Category: Economics


US exports increased 14.4 percent from YTD April 2016 to YTD April 2018, from $725.8 billion to $830.5 billion.

US imports increased 16.5 percent from YTD April 2016 to YTD April 2018, from $886.2 billion to $1,032.3 billion.

Here is the source, via James Hohman.  You don’t have to credit Trump with much if any of that, the broader point is that, as I argued yesterday, the age of trade is hardly over.

The Economic Limits of Bitcoin and the Blockchain

From Eric Budish at the Booth School of Business at Chicago:

The amount of computational power devoted to anonymous, decentralized blockchains such as Bitcoin’s must simultaneously satisfy two conditions in equilibrium: (1) a zero-profit condition among miners, who engage in a rent-seeking competition for the prize associated with adding the next block to the chain; and (2) an incentive compatibility condition on the system’s vulnerability to a “majority attack”, namely that the computational costs of such an attack must exceed the benefits. Together, these two equations imply that (3) the recurring, “flow”, payments to miners for running the blockchain must be large relative to the one-off, “stock”, benefits of attacking it. This is very expensive! The constraint is softer (i.e., stock versus stock) if both (i) the mining technology used to run the blockchain is both scarce and non-repurposable, and (ii) any majority attack is a “sabotage” in that it causes a collapse in the economic value of the blockchain; however, reliance on non-repurposable technology for security and vulnerability to sabotage each raise their own concerns, and point to specific collapse scenarios. In particular, the model suggests that Bitcoin would be majority attacked if it became sufficiently economically important — e.g., if it became a “store of value” akin to gold — which suggests that there are intrinsic economic limits to how economically important it can become in the first place.

I like the framework of this paper, though I wonder if there shouldn’t be more on the coordination costs of mounting a “double spending” attack, namely how exactly the returns from the attack should be divided.  Perhaps the most positive scenario for Bitcoin is if those coordination costs rise with the returns to the attack itself, in which case a much higher market value for Bitcoin still might be stable.

Why we still should be optimistic about free trade

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

A lot of the recent cross-border migration is planting a hugely positive, pro-trade legacy that will yield dividends for decades to come. The Chinese, Indians, Nigerians and many other groups around the world will continue to build economic connections, even when the countries involved aren’t always so geographically close. I expect the positive trade gains from these connections and personal networks will outweigh the downside from some higher tariffs in the meantime. Ultimately the opportunities are there, and the biggest problem is the lack of human talent to execute on them.

I do however see one big problem:

The internet shows some signs of breaking down into separate networks, connected only imperfectly. The Chinese “Great Firewall” has proved robust, and recently the European Union has moved toward creating its own set of stringent privacy and data protection laws, such as the new General Data Protection Regulation standards. Sitting here in Norway for a conference, I find I am unable to access many American websites, such as the Chicago Tribune, which are not (yet?) GDPR-compliant. There is thus a danger that the internet will become carved into three or more separate systems, to the detriment of trade, data flows and eventually personal  connections.

Do read the whole thing.

More on the Education Tax

In my post, The Education Tax Reduces Inequality and the Incentive to Work, I illustrated how the high cost of college combined with income based pricing have turned education pricing into a tax with potentially significant effects on work and savings incentives. David Henderson pointed me to a paper by Martin Feldstein in 1992, College Scholarship Rules and Private Saving which states the issues very well.

This paper examines the effect of existing college scholarship rules on the incentive to save. The analysis shows that families that are eligible for college scholarships face “education tax rates” on capital income of between 22 percent and 47 percent in addition to regular slate and federal income taxes. The scholarship rules also impose an annual tax on previously accumulated assets. Through the combination of the implied tax on capital income and the associated tax on previously accumulated assets, the scholarship rules that apply to a middle-income family reduce the value of an extra dollar of accumulated assets by 30 cents in four years. A similar family with two children who attend college in succession will see an initial dollar of assets reduced to 50 cents. Such capital levies of 30 to 50 percent are a strong incentive not to save for college expenses but to rely instead on financial assistance and even on regular market borrowing, Moreover, since any funds saved for retirement are also subject to these education capital levies. the scholarship rules discourage retirement saving as well as saving for education. The empirical analysis developed here, based on the 1986 Survey of Consumer Finances, implies that these incentives do have a powerful effect on the actual accumulation of financial assets. More specifically, the estimated parameter values imply that the scholarship rules induce a typical household with a head aged 45 years old, with two precollege children, and with income of $40,000 a year to reduce accumulated financial assets by $23,124 approximately 50 percent of what would have been accumulated without the adverse effect of the scholarship rules.

Dick and Edlin made a similar point in 1997 but, as far as I can tell, there have been only a handful of papers on this issue since that time. The cost of college, however, is about twice as high today as in the 1980s and price discrimination is much more extensive so the effects are likely larger today.

Is carbon capture underrated?

Siphoning carbon dioxide (CO2) from the atmosphere could be more than an expensive last-ditch strategy for averting climate catastrophe. A detailed economic analysis published on 7 June suggests that the geoengineering technology is inching closer to commercial viability.

The study, in Joule, was written by researchers at Carbon Engineering in Calgary, Canada, which has been operating a pilot CO2-extraction plant in British Columbia since 2015. That plant — based on a concept called direct air capture — provided the basis for the economic analysis, which includes cost estimates from commercial vendors of all of the major components. Depending on a variety of design options and economic assumptions, the cost of pulling a tonne of CO2 from the atmosphere ranges between US$94 and $232. The last comprehensive analysis of the technology, conducted by the American Physical Society in 2011, estimated that it would cost $600 per tonne.

That is by Jeff Tollefson in Nature, via Brad Plumer.  Of course this is potentially very significant news.

How much is deep sea fishing subsidized?

While the ecological impacts of fishing the waters beyond national jurisdiction (the “high seas”) have been widely studied, the economic rationale is more difficult to ascertain because of scarce data on the costs and revenues of the fleets that fish there. Newly compiled satellite data and machine learning now allow us to track individual fishing vessels on the high seas in near real time. These technological advances help us quantify high-seas fishing effort, costs, and benefits, and assess whether, where, and when high-seas fishing makes economic sense. We characterize the global high-seas fishing fleet and report the economic benefits of fishing the high seas globally, nationally, and at the scale of individual fleets. Our results suggest that fishing at the current scale is enabled by large government subsidies, without which as much as 54% of the present high-seas fishing grounds would be unprofitable at current fishing rates. The patterns of fishing profitability vary widely between countries, types of fishing, and distance to port. Deep-sea bottom trawling often produces net economic benefits only thanks to subsidies, and much fishing by the world’s largest fishing fleets would largely be unprofitable without subsidies and low labor costs. These results support recent calls for subsidy and fishery management reforms on the high seas.

Emphasis added, that is by Enric Sala,, via Anecdotal.

Can privatization solve Ethiopia’s problems?

Here is a new paper by Ermyas Amelga, excerpt:

Privatization will not just solve the GTP’s financing problem, a worthy enough accomplishment in its self, but would also help address macroeconomic problems. These include funding/driving aggregate demand, financing aggregate investment, solving the foreign exchange shortage, rebalancing the balance of payments, dampening inflation and reviving general economic activity. May seem improbable but its not.

In the context of the huge financing needs to fulfill the plans under the GTP, privatization represents an excellent means of cashing out on the accumulated net worth of Ethiopia’s SOE’s. Indeed, there is arguably no more justifiable use of this accumulated net worth than spending it on the GTP that the government itself believes is worthy of supreme sacrifice from all corners of society.

This paper is a very good introduction to both Ethiopia’s corporate problems and also their fiscal problems.  Privatization is not entirely fashionable these days, but the current situation in Ethiopia presents perhaps the strongest case for it.  So if your initial reaction is “Ah privatization, that is the failed strategy that China rightly rejected”…you are making exactly the same mistake made by many privatization proponents in the 1990s.  Ethiopia is starved for revenue, foreign exchange, and the country needs more private sector involvement/

And lo and behold, Ethiopia has in fact just announced a major plan to privatize many parts of some of the major state-owned companies.

By the way, I wish to thank Chris Blattman for an introduction to Ermyas and also for valuable ideas and information related to Ethiopia.

The Education Tax Reduces Inequality and the Incentive to Work

At the NYTimes David Leonhardt breaks families down into six income classes from the poor to the very affluent, defined as follows:

Using a tuition calculator he then estimates tuition (including room and board) by income class at 32 colleges and universities (see below–the darker dots indicate the richer income classes). At many private colleges and universities it is not unusual for some students to be paying $70,000 per year while others pay less than $5,000, for exactly the same education. (Tyler and I provide some similar data on college price discrimination in Modern Principles.) Leonhardt’s point is that a poor student can afford an expensive education and might actually save money by going to an elite private university rather than to a state college.

Price discrimination in education has two other, less recognized, consequences. It reduces income inequality and it reduces the incentive to work. If every firm charged twice as much to someone who earned twice as much, there would no consumption inequality despite high measured income inequality. The rich don’t pay more than the poor when they buy the same basket of goods at the grocery store but they do pay much more for the same education.The Affluent pay approximately $70 thousand for education at the colleges Leonhardt examines while the Upper-Middle pay about half that. The effect on inequality is significant for families with kids in college. An Affluent person is 52% richer than an Upper-Middle income person (186/122=1.52) but an Affluent person with a kid in college is only 33% richer than an Upper-Middle income person with a kid in college (((186-70)/(122-35)=1.33). Shockingly, an Affluent person with two kids in college is actually poorer than an Upper-Middle income person with two kids in college! ((186-140)/(122-70)=0.88.

Under income-based pricing the education tax becomes an income tax with all the negative aspects of income taxes on behavior such as diminished work incentives. Let’s take a closer look at an Upper-Middle income parent earning $122 thousand per year. If this parent gets a promotion or takes on extra work that bumps their salary by $64 thousand, they move from being Upper-Middle income to Affluent. At least on paper. At an income of $122 thousand the parent will be paying approximately $35 thousand to send their child to college but at $186 thousand they will have to pay $70 thousand for the same college so the increase in salary of $64 thousand is an effective increase of only $29 thousand. If the Upper-Middle income parent has two children in college, earning more money actually results in a net loss. For an Upper-Middle income family with two kids spaced in age a few years apart the education tax could be a very severe work disincentive for up to a decade.

The education tax is a peculiar tax as it is often paid to private organizations rather than to the government but it is still a tax and for those of Upper-Middle income the education tax is a very significant tax.

The consequences of the education tax on inequality and work incentives are neither well studied nor well understood.

Long-run Effects of Lottery Wealth on Psychological Well-being

Here is a new NBER working paper from Erik Lindqvist, Robert Östling, and David Cesarini:

We surveyed a large sample of Swedish lottery players about their psychological well-being and analyzed the data following pre-registered procedures. Relative to matched controls, large-prize winners experience sustained increases in overall life satisfaction that persist for over a decade and show no evidence of dissipating with time. The estimated treatment effects on happiness and mental health are significantly smaller, suggesting that wealth has greater long-run effects on evaluative measures of well-being than on affective ones. Follow-up analyses of domain-specific aspects of life satisfaction clearly implicate financial life satisfaction as an important mediator for the long-run increase in overall life satisfaction.

In other words, it is good to have more money.

The Interpersonal Sunk-Cost Effect

Christopher Olivola
Psychological Science, forthcoming


The sunk-cost fallacy — pursuing an inferior alternative merely because we have previously invested significant, but nonrecoverable, resources in it — represents a striking violation of rational decision making. Whereas theoretical accounts and empirical examinations of the sunk-cost effect have generally been based on the assumption that it is a purely intrapersonal phenomenon (i.e., solely driven by one’s own past investments), the present research demonstrates that it is also an interpersonal effect (i.e., people will alter their choices in response to other people’s past investments). Across eight experiments (N = 6,076) covering diverse scenarios, I documented sunk-cost effects when the costs are borne by someone other than the decision maker. Moreover, the interpersonal sunk-cost effect is not moderated by social closeness or whether other people observe their sunk costs being “honored.” These findings uncover a previously undocumented bias, reveal that the sunk-cost effect is a much broader phenomenon than previously thought, and pose interesting challenges for existing accounts of this fascinating human tendency.

Via the excellent Kevin Lewis.

Blockchains and the Opportunity of the Commons

Tyler asks which goods and services are most likely to be bought and sold on a blockchain that is paid for with token issuance and appreciation?

  1. The services with high mark-ups? Low mark-ups?
  2. Big consumer bases?
  3. Well informed and well coordinated consumer bases?
  4. “Influencer” consumer bases, in the Gladwellian sense?
  5. “Trivial” consumer bases, that you don’t mind risking?
  6. Some other properties?

I will go with 6. Blockchains and tokenization are a way to incentivize the creation of a commons. A commons is an unowned place, platform, or protocol that helps people to meet, communicate and transact. Commons underlying modern life include TCP/IP, SMTP, HTTP, GPS and the English language. We don’t see these commons clearly because they are free, ubiquitous and, like air, taken for granted. What we do see are platforms like Airbnb, Uber and the NYSE and places to meet and communicate like OkCupid, Twitter, Facebook and YouTube. What blockchain and tokenization offer is the possibility of creating commons to replace all of these services and much more.

As the examples of AirBnb, Facebook and YouTube indicate, it’s possible for private firms to create platforms that serve the same purposes as a commons but these platforms are not a commons since they are privately owned. Private ownership is great but not without tradeoffs. Bill Gates hinted at one problem when he defined a platform:

A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it.

The platform dilemma is that a company that controls a platform wants to maximize the company’s value rather than the economic value of everybody that uses it. Company value and social value are correlated but they are not the same. There are three problems. First, the company will want to grab up as large a share of the social value as possible. That’s ok for efficiency but not ideal for platform users who, because of network effects and coordination issues, may find that they need to use the platform even though it leaves them with only a small surplus. Second, the company may take actions that increase its value but reduce social value. On some margins, for example, Facebook and YouTube profit from advertising that reduces social value. The third problem is that in creating a platform where many people meet and transact, a small number of companies come to control and access more data than may be ideal. Big centralized data is worrying for libertarian reasons but also because big, centralized data is a honeypot for bad actors and hence insecure.

The first set of internet commons like TCP/IP and HTTP were created by government and independent researchers. The unique use-case of blockchains is that blockchains can be used to incentivize the creation of unowned platforms, i.e. commons. The creator of a blockchain need not control the blockchain and indeed can credibly commit not to control it. Thus, the creator of a blockchain can commit to never taking actions to maximize profit at the expense of social value and it can commit to never taking actions to redistribute more of the social value to itself. The blockchain creator, however, can be rewarded through token issuance. Moreover, since the value of the token and the social value of the blockchain are positively correlated the blockchain creator has strong incentives to create a commons that maximizes social value.

To give an example, LBRY–one of the blockchain firms that I advise–is a kind of YouTube on the blockchain. The protocol that LBRY has created is unowned. LBRY’s incentives are to create something that will maximize the value of both content creators and content consumers. The social value created could well exceed that of any owned platform and if LBRY earns a small share of this social value they will be well compensated. Token issuance and appreciation is what incentivizes the creation of the commons.

Creating a commons on the blockchain isn’t easy, however. Decentralized institutions are much more difficult to design than centralized institutions. Decentralized databases are a big advance but making them work at scale-size and speed is a challenge. Precisely because the blockchain is unowned the designers have to get much more correct, right out of the gate. Changing a commons on the fly, forking, is costly, disruptive and not always possible. All of this explains why in the history of the world almost all decentralized institutions, such as markets and language, were not designed but arose through evolutionary forces. Hayek called decentralized institutions spontaneous orders because he implicitly assumed that all such decentralized institutions were spontaneous, i.e. unplanned. Only in very recent years have economists and computer scientists developed the understanding and tools that are necessary to design decentralized orders–orders that are planned but not controlled. Today smart contracts on blockchains like Ethereum have the potential to create a sophisticated set of global common resources that will form the foundation for much of the economic and social structure of this century–this is the opportunity of the blockchain commons.

Vanilla is worth more than silver

The price of vanilla has hit a record high of $600 (£445) per kilogram for the second time since 2017 when a cyclone damaged many of the plantations in Madagascar, where three quarters of the world’s vanilla is grown. Silver by comparison currently costs $538/kg.

Demand for vanilla has kept the prices high, leading some ice cream manufacturers to cut back and even halt production of the flavour, sparking fears of shortages over the summer.

Here is the full story, and note this:

Replacement printer ink cartridges can cost between $8 and $27, depending on the type of printer you have. A single black ink jet cartridge from one major manufacturer can cost $23 for just 4ml of ink – enough to print around 200 pages.

Manufacturers argue they need to charge this to cover the loss they are selling the printer hardware at, together with the research and development they do on ink technology. But cut open an ink cartridge and you will see that most of the space inside is taken up with sponge, designed to help preserve and deliver the ink.

And when you are paying what works out to be around $1,733/kg of ink, you might be better off printing with pure silver instead.

New issue of Econ Journal Watch

Volume 15, Issue 2, May 2018

In this issue:

Do ghastly images much reduce smoking? A study published in Tobacco Control reports large impact from mandated graphic warning labels—pictures of disease, suffering, and death—on cigarette packages in Canada. Trinidad Beleche, Nellie Lew, Rosemarie Summers, and J. Laron Kirby raise empirical challenges and suggest that the reported impact is greatly exaggerated.

Colonial Maryland’s bills of credit: Fiat money, discounted securities, or something else? In Economic History Review, James Celia and Farley Grubb argue that the dollar-denominated bills of credit circulated at less than face value like discounted securities. Ron Michener offers evidence that they circulated at par with specie and were treated as interchangeable with specie dollars. Farley Grubb replies, disputing Michener’s reading of the evidence.

Another pathPatricia Saenz-Armstrong describes the history and current standing of liberalism in Peru, extending the Classical Liberalism in Econ, by Country series to 18 articles.

Dissing TMS: After Adam Smith died in 1790, The Theory of Moral Sentiments soon came to be disparaged and disregarded, and was largely forsaken all the way up to the late 1970s. Compiled here are quotations from 26 critics of TMS. The long train of ‘dissing’ is striking in light of our warm regard for TMS today. But have the criticisms ever been answered?

Esoteric instruction: Republished here by permission of University of Chicago Press is a chapter from Arthur Melzer’s landmark work Philosophy Between the Lines: The Lost History of Esoteric WritingThe chapter explains pedagogical esotericism, in which the author sparks the superior reader to work to find things beyond the exoteric.

EJW Audio: Patricia Saenz-Armstrong on Economic Liberalism in Peru

GDPR is centralizing the market

GDPR, the European Union’s new privacy law, is drawing advertising money toward Google’s online-ad services and away from competitors that are straining to show they’re complying with the sweeping regulation.

The reason: the Alphabet Inc. GOOGL +2.58% ad giant is gathering individuals’ consent for targeted advertising at far higher rates than many competing online-ad services, early data show. That means the new law, the General Data Protection Regulation, is reinforcing—at least initially—the strength of the biggest online-ad players, led by Google and Facebook Inc.

Here is the full WSJ story.

The ongoing experiment with bootstrap equilibria, also known as tokens

There are many economics papers on bootstrap equilibria, for instance if agents in an economy expect it will do well, maybe that translates into actual results through the mechanisms of confidence, investment, and so on.

Right now we have a huge and unprecedented laboratory for testing claims about bootstrap equilibria, namely crypto and in particular the markets for tokens.  Imagine you are a private entrepreneur, and you have a new idea for how a money or store of value should be run.  Yet, to give your asset some value, you need to convince others your idea is valid.

One option is to write better software than that governing existing crypto-assets.

Another option, increasingly popular, is to use your market power in some good or service to make your “gift certificate” (read: token) more focal.  Let’s say for instance that you have invented a new computer game that in some regards is better than that of the competitors.  The “old school” approach was to sell the game for a profit, and of course that still often goes on.

Yet there is now another option.  Try to cash those potential profits into yet higher profits by using them to build focality for a new money.  Issue tokens that can be used to play the game.  You hope that will create a demand for the new money you are issuing and thus bootstrap its value.  If requiring money to be used to buy a “get out of jail card for having paid your taxes” works for Uncle Sam, might not “get to play this computer game token/card” give your money positive value too?

Let’s say the market can support 4000 different monies, one public the others private.  In equilibrium, which are the services that get tokenized?  Is it?:

1. The services with high mark-ups?  Low mark-ups?

2. Big consumer bases?

3. Well informed and well coordinated consumer bases?

4. “Influencer” consumer bases, in the Gladwellian sense?

5. “Trivial” consumer bases, that you don’t mind risking?

6. Some other properties?  What I observe so far is that crypto-assets are being created by nerdy tech types, and thus they are linked to goods and services that also are created by those same nerdy tech types — a classic economies of scope, lack of trust on the supply side question.  I doubt if many of the top executives at Nordstrom are sitting around wondering whether their next Fall sale should be attached to a crypto-token.  But exactly why not?  This probably boils down to trust issues, rather than any intrinsic suitability of the product.

Is there any good theory paper on these questions?

Note that Heinrich Rittershausen, writing in the early twentieth century, thought that eventually most goods and services would be self-financing through their own currencies.

What theory of bootstraps can we divine from the data on which tokens meet the market test?  (Or is it too early to say?…but surely we can start in on a measurement…)  Am I correct in thinking that the really successful consumer products just want to take the profits and run, without bothering with tokenization?  There is no such thing as an Apple token, is there?

Help!  And no, I am not giving away free tokens…for any good or service.