may be released at the expiration of 20 days from the time the curing materials are added. Sausage in casings exceeding 3 1⁄2 inches, but not exceeding 4 inches, in diameter at the time of stuffing, shall be held in a drying room not less than 35 days at a temperature not lower than 45 °F., and in no case shall the sausage be released from the drying room in less than 40 days from the time the curing materials are added to the meat.
The act goes on like this for many, many pages. All to regulate sausages. Sausage making, once an artisan’s craft, has become a compliance exercise that perhaps only corporations can realistically manage. One can certainly see that regulations of this extensiveness lock-in production methods. Woe be to the person who wants to produce a thinner, fatter or less salty sausage let alone who tries to pioneer a new method of sausage making even if it tastes better or is safer. Is such prescriptive regulation the only way to maintain the safety of our sausages? Could not tort law, insurance, and a few simple rules substitute at lower cost and without stifling innovation?
Prediction Markets Podcast
I was delighted to appear on the a16z crypto podcast (Apple, Spotify) talking with Scott Duke Kominers (Harvard) and Sonal Chokshi about prediction markets. It’s an excellent discussion. We talk about prediction markets, polling, and the recent election but also about prediction markets for replicating scientific research, futarchy, dump the CEO markets, AIs and prediction markets, the relationship of blockchains to prediction markets and going beyond prediction markets to other information aggregation mechanisms.
Against federal usury laws for credit cards
That is the topic of my latest Bloomberg column, here is one excerpt:
Given that background, simple economics would indicate that an interest rate cap of 10% would mean that only people with strong credit ratings would be able to borrow money on their cards. Those with lower net wealth, or poorer payment histories, would be blocked from using credit cards for credit, because they would no longer be profitable to serve. They would also find it harder to get the other services of credit cards, such as rewards or payment conveniences. Keep in mind that the average borrowing rate on credit cards today is more than 20%.
Then there are the secondary consequences. If someone cannot borrow against his or her credit card, maybe payday loans will be the next option. Are they so much better? The logic of the Sanders-Trump proposal, pursued consistently, would choke off borrowing for people with high credit risk. Should the government close all the pawn shops as well? In the limiting case, there are loan sharks and other more desperate measures. Why give those businesses greater opportunities to expand?
It is a legitimate question, of course, whether so much consumer borrowing is productive and beneficial. Many people borrow money to engage in sports gambling, for example, a negative-sum and sometimes addictive pursuit. Yet productive uses of borrowing are legion. What if you are a recent immigrant who just got your first job, and want to buy your kids some sports equipment so they can play after school? Should the federal government be making this more difficult for you?
The right to borrow money is inextricably linked with other liberties. Sanders, for instance, is pro-choice when it comes to abortion. So why would he support restricting a woman’s right to borrow money to finance that abortion, or to borrow money to travel across state lines? The question is all the more pressing in a post Roe v. Wade world, where the costs of obtaining an abortion have been rising.
Ultimately, freedom of choice is intertwined with the freedom not only to spend money, but also to borrow it. And since money is a general medium of exchange, there is no way to stop only the “bad uses” of borrowed money. Thus there arises a fundamental question: Who is more qualified to make the final decisions about how best to use their financial resources, US citizens or their government?
Recommended.
Milei and populism
Bryan Caplan and Daniel Klein both opine on Milei and populism, Dan being very enthusiastic, while Bryan praising Milei but more reserved in his praise of populism. I too am a big fan of Milei, and I think he is still on a good track. If his reforms do not succeed, likely it will not be his fault, but rather the result of soft commodity prices, pending credit lawsuits (predating him), and an impatient public. But so far things are holding up.
What neither Klein nor Caplan mentions — and it is very very important for this issue — is that Milei has hewed pretty closely to the IMF playbook for his most important reforms. He named a very serious and mainstream finance team to oversee his changes. And his plan is dependent on an IMF bailout. The more “populist” elements of the original promises, such as rapid dollarization, have been put on hold indefinitely. In other words, the actual policies, for the most part, are not populist at all.
It is fine to call Milei a populist in some very critical rhetorical regards. But the project is working because he has turned his back on a lot of populism and is mainly following the recommendations of expertise, as well as relying on the IMF.