Category: Economics
Some game theory of Greenland
It is commonly assumed that the U.S. “acquiring” Greenland, whatever that might mean, will result in greater U.S. control of the territory. Along some dimensions that is likely. But it is worth pondering the equilibrium here more seriously.
I observe, in many locations around the world, that indigenous groups end up with far more bargaining power than their initial material resources might suggest. For instance, in the United States Native Americans often (not always) can exercise true sovereignty. The AARP cannot (yet?) say the same. In Mexico, indigenous groups have blocked many an infrastructure project.
One reason for these powers is that, feeling outmatched, the indigenous groups cultivate a temperament of “orneriness” and “being difficult.” Some of that may be a deliberate strategic stance, some of it may be heritage from having been treated badly in the past and still lacking trust, and some of it may, over time, be acquired culture as the strategic stance gets baked into norms and behavior patterns.
Often, in these equilibria, the more nominal power you have over the indigenous group, the more orneriness they will have to cultivate. If you only want a few major concessions, sometimes you can get those better as an outsider. A simple analogy is that sometimes a teenager will do more to obey a grandparent than a parent. Fewer issues of control are at stake, and so more concessions are possible, without fear of losing broader autonomy.
So a greater American stake in Greenland, however that comes about, may in some regards end up being counterproductive. And these factors will become more relevant as more resource and revenue control issues come to the table. For some issues it may be more useful having Denmark available as “the baddie.”
It is worth thinking through these questions in greater detail.
The Borda Count is the Best Method of Voting
It’s well known that the voting methods we use are highly defective, as they fail to meet fundamental criteria like positive responsiveness, the Pareto principle, and stability. Positive responsiveness (monotonicity) means that if a candidate improves on some voters’ ballots, this should not reduce the candidate’s chances of winning. Yet, many voting methods, including runoffs and ranked-choice voting, fail positive responsiveness. In other words, candidates who became more preferred by voters can end up losing when they would have won when they were less preferred! It’s even more shocking that some voting systems can fail the Pareto principle, which simply says that if every voter prefers x to y then the voting system should not rank y above x. Everyone knows that in a democracy a candidate may be elected that the minority ranks below another possible candidate but how many know that there are democratic voting procedures where a candidate may be elected that the majority ranks below another possible candidate or even that democratic voting procedures may elect a candidate that everyone ranks below another possible candidate! That is the failure of the Pareto principle and the chaos results of McKelvey–Schofield show that this kind of outcome should be expected.
Almost all researchers in social choice understand the defects of common voting systems and indeed tend to agree that the most common system, first past the post voting, is probably the most defective! But, as no system is perfect, there has been less consensus on which methods are best. Ranked choice voting, approval voting and the Borda Count all have their proponents. In recent years, however, there has been a swing towards the Borda Count.
Don Saari, for example, whose work on voting has been a revelation, has made strong arguments in favor of the Borda Count. The Borda Count has voter rank the n candidates from most to least preferred and assigns (n-1) points to the candidates. For example if there are 3 candidates a voter’s top-ranked candidate gets 2 points, the second ranked candidate gets 1 point and the last ranked candidate 0 points. The candidate with the most points overall wins.
The Borda Count satisfies positive responsiveness, the Pareto principle and stability. In addition, Saari points out that the Borda Count is the only positional voting system to always rank a Condorcet winner (a candidate who beats every other candidate in pairwise voting) above a Condorcet loser (a candidate who loses to every other candidate in pairwise voting.) In addition, all voting systems are gameable, but Saari shows that the Borda Count is by some reasonable measures the least or among the least gameable systems.
My own work in voting theory shows, with a somewhat tongue in cheek but practical example, that the Borda Count would have avoided the civil war! I also show that other systems such as cumulative voting or approval voting are highly open to chaos, as illustrated by the fact that under approval voting almost anything could have happened in the Presidential election of 1992, including Ross Perot as President.
One reason the Borda Count performs well is that it uses more information than other systems. If you just use a voter’s first place votes, you are throwing out a lot of information about how a voter ranks second and third candidates. If you just use pairwise votes you are throwing out a lot of information about the entire distribution of voter rankings. When you throw out information the voting system can’t distinguish rational from irrational voters which is one reason why the outcomes of a voting system can look irrational.
Eric Maskin has an important new contribution to this literature. Arrow’s Independence of Irrelevant Alternatives (IIA) says that if no voters change their rankings of x and y then the social ranking of x and y shouldn’t change. In other words, if no voter changes their ranking of Bush and Gore then the outcome of the election shouldn’t change regardless of how Nader is ranked (for the pedantic I exclude the case where Nader wins.) The motivation for IIA seems reasonable, we don’t want spoilers who split a candidate’s vote allowing a less preferred candidate, even a Condorcet loser to win. But IIA also excludes information about preference intensity from the voting system and throwing out information is rarely a good idea.
What Maskin shows is that it’s possible to keep the desirable properties of IIA while still measuring preference intensity with what he calls modified IIA, although in my view a better name would be middle IIA. Modified or middle IIA says that an alternative z should be irrelevant unless it is in the middle of x and y, e.g. x>z>y. More precisely, we allow the voting system to change the ranking of x and y if the ranking of z moves in or out of the middle of x and y but not otherwise (recall IIA would forbid the social ranking of x and y to change if no voter changes their ranking of x and y).
Maskin shows that the Borda Count is the only voting system which satisfies MIIA and a handful of other desirable and unobjectionable properties. It follows that the Borda Count is the only voting system to both measure preference intensity and to avoid defects such as a spoilers.
The debates over which is the best voting system will probably never end. Indeed, voting theory itself tells us that multi-dimensional choice is always subject to some infirmities and people may differ on which infirmities they are willing to accept. Nevertheless, we can conclude that plurality rule is a very undesirable voting system and the case for the Borda Count is strong.
The circulation of elites, sort of
Is the top tail of wealth a set of fixed individuals or is there substantial turnover? We estimate upper-tail wealth dynamics during the Gilded Age and beyond, a time of rapid wealth accumulation and concentration in the late 19th and early 20th centuries. Using various wealth proxies and data tracking tens of millions of individuals, we find that most extremely wealthy individuals drop out of the top tail within their lifetimes. Yet, elite wealth still matters. We find a non-linear association between grandparental wealth and being in the top 1%, such that having a rich grandparent exponentially increases the likelihood of reaching the top 1%. Still, over 90% of the grandchildren of top 1% wealth grandfathers did not achieve that level.
That is from a new NBER working paper by Priti Kalsi and Zachary Ward.
Canada’s Comparative Advantages
Jay Martin writes a provocative post, Has Canada Become a Jamaican Bobsled Team?
if Canada were to become a state, it would be the third poorest in the country, right behind Alabama.
Everybody talks about the American debt issue, but Canadian households bear more debt relative to their income than any other G7 country. The average Canadian now spends 15% of their income on debt servicing.
This is a stark shift from 2008 when Canada emerged from the global financial crisis with a healthier balance sheet than any other G7 nation.
One indicator I pay close attention to is corporate investment per worker.
Every year, businesses invest in growth – new technology, new projects, new employees or products. If you take the total number that businesses invest during a calendar year, and divide that by the number of active workers in the country, you get the corporate investment per worker.
In the U.S., businesses invest about $28,000 per worker. In Canada, that number is only $15,000—nearly half.
Corporate investment is what drives future productivity, economic growth, and opportunity. The higher the number, the brighter the future.
What is Canada’s comparative advantage?
…we have vast natural resources, we have easy-to-navigate geography, we have the world’s longest coastline that spans three oceans – allowing direct access to every global market, and the largest shared international land border, on the other side of which is the worlds wealthiest, hungriest customer.
We have product. And we have a direct line to the consumer.
We are not capitalizing on these advantages because we have been sold a narrative discouraging investment in the industries where we outperform the world.
…The narrative that Canada should abandon its resource sector to pursue conceptual industries like hydrogen power or electric vehicle production is both misguided and damaging. These are fields where Canada has little experience or infrastructure, we are not competitive, and the evidence is in our economic data.
I would add one point. The issue shouldn’t be framed as extracting natural resources versus high-tech investment, as if mining, oil and gas, lumber and agriculture were simple brute-labor industries. In fact, there is plenty of room for artificial intelligence to dramatically increase the rate at which profitable mines are discovered. Industrial robotics and automation are the future of mining. Agriculture is a high-tech industry from genetic engineering to robotic laser weeding to satellite based based crop monitoring.
Indeed, Canada’s best chance to stay at the forefront of technology lies in exploiting its comparative advantages.
The Acemoglu arguments against high-skilled immigration
Here is Daron Acemoglu’s Project Syndicate piece, mostly critical on high-skilled immigration.
Here is the first argument from Acemoglu:
…one would expect corporate America’s growing need for skilled STEM workers to translate into advocacy for, and investments in, STEM education. But an overreliance on the H-1B program may have broken this link and made American elites indifferent to the widely recognized failures of the US education system. Put differently, the problem may not be a cultural veneration of mediocrity, as Ramaswamy argued, but rather neglect on the part of business leaders, intellectual elites, and politicians.
o1 responds. Here is Acemoglu’s second argument:
Even as H-1B workers boost innovation, their presence may affect the direction innovation takes. My own work shows (theoretically and empirically) that when the supply of skilled labor increases, technology choices start favoring such workers. Over the last several decades, businesses have increasingly adopted technologies that favor high-skill workers and automate tasks previously performed by lower-skill workers. While this trend may have been driven by other factors, too, the availability of affordable high-skill workers for the tech industry plausibly contributed to it.
The third argument about brain drain has enough qualifications and admissions that it isn’t really a criticism. In any case my colleague Michael Clemens, among others, has shown that the brain drain argument applies mainly to very small countries. But if you wish, run it through AI yourself.
If all I knew were this “exchange,” I would conclude that o1 and o1 pro were better economists — much better — than one of our most recent Nobel Laureates, and also the top cited economist of his generation. Noah Smith also is critical.
Via Mike Doherty.
Facts about U.S. employment
First, the labor market is no longer polarizing— employment in low- and middle-paid occupations has declined, while highly paid employment has grown. Second, employment growth has stalled in low-paid service jobs. Third, the share of employment in STEM jobs has increased by more than 50 percent since 2010, fueled by growth in software and computer-related occupations. Fourth, retail sales employment has declined by 25 percent in the last decade, likely because of technological improvements in online retail.
That is from a recent NBER working paper by David J. Deming, Christopher Ong, and Lawrence M. Summers.
Companies in Argentina (from my email)
From Krzysztof Tyszka-Drozdowski:
Every weekend, I try to go through interesting articles about Argentina. Here’s something from La Nación that surprised me: it discusses the relatively weak standing of Argentine companies internationally. (https://www.lanacion.com.ar/opinion/las-empresas-argentinas-ante-un-cambio-de-perfil-nid11012025/):
– only 3 of the top 50 largest Latin American companies are Argentine (22 are Brazilian, 14 Mexican, and 8 Chilean). Moreover, only 7 of the top 100 largest Latin American companies are Argentine.
– there are just about $50 billion invested by Argentine companies abroad; compared to $300 billion from Brazil, $215 billion from Mexico, $140 billion from Chile, and $75 billion from Colombia.
Argentina still has a long way to go!
>By the way, what would be your answer to the question: why is Argentina not Australia? I’m currently reading the book ‘Por qué Argentina no fue Australia’ by Gerchunoff and Fajgelbaum, which discusses this topic.
My podcast with Reason
With Liz Wolfe and Zach Weissmueller:
The link here contains the YouTube video, text description, and links to audio versions at reason.com: https://reason.com/podcast/2025/01/10/tyler-cowen-why-do-we-refuse-to-learn-from-history/
Youtube page for embedding is here: https://www.youtube.com/watch?v=p-Kpyg2mFU8
Lots of about libertarianism and state capacity libertarianism, and The Great Forgetting, food at the end…interesting throughout!
Congestion Tolls versus Congestion Pricing
New York’s new congestion fee appears to be reducing commuting times on key routes (see Tyler and this thread from Michael Ostrovsky). The toll only has two rates, however, on-peak (5 AM to 9 PM on weekdays and 9 AM to 9 PM on weekends) $9 and off-peak ($2.50). I like the way Vitalik Buterin explained a key weakness:
I wish the tolls were dynamic. Price uncertainty is better than time uncertainty (paying $10 more today is fine if you pay $10 less tomorrow, but you can’t compensate being 30 min late for a flight or meeting by being 30 min early to the next one).
Exactly right. Tyler and I make the same point about price controls (ceilings) in Modern Principles. A price ceiling substitutes a time price for a money price. But this isn’t a neutral tradeoff—money prices benefit sellers, while time prices are pure waste (see this video for a fun illustration).
Here in Northern Virginia the toll on I-66 to Washington is dynamic and on-average varies by more than a factor of 6 during peak hours. Everyone complains about congestion pricing when it is first introduced but people get used to it quickly. Albeit in VA we still have the option of paying no-toll which perhaps eases the transition.
Martha
Martha (Netflix): A compelling bio on Martha Stewart. Her divorce from Andrew Stewart happened more than 30 years ago so the intensity of her anger and 
bitterness comes as a surprise. With barely concealed rage, she recounts his affairs and how poorly he treated her. “But didn’t you have an affair before he did?” asks the interviewer. “Oh, that was nothing,” she replies waving it off, “nothing.”
Stewart’s willpower and perfectionism are extraordinary. She becomes the U.S.’s first self-made female billionaire after taking her company public in 1999. Then comes the insider trading case. The amount in question was trivial—she avoided a $45,673 loss by selling her ImClone stock early. Stewart was not an ImClone insider and not guilty of insider trading. However, in a convoluted legal twist, she was charged with attempting to manipulate her own company’s stock price by publicly denying wrongdoing in the ImClone matter. Ultimately, she was convicted of lying to the SEC. It’s worth a slap on the wrist but the lead prosecutor is none other than the sanctiminous James Comey (!) and she gets 5 months in prison.
Despite losing hundreds of millions of dollars and control of her own company, Martha doesn’t give up and in 2015, now in her mid 70s, she creates a new image and a new career starting with, of all things, a shockingly hard-assed roast of Justin Bieber. The Bieber roast leads to a succesful colloboration with Snoop Dogg. Legendary.
Stewart is as compelling a figure as Steve Jobs or Elon Musk. Not entirely likable, perhaps, but undeniably admirable.
My Conversation with the excellent Scott Sumner
Here is the audio, video, and transcript. Here is the episode summary:
Scott joins Tyler to discuss what reading Depression-era newspapers revealed about Hitler’s rise, when fiat currency became viable, why Sweden escaped the worst of the 1930s crash, whether bimetallism ever made sense, where he’d time-travel to witness economic history, what 1920s Hollywood movies get wrong about their era, how he developed his famous maxim “never reason from a price change,” whether the Fed can ever truly follow policy rules like NGDP targeting, if Congress shapes monetary policy more than we think, the relationship between real and nominal shocks, his favorite Hitchcock movies, why Taiwan’s 90s cinema was so special, how Ozu gets better with age, whether we’ll ever see another Bach or Beethoven, how he ended up at the University of Chicago, what it means to be a late bloomer in academia, and more.
And an excerpt:
COWEN: If the Fed had listened to you during the great financial crisis, what would have been the rate of price inflation in 2009, roughly?
SUMNER: I think it would have been a little bit higher than the Fed’s target, but not a lot higher.
COWEN: Say real GDP was going to fall by 2 percent.
SUMNER: You see, that’s what I don’t accept. See, I believe that the fall in real GDP was mostly due to the fall in nominal GDP. We know that the trend rate of growth in nominal GDP had been 5 percent a year going into the slump, and it fell to -3. It’s like an eight-point decline in the growth rate. Now, in a counterfactual where they keep nominal GDP growing at 5 percent a year, let’s say, most of the difference shows up in stronger real growth, and only a small part of the difference shows up in higher inflation. The inflation rate in 2009 was actually around zero. It might have been no more than 2 percent or 3 percent, if nominal growth had been that much higher. Real growth might have been 5 percent higher.
COWEN: This is a point where I think I disagree with you, even though I agree with much of what you’ve said up until now. I worry that by attributing the decline in real GDP to a decline in nominal GDP, that it’s on the verge of being tautologous. Not a literal tautology, given prices don’t move that much — that you’re explaining a thing by itself, and I think it would have been quite possible for real GDP to fall by a few percent.
If we had stabilized the growth path of nominal GDP, we would have had price inflation of, say, 5 percent, which I would have greatly preferred to what we did, to be clear. I think it’s one reason why central banks are reluctant to institute your kind of advice, because they know they’ll be blamed for a price inflation rate of 5 percent. Do you see what I’m saying?
SUMNER: I see what you’re saying, but I think that, in a way, your instincts that it’s almost tautological reflect the fact that you sort of buy into what I’m saying about the interrelationship between real and nominal shocks. We both know that they’re not necessarily at all closely correlated, right? In 2008 and 2009, Zimbabwe had a recession and a hyperinflation at the same time. Their nominal and real economies are going in dramatically different directions. We also know that real and nominal variables are radically different variables.
When our instincts tell us that there’s something tautological about the correlation between real and nominal GDP in the United States, it’s because our instincts have recognized the fact that, in fact, most of the US business cycle is due to nominal shocks interacting with sticky wages. If that hypothesis is true, that model of the business cycle is true for the United States but not for Zimbabwe, then what it’s telling us is that if we can control nominal GDP growth, probably the path of real GDP will also be more stable.
Now, it’s possible that we do succeed in stabilizing nominal GDP growth, and we find out it doesn’t help. But there’s an awful lot of circumstantial evidence to support my claim, because we observe, for instance, in the United States that when nominal GDP is more volatile, so is real GDP. That’s one thing we know. We also know that some of the volatility of nominal GDP comes from very clear monetary policy mistakes that have been made at various periods of time that can be clearly identified.
When we see this show up in similar movements in real output, there’s just a strong presumption that there’s a causal relationship there. Financial markets also seem to treat it like there’s a causal relationship. Financial market responses to Federal Reserve policy shocks seem to reflect a view in the financial markets that these things are important for the real economy.
COWEN: I think my view would be, when you get a very bad recession, it’s typically the combination of negative nominal shocks and significant negative real shocks, often to credit markets. The negative real shocks are not just an epiphenomenon or result of the nominal problem mixed with sticky wages. You have both happening, and the credit market problems don’t just go away if you do your nominal job. Then you get back to these situations where you’ll need a fairly high rate of price inflation to stabilize the growth path of nominal GDP.
You just think credit market shocks are not that important? Like what Charles Kindleberger wrote, you wouldn’t really agree with that economic history? Or how should I frame your view here?
And on cinema and the arts:
SUMNER: Well, there was — I can’t get the quote right exactly, but Susan Sontag said something to the effect of, “Are artistic masterpieces still possible?” Then she said, “Or are we not receptive to the possibility of future masterpieces?” Is the problem they’re not being produced, or that we’re no longer receptive to them? I think it is somewhat of an open question. You can consume so much of any art form, or multiple art forms, that you become a bit jaded.
I don’t know, it would be interesting to think about what younger viewers that are very talented at the arts think of directors like, say, Kubrick as compared to how I view Kubrick. I saw the Kubrick films when they first came out, but he has been very much imitated. So maybe younger viewers would be less impressed by some of his films because they would think, “Well, I’ve seen that before.” Of course, what they saw before was actually after he created that innovative style.
We just have so much material flooding our senses that it may be more difficult. Like, could you imagine someone coming along like Bach or Beethoven in classical music in the next decade and having that impact? Wouldn’t you agree it’s unlikely we’ll get something like that?
Self-recommending, I also liked the part at the very end.
Addendum: Here is commentary from Scott on the CWT.
Evolving Returns to Personality
Weanalyze trends in labor-market returns to psychological traits using data from half a million Finnish men from 2001 to 2015. Cognitive skills’ value declined, while noncognitive skills’ value increased. Our novel findings show that extraversion drives this rise, while conscientiousness remains stable. Extraversion’s rising returns are most pronounced for lower earners and those on the employment margin. These traits predict different labor market paths: extraversion predicts lower education and more work experience, while cognitive ability and conscientiousness lead to higher education and high-paying jobs.
That is from a recent paper by Ramin Izadi and Joonas Tuhkuri.
One early report on congestion pricing in NYC
That is my latest Bloomberg column, here is one bit:
The core version of the plan stipulates a $9 toll for drivers entering Manhattan below and including 60th Street. Implementation is by E-Z Pass, and the tolls can vary in complex ways. But if you don’t cross the line, you don’t pay. So residents below 60th Street are exempt, provided they stay within the zone.
And:
The data do indicate some effective immediate adjustments. Most notably, morning commutes through the major bridges and tunnels into Manhattan have eased. Presumably the tolls have discouraged some drivers whose trips were less important to them, leading to quicker travel times for those drivers willing to pay. Economists typically consider such changes to be an improvement.
Such changes, however, aren’t of much help to native New Yorkers, in particular those living inside the zone. The earliest measurements indicate that traffic within the zone has not eased notably. So far, I would say the biggest beneficiaries of the policy are the wealthier residents of New Jersey and the New York state government, which is now set to take in more revenue.
Whatever you think of those consequences — YMMV, as they say — at least there is now actual data to sift through. You can track it here, and again it is important to stress that these preliminary assessments may change with time.
Many Manhattanites supported the charges on the grounds that they wanted a quieter, cleaner, less congested center city that was more friendly to bicycles and pedestrians. Think of Copenhagen or Amsterdam, if you have ever been. What they may end up getting is a central city more friendly to their cars — and less friendly to outsiders. It remains to be seen if central Manhattan has a path to becoming truly pleasant in the Nordic sense.
I will continue to follow this issue, as new results will be coming in. Of course stiff tolls on those living inside the zone were the correct thing to do. But that is not how politics works.
Should America privatize the postal service?
That is the topic of my latest Bloomberg column, here is one bit:
But Poles did not privatize everything. They generally left water companies and electricity providers in the public sector, for example. This is the second category of privatizations: those that are uncertain in their impact.
Water and electricity are two essential services where there is no easy way to get privatization exactly right. It is simply impractical to have many firms selling the product to a single group of households — not in the same way that, say, many cow farmers can produce and sell cheese. It costs too much to lay the basic piping or wires.
One option is to have a private entity with monopoly privileges but regulated prices. Another is to have a set of “common carrier” wires and allow multiple producers to use the network on regulated terms of access. A third is just to have the government own and run the company.
Involving the private sector may give better incentives for cost reduction as well as innovation, since profit maximization is a strong impetus for those kinds of improvements. The efficiency of the private company, however, is also a source of problems. A private company may be efficient at lobbying the government for cronyist privileges. That may lead to higher prices, overly generous reimbursement for cost increases, tougher barriers to entry, or entrenched technologies that favor the incumbent.
In other words: If embedded in an imperfect system, corporate efficiency is not always a pure virtue.
In the US, privately owned and publicly owned water utilities show, on average, roughly equal performance. Perhaps that is a disappointing result, but it is consistent with the “public choice” theories favored by many free-market economists.
A third kind of privatization is when business adds a layer of activity to a preexisting government function. For instance, some states have “privatized” their Medicaid services by outsourcing Medicaid provision to private health insurers. The Medicaid program has not gone away or been turned over to the private sector — rather, companies have a role in administering the system.
This kind of “layered” privatization, like the second kind of privatization, can work out either for the better or for the worse. One recent study shows this privatization increased the costs of Medicaid significantly without providing offsetting benefits. The private companies have done a good job — for themselves — of extracting more revenue from the system. Yet Medicare Cost Advantage, which creates a private layer of service on top of Medicare, run by insurance companies, does offer significant benefits to those who opt for it.
The lesson here is that talk of “privatization” per se is meaningless without elucidating which kind of privatization is under consideration.
Worth a ponder. Overall I think postal service privatization cannot be too closely tied to crony capitalism if it is going to work.
Richard A. Easterlin, RIP
He was one of the fathers of “happiness economics,” here is a NYT obituary. Via John Chamberlin.