Category: Economics

Trying to sell your data

I have news for you people: your data ain’t worth nuthin’:

I was ready to call it quits—unless, that is, my proceeds reeled me back in. I tallied up my fiat (that’s money, to the rest of us): 162 WIB, 1 DAT, 0 NRN. My earnings, while eclectic, were worth approximately 0.3 cents.

That is from a recent Wired article by Gregory Barber, who tried to sell his data in the open market.  Yet data can be worth a good deal in the aggregate — just ask some of the major tech companies.  The economics here are a bit like the economics of voting.  If it were legal, and you tried to sell your vote and your vote alone, you might not get much more than 0.3 cents.  That vote is unlikely to prove decisive.  Yet average and marginal value do not coincide.  If someone could buy a whole block of votes, which in turn could swing an election, the price could be much higher.

The upshot is that giving individuals ownership of their data, so they can sell it, is unlikely to yield much, unless of course you think widespread consumer collusion will prove feasible.

For the pointer I thank the excellent Samir Varma.

What should I ask Mark Koyama and Noel Johnson

They are my colleagues, and both are economic historians, and they have an important forthcoming book Persecution and Toleration: The Long Road to Religious Freedom.  I will be doing a Conversation with them.

More generally they have worked on state capacity, nation building, why China evolved into such a large political unit, the Black Death, scapegoating, usury prohibitions in history, the economic impact of volcanic eruptions, and more.  I am always happy to see them.

Their home pages are here and here.  So what should I ask them?

The United States is Underpoliced and Overprisoned

Daniel Bier has a nice rundown on the ratio of police to prison spending comparing the United States to Europe. The US spends less on police and more on prisons than any European country.

Moreover, this is not because Europe spends less on criminal justice. Surprisingly, there is very little correlation between total spending and the ratio of police to prison spending. What we see in the graph below, for example, is that Europe is on the right, indicating more police to prison spending but not noticeably below the US states on total spending as a percent of GDP.

As I have argued before, the United States is underpoliced and overprisoned.

The top marginal tax rate

Taxing Top Incomes in a World of Ideas
Charles I. Jones∗
Stanford GSB and NBER September 26, 2018 — Version 0.5
Preliminary Abstract
This paper considers the taxation of top incomes when the following conditions apply: (i) new ideas drive economic growth, (ii) the reward for creating a successful innovation is a top income, and (iii) innovation cannot be perfectly targeted by a separate research subsidy — think about the business methods of Walmart, the creation of Uber, or the “idea” of Amazon.com. These conditions lead to a new term in the Saez (2001) formula for the optimal top tax rate: by slowing the creation of the new ideas that drive aggregate GDP, top income taxation reduces everyone’s income, not just the income at the top. When the creation of ideas is the ultimate source of economic growth, this force sharply constrains both revenue-maximizing and welfare-maximizing top tax rates. For example, for extreme parameter values, maximizing the welfare of the middle class requires a negative top tax rate: the higher income that results from the subsidy to innovation more than makes up for the lost redistribution. More generally, the calibrated model suggests that incorporating ideas and economic growth cuts the optimal top marginal tax rate substantially relative to the basic Saez calculation.

Via Illya Novak.  Here are the slides, here is the paper.

Two Teaching Resources

William Luther has put together an excellent list of Planet Money episodes that are keyed to the relevant chapters in Modern Principles of Economics. A similar list is also available for the excellent intermediate-micro text by Goolsbee, Levitt and Syverson.

For graduate students, Luke Stein has put together a 64 page “cheat sheet” (pdf) for basically the first 2 years of micro and macro theory. It’s not for everyone but would be great for studying for prelims at many top programs. This diagram summarizing key results in consumer theory was excellent.

My *Stubborn Attachments* essay for Cato Unbound

Here it is, here is one excerpt:

The classics of political philosophy deal with wealth and economic growth awkwardly at best. John Rawls, in his Theory of Justice and elsewhere, was suspicious of economic growth outright. Rawls feared that the savings rate of the first generation would lead to deprivation, and a diminishment of the well-being of the worst-off group (that first generation), and so he toyed with John Stuart Mill’s idea of the stationary state. Robert Nozick evinced a good understanding of markets in his Anarchy, State, and Utopia, but still he focused on individual libertarian rights as an underpinning for a free society. Like Nozick, I believe in individual rights, but I don’t think they settle most questions, and I don’t find modest levels of taxation under democratic conditions to be morally problematic.

In part I wrote Stubborn Attachments to respond to Derek Parfit’s Reasons and Persons, first published in 1984. In that wonderful book, Parfit wondered whether consequentialist reasoning could in fact produce coherent recommendations, for either individuals or societies. Yet there is no talk in Reasons and Persons of economic growth, or how a much better future might help resolve aggregation problems. Nonetheless Parfit did produce an important appendix on why the social discount rate should be zero, and you can think of Stubborn Attachments as trying to think through the broader implications of that argument.

And:

You should always ask what are the weakest points of any book, including this one. For me, it is the fear that progress has a mean-reverting character and that improvements end up as temporary rather than sustainable. In that case, the idea of enduring benefits would be an illusion, and even if pursuing such benefits were a good recommendation we might end up with the empty set in terms of policy recommendations. Historical pessimism would trump my recommendations, and we would be devoting our energies to the proverbial rearranging of the deck chairs on the Titanic.

Furthermore, Stubborn Attachments gives little guidance on how to offset the claims of humans versus the claims of nature. The benefits of economic growth are specified for human beings, and it is less clear that such economic growth is good for the animal kingdom as a whole, given the encroachments of humans and also the tortures of factory farming. If it is any consolation, however, I don’t think other philosophers have solved that problem either. Utilitarians, for instance, offer no plausible guidelines for weighting the well-being of non-human animals versus the well-being of humans, nor have they shown how it might be feasible to follow such guidelines.

Philosophical critiques will be forthcoming, so stay tuned!

The World Bank reappointment process

Kim had been a lame duck for some while, and few outsiders grasp how active is the role of the Board in the World Bank.  So it is probably good they got him out of there sooner rather than later.

I know you’re all aghast that Trump will pick the successor, but remember the good ol’ days when everyone fell apart when Bush picked Paul Wolfowitz, considered to be one of the architects of the Iraq War?  Whatever you think of Wolfowitz and his tenure at the Bank, it was not The End Times or even the beginning of the end.

It is very hard for a bad Bank president to shut down the works.  The World Bank has borrowed a lot of money and to pay it back the Bank needs to make profitable loans.  The mechanism for this to happen is already in place, and short of bankrupting the institution it is hard to imagine how a Bank president can totally gum up the works.  That is also why good Bank presidents find it hard to reform the place.

It is trendy to call for a “meritocratic” approach to this appointment and who could be opposed to that?  That said, there are plenty of plausible candidates ex ante, but it is not so easy to determine who will be effective ex post.  So if you read someone calling for meritocracy here, odds are they have some other political agenda in mind (which may be fine, but evaluate that agenda on its own terms).  There are plenty of Americans qualified at the highest level for this post.

I think America and yes DT should pick the next Bank president and should pick an American.  How do you think it is going to go the next time the Bank calls for more capital from the US and UK?  Whose certification there do you think is most important?  And which country is the most nervous about the World Bank doing something geopolitically unpopular, as say the UN repeatedly has done?  All this will run most smoothly if the U.S. feels, to some extent, that the Bank is its preserve.  And of course the “we’ve really got to up China’s quota and get it more involved” days are long since past.

You’re all out there saying Trump should not disengage America from the world, blah blah blah etc.  I agree.  But let’s be honest about what the terms of that engagement were in the first place, and be willing to swallow the whole package deal once again.

Here is some FT analysis, noting that not all of its suggested candidates are good ideas.

Border Crime

Alex Nowrasteh at Cato shows that crime is lower in counties adjacent to the Mexican border than in the rest of the United States:

If the entire United States had crime rates as low as those along the border in 2017, then the number of homicides would have been 33.8 percent lower, property crimes would have been 2.1 percent lower, and violent crimes would have dropped 8 percent.

Obviously border counties are different than non-border countries, more rural etc. Nevertheless, the raw fact is striking in comparison to the heated rhetoric about illegal immigration and American blood.

Ethereum Classic Double Spend Attack?

Yesterday, I warned that double spend attacks were cheap and particularly likely for smaller coins using standard hash algorithms. Coincidentally (?) later that day there was this:

It’s not entirely clear whether that is true or if there is an alternative explanation. Coinbase, however, says that approximately $500,000 was double spent. You can find a good discussion on Hacker News.  You can also find an interesting calculation of the cost of renting enough hashing power to 51% dominate various networks here. It’s cheap. The costs given are underestimates in one respect since they don’t include block rewards but overestimates in another as renting may not always be possible.

Here’s some back of the envelope calculations on the cost of the ETC attack. If I am reading the blockchain stats correctly, ETC has a block time of about 15 seconds and the chain was reorganized almost to a depth of 100 blocks or 1500 seconds, i.e. 25 minutes. The cost of dominating the ETC hasing power for an hour is around $5000. Thus, this attack could have been very profitable, even adding in substantial setup costs. Feel free to write in the comments if these numbers look wrong.

As I mentioned yesterday, it’s not surprising that this is happening now because with massive falls in prices in most cryptocurrencies there is an excess supply of computation. Expect more stress testing this year.

Hat tip: The excellent Jake Seliger.

Bitcoin is Less Secure than Most People Think

I spent part of the holidays poring over Eric Budish’s important paper, The Economic Limits of Bitcoin and the BlockChain. Using a few equilibrium conditions and some simulations, Budish shows that Bitcoin is vulnerable to a double spending attack.

In a double spending attack, the attacker sells say bitcoin for dollars. The bitcoin transfer is registered on the blockchain and then, perhaps after some escrow period, the dollars are received by the attacker. As soon as the bitcoin transfer is registered in a block–call this block 1–the attacker starts to mine his own blocks which do not include the bitcoin transfer. Suppose there is no escrow period then the best case for the attacker is that they mine two blocks 1′ and 2′ before the honest nodes mine block 2. In this case, the attacker’s chain–0,1′,2′–is the longest chain and so miners will add to this chain and not the 0,1… chain which becomes orphaned. The attacker’s chain does not include the bitcoin transfer so the attacker still has the bitcoins and they have the dollars! Also, remember, even though it is called a double-spend attack it’s actually an n-spend attack so the gains from attack could be very large. But what happens if the honest nodes mine a new block before the attacker mines 2′? Then the honest chain is 0,1,2 but the attacker still has block 1′ mined and after some time they will have 2′, then they have another chance. If the attacker can mine 3′ before the honest nodes mine block 3 then the new longest chain becomes 0,1′,2′,3′ and the honest nodes start mining on this chain rather than on 0,1,2. It can take time for the attacker to produce the longest chain but if the attacker has more computational power than the honest nodes, even just a little more, then with probability 1 the attacker will end up producing the longest chain.

As an example, Budish shows that if the attacker has just 5% more computational power than the honest nodes then on average it takes 26.5 blocks (a little over 4 hours) for the attacker to have the longest chain. (Most of the time it takes far fewer blocks but occasionally it takes hundreds of blocks for the attacker to produce the longest chain.) The attack will always be successful eventually, the key question is what is the cost of the attack?

The net cost of a double-spend attack is low because attackers also earn block rewards. For example, in the case above it might take 26 blocks for the attacker to substitute its longer chain for the honest chain but when it does so it earns 26 block rewards. The rewards were enough to cover the costs of the honest miners and so they are more or less enough to cover the costs of the attacker. The key point is that attacking is the same thing as mining. Budish assumes that attackers add to the computation power of the network which pushes returns down (for both the attacker and interestingly the honest nodes) but if we assume that the attacker starts out as honest–a Manchurian Candidate attack–then there is essentially zero cost to attacking.

It’s often said that Bitcoin creates security with math. That’s only partially true. The security behind avoiding the double spend attack is not cryptographic but economic, it’s really just the cost of coordinating to achieve a majority of the computational power. Satoshi assumed ‘one-CPU, one-vote’ which made it plausible that it would be costly to coordinate millions of miners. In the centralized ASIC world, coordination is much less costly. Consider, for example, that the top 4 mining pools today account for nearly 50% of the total computational power of the network. An attack would simply mean that these miners agree to mine slightly different blocks than they otherwise would.

Aside from the cost of coordination, a small group of large miners might not want to run a double spending attack because if Bitcoin is destroyed it will reduce the value of their capital investments in mining equipment (Budish analyzes several scenarios in this context). Call that the Too Big to Cheat argument. Sound familiar? The Too Big to Cheat argument, however, is a poor foundation for Bitcoin as a store of value because the more common it is to hold billions in Bitcoin the greater the value of an attack. Moreover, we are in especially dangerous territory today because bitcoin’s recent fall in price means that there is currently an overhang of computing power which has made some mining unprofitable, so miners may feel this a good time to get out.

The Too Big to Cheat argument suggests that coins are vulnerable to centralized computation power easily repurposed. The tricky part is that the efficiencies created by specialization–as for example in application-specific integrated circuits–tend to lead to centralization but by definition make repurposing more difficult.  CPUs, in contrast, tend to lead to decentralization but are easily repurposed. It’s hard to know where safety lies. But what we can say is that any alt-coin that uses a proof of work algorithm that can be solved using ASICs is especially vulnerable because miners could run a double spend attack on that coin and then shift over to mining bitcoin if the value of that coin is destroyed.

What can help? Ironically, traditional law and governance might help. A double spend attack would be clear in the data and at least in general terms so would the attackers. An attack involving dollars and transfers from banks would be potentially prosecutable, greatly raising the cost of an attack. Governance might help as well. Would a majority of miners (not including the attacker) be willing to fork Bitcoin to avoid the attack, much as was done with The DAO? Even the possibility of a hardfork would reduce the expected value of an attack. More generally, all of these mechanisms are a way of enforcing some stake loss or capital loss on dishonest miners. In theory, therefore, proof of stake should be less vulnerable to 51% attacks but proof of stake is much more complicated to make incentive-compatible than proof of work.

All of this is a far cry from money without the state. Trust doesn’t have the solidity of math but we are learning that it is more robust.

Hat tip to Joshua Gans and especially to Eric Budish for extensive conversation on these issues.

Addendum: See here for more on the Ethereum Classic double spend attack.

Airport food is hard

* space is at a huge premium, you can store very little
* knives are usually chained to the wall, and inventoried between shifts
* you can’t just bring supplies down the airport corridors when you need them. Items need to clear security.  It’s often a third party that’s engaged to do that, and it has to happen off hours.  Working with the third party can make sourcing ingredients challenging.
* customers have varied tastes and need to be served quickly.  Despite the high rents and challenging operating environment airports often require ‘street pricing’ (charge the same in the airport, perhaps plus 10%, versus what same item would cost on the outside)
* it’s not even the restaurant that’s managing the operation, usually they are licensing he concept.  For example there are only two vendors offering food serving in the Phoenix airport, despite all the different restaurant names.
* in Atlanta the way you get into the airport is ‘partnering with’ the former Mayor’s daughter
And consumers are pretty captive, security won’t let you bring many food items into the airport…

That is all from an email from Air Genius Gary Leff.

Do consumer interests shape trade policy?

Alas, it seems not, or so it is reported by Timm Betz and Amy Pond:

Why are some countries more open to trade than others? Prominent explanations emphasize differences in the influence of voters as consumers. Consumers benefit from lower prices. Because governments in democracies are more responsive to voters, they should implement lower tariffs. We develop and evaluate an implication of this line of argument. If lower tariffs are a response to consumer interests, lower tariffs should be concentrated on products most relevant to consumers. Using data on consumption shares across product categories, we report evidence that consumer interests do not account for lower tariffs. Governments place higher tariffs on goods with higher consumption shares, and we find no evidence that this relationship attenuates under more democratic institutions. There may be a variety of reasons why more democratic states are engaged in higher levels of international trade. A larger concern for consumer interests, however, is likely not among them.

Via the excellent Kevin Lewis.

How to reform scientific grants?

Using the economic theory of contests, Gross and Bergstrom modeled a controversial alternative: awarding grants instead by partial lottery. Under a partial lottery system, funds are awarded by random draw among a pool of high-ranking grants — the top 40 percent, for example. Since applicants would be aiming to clear a lower bar for a smaller prize — a shot at the lottery instead of a guaranteed payout for winning proposals — the contest theory model predicts that applicants would spend less time trying to perfect their applications, Bergstrom said.

Here is more from James Urton, and more here, via Charles Klingman and also Michelle Dawson.

The option value of civilization

Hi Tyler, I’m a longtime reader of MR and your more recent books.  I enjoyed Stubborn Attachments and was particularly interested in your discussion of the social discount rate.  Like you, I’m inclined to think that this rate should be very low, if not zero.  But more importantly, I think discounting is the wrong financial metaphor to use when discussing the moral worth of the present vs. the future.  Instead, we should look to option pricing theory.  As strange as it seems, option theory provides a neat way to unify many of the claims in Stubborn Attachments, and it gives us arguments for other important claims.  I’m a mortgage-backed securities trader, so embedded mispriced (or unpriced) optionality is always on my mind.

The key idea is that the total moral worth of the universe has some positively skewed distribution: there are more ways for things to be good than there are for it to be bad.  Let’s take this as a given for now; towards the end of this message I explore the consequences of relaxing this assumption.  If the moral worth of the universe has a distribution like this, we can draw an analogy to the payout profile of a call option.  We can imagine that we own an option on the underlying process that generates historical outcomes.

The first thing to recognize is that there’s a fundamental difference between the value of the option, and the value of the underlying.  Translated to moral terms, we should distinguish between the value of present, and the ultimate moral worth of the universe.  The former is just one input in calculating the latter, and the latter should be our primary concern.  We are only indirectly exposed to the value of the present.  We are also exposed to other factors, including the volatility of the historical process, and the social discount rate.

Let’s consider these in turn.  Options theory tells us that the value of an option increases in volatility — a trader would say that an option has positive “vega.”  Thus it makes perfect sense to see you arguing in Stubborn Attachments (and TGS and TCC) for increased social dynamism, risk taking, and openness to innovation.  If we can increase upside volatility, or reduce downside volatility, that’s even better than a symmetric increase in volatility.  My sense is that you view human rights as a way to mitigate downside risk.  This framework implies that some degree of downside mitigation can be traded for upside, a view which seems to be consistent with your view of human rights.

In the option-theoretical framework, the value of an option is decreasing in the discount rate.  But while the specific choice of discount rate changes the overall value of the option, it doesn’t change the sign of any of the sensitivities.  One advantage of this framework is that it can incorporate any particular social discount rate, without affecting the broader conclusions.

We can restate other common questions in this jargon.  Let’s start with the question of the value of the present vs. the value of the future.  In my view, that language is confused.  The value of the future is unknowable and can’t be affected directly.  We should stop talking as if we can.  We can only affect things like the value of the present and the volatility and overall trajectory of the historical process.  Rather than asking about the value of the present vs. the future, we should simply ask “how much should we care about the present, relative to the other things we can affect directly?”  In options jargon, the “delta” of an option is the derivative of the option’s value with respect to the value of the underlying process.  In moral terms, delta is interpreted as the derivative of the moral worth of the universe with respect to the value of the present.  “How much should we care about the present?” can be restated as “What is the delta the option?”

In standard theory, delta is positive (obviously) and increasing in the value of the underlying process.  That is, the second derivative of an option’s value with respect to the value of the underlying process is also positive.  Translated to moral terms: the more valuable the present, the more we should care about it.  This is intuitive, at least to me.  If you think the potential value of the future is vastly greater than the value of the present (i.e. if you think our option is only slightly in-the-money) you should care less about the value of the present.  But if the option is deep in-the-money — if civilization is secure and of great value — we should care more about increasing its value.

We can also think about partial sensitivities.  The most interesting is the sensitivity of delta with respect to volatility: as volatility increases, delta decreases.  In moral terms: the greater the range of historical outcomes, the less we should care about the precise moment we’re in now.  If we think history is highly dynamic, that the space of potential outcomes is very large, and that the far future can be vastly more valuable than the present, we should care less about the specific value of the present.  Similarly, if we think we’re close to the end of history, we should focus on incremental tweaks to improve the value of the present.  The arguments in Stubborn Attachments clearly tend toward the former view.

Finally, we can return to the original assumption, that the value of the future is biased to the upside.  I don’t think you argue for this explicitly, but it’s implied in your idea of Crusonia plants.  What would a negative or inverse Crusonia plant look like?  Could one even exist?  I think it’s vastly more likely for civilization and value to simply be wiped out, than it is for a monstrously evil future to occur.  But if you disagree, you can account for it in the option framework.  The more likely an evil future, the more symmetric (and less option-like) our payout profile.  You can think of humanity as owning some combination of a long call and a short put.  If our portfolio contains equal positions in each, our total delta is 1 — implying that the value of our options position is identical to the value of the underlying.  Translated into moral terms: the more symmetric we think future outcomes are, the more we should care about the present.

This is a new framework for me, but I think it is useful.  I’m sure there are other implications that haven’t yet occurred to me.  I can’t imagine I’m the first to come up with this framework: after all, Cowen’s Second Law states that there’s a literature on everything.  There’s perhaps some precedent in Nassim Taleb’s work and his popularization of options theory and its usefulness in non-financial contexts.  I’m sure someone in the Effective Altruism community has kicked these ideas around; I’m just not aware of it.  If you know of any related work, I’d love to be pointed in the right direction.

That is from MR reader CK.