Category: Economics

*The WEIRDest People in the World*

That is the new 655 pp. book by Joseph Henrich, due out September 8, and yes it is “an event.”  The subtitle is “How the West Became Psychologically Peculiar and Particularly Prosperous,” and that is indeed one of the very most important questions in all of social science.

“WEIRD” of course refers to “Western, Educated, Industrialized, Rich, and Democratic.”  And is it not weird that we (some of us, at least) are WEIRD?

Here is an excerpt from the opening segment:

Let’s close by returning to the core questions of this book:

1. How can we explain the global psychological variation highlighted above?

2. Why are WEIRD societies particularly unusual, so often occupying the extreme ends of global distributions of psychology and behavior?

3. What role did these psychological differences play in the Industrial Revolution and the global expansion of Europe during the last few centuries?

If you are wondering how this material might differ from Henrich’s previous output, there is above all much more on marriage customs and monogamy, for instance:

…I’ll make the case that monogamous marriage norms — which push upstream against our polygynous biases and the strong preferences of elite men — create a range of social and psychological effects that give the societies that possess them a big edge in competition against other groups.

Obviously recommended, and you will be hearing more about this both from me and from others.  You can pre-order here.

Some reflections on GRE scores

The evidence indicates that GRE scores predict graduate school success, general intelligence, and also that SAT scores predict later success in science.  Here is further evidence, and here is yet further evidence.

You don’t have to think that “high GRE score fields” are better than “low GRE score fields.”  Many of my friends, for instance, think string theory is intellectually bankrupt, despite many of its proponents being very, very smart.  I don’t have an opinion on string theory per se, but my friends might be right, and in any case I would rather read books from cultural studies, a lower GRE score field.

If you wish to understand the relative strengths and pathologies of theoretical physics and cultural studies, you cannot do that without knowing that the former is a relatively high GRE score field (or the equivalent) and that the latter is a relatively low GRE score field (or the equivalent).

There are many top economists on Twitter, most of them Democrats, who would never ever utter a word about GRE scores in a blog post or on Twitter.  Yet when on an admissions committee, they will ruthlessly enforce the strictest standards for math GRE scores without hesitation.  Not only in top ten programs, but in top thirty programs and even further down the line in many cases.  It is very, very hard to get into a top or even second-tier economics program without an absolutely stellar math GRE score, and yes that is enforced by the same humans who won’t talk about the issue.

Just in case you didn’t know that.

Personally, I feel it has gone too far in that direction, and economics has overinvested in one very particular kind of intelligence (I would myself put greater stress on the old GRE subject test scores for economics, thus selecting for those with an initial interest in the economy rather than in mathematics).

When I did graduate admissions for George Mason University, I very consciously moved away from an emphasis on GRE scores, and for the better.  My first goal was simply to take in more students, and a more diverse group of students, and in fact many of the later top performers were originally “marginal” students by GRE standards.  Looking back, many of our top GRE-scoring students have not done better than the peers, though they have done fine.  For GMU these admission criteria are (in my view) more like the Rosen-Roback model than anything else, though I would readily grant Harvard and MIT are not in the same position.

If you are afraid to talk about GRE scores, you are afraid to talk about reality.

The Risk of Immunity Passes

I argued earlier that if we have Immunity Passes they Must Be Combined With Variolation because “the demand to go back to work may be so strong that some people will want to become deliberately infected. If not done carefully, however, these people will be a threat to others, especially in their asymptomatic phase.” Thus, if we have immunity passes we must also have controlled infection.

In a new paper, Daniel Hemel and Anup Malani run the numbers and verify the intuition:

…Our topline result is that strategic self-infection would be privately rational for younger adults under a wide range of plausible parameters. This result raises two significant concerns. First, in the process of infecting themselves, younger adults may expose others—including older and/or immunocompromised individuals—to SARS-CoV-2, generating significant negative externalities. Second, even if younger adults can self-infect without exposing others to risk, large numbers of self-infections over a short timeframe after introduction of the immunity passport regime may impose significant congestion externalities on health care infrastructure. We then evaluate several interventions that could mitigate moral hazard under an immunity passport regime, including the extension of unemployment benefits, staggered implementation of passports, and controlled exposure of individuals who seek to self-infect. Our results underscore the importance of careful planning around moral hazard as part of any widescale immunity passport regime.

The Miracle of the Internet

The internet has performed incredibly well in the crisis. Charles Fishman, at the Atlantic, gets an inside picture from AT&T:

The surge in traffic, on the internet as a whole and on AT&T’s part of the network, is extraordinary in a way that the phrase 20 percent increase doesn’t quite capture. AT&T’s network is carrying an extra 71 petabytes of data every day. How much is 71 petabytes? One comparison: Back at the end of 2014, AT&T’s total network traffic was 56 petabytes a day; in just a few weeks, AT&T has accommodated more new traffic every day than its total daily traffic six years ago. (During the pandemic, the AT&T network has been carrying about 426 petabytes a day—one petabyte is 1 million gigabytes.)

It’s not an accident. Like HEB in Texas

…AT&T rehearses for disaster. Last May, the company ran an internal war game on how a pandemic would affect its ability to keep phone and internet service running. The company does these exercises routinely to try to get ready—to build teams of people and their reflexes, and also to understand what they will need on the ground.

Tom Hazlett at City Journal points out that the strength of the American internet in particular has been due to greater investment and non network-neutrality.

The payoff is that Netflix (or Hulu, Amazon, or YouTube) have forged bargains with ISPs: if you subscribe to Comcast, you might notice that Netflix is so integrated into its network that a button on your cable TV remote clicks you right from CNBC (owned by Comcast) to Netflix—away from the cable operator’s shows and onto a streaming “over-the-top” media platform. These non-neutral arrangements, along with side payments between the companies, fundamentally support Internet growth.

So while Netflix and Amazon have been throttling their video services in Europe, reducing their customers’ data consumption by one-fourth in response to surging demand, high-definition streaming, following a long trend, remains the U.S. norm. In a 2012 paper in the Journal of Law & Economics, Michal Grajek and Lars-Hendrik Röller found that higher levels of regulatory control (with rules designed to force network sharing) undermined investment incentives, reducing information infrastructure across Europe by 23 percent….U.S. network investments are higher than in Europe, accounting for population and relative economic output.

Despite arguments that the U.S. is falling behind, these network investments pay off. American Internet users consume considerably more data than do Europeans on a per-capita basis. According to Cisco, ISP end-users in the U.S. and Canada stream 115.6 gigabytes of data per month, compared with 43.8 gigabytes in Western Europe and 10.6 gigabytes in Asia Pacific.

World’s Largest Producer of Rubbing Alcohol Can’t Manufacturer Hand Sanitizer

How many stupid, outrageous, maddening government failures can you document in just 500 words? Jim Doti and my former colleague Laurence Iannaccone should win a prize for this piece in the WSJ:

…the U.S. is, by far, the world’s largest producer of alcohol. That distinction is a result of the Energy Policy Act of 2005, which required fuel producers to blend four billion gallons of corn ethanol into their gasoline by 2006 and 7.5 billion by 2012. The immediate result was a spike in the price of corn and an increase in food prices world-wide. U.S. farmers soon solved this problem by diverting millions of acres of land to growing corn. Ironically, this increased overall CO2 emissions, much to the chagrin of the environmentalists who had championed the mandate as a way of fighting global warming.

Long before policy makers had seen their error, however, farm states had so fallen in love with ethanol that they successfully lobbied the federal government to raise the mandate to 32 billion gallons a year by 2022. Keep in mind that the oil industry would gladly pay billions of dollars in extra taxes each year not to use it.

The negative effects of this forced usage of corn-based ethanol in refined petroleum include higher gas prices (alcohol costs more than oil per British thermal unit) and more than 30 million acres lost to subsidized corn production — an area that vastly exceeds all the land lost to urban, suburban and exurban “sprawl” over the past century. And while the U.S. now has inordinate supplies of excess alcohol, fuel producers can’t use it, since adding any more to gasoline will damage car engines.

Surely now, with people clamoring for germ-sanitizing alcohol, this excess supply can be put to good use. Not so fast. The Food and Drug Administration and Bureau of Alcohol, Tobacco, Firearms and Explosives have prohibited the use of ethanol in place of isopropyl alcohol even though both are equally effective as germ-killers.

On April 3 the FDA announced that “ethanol made at plants producing fuel ethanol can be used as rubbing alcohol if it contains no additional additive or chemicals from the plants and they can ensure water purity and proper sanitation of equipment.” But it’s unclear how much supply will increase, since the FDA also stated that it would “consider each plant on an individual basis and grant approval only if a plant meets quality control specifications.”

Worse yet, the FDA reversed course on April 16, announcing additional restrictions that effectively prevent any sales, even though ethanol companies had already produced and shipped millions of gallons of high-grade alcohol for hand sanitizer. With U.S. ethanol inventories at all-time high of about 900 million gallons, you’d think the FDA would let us have a little for our hands.

Facts about labor markets ouch, when are rising wages bad edition

Workers in the bottom quintile of the wage distribution experienced a 35 percent employment decline while those in the top quintile experienced only a 9 percent decline. Large differences across the wage distribution persist even after conditioning on worker age, business industry, business size, and worker location. As a result, average base wages increased by over 5 percent, though this increase arose entirely through a composition effect. Overall, we document that the speed and magnitude of labor market deterioration during the early parts of the pandemic were unprecedented in the postwar period, particularly for the bottom of the earnings distribution.

That is from a new paper by many authors, including Cajner, Decker, and Hurst.  Via Adam Ozimek.

America’s reopening will depend on trust

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

The first wave of the Covid-19 pandemic brought serious economic damage for thinly capitalized face-to-face retailers, such as small family-owned restaurants. But many of those same institutions will lead the recovery — that is, if they have built up trust among their patrons. If they ask me to sit outside to eat my meal, I will trust that their kitchen procedures are “clean enough,” because I believe that the boss is watching [there I am referring to two of my favorite local places].

It is also worth asking whom I do not trust. When it comes to providing a fully clean and safe store, I do not trust most of the big-box retailers. I trust them just fine in ordinary times, but no single manager can oversee the entire cleaning and disinfectant operation. And can they monitor Covid-19 in the air? If they tell me that “all possible precautions have been taken,” I might believe their words, but I won’t believe that is enough.

And:

The NBA is wondering if it can resurrect its playoffs at a dedicated location with television coverage but no audience in the stands. So far the teams are hesitant, in part because they are afraid of public resentment if the league’s millionaire players have access to Covid-19 tests while the general public does not.

The reality is that if the NBA announced it was buying up a lot of tests, it would boost the supply of tests. That could provide testing with valuable positive publicity, with the NBA serving as a role model for what other businesses might do. Yet the NBA does not yet trust its fans to see things in such a positive light, and so reopening is delayed. There might be some danger to playoffs games without fans, but surely less than in, say, collegiate or professional football, where injuries and concussions are built into the very nature of the competition.

Which are the businesses that you really trust in matters pandemic?

Labor market restructuring and its possible permanence

We find 3 new hires for every 10 layoffs caused by the shock and estimate that 42 percent of recent layoffs will result in permanent job loss.

That is from a new paper by Jose Maria Barrero, Nick Bloom, and Steven J. Davis, top experts on this and related topics.  As for policy:

Unemployment benefit levels that exceed worker earnings, policies that subsidize employee retention, occupational licensing restrictions, and regulatory barriers to business formation will impede reallocation responses to the COVID-19 shock.

Should South Africa lock down?

The lockdown will lead to 29 times more lives lost than the harm it seeks to prevent from Covid-19 in SA, according to a conservative estimate contained in a new model developed by local actuaries.

The model, which will be made public today for debate, was developed by a consortium calling itself Panda (Pandemic ~ Data Analysis), which includes four actuaries, an economist and a doctor, while the work was checked by lawyers and mathematicians. The process was led by two fellows at the Actuarial Society of SA, Peter Castleden and Nick Hudson.

They have sent a letter, explaining its model, to President Cyril Ramaphosa. In the letter, headed “Lockdown is a humanitarian disaster to dwarf Covid-19”, they call for an end to the lockdown, a focus on isolating the elderly and allowing children to go back to school, while ensuring the economy restarts so that lives can be saved.

The paper also is at the link, and it is perhaps more of a rough and ready calculation than a formal model per se.  Nonetheless South Africa has a relatively young population and the core points are well taken:

In SA, they estimate that 5.4 years of life have been lost per Covid-19 death. They then multiply this by the range of deaths which they predict – 20,000 – as well as the actuarial society’s prediction of 88,000 fatalities. They factor in that the lockdown will have reduced some deaths, but not all. In the end, their model translated into a minimum of 26,800 “years of lives lost” due to Covid-19, and a maximum of 473,500 years. (This, critically, shouldn’t be confused with the actual number of fatalities expected from Covid-19.)

The actuaries then used the figures predicted by the National Treasury to model the impact on poverty. On Friday, the Treasury estimated that between 3-million and 7-million jobs will be lost due to the measures taken to combat the virus. The actuaries then work out that, conservatively, 10% of South Africans will become poorer, and as a result, will lose a few months of their lives.

It is a good question how many of the models used for the West have taken into account the “demonstration effect,” namely that poorer (and much younger) countries will be tempted to follow the same policies.  I’ve yet to see a good discussion of this.

My Conversation with Adam Tooze

Tinges of Covid-19, doses on financial crises, but mostly about economic history.  Here is the audio and transcript.  Here is the summary:

Adam joined Tyler to discuss the historically unusual decision to have a high-cost lockdown during a pandemic, why he believes in a swoosh-shaped recovery, portents of financial crises in China and the West, which emerging economies are currently most at risk, what Keynes got wrong about the Treaty of Versailles, why the Weimar Republic failed, whether Hitler was a Keynesian, the political and economic prospects of various EU members, his trick to writing a lot, how Twitter encourages him to read more, what he taught executives at BP, his advice for visiting Germany, and more.

Here is one excerpt:

And:

Tooze’s discussion of his own career and interests, toward the end, is hard to excerpt but for me the highlight of the conversation.  He also provided the best defense of Twitter I have heard.

Definitely recommended.

Online Education is Better

The COVID-19 crisis is accelerating a long-term trend, the shift to online education. I’ve long argued that online education is superior to traditional models. In an excellent essay in the New York Times, Veronique Mintz, an eighth-grade NYC student agrees:

Talking out of turn. Destroying classroom materials. Disrespecting teachers. Blurting out answers during tests. Students pushing, kicking, hitting one another and even rolling on the ground. This is what happens in my school every single day.

You may think I’m joking, but I swear I’m not…during my three years of middle school, these sorts of disruptions occurred repeatedly in any given 42-minute class period.

That’s why I’m in favor of the distance learning the New York City school system instituted when the coronavirus pandemic hit.

…Distance learning gives me more control of my studies. I can focus more time on subjects that require greater effort and study. I don’t have to sit through a teacher fielding questions that have already been answered.

…This year I have struggled with math. The teacher rarely had the patience for questions as he spent at least a third of class time trying to maintain order. Often, when I scheduled time to meet with him before school, there would be a pileup at his door of students who also had questions. He couldn’t help us all in 20 minutes before first period. Other times he just wouldn’t show up….With distance learning, all of that wasted time is eliminated. I stop, start and even rewind the teacher’s recording when I need to and am able to understand the lesson on the day it’s taught.

Veronique’s online courses were put together in a rush. Imagine how much more she will learn when we invest millions in online classes and teach at scale. The online classes that Tyler and I teach, using Modern Principles and the Sapling/Achieve online course management system, took years to produce and feature high quality videos and sophisticated assessment tools including curve shifting (not just multiple-choice), empirical questions based on FRED, and adaptive practice–plus the videos are all subtitled in multiple languages, they can be sped up or slowed down, watched at different times of the day in different time zones and so forth. Moreover, technology is increasing the advantages of online education over time.

Did non-pharmaceutical interventions actually help against the Spanish flu?

From three economics Ph.D students at Harvard, namely Andrew Lilley, Matthew Lilley, and Gianluca Rinaldi:

Using data from 43 US cities, Correia, Luck, and Verner (2020) find that the 1918 Flu pandemic had strong negative effects on economic growth, but that Non Pharmaceutical Interventions (NPIs) mitigated these adverse economic effects. Their starting point is a striking positive correlation between 1914-1919 economic growth and the extent of NPIs adopted at the city level. We collect additional data which shows that those results are driven by population growth between 1910 to 1917, before the pandemic. We also extend their difference in differences analysis to earlier periods, and find that once we account for pre-existing differential trends, the estimated effect of NPIs on economic growth are a noisy zero; we can neither rule out substantial positive nor negative effects of NPIs on employment growth.

I am very willing to publish a response from the original authors on this one.

Seller Reputation and Price Gouging

That is a new paper by Luís Cabral and Lei Xu, here is the abstract:

We test the theory that seller reputation moderates the effect of demand shocks on a seller’s propensity to price gouge. From mid January to mid March 2020, 3M masks were priced 2.72 times higher than Amazon sold them in 2019. However, the difference (in price ratios) between a post-COVID-19entrant and an established seller is estimated to be about 1.6 at times of maximum scarcity, that is, post-COVID-19entrants price at approximately twice the level of established sellers. Similar results are obtained for Purell hand sanitizer. We also consider cumulative reviews as a measure of what a seller has to lose from damaging its reputation and, again, obtain similar results. Finally, we explore policy implications of our results.

In other words, Amazon is afraid to raise its prices, presumably for a mix of reputational and regulatory reasons.

A multi-risk SIR model with optimally targeted lockdown

Or you could say “all-star economists write Covid-19 paper.”  Daron Acemoglu, Victor Chernozhukov, Iván Werning, and Michael D. Whinston have a new NBER working paper.  Here is part of the abstract:

For baseline parameter values for the COVID-19 pandemic applied to the US, we find that optimal policies differentially
targeting risk/age groups significantly outperform optimal uniform policies and most of the gains can be realized by having stricter lockdown policies on the oldest group. For example, for the same economic cost (24.3% decline in GDP), optimal semi–targeted or fully-targeted policies reduce mortality from 1.83% to 0.71% (thus, saving 2.7 million lives) relative to optimal uniform policies. Intuitively, a strict and long lockdown for the most vulnerable group both reduces infections and enables less strict lockdowns for the lower-risk groups.

Note the paper is much broader-ranging than that, though I won’t cover all of its points.  Note this sentence:

Such network versions of the SIR model may behave very differently from a basic homogeneous-agent version of the framework.

And:

…we find that semi-targeted policies that simply apply a strict lockdown on the oldest group can achieve the majority of the gains from fully-targeted policies.

Here is a related Twitter thread.  I also take the authors’ model to imply that isolating infected individuals will yield high social returns, though that is presented in a more oblique manner.

Again, I would say we are finally making progress.  One question I have is whether the age-specific lockdown in fact collapses into some other policy, once you remove paternalism as an underlying assumption.  The paper focuses on deaths and gdp, not welfare per se.  But what if older people wish to go gallivanting out and about?  Most of the lockdown in this paper is for reasons of “protective custody,” and not because the older people are super-spreaders.  Must we lock them up (down?), so that we do not feel too bad about our own private consumption and its second-order consequences?  What if they ask to be released, in full knowledge of the relevant risks?