Category: Economics

My charitable giving advice from 2007

I had a chapter on this topic in my 2007 book Discover Your Inner Economist, with much of the material based on blog posts from 2004-2006 or so.  No, I was not recommending particular charities, but rather considering how to think about giving more generally.  Since that time there has been so much discussion of the topic in EA communities, I thought it would be interesting to see how well my earlier recommendations have held up.

I argued for the following:

1. Do not give money to beggars, it only encourages rent-seeking for further transfers.

2. Accordingly, many donations should be surprise donations.  In the meantime, limit the ability of people to invest resources in donation-seeking.

3. Give to causes where your giving will have a positive contagion effect upon others.

4. The promise of matching grants is not always very effective in stimulating larger donations.

5. Many forms of ostensible charity in fact have negative effectiveness.  For instance parachuting for charity can lead to a good number of injuries and not bring much positive attention to the charitable cause, at least not relevant to alternatives.

6. I endorse cash transfers, provided you don’t encourage people to work too hard to receive them.

7. There is a cautious endorsement of micro-credit.

8. A fundamental problem is that a lot of giving is driven by motives of affiliation rather than effectiveness.

#8 seems more true than ever before and it is now widely recognized.  #3, while discussed in the current literature, still seems an undervalued point.

On the revisions, microcredit has lost some status since that time, though it still seems modestly effective and it has the further virtue of being self-sustaining.  Cash transfers remain a popular and reasonably effective option, although a) sometimes they are much more effective with mentoring, b) some recent Chris Blattman results suggest they may wash out in the longer run, and c) sometimes cash transfers raise expectations without making the recipients happier in the longer run (a recent paper measures this, does anyone have the link handy?  From Ariella, link is here).

Overall I overrated the dangers of charitable rent-seeking, and underrated the dangers of the bureaucratization of altruism?  In any case, it was interesting to go back and read my earlier thoughts on the question.

Taxing Top Incomes in a World of Ideas

We’ve covered this before, but now it is out in the JPE and worthy of a repeat, because you won’t see its lessons promulgated in too many other places.  From Charles Jones:

This paper considers top income taxation when (i) new ideas drive economic growth, (ii) the reward for successful innovation is a top income, and (iii) innovation cannot be perfectly targeted by a research subsidy—think about the business methods of Walmart, the creation of Uber, or the “idea” of Amazon. These conditions lead to a new force affecting the optimal top tax rate: by slowing the creation of new ideas that drive aggregate GDP, top income taxation reduces everyone’s income, not just income at the top. This force sharply constrains both revenue-maximizing and welfare-maximizing top tax rates.

In other words, we should be very cautious about raising taxes on top earners.

Get the Lead Out of Turmeric!

Exposure to lead especially in childhood can have a lifetime of negative consequences:

According to the WHO, there is no known safe level of lead exposure. Relatively low levels of lead exposure that were previously considered ‘safe’ have been shown to damage children’s health and impair their cognitive development. Lead is a potent neurotoxin that, with even low-level exposure, is associated with a reduction in IQ scores, shortened attention spans and potentially violent and even criminal behaviour later in life. Children under the age of 5 years are at the greatest risk of suffering lifelong neurological, cognitive and physical damage and even death from lead poisoning.

In recent decades, some countries have begun to address the problem by removing lead from gasoline, paint, and pipes. Lead poisoning, however, remains a serious problem in South Asian countries such as Bangladesh. But where is the lead coming from?

Looks nice but what gives turmeric that pleasing yellow-orange look? Maybe, lead.

Incredibly, one small study that examined the blood of pregnant women in Bangladesh for lead isotopes concluded that a major source of lead exposure is from turmeric consumption. Turmeric is a spice used in India and Bangladesh and other South East Asian both in cooking and for health. Lead from the soil could enter turmeric but the major cause seems to be lead pigments that are illegally added to turmeric to give it a pleasing looking yellow color. Lead in spices can exceed national limits by hundreds of times.

Our results indicate that turmeric Pb concentrations were as high as 1151 μg/g (Table 2). Eight of 28 market turmeric samples contained Pb above the 2.5 μg/g Government of Bangladesh limit for Pb in turmeric (Table S6). Using the simplified bioaccessibility extraction test, prior studies reported that the bioaccessible fraction of Pb in turmeric varied from 42.9 to 70% of total Pb. (12,39) Given that turmeric is used in dishes containing tamarind and other acidic ingredients, cooking could further increase the bioaccessibility of the Pb. (40) Other researchers hypothesized that PbCrO4 is added to turmeric to enhance its color or weight, but they did not test any turmeric processing powders to assess molar Pb/Cr ratios or Pb speciation. (12) We found that the yellow pigment powders used in turmeric processing contained 6–10% Pb by weight (61 870–101 300 μg/g Pb). Both pigment and turmeric samples also contained elevated chromium (Cr) concentrations, with average Pb/Cr molar ratios of 1.3 ± 0.06 (2 SD) and 1.1 ± 0.8 (2 SD), respectively. X-ray diffraction analyses indicated that all three pigment samples contained lead chromate (PbCrO4, 10–15%), that two of the pigments also contained lead carbonate (PbCO3, 2–3%), and that one also contained lead sulfate (PbSO4, 3%). Because PbCO3 and PbSO4 have a greater bioaccessibility than PbCrO4, our results support the parallel findings of high turmeric bioaccessibility reported in other studies. (12,39,41)

Respondents described turmeric, primarily purchased as a loose powder, as one of three essential spices consumed daily, alongside chili powder and cumin. Women reported adding turmeric in heaping spoonfuls to curries and other dishes for at least one meal per day.

I’d also worry about lead adulteration of safron, another yellow spice. The problem is not limited to Bangladesh, significant amounts of lead have been found in spices sold in in New York.

Addendum: Givewell has a good rundown on Pure Earth a charity working to address this problem.

Hat tip: Alexander Berger.

Photo Credit: MaxPixel.

Electoral sentences to ponder

It is more than ten percent less democracy at the AEA!

There is only one candidate running for president of the association.

And this is just hilarious: “Several colleagues have explained the reasons behind this, which I do not dispute. e.g. Eminent economists would not run for President if they had to compete.”

And how exactly do those “reasons” get turned into restrictions on entry?  And how about these proposals:

More seriously, what would a good economist or political scientist recommend to make this market more competitive?

And c’mon people, you really can’t fool us anymore with this stuff.  That said, the sad thing is that almost any likely reform is going to make matters worse rather than better.  So perhaps I shouldn’t have written this post at all.

New results on social capital and interconnectedness

There are two new NBER papers written by large teams, headlined by Raj Chetty.  Here is an excerpt from the first paper:

The fraction of high-SES friends among low-SES individuals—which we term economic connectedness—is among the strongest predictors of upward income mobility identified to date, whereas other social capital measures are not strongly associated with economic mobility. If children with low-SES parents were to grow up in counties with economic connectedness comparable to that of the average child with high-SES parents, their incomes in adulthood would increase by 20% on average.

And this as a general introduction to the project:

….we measure and analyze three types of social capital by ZIP code in the United States: (i) connectedness between different types of people, such as those with low vs. high socioeconomic status (SES); (ii) social cohesion, such as the extent of cliques in friendship networks; and (iii) civic engagement, such as rates of volunteering. These measures vary substantially across areas, but are not highly correlated with each other.

The core data are taken from Facebook and anonymized.  And from the second paper:

We show that about half of the social disconnection across socioeconomic lines—measured as the difference in the share of high-socioeconomic status (SES) friends between low- and high-SES people—is explained by differences in exposure to high- SES people in groups such as schools and religious organizations. The other half is explained by friending bias—the tendency for low-SES people to befriend high-SES people at lower rates even conditional on exposure.

There is then this concrete result:

…friending bias is higher in larger and more diverse groups and lower in religious organizations than in schools and workplaces.

Here is a tweet storm with a relevant map.  These papers are sure to have considerable influence on how we think about social connections.  Yes this is sociology, but has not this team done it better?

Geoff Brennan, we hardly knew ye, RIP

Geoff has long been one of my favorite economists, and he was perhaps the single most underrated economist around.  For all of Geoff’s brilliance, wisdom, and contributions, he never quite made it into mainstream renown (maybe living and teaching in Australia hurt him?).

The three Brennan contributions that have influenced me most are:

1. His account of expressive voting with Loren Lomasky, showing how politics can generate a measured concern that people may not care about all that much.  That was also a big influence on Bryan Caplan’s book on voting.

2. His arguments with Jim Buchanan about the limitations of optimal tax theory (Amazon, when I search for this book, why do you summon up as the first pick “Sol de Janeiro Brazilian Bum Bum Body Cream“?).  If government policy is misaligned with social welfare, “more efficient” forms of taxation, such as the Ramsey rules, will not in general be more efficient.  In particular they can make it too easy for the government to maximize revenue and transfer resources to the public sector.  The profession as a whole still refuses to recognize this point, but it should be front and center of most analyses.  One side of the coin is that the French government is too large a share of gdp, but it would be interesting to flip the argument and try to apply it to Mexico…

3. Geoff’s book The Economy of Esteem (with Philip Pettit), which analyzed approbational incentives, building upon Adam Smith’s TMS.

Geoff was one of the few scholars comfortable in economics, philosophy, and also political science.  Two of his main books, listed above, are co-authored with philosophers.  Here is Geoff on scholar.google.com.

Personally, Geoff was popular with just about everybody.  He is also one of the few people to have worked with Buchanan and come out of the experience intact.  If he was at a conference dinner, he would be sure to find the occasion to sing a song for everybody, and he had a wonderful voice.

Geoff Brennan, we shall miss ye.

Nashville: Snitch City

In Nashville, complaints about vague code violations can be made anonymously. The city gets fine revenue. There are a mix of black and white, poor and rich residents, and newly gentrifying neighborhoods. The result: a perfect brew for evil busybodies, meddlers, and assholes trying to leverage the power of the state to make a buck. A story to make you mad as hell from the great Radley Balko.

…to get to the main problem, I have to take the couple’s long driveway up to the house and enter the backyard to find the carport that extends out from the home. Benford spends a lot of time under the carport. He works on the Coronet here. He tinkers at his workbench and listens to the radio. On the blistering June day I visit, it isn’t hard to see why he likes it. The trees provide shade, rustle up a nice breeze, and bathe the area in dappled light. As we talk, the couple’s lab mix Bella patrols a T-shaped patch of grass.

“See that mini fridge over there? He wrote me up for that,” Benford says, referring to the Codes inspector. “I never heard of something so dumb. A man can’t have a mini fridge in his own garage?”

Benford sighs, rolls his eyes, and continues. “He wrote me up for having tools out here. Said you can’t have tools that aren’t put away. He said I can’t have the work bench. Once I was drinking a can of soda when he came over. He told me to put it away. You believe that? I’m a grown man, and you’re telling me to put away my soda. Everything you see out here, they told me I can’t have.”

Benford’s hardly a hoarder. At worst, you could say the carport has some clutter. There are a few chairs, some tools, a grill and a couple empty kerosene tanks. In 2018, his wife suffered a fall in the shower, hit her head, and sustained injuries that required brain surgery and a long convalescence. Benford himself recently had knee surgery. So there’s also a walker, a cane and assorted medical devices.

The structure is enclosed by the house on one side. The other three sides are open. And that, apparently, is the problem. “If that was an enclosed garage, it wouldn’t be an issue,” says Jamie Hollin, the couple’s attorney. “But they can’t afford to build a garage. So the city won’t leave them alone.” The carport isn’t visible from any public space, and as far as I could tell, the surrounding neighbors would have to strain to see it.

…Those reports attracted the attention of a particular Codes inspector, who then became a thorn in the couple’s side for nearly two decades. “At first he’d only come around when she called in a complaint,” Benford says. “But then he just started showing up on his own. He’d just come into the backyard and start telling me to put things away. Neighbors told me he’d sometimes park in their driveway and watch us with binoculars.”

The Coronet also became an issue. Nashville prohibits residents from keeping inoperable or unregistered vehicles on residential properties unless they’re stored in an enclosed garage. Paradoxically, the city also forbids residents from making major repairs on their own vehicles — again, unless it’s done in an enclosed garage. For Benford, that means when the Coronet has broken down over the years, his only legal option is to have it towed to a garage and pay someone else to fix it, even though he has the skills to fix it himself. According to Benford, the same Codes inspector has repeatedly shown up at his home over the years solely to demand that Benford prove that the car is operable. “I lost count of how many times he made me do that,” Benford says. “More than 20.”

“It’s just outrageous and demeaning,” says Hollin. “You’re going to come out and make this man start his car for you on command? You’re going to put a lien on this couple’s home over an old car? Some chairs in a carport? A goddamn refrigerator?”

That is just one example:

…Because complaints are anonymous, it’s almost impossible to prove who filed them. But in 2019, Nashville’s Fox affiliate WZTV ran a series of reports alleging that developers have been weaponizing codes to target properties they want to acquire. Two reports focused on Evelyn Suggs, a beloved, then-94-year-old Black landlord in North Nashville. Suggs told the station several of her properties had recently been hit with a rash of Codes complaints. Shortly after, developers began contacting her with offers to buy those properties. Some made reference to her battles with Codes. Other local residents, including Freddie Benford, have similar stories.

It’s possible that these developers simply scoured the complaints and court records available online to find property owners with fines, then made offers to those owners. But Burt, the local builder, says he’s witnessed it firsthand. “It absolutely happens,” he says. “I’d go so far as to say it’s common. I’ve personally heard developers boast about ‘lighting up Codes’ on a property they want to buy.”

Advocates like Weiss and Maurer say this is common in other places. “It’s just eminent domain by another name,” Maurer says. “Instead of officially declaring a property blighted and handing it over to a developer, you just hit it with codes complaints until the owner is overwhelmed.”

Now on top of this nonsense add vaguely written regulations and an administrative system that thinks it’s a court but isn’t subject to any due process or oversight.

Property rights aren’t simply about buying and selling for profit they are about privacy, individuality and freedom from busybodies. The urge to collectivize all decisions is a curse. Property rights, they make good neighbors.

Addendum: Yes I am in a bad mood today. I am, however, pleased to have played a very small role in the story. Read the whole thing for more.

They modeled this

…we demonstrate that individuals who hold very strict norms of honesty are more likely to lie to the maximal extent. Further, countries with a larger fraction of people with very strict civic norms have proportionally more societal-level rule violations. We show that our findings are consistent with a simple behavioral rationale. If perceived norms are so strict that they do not differentiate between small and large violations, then, conditional on a violation occurring, a large violation is individually optimal.

Life at the margin!  That is from a new paper by Diego Aycinena, Lucas Rentschler, Benjamin Beranek, and Jonathan F. Schulz.

Economics of Ideas, Science and Innovation Online PhD Short Course

The Institute for Progress is hosting a six week course on the economics of ideas, science and innovation taught at the PhD level by Pierre Azoulay, Matt Clancy, Ina Ganguli, Benjamin Jones, and Heidi Williams. What an all star-cast! The syllabus is excellent. The course is aimed at first year or more PhD students. More details here.

My Conversation with Leopoldo López

Here is the audio, video, and transcript.  Here is the CWT summary:

As an inquisitive reader, books were a cherished commodity for Leopoldo López when he was a political prisoner in his home country of Venezuela. His prison guards eventually observed the strength and focus López gained from reading. In an attempt to stifle his spirit, the guards confiscated his books and locked them in a neighboring cell where he could see but not access them. But López didn’t let this stop him from writing or discourage his resolve to fight for freedom. A Venezuelan opposition leader and freedom activist, today López works to research and resist oppressive autocratic regimes globally.

López joined Tyler to discuss Venezuela’s recent political and economic history, the effectiveness of sanctions, his experiences in politics and activism, how happiness is about finding purpose, how he organized a protest from prison, the ideal daily routine of a political prisoner, how extreme sports prepared him for prison, his work to improve the lives of the Venezuelan people, and more.

And one excerpt:

COWEN: In 1970, you were richer than Spain, Greece, or Israel, which I find remarkable. But do you, today, ever look, say, at Qatar or United Arab Emirates, Dubai, and think the problem actually was democracy, and that here are oil-rich places that have stayed stable, in fact, but through autocratic rule, and that it’s the intermediate situation that doesn’t work?

LÓPEZ: Well, I think that I, personally, will always be in favor of a democratic regime, a democratic system that promotes a rule of law, the respect for human rights, the respect of freedoms. I think that’s a priority. For me it is, and I believe it’s a priority also for the large, large majority of the Venezuelan people that want to live in a democracy.

However, there has been great mismanagement due to misconceptions of the economy, to a state-led economy that did not open possibilities for a private sector to flourish independently of the state, but also with the level of corruption that we have seen, particularly over the past 22 years — it’s what has led Venezuela to the situation in which we are.

In Venezuela, you could argue that we did much, much better economically, and in terms of all of the social and economic standards, than what happened during these last 20 years of autocracy. This autocracy had the largest windfall and the largest humanitarian crisis.

During the democratic period of 40 years, Venezuela became one of the most literate countries in Latin America, with the largest amount of professionals being graduated every year, with the best in social, health, and education standards, vaccination rates, housing programs that were in Latin America. So, we did perform much better under the democratic period than has been the performance by any means in the autocratic regimes of the last 22 years.

Interesting throughout.

In praise of regulatory arbitrage

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

So if you issue a crypto token, but don’t have to register it as a security and go through the process of satisfying securities laws, you are engaging in regulatory arbitrage.

It is worth thinking through why some of the regulations ought to change in this new context. In the pre-crypto world, issuing a security involved a host of institutional preparations and investments and legal planning, even apart from whatever regulatory constraints needed to be met. Issuing crypto tokens is usually easier and quicker, and quite immature institutions have done so. Software and blockchains do much of the work that once required offices, personnel and a lot of hands-on management…

Standard US regulatory practice typically focuses on regulating host firms and intermediaries, rather than software. Yet once a blockchain is verifying, storing and communicating information, it is hard for regulators to step in and make a meaningful difference. Thus the old regulatory model no longer applies to a significant part of the crypto experience.

And the lower costs of token issuance mean that the issuing intermediaries can be quite thinly capitalized. Often they are either not able or not incentivized to meet a lot of regulations. In addition, an institution can participate fully in the crypto space without being based in the US or being tied to any specific nation-state.

You can inveigh against those features of the market. Regardless, they are going to mean a radically different set of regulatory constraints. They also mean that some kinds of securities (if it is appropriate to call them that) can be issued far more cheaply than before.

Given this reality, shouldn’t regulations be changed — and substantially? This may include some areas where regulation is even tighter, though overall regulations will likely become looser. The regulators will have to learn to live with a more decentralized market structure that has lower costs and is harder to control. It is common sense that when software can substitute for major capital investments, regulations ought to change, even if observers disagree over how.

Unfortunately, the regulatory process is static and typically slow to change. Regulatory agencies often stick with the status quo until it is no longer tenable. One of the benefits of regulatory arbitrage is that it forces their hand and brings about a new equilibrium.

Recommended, this topic remains underdiscussed.  “Regulatory arbitrage” is in fact one of the more significant potential benefits of crypto, noting that not everyone in the crypto space wants to come out and say that.

Incentives matter, installment #5637

America needs more than 5 million new houses to meet demand, according to a study last year by Realtor.com. With sales of existing homes slowing, the need for more new houses is only growing. Florida, my home state, might have found part of the solution: Reform the permitting process so that building houses is easier.

Last year, Gov. Ron DeSantis (R) signed a bill that fundamentally changes the state’s permitting process for home building. It requires local jurisdictions to post online not only their permitting processes but also the status of permit applications. The transparency takes a good amount of mystery out of what can be an inscrutable branch of bureaucracy.

More important, the reforms also created a system that strongly incentivizes cities and counties to approve new home permits in a timely way. When a builder or property owner submits an application to build a new home, cities and counties have 30 business days to process it or request corrections.

If the government offices fail to respond in that time frame, the locality must refund 10 percent of the application fee for every additional business day of silence. Application fees can vary widely by locality, but the average cost in Florida is nearly $1,000, according to HomeAdvisor.com. If officials request corrections to the application, they have 10 business days to approve or disapprove of the resubmitted application. Blowing past that deadline leads to an automatic 20 percent refund, with a further 10 percent added for each additional missed day, up to a five-day cap.

And this:

A study of housing sales in southwest Florida between 2007 and 2017 by the James Madison Institute found that permitting delays added as much as $6,900 to the cost of a typical house. That’s a de facto tax on Florida families; now the Sunshine State is making cities and towns pay for their own delays.

Here is the full story, via the excellent Kevin Lewis.