Category: Economics
Labor market effects of the Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (TCJA) of 2017 represents the most significant reform of the U.S. income tax code since the Tax Reform Act of 1986. Previous analyses of the TCJA’s economic impact often rely on estimates based on data prior to the enactment of the legislation. This paper leverages plausibly exogenous variations in state-level tax changes brought about by the TCJA and employs local projections with two-way fixed effects to examine its effects on the labor market. Measures of TCJA tax shocks are constructed with the NBER-TAXSIM model using state-level tabulations of individual income tax returns from the Statistics of Income (SOI). Our findings suggest that tax cuts amounting to 1 percent of Adjusted Gross Income (AGI) under the TCJA are associated with a 0.7–1 percentage point increase in the labor force participation rate (LFPR) and a 0.8–1.5 percent increase in payroll employment over the two years following the TCJA’s implementation. These results appear broadly robust to assumptions about heterogeneous state responses and the inclusion of interactive fixed effects.
That is from a newly published article by Anil Kumar. Via the excellent Kevin Lewis.
The Shingles Vaccine Reduces Dementia
In 2023 in Can the Shingles Vaccine Prevent Dementia? I wrote:
A new paper provides good evidence that the shingles vaccine can prevent dementia, which strongly suggests that some forms of dementia are caused by the varicella zoster virus (VZV), the virus that on initial infection causes chickenpox.
We now have three more studies–from America, Australia and Canada–that find similar results using large numbers and credible research designs. Thus, I think we can up this to the Shingles vaccine reduces dementia.
Eric Topol summarizes the new evidence and writes:
If you are 50+ and have not gotten Shingrix vaccinated, you may want to consider that. You get protection vs Shingles (which can be dreadful), slowing of your biological aging (by methylation and RNA metrics), and ~20% reduction of dementia, predominantly related to Alzheimer’s disease. All of this benefit is magnified in women compared with men, but 3 of the studies showed some reduction of dementia in men. As a tradeoff, men appear to derive more cardiovascular benefit, but that evidence is not as compelling as protection from dementia from natural experiments.
AI-Native Firms
Very important work from Hyunjin Kim and Rembrand Koning. Insead and HBS respectively:
We study how firms built around AI capabilities-“AI-native” firms-are organized. Drawing on Y Combinator batches W20-F24 and U.S. venture-backed startups whose first financing closed between 2020 and 2024, we classify each firm’s AI-native status and link it to workforce microdata on team size, function, seniority, and hierarchy. Relative to non-AI startups in the same industry-cohort, AI-native firms are 25% smaller. Their share of engineers is 13% greater, and the shares of entry-level workers and managers are each roughly 15% lower. Their hierarchies are half a seniority level flatter-yet valuations are comparable, implying more value created per employee. We argue these patterns reflect two channels: a process channel, in which AI changes how people work inside the firm, and a product channel, in which AI capabilities are built into what the firm sells. Using text from product descriptions and job postings, we find that embedding AI into the product, beyond layering on AI tools into existing workflows, is a primary way startups are scaling “knowledge work” without large teams of knowledge workers.
The tweet storm on the new paper is especially useful. Via Luis Garicano. And note those results predate the very latest and best tools.
Montana’s SB535 and a Potential Biotech Renaissance in America
In 2024, China’s NMPA approved 83 new drugs, the FDA approved 50. China’s share of new commercial clinical trials jumped from 8% globally in 2013 to 30% in 2024, just behind the US at 35%. Last year, China-based Jiangsu Hengrui Pharmaceuticals overtook AstraZeneca as the top clinical trial sponsor in the world.
What’s remarkable is how China is winning: deregulation and capitalism. It’s faster and easier to set up a clinical trial in China than in the United States. China is even experimenting with the peer approval model I’ve long advocated. The Medical Tourism Pilot Zone on Hainan island lets medical institutions import and use any pharmaceutical or device approved in the EU, US, or Japan — no separate Chinese approval needed. China is using our own regulatory judgments to get treatments to its patients faster than we do.
The core problem is that our clinical trial and drug approval system is slow and expensive. Getting a new drug to market in the US takes billions of dollars and a decade or more of clinical trials — and all of that before a company earns a single dollar. The consequence is drug lag and drug loss and also learning loss. Innovation is a dynamic process. You must build to build better.
It’s not over for the United States, however. Montana’s SB535, signed into law in May 2025, is the most important regulatory innovation in drug approval in my lifetime. The law authorizes investigational drugs and therapies that have cleared Phase I trials to be prescribed and sold — bypassing the traditional FDA approval pathway. It makes Montana the first state to license experimental treatment centers, “one stop shops” for otherwise hard-to-access care.
This is a very big deal.
SB535 makes Montana the only state in the nation where firms can move more quickly from a successful Phase I trial into limited commercialization. This positions Montana as a highly attractive location for biopharma, biotherapeutics, and other life sciences companies that want to accelerate time-to-market while continuing the federal FDA approval process.
Montana’s regulatory system creates the possibility of a self-funding clinical pipeline: companies using early commercial revenues to finance the path to full FDA approval. You get treatments to patients faster, and you keep companies alive long enough to prove their treatments work. Experimental treatments are not for everyone–these treatments are cash based–no Medicaid or Medicare and probably no private insurance either–but after conventional treatments have failed experimental treatments should be available for some patients, both for their benefit and for ours.
Montana is not alone. Florida now allows non-FDA approved stem cell therapies:
A new law in Florida, CS/CS/SB 1768, allows physicians to market and administer stem cell therapies that have not been approved by the U.S. Food and Drug Administration (FDA) for orthopedic conditions, wound care and pain management.
These experiments in regulatory federalism are vital and not just for patients but also for geopolitical competition. I am thrilled China is pursuing medical innovation (I predicted and applauded this in my TED talk) but I also don’t want to see America falling behind.
The Trump administration has been supportive. I would like to see HHS and the FDA working with companies operating under state right-to-try frameworks — sharing data, clarifying federal-state boundaries favorably, and treating these experiments as the biotech competitiveness infrastructure they are.
The FDA approval process has long been treated as the only legitimate path to market. The cost of that orthodoxy is measured in companies that never reached viability, innovations that never got off the ground, and patients who died when they didn’t have to. I have spent thirty years trying to get people to see the invisible graveyard. That’s hard. Most remain blind. But China’s bursting pipeline of new drugs is visible — could this be a Sputnik moment for biotech?
An American biotech renaissance — driven by AI, federalism, and regulatory innovation — is possible. The path forward is to double down on what makes America great: the laboratories of democracy are working, and in Montana and Florida, so are the labs.
The Cultural War is a Civil War
Kevin Bryan riffs on on my post The Nationalization of American Science. He is rightfully incensed:
AT is right this is a red tape-filled science policy of “losers”. If you think “cut funds from DEI-driven professors in the small departments no one cares about” is more important than “make sure the world’s strongest fundamental science continues”, you’re an idiot.
And yes, this is also the policy of “right-wing JD-brain” folks. They haven’t worked in a lab. They don’t know how we got AI, and recent cancer breakthroughs, and on and on. It’s all culture war, all the time – just the right-wing equivalent of the worst left-wing habits.
One last thing: I *hate* the term “administration priorities” or “President’s priorities”. Totally Unamerican! The President *executes* the law created by Congress, who represent the people, and who see turnover every two years. Period. “Oh, but Democrats do this too!” Grow up!
Owning the libs may feel good today but please look just one move ahead in the game tree. When AOC controls the executive branch, she will inherit every tool Trump normalized. Look a few moves further and see the damage to American institutions.
The culture war is a civil war. If we don’t end it, American science will be collateral damage.
The bullish case for Brazil
Start with the most important number in economics, even though no one on Wall Street talks about it: calories per acre. Human civilization runs on food. Ten billion people will inhabit this planet by 2050. The amount of arable land is not growing. It is shrinking, every year, to urbanization, desertification, salinization, and topsoil erosion. The countries that can grow food at scale will be the most strategically valuable territories on earth. The countries with the best apps and the most PhDs will depend on the countries with the best dirt.
Brazil has more unused arable land than any country on earth. That sentence alone should stop every allocator in their tracks. It means that Brazil can approximately double its total cultivated area, without touching a single hectare of the Amazon, simply by converting degraded pasturelands in the Cerrado and other biomes into productive cropland using technology that already exists.
No other agricultural superpower has this headroom. The United States is fully utilized. China is losing farmland to urbanization at a rate that should terrify its central planners. India’s agricultural productivity gains are hitting diminishing returns against water stress and soil degradation. Europe is hemmed in by geography and regulation. Sub-Saharan Africa has theoretical potential, but lacks the roads, the ports, the legal frameworks, and the capital to exploit it within a generation.
Brazil is already the world’s largest net food exporter. It leads the world in soybeans, coffee, sugar, orange juice, beef, and poultry. It is the second-largest exporter of corn, pork, and ethanol, and recently surpassed the United States as the largest cotton exporter. Agribusiness generates approximately 25% of GDP and more than 40% of export revenue. And the agricultural sector has been growing productivity at 3-4% per year for two decades straight, driven by Embrapa’s tropical soil science, satellite-guided precision agriculture, and the industrialization of protein supply chains that stretch from feedlots in Mato Grosso to dinner tables in Shanghai.
A single farm in Mato Grosso can be more than twice the size of the state of Rhode Island. A literal fact. The Bom Futuro Group cultivates more than 700,000 hectares (roughly 2,700 square miles) of soybeans, corn, and cotton across 35 production units. This is farming at a scale that American and European investors cannot easily conceptualize, operating with GPS-guided machinery, drone monitoring, and soil analytics that rival anything in Iowa, but across an area that dwarfs it.
The post is interesting throughout and offers further points of interest.
Why is America less of a 24/7 society?
It’s deeply odd to me that America is a far less 24/7 hour society today than it was 10, 20, or even 30 years ago. I vividly remember friends from the UK back in 1996 marveling at the fact that in the mid-sized Indiana town where I went college it was possible to buy groceries, clothing, a lawn mower, a snow blower, Lego sets, and bow hunting gear at 3 AM on any given Tuesday of the year. That was peak American Empire, and it’s long gone.
That is from Christopher Kratovil. What are some hypotheses here? I see a few:
1. America is older. True, but this is hardly the main explanation for anything.
2. Due to increasing leisure time, fewer people want to work weird and long hours? Tighter labor markets and the Great Moderation contributed to this.
3. It is stores that are in decline. 24/7 activity has moved into the warehouse, the fulfillment center, the server farm, the delivery network, and the home.
3b. When you can do Doordash at 10:30 p.m., you do not need to go out for snacks at 3 a.m.
4. Shoplifting has become more common? If the drug stores have to lock up their wares in NYC, why should stores try to be open at 3 a.m., when presumably shoplifting risk is higher and the quantity of monitoring labor is lower?
5. Online entertainment is much better, so why go out late at night?
6. More work from home means people are not returning from their jobs at late hours and then wanting to buy things.
I would put most of my money on #3 and #5 — what do you think?
Here Comes the Sun(screen)
I have been banging on about FDA delay in approving new sunscreens since 2013. Well it has finally happened. Twenty six years after being approved by the European Union and thirteen years after then-FDA Commissioner Margaret A. Hamburg told lawmakers that sorting out the sunscreen issue was “one of the highest priorities” the FDA has approved a new sunscreeen ingredient.
The US has been slow because it regulates sunscreens under the the more expensive, time consuming and rigorous drug standard rather than the less expensive cosmetic standard. Does this mean that our sunscreens are safer? No.
In fact, American sunscreens may be less safe.
Sunscreens protect by blocking ultraviolet rays from penetrating the skin. Ultraviolet B (UVB) rays, with their shorter wavelength, primarily affect the outer skin layer and are the main cause of sunburn. In contrast, ultraviolet A (UVA) rays have a longer wavelength, penetrate more deeply into the skin and contribute to wrinkling, aging and the development of melanoma, the deadliest form of skin cancer. In many ways, UVA rays are more dangerous than UVB rays because they are more insidious. UVB rays hit when the sun is bright, and because they burn they come with a natural warning. UVA rays, though, can pass through clouds and cause skin cancer without generating obvious skin damage.
The problem is that American sunscreens work better against UVB rays than against the more dangerous UVA rays. That is, they’re better at preventing sunburn than skin cancer. In fact, many U.S. sunscreens would fail European standards for UVA protection. Precisely because European sunscreens can draw on more ingredients, they can protect better against UVA rays. Thus, instead of being safer, U.S. sunscreens may be riskier.
European sunscreens are also more pleasant to apply, and because they work better with makeup they are probably used more often as part of a skin care regimen, which may reduce the prevalence of skin cancer. Once again, the United States’ slower and seemingly more risk-averse approach actually increases risk.
The lesson, for those who are listening, is general.
Again, the research paper format will be dying out
‘Recently, I came across a paper co-authored by 37 authors from Stanford, CMU, Michigan, and elsewhere: *The Last Human-Written Paper*.
The core argument is pretty brutal: the paper format we’ve been using for centuries might already be obsolete in the AI era.
The authors point out two “invisible taxes” that we’ve long overlooked:
One is the narrative tax. To tell a compelling story, we delete failed experiments, dead ends, and overturned hypotheses. What AI reads is a “walkthrough guide” to beating the game, but it misses the truly valuable “pitfall logs.”
The other is the engineering tax. The implementation details in papers are usually enough to convince reviewers, but not enough for an Agent to directly reproduce. Many key tricks are still buried in the authors’ heads, code comments, and Slack threads.
So the authors propose ARA, transforming papers directly into “research packages” that Agents can read and execute: not just telling you the conclusions, but packaging in how they were reached, how the code runs, where the evidence chain is, and which paths led nowhere.
I think the most intriguing part of this paper is that it’s not discussing how AI can help humans write papers—it’s asking:
When AI also becomes a reader and executor of papers, should papers still look like they do today?
In the future, the core of research output might no longer be “how much it resembles a paper,” but whether it can be understood, reproduced, traced, and iteratively extended by AI.
Humans have been writing papers for centuries—next, we might start writing research packages for Agents to execute.
Here is my earlier post on whether the research paper will die out. By the way, as a side point has anyone mentioned that, due to writing detection abilities of AI models, anonymous referee reports are now a thing of the past?
The Nationalization of American Science
OMB, joined by some forty grantmaking agencies—NSF, HHS, DOE, NASA, DOD among them—has proposed a sweeping rewrite of the rules governing all federal grants, the Regulation for Federal Financial Assistance.
American science has long been state funded but not state directed. Since Vannevar Bush, money has flowed through many agencies to independent universities, allocated largely by peer review. The system has flaws—conformity, gerontocracy, waste—but it had one great virtue, the system was decentralized and not under state control. This rule proposes to bring science funding under top-down, state control.
Program goals must now be “aligned with administration policies and priorities” (§ 200.202). Merit review is subordinated to politics: “senior appointees must conduct these reviews,” ensuring “that discretionary awards advance the President’s policy priorities,” while “peer review remains advisory and does not replace agency discretion” (§ 200.205). And every grant becomes terminable at will, whenever it “no longer effectuates program goals, Federal agency priorities, or the national interest *as they exist at the time of the termination*” (§ 200.340, emphasis added). Universities must even ensure their subrecipients don’t “significantly damage the reputation of… the Federal Government” (§ 200.332)—a loyalty clause for scientists.
All this is sold as cutting “burdensome conditions,” a goal I would support, but sadly that is bullshit. The proposed rules add more paperwork and many more layers of bureaucratic review. Payment requests must include written justifications. Every disbursement gets screened through Treasury’s “Do Not Pay” system. Every recipient must run E-Verify. Applicants must disclose any employee who worked at the awarding agency within two years. And on top of the existing review machinery sits a new pre-issuance review committee of “senior appointees” second-guessing the experts. Fixed amount awards—pay for outputs, not inputs—an innovative reward mechanism are *eliminated*, so every award now gets routine cost monitoring and financial reporting.
Political review of every award, peer review demoted, agency review promoted, termination whenever “priorities” change. Chilling. It’s a nightmare of petty low-trust review of the kind that is already drowning science. I must deal with this kind of nonsense all the time. More is not better.
The machinery is centralized too. OMB’s guidance becomes binding regulation, effective government-wide with no agency rulemaking. One dial in the White House now turns every grant program in the country.
The new rules will be sold as getting rid of DEI but that is an excuse to bring in the commissars. The new rules don’t depoliticize science they create even more politicization with the sign flipped, and the drafters admit it:
In the previous administration, executive agencies frequently chose to subsidize and expressly prioritize projects based on their ideological alignment with the categories of activities discussed in the proposed version of § 200.300. See, for example, E.O. 13985, sec. 1, 86 FR 7009, 7009 (Jan. 25, 2021) (“It is therefore the policy of [the Biden] Administration that the Federal Government should pursue a comprehensive approach to advancing equity . . . .”). In this administration, executive agencies will continue to use their discretionary authorities in a manner consistent with current Executive Branch policy. If executive agencies were entitled to subsidize those types of activities during the previous administration, there is no constitutional basis to prevent the government from reaching a different policy determination regarding which activities to fund during this administration.
Read that twice. Tip your hat to the new constitution, take a bow for the new revolution. Will science prosper when it is whipped by political turnover? Research runs on decade timescales; administrations run on four-year ones.
A decentralized funding system is inefficient the way markets and federalism are inefficient—we give up some economies of scale and get experimentation, error correction, and robustness in return. A system in which every award advances “the President’s policy priorities” is efficient the way ministries of science are efficient. We know how that experiment ends.
America is moving in the wrong direction. We should double down on what made America great. Instead we are adopting all of the loser policies of authoritarian nations.
The Labor Share Fell. So What?
The share of Gross Domestic Income accruing to labor has been declining in recent decades while the share accruing to capital has been rising. In the graph below, I show labor compensation as a share of GDI (left axis). Labor share has indeed been trending down–some of this could be an artifact of the data, e.g. an increase in proprietor’s income (labor) mislabeled as capital income, more pass throughs and so forth—but for the purposes of this post I will accept that the labor share has declined. What does this mean?
The natural response is to think that because the share going to labor has fallen and the share going to capital has risen that there has been a transfer of income from labor to capital. That is possible but it is not the only interpretation and it does not follow mechanically from the share data.
I have also plotted total compensation to labor (in real terms) in the graph above and far from shrinking it is higher than ever and growing. Moreover the right axis is logged so you can also see that outside of recessions the growth rate of labor compensation looks quite steady (similar slope over time). (Labor compensation per member of the labor force is noisier but looks similar).
The recessions in 2008 and 2020 are worth noting because these are periods when the labor share was high and locally at a maximum! The reason, of course, is that GDI was shrinking in these periods more than labor compensation. In other words, capital takes a bigger hit than labor in a recession. This is a good reminder that a high share of GDI is not what workers most care about–a high absolute level of GDI is more important for the bottom line.
In short, the data are consistent—not proof of, but consistent with—a story in which capital has become more productive, raising output. More productive capital also raises the demand for labor, so while more of the new output goes to capital in the first instance, the pie is growing and labor’s absolute compensation has grown with it. Yes, if the shares had stayed constant and output had grown just as much, labor compensation would have been higher still. And if my grandmother had wheels, she would have been a bicycle.
The new Mythos release
My prompt:
Write your own exam question and answer it, for microeconomics. Not a math question, but a high level PhD level question. You will be graded on the quality, interest, and creativity of the question as much as by your answer.
The answer. Here is Ethan Mollick on Mythos.
How well does current AI find errors in economics papers?
Can artificial intelligence (AI) refute economic theory? I document experiments in which I asked several AI models (Gemini, Refine, Claude, and ChatGPT) to check the correctness of four published papers in economic theory, each containing an error that I helped identify or correct. ChatGPT Pro performed best, occasionally constructing counterexamples and corrected proofs, while other models fared worse. However, no model located a true error without substantial human guidance, and data contamination complicates interpretation. I argue that a competent human paired with a frontier model can outperform current peer review, but AI cannot yet refute economic theory on its own.
That is from a new piece by Alexis Akira Toda.
Séb Krier
I really loved this article. A one-time increase in per capita growth from 2% to 2.1% for a single year, then dropping back to 2%, would permanently raises the level of GDP per capita – and because that small gain recurs and compounds every year afterward across the population, it would add up to roughly a trillion dollars in cumulative value. abundanceandgrowth.org/p/a-little-pro
When people talk about pausing AI development, I can’t help but think about the enormous cumulative value that would get lost over time, the higher rates of absolute poverty that would persist across the world, and the needless deaths from delayed medical advances. There may be worlds where some version of this is something to consider, but the evidentiary bar for delaying technological development should obviously be pretty high.
Here is the link.
Sao Paulo notes
The old saw “Brazil is the country of the future, and always will be” now seems so wrong. The place feels increasingly conservative, and it is aging rapidly. In the domestic airport you see couples with only a single kid, not two or three kids, never mind four.
Country and Western music, in their Brazilian incarnations, are very popular.
It does not feel like the next Pelé will be coming from Brazil.
Sao Paulo as a city is much improved. The murder rate has plummeted, and the nice neighborhoods are very nice and are growing in size. The business community is strong, interesting architecture abounds, and there is a real arts scene. It is arguably Latin America’s number one city, with only Mexico City as a rival. It has, along with Mexico City, evolved into a “must know” global city, though it is rarely treated that way by outsiders. In the three days I spent there, going around to many places, I did not see a single person who was evidently a foreign tourist. That is crazy, but also a sign there is good value here.
Sao Paulo has food to die for. It is top tier for Brazilian (of course), meat/steak, Japanese, and Italian, and pretty good in many other offerings as well. I had a wonderful fifteen-course omikase for $110 at a Michelin star restaurant. The establishment, Kan Suke, has only eight seats, but I could get a table by inquiring only an hour in advance.
For Italian food it is probably the second best country in the world? For meats it might be number one, at least if you are willing to put aside the small country of Uruguay. For beans it is top two, and the fruits are excellent as well. Chocolate ice cream and gelato abound. All constraints considered, I would rather spend a week dining out here than in London or Paris or Rome, or for that matter New York City.
People are very friendly, surprising few speak decent English, and Brazilian warmth still abounds.
I was very pleased with my stay at Hotel Unique, due to its architecture and also a perfect location.
Observers should be more optimistic about the Brazilian economy. Yes it is overregulated and the government is locked into far too much spending. But hyperinflation is now a distant memory, a reasonable fiscal consolidation occurred in the 1990s, and the country has plenty of its own energy. Keep in mind that for emerging economies, years of negative growth are a major problem. Brazil now has sidestepped most (not all!) of those risks. Slow, steady growth should be able to get them somewhere, albeit at a langorous pace.
My biggest worry about Brazil is demographics and shrinking population. In recent times TFR has been in the 1.3 to 1.4 range, hardly satisfactory. A shrinking population is bad per se, and also it will hurt many regions of the country due to imperfect market integration, both nationally and globally. More importantly, the country does not have an obvious and easy option for pulling in a higher number of desirable immigrants, at least not relative to its size. There is Venezuela and Bolivia, but the former of those may go away as a major source of people.
Will Brazilian fertility tick back up? Will Brazil re-attain its status as a highly influential culture on the world scene, as it was in the 1960s through early 1990s? Unclear. But if the question is “should you go visit?”, the answer is a definite yes.