Category: Economics

Did the zero lower bound matter?

This is an article of faith in “Twitter economics,” but Scott Sumner, myself, and many others have been insisting for years that the arguments simply are not there and that the zero lower bound is not such a big deal.  There is now a new NBER working paper by Davide Debortoli, Jordi Gali, and Luca Gambetti:

The zero lower bound (ZLB) irrelevance hypothesis implies that the economy’s performance is not affected by a binding ZLB constraint. We evaluate that hypothesis for the recent ZLB episode experienced by the U.S. economy (2009Q1-2015Q4). We focus on two dimensions of performance that were likely to have experienced the impact of a binding ZLB: (i) the volatility of macro variables and (ii) the economy’s response to shocks. Using a variety of empirical methods, we find little evidence against the irrelevance hypothesis, with our estimates suggesting that the responses of output, inflation and the long-term interest rate were hardly affected by the binding ZLB constraint, possibly as a result of the adoption and fine-tuning of unconventional monetary policies. We can reconcile our empirical findings with the predictions of a simple New Keynesian model under the assumption of a shadow interest rate rule.

In my somewhat jaded view, the zero lower bound arguments have been an excuse of sorts to move outside of “scarcity economics” and make politically convenient claims about the necessity fiscal stimulus.  It is no wonder we ended up with MMT!

In the meantime, this evidence is the (current) final word, and I hope it will be heeded as such.

Who loses most from the U.S.-China trade war?

You are hearing claims, hints, implications, or outright statements that the full burden of the trade war is falling on American consumers.  (Maybe some of the commentators are too wrapped up in the “Trump’s action have no merits whatsoever” game?)  I strongly believe that is wrong, as outlined in my latest Bloomberg column.  Here is one bit:

…there are well-done studies showing that the recent tariffs have translated into higher prices for U.S. consumers. I am not contesting that research. The question is whether those studies give sufficient weight to all relevant variables for the longer run.

To see why the full picture is more complicated, let’s say the U.S. slaps tariffs on the industrial inputs (whether materials or labor) it is buying from China. It is easy to see the immediate chain of higher costs for the U.S. businesses translating into higher prices for U.S. consumers, and that is what the afore-mentioned studies are picking up. But keep in mind China won’t be supplying those inputs forever, especially if the tariffs remain. Within a few years, a country such as Vietnam will provide the same products, perhaps at cheaper prices, because Vietnam has lower wages. So the costs to U.S. consumers are temporary, but the lost business in China will be permanent. Furthermore, the medium-term adjustment will have the effect of making China’s main competitors better exporters.

And:

China has an industrial policy whose goal is to be competitive in these [branded goods] and other areas. Tariffs will limit profits for these companies and prevent Chinese products from achieving full economies of scale. So this preemptive tariff strike will hurt the Chinese economy in the future, even if it doesn’t yet show up in the numbers.

Most generally:

In my numerous visits to China, I’ve found that the Chinese think of themselves as much more vulnerable than Americans to a trade war. I think they are basically correct, mostly because China is a much poorer country with more fragile political institutions.

I should note that I am not trying to defend Trump in this column, rather we need to get the economics right if we are to understand what is going on and why America can exert any pressure at all.  On Twitter, Christopher Balding is one who is getting these matters right.

Returning to the bigger picture, to the extent you wish to criticize Trump’s policies, focus on what China may do as a result of its vulnerability, not America’s supposed lack of bargaining power in the struggle.

Why Do Experiments Make People Uneasy?

People were outraged in 2014 when Facebook revealed that it had run “psychological experiments” on its users. Yet Facebook changes the way it operates on a daily basis and few complain. Indeed, every change in the way that Facebook operates is an A/B test in which one arm is never run, yet people object to A/B tests but not to either A or B for everyone. Why?

In an important and sad new paper Meyer et al. show in a series of 16 tests that unease with experiments is replicable and general. The authors, for example, ask 679 people in a survey to rate the appropriateness of three interventions designed to reduce hospital infections. The three interventions are:

  • Badge (A): The director decides that all doctors who perform this procedure will have the standard safety precautions printed on the back of their hospital ID badges.

  • Poster (B): The director decides that all rooms where this procedure is done will have a poster displaying the standard safety precautions.

  • A/B: The director decides to run an experiment by randomly assigning patients to be treated by a doctor wearing the badge or in a room with the poster. After a year, the director will have all patients treated in whichever way turns out to have the highest survival rate.

It’s obvious to me that the A/B test is much better than either A or B and indeed the authors even put their thumb on the scales a bit because the A/B scenario specifically mentions the positive goal of learning. Yet, in multiple samples people consistently rate the A/B scenario as more inappropriate than either A or B (see Figure at right).

Why do people do this? One possibility is that survey respondents have some prejudgment about whether the Badge or Poster is the better approach and so those who think Badge is better rate the A/B test as inappropriate as do those who think Poster is better. To examine this possibility the authors ask about a doctor who prescribes all of his patients Drug A or all of them Drug B or who randomizes for a year between A and B and then chooses. Why anyone would think Drug A is better than Drug B or vice-versa is a mystery but once again the A/B experiment is judged more inappropriate than prescribing Drug A or Drug B to everyone.

Maybe people don’t like the idea that someone is rolling dice to decide on medical treatment. In another experiment the authors describe a situation where some Doctors prescribe Drug A and others prescribe Drug B but which drug a patient receives depends on which doctor is available at the time the patient walks into the clinic. Here no one is rolling dice and the effect is smaller but respondents continue to rate the A/B experiment as more inappropriate.

The lack of implied consent does bother people but only in the explicit A/B experiment and hardly ever in the implicit all A or all B experiments. The authors also show the effect persists in non-medical settings.

One factor which comes out of respondent comments is that the experiment forces people to reckon with the idea that even experts don’t know what the right thing to do is and that confession of ignorance bothers people. (This is also one reason why people may prefer pundits who always “know” the right thing to do even when they manifestly do not).

Surprisingly and depressingly, having a science degree does not solve the problem. In one sad experiment the authors run the test at an American HMO. Earlier surveys had found huge support for the idea that the HMO should engage in “continuous learning” and that “a learning health system is necessary to provide safe, effective, and beneficial patient-centered care”. Yet when push came to shove, exactly the same pattern of accepting A or B but not an A/B test was prevalent.

Unease with experiments appears to be general and deep. Widespread random experiments are a relatively new phenomena and the authors speculate that unease reflects lack of familiarity. But why is widespread use of random experiments new? In an earlier post, I wrote about ideas behind their time, ideas that could have come much earlier but didn’t. Random experiments could have come thousands of years earlier but didn’t. Thus, I think the authors have got the story backward. Random experiments generate unease not because they are new, they are new because they generate unease.

Our reluctance to conduct experiments burdens us with ignorance. Understanding and overcoming experiment-unease is an important area for experimental research. If we can overcome our unease.

Do Pimples Pay? Acne, Human Capital, and the Labor Market

We use data from the National Longitudinal Study of Adolescent to Adult Health to investigate the association between having acne in middle to high school and subsequent educational and labor market outcomes. We find that having acne is strongly positively associated with overall grade point average in high school, grades in high school English, history, math, and science, and the completion of a college degree. We also find evidence that acne is associated with higher personal labor market earnings for women. We further explore a possible channel through which acne may affect education and earnings.

Here is the full piece by Hugo Mialon and Erik T. Nesson.  For the pointer I thank Daniel Gross.

Price Regulation in Credit Markets

From Cuesta and Sepulveda’s Price Regulation in Credit Markets: A Trade-off between Consumer Protection and Credit Access.

Interest rate caps are widespread in consumer credit markets, yet there is limited evidence on its effects on market outcomes and welfare. Conceptually, the effects of
interest rate caps are ambiguous and depend on a trade-off between consumer protection from banks’ market power and reductions in credit access. We exploit a policy in Chile that lowered interest rate caps by 20 percentage points to understand its impacts. Using comprehensive individual-level administrative data, we document that the policy decreased transacted interest rates by 9%, but also reduced the number of loans by 19%. To estimate the welfare effects of this policy, we develop and estimate a model of loan applications, pricing, and repayment of loans. Consumer surplus decreases by an equivalent of 3.5% of average income, with larger losses for risky borrowers. Survey evidence suggests these welfare effects may be driven by decreased consumption smoothing and increased financial distress. Interest rate caps provide greater consumer protection in more concentrated markets, but welfare effects are negative even under a monopoly. Risk-based regulation reduces the adverse effects of interest rate caps, but does not eliminate them.

Hat tip: Matt Notowidigdo.

What should I ask Eric Kaufmann?

I am doing a Conversation with him, no associated public event.  I am a big fan of his book WhiteShift (perhaps the best book of the year so far?), here is my review.  Here is Wikipedia on Eric:

Eric Peter Kaufmann (born 11 May 1970) is a Canadian professor of politics at Birkbeck College, University of London. He is a specialist on Orangeism in Northern Ireland, nationalismpolitical demography and demography of the religious/irreligious.

Eric Kaufmann was born in Hong Kong and raised in Vancouver, British Columbia, Canada. His ancestry is mixed with a quarter Chinese and a quarter Latino. His father is of Jewish descent, the grandfather hailing from Prostejov in the modern Czech Republic. His mother is a lapsed Catholic; he himself attended Catholic school for only a year. He received his BA from the University of Western Ontario in 1991. He received his MA from the London School of Economics in 1994 where he subsequently also completed his PhD in 1998.

Here is Eric’s home page.  He’s also written on what makes the Swiss Swiss, American exceptionalism, and whether the Amish will outbreed us all.

So what should I ask Eric?

Marginal rates of substitution in everything

Among married women aged 20‐45, we estimate the average marginal willingness to pay (WTP) for a spring birth to be 877 USD. This implies a willingness to trade‐off 560 grams of birth weight to achieve a spring birth. Finally, we estimate that an increase of 1,000 USD in the predicted marginal WTP for a spring birth is associated with a 15 pp increase in the probability of obtaining an actual spring birth.

Here is the full article, from the Journal of Applied Econometrics, by Damian Clarke, Sonia Oreffice, and Climent Quintana-Domeque, via the excellent Kevin Lewis.

Chronicle of Philanthropy covers Emergent Ventures

Here is the very good Alex Daniels story, here is one excerpt:

One of the benefits of receiving a grant from the center’s Emergent Ventures program, Cowen says, is that grantees will have access to a brain trust associated with the center and with his own well-established contacts among Silicon Valley’s tech elite. Cowen, a highly regarded economist who writes daily on his popular blog Marginal Revolution, doesn’t envision supporting a lot of traditional nonprofits. Instead, he tells the social entrepreneurs interested in applying that it’s OK to score a profit from their idea, calling a quick path to self-sufficiency a “feature, not a bug,” of any plan.

But the thrust behind Emergent Ventures isn’t ideological Cowen says. He’d simply like to get money out the door as quickly as possible to people who have a vision and need some support to bring those big ideas to fruition.

It’s a clear departure from what’s currently in fashion among institutional donors. Foundations often spend long hours tinkering with strategies to change broad societal systems. Some require grant applicants to enter monthslong challenges that are open to public input. Grant makers develop “scans” of the players involved in various social issues, employ consultants to develop measurements to determine success, and set up “feedback loops” to hear from other organizations and beneficiaries of grants.

And:

Emergent Ventures may offer some insight, he says. So, too, could a philanthropy guided by public intellectuals with other perspectives, including Malcolm Gladwell, Paul Krugman, and Steven Pinker.

“I want to see a dozen or 20 other people set up their own version of this,” he says. “I’ll consider this a success if we’ve inspired people to do something similar.”

There is more at the link.

How Much Did Physicians Drive the Opioid Crisis?

It’s well known that the opioid crisis started with prescription abuse but how much abuse was driven by patients who fooled their physicians and how much was driven by physicians who responded to monetary incentives with a nod and a wink? Molly Schnell provides some evidence which even a hard headed rationalist like myself found startling.

In August of 2010, Purdue Pharma replaced old OxyContin with a new, anti-abuse version of OxyContin. The new version was just as good at reducing pain as the old but it was more difficult to turn it into an injectable to produce a high. If physicians are altruists who balance treating their patient’s pain against their fear of patient addiction and downstream abuse then they should increase their prescriptions of new Oxy. From the point of view of health, the new Oxy is simply a better drug and with less abuse to worry about altruistic physicians should be more willing on the margin to prescribe Oxy to reduce pain. So what happened? Prescriptions for Oxy fell immediately and dramatically when the better version was released.

Now, to be fair to the physicians, patients who wanted to abuse Oxy stopped demanding it after the new version was released and physicians might not have realized how many of their prescriptions were being abused or sold on the secondary market. The aggregate data, which is a combination of supply and demand shifts, can mask individual physician behavior. Schnell, however, has data on the prescribing behavior of about 100,000 individual physicians who prescribed opioids.

Schnell finds that nearly a third of physicians behaved exactly as the altruism theory predicts. Namely, when new Oxy was released these altruistic physicians increased their prescriptions of Oxy and they maintained or reduced their prescriptions of other opioids. In fact, the median altruistic physician doubled their prescriptions of the new and improved Oxy. But almost 40% of physicians in Schnell’s sample behaved in a decidedly non-altruistic manner. Beginning in August of 2010, these non-altruistic physicians halved their prescriptions of new and improved Oxy and increased their prescriptions of other opioids. It’s difficult to see how attentive and altruistic physicians could decrease their demand for a better drug.

Schnell also finds that some parts of the country had fewer altruistic physicians and the consequences are evident in mortality statistics:

…. these differences in physician altruism across commuting zones translate into significant differences in mortality across locations…a one standard deviation increase in low-altruism physicians is associated with a 0.33 standard deviation increase in deaths involving drugs per capita. While this association is reduced conditional on observable commuting zone characteristics (including race, age, education, and income profiles), a significant and large association between the share of low-altruism physicians and drug-related mortality remains. Furthermore…this relationship persists even conditional on the number of opioid prescriptions, suggesting that the association is driven by the allocation of prescriptions introduced by low-altruism physicians rather than simply the quantity.

The less-altruistic physicians increased prescriptions for other opioids after new Oxy was introduced but perhaps even this was better than the non-prescription alternatives like heroin and street fentanyl. Indeed, Alpert, Powell and Pacula show that the introduction of improved Oxy led to more deaths because people switched to more dangerous, illegal alternatives. So was it a bad idea to introduce a better drug? Maybe, but if new Oxy had been introduced earlier perhaps fewer people would have been addicted, leading to less demand for illegal markets later. Thus, static and dynamic effects may differ. The economics of dual use goods is complicated.

Algiers fact of the day

There has not been a single property transaction in the Casbah in 40 years, said Mr. Ben Meriem, the head of the Paris institute. “No buyers, no sellers — for 30 percent of the buildings, we don’t even know who the owners are.”

Among the disused buildings, said Mr. Mebtouche, “eighty percent are owners who have abandoned their properties,” unable to pay for renovations.

Here is the longer NYT story by Adam Nossiter.  An excellent piece, though I would like to know more about the underlying regulations and incentives.

The Facebook cryptocurrency

Kroszner and I wrote about related possibilities in our 1994 book Explorations in the New Monetary Economics.  Here is a not very informative WSJ article.  Here is Ben Thompson speculating from his email newsletter:

This, then, is what I suspect is the overall motivation for Facebook’s efforts: having its own currency will allow for transactions on Facebook’s terms, not the credit card companies, which should, in turn, allow for both more kinds and more total transactions. Consider a Facebook currency on a theoretical level: if there were no fees attached to a transaction, micropayments suddenly become much more viable; peer-to-peer payments are simple — for both users and Facebook — as clicking a button; tipping models actually make sense.

None of these benefits are new to be sure, the question, though — and this is always the question generally, but with payments especially — is how you get from here-to-there. Remember, payments is a multi-sided network: users have to be one board, merchants need to be on board, and there has to be some sort of liquidity in the market. From a user perspective, how do you get them to buy into the network? Then consider merchants: how do you prevent them from taking money out of the market, killing liquidity?

In fact, Facebook is well-equipped on both fronts, particularly the merchant side: remember, merchants are the most likely culprits when it comes to killing liquidity in a market. They are going to transfer a cryptocurrency to fiat as soon as possible. Merchants, though, are also paying Facebook a lot of money for ads: that is, they are already putting money into the system. To that end, it is easy to see Facebook giving a discount to merchants willing to leave their money in the system and simply buy advertising using their Facebook tokens.

Users are trickier: certainly Facebook will push things like peer-to-peer payments to get users to connect up their bank accounts or debit cards to Facebook’s network, but I also suspect this is where the rumors about Facebook paying for ad-viewing comes in. This is not, in my estimation, some sort of genuine acknowledgment that user attention is worth compensating directly, but rather a plausible way to seed user accounts such that they are motivated to use Facebook’s currency; ideally, at least for Facebook, there will end up being lots of ways to use that currency.

…I don’t think that Facebook wants to impose any fees at all: thinks about it — what could possibly be more valuable to an advertising-based business than knowing exactly what customers are spending their money on?

You have to pay for Ben, but it is worth doing so, you can subscribe here.

Intelligence predicts cooperativeness better than conscientiousness does

We study how intelligence and personality affect the outcomes of groups, focusing on repeated interactions that provide the opportunity for profitable cooperation. Our experimental method creates two groups of subjects who have different levels of certain traits, such as higher or lower levels of Intelligence, Conscientiousness, and Agreeableness, but who are very similar otherwise. Intelligence has a large and positive long-run effect on cooperative behavior. The effect is strong when at the equilibrium of the repeated game there is a trade-off between short-run gains and long-run losses. Conscientiousness and Agreeableness have a natural, significant but transitory effect on cooperation rates.

That is by Eugenio Proto, Aldo Rustichini, and Andis Sofianos, forthcoming in the JPE.  Note that agreeable people do cooperate more at first, but they don’t have the strategic ability and consistency of the higher IQ individuals in these games.  Conscientiousness has multiple features, one of which is caution, and that deters cooperation, since the cautious are afraid of being taken advantage of.  So, at least in these settings, high IQ really is the better predictor of cooperativeness, especially over longer-term horizons.

Money lending and the origins of anti-Semitism

We study the role of economic incentives in shaping the coexistence of Jews, Catholics, and Protestants, using novel data from Germany for 1,000+ cities. The Catholic usury ban and higher literacy rates gave Jews a specific advantage in the moneylending sector. Following the Protestant Reformation (1517), the Jews lost these advantages in regions that became Protestant. We show (i) a change in the geography of anti-Semitism with persecutions of Jews and anti-Jewish publications becoming more common in Protestant areas relative to Catholic areas; (ii) a more pronounced change in cities where Jews had already established themselves as moneylenders. These findings are consistent with the interpretation that, following the Protestant Reformation, Jews living in Protestant regions were exposed to competition with the Christian majority, especially in moneylending, leading to an increase in anti-Semitism.

That is from a new AER piece by Sascha O. Becker and Luigi Pascali.