Category: Economics

Peter Isztin on the incidence of AI

This short paper considers the effects of artificial intelligence (AI) tools on the division of labor across tasks. Following Becker and Murphy (1992) I posit a “team” with each team member being assigned to a task. The division of labor (that is, the number of specialized tasks) is here limited not only by the extent of the market, but by coordination costs. Coordination costs stem from the need for knowledge in multiple tasks, as well as from monitoring and punishing shirking and other malfeasance. The introduction of AI in this model helps the coordination of the team and fully or partially substitute for human “generalist” knowledge. This in turn can make specialization wider, resulting in a greater number of specialized fields. The introduction of AI technologies also increases the return to fully general knowledge (

Not a certainty, but definitely worth a ponder.  Here is the draft

Can the School Choice Movement Liberate Childhood?

Richard Hanania has a very good post on the rapidly expanding school choice movement and his hopes for a radical rethinking of education.

The first thing to point out about public education is that it involves an extreme restriction of liberty beyond anything we usually accept. How common is it for government to force you to be in a certain place at a certain time? What I call “time-place” mandates are rare. Sometimes you have to go to the DMV, but even then you spend a short amount of time there, and can generally choose when to go. Sometimes people have to respond to subpoenas or jury duty, but those are uncommon events in most people’s lives. Government says to do your taxes, though you only have a deadline and can fill out the paperwork whenever and under whatever conditions you want.

The only substantial populations of individuals who have their lives structured according to time-place mandates in a free society like ours are prisoners, members of the military, and children. The mandates for children have gotten less strict over the years now that all states allow homeschooling, but opponents of school choice for all practical purposes want to do what they can to shape the incentive structures of parents so that they all use public schools (liberal reformers tend to like vouchers that can be used at charter schools, but not ESAs, which give parents complete control). Of course, children don’t have the freedom of adults, and so others are by default in control of how they spend most of their time. But it’s usually parents, not the government, that we trust in this role. Given the unusual degree to which public education infringes on individual liberty and family autonomy, the burden of proof has to be on those in favor of maintaining such an extreme institution.

…To me, the true promise of the school choice movement isn’t that it might simply save a bit of money or avoid the worst excesses of public education. Rather, it presents an opportunity to rethink childhood…On what basis did we as a society decide that the ideal way to spend a childhood was to attend government institutions 5 days a week, 7 hours a day, 9 months a year, for 12 years? That most of that time should be spent sitting at a desk, with say one hour for lunch and one for recess?

My hope is that states with universal ESAs will see radical experimentation. Maybe some parents would send their kids to a traditional school for six months of the year, and then have them apprenticing or interning in the workforce the rest of the time. Imagine having a few months experience working at a law firm during eighth grade, grabbing coffee for corporate executives in ninth grade, following around a pipe fitter in tenth grade, and helping around a gym in eleventh grade.

I too would like to see radical experimentation in education but I’m struck by how conservative and homogeneous schools are, regardless of their public or private status. Private schools, despite having the autonomy, have not pioneered novel teaching methods. Montessori was innovative but that was a hundred years ago. A few private schools have adopted Direct Instruction, but how many offer lessons in memory palaces, mental arithmetic or increasing creativity?

I am enthusiastic about developments coming out of Elon Musk’s school and Minerva but it’s still remarkable how similar almost all private schools are to almost all public schools. The global adoption of a nearly identical education model is also disturbing, as I harbor significant skepticism that we’ve reached an optimum. I see this as more of an outcome of world-elite consensus, similar to what we saw with COVID policy, with basically only Sweden bucking the trend and coming under intense pressure for doing so.

Online education and AI ought to greatly expand the potential range of experimentation but the demand for experimentation appears to be low.

Hanania has more of interest to say. Read the whole thing.

Thinking about congestion pricing in terms of the quantity dual

Ask a YIMBY person: “What about the extra traffic from all those new people moving in?  Won’t the ambulance arrival times be slower?  Won’t the air pollution be worse?  Won’t….?” and you will get a reassuring answer that a) yes there will be some problems but they can be managed by other means, and b) the external benefits of new arrivals will outweigh those problems.

Fair enough.

But then ask that same YIMBY person: “What about the extra traffic coming from all these out-of-NYC visitors?” …and you will get a very different answer.  “Tax them!”

So the basic view, at current margins, is “residents good, visitors bad.”

Maybe!  But, to follow up on the recent debate, that differential treatment is never justified.  What if a guy starts visiting a girlfriend in the East Village — by car — for one night every two weeks?  Then he is a visitor to be taxed.  Say the relationship goes well, he is there 2/3 of the time, and he rents a space for his car in her apartment building garage and uses it periodically.  Is he then “a resident”?  Are his per hour externalities for the world then suddenly so much more positive?  (Does he stop spitting on the sidewalk?)

Again, maybe, but you can see the a priorism embedded in the standard “YIMBY plus congestion tax” mix of proposals.  Somehow the differential views on residents and visitors do not need to be justified.

If you wish, think of the cars issue in terms of quantity allocation.  There is only so much space for cars in lower Manhattan.  How much of that space do you wish to allocate to residents with cars or to visitors with cars?  (This question can hold whether you are doing the allocating with prices, with planning, or by some other method.)

If you favor YIMBY plus a congestion tax, in essence you think resident car use is better than visitor car use.

But how do you know that?  Repeating to me on Twitter that pollution is bad, traffic in NYC is too slow, externalities are present, and so on is a non sequitur that does not address the question.

Alternatively, you might think visitor car use is better at the margin.  Then you might place bigger taxes on cars garaged in lower Manhattan, and lower the tolls on the George Washington Bridge.

I don’t see a good a priori case against the visitors.  Maybe there are diminishing returns to being exposed to the genius of NYC, and at the margin we want to encourage the dad who drives from Westchester County with his 15 year old son to see a concert at the Village Vanguard, to get the kid excited about the saxophone.  Or maybe there are increasing returns to being exposed to the genius of NYC (you have to soak up book wisdom at the Strand for twenty years running), which would then cut the other way.

We do observe a lot of people living in NYC for a few years when they are younger, and then leaving for saner pastures.  But they move there to be moved and inspired for a while.  That suggests there is some temporary nature to the net benefits from the exposure to NYC.  We also see more generally, for political economy reasons, that status quo urban policies tend to favor residents and punish visitors to an undue degree.  And, if we stick with the pro-YIMBY intuitions and reallocate more road resources toward residents, do we not have to worry about the traffic, noise, and congestion from the required extra construction?  These arguments don’t prove any conclusion, but they do suggest there should not be an a priori bias against reallocating some traffic space away from residents and toward visitors.

The point here is to have consistent views across YIMBY and a congestion tax.  And if you think we should reallocate vehicle space more toward residents and away from visitors, please make a comparative argument to that effect.  Repeating observations about crowding and externalities is not an argument on either of these questions.

Addendum: For an extra point, “throughput” and “demand” are not the same.

I’ve been seeing this error frequently.  Congestion pricing may well increase throughput, which is how many users get through a road or some other chokepoint in a discrete period of time, say an hour.

It is much harder for congestion pricing to increase overall demand.  For instance, at a zero explicit price the ride takes much longer but overall more people will travel through than if you charge them $20 to do the trip.  That said, the $20 price may well increase throughput, but if it decreases demand there is still an opportunity cost from the policy.  Don’t use the possibility of higher throughput to argue the congestion toll does not have costs for many of the visitors (of course some visitors will gain due to heterogeneity effects).

Michael Power on Kenya

With cyclical and Covid-related variations, of course, Kenya has been running a 5%+ GDP average annual growth rate for two decades. Since 1994, South Africa’s has, with an average of 2.4% per annum, not achieved half that. The contrast in performance is even more stark since 2011: in that year, South Africa’s GDP was 10.2 times Kenya’s; a decade later, in 2021, this ratio had fallen to 3.8. Meanwhile, according to Trading Economics, as South Africa’s current unemployment rate is 33%, Kenya’s is 5%…


The first item to note in Kenya’s favour is the extraordinary “can do” commercial attitude that prevails no matter which political party is in power. Of course, there have been, are and will be differences in emphasis, but whether it is Team Uhuru Kenyatta or Team William Ruto that is calling the shots, both sides are unashamedly pro-business.

And before assuming that this means they are therefore anti-labour, that is simply not the case: more than halving unemployment to under 5% during the last decade is evidence of that. It helps that 86% of Kenya’s workforce now has some post-secondary education.

Kenya’s informal economy is vibrant, solutions-oriented and celebrated — far more than pooh-poohed — by politicians of every persuasion. Called in Swahili “jua kali” — “hot sun”, or, literally, “sun hot” — it operates outdoors and amounts to a training ground for industrial labourers, many of whom have gone on to “graduate” into more formal manufacturing activities, a form of tropical apprenticeship that even the Germans would applaud.

On a drive into the City Centre from Nairobi Airport — now much faster thanks to a Chinese-built highway — you can see roadside manufacture of beds, buckets, furniture, tin trunks, lamps, kitchen pots, jikos (ovens), coffins… you name it. And this is all happening at 8pm, well after the jua has gone down!


GDP-adjusted, Kenya now receives more venture capital investment than anywhere else in Africa; its ratio of VC-to-GDP is more than triple “rivals” Nigeria, Egypt and South Africa. Unsurprisingly, these money inflows have helped reinforce Nairobi’s long-held status as East Africa’s financial capital.


Remoteness in Kenya is no longer a barrier to generating power: a flight over arid northern Kenya on a sunny day gives the impression of a country littered with “glittering diamonds”. On-grid electricity has benefitted from solar too, as well as wind and thermal with over 90% of power generated now coming from these sources.

The 2030 target — which is well within reach as the country is ahead of its interim targets — is to generate 100% of power from renewable sources.

As noted above, for renewable energy projects, private sector financing is everywhere to be seen, from the single solar panel on a house to the giant wind farms of Kipeto and Lake Turkana: Blackrock is an investor in the latter with the US government helping fund the former.

And Kenya’s thermal endowment — born of the country’s geological position astride the hot steam vents of the Great Rift Valley — is the original underpinning of its renewable energy story: here it has benefitted hugely from best-in-class Icelandic technical support and finance.

Kenya still has major problems with foreign investment, as I have noted, but the Power piece is interesting on numerous fronts.

The Birth-Weight Pollution Paradox

Maxim Massenkoff asks a very good question. If pollution reduces birth weight as much as the micro studies on pollution suggest, why aren’t birth weights very low in very polluted cities and countries? Figure 1, for example, shows birth weights in a variety of highly polluted world cities. The yellow dashed and blue lines show “predicted” birth weights extrapolated from the well-known Alexander and Schwandt “Volkswagen study” which looked at the effects of increased pollution in the United States. Despite the fact that every one of the highly-polluted cities is much more polluted than the most polluted US city, birth weight is not tremendously lower in these cities. Indeed, there is no obvious correlation between birth weight and pollution at all.

Similarly, US cities were more polluted in the past but were birth weights lower in the past? Figure 2 shows a number of US cities which were two to three times more polluted in 1972 (right side of diagram) than 2002 (left side of diagram). Yet, birth weights do not appear lower in the more polluted past and certainly do not follow the extrapolated birth weight-pollution predictions from the micro literature.

Massenkoff looks at a variety of possible explanations. One possibility, for example, is culling. Perhaps in highly polluted areas there are more miscarriages, still births or difficulty conceiving with the result that the observed sample of births is highly selected. There is some evidence that pollution increases miscarriages and stillbirths but these tend to be correlated with lower birth weight–a scarring effect rather than a culling effect. In addition, the effect of pollution on miscarriages and stillbirths also appears to be bigger on a micro level than on a macro level. That is, these rates aren’t massively higher in high pollution countries.

Another possibility is that pollution isn’t that bad and, in particular, not as bad as I have suggested. As a good Bayesian, I update, but for reasons I have given here, it’s not justifiable to update very much.

I assume, as I always do, that there are some overestimates in the micro literature for the usual reasons. But, more fundamentally, my best guess for the birth-weight pollution paradox is that weight is one of the easiest margins on which the body can adapt and compensate. Even in poor countries there are plenty of calories to go around and so it’s relatively easy for the body to adjust to higher pollution, on this margin. Indeed, weight is known as a variable that creates paradoxes!

Micro studies on weight and exercise, for example, show that exercise reduces weight. But looking across countries, societies, and time we don’t see big effects–indeed, calorie expenditure doesn’t vary much with exercise! Importantly, notice that the micro-estimates are correct. If you increase physical activity for the next 3 months, holding all else equal (which is possible for 3 months), you will lose weight. However, the micro estimates are difficult to extrapolate to permanent, long-run changes because there are complex, adaptive mechanisms governing weight, calorie consumption and energy expenditure.

The exercise paradox doesn’t mean that exercise isn’t good for you–the evidence on the benefits of exercise is extensive and credible. In the same way the birth-weight pollution paradox doesn’t mean that pollution isn’t harmful–the evidence on the costs of pollution is extensive and credible. In particular, it’s going to be much harder to adapt to pollution for heart disease, cancer, life expectancy and IQ than for weight. 

I am always impressed with papers that present big, obviously-true facts that most people have simply missed. Massenkoff is becoming a leader in this field.

Why the NYC congestion pricing plan is bad

I am seeing some critical comments on my latest column, mostly from people who are not reading it through, or in some cases they are making basic mistakes in economics.  Let me start with part of my conclusion:

I suspect that I could endorse a properly targeted version of congestion pricing for Manhattan, for instance, one that encouraged mass transit without discouraging density.

Many people are responding by making a version of that point and thinking it contradicts me.  Here are a few basic facts about the current proposal:

1. The off-peak price is too high at $17, relative to $23 for peak.

2. There is an odd and unjustified discrete notch at 60th St, which will cause further distortions of its own.

3. There is no difference for cars passing through and cars with passengers spending money or doing something productive in lower Manhattan.

This is not the traffic congestion charge you should be looking to implement.

A second line of responses (Erik B. and Alex) suggests that the congestion charge will not lower the flow of humans into Manhattan.  I am sorry, but demand curves slope downward!  The resulting auto commute does become more predictable and regular, but that holds only because there are fewer trips and to some extent because trips are time-shifted.  (Note that the small gap between the $17 and $23 prices suggests a small benefit from time shifting.)  Fewer outsiders will benefit from Manhattan, and those outsiders will skew richer and older.  The methods for improving the quality of the trip really do lower the number of trip-makers, probably both peak and off-peak.  It is not going to mean higher or even constant throughput for vehicles or humans.  (If you think it does, does that imply a big subsidy to car trips would get us to a carless city?  There are some non-linear scenarios where a congestion charge boosts throughput, such as when otherwise no cars move at all in extreme gridlock.  In reality, it seems cars are moving at about 12 mph in Manhattan.)

The actual possible gain — oddly not cited by the critics — is that a congestion charge might get a given visitor more effective time spent learning from Manhattan.  Though do note an offsetting effect — the higher the traffic problem, the more you will make each trip to Manhattan a grand and elaborate one, and it is your externality-less domestic time in Long Island that will suffer all the more.  So per person learning externalities from effective time spent in Manhattan could go either way, noting the number of visitors still goes down.

You might think such a congestion charge improves welfare (a sounder point than suggesting it will not have a standard price effect), but the whole point is that Manhattan density involves massive positive externalities, including for visitors and note that visitors also finance the  externality-rich activities of the natives:

In some urban settings, the clustering of human talent is of utmost importance. Manhattan is the densest urban area in the US, and it succeeds in large part because it is so crowded. You want to be there because other people want to be there. Even though I don’t live there, I nonetheless benefit from Manhattan, both when I visit and when I consume the television shows, movies, music, and art works that come, either directly or indirectly, out of this urban environment. Manhattan also supports America’s financial center, many tech start-ups, and much more.

I don’t want Manhattan to be less crowded, even though it probably would make many Manhattanites happier and less stressed. I want Manhattan to be efficient for me and others, not just for the residents. If there is any part of America where ideas rubbing together lead to great things, it is Manhattan (and the Bay Area). Arguably, Manhattan should be more crowded, at least if we consider everyone’s interest. That militates against congestion tolls, even though such charges are usually a good idea.

The actually useful solution is to make mass transit, most of all the subway, a reliable and predictable method of getting around.  Right now it is not.  (I doubt if lowering the already low subway prices gets you much.)

If you look at visits into Manhattan, whether by car or not, they already face lots of implicit taxes.  Those include poor roads, mediocre subway performance, high variance public infrastructure including on issues such as trash, pollution issues, some degree of crime, awful connecting infrastructure (NJ Transit anyone?) and much more.  And yet Manhattan is one of the world’s very top TFP factories and we are already taxing entry in so many different ways.

It does not make good economic sense to impose higher yet entry fees into that TFP factory.  Given that multiple externalities are present, the correct mix is to lower many different costs of entry and mobility (including within Manhattan), while shifting the relative use benefits toward mass transit and the subway.  Density really does have positive externalities here, and we all know how much idea makers and distributors are undercompensated.

There are a few more threads of responses on Twitter.  One is to note the noise and pollution costs of vehicles.  That is relevant, but fairly soon we will have lots more electric vehicles, which should be encouraged.  The tolls will become a revenue source that lasts forever and they will not be taken away, but the noise and pollution costs of the vehicles soon will be much lower.

Another thread is to argue that most of the people who drive will switch to mass transit if there is a congestion cost.  Some will, but we are asked to believe that a) current traffic congestion is so awful, b) people put up with it anyway, and c) they nonetheless can be easily nudged into taking mass transit.  That is an uncomfortable blend of views that fails to understand the initial motivations behind the car trips.  There are plenty of people with young kids, or elderly relatives, or multiple packages, or multiple stops, or unreliable mass transportation for getting back home at the end of the evening.  Many of those people cannot feasibly switch to mass transit and that is precisely why they put up with the bad traffic.  Say you finish your Manhattan doings at 10:45 p.m., and have to get back to your New Jersey home in a timely and safe manner.  The PATH train will work for some, but a lot of these people really do need cars to consummate the trip.

(It is a theoretically defensible argument to claim that this congestion tax is the only way of financing mass transit improvements. That may or may not be true, but if it is one should still “regret” the plan, which is not the attitude people are taking.  And are there guarantees this will lead to a refurbishment of the subway?  It has proven remarkably difficult to improve the system, and that is with rising NYC budgets.  Another argument that might work is if non-car visitors so hate seeing cars in Manhattan that the net human inflow, due to auto trips, goes down rather than up.  Do note however that the car trips are still helping to finance retail and cultural infrastructure that attracts the non-car visitors, so don’t just take complaints about cars at face value.  Furthermore this car hatred factor also should become less serious as we transition to electric vehicles.)

On net, do you think our most important cities should be more or less dense?  If you support YIMBYism, which surely does make traffic worse, have you not already answered that question?  So either become a NIMBY or — better yet — be a little more consistent applying your intuitions about the net positive externality from Manhattan density.  A simple way to put the point is that an export tax on your TFP factory is unlikely to be the best way to reduce congestion.

Markets in everything those new (Japanese) service sector jobs

Certain tech bosses are notoriously temperamental – so much so that conflict-averse folks have been known to put in their notice while the execs are on leave. But some Japanese employees have taken this a step further – actually employing an agent to quit their job for them.

The idea is to extricate themselves from delicate scenarios where they feel bullied to stay on board or are otherwise unwilling to leave for fear of being accused of “betraying” the corporation.

In a country renowned for its ultra conservative culture and hierarchical structure, those in the workforce who jump between jobs can be perceived as quitters, with all the shameful connotations attached to that branding.

Step forward the taishoku daiko – or “job-leaving agents” – that emerged in recent times to aid those who simply cannot tell their boss they’re off to pastures new.

Here is the full article, via the excellent Samir Varma.

The Running Seminar

Olivier Blanchard on Stan Fisher:

For a number of years, the informal thesis seminar was replaced by a running seminar, in which thesis students would run with Rudi and Stan around the Charles River. One of us would be asked to present his or her work while running. When the argument became too involved, Rudi or Stan would accelerate the pace to force the speaker to slow down their presentation. It made for simpler and clearer presentations.

Also explains why a 280 character limit has some advantages.

 Hat tip: David Beckworth

How will artificial intelligence affect real interest rates?

In standard models, a big dose of AI boosts productivity, which in turn boosts the return on capital, which then raises real interest rates.

I am less convinced.  For one thing, I believe most of the gains from truly fundamental innovations are not captured by capital.  Was Gutenberg a billionaire?  The more fundamental the innovation, the more the import of the core idea can spread to many things and to many sectors.

Furthermore, over the centuries real rates of return seem to be falling, even though there are some high productivity eras, such as the 1920s, during that time.  The long-run secular trend might overwhelm the temporary productivity blips, I simply do not know.

I do think AI is likely to increase the variance of relative prices.  Observers disagree where the major impacts will be felt, but possibly some prices will fall a great deal — tutoring and medical diagnosis? — and other prices will not.  Furthermore, only some individuals will enjoy those relative price declines, as many may remain skittish about AI for quite a few years, possibly an entire generation.

That heterogeneity and lack of stasis will make it harder to infer real interest rates from observed nominal interest rates.  Converting nominal to real variables is easiest under conditions of relative stasis, but that is exactly what AI is likely to disrupt.  Furthermore, real inflation rates, and thus real interest rates, across different individuals, are likely to increase in their variance.

Overall, that blurring of nominal and real will make the Fed’s job harder.  And it will be harder for Treasury to forecast what will be “forthcoming real interest rates.”

Stephen King on inflation targets

Inflation targets are not supposed to be mere fair weather friends. They serve at all times to reduce arbitrary and undemocratic redistributions of income and wealth and stealthy forms of “hidden” taxation, all of which monarchs, despots, autocrats and, yes, democratically elected governments have, via the printing press, exploited. While there’s nothing wrong with debating the correct target “number”, choosing to raise targets when inflation has persistently surprised on the upside smacks of no more than short-run political opportunism — precisely what central bank independence was supposed to avoid.

There is more, here is the full FT link.

The new Austrian business cycle theory

Of course that is not what they call it:

We study the relationship between credit expansions, macroeconomic fluctuations, and financial crises using a novel database on the sectoral distribution of private credit for 117 countries since 1940. We document that, during credit booms, credit flows disproportionately to the non-tradable sector. Credit expansions to the non-tradable sector, in turn, systematically predict subsequent growth slowdowns and financial crises. In contrast, credit expansions to the tradable sector are associated with sustained output and productivity growth without a higher risk of a financial crisis. To understand these patterns, we show that firms in the non-tradable sector tend to be smaller, more reliant on loans secured by real estate, and more likely to default during crises. Our findings are consistent with models in which credit booms to the non-tradable sector are driven by easy financing conditions and amplified by collateral feedbacks, contributing to increased financial fragility and a boom-bust cycle.

That is from a new NBER working paper by Karsten Müller and Emil Verner.

The rise of niche consumption

Over the last 15 years, individual households have concentrated their spending on a few preferred products. However, this is not driven by “superstar” products capturing larger market shares. Instead, households increasingly purchase different products from each other. As a result, aggregate spending concentration has decreased. We develop a model of heterogeneous household demand and use it to conclude that increasing product variety drives these divergent trends. When more products are available, households select products better matched to their tastes. This delivers welfare gains from selection equal to about half a percent per year in the categories covered by our data.

By Brent Neiman and Joseph Vavra, that is from a new issue of American Economic Journal: Macroeconomics.  Some of you may recall a related discussion of “matching” in The Complacent Class.