Category: Economics
Is Regulation to Blame for the Decline in American Dynamism?
The US economy has been one of the most dynamic economies in the world but recent research suggests that US dynamism is in decline. The startup, job creation, and job destruction rates have all declined over the past three decades with a possible increase in the rate of decline in the past decade. The dynamism decline is robust, appearing in a variety of data. Moreover because startups and the movement of resources from low to high productivity firms are closely associated with improvements in productivity, the decline of dynamism may reduce real wages and the standard of living.
Could regulation be increasing barriers to entry, raising the costs of reallocation, and slowing the diffusion of productivity innovations? To test the hypothesis that regulation is reducing dynamism Nathan Goldschlag and I combined data on dynamism with an industry level measure of regulation. Our measure of regulation is produced by an innovative technique that combs the Code of Federal Regulations (CFR) for restrictive terms or phrases such as “shall,” “must,” “may not,” “prohibited,” and “required”. The count of restrictive words in each section is then associated to industries via a machine learning algorithm that recognizes similarities between the language in that CFR section and industry language (e.g. a section of the text with words such as “pipeline” would be associated with the oil and gas industry). In this way, we can associate each industry with an index of regulation derived from the entire CFR.
The following figure shows the startup rate against the regulatory stringency index (both averaged by industry over the period 1999-2011). Contrary to expectation, there is a slight positive relationship; industries with greater regulatory stringency have higher startup rates. We find a similar relationship with job creation rates.
Of course, it could be the case that more dynamic industries attract greater regulation so the apparent positive relationship in our graph would not reflect a causal connection and could even be masking a negative causal connection. Thus, to further test the relationship, we statistically test whether increased regulatory stringency is associated with reduced dynamism within an industry over time (we give each industry a “fixed effect”). After subjecting the data to a number of different tests we find no statistically significant relationships between dynamism and regulatory stringency (see the paper for details).
One simple test divides manufacturing industries into those that experienced a large increase in regulation (+50% or more) during our time period and those where regulation hardly changed at all (+10%-to -10%). If regulation were the cause of changes in dynamism we would expect to see big differences between these groups. The figure below, however, shows that startup rates, for example, track similarly across the two types of groups suggesting that regulation is not a primary cause of declining startup rates (the same is true for job creation and destruction rates).
It’s important to note that regulation could have large negative (or positive) effects without having a big effect on dynamism. A tax, for example, could reduce the size of the industry without have a big effect on the startup rate or how well the industry responds to shocks by reallocating labor from low to high productivity firms. In short, regulation can have significant effects on levels without necessarily having large effects on growth rates.
If regulation is not responsible for the decline in dynamism then what is? We offer some suggestive hypotheses in another paper. First, it could be the case that we are mis-measuring entrepreneurship. If entrepreneurship is measured as new firm creation, for example, we miss the entrepreneurship inherent in rebuilding and revitalizing larger and older firms. Since most workers work for larger and older firms, revitalizing these firms may be a more important use of entrepreneurship than starting new firms. In an increasingly global economy we may also miss some of the outsourcing of dynamism that has occurred in recent decades. Apple, for example, is measured in US data as a relatively stable firm but the Apple ecosystem from which Apple sources its product is a maelstrom of entry and exit as Apple hires and fires new firms with each new iteration of the iPhone.
Even if dynamism has declined is this necessarily a bad thing? We should not let word associations influence our evaluations of underlying realities. Dynamism as measured by, for example, job reallocation rates might equally well be called churn. Declining churn doesn’t sound as bad as declining dynamism. Moreover, combining the last two points, perhaps the reason for some of the declining dynamism as measured in the US statistics is that we have outsourced some of our churn. A very different way of describing the same data.
More generally, information technology may allow us to reduce churn while still allowing adaption and innovation. Creative destruction is necessary for a growing economy but if we can boost the ratio of creation to destruction that counts as an improvement in welfare.
Reallocation of labor and capital is an important force driving the American economy forward. We don’t fully understand, however, what the causes of declining dynamism are or exactly how our measures of dynamism relate to entrepreneurship, growth and improvements in the standard of living.
Addendum: Cross-posted at the Columbia Law School Blue Sky Blog.
The causes of the Bengal famine
The 1943 Bengal famine has been cited by Amartya Sen and others as a classic example of market failure. But in his new (and excellent) book Eating Dead People is Wrong, and Other Essays on Famine, Its Past, and Its Future, Cormac Ó Gráda devotes an entire chapter to that episode and comes away with a different impression. Here is a summary sentence:
The 1943-44 famine has become paradigmatic as an “entitlements famine,” whereby speculation born of greed and panic produced an “artificial” shortage of rice, the staple food. Here I have argued that the lack of political will to divert foodstuffs from the war effort rather than speculation in the sense outlined was mainly responsible for the famine.
I will add to that price controls were imposed once the famine was underway, and campaigns were conducted against hoarders.
In the book I also very much enjoyed the discussion of the 1946-47 famine in Moldova, which apparently involved a good deal of cannibalism.
Is Greece really going to leave the eurozone?
No one knows. Nor should you react too much to the latest headline or tweet. The further apart the various parties appear to be, the more the whip of concession gets cracking. The closer to an agreement they may seem, the greater the incentive to play hardball and demand further concessions. So short-run news reports are hard to interpret, don’t obsess over them. A given swing very often implies a counter-swing in the opposite direction, even if the latter has not yet made a headline. So the direction of the last-reported swing just doesn’t contain that much information.
We won’t know until the proverbial “fat lady” sings, namely deposits leave the country at a critical pace, or not, or the ECB cuts off Emergency Liquidity Assistance, or not.
So why, then, do I believe that Greece will leave the eurozone?
First, I do not see that (most) extant commentary is properly accounting for the very recent fiscal collapse of the Greek economy. I am not sure there is any fix, and the expression “failed state” comes to mind. The momentum here does not seem to be positive.
Second, I do not assume Syriza — whom I have called The Not Very Serious People — have a coherent bargaining strategy at all. I take this point from a broader reading of history, where I see that quite often leaders in critical positions simply do not know what they are doing. By no means is that always the case, but it is more often the case than narrative-imposing journalism encourages us to perceive.
Third, I believe we as observers tend to overestimate the permanence of trends/state of affairs which have lasted ten to fifteen years or more. That included the Great Moderation and that also includes Greece in the eurozone. In a broader historical perspective, the arrangement simply doesn’t make sense to me, as there is more than one Europe. So I am willing to predict its end. And the next year seems like a quite possible time for that end to come about.
Fourth, I still don’t think enough commentators are stressing how much the creditor eurozone countries see this as a nested game, where concessions to Greece would have to imply larger concessions elsewhere and embolden Podemos in Spain.
Fifth, it is hard to see Greece being in truly safe territory for the next few years to come, even if a handy bargain is dispatched over the next day or two.
I gladly admit all of those reasons are speculative rather than firm or based in concrete information. But that is what I think and why. I don’t consider this kind of prediction to be very scientific, but still we proceed by engaging in discourse and, next time around, seeing what we got wrong the time before.
Accelerating the velocity of goods, a continuing series
Uber for private jets, sort of:
To make travel easier, and to avoid the headache of commercial flying, he [Aaron Smart] often uses JetSmarter, a start-up service that, for an annual membership fee [7k], allows him to fly on so-called empty legs, or private jets flying without passengers on their way to pick someone up.
…In some cases, the flights end up costing the same or less than first-class tickets on a commercial airliner.
Among the start-ups is Magellan Jets, which offers a subscription-based model where passengers can buy blocks of flight time and then get matched to planes through an iPhone app. Magellan users are not tied to a specific plane, which allows more flexibility.
Magellan Jets guarantees an aircraft — including turboprops and helicopters — within 10 hours of a customer’s request in the United States, or within 24 hours in Europe. The company, which is based in Quincy, Mass., and works with about 95 aircraft providers, conducts background checks on flight crews before every trip, said Magellan’s president, Anthony Tivnan.
The full story is here.
How bad is age discrimination in academia?
I believe it is very bad, although I do not have data. I believe that if a 46-year-old, with an excellent vita and newly minted Ph.D in hand, applied for academic economics jobs at the top fifty research universities, the individual would receive very few “bites.” Unless of course he or she managed to cover up his or her age. (I am very pleased with the openness of my own university, I will add in passing.)
Perhaps there are not many examples of this kind of age discrimination (do you know of any?). In part that is because older individuals are so discouraged from going down that path in the first place. Furthermore it is likely harder for older individuals to go down that path. In addition to life-cycle considerations, there may be age discrimination at the stage of graduate admissions.
I rarely hear complaints about age discrimination in academia, though I often hear complaints about gender and race discrimination. I believe all of these phenomena are real (and unfortunate), and I wonder what exactly this discrepancy indicates. If anything, I suspect age discrimination is far more extreme, at least when it comes to the final stage of the process, namely the actual interview and hiring decisions.
Is age discrimination less of a concern because “older people as a class” face fewer, other general handicaps than do women or African-Americans? Or is there some other reason for this difference in worry?
I believe also that older, newly minted doctoral candidates bring useful differences in perspective, as can women and ethnic minorities, due to their differing life experiences.
Here is an article about age discrimination in academia, although I find the cited evidence inconclusive. Here is an interesting short piece from someone who is arguably the victim of age discrimination in academia.
Even for similarly-aged candidates, is there a bias in academic hiring to prefer “potential” over a solid/good but perhaps not fully inspiring track record? I believe so. This is related to the causes of age discrimination, which are not always about age per se.
I found very interesting the new book by Joseph Coleman, Unfinished Work: The Struggle to Build an Aging American Workforce, which deals with some related issues though not primarily in the academic context.
From the comments, on the Greek primary surplus
Tom Warner writes:
…the budget balance fell off a cliff in December. State budget revenues were only 2.4% below adjustment program target in Jan-Nov, but were 14% below target in December and 20% below target in January. That’s a huge shortfall – if a 20% revenue shortfall were to persist for the whole of 2015, that would be more than €11b euros of missing revenues and more than 6% of GDP.
So the issue now isn’t whether Greece can hit some pie-in-the-sky target, it’s whether it can get back to where it was in Jan-Nov of last year. Syriza’s going to have to get the state finances in order very quickly or they’re going to go boom.
Here is Tom Warner’s blog.
Storing Paco (negative nominal interest rates)
Paco is a dog who lives in Norman, Oklahoma. Recently I learned it costs $12 to store him for a day, with webcam services attached. In this sense there is a negative nominal interest rate on Paco.
You might store Paco for a day if you are going to the Thunder-Clippers game, and you see leaving him at home as too risky. For related reasons, you might pay 0.75% to put your funds in Danish currency.
If all resources are costly to store, rather than some of them yielding a return, you would expect an economy to shrink over time, just as your Danish holdings eventually will waste away. Similarly, Paco does not paint your house or make it more valuable, and so both he and the home decline as the clock ticks.
Some parts of the economy are productive, so why pay for storage rather than investing there? Either those sectors are very risky, or there is no free entry into those investments.
In many (but not all) countries, consumer confidence measures are reasonably high and VIX indices are low, indicating that expected volatility is probably not so high. If these safe-ish-looking numbers were wrong, however, we would have a lot of reason to worry. Negative nominal rates — with negative real rates even lower in most cases — would imply there is a great deal of risk.
Alternatively, perhaps there is no free entry into productive investments. That suggests productive investments are not being replenished over time, and we might expect the growth rate to fall, eventually, and in the meantime for inequality to rise. That is another story of decay and decline.
Right now there are about $2 trillion in eurozone bonds with negative yields, or so I am told.
I liked Paco (more importantly Paco liked me), but I do not enjoy living in a Paco economy. I think of the calm before the storm and wonder how to reconcile the observed calm and the potential for the storm. I do not like the most obvious attempts at reconciliation.
When it comes to policy: “Trying to keep nominal rates below the cost of currency storage and movement would convert bankers back into goldsmiths, tightening rather than loosening monetary conditions.” That’s not any fun either.
Valentine’s Day Nobel Puzzle
Here is a Valentine’s Day puzzle: there have been five husband and wives awarded Nobel Prizes. Name them.
I will give you one hint. Four of the couples won for joint work. Only one of the couples each won a Nobel and that couple included a Nobel prize winner in economics.
China patriotic markets in everything fact of the day
As families around China prepare for Lunar New Year celebrations next week, shoppers in one southeastern city can add another delicacy to their shopping list: “patriotic fish.”
Photos of shoppers in Fuzhou, the capital of Fujian Province, thronging around cases of frozen fish and sea urchins circulated in China on Wednesday. This was no ordinary seafood, however. It was from Mischief Reef, which has been controlled by China since 1994 but is part of the Spratly Islands in the South China Sea also claimed by the Philippines, Taiwan and Vietnam.
“You can steam it, make soup, braise, slice or fry it — it’s all possible!” Lin Zailiang, 82, a former government official who heads the fish-farming program, told the gathered shoppers. Behind him, a blue billboard advertised the products as “South China Sea ‘Patriotic Fish’ — the Third Season.” The entire 8,300 pounds of seafood sold out in two hours, according to the state-run China News Service.
But Mr. Lin, white-haired and wearing a garland of orchids around his neck, also made it clear that the program was about more than just providing delicacies for the table.
Cultivating fish at Mischief Reef, called Meiji Reef by the Chinese, is equivalent to “safeguarding national sovereignty,” Mr. Lin was quoted as saying. “Because once there are residents there — us — it becomes our territory, according to international ocean law.”
There is more here.
An economic model of the mystery novel, and are sports suspense-optimal?
Those questions are considered by Jeffrey Ely, Alexander Frankel, and Emir Kamenica in their new JPE paper “Suspense and Surprise.” Here is one to the point excerpt:
In the context of a mystery novel, these dynamics imply the following familiar plot structure. At each point in the book, the readers thinks that the weight of evidence suggests that the protagonist accused of murder is either guilty or innocent. But in any given chapter, there is a chance of a plot twist that reverses the reader’s beliefs. As the book continues along, plot twists become less likely but more dramatic.
In the context of sports, our results imply that most existing rules cannot be suspense-optimal. In soccer, for example, the probability that the leading team will win depends not only on the period of the game but also on whether it is a tight game or a blowout…
Optimal dynamics could be induced by the following set of rules. We declare the winner to be the last team to score. Moreover, scoring becomes more difficult as the game progresses (e.g., the goal shrinks over time). The former ensures that uncertainty declines over time while the latter generates a decreasing arrival rate of plot twists. (In this context, plot twists are lead changes.)
There are ungated versions of the paper here. Note that at the very end of the paper…well, I’ll just let you read it for yourselves.
How much should you spend on Valentine’s Day flowers?
Showing that you care:
“It’s always about upping the ante,” says Meredith Waga Perez of Belle Fleur in the Flatiron District, who says clients drop as much as $5,000 for the big day.
Last year, Aleks Degtyarev spent $6,000 at Flower District-based rose-delivery service, Ode à la Rose, to propose to his girlfriend of three-plus years, Lulu.
“I wanted 1,114 roses,” says Degtyarev, a 33-year-old from Bay Ridge. “A rose for every day we knew each other.”
A friend helped him strew the thousand-plus loose stems across a Montauk bluff.
There are a variety of other anecdotes at the link. You don’t have to be a proponent of romantic countersignaling, or a member of Kakuhidou, to think this is overall counterproductive.
For the pointer I thank D.
The Valentine’s culture that is Japan against the romantic-industrial complex
On February 14th, Kakumei-teki himote doumei (革命的非モテ同盟) — literally, “Revolutionary Alliance of Men That Woman Are Not Attracted To”– will gather in Shibuya, an area of Tokyo popular with young couples, to protest Valentine’s Day and its roots in what they call “romantic capitalist oppression.”
The group, known as Kakuhidou for short, was started in 2006, when its founder, Katsuhiro Furusawa, returned home one day after being dumped by his girlfriend and began reading the Communist Manifesto. He quickly came to the realization that being unpopular with girls is a class issue.
Since then, the group has held several demonstrations each year, all coinciding with holidays that are associated with romantic love in Japanese culture, such as Valentine’s Day, Christmas, and White Day .
Kakuhidou’s slogans combine Japanese internet culture with classical Marxism, and its origins in cyberspace can be charted through its choice of language. For example, one frequent target of the group’s admonitions are the so-called “riyajuu” (リア充）, a neologism frequently used in online communities such as 2chan to refer to those who experience fulfillment in their offline lives (riyajuu is a portmanteau that combines “real” with “jyuujitsu”, the Japanese word for fulfillment).
The release posted on Kakuhidou’s website for this year’s anti-Valentines parade says “the blood-soaked conspiracy of Valentine’s Day, driven by the oppressive chocolate capitalists, has arrived once again. In order to create a brighter future, we call for solidarity among our unloved comrades, so that we may demonstrate in resolute opposition to Valentine’s Day and the romantic industrial complex.”
At previous events, leaders of the group have yelled slogans such as “I hope all riyajuus explode! But we’re still a little jealous!” while wearing shirts that say, roughly, “sex is useless.”
There is more here. By the way, the group’s official vehicle is a Mercedes-Benz.
For the pointer I thank Andrea Castillo.
Markets in everything
Better-known and more mainstream European politicians are also cozying up to Putin: French ex-president Nicolas Sarkozy, who was recently re-elected head of the powerful UMP, came out this week in support of the EU formally ceding Crimea to Russia, and had some kind words for the Kremlin. Another UMP figure, the mayor of Nice, has come out in even stronger support of Putin.
There is more here, background information here. As we already are seeing, the European response to the Russian invasion of Ukraine will not be overwhelmingly strong.
Is Norway an economically overrated country?
The petroleum sector is about 21% of gdp and half of exports. It’s not just that prices are down, rather quantities produced have been declining throughout the oughties. (That is the less well known angle here.) Currently Norwegian oil production is at about half of its 2000 level, and the sector is now bracing for 40,000 job cuts.
Here is from a recent internal economists’ critique of the country:
The group has documented how Norwegian politicians all too often have approved major investment projects that benefit far too few people, are poorly managed and plagued by huge budget overruns. Costs in general are way out of line in Norway, according to the group, while schools are mediocre, university students take too much time to earn degrees and mainland businesses outside the oil sector lack enough prestige to help Norway diversify its oil-based economy. The group mostly blamed the decline in productivity, though, on systemic inefficiencies and too much emphasis on local interests at the expense of the nation.
Is this entirely reassuring?:
Prime Minister Erna Solberg recently spoke of the need to invest in areas where people actually live…
After you adjust for wage differences, it costs 60% more to build a road in Norway than in Sweden.
“Approximately 600,000 Norwegians … who should be part of the labor force are outside the labor force, because of welfare, pension issues,” says Siv Jensen, the finance minister.
The country has largely deindustrialized, oil of course aside. And there is a fair amount of debt-financed consumption.
The country has falling and below average PISA scores by OECD standards.
Not everyone admires Norway’s immigration policy, and there is periodic talk of banning begging in the country. It seems there are only about 1000 beggars — mostly Roma — in a country of about five million, so you can take that as a sign they are not very good at processing discord. Far-right populist views do not seem to be going away.
For sure, Norway will be fine. Did I mention per capita income is over $100,000 a year and they have no current problems which show up in actual life? Hey, the “over” in “overrated” has to come from somewhere! The country also has the world’s largest sovereign wealth fund and owns about one percent of global stocks. Still, the idea of a rentier economy makes me nervous. When most people don’t “have to” do that well, often cultural erosion sets in.
They’ve made a new film : “Here’s a beautiful video of Iceland and Norway, time-lapsed and tilt-shifted to show the hustle, the bustle, and the beautiful splendor of Scandinavia from a more toy-like perspective. Called The Little Nordics, it was filmed by Dutch design team Damp Design. Happy Friday!”
Sorry Magnus, Karl — I know you guys are still underrated. It’s not for nothing that I used to call it “the Norwegian century.”
Addendum: Here is my earlier post on whether Sweden is an economically overrated country. At least it is cheaper to build a road there.
Which books should you read one hundred times or more?
No, not your own. Here is one view:
The main effect of reading Hamlet a 100 times was, counter-intuitively, that it lost its sense of cliche. “To be or not to be” is the Stairway to Heaven of theatre; it settles over the crowd like a slightly funky blanket knitted by a favorite aunt. Eventually, if you read Hamlet often enough, every soliloquy takes on that same familiarity. And so “To be or not to be” resumes its natural place in the play, as just another speech. Which renders its power and its beauty of a piece with the rest of the work.
That reader is Stephen Marche, the link is here, interesting throughout. Can you guess which is his other pick?
By the way, I believe that to do this you need to own many copies of the work (can you figure out why?), and indeed Marche owns at least ten copies of Hamlet.