Category: Economics

In which ways does inflation harm the poor?

That is the topic of my latest Bloomberg column, here is one bit:

One major factor: The poor is the socioeconomic group that finds it hardest to purchase a home, and real estate seems to be one of the best inflation hedges. U.S. real estate prices have been on a tear for some time, including through the recent inflationary period…

The poor also save less, including as a share of their incomes, because they have to spend a relatively large percentage of their incomes on necessities. That means they have smaller buffers against many kinds of changes and uncertainties, including those of inflation.

Some researchers have referred to inflation as a “regressive consumption tax,” because cash balances are so often the pathway to consumption for poorer income groups. Poorer individuals also are less likely to have cash management accounts and other asset holdings that might partially insulate them from the losses of inflation.

And:

Probably the strongest argument in favor of the notion that the poor are less affected by inflation is that inflation can, under some circumstances, lower the real value of debt. If prices go up 7%, and your income goes up 7%, all of a sudden your debts — which typically are fixed in nominal value — are worth 7% less.

This mechanism is potent, but it assumes that real wages keep pace with inflation. Right now real wages are falling, and with higher inflation may continue to do so. Furthermore, many poor people roll over their debts for longer periods of time. Repaying those debts will eventually be cheaper in inflation-adjusted terms, but not anytime soon.

I’ve been focusing on the U.S., but elsewhere in the world the general correlation is that high inflation and high income inequality go together. Correlation is not causation, but those are not numbers helpful to anyone who wishes to argue that inflation is a path to greater income equality. Have very high levels of inflation done much for the poor in Venezuela and Zimbabwe?  And if you ask which group would benefit from an improvement in living standards prompted by higher rates of investment, as might follow from a period of stability — it is the poor, not the wealthy.

There is further content at the link.

My Conversation with Ray Dalio

Here is the audio and video and transcript.  Here is part of the CWT summary:

Ray joined Tyler to discuss the forces that will affect American life in the coming decades, why we should be skeptical of the saliency of current equities prices, the market as a poker game, the benefits and risks of the US dollar as the world reserve currency, why he thinks US inflation will not be transitory, the key to his success as an investor, how studying the Great Depression enabled him to anticipate the 2008 financial crisis, Bridgewater’s culture of radical transparency, the usefulness of psychometric profiles, where the United States is falling short most in terms of moral character, his truth-seeking process, the kinds of education crucial to building a successful dynasty or empire — and what causes them to fail, how transcendental meditation helps him be creative and objective, what he loves about jazz music, what we undervalue about the ocean, why he loves bow-hunting Cape Buffalo, and more.

Here is one excerpt:

There is much more at the link!  And if you would like to donate to support Conversations with Tyler, here is the link.

How Many Lives has Vaccination Saved?

A Commonwealth Fund study:

The U.S. vaccination program campaign has profoundly altered the trajectory of the COVID-19 pandemic, preventing nearly 1.1 million deaths. Even with only about 60 percent of Americans vaccinated to date, the nation has dodged a massive wave of COVID-19 deaths that would have started as the Delta variant took hold in August 2021. Because of Delta’s rapid and nationwide spread, deaths due to COVID-19 would have far exceeded all previous peaks.

Our estimates suggest that in 2021 alone, the vaccination program prevented a potentially catastrophic flood of patients requiring hospitalization. It is difficult to imagine how hospitals would have coped had they been faced with 10 million people sick enough to require admission. The U.S. has 919,000 licensed hospital beds and typically accommodates about 36 million hospitalizations each year.3 Even the 2.6 million COVID-related hospitalizations that occurred during 2021 placed an enormous strain on hospitals, with many staff lost not only to the virus but also to exhaustion and burnout. Faced with such unprecedented demand, U.S. hospitals operating under crisis standards of care would likely have had no choice but to turn away tens of thousands or even hundreds of thousands of individuals.

The methodology is somewhat unclear so take this with a grain of salt–many future studies will look at this question–but one million lives saved is not outside the realm of the possible. One million lives saved at a $7 million value of statistical life is a 7 trillion dollar savings. Keep this number in mind when evaluating pandemic investment.

Photo Credit: Lindsay Bonanno

Austin Vernon on inflation

I think you have tangentially mentioned this before, but might it be that we are worse at measuring inflation/quality in services than goods? So maybe there has been 3-4% inflation post 2008 instead of 1-2% but it isn’t measured because it comes in the form of decreased service quality. Service list prices might be sticky. And now we see the inflation more clearly because the fiscal stimulus is larger and consumption shifted into goods from services.

From my email.  I am not so sure about post-2008, but the point may hold real relevance for today.

Don’t tell Charlie Munger

I don’t believe this result, but it is at least worth a ponder:

Previous research has found significant impacts of daylight and views on the cognitive function of office workers. In this study, we use scores on decision-making performance to estimate the annual economic potential of optimizing daylighting and views in U.S. offices. Cognitive scores were compared against over 100,000 previous test scores to obtain the distributional shift in cognitive performance when working in an office with optimized daylighting and views as opposed to an office with traditional blinds. These changes in performance were then compared to compensation data from the Bureau of Labor Statistics. Office workers shifted on average from the 52nd percentile to 65th percentile, equivalent to a $11,809 difference in salary per person per year. When conservatively accounting for the number of employees working within 15 ft of a window with blinds, optimizing daylight and views in U.S. offices has the potential to generate $352B ($240B–$464B), or 1.7% of the 2018 U.S. gross domestic product (GDP), in additional productivity. These findings suggest that building developers, architects and tenants should give additional attention to daylight design and façade technology as they consider new building construction, renovation and leasing options.

Here is the full piece by Piers MacNaughton et.al., via the excellent Kevin Lewis.

Let Students Stay in Their Dorms!

Georgetown University, like many universities, closes its dorms for the holidays. Why? Closing the dorms is an especially costly policy this year for international students, many of whom will have to quarantine if they fly home. As a result, lots of students have to find temporary housing over the holidays. Kenan Dogan, Kelly He, and Shurui Liu, students of Jason Brennan at Georgetown, offer a compelling analysis.

The average international student must pay $2,400 to fly home. this number is $3,600 to Asia, $1,200 to Europe, and $1,000 to South America, compared to just $400 within North America. parallel to flight costs, the average international student faces a 24-hour trip back home. This number is 28 hours to Asia, 14 hours to Europe, and 11 hours to South America. 

the average student from Asia faces 21 days of quarantine and must pay $1,200 for quarantine, specific to 2021. With winter break being only 25 days, the average student from Asia would spend virtually all their break in quarantine if they decided to travel home. By contrast, the average student in all other continents faces no quarantine, and thus no quarantine costs.

the average international student remaining in the US – but that wants to stay in their dorm – will spend $2,225 to remain in the us, combining housing and travel costs. this number might seem high, but it pales in comparison to the $6,100 median cost of returning home for this group, not to mention the 21-day median quarantine time and nearly 30-hour traveling process.

We find that 76% OF INTERNATIONAL STUDENTS LIVING ON CAMPUS WOULD CONTINUE LIVING IN THEIR DORMS OVER WINTER BREAK this year if given the opportunity. Further, the average international student that would like to remain on campus over break would be willing to pay $1,000 to do so. Given these topline considerations, WE RECOMMEND THE UNIVERSITY ALLOW INTERNATIONAL STUDENTS TO REMAIN IN THEIR DORMS DURING WINTER BREAK.

Georgetown and other universities with holiday shutdowns could even make money on the deal.

Does China own more of America than we thought?

This paper demonstrates that the measured stock of China’s holding of U.S. assets could be much higher than indicated by the U.S. net international investment position data due to unrecorded historical Chinese inflows into an increasingly popular global safe haven asset: U.S. residential real estate. We first use aggregate capital flows data to show that the increase in unrecorded capital inflows in the U.S. balance of payment accounts over the past decade is mainly linked to inflows from China into U.S. housing markets. Then, using a unique web traffic dataset that provides a direct measure of Chinese demand for U.S. housing at the zip code level, we estimate via a difference-in-difference matching framework that house prices in major U.S. cities that are highly exposed to demand from China have on average grown 7 percentage points faster than similar neighborhoods with low exposure over the period 2010-2016. These average excess price growth gaps co-move closely with macro-level measures of U.S. capital inflows from China, and tend to widen following periods of economic stress in China, suggesting that Chinese households view U.S. housing as a safe haven asset.

If true, does that raise or lower the chance of a war?  That piece is from William Barcelona, Nathan Converse, and Anna Wong.  Via the excellent Kevin Lewis.

The London Blitz and the NIMBYs

NIMBYs can be so bad that they make the London Blitz look good:

We exploit locally exogenous variation from the Blitz bombings to quantify the effect of redevelopment frictions and identify agglomeration economies at a micro-geographic scale. Employing rich location and office rental transaction data, we estimate reduced-form analyses and a spatial general equilibrium model. Our analyses demonstrate that more heavily bombed areas exhibit taller buildings today, and that agglomeration elasticities in London are large, approaching 0.2. Counterfactual simulations show that if the Blitz had not occurred, the concomitant reduction in agglomeration economies arising from the loss of higher-density redevelopment would cause London’s present-day gross domestic product to drop by some 10% (or £50 billion).

Here is the full paper by Gerard H Dericks and Hans R A Koster, via tekl.

Josh Angrist’s Nobel Prize Lecture

The Nobel prize lectures were online this year which gave Josh Angrist and MRU an opportunity to produce a Nobel prize lecture unlike any ever before! Josh gives a commanding yet down-to-earth talk with lots of graphics, animations and even a few guitar riffs! Indeed, Josh’s Nobel Prize lecture includes a clip from his MRU videos. Future Nobel laureates take note!

I’m also very happy that Josh focused much of his lecture on his very important work on charter schools. Watch for the stunning graph showing how Boston charter schools close the black-white achievement gap.

Josh’s work with MRU has really paid off on camera! Congrats Josh!

David Card gives a more traditional but very good lecture. Guido Imbens lecture is excellent and nicely complements Josh’s lecture and also includes some great graphics. Nobel lectures will never be the same.

Air pollution and the history of economic growth

I have not had the chance to read this through, but here goes:

Documenting environmental pollution damage affects the magnitude of aggregate output, net of pollution damage, and the contribution to national product across economic sectors. For example, air pollution damage from the production side of the economy amounted to over 5 percent of gross domestic product (GDP) in 2002…

I have presented estimates of these effects in the US economy between 1957 and 2016. This period featured the passage of the Clean Air Act (CAA) in 1970 and its subsequent implementation through the 1970s, as well as several business cycles. This research suggests that pollution damage began to decrease just after the CAA was enacted, and the orientation between GDP growth and that of the adjusted measure, or environmentally adjusted value added (EVA), switched.

That is from Nicholas J. Muller, all a bit awkwardly worded.  Jeremy Horpedahl is more to the point:

If we use the standard measure of GDP, growth indeed slowed down after 1970. If instead we augment GDP for environmental damages, the period after 1970 was actually faster! The adjustment both slows down growth from 1957-1970, and speeds up growth after 1970.

Worth a ponder.

What is the profile of leading development economists on the PhD job market?

From David McKenzie at the World Bank, here is one excerpt:

Data from big middle-income countries, and English-speaking Africa were most common, with no papers on the Middle East and North Africa, and very little study of the poorest places: In both samples, India, Brazil, and Colombia (and the U.S.!) were the most common countries studied, with a smattering of papers from East Asia, other South Asian countries, and Latin America, and one from Russia with nothing else on Eastern Europe and Central Asia. Of the World’s 25 poorest countries, only one (Mozambique) was the subject of study; of the five countries that contain half the World’s poor, there were papers on India and Bangladesh, but none on Nigeria, DRC or Ethiopia.

Here is another:

RCTs have far from overtaken development, difference-in-differences is the most popular identification method, yes, people still do IV, and no, no one does PSM on the job market: The pandemic may have reduced the ability of people to do some field experiments, but this year at least, only 20% of the top school sample, and only 6% of the World Bank sample were doing RCTs. More than one quarter in both cases were using difference-in-differences. RDD and IVs were used in about 10% of the papers each, and structural models were common in the World Bank sample (which has more trade and macro papers). None of the papers used propensity score matching.

The blog post is interesting throughout.  Via the excellent Samir Varma.

The Rise and Decline and Rise Again of Mancur Olson

Mancur Olson’s The Rise and Decline of Nations is one of my favorite books and a classic of public choice. Olson may well have won the Nobel prize had he not died young. He summarized his book in nine implications of which I will present four:

2. Stable societies with unchanged boundaries tend to accumulate more collusions and organizations for collective action over time. The longer the country is stable, the more distributional coalitions they’re going to have.

6. Distributional coalitions make decisions more slowly than the individuals and firms of which they are comprised, tend to have crowded agendas and bargaining tables, and more often fix prices than quantities. Since there is so much bargaining, lobbying, and other interactions that need to occur among groups, the process moves more slowly in reaching a conclusion. In collusive groups, prices are easier to fix than quantities because it is easier to monitor whether other industries are selling at a different price, while it may be difficult to monitor the actual quantities they are producing.

7. Distributional coalitions slow down a society’s capacity to adopt new technologies and to reallocate resources in response to changing conditions, and thereby reduce the rate of economic growth. Since it is difficult to make decisions, and since many groups have an interest in the status quo, it will be more difficult to adopt new technologies, create new industries, and generally adapt to changing environments.

9. The accumulation of distributional coalitions increases the complexity of regulation, the role of government, and the complexity of understandings, and changes the direction of social evolution. As the number of distributional coalitions grows, it will make policy-making increasingly difficult, and social evolution will focus more on distributing wealth among groups than on economic efficiency and growth.

Olson’s book has become less well known over the years but you can gauge it’s continued relevance from this excellent thread by Ezra Klein which gets at some of the consequences of the forces Olson explained:

A key failure of liberalism in this era is the inability to build in a way that inspires confidence in more building. Infrastructure comes in overbudget and late, if it comes in at all. There aren’t enough homes, enough rapid tests, even enough good government web sites. I’ve covered a lot of these processes, and it’s important to say: Most decisions along the way make individual sense, even if they lead to collective failure.

If the problem here was idiots and crooks, it’d be easy to solve. Sadly, it’s (usually) not. Take the parklets. There are fire safety concerns. SFMTA is losing revenue. Some pose disability access issues. It’s not crazy to try and take everyone’s concerns into account. But you end up with an outcome everyone kind of hates.

I’ve seen this happen again and again. Every time I look into it, I talk to well-meaning people able to give rational accounts of their decisions.

It usually comes down to risk. If you do X, Y might happen, and even if Y is unlikely, you really don’t want to be blamed for it. But what you see, eventually, is that our mechanisms of governance have become so risk averse that they are now running *tremendous* risks because of the problems they cannot, or will not, solve. And you can say: Who cares? It’s just parklets/HeathCare.gov/rapid tests/high-speed rail/housing/etc.

But it all adds up.

There’s both a political and a substantive problem here.

The political problem is if people keep watching the government fail to build things well, they won’t believe the government can build things well. So they won’t trust it to build. And they won’t even be wrong. The substantive problem, of course, is that we need government to build things, and solve big problems.

If it’s so hard to build parklets, how do you think think that multi-trillion dollar, breakneck investment in energy infrastructure is going to go?
This isn’t a problem that just afflicts liberal governance, of course.

All these problems were present federally under Trump and Bush. They are present under Republican governors and mayors. But it’s a bigger problem for liberalism because liberalism has bigger public ambitions, and it requires trust in the government to succeed. I’m going to be working a lot over the next year on the idea of supply-side progressivism, and this is an important part.

Estonian E-Residency

A useful post on getting E-Residency in Estonia:

Being an e-Resident of Estonia means that you get remote access to the Estonian economy from anywhere in the world. It doesn’t mean you get to vote or receive access to Estonian welfare services, or even that you get to live there. However, access to the Estonian market also means access to the European Union’s market —twenty-six economies which, when combined, constitute the world’s third largest.

Starting a business in the United States is hard and complicated and full of all kinds of expenses. Trust me, Spectacles has taught me that lesson at least. As an e-Resident or citizen of Estonia, however, it’s incredibly simple and inexpensive. Opening a business in the country costs €120, and everything can be done online through Estonian government web portals which feature detailed and useful explanations of everything one needs to know. This is why Estonia has the most startups per capita in the EU and is ranked the most entrepreneurial country in Europe by the World Economic Forum.

Becoming an e-Resident of Estonia is similarly straightforward. All you need to do is head to the government website—which actually feels modern and professional, especially compared to US government pages—and fill out the application. It takes about 30 minutes to an hour. All you really need is a headshot, a picture of your passport, links to your social media, and some answers to various questions about your motivation and interest.

When you’re finished, you pay a €120 fee and wait around 30 days to find out the result of your application.

E-Residency is a fascinating program, but it’s merely one example of how streamlined, modern, and innovative Estonia’s bureaucracy is. The features and mechanics which underpin e-Residency extend far beyond it.

Estonia also has a flat tax of ~20% which is administered automatically. Voting is also online.

Cost of living sentences to ponder

The overall cost of living faced by low-income households (post-tax income <$50,000) in the most expensive city—San Jose, CA—is 49% higher than in the median commuting zone, Cleveland, and 99% higher than the most affordable commuting zone—Natchez, MS.

And:

The three commuting zones with the lowest consumption of low income households are San Jose, CA; San Francisco, CA; and San Diego, CA, with consumption levels between 27% and 30% lower than the median commuting zone. At the other extreme of the spectrum, examples of commuting zones with high consumption of low-income households are Huntington, WV; Johnstown, PA; and Elizabeth City, NC, with consumption levels in real terms 22–23% higher than the median commuting zone. The range of consumption levels observed across U.S. communities is quite wide: Low-income families who live in the most affordable commuting zone enjoy a level of market-based consumption measured in real terms that is 74% higher that of families with the same income who live in the least affordable commuting zone.

And:

The estimated coefficient implies that a middle-skill household moving from the median commuting zone (Cleveland) to the commuting zone with the highest price index (San Jose) would experience a 7.7% decline in their standard of living. Moving from the commuting zone with the lowest cost of living index (Natchez) to the commuting zone with the highest index would imply a decline in the standard of living by 12.7%.

As for high school dropouts:

Moving from Natchez to San Jose implies a 26.9% decline in the standard of living.

Here is the NBER working paper by Rebecca Diamond and Enrico Moretti

Geoffrey Harcourt has passed away

Here is one notice.  As a teenager I spent a great deal of time with his book Some Controversies in the Cambridge Theory of Capital.  It was difficult, and seemed to contain so many secrets…and it was so elegantly presented with a lovely cover.

Here is Harcourt’s Wikipedia page — many of his children went into academia as well.

For the pointer I thank Alexander Millmow.