Category: Economics

Rachel Glennerster calls for reforming foreign aid

by  Tyler Cowen in

Aid agencies already try to cover too many countries and sectors, incurring high costs to set up small programs. Aid projects are far too complicated, resembling a Christmas tree weighed down with everyone’s pet cause. With less money (and in the US, very few staff), now is the time to radically simplify. By choosing a few highly cost-effective interventions and doing them at large scale in multiple countries, we would ensure

  • aid funds are spent on highly effective projects;
  • we benefit from the substantial economies of scale seen in development;
  • a much higher proportion of aid money goes to recipient countries, with less spent on consultants; and
  • politicians and the public can more easily understand what aid is being spent on, helping build support for aid.

The entire piece is excellent.

Long-Run Effects of Trade Wars

by  Tyler Cowen in

This short note shows that accounting for capital adjustment is critical when analyzing the long-run effects of trade wars on real wages and consumption. The reason is that trade wars increase the relative price between investment goods and labor by taxing imported investment goods and their inputs. This price shift depresses capital demand, shrinks the long-run capital stock, and pushes down consumption and real wages compared to scenarios when capital is fixed. We illustrate this mechanism by studying recent US tariffs using a dynamic quantitative trade model. When the capital stock is allowed to adjust, long-run consumption and wage responses are both larger and more negative. With capital adjustment, U.S. consumption can fall by 2.6%, compared to 0.6% when capital is held fixed, as in a static model. That is, capital stock adjustment emerges as a dominant driver of long-run outcomes, more important than the standard mechanisms from static trade models — terms-of-trade effects and misallocation of production across countries.

That is from a new NBER working paper by David Baqaee and Hannes Malmberg.  Bravo to the authors for producing this result so quickly.  And…as a side note…other forms of taxing capital can be bad too!  Really.  A number of people have spent the last twenty years tying themselves into knots on this question.

Pandemic Preparation Without Romance

by  Alex Tabarrok in

My latest paper, Pandemic Preparation Without Romance, has just appeared at Public Choice.

Abstract: The COVID-19 pandemic, despite its unprecedented scale, mirrored previous disasters in its predictable missteps in preparedness and response. Rather than blaming individual actors or assuming better leadership would have prevented disaster, I examine how standard political incentives—myopic voters, bureaucratic gridlock, and fear of blame—predictably produced an inadequate pandemic response. The analysis rejects romantic calls for institutional reform and instead proposes pragmatic solutions that work within existing political constraints: wastewater surveillance, prediction markets, pre-developed vaccine libraries, human challenge trials, a dedicated Pandemic Trust Fund, and temporary public–private partnerships. These mechanisms respect political realities while creating systems that can ameliorate future pandemics, potentially saving millions of lives and trillions in economic damage.

Here’s one bit:

…in the aftermath of an inadequate government response to an emergency, we often hear calls to reorganize and streamline processes and to establish a single authority with clear responsibility and decision-making power to overcome bureaucratic gridlock. By centralizing authority, it is argued that the government can respond more swiftly and effectively, reducing the inefficiencies caused by a fragmented system.

Yet, the tragedy of the anti-commons was also cited to explain the failure of the government after 9/11. Indeed, the Department of Homeland Security was created to centralize a fragmented system and allow it to act with alacrity. Isn’t a pandemic a threat to homeland security? And what about the Swine Flu pandemic of 2009? While not nearly as deadly as the COVID pandemic, 60 million Americans were sickened, some 274 thousand hospitalized with over 12 thousand deaths (Shresha et al. 2011). Wasn’t this enough practice to act swiftly?

Rather than advocating for a reorganization of bureaucracies, I propose accepting the tragedy of the anti-commons as an inevitable reality. The tragedy of the commons is an equilibrium outcome of modern-day bureaucracy. Bureaucracy has its reasons and some of those reasons may even be reasonable (Wittman 1995). It is too much to expect the same institution to respond to the ordinary demands of day-to-day politics and to the very different demands of emergencies. Indeed, when an institution evolves to meet the demands of day-to-day politics it inevitably develops culture, procedures and processes that are not optimized for emergencies.

Instead of rearranging organization charts we should focus on what has proven effective: the creation of ad-hoc, temporary, public–private organizations. Two notable examples are Operation Warp Speed in the United States and the British Vaccine Taskforce. These entities were established quickly and operated outside regular government channels, free from the typical procurement, hiring, or oversight rules that hinder standard bureaucracies.

…Operation Warp Speed exemplified the “American Model” of emergency response. Rather than relying on command-and-control or government production, the American Model leverages the tremendous purchasing power of the US government with the agility and innovation of the private sector.

The only problem with the “American Model” was its inconsistent application.

I am especially fond of this paper because it is the first, to my knowledge, to cite separate papers from Alex, Maxwell and Connor Tabarrok.

Addendum: This paper isn’t about lockdowns. It’s about avoiding lockdowns!

“Growth is getting harder to find, not ideas”

by  Tyler Cowen in

Here is the thread, here is the paper:

Relatively flat US output growth versus rising numbers of US researchers is often interpreted as evidence that “ideas are getting harder to find.” We build a new 46-year panel tracking the universe of U.S. firms’ patenting to investigate the micro underpinnings of this claim, separately examining the relationships between research inputs and ideas (patents) versus ideas and growth. Over our sample period, we find that researchers’ patenting productivity is increasing, there is little evidence of any secular decline in high-quality patenting common to all firms, and the link between patents and growth is present, differs by type of idea, and is fairly stable. On the other hand, we find strong evidence of secular decreases in output unrelated to patenting, suggesting an important role for other factors. Together, these results invite renewed empirical and theoretical attention to the impact of ideas on growth. To that end, our patent-firm bridge, which will be available to researchers with approved access, is used to produce new, public-use statistics on the Business Dynamics of Patenting Firms (BDS-PF).

By Teresa C. Fort, Nathan Goldschlag, Jack Liang, Peter K. Schott, and Nikolas Zolas.  Via Basil Halperin.

The 1982 IHS seminar I attended

by  Tyler Cowen in

It was a week long, in Hartford, CT, sponsored by the Institute for Humane Studies.  The four faculty were:

Robert Nozick

Israel Kirzner

John Gray

Ronald Max Hartwell

Those were the only faculty, for one week — pretty amazing!  Libertarianism and classical liberalism quite simply had much higher intellectual status in those days.  You could not assemble a comparable group of lecturers today.

I thank David Price for jogging my memory here.

My Blind Spots

by  Alex Tabarrok in

“Based on everything I’ve ever asked you, what do you think my biggest blind spots are?” ChatGPT replies:

Here’s a speculative, analytical take based on your past questions and style of interaction:

1. Underestimating Non-Market Frictions in Implementation
You’re extremely sharp on incentives, regulation, and institutional design, especially in economic theory and historical analysis. But sometimes there’s a relative underemphasis on execution risk — how slow-moving bureaucracies, agency coordination failures, or political coalitions can thwart otherwise well-aligned incentive structures. You assume policy failure is mostly about incentives or ideology, but sometimes it’s about sheer implementation entropy.

Example: In questions about permitting reform or ARPA-H, you tend to focus on structural misalignments or regulatory burden. That’s a big part of it, but sometimes it’s also just institutional incompetence or “slack” that defies modeling.

2. Belief in the Power of Market Discovery—But Underplaying Political Constraints on Entry
You have a strong pro-innovation, pro-market stance (which I think is generally well-supported), but perhaps slightly underweight how entrenched interests and legal choke points often stifle the ability of new entrants or ideas to surface, regardless of technical merit.

Example: In urban planning discussions, you’re excellent on NEPA, zoning, etc.—but some of the constraints (e.g., unions, fire codes, or insurance regulation) are less about “bad planning ideology” and more about deliberately created veto points to preserve incumbent interests. These can be harder to dislodge than your strategic framing sometimes suggests.

3. Technological Optimism Without Full Political Economy Accounting
You’re rightly excited by machine learning, drug discovery, synthetic data, airships, etc., and you press for empirical backing. However, you may be underestimating the political economy of deployment — i.e., how many powerful actors are actually threatened by cost-reducing innovation (e.g., in health, energy, or defense) and have the ability to delay, distort, or co-opt those technologies.

Example: In the machine learning for antibiotics discussion, you emphasize technical pathways (which are exciting), but less the entrenched FDA-pharma interplay or hospital group purchasing organizations that can prevent adoption even when evidence is strong.

4. Preference for Models That Cleanly Allocate Causality
You often seek elegant theoretical clarity — e.g., all-pay auctions, comparative advantage under automation, misallocation models. But the real world often features multiple overlapping distortions (e.g., taxes, zoning, union rules, insurance, etc.) that interact nonlinearly. Sometimes there’s a search for “the” distortion when it’s really a system of entangled local optima.

5. Policy-First Lens vs. Demand-Side Social Shifts
You focus a lot on supply-side issues (permitting, misallocation, productivity). This is correct and important. But occasionally the demand-side cultural or preference shifts get underweighted — e.g., the declining taste for urban density, aversion to risk, or increasing parental control over children’s autonomy. These may not be fixable through supply-side tweaks alone.

Hat tip: Aashna Doshi.

What should I ask John Arnold?

by  Tyler Cowen in

Yes, I will be doing a Conversation with him.  John might be the smartest person I know about the energy sector and also about philanthropy.  Here is the opening of his Wikipedia entry:

John Douglas Arnold (born 1974) is an American philanthropist, former Enron executive, and founder of Arnold Ventures LLC, formerly the Laura and John Arnold Foundation. In 2007, Arnold became the youngest billionaire in the U.S. His firm, Centaurus Advisors, LLC, was a Houston-based hedge fund specializing in trading energy products that closed in 2012. He now focuses on philanthropy through Arnold Ventures LLC. Arnold is a board member of Breakthrough Energy Ventures and since February 2024, is a member of the board of directors of Meta.

So what should I ask him?

Markets expand to fill empty spaces

by  Tyler Cowen in

How does a start-up founder hire a software engineer or a tech worker find a date in 2025? They could share a job posting on LinkedIn, log on to a dating app — or leave a handwritten note in a Waymo.

That’s what Influur CEO Alessandra Angelini was thinking when she and Jennifer Lo Chan, Influur’s head of marketing, tucked a piece of paper into a self-driving taxi’s center console on a recent trip to San Francisco.

“Looking to hire senior software engineers to work on AI/music project,” said the note, a retro touch in a futuristic setting, with the company’s website and Angelini’s email scrawled below. That same day, another Waymo rider snapped a photo of the note and posted it on the social media platform X, where it has been reshared nearly 200 times, received more than 4,000 likes and more than 300,000 views…

A few days later, another handwritten ad found in a Waymo was shared on X from a single man looking for a date. The bachelor described himself as a 26-year-old who works in tech but “doesn’t make it my whole personality” and left a phone number for interested parties to text. The post has gotten more than 200 replies.

Here is more from Lisa Bonos at The Washington Post.

Problems in Treasury markets (from my email)

by  Tyler Cowen in

Max writes to me:

“Hope you’re doing well. And the craziness in the world hasn’t been affecting you too much. I know I’ve written to you about cash-treasury basis a couple of times over the years. The situation has unfortunately become somewhat more acute and has started to get wider media attention.

There are some good accounts of the issue in the media, by Matt Levine for example But, there are a few things being missed even in high quality media accounts:

  • The issue is now a global one, which has not been the case historically. German bunds now trade at a negative swap spread (the yield on cash bonds is higher than on similar tenor swaps). This is a fairly recent development. It suggests the problem has shifted from being primarily a  shortage of USD cash (though that is still true to a significant degree), to a global oversupply of longer dated bonds.
  • A crunch in repo funding does not seem to be primarily responsible here. Balance sheet efficient methods of intermediating repo (sponsored repo) are more available now than they have been in the past. And they haven’t solved the problem.
  • Permitting bond basis to fluctuate is quite pernicious. It meaningfully reduces the negative correlation between long bonds and risk assets. Meaningully reducing the attractiveness of holding them in a portfolio and increasing funding costs.
  • At this point, global government debt outstanding is so large basis is so high that failing to correct this issue has a meaningful budget impact. Not only in the US, but across the Western world.

I think there is a straightforward solution: The Fed has clear cut authority to trade Treasury forwards during open market operations. Which would alleviate the pressure on dealer balance sheets, relieve market dysfunction, and help restore basis to more natural levels. And do so without relying on emergency authorities.”

America’s Tourism Deficit: How the French Are Winning the Currency War One Croissant at a Time

by  Alex Tabarrok in

Every year, American tourists pour billions of dollars into France, wandering the Louvre, sipping overpriced espresso in Montmartre, and snapping selfies along the Seine—while far fewer French tourists bother making the reverse pilgrimage to admire, say, Disney World. The result? A massive tourism deficit.

On paper, this reflects wealth differentials and revealed preferences – Americans, being richer and more numerous than the French, express a high demand for old world Parisian experiences. But behind this innocent wanderlust is something more sinister. When Americans vacation in France, that’s counted as a US import of tourism. When French people vacation here—fewer, more begrudgingly—that’s a US export. So voilà, the tourism deficit creates a trade deficit, an excess of imports over exports!

The tourism deficit means there is a steady leak of the world’s reserve currency into the hands of a nation famous for its cheese, wine, and suspicion of American capitalism. France, using little more than museums and moodiness, is accumulating dollars from innocent American travelers. And they’re not just hoarding them for kicks. Those dollars are claims on real assets. First it’s a Napa vineyard. Then a Brooklyn fintech startup. Eventually, who knows? The Port of Long Beach? The Federal Reserve’s snack bar?

Make no mistake: France’s true comparative advantage isn’t wine or luxury goods—it’s the ruthless extraction of tourism dollars, performed with flawless precision, a disdainful shrug, and a little help from Emily in Paris. We’re being out-traded, one overpriced pastry at a time, by a nation whose strategic horizon spans centuries—and whose Netflix marketing is impeccable.

The political implications are, shall we say, obvious.

From now on, we demand a tourism balance. No more visa waivers, no more jet-setting to Provence until they send an equal number of French tourists to Branson, Missouri. It’s high time the French get over their Napoleon complex and start to appreciate American corn dogs and Dolly Parton. France needs to treat us with the same respect as the friendly countries that enthusiastically dispatch high-spending tourists to our shores.

It’s one-for-one, or the deal is off. Tourism parity or rien! Point final.

AI on Tariffs

by  Alex Tabarrok in

There is some evidence that the White House used AI to come up with a quick and dirty (and incorrect) formula to correlate tariff rates with trade deficits. I have no problem with using AI, I think they just didn’t go far enough. The White House should have asked the AI a question like this:

Suppose the US imposed tariffs on other countries in an effort to reduce bilateral trade deficits to zero using the formula for the tariff of (exports-imports)/imports. What do you estimate would be the consequences of such a policy?

Answer (O1 Pro):

A tariff schedule keyed to bilateral deficits—imposing a rate equal to (US exports − US imports) / US imports—would be extremely disruptive and unlikely to achieve its goal. Key points:

  1. Immediate Impact on Prices and Supply Chains

    • If the US imports more than it exports from a given country, (exports − imports) is negative, making the tariff percentage negative unless the formula is modified (e.g., by absolute value). In practice, one would presumably set a positive tariff aimed at closing the bilateral gap.

    • Such high tariffs would sharply raise import prices for both consumers and firms reliant on foreign inputs. It would encourage attempts to switch suppliers but at the cost of disrupting supply chains and increasing production expenses.

  2. Retaliation and Trade War Dynamics

    • Targeted countries would almost certainly retaliate with their own tariffs. Retaliation would damage US export sectors—especially agriculture and high-value manufacturing—and risk a broader trade war.

    • Countries with a US trade surplus would apply punitive measures that shift US business to alternative suppliers, undermining the very exports the policy is meant to foster.

  3. Misalignment with Macroeconomic Fundamentals

    • Bilateral imbalances reflect global production patterns, comparative advantage, and macro factors like savings–investment imbalances and currency flows. A country that persistently imports more overall does so because it’s running a capital account surplus. Tariffs don’t fundamentally alter that global saving–investment arithmetic.

    • If the US still runs an overall current account deficit, restricting imports from some countries will simply shift deficits to others. Global supply chains will rearrange, but the total US deficit will be largely unchanged.

  4. Violation of Trade Agreements

    • Such a policy almost certainly violates WTO rules, since it imposes discriminatory tariffs based on bilateral imbalances. The resulting litigation and sanctions would add more uncertainty.

  5. Net Effect: Reduced Efficiency, Higher Costs

    • Economically, the net effect is negative. Costs rise for US consumers and US manufacturers reliant on imported inputs. Retaliatory measures reduce export opportunities. Overall trade volume shrinks. Growth slows, and no fundamental improvement in the US external balance occurs.

In summary, a bilateral “deficit-equalizing” tariff policy would create severe distortions, invite retaliation, and do little to fix the structural causes of US trade deficits. Empirical evidence and standard trade theory both suggest it would reduce economic efficiency and likely harm US producers and consumers alike.

Good answer.

Hat tip: SB.

A Blueprint for FDA Reform

by  Alex Tabarrok in

The new FDA report from Joe Lonsdale and team is impressive. It has a lot of new material, is rich in specifics and bold in vision. Here are just a few of the recommendation which caught my eye:

From the prosaic: GMP is not necessary if you are not manufacturing:

In the U.S., anyone running a clinical trial must manufacture their product under full Good Manufacturing Practices (GMP) regardless of stage. This adds enormous cost (often $10M+) and more importantly, as much as a year’s delay to early-stage research. Beyond the cost and time, these requirements are outright irrational: for example, the FDA often requires three months of stability testing for a drug patients will receive after two weeks. Why do we care if it’s stable after we’ve already administered it? Or take AAV manufacturing—the FDA requires both a potency assay and an infectivity assay, even though potency necessarily reflects infectivity.

This change would not be unprecedented either. By contrast, countries like Australia and China permit Phase 1 trials with non-GMP drug with no evidence of increased patient harm.

The FDA carved out a limited exemption to this requirement in 2008, but its hands are tied by statute from taking further steps. Congress must act to fully exempt Phase 1 trials from statutory GMP. GMP has its place in commercial-scale production. But patients with six months to live shouldn’t be denied access to a potentially lifesaving therapy because it wasn’t made in a facility that meets commercial packaging standards.

Design data flows for AIs:

With modern AI and digital infrastructure, trials should be designed for machine-readable outputs that flow directly to FDA systems, allowing regulators to review data as it accumulates without breaking blinding. No more waiting nine months for report writing or twelve months for post-trial review. The FDA should create standard data formats (akin to GAAP in finance) and waive documentation requirements for data it already ingests. In parallel, the agency should partner with a top AI company to train an LLM on historical submissions, triaging reviewer workload so human attention is focused only where the model flags concern. The goal is simple: get to “yes” or “no” within weeks, not years.

Publish all results:

Clinical trials for drugs that are negative are frequently left unpublished. This is a problem because it slows progress and wastes resources. When negative results aren’t published, companies duplicate failed efforts, investors misallocate capital, and scientists miss opportunities to refine hypotheses. Publishing all trial outcomes — positive or negative—creates a shared base of knowledge that makes drug development faster, cheaper, and more rational. Silence benefits no one except underperforming sponsors; transparency accelerates innovation.

The FDA already has the authority to do so under section 801 of the FDAAA, but failed to adopt a more expansive rule in the past when it created clinicaltrials.gov. Every trial on clincaltrials.gov should have a publication associated with it that is accessible to the public, to benefit from the sacrifices inherent in a patient participating in a clinical trial.

To the visionary:

We need multiple competing approval frameworks within HHS and/or FDA. Agencies like the VA, Medicare, Medicaid, or the Indian Health Service should be empowered to greenlight therapies for their unique populations. Just as the DoD uses elite Special Operations teams to pioneer new capabilities, HHS should create high-agency “SWAT teams” that experiment with novel approval models, monitor outcomes in real time using consumer tech like wearables and remote diagnostics, and publish findings transparently. Let the best frameworks rise through internal competition—not by decree, but by results.

…Clinical trials like the RECOVERY trial and manufacturing efforts like Operation Warp Speed were what actually moved the needle during COVID. That’s what must be institutionalized. Similarly, we need to pay manufacturers to compete in rapidly scaling new facilities for drugs already in shortage today. This capacity can then be flexibly retooled during a crisis.

Right now, there’s zero incentive to rapidly build new drug or device manufacturing plants because FDA reviews move far too slowly. Yet, when crisis strikes, America must pivot instantly—scaling production to hundreds of millions of doses or thousands of devices within weeks, not months or years. To build this capability at home, the Administration and FDA should launch competitive programs that reward manufacturers for rapidly scaling flexible factories—similar to the competitive, market-driven strategies pioneered in defense by the DIU. Speed, flexibility, and scale should be the benchmarks for success, not bureaucratic checklists. While the drugs selected for these competitive efforts shouldn’t be hypothetical—focus on medicines facing shortages right now. This ensures every dollar invested delivers immediate value, eliminating waste and strengthening our readiness for future crises.

To prepare for the next emergency, we need to practice now. That means running fast, focused clinical trials on today’s pressing questions—like the use of GLP-1s in non-obese patients—not just to generate insight, but to build the infrastructure and muscle memory for speed. 

Read the whole thing.

Hat tip: Carl Close.