Category: Economics

Has the time come and passed for negative interest rates?

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

Step back and consider the cultural context. Germany is still scarred by the memories of two world wars, fascism, communism, deflation and hyperinflation: in general, huge instability. Since the end of World War II, however, personal savings and the banking system have been an oasis of predictability and a driver of growth. Many Germans treasure their frugality, perhaps excessively or irrationally, and it has become an important part of the narrative Germans tell themselves about the economic order they have built.

Now enter the ECB, in essence telling Germans (and others) that savings are a bad thing, to be taxed and penalized. The very word “negative,” as in “negative interest rate,” makes the policy hard to sell politically. The German word “Strafzinsen” refers to a penalty rate, but the root “Straf” also refers to punishment, and it was used effectively by Franz Kafka in his famous torture-laden short story “In the Penal Colony” (the German title is “In der Strafkolonie”). One German newspaper referred to the “final expropriation” of the German saver, noting that the ECB’s decision to deviate from its inflation target carries “grave consequences.”

More generally, a significant segment of the German population is upset or outraged by the policy. There is even a claim that the revenue from the negative interest payments will be used to finance other EU countries.

Most economists and central bankers view negative interest rates as an acceptable tool of macroeconomic management. Maybe so. But in an era when trust, including trust among nations, is much lower than previously thought, it probably isn’t a good idea to place a punishing new tax on the German national virtue of saving. Central bankers must also be sensitive to public relations.

I find it striking how many people are responding to this column by insisting that Merkel should do more fiscal stimulus.  She should (though I don’t find “stimulus” to be the most instructive word here), as I suggest in the piece, because the Germans have been letting their infrastructure run down for a good while now — internet speeds anybody?  But at the end of the day, I don’t think that spending will eliminate the basic macroeconomic problem facing the EU, nor is most of that spending likely to land on the doorstep of the countries which most need it (though Huawei may benefit a good deal).  There is also this:

So if a policy of negative interest rates is just a Band-Aid, it is one that should be ripped off. And if monetary policy is insufficiently expansionary, that is going to require an increase in the ECB’s inflation target, or a move to nominal GDP targeting, not a jerry-rigged tax on deposits.

There is also an argument that Germans are saving too much. But by some measures, they have a level of national wealth relatively low for their per capita income, in part because Germans are less likely to own their own homes. According to the OECD, Germany’s near neighbors Sweden, Denmark, the Netherlands, and Switzerland all save more in percentage terms than Germany does.

German savers: underrated.

The rise of niche consumption

Here is a new and neat paper which, to the extent it is true, would appear to address several significant puzzles at once.  From Brent Neiman and Joseph S. Vavra:

We show that over the last 15 years, the typical household has increasingly concentrated its spending on a few preferred products. However, this is not driven by “superstar” products capturing larger market shares. Instead, households increasingly focus spending on different products from each other. As a result, aggregate spending concentration has in fact decreased over this same period. We use a novel heterogeneous agent model to conclude that increasing product variety is a key driver of these divergent trends. When more products are available, households can select a subset better matched to their particular tastes, and this generates welfare gains not reflected in government statistics. Our model features heterogeneous markups because producers of popular products care more about maximizing profits from existing customers, while producers of less popular niche products care more about expanding their customer base. Surprisingly, however,our model can match the observed trends in household and aggregate concentration without any resulting change in aggregate market power.

This is related to what I called “matching” in The Complacent Class.

The Entire German Yield Curve is Trading Below Zero

The German government could today borrow billions of Euro and in a decade they could give back to investors less than they borrowed and the investors would be happy. Does the German government have no net positive investments to make?

The global savings glut which drives asset prices higher and makes them more volatile is very much still with us. Around the world there is now over 15 trillion in negative interest debt.

From the FT.

The labor share is not in general falling

We study the joint impact of three measurement issues in the empirical literature on the labor share: (i) start and end periods for the empirical analysis; (ii) accounting for self-employment; and (iii) accounting for residential real estate income. When we correct for these three potential biases, we do not find a general decline in the labor share in our sample of advanced economies. In that respect the behavior of the US labor share after 2000 presents a puzzle.

That is from a new NBER Working Paper by Gilbert Cette, Lorraine Koehl, and Thoimas Philippon.

Identity Politics Versus Independent Thinking

Anthony Kronman, former Dean of the Yale Law school, writes in the WSJ:

The politically motivated and group-based form of diversity that dominates campus life today discourages students from breaking away, in thought or action, from the groups to which they belong. It invites them to think of themselves as representatives first and free agents second. And it makes heroes of those who put their individual interests aside for the sake of a larger cause. That is admirable in politics. It is antithetical to one of the signal goods of higher education.

…Grievance is the stuff of political life…Academic disagreements are different. Important ones are often inflamed by passion too. But the goal of those involved is to persuade their adversaries with better facts and arguments—not to bludgeon them into submission with complaints of abuse, injustice and disrespect to increase their share of power. Today, the spirit of grievance has been imported into the academy, where it undermines the common search for truth by permeating it with a sense of hurt and wrong on the part of minority students, and guilt on the part of those who are blamed for their suffering.

…For college students, the search for truth is important not because reaching it is guaranteed—there are no such guarantees—but as a discipline of character. It instills habits of self-criticism, modesty and objectivity. It strengthens their ability to subject their own opinions and feelings to higher and more durable measures of worth. It increases their self-reliance and their respect for the values and ideas of those far removed in time and circumstance. In all these ways, the search for truth promotes the habit of independent-mindedness that is a vital antidote to what Tocqueville called the “tyranny of majority opinion.”

…Tocqueville was an enthusiastic admirer of America’s democracy. He thought it the most just system of government the world had ever known. But he was also sensitive to its pathologies. Among these he identified the instinct to believe what others do in order to avoid the labor and risk of thinking for oneself. He worried that such conformism would itself become a breeding ground for despots.

As a partial antidote, Tocqueville stressed the importance of preserving, within the larger democratic order, islands of culture devoted to the undemocratic values of excellence and truth. These could be, he thought, enclaves for protecting the independence of mind that a democracy like ours especially needs.

Today our colleges and universities are doing a poor job of meeting this need, and the idea of diversity is at least partly to blame. It has become the basis of an illiberal and antirational academic cult—one that undermines the spirit of self-reliance and the commitment to truth on which not only higher education, but the whole of our democracy, depends.

Genetic Endowments and Wealth Inequality

That new paper by Daniel Barth, Nicholas W. Papageorge and Kevin Thom is attracting a great deal of attention and also some controversy.  Here is the first sentence of the abstract:

We show that genetic endowments linked to educational attainment strongly and robustly predict wealth at retirement.

But it’s not mainly about IQ.  I found this to be the most interesting part of the paper, noting that EA is a polygenic score:

Our use of the EA score as a measure of biological traits linked to human capital is related to previous attempts in the literature to measure ability through the use of tests scores such as IQ or the AFQT…We note two important differences between the EA score and a measure like IQ that make it valuable to study polygenic scores. First, a polygenic score like the EA score can overcome some interpretational challenges related to IQ and other cognitive test scores. Environmental factors have been found to influence intelligence test results and to moderate genetic influences on IQ (Tucker-Drob and Bates, 2015). It is true that differences in the EA score may reflect differences in environments or investments because parents with high EA scores may also be more likely to invest in their children. However, the EA score is fixed at conception, which means that post-birth investments cannot causally change the value of the score. A measure like IQ suffers from both of these interpretational challenges. High IQ parents might have high IQ children because of the genes that they pass on, but also because of the positive investments that they make…Compared to a cognitive test score like IQ, the EA score may also measure a wider variety of relevant endowments. This is especially important given research, including relatively recent papers in economics, emphasizing the importance of both cognitive and non-cognitive skills in shaping life-cycle outcomes (Heckman and Rubinstein, 2001). Existing evidence suggests a correlation of approximately 0.20 between a cognitive test score available for HRS respondents and the EA score (Papageorge and Thom, 2016). This relatively modest correlation could arise if both variables measure the same underlying cognitive traits with error, or if they measure different traits. However, Papageorge and Thom (2016) find that the relationship between the EA score and income differs substantially from the relationship between later-life cognition scores and income, suggesting that the EA score contains unique information…

…we interpret the EA score as measuring a basket of genetic factors that influence traits relevant for human capital accumulation.

If I understand the paper correctly, the polygenic score is what predicts well from the genetic data set, it is not a “thing with a known nature.”  And I believe the results are drawn from the same 1.1 million person data set as is used in this Nature paper.

A Toolkit of Policies to Promote Innovation

That is the new Journal of Economic Perspectives article by Nicholas Bloom, John Van Reenen, and Heidi Williams.  Most of all, such articles should be more frequent and receive greater attention and higher status, as Progress Studies would suggest.  Here is one excerpt:

…moonshots may be justified on the basis of political economy considerations. To generate significant extra resources for research, a politically sustainable vision needs to be created. For example, Gruber and Johnson (2019) argue that increasing federal funding of research as a share of GDP by half a percent—from 0.7 percent today to 1.2 percent, still lower than the almost 2 percent share observed in 1964 in Figure 1—would create a $100 billion fund that could jump-start new technology hubs in some of the more educated but less prosperous American cities (such as Rochester, New York, and Pittsburgh, Pennsylvania). They argue that such a fund could generate local spillovers and, by alleviating spatial inequality, be more politically sustainable than having research funds primarily flow to areas with highly concentrated research, such as Palo Alto, California, and Cambridge, Massachusetts.

In general I agree with their points, but would have liked to have seen more on freedom to build, and of course on culture, culture, culture.  At the very least, policy is endogenous to culture, and culture shapes many economic outcomes more directly as well.  I’m fine with tax credits for R&D, but I just don’t see them as in the driver’s seat.

Paul Krugman’s Most Evil Idea

Erik Torenberg, co-founder of the VC firm Village Global, interviews me in a wide-ranging podcast. Here is one bit from a series of questions on what do you disagree about with ____. In this case, Paul Krugman.

AT: …Krugman and I are almost in perfect agreement. Only marginally different. Paul says ‘Republicans are corrupt, incompetent, unprincipled and dangerous to a civil society’. I agree with that entirely. I would only change one word. I would change the word Republicans to the word politicians. If Paul could only be convinced of doing that, coming over to the libertarian side, we would be in complete agreement. But he is much more partisan than I am and even though I worry about Republicans more than Democrats at this particular point in time I think the larger incentive is that we all need to be worried about politicians rather than any one particular party.

Although I agree with Paul a lot of the time, sometimes he does just drive me absolutely batty. He just says things which I think are so wrong. In his latest column which to be fair was written as a column fifty years in the future so maybe it was a bit tongue in cheek. The column was pretending that Elon Musk and Peter Thiel were a hundred years of age and fit and fiddle and still major players in society. And Krugman wrote:

Life extension for a privileged few is by its nature a socially destructive technology and the time has come to ban it.

Now to me this is just evil. This is like something out of Ayn Rand’s Anthem, that it is evil to live longer than your brothers and all must be sentenced to death so that none live more than their allotted time. I think it is evil if we accept even the premise of his argument that these technologies are very expensive. Even on that ground it’s evil to kill people just so that they don’t live longer than average. But perhaps even a bigger point is that I think these technologies of life extension are some of the most important things that people are working on today. And the billionaires are doing an incredible service to humanity by investing in these radical ideas and pushing the frontier and that is going to have spillover effects on everyone. If we are to reach the singularity it will because the billionaires are getting us there earlier and faster and they are the ones pushing us to the singularity and everyone will benefit from these life extension technologies.

So I agree with Paul quite a bit, more than you might expect, but sometimes he just says things which are absolutely evil.

We cover open borders, whether capitalism and democracy are compatible, the Baumol effect and more. Listen to the whole thing.

Average is Over: Newspaper Edition

Joshua Benton at the LA Times illustrates average is over for newspapers. On the left the print circulation of major newspapers in 2002. The NYTimes is the leader but other newspapers follow closely behind in a slowly decaying curve likely related to city size. On the right, 2019 digital subscriptions. The NYTimes dominates. Only the Washington Post is even in the same league (The Wall Street Journal, however, should also have made Benton’s list at 1.5 million digital subscribers.) Without classified ads and other local information, for which there are now multiple online substitutes, there isn’t a big demand for local newspapers. News is now national and only a handful of newspapers can survive at national scale. Moreover, the few who can survive at national scale are now so much better than their competitors precisely because they can afford to be better.

Image

 

Collective reputation matters for firms

This paper uses the 2015 Volkswagen emissions scandal as a natural experiment to provide evidence that collective reputation externalities matter for firms. We find that the Volkswagen scandal reduced the U.S. sales of the other German auto manufacturers—BMW, Mercedes-Benz, and Smart—by about 105,000 vehicles worth $5.2 billion. The decline was principally driven by an adverse reputation spillover, which was reinforced by consumer substitution away from diesel vehicles and was partially offset by substitution away from Volkswagen. These estimates come from a model of vehicle demand, the conclusions of which are also consistent with difference-in-differences estimates. We provide direct evidence on internet search behavior and consumer sentiment displayed on social media to support our interpretation that the estimates reflect a reputation spillover.

That is from a new NBER Working Paper by Ruediger Bachmann, Gabriel Ehrlich, Ying Fan, and Dimitrije Ruzic.

Rational discourse about the federal budget has become virtually impossible

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

The conservative and fiscal conservative response has been no more coherent. On one hand, conservatives like to boast of the power of economic growth. But if, as they often assume, the economy is going to keep growing strongly, a widening budget deficit may well prove manageable. Interest rates have been low, and even falling over the past year, while economic growth has been running over 2%. If it continues to exceed the government’s inflation-adjusted borrowing rate (currently negative for T-Bills and close to zero for longer maturities), the U.S. will be able to grow out of its debt. Under this scenario Trump will look like a genius, and the fiscal conservatives will continue their slide into irrelevance.

You might argue that the problem is government spending, rather than budget deficits per se. But the U.S. can in essence pull in more resources from abroad, finance greater spending and consumption with additional borrowing, and still pay off its bills in orderly fashion without bankrupting the future. Our grandchildren can inherit both the debt and the government bonds.

In my experience, fiscal conservatives hate this argument. But through the term structure of interest rates, markets are forecasting low rates for at least the next 10 years, and conservatives tend to respect market prices. To be against the budget deal is also to go against the markets’ current message that debt service costs will remain low.

There are twists and turns in the piece, and just about everyone gets whacked, so don’t judge the final message by that excerpt alone.

Air Genius Gary Leff on market power for airlines

Read the whole post, but are is an excerpt:

With oil hovering around $100 a barrel we did see airfares rise 2011-2014 but then return to long run trend, and indeed real airfares inclusive of fees were lower 2016-2018 than in 2010…

Indeed the drivers of increased airline profits are:

  • lower fuel prices
  • richer co-brand credit card deals.

As I’ve pointed out in many recent quarters the entirety of American Airlines profit has been accounted for by its co-brand credit card deals and not flying. The richness of these deals for airlines has grown markedly. This may be partly attributable to industry consolidation (fewer airlines for banks to negotiate with) and partly due to American Express losing its deal with Costco which set off a chain of renegotiations at higher price points.

Consolidation has improved airlines’ bargaining position vis-a-vis banks more so than consumers. And indeed with fuel prices up from three and four years ago profits are down…

Moreover it’s the ultra low cost carriers – Spirit, Frontier, and to a lesser extent Allegiant – that have been the driving forces in the U.S. airline industry.

Do read the whole thing.

The Online Tipping Outrage

The latest outrage cycle was started by April Glaser in Slate who is outraged that some online delivery companies apply tips to a worker’s base pay:

My first DoorDash order is probably my last because, as journalist Louise Matsakis put it on Twitter, “I don’t believe that a single person intends to give a tip to a multibillion dollar venture-backed startup. They are trying to tip the person who delivered their order.”

You will probably not be surprised, however, that Slate is also outraged at tipping.

Tipping is a repugnant custom. It’s bad for consumers and terrible for workers. It perpetuates racism.

But one way for a firm to get rid of tipping is to guarantee a payment per delivery. Many delivery workers may prefer such a system because tips are often perfunctory and therefore from the point of view of the worker random or they vary based on factors over which the delivery person has little control (e.g. worker race but also the customer’s online experience and whether other workers got the pizza into the oven on time). In other words, the no-tip system reduces the variance of pay. Moreover, it won’t reduce pay on average. Delivery workers will earn what similarly skilled workers earn elsewhere in the economy whether they get to keep “their” tips or not. The outrage over who gets the tip is similar to complaining about who pays the tax, the supplier or the demander.

There are exceptions. In some industries, such as bartending, the quality of the service can vary dramatically by worker and tips help to reward that extra quality when it is difficult to observe by the firm. In these industries, however, both the workers, at least the high quality workers, and the firms want tips. If the firms themselves are removing tips that is a sign that they think that the worker has little control over quality and thus tips serve no purpose other than to more or less randomly reward workers. Since random pay is less valuable than certain pay and firms are less risk averse than workers it makes sense for the firm to take on the risk of tips and instead pay a higher base (again, with the net being in line with what similar workers earn elsewhere).

In short, a job is a package of work characteristics and benefits and it’s better to let firms and workers choose those characteristics and benefits to reach efficient solutions than it is to try to move one characteristic on the incorrect assumption that all other characteristics will then remain the same, to do so is the happy meal fallacy in another guise.

A test of Marginal Revolution political bias

Here is an email from Daniel Stone at Bowdoin, I am not imposing a double-formatting on it for ease of reading and formatting:

“Dear Tyler (if I may),

I’m a big fan of your work in general, and MR in particular, and think that you do as good a job as anyone at exploring a variety of political perspectives, and sharing related (diverse) research.

Still, you’re human after all J. I’ve always been curious if there are systematic patterns in your writing or links you post.

It occurred to me a couple weeks ago that you sometimes describe research as speculative or imply this by adding a question mark to the end of the link (the example that made me notice this was: “Minimum wage effects and monopsony?”https://marginalrevolution.com/marginalrevolution/2019/07/thursday-assorted-links-215.html). At other times your link simply states the main research finding or directly quotes from the paper or its title.

So, while it might be hard to identify a general bias in your links – even if the majority were, say, “pro-liberal”, this wouldn’t necessarily mean *you* were biased, since the majority of good research out there could be pro-liberal, using the added “?”s provides an identification strategy: if you were more likely to add a ? for research that leans one political direction or the other, that would suggest a bias on your part.

As a fun side project, that I thought might also have some value given the importance of MR and understanding bias more generally, I had my RA (Maggie Hanson, cc’d) grab all your links from Assorted Links posts to social science research this year (as of a few days ago). Together we coded the ‘slant’ of each as L, R or N (neutral) – depending on whether the research supports regulation, indicates market failure, etc (admittedly our process here was not extremely scientific). She also recorded whether your link text is phrased as a question (or notes that the finding is speculative, which you did a couple times and seems similar). In addition, for link text phrased as a question, we also noted whether this text is a direct reference to the research paper’s title, as this means you didn’t actually add the “?”.

We did a bit of very basic analysis, here are results:

The distribution of slant across links is quite balanced, but leans left:

. tab sla

Slant |

(L/N/R) |      Freq.     Percent        Cum.

————+———————————–

L |         35       29.17       29.17

N |         58       48.33       77.50

R |         27       22.50      100.00

————+———————————–

Total |        120      100.00

 

But you were slightly more likely to phrase your link as a question for “L” links vs for Rs (9/35 for Ls vs 5/27 for Rs):

.   tab slant endswith

Slant |      Ends with ?

(L/N/R) |         n          y |     Total

———–+———————-+———-

L |        26          9 |        35

N |        48         10 |        58

R |        22          5 |        27

———–+———————-+———-

Total |        96         24 |       120

 

And you were a bit more likely to do this for links that were not direct quotes of article titles that were questions (7/33 = 0.21 for Ls vs 2/24=0.083 for Rs):

tab slant endswith if linktex==”n”

Slant |      Ends with ?

(L/N/R) |         n          y |     Total

———–+———————-+———-

L |        26          7 |        33

N |        48          8 |        56

R |        22          2 |        24

———–+———————-+———-

Total |        96         17 |       113

 

But the magnitude of this difference is not large (and I bet not statistically significant), and the large majority of both L and R links were presented by you without questions marks.

Bottom line: you do present a quite balanced set of research findings, the general distribution leans left but it is hard to interpret this (without knowing the slants of research in general or the slant of research you post elsewhere, aside from Assorted Links). And there is suggestive evidence of a small tendency for you to be more questioning of research supportive of liberal/leftist policies.

Here’s a link to the data:

https://docs.google.com/spreadsheets/d/1CrPqezV51SCwAwuwjdRqBy4jUlX76Iti0X4P1nKPMpM/edit?usp=sharing

This includes a sheet with all the links that end in ?, that aren’t quotes of article titles, and their slants.

I wanted to share this with you before sharing with others. Please feel free to let me know any questions or comments!

Thanks, and thanks again for all your work. All the best – Dan”