Category: Economics
What do LLMs expect for the economy?
I introduce a survey of economic expectations formed by querying a large language model (LLM)’s expectations of various financial and macroeconomic variables based on a sample of news articles from the Wall Street Journal between 1984 and 2021. I find the resulting expectations closely match existing surveys including the Survey of Professional Forecasters (SPF), the American Association of Individual Investors, and the Duke CFO Survey. Importantly, I document that LLM based expectations match many of the deviations from full-information rational expectations exhibited in these existing survey series. The LLM’s macroeconomic expectations exhibit under-reaction commonly found in consensus SPF forecasts. Additionally, its return expectations are extrapolative, disconnected from objective measures of expected returns, and negatively correlated with future realized returns. Finally, using a sample of articles outside of the LLM’s training period I find that the correlation with existing survey measures persists – indicating these results do not reflect memorization but generalization on the part of the LLM. My results provide evidence for the potential of LLMs to help us better understand human beliefs and navigate possible models of nonrational expectations.
That is from a new paper by J. Leland Bybee, via Paul Goldsmith-Pinkham.
The macroeconomics of immigration
No, this isn’t a question about the real world economics of immigration, this is merely a question about the basic model, viewed as model along.
Let’s say more migrants arrive in a country. One view, held by Bryan Caplan, is that (ceteris paribus) the monetary base is fixed, so now the monetary base per capita has decline. Thus immigration is deflationary. There are more people and not more money, alternatively you could say that the demand to hold money has gone up. (I am, by the way, blogging this with Bryan’s permission.)
Another view, mine, is that the new immigrants shift out both the aggregate demand and aggregate supply curves, and the net effect can be either inflationary or deflationary. Even given a fixed monetary base, M2 likely will go up, as for instance banks will find they have more desirable loans to make, for instance to the new arrivals. Optimal reserve requirements and money multiplier variables are likely to change, so the fixed monetary base need not choke off a demand increase.
Who is right and under which conditions?
Small steps toward a much better world, job search edition
Jobseekers face multiple barriers with potentially different implications for the level of search and returns to increasing search. An experiment on a job search platform in Pakistan shows that lowering users’ psychological cost of initiating job applications increases applications by 600%. Returns to the marginal applications induced by treatment are approximately constant rather than decreasing, in contrast with intuitive job search models. This pattern is consistent with a model in which heterogeneous psychological costs of initiating applications, potentially due to heterogeneous present bias, lead some jobseekers to miss applying to even high-return vacancies. Additional experiments and measurement reject alternative behavioral and non-behavioral explanations. Our finding of constant returns to marginal search effort, combined with limited spillovers onto other jobseekers, raises the possibility of suboptimally low search effort due to psychological costs of initiating applications.
That is from a new paper by Erica Field, Robert Garlick, Nivedhitha Subramanian, Kate Vyborny. Via Maxwell G.
Buying a Coal Mine Gets Easier!
Long time readers will know that I have been advocating for buying a coal mine and shuttering it, especially a coal mine in India or China. The basic idea is that there are plenty of coal mines which are barely profitable so buying and shuttering these mines could be a relatively cheap way to reduce air pollution and climate change (much cheaper, for example, then letting the coal mine produce and then paying for carbon extraction). (I give an example of how this might work with an actual coal mine for sale here).
One objection, which I noted earlier, was BLM use it or lose it rules:
There are also some crazy “use it or lose it” laws that say that you can’t buy the right to extract a natural resource and not use it. When the high-bidder for an oil and gas lease near Arches National Park turned out to be an environmentalist the BLM cancelled the contract! That’s absurd. The high-bidder is the high-bidder and there should be no discrimination based on the reasons for the bid. See this Science piece.
Well some good news.
The Bureau of Land Management unveiled a draft rule late last month that would place conservation “on equal footing” with energy development and other traditional uses — a proposal that seeks to confront the agency’s long record of prioritizing extraction across the federal estate. A key provision of that rule would grant the BLM, which oversees one-tenth of all land in the United States, the authority to issue “conservation leases” to promote land protection and ecosystem restoration.
The article does a pretty good job of explaining conservation leases but it’s hilarious how the author reflexively labels PERC a right-wing think tank with deep ties to fossil fuels that supports “free market environmentalism” in scare quotes and never feels the need to resolve this with their support of conservation leases. Blank out, as Ayn Rand would say.
Few people have done more to advance the idea of conservation leases than Shawn Regan, vice president of research at the Property and Environment Research Center, or PERC, a right-wing, Montana-based think tank that promotes “free market environmentalism” and has deep ties to fossil fuels. Regan points to Williams’ and DeChristopher’s cases to highlight how legacy “use it or lose it” rules have biased public land management in favor of extraction.
“We have these ‘use it or lose it’ requirements that define ‘use’ in these really narrow ways that preclude conservation groups from participating in the leasing markets that affect the use of vast swaths of the American West,” he told HuffPost. “Conservation should be considered a valid use of public lands, and groups should be able to acquire those leases and decide to conserve them in some form or restore them.”
Regan argues the inability of conservationists to participate in federal land leasing, even when they are willing to pay more than a driller or rancher, has only helped fuel conflict in Western states.
…“Why don’t environmentalists just buy what they want to protect? Well, in many cases they can’t,” Regan said.
Hat tip: Robert Keller.
Sebastian Edwards on Chilean social security reform
In his forthcoming book on the Chilean reforms, Edwards is clear that the social security reforms did not succeed. He gives the following reasons (a partial and incomplete summary):
1. “At 10 percent of wages, the rate of contribution was obviously too low. The average for the OECD countries was 19 percent.” Accumulated funds ended up being too low.
2. The system assumed a static labor market, where workers stayed in the formal sector for 30 to 50 years.
3. Workers were never quite sure if they really were going to get the funds, or if they just were paying another tax.
4. Workers’ representatives were not included on the relevant program boards, and so workers felt little stake in the system.
5. The number of retirement years rose dramatically, due in part to rising life expectancy. Yet the system made no adjustment for this, requiring a certain amount of savings to be stretched out to finance a growing number of years.
6. Management fees were very high, and this became a major issue when equity returns fell.
Here is my earlier post on the book — The Chile Project: The Story of the Chicago Boys and the Downfall of Neoliberalism, one of the must-reads of the year.
From the Comments
The context is that human challenge trials were “ethically fraught” but, Sure writes:
…I think we had more than a few instances in history where restricting movement, shuttering houses of worship, and stratifying the economy into favored and disfavored sectors was considered ethically fraught.
I mean we know that limiting visitation to old folks shortens their lives. We know that child abuse becomes harder to find the fewer the number of folks who lay eyes on them each day. We know that initimate partner violence increases when the housing market gets frozen. And we know that suicides crest when businesses go under.
Yet no such epistemic humility and wariness followed with public health recommendations to be tried on a scale reserved hitherto for literal wars and genocides. And we blindly went ahead full speed.
Or consider even the better defined but wildly more mundane issue: proof of vaccination. For decades health ethicists told us that merely revealing a patient’s name, let alone which medications they have taken, was an unconscionable ethical violation. One which we instituted balkanized medical systems to manage and where the cost has been literal lives lost as we have had untold numbers of patients fall through the cracks thanks to duplicate profiles, failure of providers to communicate, and of course scads and scads of useful data locked away from effective statistical analysis that could spot patterns of medical error.
Yet when the powers that be decided that we needed vaccine passports so we could enjoy dining again? Well, every waiter in the country becomes a safe repository of PHI.
No formal study. No deliberations. Precious little if any publications.
And even then, it went only for what was the most expedient option for the enlightened. No ability to get an antibody titer card for medical equivalence. No ability to substitute PCR results with a physician evaluation of recent disease recovery.
Professional medical ethics are bogus. There is no consistency and the entire profession serves to pander to the prejudices of the educated.
New results on retail productivity
We find: (i) managers affect and explain a large share of the variance of store-level productivity; (ii) negative assortative matching between managers and stores, which may reflect both firms’ decisions and a selection-driven bias that we characterize and argue might apply in other settings using movers designs; (iii) managers who move do so on average from less productive to more productive stores; (iv) female managers are less likely to move stores than male managers; (v) manager quality is generally hard to explain with the observables in our data, but is correlated with the ratio of full-time to part-time workers; (vi) managers who obtain high labor productivity also tend to obtain high energy productivity, revealing some breadth in managers’ skills applicability; (vii) high-performing managers in stable growth times are also high-performing during turbulent times; and (viii) exogenous productivity shocks improve the quality of initially low quality managers, suggesting managers can learn.
That is from a new NBER working paper by Robert D. Metcalfe, Alexandre B. Sollaci, and Chad Syverson.
Gabriel Zucman wins the John Bates Clark Medal
Here is the announcement.
Do higher minimum wages reduce poverty?
Advocates of minimum wage increases have long touted their potential to reduce poverty. This study assesses this claim. Using data spanning nearly four decades from the March Current Population Survey, and a dynamic difference-in-differences approach, we find that a 10 percent increase in the minimum wage is associated with a (statistically insignificant) 0.17 percent increase in the probability of longer-run poverty among all persons. With 95% confidence, we can rule out long-run poverty elasticities with respect to the minimum wage of less than -0.129, which includes central poverty elasticities reported by Dube (2019). Prior evidence suggesting large poverty-reducing effects of the minimum wage are (i) highly sensitive to researcher’s choice of macroeconomic controls, and (ii) driven by specifications that limit counterfactuals to geographically proximate states (“close controls”), which poorly match treatment states’ pre-treatment poverty trends. Moreover, an examination of the post-Great Recession era — which saw frequent, large increases in state minimum wages — failed to uncover poverty-reducing effects of the minimum wage across a wide set of specifications. Finally, we find that less than 10 percent of workers who would be affected by a newly proposed $15 federal minimum wage live in poor families.
That is from a new NBER working paper by Richard V. Burkhauser, Drew McNichols, and Joseph J. Sabia. Should one believe these new results over the old results, or just be skeptical of the whole line of research entirely?
Should we limit capital flows from America to China?
I am not thrilled with these policy proposals:
President Joe Biden is expected to issue an executive order next month restricting US investment in China, in part over concerns about US national security. Those concerns are valid, but the move would cede far too much arbitrary power to the federal government over capital flows and economic activity.
The policy will reportedly cover semiconductors, AI and quantum computing, and on the supply side it applies to venture capital, private equity and some technology transfers and joint ventures. It’s reminiscent of the proposed ban on TikTok. You can debate whether a bill that said “Ban TikTok” — and little else — would be a good idea. In reality, what was proposed would potentially criminalize a broad swath of internet activity in America.
Restrictions on capital flows to China would run into similar problems. On the surface, they would be addressing commonsensical national-security issues. Underneath, they would give the executive branch carte blanche to both punish foreign nations economically and to restrict domestic investors.
And this:
All said, it would be better for the US to devote resources to limiting Chinese espionage, or upgrading US supply chains and weapons systems. When it comes to relations with China, blocking its access to key weapons systems should be the priority.
Here is the full Bloomberg column.
Diamond arbitrage!
That diamond ring your newly engaged friend is showing off? It may not be a traditional diamond.
More than a third of all engagement rings with center stones purchased last year were created in a lab, according to an online survey of nearly 12,000 U.S. couples by wedding-planning website The Knot. That’s double the number from 2020.
A natural diamond takes billions of years to form deep within the earth. The diamond industry, it seems, evolves almost as slowly. But a major shift seems to be under way.
As the technology to make lab-grown diamonds has improved, production has increased and retail prices are falling. Their growing popularity, especially among younger consumers, has caught the attention of jewelers and watchmakers — and is challenging traditional diamonds that are mined from the earth.
It’s not just engagement rings. Diamonds grown in a lab accounted for 13.6% of the $88.6 billion in diamond jewelry sold globally in 2022, up from less than 1% in 2015 where they had hovered since the early 2000s, according to Paul Zimnisky, a diamond industry analyst.
Here is more from the WSJ, and the article is interesting throughout. Here is my 2004 post on diamonds. Didn’t Alex once have a long post on this as well? (I can’t find it in the MR search function.)
*The Chile Project*
An excellent book, the author is Sebastian Edwards, and the subtitle is The Story of the Chicago Boys and the Downfall of Neoliberalism. This is the only book on this topic where I feel I am finally getting to the bottom of what happened. Here are a few points:
1. The Chicago School ties to Chile go as far back as 1955, when Theodore Schultz, Earl Hamilton, Arnold Harberger, and Simon Rottenberg visited to strike up an agreement with Catholic University in Santiago.
2. The same year Chilean students started arriving at U. Chicago for graduate study.
3. Edwards himself, at the age of 19, worked on price controls under the Allende regime.
4. Paul Rosenstein-Rodan, the (left-wing) Austrian economist, was critical of the Allende regime for deviating from true socialism.
5. The Allende regime was a disaster, with for instance real wages falling by almost 40 percent (this one I knew).
6. Pinochet’s much-heralded private pension reform really did not work (I may do a whole post on this).
7. Milton Friedman’s famed visit really was quite modest, contrary to what you sometimes hear. Nonetheless he was so persuasive he really did convince Pinochet to proceed with the shock therapy version of reform. He had mixed feelings about this for the rest of his life, and did not like to talk about it: “But deep inside, Friedman was bothered by the Chilean episode.”
8. You may know that pegging the exchange rate was one of the major Chilean mistakes during the reform era. Friedman, although usually a strict advocate of floating exchange rates, did not take the opportunity to criticize that decision, and in fact made some remarks that suggested a possible willingness to tolerate a moving peg regime for the Chilean exchange rate.
9. Friedman underestimated how long Chilean unemployment would last, following shock therapy.
10. Arnold Harberger “…prided himself in not being doctrinaire and not being a Milton Friedman clone.”
11. Much more recently, Chile turned to the Left, in part because Chilean market-oriented economists retreated from public debates.
Strongly recommended, one of the must-reads of the year. You can buy it here.
Another bit on short-termism
A better argument would be that the agency relationship (and habitual firing for inferior short-term performance), rather than capitalism, leads to excess short-termism. Capitalism has plenty of agency relationships, of course, but so do all other systems, including politics and the charitable sector. At least under capitalism there is an incentive to terminate or alter the most destructive agency relationships, precisely because they reduce longer-term wealth.
That is by me, from my recent TLS review essay.
How much smaller will big business become?
At least on the tech side:
Consider the most prestigious service that generates images using AI, a company called Midjourney. It has a total of 11 full-time employees. Perhaps more are on the way, but that is remarkably few workers for a company that is becoming widely known in its field.
Part of the trick, of course, is that a lot of the work is done by computers and artificial intelligence. I don’t think this will lead to mass unemployment, because history shows that workers have typically managed to move from automating sectors into new and growing ones. But if some of the new job-creating sectors are personal services such as elder care, those jobs are typically in smaller and more local firms. That means fewer Americans working for big business.
Or consider ChatGPT, which has been described as the most rapidly growing consumer technology product in history. It is produced by OpenAI, headquartered in San Francisco. By one recent estimate the company has about 375 employees. By contrast, Meta, even after some layoffs, currently has more than 60,000.
Perhaps cloud computing will be run through a few mega-firms such as Microsoft and Amazon, but — due largely to AI — we can expect many firms to radically shrink in size?
Here is the rest of my Bloomberg column.
Should we expect a recession?
Christina and David Romer have a new NBER paper on this topic and they say yes:
The narrative approach to macroeconomic identification uses qualitative sources, such as newspapers or government records, to provide information that can help establish causal relationships. This paper discusses the requirements for rigorous narrative analysis using fresh research on the impact of monetary policy as the focal application. We read the historical minutes and transcripts of Federal Reserve policymaking meetings to identify significant contractionary and expansionary changes in monetary policy not taken in response to current or prospective developments in real activity for the period 1946 to 2016. We find that such monetary shocks have large and significant effects on unemployment, output, and inflation in the expected directions. Analysis of available policy records suggests that a contractionary monetary shock likely occurred in 2022. Based on the empirical estimates of the effect of previous shocks, one would expect substantial negative impacts on real GDP and inflation in 2023 and 2024.
They call this “the narrative approach.”