Category: Economics

My Conversation with the excellent John Arnold

by  Tyler Cowen in

Here is the audio, video, and transcript.  Here is part of the episode summary:

Tyler and John discuss his shift from trading to philanthropy and more, including the specific traits that separate great traders from good ones, the tradeoffs of following an “inch wide, mile deep” trading philosophy, why he attended Vanderbilt, the talent culture at Enron, the growth in solar, the problem with Mexico’s energy system, where Canada’s energy exports will go, the hurdles to next-gen nuclear, how to fix America’s tripartite energy grid, how we’ll power new data centers, what’s best about living in Houston, his approach to collecting art, why trading’s easier than philanthropy, how he’d fix tax the US tax code and primary system, and what Arnold Ventures is focusing on next.

Excerpt:

COWEN: Say there’s a major volcanic event, and there’s a lot of ash in the sky for two or three years. Solar needs a backup. In the meantime, before the volcanic event happens — and of course, that’s quite rare — how much do we need to be up and running with the backup energy infrastructure? What do we need for reserve capacity in case the solar goes down?

ARNOLD: Good question. It would be difficult. It’s doable today. I think as solar continues to grow in market share, both in the US and globally, it will have to be met with some type of battery, a significant battery resource. That’s part of the economics of solar now, that it’s not just sticking it right outside of Phoenix, but it is solar plus transmission or solar plus battery. The question of what happens in that type of event — it would be difficult. The existing energy infrastructure is still largely around.

COWEN: But it will dwindle over time, right?

ARNOLD: It will dwindle over time.

COWEN: Is there some market issue? Say the volcanic event is only once every 150 years, but sooner or later, one happens. In the meantime, you need economic incentives for the gas or the nuclear to be ready. Does our government just keep on paying for those for 149 years in a row until the catastrophe comes?

ARNOLD: It’s a great question, and I think this is why nuclear, and particularly next-gen nuclear, is considered the holy grail, right? You’re not constrained by location. You’re not constrained by, is the wind blowing, is the sun shining? And it’s a clean resource. The problem today is just economics. In order to develop the current generation of nuclear, it’s extraordinarily expensive. Next generation — either small modular fission or fusion — both have a number of technological as well as unclear economics in how they compete.

I do think this question of how do you do this transition in a manner that maintains affordability but continues to get cleaner and lower emissions over time is a complex one, and I think it’s one that the environmentalists probably oversold five years ago in saying that this was going to be an easy transition. It’s certainly not. Just the scale and scope of the energy system is enormous, as you’re pointing to in your question. The need for backup, the need for a diversity of fuels, and how they complement each other is real, and you can’t replace that just with the intermittent resources we have today, plus battery.

And:

COWEN: What’s your most optimistic scenario for the US energy future from an environmental point of view, something that could plausibly happen?

ARNOLD: I think next-gen nuclear, if we can overcome the technical hurdles, if we can overcome the economic hurdles.

COWEN: But isn’t NIMBYism the biggest hurdle? The others I could imagine overcoming pretty readily, but I live in Fairfax County, which builds a fair amount. People there just don’t want nuclear. It’s irrational, but I’m not sure they’ll change their minds. It could be called fusion; it’s still nuclear to them.

ARNOLD: Yes, I’ve been surprised. That was my prior five years ago. I’ve been surprised at the number of jurisdictions that are inviting these next-gen nuclear companies to come. Texas, for instance, just passed a bill creating new incentives for nuclear companies to come and build their first plants and pilot projects in Texas. You see jurisdictions that are choosing to take the economic growth associated with it and that have more of a building culture and say, “Come here.”

I think, as things get proven out, then the question is, will the Fairfax counties of the world see what’s going on and become more agreeable to having that? I think it’s very similar to self-driving cars.

There’re some jurisdictions that say, “Come here. We want you to come, test,” and this is what’s happening in Texas. These companies say, “We want you to come pilot your projects here.” And some jurisdictions are saying, “No, prove it out, and then we’ll talk.”

COWEN: My nightmare is that even Texas becomes NIMBY. You see this in Austin already. Houston, Dallas will become more like the rest of America over time, maybe even San Antonio someday, El Paso with more time.

Interesting throughout, recommended.  We also talk about art and art collecting…

Using AI to explain the gender wage gap

by  Tyler Cowen in

Understanding differences in outcomes between social groups—such as wage gaps between men and women—remains a central challenge in social science. While researchers have long studied how observable factors contribute to these differences, traditional methods oversimplify complex variables like employment trajectories. Our work adapts recent advances in artificial intelligence—specifically, foundation models that can process rich, detailed histories—to better explain group differences. We develop mathematical theory and computational methods that allow these AI models to provide more accurate and less biased estimates of how much of group differences can be explained by observable factors. Applied to real-world data, our approach reveals that detailed histories explain more of the gender wage gap than previously understood using conventional methods.

That is from a new paper by Keyon Vafa, Susan Athey, and David M. Blei.  Via the excellent Kevin Lewis.  This is also real progress on the methodological front.

Do more laws boost economic growth?

by  Tyler Cowen in

This paper analyzes the conditions under which more legislation contributes to economic growth. In the context of US states, we apply natural language processing tools to measure legislative flows for the years 1965–2012. We implement a novel shift-share design for text data, where the instrument for legislation is leave-one-out legal topic flows interacted with pretreatment legal topic shares. We find that at the margin, higher legislative output causes more economic growth. Consistent with more complete laws reducing ex post holdup, we find that the effect is driven by the use of contingent clauses, is largest in sectors with high relationship-specific investments, and is increasing with local economic uncertainty.

That is from a new issue of the JPE, by Elliott Ash, Massimo Morelli, and Matia Vannoni.

*Crisis Cycle*

by  Tyler Cowen in

That is the new book by John H. Cochrane, Luis Garicano, and Klaus Masuch, and the subtitle is Challenges, Evolution, and Future of the Euro.  Excerpt:

Our main theme is not actions taken in crises, but that member states and EU institutions did not clean up between crises.  They did not reestablish a sustainable framework for future monetary-fiscal coordination that would unburden the ECB.  They did not mitigate unwelcome incentives to ameliorate the next crisis and make further interventions less likely.  These too are understandable failings, as political momentum for difficult reforms is always lacking.  But the consequent problems have now built up, such that the ad hoc system that emerged from crisis internventions is in danger of a serious and chaotic failure.  Now is the time to get over inertia.  The EU and its member states should start a serious process of institutional reform.  We aim to contribute to such a discussion.

Overall this book made me more pessimistic about the future of the euro.  The authors propose a joint fiscal authority, but that to me makes the problems worse rather than better?  After all, these countries still all have separate electorates, and want to have a real say over their own budgets.  We will see.  You will recall both Milton Friedman and Paul Krugman, at the time, doubted the stability of the euro.

How America Built the World’s Most Successful Market for Generic Drugs

by  Alex Tabarrok in

The United States has some of the lowest prices in the world for most drugs. The U.S. generic drug market is competitive and robust—but its success is not accidental. It is the result of a series of deliberate, well-designed policy interventions.

The 1984 Hatch-Waxman Act allowed generic drug manufacturers to bypass costly safety and efficacy trials for previously approved drugs by demonstrating bioequivalence through Abbreviated New Drug Applications (ANDAs). To spur competition, the Act also granted 180 days of market exclusivity to the first generic filer who challenges a brand-name patent—a mini-monopoly as a reward for initiative. Balancing static efficiency (P=MC) with dynamic efficiency (incentives for innovation) is hard, but Hatch-Waxman mostly got it right.

The Generic Drug User Fee Amendments (GDUFA), modeled after the very successful Prescription Drug User Fee Act (PDUFA), require generic manufacturers to pay user fees to the FDA. These funds allow the Office of Generic Drugs to hire more staff and meet stricter approval timelines. GDUFA dramatically reduced ANDA backlogs and accelerated market entry, especially under GDUFA II.

Generic Substitution Laws allow—or in some states even require—pharmacists to substitute a generic for a more expensive brand-name drug unless the prescriber writes “dispense as written.” This gives generics immediate access to the full market without the need for marketing to doctors or patients. The generic drug market has thus become focused on price as the means of competition. Pharmacists also often earn a bit more on generics due to reimbursement spreads, giving them a financial incentive to substitute. And while pharmacy benefit managers (PBMs) are often criticized, they have also been effective promoters of generics by steering patients toward lower-cost options via formulary design.

The FDA’s Division of Policy Development in the Office of Generic Drug Policy also played an underappreciated but vital role in producing recipes for generics, which has opened up the market to smaller firms. Former FDA commissioner Scott Gottlieb writes:

The division’s core responsibility was drafting, reviewing, and approving the policy guidance documents that defined precisely how generic versions of branded medications could be developed and brought to market. For many generic drugmakers, these documents were indispensable — step-by-step recipes detailing how to replicate complex drugs. Without these clear instructions, numerous generic firms could find themselves locked out of the market entirely…the dramatic increase in the quantity and sophistication of guidance documents issued by the FDA during Trump’s first term was instrumental to his administration’s record-setting approvals of generic drugs and the substantial cost savings enjoyed by patients. 

Unfortunately, the Trump administration DOGEd this division—an unforced error that should be reversed. The generic drug market is one of the great policy successes in American healthcare. It works. And it should be strengthened, not undermined.

Noah on health care costs

by  Tyler Cowen in

…in 2024, Americans didn’t spend a greater percent of their income on health care than they did in 2009. And in fact, the increase since 1990 has been pretty modest — if you look only at the service portion of health care (the blue line), it’s gone up by about 1.5% of GDP over 34 years.

OK, so, this is total spending, not the price of health care. Is America spending less because we’re getting less care? No. In cost-adjusted terms, Americans have been getting more and more health care services over the years…

So overall, health care is probably now more affordable for the average American than it was in 2000 — in fact, it’s now about as affordable as it was in the early 1980s. That doesn’t mean that every type of care is more affordable, of course. But the narrative that U.S. health costs just go up and up relentlessly hasn’t reflected reality for a while now.

Here is the full post, which covers education as well.

The Bank of Starbucks

by  Alex Tabarrok in

Connor Tabarrok points out that Starbucks is also a bit of a bank:

In 2011, Starbucks rolled out the ability to load money onto a virtual card via their mobile app. purchases made with these pre-loaded dollars earned extra rewards points, which could eventually be redeemed for free drinks. According to their quarterly report from this March, through the app pre-payment system and physical gift cards, Starbucks owes almost $2 billion in coffee to it’s customers.

…The company can treat this money as a 0% interest loan, and with about 10% of funds eventually being forgotten, it’s actually a negative interest loan.

Starbucks can make money on the float and it makes more money as interest rates rise. At $2 billion and 4% they can earn about $80 million annually on the float. Moreover, breakage (some money on the cards is never redeemed) is running at about 10% so that’s another $200 million a year for a grand total of $280 million or a little over 5% of the $5 billion in operating profit. Not a game changer but also not bad for free money.

As interest rates rise, the value to Starbucks of pre-loaded cards increases. So does the cost to users but I suspect supply incentives will dominate here so you can expect to see Starbuck’s pushing these cards.

Affordable Housing Is Almost Pointless

by  Alex Tabarrok in

What is the most important feature of affordable housing? Simple! It’s right there in the name, right? Affordable. But no. When the Illinois Housing Development Authority (IHDA) evaluates housing projects for tax credits it gives out points for desirable projects. Quoting Richard Day:

For the general scoring track, 10% of points are awarded for extra accessibility features, 13% are awarded for additional energy efficiency criteria, 15% are awarded based on the makeup of the development team, and an extra 4% are headed out to non-profit developers. Only 3% of scorecard points are awarded based on project cost.

Thus, when you look at what the affordable housing authority actually does it awards more than four times as many points to energy efficiency than cost which ultimately determines affordability and availability. “Development team” includes some mandatory requirements for experience, which makes sense, but also:

(a) incentivizing Black, Indigenous, or People of Color (“BIPOC”) and minority participation on the development team,

Indeed, a for-profit “certified” BIPOC-led business can earn up to 11 points (and a BIPOC-led non-profit up to 7 points) and you can get a few more points if you go the intersectionality route and have a certified female headed BIPOC team. Cost Containment in Project Design & Construction tops out at only 3 points (plus there are 8 more potential points for targeting to extremely poor residents which presumably also gets you some cost control).

Thus, rather than affordable housing what is actually being incentivized is some combination of:

  • Racial equity goals
  • Environmental sustainability
  • Community development
  • Supporting vulnerable populations
  • Universal design for accessibility (7 points for going beyond code)

This is what Ezra Klein calls Everything Bagel Liberalism and what I called in one of my favorite posts the Happy Meal Fallacy.

The icing on the cake, by the way, is that Day argues that the IHDA is a better system than the even more convoluted and expensive system for affordable housing promoted by Chicago’s Department of Housing.

Hat tip: Ben Krauss writing at Slow Boring.

USA employment facts of the day

by  Tyler Cowen in

According to the Federal Reserve Bank of New York, the college majors with the lowest unemployment rates for the calendar year 2023 were nutrition sciences, construction services, and animal/plant sciences. Each of these majors had unemployment rates of 1% or lower among college graduates ages 22 to 27.  Art history had an unemployment rate of 3% and philosophy of 3.2%…

Meanwhile, college majors in computer science, chemistry, and physics had much higher unemployment rates of 6% or higher post-graduation. Computer science and computer engineering students had unemployment rates of 6.1% and 7.5%, respectively…

Here is the full story.  Why is this?  Are the art history majors so employable?  Or are their options so limited they don’t engage in much search and just take a job right away?

Via Rich Dewey.

China espionage and the Fed

by  Tyler Cowen in

Prosecutors say Rogers was a logical target for Chinese espionage, with an important-sounding title at the Fed and a growing affection for China. In 2018, he married a Shanghainese woman whom he met through a Chinese matchmaking service. FBI agents would later find a note on his iPad, dated December 2018 and addressed to “Dear Chinese People,” in which he expressed admiration for China.

“I love your kindness, your generosity, and your humbly hard working, high-achieving society,” the note said. “I love you unconditionally, Shanghai.”

…In one case in 2019, Chinese authorities allegedly held a Fed economist in a hotel room during a trip to Shanghai and threatened to imprison him unless he agreed to provide nonpublic economic data, according to the Senate committee report. Chinese officials allegedly told him they had been monitoring his phones, including conversations about his divorce, and would publicly humiliate him if he didn’t cooperate. The economist reported the incident to Fed officials after being released, the report said.

China’s Foreign Ministry denounced the report, calling it “political disinformation.”

Here is more from the WSJ.  While I do in general have a high opinion of Fed staff, China…I really do not think you can learn very much from these people!  Perhaps they can tell you about the Lucas critique.

You Can See the End of the Great Stagnation Everywhere but in the Productivity Statistics

by  Alex Tabarrok in

Eli Dourado continues to keep his eye on the most important number in the world, total factor productivity. It continues to be bad, -3.88% on an annual basis for the first quarter of 2025. It’s too early for Trump’s tariffs to have made an effect and too early for AI.

You can see the end of the great stagnation everywhere but in the productivity statistics.

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The 3.5 percent remittance tax

by  Tyler Cowen in

Trump has been talking about this.  I am not sure what version of the idea we might end up with, but let’s consider the idea in its abstract form.  Let’s also put aside money laundering issues, and talk about “simple remittances.”

The United States has a partial monopsony power over Latino (and often other) migrants, as there are few comparable places to go.  Some may switch to Spain, or stay in their home countries, but many will have to pay the tax, though of course they may send less money back home.

If elasticities were zero (unlikely), the US government would pull in 3.5 percent of the relevant flow of remittances.  More likely, funds sent will decline, and tax revenue earned will decline as well.  The former effect will strengthen the dollar against the Latin currencies, while the latter effect may weaken the dollar through the indirect mechanism of domestic output being lower.  I think most economists would expect the dollar to strengthen on net, as in essence the tax makes it costlier to sell dollars.  (As a side effect, the tax might accelerate a transition to weirder, harder to tax forms of crypto?)

So US exporters suffer a modest amount from the stronger USD, and US consumers gain from modestly cheaper imports.  Family members back home in the receiving countries are worse off, as they are receiving less in terms of real transfers, due to the tax.

It is less clear how much the receiving countries are worse off on net.  This is easiest to see in the case of El Salvador, which has dollarized.  If fewer remittances are sent to El Salvador, other dollar holders in the country may be better off.  In this regard remittances have a partial zero-sum component.  It is not right to say they are purely zero-sum, because the remittance is “the market” sending funds to where the demand to hold those funds is highest, and furthermore El Salvador as a whole has greater net command over imports.  Still, from another point of view it is a kind of domestic inflation for El Salvador and it taxes their cash balance holders.

In any case, you also can think of this as a funny, quite indirect way of auctioning off the right to come and send money back to your family.  Gary Becker once suggested a more direct auction of entry rights, an idea broadly popular with many economists.  This particular form of the auction maintains an ongoing tax on the margin, rather than a once and for all payment up front, and thus might involve higher distortions. (on the other hand it eases credit constraints, since you do not pay up front)  As a side note, this particular form of the auction mechanism also might discourage most of all the more altruistic and family-oriented migrants to a modest degree, or encourage some to try harder to bring their families with them.  Those could be pretty small effects, but substitution effects are always worth noting.

As someone with broadly libertarian sympathies, I am strongly opposed to this tax.  I think often the best way to analyze a tax is not with traditional deadweight loss tools, but rather to ask “does this allow the government to get its paws on a whole new source of revenue?”  If it does, be very suspicious.

But if you are not libertarian in that manner, I do not see why you should hate this tax.  It harms migrants and their relatives back home, but without necessarily harming those countries on net.  And international trade economics, and economics more generally, has a long tradition of “nationalistic” points of view that focus on maximizing domestic welfare, not global welfare.  I see those pop up all the time — for decades — without people screaming bloody murder (I am myself more Parfitian on these issues of course.)

Most Democrats I know really want to raise taxes.  Many centrists feel the same way, though perhaps less strongly.  So why should they hate this tax hike so much?  My views on taxes differ, though I recognize that sometimes you have to raise taxes.

I think, at least in this case, that the broadly libertarian principles are the relevant factor here.  I do not want the US federal government getting its paws on remittances as a revenue source.  In turn, I hope other opponents of this policy — and I suspect there will be many — join me and become slightly more libertarian, and slightly more willing to focus on the question “does this allow the government to get its paws on a whole new source of revenue?”

We will see.