Category: Economics

What Caused the Murder Spike?

I think there’s clear evidence that the current murder spike was caused primarily by the 2020 BLM protests. The timing matches the protests well, and the pandemic poorly. The spike is concentrated in black communities and not in any of the other communities affected by the pandemic. It matches homicide spikes corresponding to other anti-police protests, most notably in the cities where those protests happened but to a lesser degree around the country. And the spike seems limited to the US, while other countries had basically stable murder rates over the same period.

I agree with Scott Alexander, although I would emphasize a little more the mediating factor of the police pullback.

I would also add that each step in the mechanism–protests lead to police pullback which leads to an increase in murders–is well supported on its own in the academic literature. Step one, for example, is that protests lead to police pullback. In The effect of highly publicized police killings on policing: Evidence from large U.S. cities Cheng and Long document exactly this:

Our regression discontinuity and difference-in-differences estimates provide consistent and strong evidence that those high-profile killings reduced policing activities, including police self-initiated activities and arrests.

That’s step one. Step two is that police on the street reduce crime which you can find from my research using the terror alert level as well as that of many others. Step one plus step two leads to a spike in murders following the 2020 BLM protests.

As Alexander noted, we also have plenty of evidence on a micro level. For example, I showed clear evidence of police pullback–a “blue strike”–and consequent increase in crime in Baltimore after the Freddie Gray protests. Put it all together along with the timing and other evidence and the case is strong that the 2020 BLM protests led to police pullback which led to a spike in murders, especially in black communities.

Photo Credit.

Rent seeking and the decline of the Florentine school

Economists have claimed that the invisible hand of competition is behind the historical episodes of outstanding artistic achievement, from Shakespearean theater to musical composition in Mozart’s Vienna. Competition, the argument goes, acts on producers of the arts just as it does on producers of mundane commodities. By pitting one artist against all others for the public’s purse and the critics’ praise, rivalry encourages them to supply more refined products. While often left unstated, the same argument implies that the absence of competition will be detrimental to the quality of artists’ output. We extend that insight to explain the decline of the Florentine school of painting in the Late Renaissance period. The rise of the Medici family as Florence’s ruling dynasty turned the previously competitive market for paintings into a monopsony. That development, we argue, strengthened the benefits to local painters of forming a cartel to reclaim the rents captured by the monopsonist. The result was the creation of a local painters’ guild that restricted competition, ultimately contributing to a decline in the quality and influence of Florentine painting.

That is from a new piece by Ennio E. Piano and Tanner Hardy in Public Choice.  Speculative, as they say, and declines in artistic quality are notoriously difficult to predict or to squish into standard models.  That said, the earlier model of competitive guild bidding for artists was, I think, better for quality than Medici patronage.

Via the excellent Kevin Lewis.

Blockchains: A Promise Enforcement Engine

Anthony Lee Zhang on blockchains

How do blockchains change the state of things? Blockchains are an alternative system for promise enforcement, fundamentally different from any system human history has seen before. Promises in blockchain systems are enforced by miners, who — in reasonably competitive mining markets — have limited ability, and weak incentives, to do anything other than execute others’ promises roughly according to the gas fees they pay. In other words, the blockchain can be thought of as a universal, extremely low-discretion promise enforcement engine.

Consider, for example, automated market maker (AMM) protocols, such as Uniswap. An automated market maker allows anyone to become a liquidity provider, that is, to contribute capital, to make markets in a pair of tokens. Fees are collected from anyone trading with the market maker, and can be programmatically redistributed to liquidity providers. These “terms” are promises in the same way classic financial contracts are — but, rather than promises stated in English enforced in courts of law, they are written in Solidity and “enforced” by Ethereum miners.

Lending protocols, such as Aave, allow agents to borrow if they pledge their risky assets to the system as collateral. Aave values the collateral automatically using price oracles, and automatically seizes and liquidates collateral when the amount borrowed is worth too much compared to the collateral staked. MakerDAO similarly functions like a virtual “pawn shop”, taking risky assets and printing tokens whose value derives from the fact that they are overcollateralized by risky collateral, automatically valued using collateral price feeds. Aave and Maker function similarly to margin lending systems in traditional finance, except that the lenders are bots instead of banks. A nontrivially large fraction of the useful promises that are traded in financial systems, it seems, can be approximately as easily expressed in Solidity as they can in English, and thus can be enforced by miners rather than by courts.

The consequences of the existence of blockchains are thus that, for the first time in human history, we have a real alternative to governments and legal systems for the enforcement of promises. What are the effects this will have on the world?

Governments in developed economies are imperfect but they are adequate promise enforcers and they have reasons to suppress their competitor, blockchains. Hence Zhang argues:

…The future of finance will not be built on Wall Street, by a handful of privileged graduates from a handful of top colleges in a handful of high-income countries. The future of finance will be built on blockchains, in Africa, South America, Southeast Asia, through the combined efforts of many billions of people, who for the first time in human history will be able to participate on an equal footing in the market for promises.

This is similar to what Tyler and I write in cryptoeconomics:

Traditional finance relies on legal documents like contracts, titles, and personal identification and thus it ultimately relies on a legal system that can enforce those contracts quickly, reliably, and at low cost. Relatively few countries in the world have all the required abilities, which is why traditional finance clusters in a handful of places like New York, London, Singapore, and Zurich.

Decentralized finance, in contrast, relies on smart contracts and cryptographic identification that work exactly the same way everywhere. Decentralized finance, therefore, could be broader based and more open than traditional finance. Indeed, decentralized finance could prosper in precisely those regions of the world that do not have reliable legal systems or governments with the power to regulate heavily.

The glories of Irish economics

Yesterday I mentioned the underrated Irish Enlightenment (don’t forget Toland!), today I will briefly lay out how many top early economists came from Ireland.  Here is a partial list of those economists and their contributions:

1. Richard Cantillon, 1680s-1734.  Perhaps the second greatest economist of his century after Adam Smith, he developed the ideas of entrepreneurship and opportunity cost and in general embraced common sense.  Jevons called his Essay on the Nature of Commerce in General the “cradle of political economy.”  He was a major influence on Smith.

2. Edmund Burke, 1729-1797.  Burke has been underrated as an economist, see the recent book by Greg Collins on Burke’s economic thought.  Here is a short essay on Burke’s conservative case for markets.

3. Robert Torrens, 1780-1864.  A major thinker on international trade, he developed the theory of comparative advantage before Ricardo did, and was a sophisticated analyst on a broad range of questions, including terms of trade and currency policy.  He also promoted a version of the charter city idea for southern Australia, and to this day some things in Adelaide bear his name.

4. Richard Whately, 1787-1863.  Mostly an archbishop, theologian, and philosopher, his writings on economics developed the notion of “catallactics,” namely economics as the science of exchange.

3. Mountifort Longfield, 1802-1884.  A first-rate common sense economist, and arguably the first writer to clearly state the laws of supply and demand.  He also developed a marginal productivity theory for the value of labor and capital.  The first professor of political economy at Trinity College.

5. John Elliott Cairnes, 1823-1875.  An important thinker on the methodology of the social sciences, an all-around excellent economist, and his diagnosis of the economics and sociology of slavery (it ruined and infected all parts of Southern society) was spot on.  He is sometimes considered “the last of the classical economists.”

6. Isaac Butt, 1813-1879.  Best-known for his role in Irish political history and the Home Rule movement, he produced what is arguably the first coherent account of the marginal product theory of distribution and factor prices.  He also analyzed the Irish system in terms of the economics of misallocated land, and he promoted welfare state ideas.

7. Francis Ysidro Edgeworth, 1845-1926.  One of the founders and leading lights of mathematical economics, he produced an early version of the Coase Theorem, the notion that market price converges on a competitive equilibrium as the number of buyers and sellers grows, explained the importance of tangency conditions for economic equilibrium, developed the economics of progressive taxation, fleshed out the economics of monopoly pricing, and he initiated the use of offer curves for international trade theory.

And please, none of your b.s. about Anglo-Irish, Norman, Spanish, etc. — they were Irish!  I think of these individuals as continuing the earlier Irish Enlightenment of the eighteenth century.

The Birds and the Bees

Ocean City, NJ hires falconers to keep the seagulls off the boardwalk–in fact, they are looking for more trainees. West Coast Falconry explains more generally:

Falconry based bird abatement is quiet, discrete, organic, eco-friendly, and very sustainable. The objective is not killing the nuisance birds, but scaring them off the premises.

West Coast Falconry conducts pest bird abatement by contract. We have professionals on staff that can help rid your establishment of a number of pest bird species including pigeons, starlings, and seagulls. Regular flyovers are key to this environmentally-friendly service.

I am reminded of the extensive markets in bees.

Hat tip: Luke Froeb.

Roland Fryer on DEI

One of the most important developments in the study of racial inequality has been the quantification of the importance of pre-market skills in explaining differences in labor market outcomes between Black and white workers. In 2010, using nationally representative data on thousands of individuals in their 40s, I estimated that Black men earn 39.4% less than white men and Black women earn 13.1% less than white women. Yet, accounting for one variable–educational achievement in their teenage years––reduced that difference to 10.9% (a 72% reduction) for men and revealed that Black women earn 12.7 percent more than white women, on average. Derek Neal, an economist at the University of Chicago, and William Johnson were among the first to make this point in 1996: “While our results do provide some evidence for current labor market discrimination, skills gaps play such a large role that we believe future research should focus on the obstacles Black children face in acquiring productive skill.”

…the key step that is missing in every DEI initiative I have seen in the past 25 years: a rigorous, data-driven assessment of root causes that drives the search for effective solutions. In other aspects of life, we would not fathom prescribing a treatment without knowing the underlying cause.

…Solutions that yield measurable results can be substantiated into company policy, while those that don’t should be discarded. In the case of the hospital network, once a small change was made to the structure of their scheduling, gender differences were reduced. Despite countless hours spent in training and seminars, their results were unchanged for years. The solution was hidden in plain data.

Roland Fryer on using data not feelings to address diversity, equity, and inclusion.

Rich people pay higher mark-ups

One implication is that income inequality isn’t quite as extreme as measured.  Another implication is that rising income inequality will itself cause higher mark-ups, but without the economy becoming “more monopolistic” per se.  Here is the paper:

The Law of Diminishing Elasticity of Demand (Harrod 1936) conjectures that price elasticity declines with income. I provide empirical evidence in support of Harrod’s conjecture using data on household transactions and wholesale costs. Over the observed set of purchases, high-income households pay 9pp higher retail markups than low-income households. Half of the differences in markups paid across households is due to differences in markups paid at the same store. Conversely, products with a high-income customer base charge higher markups: a 10pp higher share of customers with over $100K in income is associated with a 2.5–5.2pp higher retail markup. A search model in which households’ search intensity depends on their opportunity cost of time can replicate these facts. Through the lens of the model, changes in the income distribution since 1950 account for a 9pp rise in retail markups, with one-third of the increase due to growing income dispersion. This rise in markups consists of within-firm markup increases as well as a reallocation of sales to high-markup firms, which occurs without any changes to the nature of firm production or competition.

Here is the full paper by Kunal Sangani.  Via tekl.

GiveDirectly to Administer Cash Grants Pilot in Chicago

Long time readers will know that both Tyler and I have been promoting GiveDirectly since its creation in 2011. GiveDirectly was started by four economists and it gives money directly to the very poor in Kenya and Uganda. Unusually for any charity, GiveDirectly has published substantial, high quality, pre-registered RCTs on its work and is a top-rated charity by GiveWell. GiveDirectly, the charity, continues to do great work helping the world’s poorest people but they are now also using their experience to help design and administer programs in the United States.

A nonprofit that originally focused on giving cash to impoverished people in Africa will soon be delivering money to poor residents of Chicago, in one of the largest tests of a guaranteed basic income program in the US.

GiveDirectly is administering a program that will give $500 a month to each of 5,000 households in Chicago as soon as the end of June. The city is using $31.5 million from the federal government’s American Rescue Plan Act for the year-long pilot, and hoping the payments will help it recover faster from the pandemic.

I look forward to seeing the results.

Does economic literacy encourage polarization?

Hume’s revenge!

Previous research highlights the role that political knowledge plays in forming political positions and how financial literacy influences personal economic decisions. But even among economists, how economic knowledge affects policy views remains little studied. We measure economic literacy among a representative sample of U.S. residents, explore the demographic and socioeconomic correlates of this measure, and examine how respondents’ policy positions correlate with their economic knowledge. We also estimate counterfactual policy positions as if respondents were fully economically literate. We find significant differences in economic literacy by sex, race/ethnicity, and education, but little evidence that respondents’ policy views are related to their level of economic literacy on average. Examining heterogeneity by political party, we uncover an interesting if polarizing pattern: estimated fully economically literate policy views for Democrats and Republicans are farther apart than respondents’ unadjusted views.

And:

We find that men, older Americans, Americans without children, Republicans, and the more educated have higher economic literacy. Family income is unrelated to economic literacy, though Black and Hispanic Americans have lower economic literacy (including conditional on education and income).

Here is the full paper by Jared Barton and Cortney Stephen Rodet.

Work From Home and commercial real estate values

We study the impact of remote work on the commercial office sector. We document large shifts in lease revenues, office occupancy, lease renewal rates, lease durations, and market rents as firms shifted to remote work in the wake of the Covid-19 pandemic. We show that the pandemic has had large effects on both current and expected future cash flows for office buildings. Remote work also changes the risk premium on office real estate. We revalue the stock of New York City commercial office buildings taking into account pandemic-induced cash flow and discount rate effects. We find a 32% decline in office values in 2020 and 28% in the longer-run, the latter representing a $500 billion value destruction. Higher quality office buildings were somewhat buffered against these trends due to a flight to quality, while lower quality office buildings see much more dramatic swings. These valuation changes have repercussions for local public finances and financial sector stability.

That is from a new paper by Arpit Gupta, Vrinda Mittal, and Stijn Van Nieuwerburgh, via the excellent Samir Varma.

Against Historic Preservation II

 In Manhattan, once famed for its ever-evolving skyline, an astonishing 27 percent of the borough’s lots now fall under the purview of the landmarks commission.

That’s from Jacob Andinder’s What Historic Preservation Is Doing to American Cities in the Atlantic. It’s a pretty good history of the movement for historic preservation focusing (of course) on some of the racist motivations and effects. But it has little to say about what to do about the consequent difficulties of building anything new. Similarly, here’s Binyamin Applebaum in the NYTimes correctly decrying the fact that historic preservation laws mean you can’t put solar panels on the rooftops of many homes in Washington, DC. Applebaum suggests a tiered approach.

I am more radical. All historical preservation laws should be repealed.

It’s one thing to require safety permits but no construction project should require a historic preservation permit. Here are three reasons:

First, it’s often the case that buildings of little historical worth are preserved by rules and regulations that are used as a pretext to slow competitors, maintain monopoly rents, and keep neighborhoods in a kind of aesthetic stasis that benefits a small number of people at the expense of many others.

Second, a confident nation builds so that future people may look back and marvel at their ancestor’s ingenuity and aesthetic vision. A nation in decline looks to the past in a vain attempt to “preserve” what was once great. Preservation is what you do to dead butterflies.

Ironically, if today’s rules for historical preservation had been in place in the past the buildings that some now want to preserve would never have been built at all. The opportunity cost of preservation is future greatness.

Third, repealing historic preservation laws does not mean ending historic preservation. There is a very simple way that truly great buildings can be preserved–they can be bought or their preservation rights paid for. The problem with historic preservation laws is not the goal but the methods. Historic preservation laws attempt to foist the cost of preservation on those who want to build (very much including builders of infrastructure such as the government). Attempting to foist costs on others, however, almost inevitably leads to a system full of lawyers, lobbying and rent seeking–and that leads to high transaction costs and delay. Richard Epstein advocated a compensation system for takings because takings violate ethics and constitutional law. But perhaps an even bigger virtue of a compensation system is that it’s quick. A building worth preserving is worth paying to preserve. A compensation system unites builders and those who want to preserve and thus allows for quick decisions about what will be preserved and what will not.

What should I ask Byron Auguste?

I will be doing a Conversation with him.  Here is one take:

Byron Auguste is…the CEO and co-founder of [email protected], a nonprofit organization that seeks to expand access to career opportunities so that all Americans can work, learn, and earn to their full potential in a dynamic economy.

Prior to co-founding [email protected], Auguste served for 2 years in the White House as deputy assistant to President Barack Obama for economic policy and deputy director of the National Economic Council, where his policy portfolio included job creation and labor markets, skills and workforce policies, innovation, investment, infrastructure, transportation, and goods movement.

Until 2013, Auguste was a senior partner at McKinsey & Company in Washington, DC, and in Los Angeles, where he was elected principal in 1999 and director in 2005. He also served as a member of the boards of trustees of The William and Flora Hewlett Foundation and Yale University.

…Auguste earned a B.A. summa cum laude in economics and political science from Yale University, where he was awarded a Truman Scholarship and the James Gordon Bennet Prize, and he holds an M.Phil. and D.Phil. in economics from Oxford University as a Marshall Scholar.

So what should I ask him?

What the AEA does and does not cover

This new blog post by John Cochrane is too good to excerpt, but here is one bit of it anyway, noting two points that on the AEA program do not receive a whole lot of attention:

  • Education, another policy issue that should be the top of progressive concern. Choice vs. teachers unions and the horrible results, especially for minorities and the poor. On the top of things that entrench social and income inequality in the US, this is it, and teachers’ unions arguably bear much of the blame. But we should ask the question.
  • Since we’re veering off to social science, if we care about equity and gender, do facts on low income single motherhood not matter at all? In many states more than half of all children are born to single mothers on medicaid.

Definitely recommended.  Can you guess at what does receive a lot of attention?  By the way, who today is “the next John Cochrane” and where is he or she being trained?  That is what I would like to see discussed most of all.