Category: Economics

Canada gamble of the day

Canada’s deficit is growing at the fastest rate among developed nations as it seeks to prop up its economy during the Covid-19 pandemic.

Canadian officials are betting the aggressive approach will pay off, pointing to the number of jobs already recovered, and argue that the country can afford to pour money into the economy while borrowing costs are historically low. But some economists warn the heavy spending could lead to a fiscal crisis, and one major ratings firm has already stripped the country of its triple-A rating…

Canada’s virus-related spending, the bulk of which originates with the federal government, has totaled about 382 billion Canadian dollars, the equivalent of $294 billion, and accounts for roughly 19% of Canada’s total economic output.

Yet data from the IMF indicate Canada’s fiscal position during the pandemic—incorporating all levels of government—has deteriorated at the fastest pace among the major economies in the Group of 20 industrialized countries as it seeks to keep the economy pumping.

…So far, Canada has recovered about 80% of the jobs lost in March and April because of the virus, whereas the U.S. has regained just over half of employees shed. Canada’s economy grew by a record 40.5% annual rate in the third quarter, Statistics Canada said Tuesday. However, growth is expected to grind to a halt in the final three months of 2020 as restrictions re-emerged to deal with a rise in Covid-19 infections.

The federal government’s debt is also set to surpass C$1 trillion for the first time this year, or 50% of GDP, and debt from all levels of Canadian government will surge to roughly 115% of GDP this year from 89% in 2019, the IMF said.

Here is the WSJ article, do stay tuned…

I would like to complain about complaining

That is in my latest Bloomberg column, here is part of the argument:

…complaining at a hotel…very often yields a relatively high return, whether your complaint is justified or not. If you tell the front desk that your room was not cleaned promptly and properly, or contact the hotel chain with a similar message, there is a good you will get an upgrade or extra points on your account. Most hotels have empty rooms most of the time, so they are not forgoing very much revenue by granting such favors. They might even be turning you into a more loyal customer.

The injustice you cite doesn’t have to be that serious — what matters is that you brought it to their attention. That means you are looking for a benefit, perhaps with an exploitative motive, but still hotel management may respond. If you are a complainer by nature, you might also be especially likely to post on travel websites, and hotels want to prevent that.

The basic service and pricing model of hotels was never egalitarian to begin with, and that too makes it easier for them to give you a break. They usually charge different prices depending on the time and manner of booking — so if they cut you a special favor, no one looks askance.

The basic “economics of complaining” are becoming clear: Complain when the marginal cost of extra service is low. Complain when the reputation of the seller is evaluated online in a meaningful way. Complain when the service norms are something other than equal treatment.

…Complaining to the airlines is a tricky one. They often have free inventory to give away or offer at a discount, but unlike hotels, almost all their customers have something to complain about! (The same is often true of social media services.) Unless your case is strong and well-documented, airlines also tend to be pretty stingy about complaints.

As progress proceeds, and more services become automated and homogenized and well-functioning, businesses will resemble hotels more than airlines — at least from a complaining point of view. There will be fewer reasons for complaints, but the complaints that surface will be treated very well. Return on a complaint will be quite high, and if you (like me) do not love most complainers, you may find this slightly upsetting.

…What about complaining about the economics of complaining? The sad reality is this: Complaining is most lucrative precisely when and where it’s needed least.

If you have any complaints, you may leave them in the comments section.  And I thank an emailing “Peter” for drawing my attention to this question and suggesting some possible answers.

My excellent Conversation with Zach Carter

Zach is author of the recent book The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes, which has been on many year-end “best of” lists.  Here is the audio, transcript, and video.  Here is part of the CWT summary:

Zach joined Tyler to discuss what Keynes got right — and wrong — about the Treaty of Versailles, how working in the India Office influenced his economic thinking, the seemingly strange paradox of his “liberal imperialism,” the elusive central message of The General Theory, the true extent of Keynes’ interest in eugenics, why he had a conservative streak, why Zach loves Samuel Delaney’s novel Nova, whether Bretton Woods was doomed to fail, the Enlightenment intuitions behind early defenses of the gold standard, what’s changed since Zach became a father, his next project, and more.

Here is one excerpt:

COWEN: [Keynes is] sympathetic to his own ideas and wants to promote them. But to me, there’s a discord. Milton Friedman spends, what, 45 minutes talking to Pinochet, has a very long record of insisting economic and political freedom come together — maybe even too simplistically — writes against the system of apartheid in South Africa and Rhodesia, calls for free markets there. And people give Friedman hell over that.

Keynes writes the preface for the Nazis and favors eugenics his whole life, and that’s hardly ever mentioned.

CARTER: I don’t know that the way that Keynes talks about eugenics is as salient as you suggest. The best article that I came across on Keynes and eugenics is by this guy — I think David Singerman. It’s in the Journal of British Studies. It’s a pretty in-depth look at the way Keynes came to eugenics and what he did and did not support. It’s very clear that Keynes didn’t support eugenics in the way that Americans sterilizing poor Black workers in the South were interested in eugenics.

Keynes was broadly interested in it from the perspective of birth control. This is a time when eugenics and genetics are not as clearly defined as they are today, so he’s thinking about heritability of eye colors — how he gets involved in this stuff. He never really supports anything other than birth control.

When he actually has power as a policymaker, he just doesn’t do any of this stuff. He is working on the Beveridge plan. He is working on financial stuff that is much more egalitarian than what we think of him when we think about eugenics.

COWEN: But he is chair of the British Eugenics Society for eight years late in his career.

CARTER: He doesn’t do much there. There are big debates that are happening within that society, and he’s mostly sitting them out. Singerman goes into this in much more detail. It’s been a while since I read the article, but Singerman seems to think that this is a useful way of understanding Keynes’s worldview, but not that Keynes is some guy who’s going around wanting to sterilize people and do the things that we think of with the eugenics movement in the United States.

COWEN: I don’t think he wants to sterilize people, but he has those essays on population, which are not put into the collected works. They’re not mentioned by Roy Harrod. He is greatly worried that the people from some countries — I think including India — will outbreed the people from Britain, and this will wreak havoc on prices and wages, and it’s a big crisis. He even says, “We need to worry not only about the quantity of people, but the quality of people in the world.”

A very good episode, definitely recommended.  And here is Zach on Twitter.

Wage stickiness for incumbents vs. new workers

Masao Fukui, job market candidate from MIT, has made some significant progress on this problem, paper here.  You should cringe if you just hear ‘wage stickiness” — for the incumbents, maybe, due to morale effects, because a grumpy worker who just took a pay cut might wreck things.  But why is there wage stickiness for the new, not yet hired workers?  Isn’t the new wage bargain what they need to negotiate in the first place?  Other than postulating stubborn unemployed workers who overestimate their worth, how might we generate microfoundations for wage stickiness for the not yet hired, also known as “the unemployed”?  Here is Fukui’s abstract:

I develop a new theory of wage rigidity and unemployment fluctuations. The starting point of my analysis is a generalized version of Burdett and Mortensen’s (1998) job ladder model featuring risk-neutral firms, risk-averse workers, and aggregate risk. Because of on-the-job search, my model generates wage rigidity both for incumbent workers, through standard insurance motives, and for new hires, through novel strategic complementarities in wage setting between firms. In contrast to the conventional wisdom in the macro literature, the introduction of on-the-job search implies that: (i) the wage rigidity of incumbent workers, rather than new hires, is the critical determinant of unemployment fluctuations; (ii) fairness considerations in wage setting dampen, rather than amplify, unemployment fluctuations; and (iii) new hire wages are too flexible, rather than too rigid, in the decentralized equilibrium. Quantitatively, the wage rigidity of incumbent workers caused by the insurance motive alone accounts for about one fifth of the unemployment fluctuations observed in the data.

As for wage stickiness for the not yet hired workers, here is I think the key point:

I show using simple phase diagrams that new hire wages must always feature rigidity at the top of the job ladder. This comes from the fact that at the very top of the job ladder, potential new employers have no incentive to increase wages above what the incumbent firms offer because there would be no additional workers to poach. This extremely strong strategic complementarity spills over toward lower job ladder rungs, and the wages are asymptotically rigid regardless of functional forms or parameter values. This result provides an explanation for the recent evidence on new hire wage rigidity.

The paper has many other interesting features. For instance, once wage rigidity for incumbent workers is a larger cause of unemployment, as opposed to just wage rigidity for new hires, the Shimer empirical critiques of labor market matching models dissipate.  So matching models are strengthened, as are models of real rather than nominal rigidity of wages.

I am not yet sure if Fukui is right, but in any case this paper is a major contribution to the theory of wage-setting and it seems he is getting closer to the truth than anyone else has.

Tricky stuff!  Via Ivan Werning.

American Ph.Ds are failing at start-ups

We document that since 1997, the rate of startup formation has precipitously declined for firms operated by U.S. PhD recipients in science and engineering. These are supposedly the source of some of our best new technological and business opportunities. We link this to an increasing burden of knowledge by documenting a long-term earnings decline by founders, especially less experienced founders, greater work complexity in R&D, and more administrative work. The results suggest that established firms are better positioned to cope with the increasing burden of knowledge, in particular through the design of knowledge hierarchies, explaining why new firm entry has declined for high-tech, high-opportunity startups.

Here is more from Thomas Åstebro, Serguey Braguinsky, and Yuheng Ding.

Cognitive biases: where do we stand?

Here is a new and very important paper by Victor Stango and Jonathan Zinman, here are some of the main results, noting that each and every paragraph is important:

Our first finding is that biases are more rule than exception. The median consumer exhibits 10 of 17 potential biases. No one exhibits all 17, but almost everyone exhibits multiple biases; e.g., the 5th percentile is 6.

Our second finding is that cross-consumer heterogeneity in biases is substantial. The standard deviation of the number of biases exhibited is about 20% of its mean, and several results below suggest that this variance is economically meaningful and not substantially inflated by measurement error.

Our third finding is that cross-consumer heterogeneity in biases is poorly explained by even a “kitchen sink” of other consumer characteristics, including classical decision inputs, demographics, and measures of survey effort. Most strikingly, we find more bias variance within classical sub-groups widely thought to proxy for behavioral biases than across them. E.g., we find more bias variation with the highest-education group than across the highest- and lowest-education groups.

Our fourth finding is that our 17 biases are positively correlated with each other within-consumer, especially after accounting for measurement error following Gillen et al. (2019).1Across all biases, the average pairwise correlation is 0.13, and 18% have p-values < 0.001. Within six theoretically-related groups of biases (present-biased discounting, inconsistent and/or dominated choices, risk biases, overconfidence, math biases, and limited attention/memory), the average pairwise correlation is 0.25 and 29% have p < 0.001.

Our fifth finding is that there are also some important correlations between biases and classical inputs. Classical inputs and demographics may not explain much of the variance in biases (per finding #3), but some of them are correlated with biases in patterns that align with prior work. Most notably, the average pairwise correlation between cognitive skills and biases is -0.25. Cognitive skills are strongly negatively correlated with most biases, but positively correlated with loss aversion and ambiguity aversion. Other classical inputs are relatively weakly correlated with biases, except for a few expected links between patience and present bias, risk aversion and aversion to uncertainty and losses, and risk aversion and math biases that can lead to undervaluation of returns to risk-taking.

Overall not encouraging!  But perhaps some of that is also what makes life more meaningful, at a high cost admittedly.

Teaching Modern Principles Online

I’ve been teaching hundreds of students the principles of economics using Modern Principles of Economics and its online course management system and the response has been excellent. Most students like the class but what always surprises me is that some students like the online class better than any other class they have ever taken. A good lesson about different learning styles. Some reviews:

  • I wanted to say thank you for the way you teach your class. I just started it and it is way better than I expected. The videos you made are why I’m thanking you. In high school I would always have to go home and watch videos explaining what the teacher taught us….your class is already the best class I have taken in my life because it fits the way I learn. I’ve never really written an email like this so forgive me if it breaks the usual business casual email approach. Thank you again!
  • I am a student a George Mason…I would like to say that these classes are the best online classes I have taken and wish all my classes would be like this! Especially with Mason being mostly online and all of my classes being online this semester, I think that this class’s design should be an outline for other online classes. The videos themselves are very well edited and can be fun to watch! Instead of just watching a PowerPoint online and taking notes, being able to see the professor speak, while incorporating graphs, and even animations makes the class much more enjoyable, and in my case easier to absorb. Another aspect I wish all online classes did is giving quizzes along with the videos to check information learned. Speaking from my experience in your previous class the “Learning Curve” and other pre-test activities did wonders for me when preparing for chapter tests and exams. Overall, these classes are a great experience and I look forward to this semester in Econ 104! As a little side note, my favorite videos/lessons from last semester where the ones where you and Professor Cowen would debate over subjects learned in class. It gave useful insight and thinking to both sides of the argument.
  • I really liked how it was set up with the videos. As someone who has diagnosed ADHD, this type of online class, and class in general has made it so much easier for me to constantly go back on videos to hear what the professors were saying and trying to teach us. Honestly best class experience I’ve ever had, and I wish more were like it.
  • Prof. Tabarrok’s videos that accompanied our course material were of high quality. Even though this was a distance learning course, I felt that I got an in depth lecture for each section of the course. I did not feel that I was left to read the book myself; it was like I had great in-person lecture that I could re watch again and again.
  • Since this is an online course, I expected it to be very short cut and not interactive. This course was the total opposite. Being able to watch videos about professors genuinely teaching economics and answering questions while following the video was so helpful.The aspects of the course allowed me to connect with different imperative issues & solutions across the world.

Who Mismanages Student Loans and Why?

From Kimberly Rodgers Cornaggia and Han Xia:

With a license to use individually identifiable information on student loan borrowers, we find that a majority of distressed student borrowers manage their debt sub-optimally and that suboptimal debt management is associated with higher loan delinquency. Cross-sectional analysis indicates that loan (mis)management varies significantly across student gender, ethnicity, and age. We test several potential selection-based explanations for such demographic variation in student loan management, including variation in students’ overconfidence, consumption preferences and discount rates, and aversion to administrative paperwork. Motivated by federal and state allegations against student loan servicers, we also test for the presence of treatment effects. Overall, the empirical evidence supports the conclusion that loan servicers’ differential treatment across borrowers play an important role in student loan outcomes.

Here is a key background fact:

Broadly, subsidized student borrower assistance programs include provisions for loan forbearance, loan deferment, and
income-driven repayment (IDR) options for financially distressed borrowers.

Borrowers should switch to those provisions more than they do, with older students, non-traditional students, males, and non-whites performing less well than others.  Here is the link to the paper, via the excellent Kevin Lewis.

Yes, Testing Works

I’d shout it from the rooftops but my voice has become hoarse.

WBUR: In August, more than 100 New England colleges launched a massive experiment: What happens if you bring students back to petri dish campuses in the midst of a pandemic, but put huge energy into prevention culture and testing them once or twice a week?

The colleges partnered with the Broad Institute, a research giant that pivoted to mass coronavirus testing, in hopes the proposition could work well enough to salvage at least a partially on-campus fall.

As many students head home or settle back into their childhood bedrooms, the interim results of the experiment are now clear. The data show “that asymptomatic testing does work,” says Dr. Paula Johnson, president of Wellesley College and a leader of the group that put together the partnership. “And it works in terms of identifying cases quickly, paired with aggressive contact tracing. You identify a case, you identify the contacts. You pull them out of the system. And that really helps to prevent the spread.”

Bryan Caplan on the cost of Covid

Here is Bryan’s post, here is one bit:

Taking quality of life into account, how many life-years has the reaction to COVID destroyed?…

Upshot: The total cost of all COVID prevention has very likely exceeded the total benefit of all COVID prevention.

I don’t agree with Bryan’s numbers, but the more important point is one of logic.  The higher the costs of reaction to Covid, the stronger the case for subsidizing vaccines, therapeutics, and other corrective measures.  Would you accept this Bryan?  You have numerous posts about risk overreaction, but not one (if I recall correctly) calling for such subsidies.  Furthermore we just did some of those subsidies, through Operation Warp Speed, and they worked and they will fix the relevant incentives and lead to a resumption of normal life.  So the “subsidies will prove counterproductive” argument doesn’t seem strong here.  The subsidies are the (much) quicker path back to what you desire.

A second question is whether moral suasion — “don’t overreact to Covid!” — is likely to prove effective.  As I’ve already linked to, risk explains mobility reductions far more than do lockdown policies.  Or consider Sweden, which had a relatively non-panicky Covid messaging, no matter what you think of their substantive policies.  Sweden didn’t do any better on the gdp front, and the country had pretty typical adverse mobility reactions.  (NB: These are the data that you don’t see the “overreaction” critics engage with — at all.  And there is more where this came from.)

How about Brazil? While they did some local lockdowns, they have a denialist president, a weak overall response, and a population used to a high degree of risk.  The country still saw a gdp plunge and lots of collateral damage.  You might ponder this graph, causality is tricky and the “at what margin” question is trickier yet, but it certainly does not support what Bryan is claiming about the relevant trade-offs.

I keep on hearing this point again and again, about overreaction.  What kinds of reaction are you expecting or viewing as feasible and attainable?  If overreacting is indeed a public bad, why think you can talk people down out of it?  How much do you think you can talk them out of it?  What if someone suggested that we try to talk people out of their irrational voting patterns, as analyzed by Bryan’s The Myth of the Rational Voter?  How sanguine would he be about that enterprise?  I believe he instead stressed changes in relative prices.

And this is the huge flaw behind so much of the discourse about the “costs of lockdowns” — they can cite the stupidity of closing the parks in March, yes, but they don’t and indeed can’t tell you how most of those costs were to be avoided, given how the public reacts to risk.

If we instead look to the relevant changes in relative prices, that means subsidies for vaccines and tests, most of all through advance market commitments, but not only.  And a full-scale commitment to implementing testing and masks and therapeutics.

The more you push home points about overreaction, the more you ought to favor these subsidies.  Libertarians out there, do you?  This chicken has come home to roost, so please fess up and give the right answer here.  Do you favor these subsidies, not just murmured into your closet at night but in plain black and white for the world to read?  Moral suasion against risk overreaction is a red herring, fine enough for cutting back on one part of the problem by maybe a few percentage points, but serving mainly to distract from the very real economic questions at hand and the need to admit that one’s libertarian ideology doesn’t fit around this problem as nicely as one might wish.

Can we have an Operation Warp Speed for green energy?

Probably not, as I argue in my Bloomberg column.  One problem is that advance market commitments work best when the output is well-defined, more or less homogeneous, and to be distributed according to very clear principles (one shot in the arm for everybody!).  You can’t quite hand out green batteries or small nuclear reactors on the same basis.  There is a case for subsidizing those, but not necessarily through advance purchase methods.  Here is another part of the column:

Operation Warp Speed was also made easier by the internalization of vaccine research within companies or alliances of companies. The pre-purchase agreement limits risk, and within that framework the companies face strong competitive incentives to create a successful product. In the meantime, the work is removed from the public eye and debate, and at the end there is a definitive yes or no decision from the FDA. It is hardly simple, but it could be a lot more complicated.

In contrast, building a new energy infrastructure requires the cooperation of many companies and institutions, including local governments and regulators. One company can’t simply do everything (recall that the attempts of Alphabet to redesign part of Toronto as a new tech-based city met with local resistance and were ultimately put aside). The greater the number of institutions involved, the slower things get. Note that most of those institutions will not be getting pre-purchase funds from the federal government and they will face their usual bureaucratic and obstructionist incentives. When it comes to green energy policy, there are still too many veto points.

A striking feature of vaccine development is just how few social goals are involved. A vaccine should be safe, effective and easy to distribute. In broadly similar fashion, the highly successful Manhattan Project of the 1940s also had a small number of goals, namely a working and deliverable atomic bomb. When it comes to energy, there are already too many goals, and additional ones are often added: job creation, better design and community aesthetics, reductions in secondary pollution, regional economic benefits, and so on.

When I explain Fast Grants to people, and how it worked, it is always striking to me which part of the explanation they understand least.  Everybody gets “we had a preexisting team in place, ready to handle accounting, recordkeeping, and payments.”  Hardly anyone understands — really understands — “the program has two goals: supporting quality research projects that will feed into stopping Covid, and speed.”  On one hand, it sounds self-evident to them, but on the other hand I don’t think they realize how much the intellectual infrastructure of the project really is defined by those goals and no others.  Nothing about meeting payroll, or pursuing other meritorious social goals, or getting grant or donor renewal, or raising the stature of the program in the biomedical community, or…?  What you choose not to pursue is one of the most radical steps you can take, and often it is so radical that other people don’t even grasp or notice it.  They just don’t see you “not doing something.”  That can be a good way to innovate!

My podcast with Darren Lipomi

He is a well-known chemist (and more) at UC San Diego. We started with classic Star Trek and then moved into textiles, chemistry, music vs. sound, nanobots against Covid, how to interview, traveling during a pandemic, art collecting and voodoo flags, the importance of materials science, and much more.  Mostly he interviewed me, though it went a bit both ways.

Almost 100% fresh material and topics, and here is the Spotify link.

MIT graduate micro exam, 1961

From the archives of Irwin Collier (I won’t do any extra indentation):

Economics Candidates: Answer any FOUR questions (thirty minutes each).
S.I.M. Candidates: Answer any TWO questions (thirty minutes each).

  1. Within the framework of static, partial-equilibrium theory, indicate under what circumstances advertising will reduce product prices in the long run, (a) if the advertiser is a simple monopolist, (b) if the advertisers are members of a large, perfectly symmetrical, Chamberlinian group of suppliers of differentiated products (the number of firms being large enough to rule out oligopolistic relationships, and variable in accordance with a long-run-equilibrium condition of zero profit for all firms).
  2. How is a firm’s demand schedule for a particular factor of production derived (a) when that factor is the only variable one, and (b) when the quantities of all factors are variable? Show which of these demands is, if anything, the more elastic.
  3. The demands for two products are: q1 = q2 = 54 – p1 -p2. How would you characterize their relationship? If they are produced by separate sellers at constant average costs of c1 = 12 and c2 = 6, respectively, calculate each man’s equilibrium price, quantity, and profit under each of the following conditions:
    1. Each seller assumes that the other’s price is a constant;
    2. The second seller behaves that way and the first seller realizes that he does;
    3. Both sellers maximize their joint profit and share it equally.
  4. Two countries can produce food (F) and clothing (C) with labor (L) as the only factor of production. Country A has 20 billion units of L, each of which can produce either 5 units of F or 2 units of C. Country B has 10 billion units of L, each of which can produce either 8 units of F or 6 units of C. Everyone always spends half of his income on F and the other half on C. In a purely competitive equilibrium with balanced trade between the two countries (and no transportation costs), what is the effect on the quantities of F and C produced and consumed in each country? Could either country benefit by imposing a tariff on the imported good?
  5. What are the various reasons why a free-private-enterprise economy may fail to allocate its resources in an optimally efficient way? Explain.
  6. Discuss the roles of “real” and “monetary” elements in a satisfactory theory of interest. Is it logically possible to fashion an interest theory exclusively in terms of one or the other of those elements? Explain.

TC again: I don’t think current graduate students (outside of MIT and a few other places) would do very well on #1, nor do I think they would understand what is being asked on #6, much less have a good answer.  On #5, I wonder how many would give a sufficiently analytical answer rather than just repeating a bunch of cliches from media and social media?

Edward Lazear has passed away

He was one of the true microeconomists, from Wikipedia:

Edward Paul Lazear…an American economist, the Morris Arnold and Nona Jean Cox Senior Fellow at the Hoover Institution at Stanford University and the Davies Family Professor of Economics at Stanford Graduate School of Business.

Lazear served as Chairman of the Council of Economic Advisors from 2006 to 2009, replacing Ben Bernanke. As Chairman, he was the chief economic advisor to President George W. Bush holding a cabinet-level post as part of the White House team that led the response to the 2007-2008 financial crisis. Lazear has been called the founder of personnel economics a subfield of economics that applies economic models to the study of the management of human resources in the firm. His research advances new models of employee incentives, promotions, compensation and productivity in firms. He is also credited with developing a theory of entrepreneurship and leadership that emphasizes skill acquisition. In addition to personnel economics, Lazear is a labor economist known for his work on the educational production function, teaching to the test, and the importance of culture and language in explaining the rise of multiculturalism.