Category: Economics
The Macroeconomic Effects of Tariffs: Evidence From U.S. Historical Data
We study the macroeconomic effects of tariff policy using U.S. historical data from 1840–2024. We construct a narrative series of plausibly exogenous tariff changes based on major legislative actions, multilateral negotiations, and temporary surcharges– and use it as an instrument to identify a structural tariff shock. Tariff increases are consistently contractionary: imports fall sharply, exports decline with a lag, and output and manufacturing activity drop persistently. The shock transmits through both supply and demand channels. Prices rise in the full sample but fall post-WWII, a pattern consistent with changes in the monetary policy response and with stronger international retaliation and reciprocity in the modern trade regime.
That is from a new paper by Tamar den Besten and Diego R. Känzig. These effects of course do take some while to appear.
Cayman (U.S.) fact of the day
Over the past four years, hedge funds have doubled their footprint in the U.S. debt market, making the Cayman Islands — where many hedge funds are officially based — the place where the most U.S. debt outside the United States is held, according to the Fed. Typically, people flock to Treasuries for safety in times of crisis. Yet, driven in large part by hedge fund activity, the Treasury market went through unusual turbulence during recent shocks, including the onset of the Covid-19 pandemic in March 2020 and President Trump’s “Liberation Day” tariff announcement in April 2025.
And this:
By the early 2010s, these foreign governments made up over 40 percent of Treasury holdings, excluding those the Federal Reserve held. That was up from just over 10 percent in the mid-1990s…Foreign governments now make up less than 15 percent of the overall Treasury market.
Will AI Improve Undergraduate Economics Education?
For decades, undergraduate economics educators have followed a well-worn playbook featuring textbooks, lectures and problem sets. Students have passively listened, taken notes and studied for exams. AI disrupts this educational process. Some students are using this tool as a substitute for their own precious time. What is our best response? This paper provides a prospective analysis of how to restructure every phase of the undergraduate economics experience to improve the major and better prepare students for their uncertain future. Departments face a principal/agent issue in implementing major curricular reforms. I discuss the incentive problems that arise both within economics departments and across departments. If we win this competition to reimagine the undergraduate experience, will the Deans reward us?
TC again: No.
Marginal Returns to Public Universities
From Jack Mountjoy, forthcoming in the QJE:
This paper studies the returns to enrolling in American public universities by comparing the long-term outcomes of barely admitted versus barely rejected applicants. I use administrative admission records spanning all 35 public universities in Texas, which collectively enroll 10 percent of all American public university students, to systematically identify and employ decentralized cutoffs in SAT/ACT scores that generate discontinuities in admission and enrollment. The typical marginally admitted student gains an additional year of education in the four-year sector, becomes 12 percentage points more likely to ever earn a bachelor’s degree, and eventually earns 8 percent more than their marginally rejected but otherwise identical counterpart. Marginally admitted students pay no additional tuition costs thanks to offsetting grant aid; cost-benefit calculations show internal rates of return of 26 percent for the marginal students themselves, 16 percent for society (which must pay for the additional education), and 7 percent for the government budget. Earnings gains are similar across admitting institutions of varying selectivity, but smaller for students from low-income families, who spend more time enrolled but complete fewer degrees and major in less lucrative fields. Finally, I develop a method to separately identify effects for students on the extensive margin of attending any university versus those on the margin of attending a more selective one, revealing larger effects on the extensive margin.
That is one simple way of seeing why I do not think of higher education as largely signaling, noting that signaling theories might give you a higher wage up front but not over extended periods of time, as worker quality becomes known.
Economic growth
Depending on how you look at it growth in Q3 was very very strong or very strong or just possibly merely strong.
Annual rates: GDP: 4.3% Real final sales to domestic purchasers: 2.9% Average of GDP & GDI: 3.4%
GDI: 2.4%
That is from Jason Furman.
What should I ask Kim Bowes?
Yes, I will be doing a Conversation with her. Here is Wikipedia:
Kimberly D. Bowes (born 1970) is an American archaeologist who is a professor of Classical Studies at the University of Pennsylvania. She specializes in archeology, material culture and economics of the Roman and the later Roman world. She was the Director of the American Academy in Rome from 2014–2017.[2] She is the author of three monographs…
While she is continuously focused on the archaeology and material culture of the Roman and later Roman worlds, her research interests have shifted from late antiquity and the archeologies of religion and elite space to historical economies with a distinct focus on poverty and the lived experience of the poor. Her forthcoming study on Roman peasants in Italy reflects a greater attention to non-elites in the studies of Roman archaeology and economic history and a shift in her methodology, integrating archaeological and scientific data, anthropological theory and historical economics become.
I am a big fan of her new book Surviving Rome: The Economic Lives of the Ninety Percent. So what should I ask her?
Three that Made a Revolution
Another excellent post from Samir Varma, this time on the 1991 reforms in India that launched India’s second freedom movement:
Three men you’ve probably never heard of—P.V. Narasimha Rao, Manmohan Singh, Montek Singh Ahluwalia—may be the three most important people of the late 20th century.
Bold claim. Audacious, even. Let me defend it.
Here are the numbers. In 1991, over 45% of Indians lived below the poverty line—roughly 400 million people. By 2024, extreme poverty in India had fallen to under 3%.
That’s 400 to 500 million people lifted out of poverty.
The largest democratic poverty alleviation in human history.
….So there they stood.
The precipice was visible. A Hindu politician from a dusty village in Telangana who spoke 17 languages and wrote novels nobody wanted to read. A Sikh economist from a village that no longer existed, who took cold showers at Cambridge and kept dried fruits in his pockets. Another Sikh economist who’d been the youngest division chief in World Bank history and wrote a memo that would change a country.
Three men. All products of a civilization that absorbs contradictions—that somehow fits Hindus and Sikhs and Muslims and Christians and Jains and Buddhists and Parsis into one impossibly diverse democracy. A civilization where, as I’ve written before, any statement you make is true, AS IS its opposite.
India was bankrupt. The gold was gone. The Soviet model they’d followed for forty years was collapsing in real time. Every assumption that had guided Indian economic policy since independence was being revealed as catastrophically wrong.
The intelligentsia still believed in socialism. The party cadres still worshipped Nehru’s memory. The opposition would scream about selling out to foreign powers. The bureaucracy would resist losing its control. The protected industries would fight to keep their monopolies.
But the three men had something their opponents didn’t: a plan. The M Document—the years of thinking—the technocratic expertise accumulated across decades. They had political cover—Rao’s tactical genius, his willingness to let Singh take the heat while he worked the back channels. They had credibility—Singh’s Cambridge pedigree, Ahluwalia’s World Bank experience, Rao’s decades of political survival.
And they had something else: the crisis itself. The one thing that could break through forty years of socialist inertia. The emergency that made the previously impossible suddenly necessary.
Varma tells the story well. For the full history consult the indispensable The 1991 Project, full of documents, oral histories and interviews.
Hat tip: Naveen Nvn.
Séb Krier, continued
Or more specifically Nenad Tomašev, Matija Franklin, Julian Jacobs, Sébastien Krier, and Simon Osindero:
AI safety and alignment research has predominantly been focused on methods for safeguarding individual AI systems, resting on the assumption of an eventual emergence of a monolithic Artificial General Intelligence (AGI). The alternative AGI emergence hypothesis, where general capability levels are first manifested through coordination in groups of sub-AGI individual agents with complementary skills and affordances, has received far less attention. Here we argue that this patchwork AGI hypothesis needs to be given serious consideration, and should inform the development of corresponding safeguards and mitigations. The rapid deployment of advanced AI agents with tool-use capabilities and the ability to communicate and coordinate makes this an urgent safety consideration. We therefore propose a framework for distributional AGI safety that moves beyond evaluating and aligning individual agents. This framework centers on the design and implementation of virtual agentic sandbox economies (impermeable or semi-permeable), where agent-to-agent transactions are governed by robust market mechanisms, coupled with appropriate auditability, reputation management, and oversight to mitigate collective risks.
Here is the link, this is some of the most important work of our time. Here is the previous MR post on Krier.
Rent Control Creates Ghost Apartments
Adam Lehodey writing at City Journal:
In New York City, making a profit on real estate has become increasingly difficult. Rent-stabilization laws built on the mantra that “housing is a human right,” a dysfunctional housing court, and myriad other interventions have driven thousands of units off the market, giving rise to the phenomenon of New York’s “ghost apartments.”
The city now has nearly 50,000 empty units, absent from the market either because their operating costs exceed legal rents or because they require considerable renovations.
…Take a building on East 6th Street as an example. A mere five-minute walk from Tompkins Square, the building is a convenient home for students and young professionals.
One-bedroom units in the building average $3,500— except two of them, subject to the city’s rent-stabilization laws, which hold rents below $900 per month.
As a result, both units have been allowed to fall into disrepair, because the cost of restoring them to habitability is greater than what they’d generate in rent.
…Much of the predicament at the East 6th Street building and the apartments on Valentine Avenue can be traced back to one piece of legislation: the 2019 Housing Stability and Tenant Protection Act (HSTPA). Passed by a Democratic majority in the state legislature, HSTPA eliminated landlords’ abilities to raise rents after units were vacated, or when they exceeded $2,775 per month. In doing so, it also eliminated their ability to make improvements profitably and reset the stabilized rent.
Recall from the recent review by Kholodilin that “the published studies are almost unanimous with respect to the impact of rent control on the quality of housing….[namely] that rent control leads to a deterioration in the quality of those dwellings subject to regulations.”
Does the conflict between cardinal utility and ordinal preferences just keep on getting worse?
This argument is not necessarily a critique of capitalism, but it could be. At the very least, it is an observation about advanced capitalism.
As you will know from philosophy, there is a difference between what makes you happy, in the felicific sense, and what you want. Some of this difference may be due to addictions, but most of it is not. You may want to be a person of a particular kind, whether or not that makes you happier. You may wish to do things to help the world, without believing you will be personally happier as a result. You might have mixed feelings as to whether having children will make you happier (stress!), but still you might have a deep preference for raising a family. And so on. These distinctions are part of the mainsprings of human life, they are not minor exceptions standing in the corner.
The more capitalism develops, the more the gap between cardinal utility and preference satisfaction is likely to grow. Consider the polar case of a very primitive economy where the only commodity is rice. Eating rice is what makes you happy, and eating rice is also how you wish to spend your money. After all, what else is there? Given the feasible set, cardinal utility and preference satisfaction will coincide perfectly.
But as product choice grows and incomes rise, you will have more and more chances to deviate from maxing out on cardinal utility. Furthermore, your immediate “needs” likely are taken care of, so most of your income spending is discretionary rather than “I need to buy this food to avoid the miseries of starvation.”
More and more, you will be led away from cardinal utility maximization. But additional preferences will be satisfied.
Is this good or bad?
It is not quite right to say that people are becoming less happy, as they are getting what they want. That could be a central component of the good life, and of individual well-being, broadly construed. That said, some of your ordinal preferences might be harmful addictions, or you might prefer things that stress you out, either proximately or in the longer run.
Let’s say you keep on checking your phone for texts. Do you do this because you think it will make you happier? Maybe not. You simply might have a preference for wanting to know the information in those texts as soon as possible. Should we think that preference is bad? Maybe it is a mother wanting to know that her daughter got home safely, and so she checks her texts every three minutes. That might not make her happier, but I am reluctant to conclude that is a worse state of affairs. And it does not have to be an addiction, a much overused concept by intelligent people who do not define it very carefully.
I too have plenty of preferences that do not make me happier, though I consider them quite legitimate. I am keen to see as much of the world as I can, yet I am not convinced this makes me happier than say simply going back to Mexico again and again and eating the street food. I just want to know what else is out there.
If you side solely with cardinal utility, yes you condemn capitalism. Or if you think all of these ordinal preferences are addictions, again you can condemn the status quo. Your meta-preferences in that case presumably would wish to have different preferences. In any case, many books will be written about how capitalism makes us miserable. Most of them will have the incorrect framing, though most of them will have ” a point,” one way or another. Furthermore, while some of these books may be correct, in the aggregate they will push us away from viewing individual human beings as agentic. That is a negative social consequence.
I do not think those critical perspectives are, by and large, the primary correct views. Instead, I think of capitalism and markets as an unparalleled engine for making us…weirder? And for moving us into different worlds (NYT)?
YMMV.
Falling costs
Unbelievable progress that even I underestimated! Gemini 3 Flash has practically beaten ARC-AGI-1 [an AI evaluation] at cost/score parity! It achieved the same score at more than 500x lower cost than the o3 model from a year ago & 6x lower than the just-released GPT-5.2!
Here is the link.
Japan estimate of the day
At current second-hand market prices, says a new report, Japan’s “hidden asset” in terms of national reserves of things — defined as potentially resellable household objects that have lain unused for over a year — is worth around $580bn.
The dust-gathering contents of Japan’s cupboards, attics and garages, by that estimate, are worth roughly the same as the combined market capitalisation of the country’s most globally known corporate names: Toyota, Sony and SoftBank.
That’s an impressive stash, equivalent to roughly $4,600 for every person in Japan…
Over the past few years, Japan has become a uniquely attractive global magnet for buyers of second-hand goods — from Hermès bags, Rolexes and limited edition Nike Airs to Pokémon trading cards, vintage video games, golf clubs, fishing rods and rare Licca dolls. An increasingly powerful appeal for the tens of millions of visitors the country now draws annually is not just the traditional shopping, but the vibrant, over-the-counter trade in used items.
The aging of Japan, the fastidiousness of many Japanese, and the cheap yen are two factors behind these developments. Here is more from Leo Lewis at the FT.
Economics job market update
From John A. List:
AEA job market update. The numbers don’t lie, as this is the toughest market for PhD economists in recent memory.
JOE listings are down 20% from last year. Worse: they are 19% below COVID levels. Let that sink in.
The academic market took the biggest hit. Full-time US positions dropped 33% year-over-year. Liberal arts colleges and PhD-granting universities? Both down about a third. International academic postings fell 13% from last year, 25% from COVID.
Nonacademic isn’t much better: down 27% from last year, 45% below COVID. And federal government hiring? That’s where it gets ugly. Down 71% year-over-year, 79% below COVID. DOGE cuts plus the shutdown created a perfect storm.
One bright spot: private sector jobs in consulting, research, banking, and finance are holding steady at recent-year levels.
Bottom line for candidates: the data confirm what you’re feeling. It’s brutal out there. Universities facing their own financial pressures should still find ways to bridge unmatched candidates for another year. The talent is there—the opportunities aren’t. H/T John Cawley
Here is the link to the tweet.
Growth Matters
Between 2011 and 2023 India’s GDP per capita grew at a rate of about 4.8% per year so in those 12 years GDP per capita, a good measure of the standard of living, nearly doubled (77%). Shamika Ravi and Sindhuja Penumarty look at what this means on the ground.
The percentage of the budget spent on food has declined–dropping below 50% for the first time ever–and that has enabled significant purchases of consumer durables.
It will perhaps not be surprising that mobile phones have become universal among both the poor and the rich but vehicle ownership is also converging with rural ownership of a vehicle (2 or 4 wheeler) nearly tripling from (19% to 59%).
Another standout is refrigerators which reflects growing income and reliable electricity. In the 12 years across the survey, refrigerator ownership in rural areas more than tripled from 9.4% circa 2011 to 33.2% in 2023. In urban areas refrigerator ownership went from less than half (43.8%) to more than two-thirds (68.1%) of urban households. Overall, only two states Bihar (37.1%) and Odisha (46.3%), had less than 50% of urban households owning a refrigerator in 2023-24.
Economists are often accused of “line go up” thinking but the truth is that line go up matters. The 4.8% annual growth matters because it shows up as a broad, visible upgrade in how people live.
“AI is everywhere but in the productivity statistics…”
These people are saying it is there too. Though I am not quite sure what they (or anyone, for that matter) mean by AI:
First, we argue that AI can already be seen in productivity statistics for the United States. The production and use effects of software and software R&D (alone) contributed (a) 50 percent of the 2 percent average rate of growth in US nonfarm business labor productivity from 2017 to 2024 and (a) 50 percent of its 1.2 percentage point acceleration relative to the pace from 2012 to 2017. Second, taking additional intangibles and data assets into account, we calculate a long-run contribution of AI to labor productivity growth based on assumptions that follow from the recent trajectories of investments in software, software R&D, other intangibles, and productivity growth in both US and Europe. Our central estimates are that AI will boost annual labor productivity growth by as much as 1 percentage point in the United States and about .3 percentage point in Europe.
That is from Bontadini, Corrado, Haskel, and Jona-Lasinio, here is the complete abstract online.