Category: Economics
Physician Incomes and the Extreme Shortage of High IQ Workers
Physician incomes are extraordinarily high in the United States. A new NBER paper finds that U.S. physicians earn roughly two to four times as much as their counterparts in Canada, the Netherlands, and Sweden.
Why? Is it some feature particular to the US health care sector? Probably not. The same paper finds that physicians in the US have about the same relative income ranking as in Canada, the Netherlands, and Sweden. In other words, lots of high-skill workers in the US earn high incomes and physicians don’t look unusual relative to these other high-skill groups.
That is exactly what one would expect in an economy with an extreme shortage of high-IQ, high-skill workers. The US is a uniquely productive economy for high-skill workers which is why the US demand for foreign workers and the foreign demand to immigrate are so strong, especially at the high end.. By one estimate, “immigrants account for 32 percent of aggregate U.S. innovation.”
Immigration of high-skill workers such as with the H-1B and EB-1,2,3 programs, together with stronger U.S. education, is one way to reduce the shortage of high-skill workers. The alternative is simpler: make the economy less dynamic and less rewarding for talent. Then wages would fall and fewer ambitious people would bother coming. A solution but only if your preferred cure for scarcity is decline.
Oil versus Ice Cream
When Tyler and I were writing Modern Principles of Economics, we wanted examples that were modern, specific, and grounded in the real world. That has been a bit of a headache, because we have to update them with every new edition. Our biggest competitor uses the ice cream market as its central example and never has to revise. Smart! But for us, the extra work has been worth it.
We chose the oil market as our central example. Oil is always in the news, and it works really well across a wide range of textbook topics: the elasticity of demand and supply; oligopoly and cartels; the shutdown condition; shocks; expectations, speculation and futures markets; and oil prices have macroeconomic implications that connect micro to macro.
Yes, keeping the examples current takes more work. But when a student sees that the price of crude has surged past $100 a barrel because Iran closed the Strait of Hormuz—choking off 20% of the world’s oil supply—they have the framework to understand what is happening. Supply shock, inelastic demand, expectations and speculation, the macroeconomic transmission to GDP—it’s all right there in the headlines. Try doing that with the ice cream market.
See the Invisible Hand. Understand Your World. It is not just our slogan. It’s our method.
How much more will oil prices have to go up?
[Robin] Brooks: So let me give you two ways of thinking about what’s going on, both of them are really about trying to think about what kind of risk premia need to be priced in oil, given all the massive uncertainty that we have. The first way that I’ve been thinking about this is—I spent a lot of time working on Ukraine and Russia and sanctions after the invasion four years ago. Russia produces about 10 million barrels of oil per day. It exports, of that, about 7 million barrels of oil per day. The Strait of Hormuz has transit of about 20 million barrels of oil per day. So the Strait of Hormuz is roughly 3 times what Russia could have been. And remember, in the days right after the invasion, markets were really worried about Russian oil being embargoed. There was a whole discussion about that. So the rise in Brent, which is the global benchmark oil price, is about 70% from two weeks before the outbreak of war in the Gulf to now. On a similar time horizon back in ‘22, it was 20%. So we have roughly a 3X in terms of the rise in oil prices. So when people come to me and say “$150 or $200 for oil prices” and we’re currently at $115, roughly, then I think, “why, what’s the rationale?”
The second perspective is on the supply shortfall that we have and using price elasticity of demand to think about: “how much does the price need to rise if demand has to do all the adjusting in the short term,” which it does. And “what kind of numbers do we come up with if we make reasonable assumptions?” So I put out a Substack note today—thank you so much for reading my Substack, I’m incredibly flattered and stressed as a result— if you assume that the Strait of Hormuz goes from 20 million barrels of oil per day to 10, it’s basically oil from the Gulf is running at half of its normal capacity, and you assume a price elasticity sort of in the middle of the range that the academic literature has, which is about 0.15, then you get that this would generate a rise in oil prices of between 60 and 70%. So again, if I think about what we’re pricing in markets now versus what basic back-of-the-envelope-calculations tell you, then I think we’re roughly in the right ballpark.
That is from his interview with Paul Krugman. Via Luis Garicano.
More on the David Lang opera version of Wealth of Nations
In 18 parts, Lang explores some of Smith’s central themes, including one of the book’s most famous passages, where Smith uses a wool coat worn by a very poor Scottish worker as a way to examine trade. “He asks, ‘Did you ever think of how many people need to be employed in order to make that coat?’” says Lang, whose movement “the woolen coat” names all the artisans and laborers who contributed to the garment in song:
the shepherd
the sorter of the wool
the wool-comber or carder
the dyer
the spinner
the weaver
the fuller
There are also the workers on the ship that brought in the dye and all the people who built the ship. An ordinary coat is revealed to be a kind of miracle of skilled labor and global collaboration, the product of “many thousands” of workers coming together in (selfish) harmony. Part of me wanted to run out of the theater right then and buy something … perhaps a coat… for America.
Here is more from Bloomberg, via John De Palma. The opera seems to be ultimately a rather gloomy view of the book?
A Danish Fix for U.S. Mortgage Lock-in
In the Danish mortgage market every mortgage is backed by a corresponding bond. Thus, if a home buyer takes out a 500k mortgage at 3% interest, a bond is issued that pays the lender 3% interest on 500k. I’ve written about this system several times before. It has two distinct advantages.
- The correspondence principle means that mortgage banks don’t bear interest rate risk but instead specialize in evaluating credit risk (the risk that the borrower won’t pay). Deep markets rather than banks take on the interest rate risk. This makes the Danish system very stable.
- Mortgages can be pre-paid by buying the corresponding bond at market rates and extinguishing it. If a Danish borrower takes out a 500k mortgage at 3% interest and then rates rise to 6%, for example, the value of that mortgage falls to $358k and the borrower can buy the corresponding bond, deliver it to the bank, and, in this way, extinguish the loan.
In the US, a mortgage can be pre-paid only at a par. As a result, if interest rates rise, home owners don’t want to move because moving would require them giving up a 3% mortgage and replace it with say a 6% mortgage. This is called the lock-in effect. Lock-in can be quite severe. Fonseca and Liu find:
Using individual-level credit record data and variation in the timing of mortgage origination, we show that a 1 percentage point decline in the difference between mortgage rates locked in at origination and current rates reduces moving by 9% overall and 16% between 2022 and 2024, and this relationship is asymmetric. Mortgage lock-in also dampens flows in and out of self-employment and the responsiveness to shocks to nearby employment opportunities that require moving, measured as wage growth within a 50- to 150-mile ring and instrumented with a shift-share instrument.
What about in Denmark? The Danes definitely take advantage of the opportunity to buy-back. Part of this is due to tax advantages but those are just a transfer. More importantly, Danes don’t get locked in. A new paper by Berger, Jeong, Marx, Olesen, and Tourre compares mobility across Denmark and the US:
We study Danish fixed-rate mortgage contracts, which are identical to those in the United States except that borrowers may repurchase their mortgages at market value. Using Danish administrative data, we show that households actively buy back debt when mortgage prices fall below par and that household mobility is largely insensitive when existing mortgage rates are below prevailing market rates — unlike in the United States, where moving rates fall sharply as rates rise. We develop an equilibrium model that explains these patterns and show that introducing a repurchase-at market option into U.S. mortgages substantially reduces interest-rate-induced lock-in with limited effects on equilibrium mortgage rates.
The last point is especially important because you might wonder whether we are assuming a free lunch? After all, if US borrowers lose when they have to pre-pay at par then lenders surely gain. And if lenders gain on pre-payment then they will be willing to lend at lower rates on mortgage initiation. No free lunch, right? The logic is correct but note that the gain to lenders comes mainly from the relatively small set of households that move despite lock-in so the pre-payment bonus to lenders is quite small. Under the author’s calibrated model, mortgage interest rates in the US would rise by only 18 basis points on average if the US moved to a Danish type system.
In other words, there actually is a free or at least a low-priced lunch because lock-in is bad for homeowners and it doesn’t benefit lenders. As a result, moving to a Danish system would create net benefits.
Is AI currently helping economic research?
The third possibility, that AI helps to weed out mistakes, is trickier for the discipline. This stage could become even more important if journals do start to be hit by a wave of AI-generated slop — or, perhaps more likely, good papers with so many appendices and robustness checks that even the most dedicated referee is defeated. (The real “Dr Robust” does not have infinite energy.)
Eager to embrace the new technology, several of the top five economics journals are already experimenting with Refine, an impressive AI-powered reviewing tool that scours economics papers for errors. Ben Golub, one of its creators, shared that even with papers that had been through referees at top journals, Refine was picking up problems in at least a third of cases.
Here is more from Soumaya Keynes at the FT.
University of Chicago fact of the day
A team largely composed of economics majors who know their way around Milton Friedman and Gary Becker, Chicago (23-4) is a DIII powerhouse currently in the DIII Sweet 16 and chasing its first-ever NCAA national title.
“Nobody’s ever going to confuse this with Alabama football,” says head coach Mike McGrath, “but if you think about the student-athlete model, I think we show you can do both of those things very, very well.”
…“Obviously, the kids are really smart,” he says. “You can’t B.S. them. They’re going to challenge everything that you tell them, you have to be prepared for that…there’s a need to understand the why behind things.”
…a friend of the program, Chicago professor John List, is working with students on an analysis of player positioning.
Here is more from the WSJ, via Rama Rao.
*Recession*, by Tyler Goodspeed
The subtitle is The Real Reasons Economies Shrink and What To Do About It. Here is from the book’s summary:
Contrary to popular perception, recessions are not the inevitable bust that follows an unsustainable boom, and they do not operate like wildfires that clear out economic deadwood. Recessions are caused by adverse shocks like war and energy price spikes; and far from unleashing gales of creative destruction, post-recession economic growth typically resumes the same trend as before—all pain, no gain.
The book covers American history and focuses on verbal exposition of the theory, not mathematics. Overall, Goodspeed provides an underrated perspective in an era where 2008-2009 led people to become overly obsessed with issues of aggregate demand. Our current presidency may be curing this however!
International Comparison of Physician Incomes
We compare physician incomes using tax data from the United States, Canada, Sweden, and the Netherlands. Physicians are concentrated in the top percentiles of the income distribution in all four countries, especially in the United States and certain specialties. Physician incomes are highest in the United States, and a decomposition shows that this mainly reflects differences in overall income distributions, rather than physicians’ locations in those distributions. This suggests that broader labor market differences, and thus physicians’ outside options, drive absolute incomes. Shifting US physicians’ incomes to match relative positions in other countries’ distributions would only marginally reduce healthcare spending.
By Aidan Buehler, et.al., from a new NBER working paper.
Some simple economics of AI?
AI lowers the cost of building businesses. But it raises the bar for sustaining advantage. More companies can start. Fewer can dominate.
That implies greater dispersion. More volatility. Less structural concentration. A market that rewards adaptability rather than mere size.
And it raises the question that follows logically from duration compression: if software moats erode faster, where does durable advantage reconcentrate? The answer may be in the places that resist compression, physical infrastructure, energy constraints, material bottlenecks, regulatory barriers. The assets that cannot be replicated with model access and API credits. The things that still require time.
Equity does not disappear in this world.
It transforms.
From ownership of stability to exposure to speed.
From franchises to call options.
And that is the structural shift beneath the surface panic, the real story unfolding in the Age of Agents.
Here is more from Jordi Visser.
Understanding Demonic Policies
Matt Yglesias has a good post on the UK’s Triple Lock, which requires that UK pensions rise in line with whichever is highest: wages, inflation, or 2.5 percent. Luis Garicano calls this “the single stupidest policy in the entire Western world” — and I’d be inclined to agree, if only the competition weren’t so fierce.
The triple lock guarantees that pensioner incomes grow at the expense of everything else, and the mechanism bites hardest when the economy is weakest. During the 2009 financial crisis wages fell and inflation declined, for example, yet pensioner incomes rose by 2.5 percent! (Technically this was under a double-lock period; the triple lock came slightly later — as if the lesson from the crisis was that the guarantee hadn’t been generous enough.)
Now, as Yglesias notes, if voters were actually happy with pensioner income growing at the expense of worker income, that would be one thing. But no one seems happy with the result. The same pattern is clear in the United States:
As I wrote in January, there is a pattern in American politics where per capita benefits for elderly people have gotten consistently more generous in the 21st century even as the ratio of retired people to working-age people has risen.
This keeps happening because it’s evidently what the voters want. Making public policy more generous to senior citizens enjoys both broad support among the mass public and it’s something that elites in the two parties find acceptable even if neither side is particularly enthusiastic about it. But what makes it a dark pattern in my view is that voters seem incredibly grumpy about the results.
Nobody’s saying things have been going great in America over the past quarter century.
Instead, the right is obsessed with the idea that mysterious forces of fraud have run off with all the money, while the left has convinced itself that billionaires aren’t paying any taxes.
But it’s not some huge secret why it seems like the government keeps spending and spending without us getting any amazing new public services — it’s transfers to the elderly.
The contradictions of “Elderism” are an example of rational irrationality. Individual voters bears essentially no cost for holding inconsistent political beliefs — wanting generous pensions and robust public services and low taxes is essentially free, since no single vote determines the outcome. The irrationality is individually rational and collectively ruinous. Voters are not necessarily confused about what they want; they simply face no price for wanting incompatible things. Arrow’s impossibility theorem adds another layer: even if each voter held perfectly coherent preferences, there is no reliable procedure for aggregating them into a coherent social choice. The grumpiness Yglesias documents may not reflect hypocrisy so much as the incoherence of demanding that collective choice makes sense — collective choice cannot be rationalized by coherent preferences and thus it’s perfectly possible that democracy can simultaneously “choose” generous pensions and “demand” better services for workers, with no mechanism to register the contradiction until the bill arrives.
Why you should work much harder RIGHT NOW
If strong AI will lower the value of your human capital, your current wage is relatively high compared to your future wage. That is an argument for working harder now, at least if your current and pending pay can rise with greater effort (not true for all jobs).
If strong AI can at least potentially boost the value of your human capital, you should be investing in learning AI skills right now. No need to fall behind on something so important. You also might have the chance to use that money and buy into the proper capital and land assets.
So…WORK HARDER!
Addendum: From Ricardo in the comments:
Suppose you are the best maker of horse carriages in Belgium around the time the automobile is invented. You might want to take on as many orders as possible for new carriages because you know your future is precarious. Or, maybe you get your hands on one of these new-fangled automobiles as soon as possible and learn how fix them. Both options require you to WORK HARDER but these seem to be the two best options available. Paradoxical but true.
A New Order of Things
Big infrastructure projects in the developing world for things like water and electricity are under-pressure. Chinese and US funding is down and these projects often fall apart due to corruption and political incentives to build but not maintain. It is possible to break old institutions and establish new ones, but “there is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things.” Connor Tabarrok gives a great example. Ek Son Chan in Cambodia:
In 1993, the Phnom Penh Water Supply Authority was a catastrophe. The city was emerging from decades of war and genocide. Only 20 percent of the city had connections at all, and water flowed for just 10 hours a day. 72 percent of the water was non revenue water. It was lost to leaks or stolen through illegal connections.
Into this mess walked Ek Son Chan, a young Cambodian engineer appointed as Director General. Over the next two decades he executed an incredible institutional turnaround.
Chan replaced corrupt managers with qualified engineers. He got rid of unmetered taps. Every single connection received a meter and was billed. The old system of manual billing was replaced with a computerized system, which cut down on low level employees giving out free water and receiving kickbacks. Bill collection rates went from 48 percent to 99.9 percent. These changes were intensely unpopular, and Chan faced fierce resistance from rent seekers, from freeloading customers to his own employees. He established an incentive system based on bonuses among the workers, introduced an internal discipline system with a penalty for violators, and set up a discipline commission for all levels of the organization to deal with corruption
He divided the distribution network into pressure zones with flow monitoring. A 24 hour leak detection team walked the streets at night with listening bars to identify underground leaks.
The institutional change dwarfed the infrastructural change, but was absolutely necessary to make the infrastructure investment worthwhile….
This commitment would not be untested. When Chan tried to enforce bill payment on Cambodia’s elite, and sent his team out to install a water meter on the property of a high ranking general who had been freeloading. The general refused the installation of a meter, so the team attempted to disconnect the water. The general and his bodyguards ran them off the property. When Chan heard of this, he decided not to back down, and mobilized his own team to dig up the pipe and install the meter. Always a leader from the front, Chan jumped in the hole to take a shift at digging. When he looked up, his team had fled, and he was facing down the general himself, pointing a gun at his head. In Cambodia in the 90s, consequences for such a high ranking official were unlikely. CHan didn’t give up. He mobilized the local armed police and returned with 20 men to standoff against the general, disconnected him from service and left him out to dry. Chan said this about the dispute:
”He had no water. My office was on the second floor and the general came in with his ten bodyguards to look for me. I said, “ No. You can come here alone, but with an appointment”. He couldn’t do anything. He had to return. He said, “Okay”! At that time we had a telephone, a very big Motorola. He came in to make an appointment for tomorrow. I said, “ Okay, tomorrow you come alone”. So he comes alone, we talk. “Okay. I’ll reconnect on two conditions. The first condition is that you have to sign a commitment saying that you will respect the Water Supply Authority and second, you need to pay a penalty for your bad behavior and you must allow us to broadcast the situation to the public, or no way, no water in your house”. So he agreed. “
….By 2010, coverage in the city went from 25 percent to over 90 percent with 24 hour service. The utility became financially self sustaining and turned a profit. It was listed on the Cambodia Securities Exchange in 2012. Chan won the Ramon Magsaysay Award in 2006.
By separating the utility company from the low-capacity local government, Ek and PPWSA proved that:
- Functional infrastructure relies on institutional quality and mechanism design.
- State capacity need not exist within the state
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Christopher Sims, RIP
Here is one notice. Here are previous MR posts on Sims, with a survey of his Nobel contributions at the top.
Some simple spatial analytics of Cape Town
Rio de Janeiro let its hillsides be filled in with lower-cost dwellings. The result was a significant increase in the crime rate. On the more positive side of the ledger, upward mobility increased too. If you live in a decent favela, you can get to a downtown job with not too much difficulty, albeit with some travel risk. Note however that some of those jobs include “theft.”
Cape Town has not filled in its hillsides, and you see empty, valuable land all over the place. The townships have remained remarkably segregated, both racially and spatially. The nicer parts of Cape Town also have remained relatively safe, both for whites and for upper class blacks.
One secondary consequence of this equilibrium is very high unemployment in the townships, staggeringly high in fact. It is expensive to get from most of the townships to a job in the nicer part of town. For South Africa as a whole, GPT Pro reports:
OECD reports that around 70% of discouraged jobseekers cite location as the main obstacle to looking for work, and that commuting can absorb up to 37% of post-tax income for the lowest quintile, or up to 80% once time costs are included. The World Bank estimate is even harsher for the poorest households: up to 85% of daily income once the opportunity cost of time is counted. In effect, many low-wage jobs are too costly to search for, reach, or keep.
And see this link. Young male workers in particular find it hard to get the experience that would enable them to prove themselves reliable and then keep on climbing a skills ladder. So they stay in the townships, maybe engage in some black or gray market labor, and collect some welfare payments. They also might commit crimes against each other.
Which in turn makes the notion of filling in the hillside with low-cost housing all the less appealing.
It is difficult to solve the problems of South Africa.
Addendum: Note also that South African agriculture is capital-intensive, as you might expect from a wealthier country. So subsistence agriculture is less of an option here, compared to many other African nations, and that leads to all the more overcrowding in the poorly located townships.