Category: Economics

Why non-distanced social and commercial interactions have resumed so quickly

People have solved for the equilibrium.

First, the socially-distanced goods, such as food delivery, are starting to rise in price.  The non-distanced goods have been falling in relative price, and so now people are moving along their demand curves and engaging in less distancing.

Second, the longer the pandemic will run, the harder it is to use intertemporal substitution as a “make up.”  “I won’t go to a bar for two months, but then I’ll go a lot to make up for it” is a plausible story to tell oneself.  “I won’t go to a bar for a year and then I’ll go a lot…” is harder to swallow and act upon.  It starts to become a habit, and at some point you can’t drink enough to make up for what you have lost.  And so people are more inclined to go to the bar right now.

Most importantly, peer effects are remarkably strong.  Most people are not willing to accept a small additional risk of death to say eat in a particular restaurant.  But they are willing to accept a small additional risk of death to live life as other people are living life.

So once enough people are not respecting social distancing, most of the others will follow.

Some wag on Twitter said we can no longer use the expression “to avoid like the plague,” because apparently people do not take so much care to avoid the plague.

Inflation is higher than you think

The Covid-19 Pandemic has led to changes in consumer expenditure patterns that can introduce significant bias in the measurement of inflation. I use data collected from credit and debit transactions in the US to update the official basket weights and estimate the impact on the Consumer Price Index (CPI). I find that the Covid inflation rate is higher than the official CPI in the US, for both headline and core indices. I also find similar results with Covid baskets in 10 out of 16 additional countries. The difference is significant and growing over time, as social-distancing rules and behaviors are making consumers spend relatively more on food and other categories with rising inflation, and relatively less on transportation and other categories experiencing significant deflation.

That is from Alberto Cavallo, and as for concrete numbers: “The Covid Core deflation in April was only half of that in the Core CPI, while theannual inflation rate is at 1.73% compared to the 1.43% in the official Core index.”  And that is not accounting for the disappearing goods bias: “For example, the share of products with missing prices in the US CPI rose from 14% in April 2019 to 34% in April 2020.”

Of course this also has implications for those insisting we should think of this primarily as a demand shock.

Delivery service price cap regulations

Ben emails me:

Could you please consider and comment on some of the unseen consequences of local price caps on restaurant delivery services?  (Politico article describing the phenomenon in SF, NYC, etc.)  A highly competitive market for such services exists between GrubHub, DoorDash, Uber Eats, etc.  Moreover, patrons can always pickup and restaurants can always hire their own drivers.  That dynamic market will keep prices down and improve service quality and value.  As reported 2 days ago, 5/13/2020, in the Wall Street Journal, “America is stuck at Home, but Food Delivery Companies Still Struggle to Profit.”  Yet many locals are considering regulating and limiting the prices that such delivery services can charge.

Here is a NYT article on the same phenomenon, claiming that some apps charge up to 40% of the restaurant’s take.

My first question is why the restaurants do not charge higher prices for customers using the app.  That might be illegal in some localities, but surely that is not the general answer to the question.  Rather the restaurants are afraid of losing customer good will  — “what!? I have to pay 30% more just because I bought it with my phone?”  [Plus the apps do not allow it, see the comments, though I do no think the apps could prevent restaurants from giving “extras” and thus lower prices to those who show up for service in the restaurant.]

In this setting, restaurants are losing potential revenue to avoid a reputational hit, and staying in business (rather than closing up) because they believe the value of their future reputational franchise is high.  In other words, in both channels the restaurants perceive the value of their future reputational franchise to be pretty high.

That is the good news, although you might wonder how it squares with the generally low returns to running a restaurant.  I suspect some restaurants simply know they are good and profitable because they are skilled, and the losers are overconfident and less well-informed.

One efficiency advantage of the apps is that they will put the unprofitable restaurants out of business more quickly.

The next question is whether some surplus from the profitable restaurants should, in the short run (and maybe in the longer run too?) be redistributed to the app company.

The apps should increase the demand for the food from the good restaurants (easier to order and arrange delivery), but lower the profit margin on selling more of that food.  If those ingredients and kitchen capacity otherwise would go to complete waste, overall that seems like an acceptable bargain.  Kitchens are kept active, which is an efficiency gain, even if some profit is redistributed to the app company.

In this scenario, you can think of the app as doing some of the selling, rather than the restaurant doing that selling, and reaping surplus from that effort.  In essence, the business of the restaurant has become more specialized, toward pure food production and away from selling, that latter service now being performed by the app company.

Restaurants that were great at selling in the first place might be worse off.  But it is far from obvious that these apps and their prices should be decreasing efficiency.  Some other restaurants might be worse off because it is harder for them to carve up or segment the market, but that change likely is efficiency-enhancing.

And if the apps do indeed speed the bankruptcy of the lesser restaurants (presumably what the critics have to believe), over the longer haul prices will indeed go up and the good restaurants will earn back some of what they lost up front.

On net, consumers will have better services, better marketing, pay higher prices, and have a better selection of restaurants.  That just doesn’t sound so terrible, or so necessitating government intervention to cap app prices.

Note that informed customers probably need the app least, so they are least likely to see its value, just as “critics” as a class, including restaurant critics, are also least likely to see the value of the app in marketing the restaurants.  Of course this class of “critics” are exactly those who are most likely to be writing about the apps.

What should I ask Melissa Dell?

She is a professor of economics at Harvard, and winner of the most recent John Bates Clark medal.  I would describe her as a both a rising star and an already-risen star.  From Wikipedia:

Melissa Dell’s research interests include development economics, economic history and political economy. Her work has mainly focused on explaining economic development through the persistence of historical institutions and climate. She has also investigated the effect of conflict on labor market and political outcomes and vice versa. Much of her research has focused on Latin America and Southeast Asia. She was one of the first economists to use a spatial regression discontinuity design, in her paper on the long-term effects of Peru’s Mining Mita.

Her broader biography is interesting as well (see Wikipedia).  Here is previous MR coverage of Melissa Dell, and here is the very good Clark medal summary of her research.

So what should I ask her?

Keller Scholl and Robin Hanson on automation

25 simple job features explain over half the variance in which jobs are how automated.

The strongest job automation predictor is: Pace Determined By Speed Of Equipment.

Which job features predict job automation how did not change from 1999 to 2019.

Jobs that get more automated do not on average change in pay or employment.

Labor markets change more often due to changes in demand, relative to supply.

That is all from their newly published paper on the topic.

Should departments own and control journals?

There is some discussion on Twitter of this matter, and overall I say yes, I would like to see more of this at the margin.  In economics, the two best-known department-owned journals are the Journal of Political Economy (Chicago) and Quarterly Journal of Economics (Harvard).  They also have longstanding histories of being “a bit different,” the JPE having had a Chicago school orientation, and the QJE publishing lots of Harvard grad students and graduates, and being more willing to accept papers with “behavioral” results, and perhaps with more speculative empirics as well.  In both cases, I should add those different orientations are much diminished compared to say the 1990s, the JPE in particular these days not seeming especially “Chicago school” to me, and I wonder if a Chicago school still exists amongst younger economists.

I am very glad we have had these two journals standing out as different in orientation, and I strongly believe that has encouraged innovation, even if (and in fact because) the AER would not have accepted all of those papers.  A lot of “shaky” behavioral results, for instance, have in fact turned out to be quite relevant or at the very least interesting and worthy of further investigation.

One risk is that the different general interest journals become too much alike, too subject to the same pressures, and too homogenized.  And the actual “monopoly” danger, to the extent there is one, is that the American Economic Association controls too many top journals.

To be clear, I don’t see anything sinister afoot with all the AEA journals, but here is a simple way to express my worry.  If I had to, standing on one foot, recite all of the names of those journals and their missions or areas, I don’t think I could do it without multiple mistakes.  (And frankly not so many people in the entire world devote so much attention to following published economic articles as I do, noting that Larry Katz may be #1.)  Somehow the identities are too blurred together, and I wish someone else were running one or two of them.

I am hardly “anti-big business,” but I view commercial publishers as the worst alternative for journal ownership and control.  In addition to all of the usual complaints, I think the commercial publishers often (not always) care less about the quality of the editor, as the emphasis is on how well the sales force can market the journal to libraries.

So unless you want the AEA to run everything, and I certainly do not, that is going to mean more department-owned journals.  I am impressed by those departments that have the money and the commitment to see these journals through — it is not easy.

As of late, there has been a squabble on Twitter about removing one particular journal editor for his injudicious tweets on recent public events (I don’t wish to link to this and add fuel to the fire).  Everyone is entitled to his or her opinion about this particular editorship, but I will say this: Twitter is not the right forum for such a debate.  I am very pro-Twitter, as I have written numerous times in the past, but it does have some of the biases of virality, including peer pressure, and it is not always good for reproducing context or considering objections and revisions to viewpoints.  Instead, start by writing out your opinion, and considering objections, in a long, judicious, thoughtful piece.  Spend at least a few days on the piece, have three of your more critical friends “referee” it in advance of on line publication, and let it be debated for weeks.  Is “too much trouble” really a good reason not to do that?  If you think that who controls the rigorous refereeing process at a top journal is so important, the method for making judgments here is no less important.  “The refereed journals aren’t good, fair, and rigorous enough for me, so we need to slug it out and rush to judgment on…Twitter” just doesn’t make any sense.  We can do better.

Addendum: Paul Novosad has some useful suggestions for encouraging decentralization.

13.3% unemployment rate

That one surprised me, as indeed it did most other economists.  What should I learn from this episode?  After all, labor market adjustment was relatively slow coming out of the 2008 crisis.

My tentative hypothesis is that “matching” is more important than I had thought (and I already thought it was quite important, relative to other macro commentators).  One feature of the current layoffs and rehirings is that the ties between workers and firms apparently were not so severed in the first place.  For most sectors (cruise ships aside, etc.), no “rematches” were required, and so rehirings were accomplished very quickly.  As demand (partially) returned, employers wanted at least some of the old workers back, and workers wanted their old employers back, and then it happened.  “Figuring out where I belong” did not slow down the process very much.

That is good news for the remainder of the recovery, provided the recovery happens soon, and it is at least one factor (not necessarily decisive, of course) militating in favor of a speedier reopening.  “Reopen before the worker-employer ties are lost!”

It also implies that during regular, non-pandemic downturns a lot of the slowness of labor market recovery has to do with matching rather than demand per se, noting that the two interact.  And that is a sign of a more general pessimism for the future, since demand problems are easier to fix through policy than matching problems are.

Another possible implication of the new numbers is that employers realized that “F*** it, I want to get back out there” is the prevalent consumer and also worker attitude, whereas Twitter-bound intellectuals were slower to see the same.

Does partisanship shape investor beliefs?

We use party-identifying language – like “Liberal Media” and “MAGA”– to identify Republican users on the investor social platform StockTwits. Using a difference-in-difference design, we find that the beliefs of partisan Republicans about equities remain relatively unfazed during the COVID-19 pandemic, while other users become considerably more pessimistic. In cross-sectional tests, we find Republicans become relatively more optimistic about stocks that suffered the most from COVID-19, but more pessimistic about Chinese stocks. Finally, stocks with the greatest partisan disagreement on StockTwits have significantly more trading in the broader market, which explains 20% of the increase in stock turnover during the pandemic.

Here is the full piece by J. Anthony Cookson, Joseph Engelberg, and William Mullins, via the excellent Samir Varma.

The return to studying economics is fairly high

Selection bias may confound the identification of field-specific returns to higher education. This study investigates the wage return to studying economics by leveraging a policy that prevented students with low introductory grades from declaring the major. Regression discontinuity estimates show that policy-complying economics majors — who appear representative on observables — earned $22,000 (58%) higher annual early-career wages than they would have with their second-choice majors, despite otherwise-unchanged educational investment and attainment. Cross-industry wage variation explains half of the return, with economics majors channeled towards high-wage economics-related industries. Differences between institution-specific or nationally-representative average wages by major well-approximate the estimated causal return.

That is from a new paper by Zachary Bleemer and Aashish Mehta, via the excellent Kevin Lewis.

My excellent Conversation with Ashley Mears

Tired of lockdown, pandemic, and rioting?  Here is a podcast on some of their polar opposites, conducted by “a bridge and tunnel guy” with an accomplished sociologist.  Here is the audio and transcript, here is the summary:

Ashley Mears is a former fashion model turned academic sociologist, and her book Very Important People: Status and Beauty in the Global Party Circuit is one of Tyler’s favorites of the year. The book, the result of eighteen months of field research, describes how young women exchange “bodily capital” for free drinks and access to glamorous events, boosting the status of the big-spending men they accompany.

Ashley joined Tyler to discuss her book and experience as a model, including the economics of bottle service, which kinds of men seek the club experience (and which can’t get in), why Tyler is right to be suspicious of restaurants filled with beautiful women, why club music is so loud, the surprising reason party girls don’t want to be paid, what it’s like to be scouted, why fashion models don’t smile, the truths contained in Zoolander, how her own beauty and glamour have influenced her academic career, how Barbara Ehrenreich inspired her work, her unique tip for staying focused while writing, and more.

Here is one excerpt especially dear to my heart:

COWEN: Let’s say I had a rule not to eat food in restaurants that were full of beautiful women, thinking that the food will be worse. Is that a good rule or a bad rule?

MEARS: I know this rule, because I was reading that when you published that book. It was when I was doing the field work in 2012, 2013. And I remember reading it and laughing, because you were saying avoid trendy restaurants with beautiful women. And I was like, “Yeah, I’m one of those people that’s actually ruining the food but creating value in these other forms because being a part of this scene and producing status.” So yeah, I think that’s absolutely correct.

And:

COWEN: I have so many naive, uninformed questions, but why is the music so loud in these clubs? Who benefits from that?

MEARS: Who benefits?

COWEN: I find the music too loud in McDonald’s, right?

MEARS: Clubs are also in this business of trying to manufacture and experience what Emile Durkheim would call this collective effervescence, like losing yourself in the moment. And that’s really possible when you’re able to tune out the other things, like if somebody is feeling insecure about the way they dance or if somebody is not sure of what to say.

Having really loud music that has a beat where everybody just does the same thing, which is nod to the beat — that helps to tune people into one another, and it helps build up a vibe and a kind of energy, so the point is to lose yourself in the music in these spaces.

And:

COWEN: Let’s say you sat down with one of these 20-year-old young women, and you taught them everything you know from your studies, what you know about bodily capital, sociological theories of exploitation. You could throw at them whatever you wanted. They would read the book. They would listen to your video, talk with you. Would that change their behavior any?

MEARS: I don’t think so. No, I don’t think so. They might not be too surprised even to learn that this is a job for promoters, and the promoters make money doing this. Most of them know that. They didn’t know how much money promoters are making. They don’t know how much money the clubs are making, but they know that they’re contributing to those profits, and they know that there’s this inequality built into it.

…in this world, there’s a widespread assumption that everybody uses everybody else. The women are using the club for the pleasures that they can get from it. They’re using the promoter for the pleasures they can get from him, the access. The promoters are using the young women. The clients are using the promoters.

The drawing line is when there’s a perception of abuse. People have a clear sense that lying about being exclusively romantic would be a clear violation, so that would be abusive. But use is okay. Mutual exploitation is okay.

Definitely recommended, a unique and fascinating episode.  And again, I strongly recommend Ashley’s new book Very Important People: Status and Beauty in the Global Party Circuit, one of my favorite books of the year.

Is this why budget deficits might prove sustainable?

By Adrien Auclert, Hannes Malmberg, Frederic Martenet, and Matthew Rognlie:

We use a shift-share approach to quantify the general equilibrium effects of population aging on wealth accumulation, real interest rates, and capital flows. Combining population projections with household survey data from the US and 24 other countries,we project the evolution of wealth-to-GDP ratios by changing the age distribution,holding life-cycle asset and income profiles constant. We find that this compositional effect of aging is large and heterogeneous across countries, ranging from 85 percent-age points in Japan to 310 percentage points in India over the rest of the twenty-first century. In a general equilibrium overlapping generations model, our shift-share provides a very good approximation to the evolution of the wealth-to-GDP ratio due to demographic change when interest rates remain constant. In an integrated world economy, aging generates large global imbalances in the twenty-first century, pushing net foreign asset positions to levels several times larger than those observed until today.

Via Steven Bogden.  This is very likely an important piece.

What do economists believe about infrastructure?

Support for massive investments in transportation infrastructure, possibly with a change in the share of spending on transit, seems widespread. Such proposals are often motivated by the belief that our infrastructure is crumbling, that infrastructure causes economic growth, that current funding regimes disadvantage rural drivers at the expense of urban public transit, or that capacity expansions will reduce congestion. In fact, most US transportation infrastructure is not deteriorating and the existing scientific literature and does not show that infrastructure creates growth or reduces congestion. However, current annual expenditure on public transit buses exceeds that on interstate construction and maintenance. The evidence suggests the importance of an examination of how funding is allocated across modes but not of massive new expenditures.

That is from a new NBER working paper by Matthew Turner, Gilles Duranton, and Geetika Nagpal.

How equity ownership shapes values

How does engagement with markets affect socioeconomic values and political preferences? A long line of thinkers has debated the nature and direction of such effects, but claims are difficult to assess empirically because market engagement is endogenous. We designed a large field experiment to evaluate the impact of financial markets, which have grown dramatically in recent decades. Participants from a national sample in England received substantial sums they could invest over a 6‐week period. We assigned them into several treatments designed to distinguish between different theoretical channels of influence. Results show that investment in stocks led to a more right‐leaning outlook on issues such as merit and deservingness, personal responsibility, and equality. Subjects also shifted to the right on policy questions. These results appear to be driven by growing familiarity with, and decreasing distrust of markets. The spread of financial markets thus has important and underappreciated political ramifications.

That is from a newly published paper by Yotam Margalit and Moses Shayo, via the excellent Kevin Lewis.

The shift of prevalance toward the young

Half of new coronavirus infections in Washington [state] are now occurring in people under the age of 40, a marked shift from earlier in the epidemic when more than two-thirds of those testing positive were in older age groups.

A new analysis finds that by early May, 39% of confirmed cases statewide were among people age 20 to 39, while those 19 and younger accounted for 11%.

Here is the full article, via Anecdotal.  A number of points:

1. As people adjust, and the higher-risk individuals take greater precautions, and the lower risk people relax their vigilance, this is likely to happen.

2. The case for age segregation, as a remedy and protection, becomes stronger.  If your policy prescriptions never change over the course of a pandemic, you are not paying sufficient attention, or you are a dogmatist, or both.

3. Universities have to worry a bit less about their students and a bit more about their faculty, at the margin.

4. As more young people acquire immunity, the incentive for yet additional young people to invest in immunity, through stochastic deliberate exposure, rises.  That in turn strengthens #2 and #3.

5. Will markets play a further role in this trend?  The excellent Kevin Lewis sends me the following (WSJ):

…while surging demand has proven a boon for the traders known as blood brokers who source this commodity, diagnostic companies say high prices for the blood of recovered Covid-19 patients are posing a hurdle to developing tests. ‘We’ve had a terrible time trying to obtain positive specimens at a decent rate,’ said Stefanie Lenart-Dallezotte, manager of business operations for San Diego-based Epitope Diagnostics Inc., which sells an antibody test for Covid-19…She said one broker quoted $1,000 for a one-milliliter sample of convalescent plasma, a term for the antibody-containing part of the blood from recovered patients. Executives at other diagnostics companies say they have been quoted prices of several thousand dollars for one milliliter of plasma.

What is the market-clearing price here, and what is the elasticity of exposure with respect to that price?  Evolving…