Category: Economics

The Kids are Doing Alright

You may have seen the viral tweet suggesting that boomers own all the wealth and millennials are poor. It’s hard for me to get worked up. Talk about a problem that will solve itself!

The problem that the graph suggests, however, is not even correct. Why are we looking at generational wealth shares when we could be looking at the much more straightforward statistic, wealth per capita. Jeremy Horpedahl does just that:


Looking at the exact same data (from the Fed Distributional Financial Accounts) from a different perspective gives us a much different picture of recent history. In this version, Gen X is now richer (30% richer!) than Boomers were at the same age (late 40s). Millennials don’t yet have a year of overlap with Boomers, but they are tracking Gen X almost exactly. There is no reason they won’t continue to track Gen X, and therefore exceed Boomers as well when they are in their late 40s (which will happen in about 2037 for Millennials).

In other words, people in the current generation have as much or more wealth than people of previous generations did at the same age.

Read the whole thing if you want some additional astute points about student debt and politics but I call this one busted. The kids are doing alright.

Econ 101, the Drug War, and Afghanistan

Jeffrey Clemens has an excellent piece summarizing his work on the economics of opium production and foreign policy:

From the perspective of Eurasian heroin traffickers, raw opium accounts for a small share of the cost of reaching either their middle- or high-income consumers. Most of the cost is driven by the expenses and risks associated with trafficking itself—bribery, money laundering, document forgery, and, when attempts to evade the authorities fail, violence. As a result, traffickers’ demand for the opium produced by Afghan farmers is inelastic, meaning that even a substantial change in the prices required by farmers will have a modest effect on the quantity the traffickers choose to acquire. This meant that the government’s efforts to reduce poppy cultivation had a greater effect on prices than on the quantity produced—the government drove up opium prices without reducing the quantity demanded by and produced for traffickers.

While overall opium production did not decline, it did undergo an important shift. Predictably, opium production shifted out of the government’s most tightly held provinces and toward provinces in which the government struggled to exert control. This stemmed from a straightforward issue of targeting and state capacity. Prohibitions can only be enforced on territory that the state governs. As a result, opium suppression efforts reduced poppy cultivation in provinces in which the Taliban had historically been weak. Before the increase in counternarcotics spending, poppy cultivation was prevalent in districts across the country. By the late 2000s, however, it had consolidated in areas dominated by the Taliban in the country’s southwest provinces, in particular in Helmand province, which regularly accounts for half of the land cultivated with opium poppies.

Thus, not only did the war on opium fail to reduce opium production it increased the strength of the Taliban. There are general lessons:

When a policy impinges on people’s livelihoods, it risks alienating the very population on whose loyalty the government relies. When state capacity is low, pursuing such policies is thus likely to be unwise. And it is precisely those who oppose the government’s authority, and have the means to resist it, who will tend to thrive in illicit markets. By creating such markets, then, prohibition policies can create economic environments that enrich the government’s adversaries. Similar dynamics have long been at play in the conflict between the Colombian government, drug cartels, and assorted paramilitary groups, where US aid has historically been linked to efforts to suppress cocaine production

…Economic prohibitions can thus have the unintended consequence of enriching the government’s opponents. When a state is weak, it should thus forego, or at least deemphasize, the imposition of economic restrictions. The ability to enforce prohibitions is a luxury reserved for stronger and more stable regimes.

This piece and the underlying research make for excellent undergraduate teaching material as it show the power of simple economic principles to understand the world.

Addendum: On the last point about weak states foregoing the imposition of economic restrictions, see also my piece with Shruti Rajagopalan on Premature Imitation.

Picture Credit: “Poppy Field (Chollerford)” by wazimu0 is licensed with CC BY 2.0. To view a copy of this license, visit

The capital life extension query

From Arjun Narayan:

Loyal reader here and I’ve been pondering an altered version of your post [the other day] -You have the power to grant 100% more capital (that they deployed in their lifetime) to a person or institution who prematurely ran out of capital too soon. Who do you pick?

It’s worth considering the counterfactual: Elon Musk almost ran out of money in 2008 and was bailed out by Daimler. we would be far worse off on a few dimensions (lithium ion battery production, but also the urgency with which every carmaker is now attacking the transportation electrification problem). Who else should we go back in time and similarly bail out?

My answer is the companies that built the NYC subway which went bankrupt – the BMT, IRT, and IND. After the city takeover in ~1940, construction slowed over a generation, and no infrastructure has been built since. It’s unclear if infrastructure will ever be built in NYC again. It’s clear to me that the only time to build was right then and there, and we should have “overbuilt” to the maximum extent possible when we could.

And in terms of returns to society, what is the value of 10% more efficient subway service (faster/longer/more frequent)? 20? 50%? We could absorb more population (NIMBYs notwithstanding), and as the largest city in the US, the agglomeration effect means it is most impactful here.

I am very curious what your answer would be!

I do not have a better answer than that, unless you start getting into military scenarios.  If you are allowed to consider cyclical scenarios, how about more money to bail out U.S. banks in the 1929-1932 period?  More funds to limit the German deflation before Hitler, or alternatively to bail out the Weimar government so hyperinflation and later social collapse does not come?  But I take those possibilities as beyond the initial question.

Could a cash infusion alone have kept Intel active and successful in the high-quality chips market?  Somehow I doubt that.  More money for Novavax in 2020-21 as a contender?  That could have helped the rest of the world a good deal, given how slow they have been to convert their very important science into an actual product.

Don’t shoot the messenger — on the value of human life

Thus, to analysts, picking one such meta-analysis may feel as hard as picking a single “best study.” This paper responds by taking the meta-analysis another step, estimating a meta-analysis (or mixture distribution) of six meta-analyses. The baseline model yields a central VSL of $7.0m, with a 90% confidence interval of $2.4m to $11.2m. The provided code allows users to easily change subjective weights on the studies, add new studies, or change adjustments for income, inflation, and latency.

Here is the new NBER paper, by H. Spencer Banzhaf.

Further progress on the wage rigidity question

From Benjamin Schoefer, bravo:

I propose a financial channel of wage rigidity. In recessions, rather than propping up marginal (new hires’) costs of labor, rigid average wages squeeze cash flows, forcing firms to cut hiring due to financial constraints. Indeed, empirical cash flows and profits would turn acyclical if wages were only moderately more procyclical. I study this channel in a search and matching model with financial constraints and rigid wages among incumbent workers, while new hires’ wages are flexible. Individually, each feature generates no amplification. By contrast, their interaction can account for much of the empirical labor market fluctuations—breaking the neutrality of incumbents’ wages for hiring, and showing that financial amplification of business cycles requires wage rigidity.

The piece is titled “The Financial Channel of Wage Rigidity.”  One of the best macro papers!  It puts all of the pieces together, including the finance channel, and the difference between incumbent and new workers, identifying the relevant counterfactuals, and is not content to simply say “wage rigidity.”

Here is more on Schoefer, who as a sideline runs the Wirtschaftspolitik-Diskussionsrunde.  Here is his (entirely sober) Twitter account.

Hispanic and White Criminality are Converging

Keith Humphreys has a good post at the excellent Slow Boring on how Hispanics and White statistics on crime are converging.

An otherwise dull new government report on incarceration contains a startling fact: Hispanics are slightly less likely to be jailed than whites. It’s one of multiple unappreciated signs of fading disparities between Hispanics and non-Hispanic whites in the criminal justice system, a phenomenon with substantial implications both for the future of reform and electoral politics.

To be clear this is about jails not prisons where there are still differences but those differences are also rapidly converging. Hispanics are also joining police forces in much higher numbers.

Parallel changes appear in who the criminal justice system employs. From 1997 to 2016, the proportion of police officers who were African-American was stable, whereas the proportion who were Hispanic increased 61%. This helps explain why a June 2021 Gallup poll found that the proportion of Hispanics expressing “a lot” or “a great deal” of trust in police was 49%, almost as high as whites (56%), and far greater than that of African-Americans (27%).  Hispanic views on policing and crime may also be similar to whites because the two groups rate of being violent crime victims is almost identical (21.3 per thousand persons for Hispanics, 21.0 for whites).

Maybe systemic racism isn’t so systemic after all.

…in an era of widespread despair about criminal justice reform and racism in America more generally, the declining disparities between Hispanics and non-Hispanic whites merit reflection. A generation ago, the idea that such disparities would dramatically shrink or even disappear within the criminal justice system would have sounded naive. The fading of disparities should inspire reformers to even greater heights and also reduce cynicism about the alleged intractability of prejudice within American society.

This piece is proving to have legs

We develop a framework to theoretically and empirically analyze the fluctuations of the aggregate stock market. Households allocate capital to institutions, which are fairly constrained, for example operating with a mandate to maintain a fixed equity share or with moderate scope for variation in response to changing market conditions. As a result, the price elasticity of demand of the aggregate stock market is small, and flows in and out of the stock market have large impacts on prices.

Using the recent method of granular instrumental variables, we find that investing $1 in the stock market increases the market’s aggregate value by about $5. We also develop a new measure of capital flows into the market, consistent with our theory. We relate it to prices, macroeconomic variables, and survey expectations of returns. We analyze how key parts of macro-finance change if markets are inelastic. We show how general equilibrium models and pricing kernels can be generalized to incorporate flows, which makes them amenable to use in more realistic macroeconomic models and to policy analysis. Our framework allows us to give a dynamic economic structure to old and recent datasets comprising holdings and flows in various segments of the market. The mystery of apparently random movements of the stock market, hard to link to fundamentals, is replaced by the more manageable problem of understanding the determinants of flows in inelastic markets. We delineate a research agenda that can explore a number of questions raised by this analysis, and might lead to a more concrete understanding of the origins of financial fluctuations across markets.

Here is the link, by Xavier Gabaix and Ralph S.J. Koijen.  I worry that the hypothesis implies excess returns from monitoring the trading behavior of others (or even yourself?), but that’s just me.  It is in any case one of the more interesting (and ambitious) pieces in finance over the last few years.

My emails to Arnold Kling about the correct inflation model

After I cited low ten-year securities yields, Arnold asked for my basic model of inflation, here was my first email:

  • Price level dynamics and money supply processes are murky, at least in recent times
  • The median voter hates inflation
  • The Fed won’t let inflation happen

…is my model.

I would add a dose of “inflationary pressures really do seem to be distributed pretty unevenly.”

End of email!  Here was my second email to Arnold:

I think the Fed knows the true model in gross terms.
I also think there is a good chance the Fed will create a recession in limiting inflation.

But look at Japan. The EU. Even Italy. It’s not just the US.

Temporary inflation pressures all over the place, due to Covid and post-Covid adjustments. No fiscal financial crises. No long-term inflationary expectations of much note. Not in the developed nations.

The stock of saved wealth is now quite high relative to debt and deficits, especially if you count human capital.

So both the basic model and the markets predict no catastrophe, and also no run-away inflation. And central banks know how to boost the demand for money when needed.

Seigniorage returns from inflation are especially low in the contemporary environment, checking another motive for inflation. No “Assignats” revenue is in the works here.

I just don’t see what we’ve got “in the toolbox” to override all of that.

End of email!  I should note that I agree with Summers that inflation is higher than it needs to be, that is bad, and it is because we overshot on our combined monetary/fiscal response.

I’ll also repeat my standard challenge: are you short the long bond?  Are you buying those puts?  I’m not so convinced if all you’ve got is “I’m not buying so many equities any more!”

Thailand and The WHO on Fractional Dosing

Thailand will study fractional dosing:

Thailand is studying the possibility of injecting coronavirus vaccines under the skin to try to stretch its limited supply, a health official said on Thursday, as the country races to inoculate the public faster amid a worsening epidemic.

“Our previous experience shows that intradermal injections uses 25% of a muscular injection, but triggers the same level of immunity,” head of the medical science department, Supakit Sirilak told reporters.

I am also pleased that the WHO’s SAGE has issued an interim statement on fractional doses:

WHO, with support of the Strategic Advisory Group of Experts (SAGE) on Immunization and its COVID-19 Vaccines Working Group, is reviewing the role of fractionating doses as a dose-sparing strategy in light of global vaccine supply constraints. SAGE is continuously reviewing the literature and has reached out to vaccine manufacturers and the research community for available information.

….While SAGE acknowledges the potential public health benefits of dose-sparing strategies to increase vaccine supply and accelerate population-level vaccination coverage, and possibly also a reduction in reactogenicity, SAGE considers there is currently insufficient evidence to recommend the use of fractional doses. Any use of a fractional dose at this point in time constitutes an off-label use of the vaccine. SAGE encourages research in the area, with a particular emphasis on research into using fractionated doses as potential boosters and fractional doses in children and adolescents.  Programmatic and operational considerations should be considered from the start.

The statement is reasonable but could have used some cost-benefit analysis. Given shortages, I’d push for a challenge trial or some field trials. I agree that if we are to have boosters and to vaccinate young children we should be looking very hard at fractional doses as they are likely to be sufficient for purpose and to preserve as much supply as possible for the rest of the world.

By the way, I think you can also see some status quo bias in the WHOs position on boosters: they are not (yet) enthusiastic about increasing supply with fractional doses but they are very negative about reducing supply with boosters. What a miracle that the status quo is just right!

In the context of ongoing global vaccine supply constraints, administration of booster doses will exacerbate inequities by driving up demand and consuming scarce supply while priority populations in some countries, or subnational settings, have not yet received a primary vaccination series.

The WHO also doesn’t note that if developed countries go for boosters then the case for fractional doses elsewhere to make use of the even more limited supply is likely even stronger.

Here’s my paper with co-authors on fractional doses.

Hat tip: Witold.

Simple facts about Afghanistan

Trade will be a particular source of difficulty. The last IMF report on the country prior to the collapse of the government counted imports at about $7 billion annually, a huge fraction of Afghanistan’s $19 billion GDP. Imports exceeded exports by about a factor of five. While that high level of imports was sustainable under the unusual circumstances of the U.S. presence, it won’t be sustainable going forward.

So on top of its other problems, Afghanistan will need to balance its trade deficit, a deeply painful process that will, one way or another, reduce the number of imports available to Afghan civilians. Given that its currency reserves have been frozen to prevent the Taliban from accessing them, it will need to balance its trade deficit quickly, without any adjustment period.

Here is more, via Matt Yglesias (do subscribe!…and you can subscribe to the Afghanistan source here).  Note that electricity and medical supplies are among the most important Afghani imports.

The economics of Taliban finance

An example of Islamist governance can be found on the stretch of road from Kabul to the Mile 78 border crossing in south-west Farah province that borders Iran.

The road has more than 25 government checkpoints and a fee is charged at multiple points on the journey. By contrast, the Taliban who police the same road have far fewer checkpoints and give a receipt, so only a single payment is necessary.

Ibraheem Bahiss, an Afghanistan consultant at International Crisis Group, said the Taliban sought to portray themselves as better administrators. “Increasingly they began co-opting government infrastructure to offer [improved] service deliveries,” said Bahiss, explaining that the Taliban in some areas ensured that teachers and nurses showed up to work.

In recent years, the Taliban has widened its tax base from centuries-old taxes of oshr, a one-tenth tithe of harvest produce, and zakat, a religious tax of 2.5 per cent of disposable income for the poor, although collection is often lower.

In Nimroz province, levies on transit goods such as vehicles and cigarettes formed 80 per cent of Taliban revenues, ODI research concluded.

Illegal mining and taxes on imported fuel are further sources of funds. Taliban earnings on fuel imported from Iran were as high as $30m last year, according to the Alcis consultancy.

Here is the full FT story.  You will note that the “bandits” side of the Taliban are able to raise this revenue, in part, because Afghanistan suffers from the misfortune of being a landlocked country.  With sea routes as a possible alternatives to goods and services, such fiscal systems would be harder to pull off, for both the Taliban and the previous government, I might add.  Landlocked countries often have it tough.  (By the way, much of the rest of the article considers drugs as a revenue source.)

What is going on with productivity? (from my email)

Various web sources, but none of this seems controversial:

1. US GDP is now higher, in fact a fair bit higher, then when the pandemic began.

2. US labor force participation is about 1.5% lower than when the pandemic began.

Was there really slack to the tune of a few million people in Jan of 2020?

Has inflation really changed enough to make the GDP numbers misleading?

Has total factor productivity improved that much in that time, under those stresses?

Or is this all a sign that the structure of the economy is more stratified than we think – that there are millions of people in more-or-less filler jobs who can be cast out and the economy just keeps on running along?   Yes, there are all sorts of reports of labor shortages, and all manner of supply chain hiccups which seem to often be associated with off shoring, but general activity is still high.   (Or is it?  Are the numbers reporting “vapor GDP?” – or are the inflation adjustments really out of whack so real GDP is not what we think it is?)

That is all from Bryan Willman.