Category: Economics

Workers aren’t coming back

Data released by the Labor Department this morning show that last month, 61.6 percent of the working-age population were active in the labor force, either working in jobs or looking for them. That is essentially unchanged from the summer of 2020.

The second most significant statistic is that wages are soaring. In May, average wages grew at a 6.1 percent annual rate. In April, they grew at an 8.7 percent annual rate.

Combined, these two statistics tell much of the story of the economy this spring: Employers are boosting wage offers in order to attract and retain workers, who are increasingly difficult to attract and retain. This is a situation you’d expect with employers’ demand for workers growing much faster than workers are returning to the labor market. Labor demand is booming, and labor supply is not keeping up.

Here is more from Michael Strain.

Whose big business? (Europe fact of the day)

In 2000 nearly a third of the combined value of the world’s 1,000 biggest listed firms was in Europe, and a quarter of their profits. In just 20 years those figures have fallen by almost half. Europe is a place for companies such as Amazon and TikTok to find customers, not a base for local firms to conquer the world…

Of the world’s 142 listed firms worth over $100bn, 43 were set up from scratch in the past half-century, 27 in America and ten in China. Only one was in Europe: sap, a German software group founded in 1972. Half of Europe’s richest ten billionaires inherited fortunes spawned long ago; in America nine of the top ten are wealthy solely because of companies they founded.

Here is more from The Economist.  This is all the more reason for the United States to boost allowed emigration from the European Union.  It is also an object lesson in which are the true barriers to trade, often including language, culture, and national borders, even in the presence of (nearly) free trade.

Chris Anderson of TED interviews me

Here is the full podcast series and also other ways to listen.

Update on Rapid Tests for COVID

Nearly a year ago, I wrote Frequent, Fast, and Cheap is Better than Sensitive, arguing for rapid antigen tests:

A number of firms have developed cheap, paper-strip tests for coronavirus that report results at-home in about 15 minutes but they have yet to be approved for use by the FDA because the FDA appears to be demanding that all tests reach accuracy levels similar to the PCR test. This is another deadly FDA mistake.

See also my posts Infected versus Infectious and Rapid Tests. The EMA and then the FDA finally did start approving these tests. So how well are they working? Pretty damn well. Canada has two innovative programs. First, in Nova Scotia pop-up clinics have been using rapid tests for asymptomatic people:

During the third wave that hit Nova Scotia over the past month, the province’s community rapid testing centres have correctly sniffed out at least 285 COVID-19 cases in asymptomatic people, or about 10 per cent of all confirmed cases in this time period, according to the Nova Scotia Health Authority.

While most provinces reserve testing only for symptomatic people or close contacts of a case, Nova Scotia’s pop-up centres allow asymptomatic people to simply show up and get a rapid test for free, with results sent to them within an hour. The whole process relies largely on volunteers without a health-care background.

Furthermore, the true number of cases credited to rapid testing is probably much higher. When a rapid test correctly identifies a positive case, the person’s close contacts such as their family get PCR lab tests that don’t show up in the rapid test statistics.

Lisa Barrett, an infectious diseases specialist and the driving force behind the rapid testing program, said it’s hard to say for certain, but taken altogether it’s possible rapid antigen testing has helped Nova Scotia find up to 18 per cent of all cases during the third wave.

“This is the early detection system,” Barrett said. Rapid testing tends to catch people early on in their infection when they’re full of virus, meaning positive cases are found and put into isolation fast — likely days before they would have been found with a PCR test, if they were found at all.

Michael Mina argues that since the rapid antigen detected cases are among the most infectious cases, detecting these cases is probably worth half of all the PCR testing.

Second, Canada’s CDL Rapid Screening Consortium is now in 200 sites with 50 large companies and rapidly expanding. A very interesting, just published paper in The Lancet runs an experiment that suggests that these testing regimes can work. The experiment rapidly tested 1000 people and the negatives were then randomly assigned either to be sent-home to conduct their regular life or to attend a multi-hour concert with masks but also singing, dancing, alcohol and no-social distancing. After 8 days there were two infections in the at-home group and no infections in the Concert group which suggests that this type of rapid testing can be used to open and keep-open concerts, schools, universities, airplanes and workplaces.

What’s the point of testing now that we have vaccines? Two reasons. First, most of the world still hasn’t been vaccinated so testing will be a very useful stop-gap measure until vaccination is more widely distributed. Indeed, the success of these programs shows what we lost by not acting more quickly a year ago. Second, although the pandemic is (essentially) over in the United States (as predicted) there will likely be an uptick in the fall among the unvaccinated and you want rapid tests to be available rapidly in hot-spots. In other words, rapid deployment of rapid tests will help us to avoid outbreaks in the future.

My Conversation with the very very smart David Deutsch

I think this episode came off as “weird and testy,” as I described it to one friend, but I like weird and testy!  Here is the audio, video, and transcript.  Here is one excerpt:

COWEN: How do you think the many-worlds interpretation of quantum mechanics relates to the view that, just in terms of space, the size of our current universe is infinite, and therefore everything possible is happening in it?

DEUTSCH: It complicates the discussion of probability, but there’s no overlap between that notion of infinity and the Everettian notion of infinity, if we are infinite there, because the differentiation (as I prefer to call what used to be called splitting) — when I perform an experiment which can go one of two ways, the influence of that spreads out. First, I see it. I may write it down; I may write a scientific paper. When I write a paper about it and report the results, that will cause the journal to split or to differentiate into two journals, and so on. This influence cannot spread out faster than the speed of light.

So an Everett universe is really a misnomer because what we see in real life is an Everett bubble within the universe. Everything outside the bubble is as it was; it’s undifferentiated, or, to be exact, it’s exactly as differentiated as it was before. Then, as the bubble spreads out, the universe becomes or the multiverse becomes more differentiated, but the bubble is always finite.

COWEN: How do your views relate to the philosophical modal realism of David Lewis?

DEUTSCH: There are interesting parallels. As a physicist, I’m interested in what the laws of physics tell us is so, rather than in philosophical reasoning about things, unless they impinge on a problem that I have. So yes, I’m interested in, for example, the continuity of the self — whether, if there’s another version of me a very large number of light-years away in an infinite universe, and it’s identical, is that really me? Are there two of me, one of me? I don’t entirely know the answer to that. It’s why I don’t entirely know the answer to whether I would go in a Star Trek transporter.

The modal realism certainly involves a lot of things that I don’t think exist — at least, not physically. I’m open to the idea that nonphysical things do exist: like the natural numbers, I think, exist. There’s a difference between the second even prime, which doesn’t exist, and the infinite number of prime numbers, which I think do exist. I think that there is more than one mode of existence, but the theory that all modes of existence are equally real — I see no point in that. The overlap between Everett and David Lewis is, I think, more coincidental than illuminating.

COWEN: If the universe is infinite and if David Lewis is correct, should I feel closer to the David Lewis copies of me? The copies or near copies of me in this universe? Or the near copies of me in the multiverse? It seems very crowded all of a sudden. Something whose purpose was to be economical doesn’t feel that way to me by the end of the metaphysics.

DEUTSCH: It doesn’t feel like that to you. . . . Well, as Wittgenstein is supposed to have said (I don’t know whether he really did), if it were true, what would it feel like? It would feel just like this.

Much more at the link.  And:

COWEN: Are we living in a simulation?

DEUTSCH: No, because living in a simulation is precisely a case of there being a barrier beyond which we cannot understand. If we’re living in a simulation that’s running on some computer, we can’t tell whether that computer is made of silicon or iron, or whether it obeys the same laws of computation, like Turing computability and quantum computability and so on, as ours. We can’t know anything about the physics there.

Well, we can know that it is at least a superset of our physics, but that’s not saying very much; it’s not telling us very much. It’s a typical example of a theory that can be rejected out of hand for the same reason that the supernatural ones — if somebody says, “Zeus did it,” then I’m going to say, “How should I respond? If I take that on board, how should I respond to the next person that comes along and tells me that Odin did it?”

COWEN: But it seems you’re rejecting an empirical claim on methodological grounds, and I get very suspicious. Philosophers typically reject transcendental arguments like, “Oh, we must be able to perceive reality, because if we couldn’t, how could we know that we couldn’t perceive reality?” It doesn’t prove you can perceive reality, right?

And this:

COWEN: A few very practical questions to close. Given the way British elections seem to have been running, that the Tories win every time, does that mean the error-correction mechanism of the British system of government now is weaker?

DEUTSCH: No. Unfortunately, the — so, as you probably know, I favor the first-past-the-post system in the purest possible form, as it is implemented in Britain. I think that is the most error-correcting possible electoral system, although I must add that the electoral system is only a tiny facet of the institutions of criticism and consent. In general, it’s just a tiny thing, but it is the best one.

It’s not perfect. It has some of the defects of, for example, proportional representation. Proportional representation has the defect that it causes coalitions all the time. Coalitions are bad.

COWEN: You have a delegated monitor with the coalition, right? With a coalition, say in the Netherlands (which is richer than the United Kingdom), you typically have coalition governments. Some parties in the coalition are delegated monitors of the other parties. Parties are better informed than voters. Isn’t that a better Popperian mechanism for error correction?

I also tried to sum up what I think he is all about, and he reacted with scorn.  That was an excellent part of the conversation.  And here is a good Twitter thread from Michael Nielsen about the Conversation.

Do individuals make more rational decisions when the stakes are higher?

Often yes, but this is a shibboleth of economics that doesn’t always fit the facts, as has been illustrated starkly by our behaviors during the pandemic.  Many people have taken too much risk, or been too risk-averse, even with high stakes on the line.  Here is one excerpt from my recent Bloomberg column:

You might wonder why we are getting these big, important decisions so wrong. I have at least two hypotheses. One is that anxiety causes people to make worse decisions. Facing the danger of a deadly pandemic, for example, the higher stakes might induce me to shift into denial, if only to protect my sanity and peace of mind. I might make worse decisions than if I were simply trying to avoid the common cold, for which the stakes are far lower.

My other hypothesis involves identity and the desire for belonging. It is no accident that red states in the U.S. are under-vaccinated relative to blue states; vaccine skepticism is in part an identity marker for Trump supporters. People tend to see big decisions as more important in shaping their identity than small ones. In essence, the significance of a decision induces all kinds of surrounding social forces to “infect” that decision with partisan influences, and that decision in turn becomes a truly credible signal of what we believe.

For most economic decisions, people do still make better choices when the stakes are higher — but this isn’t a universal principle. Are you so sure, for example, that decisions about who to marry are made more rationally than those about which TV show to watch? Maybe they are, but it’s not entirely obvious.

Note that it is now much easier to make good small stakes decisions, largely because of the internet:

An accompanying change is that low-stakes decisions are easier than ever, due largely to the internet, with one crucial caveat: The decision-maker must be relatively rational. Several decades ago, if you wanted to figure out the best paper towels to buy, you might have asked around and then collated a lot of information yourself. These days it is easy enough to search the internet for the answer. Or consider the example of credit-card rewards, which are far easier to collect, manipulate and use because of the internet.

The danger of course is that the sum of all these smaller triumphs convinces people that they are rational about big dilemmas too — despite the fact that they choose rather poorly on some of them. We are not used to a world where we are worse at big decisions than the small ones. But it has been hurtling our way for some while now.

Recommended.  I also cite this: “Bryan Caplan, a colleague who studies human rationality, has put the individual Covid response in only the second percentile of “my initially mediocre expectations.””

More on Individualism and Benevolence

This paper investigates the role of individualism in charitable giving. Individualistic societies are those that value individual fulfillment, personal responsibility, and relationships with those outside one’s in-group. Though critics suggest individualism undermines virtues such as generosity, we consider contrary mechanisms first developed in the tradition of classical political economy, especially the “doux commerce” hypothesis (Hirschman 1982), which posits that self-interested pursuit of gains through trade has broader, usually positive, effects on the attitudes and behavior (Matson 2020). Originating in French Enlightenment–era works—especially Montesquieu (1777a, XX.2)—and later found in Mandeville (1988 [1714]), Smith (1982 [1759]), and Hume (1994 [1742]), these arguments fell out of favor within mainstream economics for much of the twentieth century (Boettke 1997). But interest in these works has reemerged alongside growing interest in endogenous preferences (Bowles 1998) and the cultural dimensions of economic activity and as experimental evidence identifying success in trade as a cause of prosocial conduct has accumulated (Smith and Wilson 2019).

…To test our hypotheses, we use evidence from a large cross-section of countries and several measures of individualism, including Hofstede’s (2001) individualism-collectivism index, the index of survival versus self-expression from the World Values Survey (WVS) (Inglehart and Oyserman 2004), and measures of generalized tolerance. Each represents a quantitative measure of culture, or what David Hume referred to as national character (Sent and Kroese 2020). Our empirical results show that individualism is indeed associated with charitable giving, as is economic freedom. The results support the argument of classical liberals thatcommercial society and the social and cultural institutions that support it are sources of the common good.

From Cai, Caskey, Cowen, Murtazashvili, Murtazashvili and Salahodjaev. See my previous post(s) on this topic.

U.S. Largest Industries, 1890

1. Transportation

2. Agriculture and Related Industries

3. Food, Beverages, and Tobacco Products

4. Metal, Metal Products, and Machinery

5. Textiles, Textile Products, and Clothing

6. Mining and Quarrying

7. Banking

8. Wood, Lumber, and Their Products

9. Leather and Allied Products

10. Slaughtering and Meat Packing

That is from the new and excellent An Illustrated Business History of the United States, by Richard Vague.  How many of you really know everything that is in here?  In that same year Buffalo was the tenth largest U.S. city.  And the most valuable import around that time (1891-1900) was sugar, with coffee #2 and “Hides and skins” #3.

The fly swatter had not yet been invented.

Just remember: picture books are usually better than regular books.

Omid on central bank digital currencies (from my email)

Really enjoyed your conversation with Mark [Carney] (as usual). I give him a B+ on his views on CBDCs. He gets credit for understanding that if nothing is done, then digitization means a disappearance of public money in the economy except for the banks. This has a lot of consequences, most of which are bad. There is no access for the unbanked, higher fees, lower privacy and more credit risk throughout the system.

Where Mark goes astray is by mentioning this oft proposed two-tier model for CBDCs, which is just a fallacy. Fiat money is a liability, and each unit can either be a liability of a central bank or commercial bank, it can’t be both. So if the Fed issues a digital dollar to the banks, and the banks issue private claims to their customers, we haven’t achieved anything, other than maybe a marginally better RTGS system. A real CBDC means the public can hold direct claims against the central bank, as it does today with cash.

Now, this is the point at which the skeptics say “what about disintermediation of the banks?” To that I say: so what? If lending via depository institutions (as opposed to via the bond market, money markets, etc) is a good, then the market will adjust to provide it. One way to think about the existing two-tier model is that savers are forced to subsidize borrowers. E.g., I want to make payments, so I have to open a checking account, for which the bank pays me no interest. The same model will exist with CBDCs, it’s just that banks will have to pay higher interest to attract deposits, or offer other value-added services.

CBDCs also allow lending via DeFi, which is more price efficient for savers and borrowers, so that will offset any increase in borrowing costs.

Individualism Promotes Benevolence

NYTimes: On average, people in more individualist countries donate more money, more blood, more bone marrow and more organs. They more often help others in need and treat nonhuman animals more humanely. If individualism were equivalent to selfishness, none of this would make sense.

…individualism promotes a more universalist outlook. In focusing on individual rights and welfare, it reduces the emphasis on groups — and the differences between “us” and “them” that notoriously erode generosity toward those outside one’s own circle.

See also my posts Globalization and the Expanding Moral Circle and Testing Doux Commerce in the Lab.

Should you make it easier for people to apply?

We study how search frictions in the labor market affect firms’ ability to recruit talented workers. In a field experiment in Ethiopia, we show that an employer can attract more talented applicants by offering a small monetary incentive for making a job application. Estimates from a structural model suggest that the intervention is effective because the cost of making a job application is large, and positively correlated with jobseeker ability. We provide evidence that this positive correlation is driven by dynamic selection. In a second experiment, we show that local recruiters underestimate the positive impacts of application incentives.

That is from a new AER piece by Girum Abebe, A. Stefano Caria, and Esteban Ortiz-Ospina.  I find this claim very interesting, though not completely general.  You will note these results are for clerical positions in Ethiopia, and note further “The impact of ability of application incentives is driven by women, and by those jobseekers who are currently unemployed and less-experienced.”  It is possible that the ease of application improves the applicant pool for those with a confidence gap, yet who are talented nonetheless.  I might add that the easy nature of the Emergent Ventures application (it really doesn’t take long and requires no reference letters or vita) reflects a similar logic.

In the context of this study, it is not just that some of the higher quality candidates apply for the money, rather the money is also a signal that the application process truly is open.  Otherwise why pay for applicants?

That said, for jobs or awards that are more creative than just clerical labor, you want to give each application close scrutiny and that may militate against encouraging more and more applicants.  You might even want “knowing to apply in the first place” to be the biggest test standing before the final prize.  What better way to test for networks?

So the mix of “hard to know about at all, easy to apply once you do” will in fact fit some situations fairly well.

Austin Vernon on digital dollars (from my email)

I was curious about if banks had many use cases for stablecoins, so I talked to [redacted] who works at a nationwide bank that focuses on small business lending. The use case he mentioned was that sometimes they need cash very quickly to stay within their requirements but wires are slow and cumbersome. If you could use a crypto network, the settlement time in minutes would be a big advantage.

The mechanics don’t quite work out because they would also want to use a product that does not change valuations compared to dollars. Stabecoins should fit the bill, but to transfer stablecoins from one bank account to another you would have to wire or ACH someone like Coinbase, do the transaction on chain, then withdraw the money from coinbase. So it would not be fast.

It is possible to imagine where every bank has their own stablecoin backed by US dollars they hold 1:1. It’d be like the days of banks issuing their own gold back notes. If Alice Bank needed more USD, they could borrow from Bob Bank. The actual mechanism might be that Bob Bank uses cash reserves to instantly create USDB and sends the USDB to Alice Bank’s wallet. Alice Bank then goes to Uniswap and trades USDB for their own USDA stablecoin. Alice Bank then retires those stablecoins and releases cash from their stablecoin cash reserves into their general fund. Any customer of Alice Bank or Bob Bank could do this same transaction with other bank customers to have cash faster than an ACH.

Can this happen today? Uniswap 3.0 is a leap forward for adding liquidity for automated market making and is especially beneficial for stablecoin transactions. There are practical limits on small transaction sizes and very large transaction sizes. The biggest practical transaction is limited by liquidity in the trading pools. Uniswap 3.0 should make this much larger than previous automated market makers, the actual amount depends on how much liquidity the market makers provide. The smallest size is limited by fees. Uniswap is launching Layer 2 scaling very soon, but the scaling is optimistic roll ups that utilize fraud proofs. If the banks were only transacting in Layer 2 this would not be a problem, but with fraud proofs it can take one week to take funds out of Layer 2 into the main Layer 1 chain. ZK-SNARK based roll ups would fix this, allowing instant settlement, and are progressing rapidly, but aren’t available yet. Blockchain technologies are still somewhat immature for this use case, but that capability is rapidly approaching.

Banks are so regulated they may not want to get involved without regulators giving them a nod. If the government favors a digital dollar, they may not want to give that nod. I think China has made its preference clear. They want a digital yuan and independent crypto networks will be subordinated. Very soon governments and central banks might have a choice between writing 100 pages of regulation that clarify standards for registered banks creating stablecoins and de facto creating a digital dollar system or embarking on a very large project to create their own digital dollar that requires much more work and owning implementation risk.

Will be fun to watch!

Fractional Dosing Trials Now!

Fractional dosing has the potential to massively increase the supply of COVID vaccine. The Moderna Phase I clinical trial and Pfizer Phase I/II trials already indicated a substantial immune response with smaller doses but the vaccine companies are under-incentivized to run additional fractional dosing trials (they won’t gain trillions, at best they will gains billions and might even lose some profit) and governments and private organizations are not picking up the ball. There are just two small trials underway that I am aware of:

N.B. now that we know that the vaccines work. we don’t need to study every dosage for efficacy against the virus. Instead of efficacy studies we can study how the vaccine is working in the body compared to those fully immunized, immunogencity trials (which is what the above trials are doing) and then use data and theory to infer effectiveness. If we felt it necessary to study effectiveness, human challenge trials would be ideal in this situation as you can study gradually smaller doses with little risk to the patients. But given the urgency, immunogenicity trials should provide enough information to make decisions on the ground. To limit risk, one could do a half-dose on the second dose or one could do a half-dose in people under the age of 50. Both of these regimens would still create significant increases in supply. Recall that in 2018, facing a yellow fever epidemic and a shortage of vaccine, Brazil used 1/5th doses to break the epidemic.

There are no guarantees but the world is ignoring a potential trillion dollar bill lying on the sidewalk.

Hat tip for discussion: Witold and Amrita.