Category: Economics
The Economics of Building Art to Last
Michael Heizer, the large-scale sculpture artist, has been building City, a sculpture in the Nevada desert since 1972. City is reputedly on the scale of the Washington, DC’s National Mall and something like Teotihuacan but no one knows for sure since “Visitors are explicitly not welcome, and due to its orientation away from the road and system of earthen berms no part of “City” can be viewed from the ground without trespassing on posted property.” A few photos have been smuggled out.
The New Yorker has an interesting article on Heizer. Naturally I appreciated his thoughtful consideration of the economics of building something for the ages:
“City” is made almost entirely from rocks, sand, and concrete that Heizer has mined and mixed on site. The use of valueless materials is strategic, a hedge against what he sees as inevitable future social unrest. “My good friend Richard Serra is building out of military-grade steel,” he says. “That stuff will all get melted down. Why do I think that? Incans, Olmecs, Aztecs—their finest works of art were all pillaged, razed, broken apart, and their gold was melted down. When they come out here to fuck my ‘City’ sculpture up, they’ll realize it takes more energy to wreck it than it’s worth.”
Poland fact of the day
When it comes to contingent government pension liabilities as a percentage of gdp, Poland appears to be above 350%.
France, Denmark, and Germany are next in line, with figures well over 300%. For purposes of comparison, the United States is considered to have a serious pension problem but the corresponding number is only slightly above 100%.
Here is the John Authers and Robin Wiggelsworth FT story. Australia seems to be doing best.
One reason for this high Polish sum is that the Polish government has semi-nationalized a lot of the private sector pension liabilities. In 2014, this procedure (FT) did not receive much discussion:
As part of an overhaul of the country’s pension system, Warsaw will next week transfer from privately-managed funds to the state 150bn zlotys (€36bn) of Polish government bonds and government-backed securities, which will then be cancelled.
I believe this idea will reenter the broader policy debate sooner or later.
Nations can be start-ups, too
That is my latest Bloomberg column, here is one excerpt:
The virtues of business startups have led to many a success story. These enterprises start with clean slates. They embody the focused and often idiosyncratic visions of their founders. The successful ones grow faster than their competitors. Even after they become larger and more bureaucratic, these companies often retain some of the creative spirit of their startup origins.
It is less commonly recognized that some nations, including many of the post-World War II economic miracles, had features of startups. For instance, Singapore started as an independent country in 1965, after it was essentially kicked out of Malaysia and suddenly had to fend for itself. Lee Kuan Yew was the country’s first leader, and he embodied many features of the founder-chief executive: setting the vision and ethos, assuming responsibility for other personnel, influencing the early product lines in manufacturing and serving as a chairman-of-the-board figure in his later years.
Other start-ups nations have been UAE, Israel, Taiwan, Hong Kong, Cayman Islands, Estonia, South Korea, and of course way back when the United States. You will note that many of these examples are imperfectly democratic in their early years, and they do not in every case grow out of it. And this:
The world today seems to have lower potential for startup nations. This is in part because international relations are more peaceful and also because most colonial relationships have receded into the more distant past. Those are both positive developments, but the corresponding downside is not always recognized, namely fewer chances for reshuffling the pieces.
This is the close:
To paraphrase John Cleese from Monty Python, the startup nation concept isn’t dead, it’s just resting. Whether in business or in politics, the compelling logic of the startup just isn’t going away.
The best chances for future start-ups may be in Africa, around the borders of Russia, and perhaps someday (not now) Kurdistan. Do read the whole thing.
The Efficient Markets Hypothesis
In the first video in the Personal Finance section of our Principles of Macroeconomics course we pointed out that mutual fund managers do not beat the market on average. Why is this? In the second video, we take a look at the efficient markets hypothesis.
I’m rather fond of this video as it has some good story-telling elements, features Einstein in an important cameo (do you know why?) and yet also covers important ideas in an intuitive yet deep way.
The Return of Glass-Steagall???
The Atlantic writes:
Hillary Clinton and Donald Trump, have included plans to reintroduce the [Glass-Steagall] bill in their economic platforms. The argument for the act is that it could have prevented (or at least dampened) the 2008 financial crisis, and that reinstating it could ward off future ones. Is that the case?
The Atlantic’s editors reached out to economists and experts in financial regulation to ask them why Glass-Steagall is seeing renewed popularity right now, and what they think would make America’s financial system safer in the future.
Here’s part of what I had to say:
When Black Lives Matter calls for a restoration of the Glass-Steagall Act we know that the Act has exited the realm of policy and entered that of mythology. No, restoring the Glass-Steagall Act would not end racism. Nor would restoring Glass-Steagall have done much, if anything, to have avoided the 2008-2009 financial crisis. Secretary of the Treasury Timothy Geithner was correct when he said the problems at the heart of the financial crisis had “nothing to do with Glass-Steagall.”
The financial crisis is best understood as a run on the shadow banking system, that collection of financial intermediaries who based their credit creation not on deposits but on repo, money market funds, structured investment vehicles, asset-backed securitizations and other financial structures. Separate commercial and investment banking? Please. The problem was that by 2007 the shadow banking system had become so separated from commercial banking that the Federal Reserve didn’t know that a majority of credit was being generated by the shadow banks.
…“Nothing has been done!” may play well in some quarters but the Obama administration has in fact imposed systematic reform on the financial system. Most importantly, capital requirements have been increased (leverage has been reduced), forcing financial intermediaries to have greater skin in the game and to provide a cushion in the event of a fall in asset prices. Moreover, capital requirements have been extended far into the shadow banking system. Most recently, the Fed has imposed a capital surcharge on the biggest institutions i.e. the too big to fail institutions.
…Ironically, despite the political power of the financial sector it seems that more has been done to raise bank capital ratios than to require homeowners to raise their capital ratios by requiring larger down payments. There is a lesson there.
Robert Reich, Sheila Bair, Lawrence White, Stephen G. Cecchetti and others also comment. Only Reich, with some support from Blair, is enthusiastic.
Elasticity optimism for me but not for thee
How many who think we should subsidize manufacturing also think high corporate tax rates are harmless?
That is from Modeled Behavior.
China politics fact or estimate of the day
This is perhaps the best and most instructive one I have heard:
…Mr Xi’s authority remains hemmed in. True, his position at the highest level looks secure. But among the next layer of the elite, he has surprisingly few backers. Victor Shih of the University of California, San Diego, has tracked the various job-related and personal connections between the 205 full members of the party’s Central Committee, which embodies the broader elite. The body rubber-stamps Mr Xi’s decisions (there have been no recent rumours of open dissent within it). But the president needs enthusiastic support, as well as just a show of hands, to get his policies—such as badly needed economic reforms—implemented. According to Mr Shih, the president’s faction accounts for just 6% of the group.
That is from The Economist. Along related but not identical lines, here is a good story of the weak control of the Chinese central government:
Through July, claimed capacity reductions were less than half the target for the year (and less than 40% of the target for coal capacity reduction). Some provinces were reported by the NDRC to have achieved only 10% of their annual targeted cuts.
…This resistance has led to more and more shrill directions from Beijing to act on instructions. Now Beijing is sending out 10 inspection teams across the country to check on claimed capacity removal and to require follow through on additional closures. I have one suggestion for them: The only way to ensure a closed plant remains closed is to physically destroy or remove key pieces of equipment. Otherwise don’t be surprised when it starts back up again.
Don’t forget this:
Many steel mills are the key employer and tax payer in their city. In boom times, they might have provided as much as 30% of the tax revenue for local government. Workers from the steel mill were at the forefront of buying property in the town, creating a positive cycle of additional demand for housing and steel. If these workers are now laid off, even with one-time transfers from the center, local government faces an enormous challenge in trying to find new jobs for people who have been in a steel mill all their life. They can’t all become part-time Uber/Didi drivers. Many government officials see delay as the most logical course of action.
That is from Gordon Orr.
The economics of Hong Kong kung fu
Hong Kong’s streets are safer, with fewer murders by the fierce crime organizations known as triads that figured in so many kung fu films. And its real estate is among the world’s most expensive, making it difficult for training studios to afford soaring rents.
Gone are the days when “kung fu was a big part of people’s cultural and leisure life,” said Mak King Sang Ricardo, the author of a history of martial arts in Hong Kong. “After work, people would go to martial arts schools, where they’d cook dinner together and practice kung fu until 11 at night.”
With a shift in martial arts preferences, the rise of video games — more teenagers play Pokémon Go in parks here than practice a roundhouse kick — and a perception among young people that kung fu just isn’t cool, longtime martial artists worry that kung fu’s future is bleak.
High studio rents are of course a big problem:
…According to Mr. Leung’s organization, the International WingTsun Association, former apprentices have opened 4,000 branches in more than 65 countries, but only five in Hong Kong…
“Kung fu is more for retired uncles and grandpas.”
That is from Charlotte Yang at the NYT, interesting throughout and yet I hear the author is only a summer intern.
Why nominal gdp targeting is an especially good idea right now
I’ve been hearing plenty of calls for a higher inflation target, perhaps four percent. I do understand the case for this, and furthermore it is not obvious that the higher rate of inflation would bring significant social costs.
The thing is this: whether rationally or not, the American public hates higher rates of price inflation. Perhaps they mis-sample or mis-estimate prices, or perhaps the higher prices really do erode their real wages in a way they can’t get back through a new labor market bargain.
So a higher price inflation target would mean that everybody would hate the central bank. It would not shock me if the first thing they did was to dismantle…the higher price inflation target.
Under nominal gdp targeting, the rate of price inflation would not have to significantly rise until worse times were upon us. That is precisely when such upward price pressures would be most useful.
China Australia fact of the day
In 2015 our iron ore exports alone were four times the value of all of our combined services exports to China. And in services the only things that really count are tourism and education. That’s not going to change for a long, long time.
The alas now gated article, by Greg Sheridan, is of interest more generally and concerns some myths about China and Australia.
Addendum: To read the piece, try here.
New MRU Course: Money Skills!
We have a new course at Marginal Revolution University, Money Skills. The first set of videos overlap with our Principles of Macroeconomics course and cover things like lessons from economics for investing in the stock market. We also cover this important material in our textbook, Modern Principles. Later videos will cover time discounting (mortgages), career choice, renting versus owning and other topics depending on demand.
Here’s our first video, How Expert Are Expert Stock Pickers? Later in the week, Tyler will cover the theory of efficient markets.
Euthanasia arbitrage the moral hazard culture that is Belgian French
Demand curves do slope downwards:
Euthanasia tourists are flocking to Brussels to get a lethal dose. Doctors at hospitals and clinics at Belgium’s capital are seeing an increase in number of euthanasia tourists who are travelling from across the world to their accident and emergency rooms.
As elective medical killings are illegal in France, French patients are often arriving with suitcases. They believe that their request to die will be carried out within a week.
In 2015, a whopping 2,023 people were medically killed in Belgium. The number has more than doubled in five years. According to Olivier Vermylen, an emergency doctor at Brugmann University hospital, seven out of 15 euthanasia cases involved French people.
“It’s a phenomenon that did not exist five or six years ago. Nowadays I get phone calls about French people who arrive in the emergency room announcing that they want euthanasia,” Vermylen told Belgium’s Sudpresse newspaper, reports The Times.
Even at the Jules Bordet institute in Brussels, almost a third of euthanasia consultations, that is 40 out of 130 cases, are by French people. One of the primary reasons why people choose to get euthanized in Belgium is the cost.
Euthanasia in Switzerland costs €4,000 (AU$5,935), writes The Australian. However, euthanasia in Belgium is usually free as the treatment is covered by the European Union’s health insurance card. The bills are sent to French healthcare providers.
And here is a person who needs that extra dose of media training:
“Of course, Belgium is not here to euthanize half the planet. I can understand those who say that France should look after its own patients. But this is easy to say in the office. When you have a patient who is suffering in front of you, you don’t think of that. You help – whether they are French or not,” said Brugmann University hospital’s Michele Morret-Rauis.
I am sorry people, but in light of that state-dependent utility function known as “life or death,” if it ever came to such a point I would opt for Switzerland.
Here is the article, via the excellent T. Hynes.
Are sticky nominal wages an overrated idea?
Via Adam Ozimek, here is one recent (still unfinished) paper, by Kurmann, McEntarfer, and Spletzer:
Using administrative worker‐firm linked data for the United States, we examine the extent and consequences of nominal wage and earnings rigidities for U.S. firms. We find less evidence of downward wage rigidity in the administrative data than has been documented in previous studies based on self‐reported earnings from surveys. In our data, only 13 percent of workers who remain with the same firm (job stayers) experience zero change in their nominal hourly wage within a year, and over 20 percent of job stayers experience a reduction in their nominal hourly wage. The lower incidence of downward wage rigidity in the administrative data is likely a function of our broader earnings concept, which includes all monetary compensation paid to the worker (e.g. overtime pay, bonuses), whereas the previous literature has almost exclusively focused on the base rate of pay. When we examine firm labor cost adjustments on both the hours and wage margins, we find that firms have substantially more flexibility in adjusting hours downward than wages. As a result, the distribution of changes in nominal earnings is less asymmetric than the wage change distribution, with only about 6 percent of job stayers experiencing no change in nominal annual earnings, and over 25 percent of workers experiencing a reduction in nominal annual earnings. During the recent Great Recession, this earnings change distribution became almost completely symmetric and the proportion of job stayers experiencing a decline in annual earnings rose markedly to about 40 percent. Finally, we exploit the worker‐firm link in our data to show that it is mostly smaller establishments that show evidence of asymmetry in their earnings change distribution. For these smaller establishments, we find that indicators of downward wage rigidity are systematically associated with higher job destruction rates.
Here is another recent paper, this one from the NBER. It shows that real estate agents, who have flexible, commission-based wages, do have smaller employment fluctuations than sticky-wage construction workers. But that difference is only by about 10 to 20 percent.
Here is my previous post on sticky wages: Basu and House show that real wages vary a great deal through changes in expected career paths. Here is Alex’s 2014 post on half the men having new jobs since the recession.
Are your views on sticky nominal wages and the minimum wage consistent?
And how are nominal wages sticky for the unemployed?
Perhaps most significantly, high nominal demand economies such as Jamaica and Brazil (yes there are still a few left!) still appear capable of generating quite high rates of unemployment.
The nature of upward Danish mobility
This link is now about two weeks old, but I’m on my way to Denmark and you’re going to get whatever I am thinking about, like it or not:
The first big idea is that Denmark is not a nation of Horatio Algersens. Its high social mobility is not the result of an economy that is uniquely good at helping poor children earn middle-class salaries. Instead, it is a country much like the U.S., where the children of poor parents who don’t go to college are also unlikely to attend college or earn a high wage. Social mobility in Denmark and the U.S. seem to be remarkably similar when looking exclusively at wages—that is, before including taxes and transfers.
It is only after accounting for Denmark’s high taxes on the rich and large transfers to the poor that its social mobility looks so much better than the U.S.’s. America’s (relatively conservative) economic philosophy is that, with low taxes and little regulation, the market is an open savannah where the most talent will win out. But Denmark’s economic philosophy seems to be that the market is an unfortunate socioeconomic lottery system, and so the country compensates the poor with generous transfers paid by high taxes on the rich.
The second big idea in the paper is that Denmark’s large investment in public education pays off in higher cognitive skills among low-income children, but not in higher-education mobility—i.e., the odds that a child of a non-college grad will go on to finish college.
That is from Derek Thompson. Here is his source:
…this Danish Dream is a “Scandinavian Fantasy,” according to a new paper by Rasmus Landersø at the Rockwool Foundation Research Unit in Copenhagen and James J. Heckman at the University of Chicago. Low-income Danish kids are not much more likely to earn a middle-class wage than their American counterparts. What’s more, the children of non-college graduates in Denmark are about as unlikely to attend college as their American counterparts.
Both the paper and the article are recommended.
The Japanese Zoning System
In Laissez-Faire in Tokyo Land Use I pointed to Japan’s constitutional protection of property rights and it’s relatively laissez-faire approach to land use to explain why housing prices in Japan have not risen in past decades, as they have elsewhere in the developed world. A very useful post at Urban kchoze offers more detail on Japan’s zoning system. Here are some of the key points.
Japan has 12 basic zones, far fewer than is typical in an American city. The zones can be ordered in terms of nuisance or potential externality from low-rise residential to high-rise residential to commercial zone on through to light industrial and industrial. But, and this is key, in the US zones tend to be exclusive but in Japan the zones limit the maximum nuisance in a zone. So, for example, a factory can’t be built in a residential neighborhood but housing can be built in a light industrial zone.
…[the] Japanese do not impose one or two exclusive uses for every zone. They tend to view things more as the maximum nuisance level to tolerate in each zone, but every use that is considered to be less of a nuisance is still allowed. So low-nuisance uses are allowed essentially everywhere. That means that almost all Japanese zones allow mixed use developments, which is far from true in North American zoning.
…[The] great rigidity in allowed uses per zone in North American zoning means that urban planing departments must really micromanage to the smallest detail everything to have a decent city. Because if they forget to zone for enough commercial zones or schools, people can’t simply build what is lacking, they’d need to change the zoning, and therefore confront the NIMBYs. And since urban planning departments, especially in small cities, are largely awful, a lot of needed uses are forgotten in neighborhoods, leading to them being built on the outskirts of the city, requiring car travel to get to them from residential areas.
Meanwhile, Japanese zoning gives much more flexibility to builders, private promoters but also school boards and the cities themselves. So the need for hyper-competent planning is much reduced, as Japanese planning departments can simply zone large higher-use zones in the center of neighborhoods, since the lower-uses are still allowed. If there is more land than needed for commercial uses in a commercial zone, for example, then you can still build residential uses there, until commercial promoters actually come to need the space and buy the buildings from current residents.
In addition, residential means residential without discrimination as to the type or form of resident:
…In Japan…residential is residential. If a building is used to provide a place to live to people, it’s residential, that’s all. Whether it’s rented, owned, houses one or many households, it doesn’t matter.
This doesn’t mean that people can build 10-story apartment blocs in the middle of single-family houses (at least, not normally). As I mentioned, there are maximum ratios of building to land areas and FAR that restricts how high and how dense residential buildings may be. So in low-rise zones, these ratios mean that multifamily homes must also have only one to three stories, like the single-family homes around them. So in neighborhoods full of small single-family homes, you will often see small apartment buildings full of what we would call small studio apartments: one room with a toilet.>
In short, as the author concludes, Japan’s zoning laws are more rational, more efficient and fairer than those used in the United States.
More details in the post. Hat tip: Sandy Ikeda.