Category: Economics

Why don’t nations buy and sell territory more?

Egypt has agreed to a $35bn deal with the United Arab Emirates to develop the town of Ras el-Hekma town on its northwestern coast, Egyptian Prime Minister Mostafa Madbouly announced on Friday after weeks of speculations.

Madbouly said at a news conference, which was attended by Egyptian and Emirati officials, that Egypt will receive an advance amount of $15bn in the coming week, and another $20bn within two months.

The deal is the largest foreign direct investment in an urban development project in the country’s modern history, the prime minister said. It is a partnership between the Egyptian government and an Emirati consortium led by ADQ, he said.

Here is the full story, Nuuk here we come…

Hazlett on T-Mobile/Sprint

Tom Hazlett whose op-ed on the T-Mobile Sprint merger I quoted earlier writes me:

A few thoughts on your robust MR debate: (1) Were we to observe the counterfactual over the post-merger period we would have additional evidence – no disagreement. But the counterfactuals are themselves controversial to construct, and antitrust analyses typically make just the “before/after” prediction referenced. As the case against the merger (brought by several states, but rejected by a federal court) put it: “The proposed transaction would eliminate Sprint as a competitor… This increased market concentration will result in diminished competition, higher prices, and reduced quality and innovation.”

(2) There is powerful supporting evidence about merger effects apart from the retail price data. If real, quality-adjusted rates were anticipated to drop at even a faster clip (without a merger), reversing a pre-merger pro-consumer trend, then the post-merger performance in stock prices would have benefited the three incumbents in the market. Instead, two of the three firms have seen large abnormal declines in share values.

(3) The “cozy triopoly” theory is itself upended by both the firm stock price performances and the pattern of capital investments. The “Demsetz Critique” of the Structure-Conduct-Performance paradigm showed that a positive concentration-profits correlation does not imply monopolistic behavior if the proximate cause of the excess profits is efficiency. Here, T-Mobile’s network improvements appear to be caused by its merger-based spectrum acquisitions, and these upgrades linked to its subscriber growth and capital gains. The non-merging mobile rivals have suffered highly negative returns, likely in significant part from intensified competitive challenges that forced them to make large investments in response. In 2021, Verizon and AT&T combined to pay over $75 billion for spectrum rights in an FCC auction, easily the most ever paid by two (or any number of) license bidders. Cartel formation predictably reduces rivalry; evidence of firms aggressively increasing capex to better compete for market share runs counter to the expectation.

(4) Industry analysts – who provide third-party evaluations often given great weight by antitrust authorities – support these interpretations. In Dec. 2022, e.g., sector expert Craig Moffett (MoffettNathanson) wrote: “We expect T-Mobile to continue, and indeed accelerate, their market share gains versus AT&T and Verizon, as T-Mobile’s 5G network superiority becomes increasingly evident and increasingly relevant as 5G handsets become ubiquitous. The combination of a single telecom operator having both the industry’s best network and its lowest prices is unprecedented… “

(5) A 750-word oped is not the ultimate format for such evidence. My Working Paper with Robert Crandall (formerly of Brookings, now with the Technology Policy Institute) supplies a more complete analysis – comments again welcome.

Shruti Rajagopalan interviews Doug Irwin

Doug of course is one of the top trade economists.  Here is the audio, video, and transcript, from the same wonderful Mercatus team that brings you CWT.  Here is one excerpt:

RAJAGOPALAN: I have a different question on Adam Smith. We’re all taught Adam Smith’s division of labor, specialization, economies of scale, the cliff notes version of that. Then, we learn about absolute advantage in about five minutes. Then, we set it aside and start thinking about comparative advantage.The first question I have is does Adam Smith’s basic model of division of labor, specialization, and economies of scale anticipate the comparative advantage trade models, or does it actually undermine the comparative advantage trade models in the way that Krugman wrote about or something else?IRWIN: I think that Adam Smith has a broader view of trade, a much richer view of trade than what I would think is of the narrower David Ricardo theory of comparative advantage. If you have to read one of the two, read Adam Smith because it’s much more fun to read. Reading David Ricardo is more like reading a textbook in the sense that he doesn’t have this broad historical sense and these new rich ideas and how they’re interacting that leaves a lot to the imagination and leaves a lot to future research to flesh out.He’s saying, “England can produce wine and cloth. Here are the labor coefficients, and we’re going to do this static comparison between England and Portugal.” That’s a very narrow way of thinking about trade.RAJAGOPALAN: So badly written, you want the wine by the end of it.IRWIN: There’s a wonderful quote by George Stigler saying: “the only thing that someone will take away from reading Ricardo’s theory of comparative advantage is that they need a bottle of wine to get through it,” or something along those lines.RAJAGOPALAN: I agree.IRWIN: Adam Smith isn’t technically as sophisticated if you will, but in terms of the ideas, they’re very sophisticated. Obviously, he wasn’t thinking in terms of an economic model directly, but it’s a much richer overall discussion of trade that I think you can learn a lot from, even reading today.RAJAGOPALAN: When you see the world today, what do you think the world looks like more? Does it look more like Ricardian comparative advantage and the more recent models like Heckscher–Ohlin, and those things that came about? Do you think it really looks like the Adam Smith story, which is much more nuanced, pay attention to what’s happening in the domestic economy in terms of division of labor, specialization, and that is the lead-in to foreign trade, which is so deeply entangled with domestic trade?IRWIN: Well, I hate to waffle, but I think you need a little bit of both. It depends on the question, depends on the country, depends on the issue that you’re examining. These are just tools that you draw to help out your understanding of a particular situation. I will confess I’m a little bit more in favor of Adam Smith. I’ve always said that his theory of trade, and in particular his analysis of trade policy, which I think is underrated, is very sophisticated, and very wise, and has a lot to say to us today.RAJAGOPALAN: Beautifully written, if I may add.

There are now 100 episodes of Ideas of India, here is a link to all of them.  And here is my own earlier CWT with Doug.

Access to Medical Data Saves Lives

ProPublica: In January, the Biden administration pledged to increase public access to a wide array of Medicare information to improve health care for America’s most sick and vulnerable.

…So researchers across the country were flummoxed this week when the Centers for Medicare and Medicaid Services announced a proposal that will increase fees and diminish access to claims data that has informed thousands of health care studies and influenced major public health reforms.

Using big Medicare databases has never been cheap or easy. Under the current system, researchers could have the data transferred to secure university computers for about $20,000–that’s a lot but once the data was on the university computers it could be accessed by multiple researchers, cutting costs. A professor could buy the data and their PhD students, for example, wouldn’t have to pay again. Under the new system it will cost $35,000 for one researcher to access the data which will be held on government (CMS) computers. Moreover, it’s unclear how complex statistical analysis will be performed or how congested the CMS systems may become.

Research teams on complex projects can include dozens of people and take years to complete. “The costs will grow exponentially and make access infeasible except for the very best resourced organizations,” said Joshua Gottlieb, a professor at the University of Chicago’s Harris School of Public Policy.

Public data should be open access to researchers, with appropriate anonymization. We know from IP law that barriers to access reduce research and innovation; and in the medical sphere research and innovation saves lives. Open access is also a check on how governments spends taxpayer money and the effectiveness of such spending. I also worry that raising the dollar cost of access is a prelude to other restrictions. The NIH, for example, is restricting access to genetic data if it thinks the researcher will be asking forbidden questions. Even without such explicit restrictions, there is a chilling effect when researchers are beholden for access to the government and indeed to the very agencies they may be researching.

I place a high value on privacy but I get suspicious when governments invoke privacy to block citizen access to government data but not to block government access to citizen data. Medicare databases have always been appropriately anonymized and care is taken so the data are secured but the dangers of these databases in anyone’s hand, let alone researchers, is far less than anti-money laundering, KYC laws and suspicious transaction reports in banking, automated license plate readers that the police us to scan billions of license plates or mass surveillance of the communications of US citizens under FISA. Sadly, this list could easily be extended. Liberty thrives on the people’s privacy and the government’s transparency.

Nixonian Politics and Student Debt Cancellations

In the political economy chapter of our textbook, Modern Principles of Economics, Tyler and I discuss how voters appear especially responsive to economic conditions in the year of an election. Politicians who want to be reelected, therefore, are wise to do whatever they can to increase personal disposable income and reduce inflation in the year of an election even if this means decreases in income and increases in inflation at other times.

One of the most brazen examples comes from President Richard Nixon. Just two weeks before the 1972 election, he sent a letter to more than 24 million recipients of Social Security benefits. President Nixon’s letter read:

Higher Social Security Payments

Your social security payment has been increased by 20 percent, starting with this month’s check, by a new statute enacted by Congress and signed into law by President Richard Nixon on July 1, 1972.

The President also signed into law a provision that will allow your social security benefits to increase automatically if the cost of living goes up. Automatic benefit increases will be added to your check in future years according to the conditions set out in the law.

In other news:

President Joe Biden on Wednesday will announce $1.2 billion of student debt relief for nearly 153,000 borrowers — and he’s sending emails to make sure they know whom to thank for it.

…“Congratulations—all or a portion of your federal student loans will be forgiven because you qualify for early loan forgiveness under my Administration’s SAVE Plan,” says the email message from Biden that the Education Department plans to send on Wednesday to the latest group of borrowers receiving loan forgiveness.

“I hope this relief gives you a little more breathing room,” Biden writes in the message.

Note also:

…The administration says that it has now approved loan discharges totaling nearly $138 billion for nearly 3.9 million borrowers through dozens of administrative actions since coming into office.

“Administrative actions,” in other words without Congress passing a law. You may recall that the Supreme Court ruled that the administration did not have the authority to cancel student debt under the HEROES Act (which it obviously didn’t). However:

Hours after the Court issued its decisions in Nebraska and Brown, the Biden Administration announced that it was beginning a regulatory process, called negotiated rulemaking, to consider providing loan cancellation under the HEA rather than the HEROES Act.

Addendum: Do also read my previous post where I noted “…the student loan program, as currently written, is looking to be one of the most costly, inefficient and unwise government programs of the 21st century.”

Random Admissions Above the Bar

Jon Klick, Professor of Law at the University of Pennsylvania Carey Law School (and a distinguished GMU econ grad), argues that Penn should “abandon the fiction that holistic evaluation is anything more than a way to hide discretion.”

Instead, Penn should set a standardized test score floor and then randomly choose its admittees from the pool of applicants meeting that requirement.  That’s it; that’s the application process.  Setting a floor helps make sure the matriculating class has the requisite cognitive ability to succeed but otherwise limits concerns about ideology being privileged over academic merit.  Random selection (as opposed to just taking the highest test scores) recognizes that standardized tests may be too blunt to make fine distinctions among students and generates a campus population that approximates the population of smart young adults along many more dimensions than we currently consider.

Faculty have largely abandoned the job of admitting students to a professional class of admissions officers. A standardized test floor would simplify the process for universities and reduce the rent-seeking scramble of high-school students to add yet more extra-curricular eye-candy to their highly-crafted personal statements.

Sentences to ponder

We find that standard population growth projections imply larger reductions in [per capita] income than even the most extreme widely-adopted climate change scenario.

Note these results are referring to population growth, not shrinkage.  Of course those of you who remember Paul Ehrlich and his “population bomb” campaign may be skeptical.  Still, if you think there are countries or regions that are just not going to grow much in absolute terms, exactly why is this wrong?  Ehrlich was clearly wrong about countries that were set to grow — is that everyone?

Should per capita or total income be the standard here?

That sentence is from a macroeconomics paper, here is more, via Robin Hanson.

Give Innovation a Chance

Elizabeth Currid-Halkett writing in the NYTimes discusses her son’s muscular dystrophy and his treatment with the controversial gene-therapy Elevidys. Currid-Halkett, like many parents whose children have been treated with Elevidys, reports much better results than appear in the statistics.

On Aug. 29, [my son] finally received the one-time infusion. Three weeks later, he was marching upstairs and able to jump over and over. After four weeks, he could hop on one foot. Six weeks after treatment, Eliot’s neurologist decided to re-administer the North Star Ambulatory Assessment, used to test boys with D.M.D. on skills like balance, jumping and getting up off the floor unassisted. In June, Eliot’s score was a 22 out of 34. In the second week of October, it was a perfect 34 — that of a typically developing, healthy 4-year-old boy. Head in my hands, I wept with joy. This was science at its very best, close to a miracle.

…a narrow focus on numbers ignores the real quality-of-life benefits doctors, patients and their families see from these treatments. During the advisory committee meeting for Elevidys in May 2023, I listened to F.D.A. analysts express skepticism about the drug after they watched videos of boys treated with Elevidys swimming and riding bikes. These experts — given the highest responsibility to evaluate treatments on behalf of others’ lives — seemed unable to see the forest for the trees as they focused on statistics versus real-life examples.

Frankly, I side with the statistics. We don’t hear from the parents in the placebo group whose children also spontaneously made improvements.

Even though I side the statistics, I side with approval. Innovation is a dynamic process. It’s not surprising that the first gene therapy for DMD offers only modest benefits; you don’t hit a home run the first time at bat. But if the therapy isn’t approved, the scientists don’t go back to the drawing board and keep going. If the therapy isn’t approved, it dies and you lose the money, experience and learning by doing that are needed to develop, refine and improve.

Approval is not the end of innovation but a stepping stone on the path of progress. Here’s an example I gave earlier of the same principle. When we banned supersonic aircraft, we lost the money, experience and learning by doing needed to develop quieter supersonic aircraft. A ban makes technological developments in the industry much slower and dependent upon exogeneous progress in other industries.

You must build to build better.

Addendum: Peter Marks is the best and perhaps the most important director CBER has ever had. CBER, the Center for Biologics Evaluation and Research, is responsible for biological products, including vaccines and gene therapies. Marks has repeatedly pushed and sometimes overruled his staff in approving products like Elevidys. Marks named and was the driving force at the FDA behind Operation Warp Speed, a tremendous FDA success and break with tradition. Marks has been challenging the FDA’s conservative culture. I hope his changes survive his tenure.

U.S. equity market dominance

That is the topic of my latest Bloomberg column:

The worldwide dominance of US equities is increasingly obvious. Of the top 10 components of the MSCI global stocks index — which itself now consists of about 70% US stocks — eight are US technology companies. The S&P 500 has breached the 5,000 level. On most days, Apple or Microsoft alone is more valuable than the entire stock markets of major European countries. By one estimate, last year publicly traded US firms accounted for 44.9% of global market capitalization.

All these gaudy numbers raise a question: Is the world on the cusp of a new American century, at least in the corporate realm? The answer is a qualified “yes.”

And this:

The major US tech companies sell to the entire world. Therefore part of the relative rise of US equities is about the liquidity and prestige of US markets, not just US economic success. US listings will dominate, and all the more over time, even when US customers are not the main source of revenue. Say you found a successful French AI company. Wouldn’t you prefer to be listed on the Nasdaq rather than on Paris Stock Exchange? A Nasdaq listing may make it easier to raise money, and the rest of the world will have a better understanding of the rules under which your securities are governed.

And:

And, just to fill out this rosy picture of America’s economic future, the US is doing well in other kinds of financial markets as well, including venture capital, private equity and private credit. The financialization of an economy does carry risks, but a lot of the recent developments are about deleveraging and greater maturity-matching — which should contribute to stability rather than damage it.

There is much more at the link.

Avoiding Repugnance

Works in Progress has a good review of the state of compensating organ donors, especially doing so with nudges or non-price factors to avoid backlash from those who find mixing money and organs to be repugnant. My own idea for this, first expressed in Entrepreneurial Economics, but many times since is a no-give, no-take rule. Under no-give, no-take, people who sign their organ donor cards get priority should they one day need an organ. The great virtue of no-give, no-take is that it provides an incentive to sign one’s organ donor card but one that strikes most people as fair and just and not repugnant. Israel introduced a no-give, no-take policy in 2008 and it appears to have worked well.

In March 2008, to increase donations, the Israeli government imple­mented a ‘priority allocation’ policy to encourage more people to sign up to donate organs after their deaths. Once someone has been registered as a donor for three years, they receive priority allocation if they themselves need a transplant. If a donor dies and their organs are usable, their close family members also get higher priority for transplants if they need them – ​which also means that families are more inclined to give their consent for their deceased relatives’ organs to be used.

In its first year, the scheme led to 70,000 additional sign-ups. The momentum continued, with 11.1 percent of all potential organ donors being registered in the five years after the scheme was introduced, compared to 7.7 percent before. According to a 2017 study, when presented with the decision to authorize the donation of their dead relative’s organs, 55 percent of families decided to donate after the priority scheme, compared to 45 percent before.

Revisiting the T-Mobile-Sprint Merger

T-Mobile’s takeover of Sprint was controversial among analysts. “If this merger is not anticompetitive,” Eleanor Fox, a trade regulation and antitrust law professor at New York University, told reporters in 2020, “it is hard to know what is.” Yale economist and antitrust scholar Fiona Scott Morton delivered her verdict on the deal in a co-authored 2021 article: “The era of aggressive price competition in wireless is over.” The authors predicted that the wireless industry, whittled down to a big three, would “nestle into a cozy triopoly.”

The prediction proved wrong. Average monthly mobile subscription fees dropped sharply. In the three years before the merger, according to government price data, mobile charges declined in real terms by about 8%. In the three years following the merger, the real price decline has been nearly 12%.

These trends were even more impressive given dramatically improving network performance. Before the merger, the top four U.S. carriers delivered data download speeds averaging about 26 megabits per second, nearly all via 3G or 4G. By early 2023, with 5G deployments spreading, Verizon and AT&T data flowed 24% to 39% faster, while T-Mobile was more than three times as fast as before. T-Mobile’s high-speed coverage had also expanded; half of its connections were via 5G by January 2023, against just 10% to 20% for its rivals.

…Further evidence that the merger of T-Mobile and Sprint was pro-competitive was seen with Verizon and AT&T share prices. From 2018 to 2023, Verizon and AT&T stock prices declined sharply, losing more than a third of their real value. The postmerger marketplace was a great victory for T-Mobile but a blow for its rivals. The cozy-cartel thesis collapsed.

That’s the excellent Tom Hazlett writing in the WSJ–useful facts to remember when thinking about the current rise of antitrust.

Early French economics, my lecture notes

Early French moralists, some of them Jansenists:

Pierre Nicole, La Rochefoucauld, etc. Invisible hand, idea of “mechanism”

Pascal, Pensées, 1669, probability and expected value

17th century mercantilism, Louis XIV, Colbert

18th century, Galiani (Italian), French debates on bread and bread prices

1748, Montesquieu, Spirit of the Laws, analysis of commerce

Diderot, Voltaire, Encyclopedia, rationalism

Beccaria (Italian), law and economics

Physiocrats (they bore me)

Turgot, 1767, liberal principles, stresses accumulation

Condorcet – stresses growth and progress

1789 French Revolution, Napoleon

Much of French economic thought ends up libertarian, e.g., the Ideologues

J.B. Say, Say’s Law, 1803, passim

French pick up on different strands in Smith

Fourier, Proudhon, and Utopian Socialism

1830 — Bourbon Restoration

1838 – Augustin Cournot

1844 – Jules Dupuit, French engineering tradition

Bastiat and free market tradition

1860 — Anglo-French Free Trade Treaty

1873 — Leon Walras, marginalism and general equilibrium theory

Lithium

WEF 2002: The world could face lithium shortages by 2025, the International Energy Agency (IEA) says, while Credit Suisse thinks demand could treble between 2020 and 2025, meaning “supply would be stretched”.

Reuters 2023:  Lithium producers are growing anxious that delays in mine permitting, staffing shortages and inflation may hinder their ability to supply enough of the battery metal to meet the world’s aggressive electrification timelines.

GEP 2023: Lithium faces supply shortages due to past underinvestment amid surging electric vehicle demand.

This list could easily be extended. In contrast here from Nat Bullard’s presentation is data on battery prices per kilowatt-hour. Note that almost all of the above is very short-term extrapolation from the price increase in 2022. As Tyler says, do not underrate the elasticity of supply.

But I haven’t yet given you my favorite headline on this topic, an all-time classic:

Lithium Price Crash Could Trigger Shortages From 2025

 

The California tax burden is driving people out

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

California’s highest income tax rate is 13.3%. That is in addition to a top federal tax rate of 37%. California also has a state sales tax rate of 7.25%, and many localities impose a smaller sales tax. So if a wealthy person earns and spends labor income in the state of California, the tax rate at the margin could approach 60%. Then there is the corporate state income tax rate of 8.84%, some of which is passed along to consumers through higher prices. That increases the tax burden further yet.

And this:

Researchers Joshua Rauh and Ryan Shyu, currently and formerly at Stanford business school, have studied the behavioral response to Proposition 30, which boosted California’s marginal tax rates by up to 3% for high earners for seven years, from 2012 to 2018. They found that in 2013, an additional 0.8% of the top bracket of the residential tax base left the state. That is several times higher than the tax responses usually seen in the data.

These high-earning California residents seem to have reached a tipping point: Maybe many of them could afford the extra tax burden, but at some point they got fed up, read the signals and decided the broader system wasn’t working in their interest.

Overall, Proposition 30 increased total tax revenue for California — but not nearly as much as intended. Due to departures, the state lost more than 45% of its windfall tax revenues from the policy change, and within two years the state lost more than 60% of those same revenues.

Here is an AEA link (gated) to the original research.

Nash’s Contributions to Mathematics

Nash won the Nobel prize in Economics for his 2-page proof of Nash equilibrium, among the slightest of his achievements. Nash’s truly staggering contributions were in his embedding theorems, according to Gromov “one of the main achievements of mathematics of the twentieth century”. In this excellent talk, Cédric Villani gives an accessible guide to these theorems for mere mortals. Villani is a Fields medal winner, a French politician, and a character, all of which adds to the talk.