Category: Economics

Berkeley markets in everything

Multiple students on campus have offered to pay their classmates to drop out of classes they are waitlisted for, raising concerns about over-enrollment and advising.

Campus sophomore David Wang reposted a screenshot on the Overheard at UC Berkeley Facebook page showing a post by a Haas senior in their final semester before going abroad offering to pay $100 to the first five students to drop UGBA 102B, “Introduction to  Managerial Accounting.” The student in question needed the class to graduate, and claimed that the “advising office was no help, so I’m taking matters into my own hands.”

Here is the full story, via Paul Kedrosky.

Uber and Lyft drivers as employees: check your mood affiliation at the door

A reminder that if drivers become employees and so no longer can be on both Uber and Lyft, welfare will be lower with higher prices and higher wait times. See this paper. In Australia, driver multihoming is baked in.

That is a tweet from Joshua Gans.  Keep in mind Uber or Lyft could simply insist on “unihoming” as a condition of employment, as indeed George Mason will not let me take a part- or full-time job teaching at another university.

What kind of industrial policy does America need?

That idea is making a big comeback, but let’s make sure we understand the status quo first.  So runs my latest Bloomberg column, here is one excerpt:

Perhaps most important, it should be recognized that the U.S. already has an industrial policy — and has for some time. It is a collection of programs and policies at the federal and state level, many of which are highly imperfect, and so the focus should be on fixing what is already in place.

The first and perhaps most significant component of U.S. industrial policy is a high level of defense spending, much higher than that of any other country. The spinoffs of this spending famously include the internet of course, but also early advances in computers and some later advances in aviation. Today’s orbiting network of satellites is in part a spinoff from the space program, which was partially motivated by military concerns.

It’s not yet clear whether current defense spinoffs will prove as innovative and as potent as those  of the past, but there are some reasons to be skeptical. Procurement cycles for weapons can stretch to a dozen years or more, yet technologies are changing far more quickly.

So if I were designing an “industrial policy” for America, my first priority would be to improve and “unstick” its procurement cycles. There may well be bureaucratic reasons that this is difficult to do. But if it can’t be done, then perhaps the U.S. shouldn’t be setting its sights on a more ambitious industrial policy.

I also consider the NIH and the biomedical establishment, and America’s extensive system of state colleges and universities, as part of what is already a quite ambitious “industrial policy,” even if we don’t always call it that.

Stable Money Implies an Inverted Yield Curve

Suppose we had stable money. It’s then obvious that long-term savers would prefer long-bonds to rolling over short bonds. If held to maturity, the long-bond guarantees a known rate of return and payout at the time it is bought while the rolling of short-term bonds exposes you to risk. Thus, in a regime of stable money, long-term savers should prefer long-bonds and the yield curve should normally be inverted. That’s the essence of an excellent post by John Cochrane:

If inflation is steady, long-term bonds are a safer way to save money for the long run. If you roll over short-term bonds, then you do better when interest rates rise, and do worse when interest rates fall, adding risk to your eventual wealth. The long-term bond has more mark-to-market gains and losses, but you don’t care about that. You care about the long term payout, which is less risky. (Throw out the statements and stop worrying.) So, in an environment with varying real rates and steady inflation, we expect long rates to be less than short rates, because short rates have to compensate investors for extra risk.

If, by contrast, inflation is volatile and real rates are steady, then long-term bonds are riskier. When inflation goes up, the short term rate will go up too, and preserve the real value of the investment, and vice versa. The long-term bond just suffers the cumulative inflation uncertainty. In that environment we expect a rising yield curve, to compensate long bond holders for the risk of inflation.

So, another possible reason for the emergence of a downward sloping yield curve is that the 1970s and early 1980s were a period of large inflation volatility. Now we are in a period of much less inflation volatility, so most interest rate variation is variation in real rates. Markets are figuring that out.

Most of the late 19th century had an inverted yield curve. UK perpetuities were the “safe asset,” and short term lending was risky. It also lived under the gold standard which gave very long-run price stability.

Existential risk and growth

Here is the abstract of a new paper by Leopold Aschenbrenner:

Technological innovation can create or mitigate risks of catastrophes—such as nuclear war, extreme climate change, or powerful artificial intelligence run amok—that could imperil human civilization. What is the relationship between economic growth and these existential risks? In a model of endogenous and directed technical change, with moderate parameters, existential risk follows a Kuznets-style inverted Ushape. This suggests we could be living in a unique “time of perils,” having developed technologies advanced enough to threaten our permanent destruction, but not having grown wealthy enough yet to be willing to spend much on safety. Accelerating growth during this “time of perils” initially increases risk, but improves the chances of humanity’s survival in the long run. Conversely, even short-term stagnation could substantially curtail the future of humanity. Nevertheless, if the scale effect of existential risk is large and the returns to research diminish rapidly, it may be impossible to avert an eventual existential catastrophe.

Bravo!  44 pp. of brilliant text, another 40 pp. of proofs and derivations, and rumor has it that Leopold is only 17 years old, give or take.

If you happen to know Leopold, please do ask him to drop me a line.

For the pointer I thank Pablo Stafforini.

Special Emergent Ventures tranche to study the nature and causes of progress

I am pleased to announce the initiation of a new, special tranche of the Emergent Ventures fund, namely to study the nature and causes of progress, economic and scientific progress yes but more broadly too, including social and cultural factors.  This has been labeled at times “Progress Studies.

Simply apply at the normal Emergent Ventures site and follow the super-simple instructions.  Feel free to mention the concept of progress if appropriate to your idea and proposal.  Here is the underlying philosophy of Emergent Ventures.

And I am pleased to announce that an initial award from this tranche has been made to the excellent Pseudoerasmus, for blog writing on historical economic development and also for high-quality Twitter engagement and for general scholarly virtue and commitment to ideas.

Pseudoerasmus has decided to donate this award to the UK Economic History Society.  Hail Pseudoerasmus!

Actual progress in exchange rate economics

In this paper, we show that there is substantial comovement between prices of primary commodities such as oil, aluminum, maize, or copper and real exchange rates between developed economies such as Germany, Japan, and the United Kingdom against the US dollar. We therefore explicitly consider the production of commodities in a two-country model of trade with productivity shocks and shocks to the supplies of commodities. We calibrate the model so as to reproduce the volatility and persistence of primary commodity prices and show that it delivers equilibrium real exchange rates that are as volatile and persistent as in the data. The model rationalizes an empirical strategy to identify the fraction of the variance of real exchange rates that can be accounted for by the underlying shocks, even if those are not observable. We use this strategy to argue that shocks that move primary commodity prices account for a large fraction of the volatility of real exchange rates in the data. Our analysis implies that existing models used to analyze real exchange rates between large economies that mostly focus on trade between differentiated final goods could benefit, in terms of matching the behavior of real exchange rates, by also considering trade in primary commodities.

That is from Joao Ayres, Constantino Hevia, and  Juan Pablo Nicolini, via Ilya Novak.

Ideological bias and argument from authority among economists

That is the topic of a new paper by Mohsen Javdani and Ha-Joon Chang, here is part of the abstract:

Using an online randomized controlled experiment involving economists in 19 countries, we examine the effect of ideological bias on views among economists. Participants were asked to evaluate statements from prominent economists on different topics, while source attribution for each statement was randomized without participants’ knowledge. For each statement, participants either received a mainstream source, an ideologically different less-/non-mainstream source, or no source. We find that changing source attributions from mainstream to less-/non-mainstream, or removing them, significantly reduces economists’ reported agreement with statements. This contradicts the image economists have of themselves…

And from the paper:

Consistent with our overall findings, we find that for all but three statements, changing source attributions to a less/non-mainstream source significantly reduces the agreement level. The estimated reductions range from around one-tenth of a standard deviation to around half of a standard deviation.

The largest agreement reduction is for this sentence:

“Economic discourse of any sort — verbal, mathematical, econometric — is rhetoric; that is, an effort to persuade.”

You also can test which kinds of authority reassignation alter the level of agreement.  And thus:

We find that the estimated ideological bias among female economists is around 40 percent less than their male counterparts.

The countries where economists exhibit the highest ideological bias are Ireland, Japan, Australia, and Scandinavia, where for Austria, Brazil, and Italy the ideological bias is smallest.  South Africa, France, and Italy are most conformist to mainstream opinion.

It is a wordy and poorly written paper, and they don’t consider the possibility that deference to authority perhaps is the rational Bayesian move, not the contrary.  Still, it has numerous results of interest.  Here is the authors’ blog post on the paper.

German export history Germans are good at exporting

The growth of foreign trade was especially significant for Germany, which by the middle of the nineteenth century was among the world’s three leading exporters.  The German export trade at the time was mostly in food and raw materials.  As worldwide economic connections grew and Germany itself developed from an agricultural into an industrial nation, world trade became increasingly important as an agent of German prosperity.  Between 1850 and 1913 German foreign trade increased on the average of 4% annually, even faster than overall economic production.  As a result, Germany’s share in the volume of world trade had reached 13% in 1913, while the export quota of the German Reich amounted to 17.5% of total industrial production.

That is from Wilfried Feldenkirchen, Werner von Siemens: Inventor and International Entrepreneur.

Girls’ comparative advantage in reading can largely explain the gender gap in math-related fields

In an earlier post, Do Boys Have a Comparative Advantage in Math and Science? I pointed to evidence showing that boys have a comparative advantage in math because they are much worse than girls at reading. (Boys do not have a large absolute advantage in math.) If people specialize in their personal comparative advantage this can easily lead to more boys than girls entering math training even if girls are equally or more talented. As I wrote earlier:

[C]onsider what happens when students are told: Do what you are good at! Loosely speaking the situation will be something like this: females will say I got As in history and English and B’s in Science and Math, therefore, I should follow my strengthens and specialize in drawing on the same skills as history and English. Boys will say I got B’s in Science and Math and C’s in history and English, therefore, I should follow my strengths and do something involving Science and Math.

A new paper in PNAS by Breda and Napp finds more evidence for the comparative advantage hypothesis. Breda and Napp look at intention to study math in ~300,000 students worldwide taking the PISA.

PISA2012 includes questions related to intentions to pursue math-intensive studies and careers. These intentions are measured through a series of five questions that ask students if they are willing (i) to study harder in math versus English/reading courses, (ii) to take additional math versus English/reading courses after school finishes, (iii) to take a math major versus a science major in college, (iv) to take a maximum number of math versus science classes, and (v) to pursue a career that involves math versus science. Our main measure of math intentions is an index constructed from these five questions and available for more than 300,000 students. It captures the desire to do math versus both reading and other sciences.

What they find is that comparative advantage (math ability relative to reading ability) explains math intentions better than actual math or reading ability. Comparative advantage is also a better predictor of math intentions than perceptions of math ability (women do perceive lower math ability relative to true ability than do men but the effect is less important than comparative advantage). In another data set the authors show that math intentions predict math education.

Thus, accumulating evidence shows that over-representation of males in STEM fields is perhaps better framed as under-representation of males in reading fields and the latter is driven by relatively low reading achievement among males.

As the gender gap in reading performance is much larger than that in math performance, policymakers may want to focus primarily on the reduction of the former. Systematic tutoring for low reading achievers, who are predominantly males, would be a way, for example, to improve boys’ performance in reading. A limitation of this approach, however, is that it will lower the gender gap in math-intensive fields mostly by pushing more boys in humanities, hence reducing the share of students choosing math.

The authors don’t put it quite so bluntly but another approach is to stop telling people to do what they are good at and instead tell them to do what pays! STEM fields pay more than the humanities so if people were to follow this advice, more women would enter STEM fields. I believe that education spillovers are largest in the STEM fields so this would also benefit society. It is less clear whether it would benefit the women.

Hat tip: Mary Clare Peate.

*Do Markets Corrupt Our Morals?*

That is the new book by my colleague Virgil Storr and co-author Ginny Seung Choi.  Here is a summary take on it, excerpt:

This book explores whether or not engaging in market activities is morally corrupting. Storr and Choi demonstrate that people in market societies are wealthier, healthier, happier and better connected than those in societies where markets are more restricted. More provocatively, they explain that successful markets require and produce virtuous participants. Markets serve as moral spaces that both rely on and reward their participants for being virtuous. Rather than harming individuals morally, the market is an arena where individuals are encouraged to be their best moral selves. Do Markets Corrupt Our Morals? invites us to reassess the claim that markets corrupt our morals.

Here is a Deirdre McCloskey blurb:

“Storr and Choi have brought economics and politics back to ethics, which should never have been left. Of course values matter. Of course markets smooth off the rough sides of humans. Of course ‘sweet commerce’ reigns, and should. Of course. But it took a brilliant book like this one to show it.”

You can order the book here.

Estimating US Consumer Gains from Chinese Imports

>We estimate the size of US consumer gains from Chinese imports during 2004–2015. Using barcode-level price and expenditure data, we construct inflation rates under CES preferences, and use Chinese exports to Europe as an instrument. We find significant negative effects of Chinese imports on US prices. This effect is driven by both changes in the prices of existing goods and the entry of new goods, and it is similar across consumer groups by income or region. A simple benchmarking exercise suggests that Chinese imports led to a 0.19 percentage point annual reduction in the price index for consumer tradables.

That is from AER Insights by Liang Bai and Sebastian Stumpner.  I would have expected a somewhat higher magnitude, and perhaps this in part explains why the trade war has been proceeding.

*The Enchantments of Mammon*

The author is Eugene McCarraher, and the subtitle of this Belknap Press book is How Capitalism Became the Religion of Modernity.  Here is one excerpt:

The world does not need to be re-enchanted, because it was never disenchanted in the first place.  Attending primarily to the history of the United States, I hope to demonstrate that capitalism has been, as Benjamin perceived, a religion of modernity, one that addresses the same hopes and anxieties formerly entrusted to traditional religion.  But this does not mean only that capitalism has been and continues to be “beguiling” or “fetishized,” and that rigorous analysis will expose the phantoms as the projections they really are.  These enchantments draw their power, not simply from our capacity for delusion., but from our deepest and truest desires — desires that are consonant and tragically out of touch with the dearest freshness of the universe.  The world can never be disenchanted, not because our emotional or political or cultural needs compel us to find enchantments — though they do — but because the world itself, as Hopkins realized, is charged with the grandeur of God…

However significant theology is for this book, I have relied on a sizable body of historical literature on the symbolic universe of capitalism.  Much of this work suggests that capitalist cultural authority cannot be fully understood without regard to the psychic, moral, and spiritual longings inscribed in the imagery of business culture.

I remain wedded to the traditional Weberian view that capitalism represents a discrete break away from such modes of thought, and I believe this perspective supported by the work of Joe Henrich and co-authors on WEIRD.  Nonetheless, this is a book of note, and it has a clearly stated thesis on matters of direct relevance to what is explored on Marginal Revolution.  Due out in November, pre-order at the link above.