Category: Economics

The one-child policy and Chinese child trafficking

In the past 40 years, a large number of children have been abandoned by their families or have been abducted in China. We argue that the implementation of the one-child policy has significantly increased both child abandonment and child abduction and that, furthermore, the cultural preference for sons in China has shaped unique gender-based patterns whereby a majority of the children who are abandoned are girls and a majority of the children who are abducted are boys. We provide empirical evidence for the following findings: (1) Stricter one-child policy implementation leads to more child abandonment locally and more child abduction in neighboring regions; (2) A stronger son-preference bias in a given region intensifies both the local effects and spatial spillover effects of the region’s one-child policy on child abandonment and abduction; and (3) With the gradual relaxation of the one-child policy after 2002, both child abandonment and child abduction have dropped significantly. This paper is the first to provide empirical evidence on the unintended consequences of the one-child policy in terms of child trafficking in China.

That is the abstract of a new paper by Xiaojia Bao, Sebastian Galiani, Kai Li, and Cheryl Xiaoning Long.

William Shatner on mortgages

 

I am once again reminded how expected returns is a critical concept in macroeconomics.  Circa 1985, you could expect to earn much higher returns putting money in a certificate of deposit, thus increasing the opportunity of buying a house back then.  No, you would not earn 12% on your money, but still we need to reckon with the higher opportunity cost of funds to calculate the true home purchase/mortgage cost at that time.

Wealth by Generation and Age

Kurt Andersen made the following arresting tweet

Fraction of all US wealth owned by Boomers & Gen-Xers when the average member of each was age 35:

Boomers, 1989 21%
GenX, 2008 8%
The average Millennial turns 35 in 2023. Right now they own 3%.

There will surely be political implications.

Definitions: Baby Boomer=born 1946-1964, Gen X=born 1965-1980, and Millennial=born 1981-1996.

You can’t take it with you, so this will change eventually but perhaps too late. Think of this as the Prince Charles effect. Prince Charles hasn’t offed his mother and led a revolution yet but in an earlier age he probably would have and surely he has thought about it. Similarly, perhaps the demand among some Gen-Xers and Millennials for wealth redistribution can be understood as a demand to get their share of the pot before they are old and tired.

The data, which are from the Federal Reserve are here.

NIMBY build for the homeless solve for the equilibrium

At an average cost of $531,373 per unit – with many apartments costing more than $600,000 each –  building costs of many of the homeless units will exceed the median sale price of a market-rate condominium. In the city of Los Angeles, the median price for a condo is $546,000, and a single-family home in Los Angeles County has a median price of $627,690, the study states.

Here is further information, via Rob Moore.

Medicare for all is not entirely efficient

There is increasing interest in expanding Medicare health insurance coverage in the U.S., but it is not clear whether the current program is the right foundation on which to build. Traditional Medicare covers a uniform set of benefits for all income groups and provides more generous access to providers and new treatments than public programs in other developed countries. We develop an economic framework to assess the efficiency and equity tradeoffs involved with reforming this generous, uniform structure.We argue that three major shifts make a uniform design less efficient today than when Medicare began in 1965. First, rising income inequality makes it more difficult to design a single plan that serves the needs of both higher- and lower-income people. Second, the dramatic expansion of expensive medical technology means that a generous program increasingly crowds out other public programs valued by the poor and middle class. Finally, as medical spending rises, the tax-financing of the system creates mounting economic costs and increasingly untenable policy constraints. These forces motivate reforms that shift towards a more basic public benefit that individuals can “top-up” with private spending.If combined with an increase in other progressive transfers, such a reform could improve efficiency and reduce public spending while benefiting low income populations.

That is from a new NBER working paper by Mark Shepard, Katherine Baicker, and Jonathan S. Skinner.

My Conversation with Mark Zuckerberg and Patrick Collison

Facebook tweets:.

@patrickc, CEO of Stripe, and @tylercowen, economist at George Mason University, sit down with our CEO, Mark Zuckerberg to discuss how to accelerate progress.

Video, audio, and transcript here, part of Mark’s personal challenge for the year, an excellent event all around.  This will also end up as part of CWT.

Why is labor mobility slowing in America?

There is a new and quite interesting paper on this topic, by Kyle Mangum and Patrick Coate:

This paper offers an explanation for declining internal migration in the United States motivated by a new empirical fact: the mobility decline is driven by locations with typically high rates of population turnover. These “fast” locations were the Sunbelt centers of population growth during the twentieth century. The paper presents evidence that as spatial population growth converged, residents of fast locations were subject to rising levels of preference for home. Using a novel measure of home attachment, the paper develops and estimates a structural model of migration that distinguishes moving frictions from home utility. Simulations quantify the role of multiple explanations of the mobility decline. Rising home attachment accounts for nearly half of the decline, roughly as large as the effect of an aging population, and is consistent with the spatial pattern. The implication is recent declining migration is a long run result of population shifts of the twentieth century.

For the pointer I thank the excellent Tyler Ransom.

Learning about the Roots of Progress from the History of Smallpox Eradication

The excellent Jason Crawford at the Roots of Progress has a long-form read on the history of smallpox eradication. It’s an important and insightful piece especially because Jason is interested not just in what happened but why it happened when and where it did and what the lessons are for today:

In 1720, inoculation had been a folk practice in many parts of the world for hundreds of years, but smallpox was still endemic almost everywhere. The disease had existed for at least 1,400 and probably over 3,000 years. Just over 250 years later—it was gone.

Why did it take so long, and how did it then happen so fast? Why wasn’t inoculation practiced more widely in China, India, or the Middle East, when it had been known there for centuries? Why, when it reached the West, did it spread faster and wider than ever before—enough to significantly reduce and ultimately eliminate the disease?

The same questions apply to many other technologies. China famously had the compass, gunpowder, and cast iron all before the West, but it was Europe that charted the oceans, blasted tunnels through mountains, and created the Industrial Revolution. In smallpox we see the same pattern. [Why?]

  • The idea of progress. In Europe by 1700 there was a widespread belief, the legacy of Bacon, that useful knowledge could be discovered that would lead to improvements in life. People were on the lookout for such knowledge and improvements and were eager to discover and communicate them. Those who advocated for inoculation in 1720s England did so in part on the grounds of a general idea of progress in medicine, and they pointed to recent advances, such as using Cinchona bark (quinine) to treat malaria, as evidence that such progress was possible. The idea of medical progress drove the Suttons to make incremental improvements to inoculation, Watson to run his clinical trial, and Jenner to perfect his vaccine.
  • Secularism/humanism. To believe in progress requires believing in human agency and caring about human life (in this world, not the next). Although England learned about inoculation from the Ottoman Empire, it was reported that Muslims there avoided the practice because it interfered with divine providence—the same argument Reverend Massey used. In that sermon, Massey said in his conclusion, “Let them Inoculate, and be Inoculated, whose Hope is only in, and for this Life!” A primary concern with salvation of the immortal soul precludes concerns of the flesh. Fortunately, Christianity had by then absorbed enough of the Enlightenment that other moral leaders, such as Cotton Mather, could give a humanistic opinion on inoculation.
  • Communication. In China, variolation may have been introduced as early as the 10th century AD, but it was a secret rite until the 16th century, when it became more publicly documented. In contrast, in 18th-century Europe, part of the Baconian program was the dissemination of useful knowledge, and there were networks and institutions expressly for that purpose. The Royal Society acted as an information hub, taking in interesting reports and broadcasting the most important ones. Prestige and acclaim came to those who announced useful discoveries, so the mechanism of social credit broke secrets open, rather than burying them. Similar communication networks spread the knowledge of cowpox to from Fewster to Jenner, and gave Jenner a channel to broadcast his vaccination experiments.
  • Science. I’m not sure how inoculation was viewed globally, but it was controversial in the West, so it was probably controversial elsewhere as well. The West, however, had the scientific method. We didn’t just argue, we got the data, and the case was ultimately proved by the numbers. If people didn’t believe it at first, they had to a century later, when the effects of vaccination showed up in national mortality statistics. The method of meticulous, systematic observation and record-keeping also helped the Suttons improve inoculation methods, Haygarth discover his Rules of Prevention, and Fewster and Jenner learn the effects of cowpox. The germ theory, developed several decades after Jenner, could only have helped, putting to rest “miasma” theories and dispelling any idea that one could prevent contagious diseases through diet and fresh air.
  • Capitalism. Inoculation was a business, which motivated inoculators to make their services widely available. The practice required little skill, and it was not licensed, so there was plenty of competition, which drove down prices and sent inoculators searching for new markets. The Suttons applied good business sense to inoculation, opening multiple houses and then an international franchise. They provided their services to both rich and poor by charging higher prices for better room and board during the multiple weeks of quarantine: everyone got the same medical procedure, but the rich paid more for comfort and convenience, an excellent example of price differentiation without compromising the quality of health care. Business means advertising, and advertising at its best is a form of education, helping people throughout the countryside learn about the benefits of inoculation and how easy and painless it could be.
  • The momentum of progress. The Industrial Revolution was a massive feedback loop: progress begets progress; science, technology, infrastructure, and surplus all reinforce each other. By the 20th century, it’s clear how much progress against smallpox depended on previous progress, both specific technologies and the general environment. Think of Leslie Collier, in a lab at the Lister Institute, performing a series of experiments to determine the best means of preserving vaccines—and how the solution he found, freeze-drying, was an advanced technology, only developed decades before, which itself depended on the science of chemistry and on technologies such as refrigeration. Or consider the WHO eradication effort: electronic communication networks let doctors be alerted of new cases almost immediately; airplanes and motor vehicles got them and their supplies to the site of an epidemic, often within hours; mass manufacturing allowed cheap production at scale of needles and vaccines; refrigeration and freeze-drying allowed vaccines to be preserved for storage and transport; and all of it was guided by the science of infectious diseases—which itself was by that time supported by advanced techniques from X-ray crystallography to electron microscopes.

Read the whole thing and follow the roots of progress.

Is Elon Musk Prepping for State Failure?

FuturePundit on twitter has an interesting theory of Elon Musk’s technology portfolio, namely a lot of it will be very valuable for living in a failed state.

Solar panels, for example, are a necessity when the state can’t deliver power reliably, as is now the case in California.

Solar panels plus the Tesla give you mobility, even if Saudi Arabia goes up in smoke and world shipping lines are shut down.

Starlink, Musk’s plan for 12,000 or more cheap, high-speed internet satellites, will free the internet from reliance on any terrestrial government.

Musk’s latest venture, the truck, certainly fits the theme and even if the demonstration didn’t go as well as planned isn’t it interesting that the truck is advertised as bulletproof. Mad Max would be pleased.

Image result for musk truck

And what will you be carrying in your Tesla truck? One of these for sure.

Finally, the Mars mission is the ultimate insurance policy against failed states.

An argument about monetary policy I had never heard before

This paper studies a model in which a low monetary policy rate lowers the cost of capital for entrepreneurs, potentially spurring productive investment. Low interest rates, however, also induce entrepreneurs to lever up so as to increase payouts to equity. Whereas such leveraged payouts privately benefit entrepreneurs, they come at the social cost of reducing their incentives thereby lowering productivity and discouraging investment. If leverage is unregulated (for example, due to the presence of a shadow-banking system), then the optimal monetary policy seeks to contain such socially costly leveraged payouts by stimulating investment in response to adverse shocks only up to a level below the first-best. The optimal monetary policy may even consist of “leaning against the wind,” i.e., not stimulating the economy at all, in order to fully contain leveraged payouts and maintain productive efficiency.

That is from a new NBER working paper by Viral V. Acharya and Guillaume Plantin.

Since I don’t see share buybacks as “draining” the economy of investment (the funds simply get recycled to other companies and ventures), I can’t agree with this argument.  Still, if you are worried about buybacks, perhaps you should think twice about always pushing for easier monetary policy.

More Pregnancy, Less Crime

When it comes to crime, economists focus on deterrence. Deterrence works but it’s not the only thing that works. Simple things like better street lighting can reduce crime as can high-quality early education or psychological interventions such as cognitive behavioral therapy. The sociological literature has emphasized that crime is about preferences as well as constraints. Life-events or turning points such as marriage and childbirth, for example, can greatly change crime preferences. The sociological literature is mostly from case studies but in an excellent new paper, Family Formation and Crime, Maxim Massenkoff and Evan Rose (both on the job market from Berkeley) demonstrate these insights in a huge dataset.

A big part of what makes their paper compelling is that almost all of the results are blindingly clear in the raw data or using simple analysis. Here, for example, is the crime rate for women (drug, DUI, economic, or property destruction crimes) in the years before pregnancy, during pregnancy (between the red dotted lines) and after birth. Crime rates fall dramatically with pregnancy and in the three years after birth they are 50% lower on average than in the years before pregnancy.

Pregnancy imposes some physical limits on women but the effects are also very large for men whose crime rates fall by 25-30% during pregnancy of their partner and continue at that lower rate for years afterwards. Keep in mind that in our paper on three strikes, Helland and I found that the prospect of an additional twenty years to life (!) reduce criminal recidivism by just ~17%, so the effect of pregnancy is astoundingly large.

It’s not obvious what the policy implications are. Have children at a younger age doesn’t sound quite right, although in an analysis on teen births Massenkoff and Rose do indeed show that whatever the costs of teen pregnancy there are some offsetting benefits in reduced crime of the parents. More generally, however, there are policy implication if we think beyond the immediate results. First, these results show that crime isn’t simply a product of family background, poverty and neglect. Crime is a choice.

In Doing the Best I Can: Fatherhood in the Inner City, Edin and Nelson relay the following anecdote (quoted in Massenkoff and Rose):

Upon hearing the news that the woman they are “with” is expecting, men such as Byron are suddenly transformed. This part-time cab driver and sometime weed dealer almost immediately secured a city job in the sanitation department (p. 36).

Byron chose to change and he did so based on the rational expectation of a future event. Massnekoff’s and Rose show that these choices are common.

Instead of thinking of these results as being about pregnancy and marriage we should ask what is it about pregnancy and marriage that makes people reduce crime? Love, responsibility and long-run thinking are all at play. In economic terms, pregnancy reduces discount rates and gives men and women a reason to invest in human capital and work for the future. Children and marriage play a large role in socializing and “civilizing” both men and women but they surely can’t be the only such factors. Indeed, although men and women on average reduce their crime rates dramatically on pregnancy this is mostly coming from men and women who had high rates to begin with–there are plenty of men and women who don’t much reduce their crime rates on pregnancy because they were already low–in a way, these men and women were pre-socialized so how do we extend the benefits of pregnancy to the expectation of pregnancy or how can we widen the effect to other factors that can also civilize?

A journal editor speaks about referees (and authors)

What are the most common errors that reviewers make when reviewing health papers for you?

There are three errors that reviewers make. First, many junior reviewers write really long reviews to show that they were thorough. This doesn’t help—if the paper has 8 problems then the editor is often most interested in the top two.

Second, some reviewers can also have really high standards in a way that creates lots of Type II errors—never accepting a paper. At the Review of Economics and Statistics, we were writing to accept more papers, but reviewers made this hard by using an impossible standard for identification.

Finally, and this is rare, but a by-product of the “triple-aim” (described above): some reviewers write reports with innuendo and meanness—I never went back to them and still think very poorly of these individuals. To be mean, when protected by the veil of an anonymous review process, is a deep pathology.

My advice is: write short reviews—don’t over referee or rewrite the paper—you are the reviewer, not the author. Be kind. Be kind. Be kind. Kindness is not the same as low standards, but posing questions and raising challenges with curiosity and humility. Always remember that an editor is reading the review, sharing it with other editors, and one’s nastiness is noted and remembered especially when directed towards a new member of the profession.

That is from an interview with Amitabh Chandra of ReStat.

The wealth tax and non-profits

That is the topic of my latest Bloomberg column, here is one excerpt:

Or imagine how art markets might be affected by a wealth tax. Rather than keeping their art collections private, many more billionaires would donate that art to museums and other nonprofits. This appears to be a good outcome. But it would exacerbate one of the art world’s worst problems, which is inflated appraisals for tax purposes. At any rate, America’s museums do not have the space or resources to display and look after all of these paintings and sculptures; it is already common for a museum to display no more than 5% or 10% of its collection.

Essentially, a lot of art would be removed from circulation, stored in warehouses largely for tax reasons. Along the way, Christie’s and Sotheby’s might go bankrupt, as well as many art galleries, as the demand to buy art would plummet. You may think that the demise of a few galleries and auction houses is a small price to pay to reduce wealth inequality. But consider that artists, too, need to make a living…

The U.S. has created the most dynamic and effective nonprofit sector in the world. It rests on a delicate balance of private support and some indirect (not too much) government subsidy. America interferes with that balance at its peril.

There is much more at the link.

Eliminate Journal Formatting on First Submission!

Many years ago I was incredulous when my wife told me she had to format a paper to meet a journal’s guidelines before it was accepted! Who could favor such a dumb policy? In economics, the rule is you make your paper look good but you don’t have to fulfill all the journal’s guidelines until after the paper is accepted.

In The high resource impact of reformatting requirements for scientific papers Jian et al. calculate the cost of reformatting–it’s $1.1 billion dollars annually! True, the authors simply surveyed 203 authors for the time it took to reformat and then multiplied that by an hourly wage and then multiplied that by all article submissions so, at best, this is a back of the envelope calculation. What is beyond doubt, however, is that reformatting typically takes several tedious hours for a high-wage professional.

Our data show that nearly 91% of authors spend greater than four hours and 65% spend over eight hours on reformatting adjustments before publication…Among the time-consuming processes involved are adjusting manuscript structure (e.g. altering abstract formats), changing figure formats, and complying with word counts that vary significantly depending on the journal. Beyond revising the manuscript itself, authors often have to adjust to specific journal and publisher online requirements (such as re-inputting data for all authors’ email, office addresses, and disclosures). Most authors reported spending “a great deal” of time on this reformatting task. Reformatting for these types of requirements reportedly caused three month or more delay in the publication of nearly one fifth of articles and one to three month delays for over a third of articles.

And for what? Most papers will be rejected so the reformatting serves no purpose.

What frustrates me about this inanity is that, as far as I can tell, almost no one benefits! We simple seem stuck in an inefficient equilibrium. What hope is there to deregulate zoning or pass a carbon tax–where benefits exceed costs but you can understand why the process is difficult because some people gain from the inefficiency–when we can’t even fix wasteful journal formatting policy? Can Elsevier or other publishing heavyweight not unilaterally move us to the Pareto frontier! Pick up those $1.1 billion bills! Come on humanity, just do it!

Addendum: Economics is good on the reformatting score but n.b. “A prior survey-based research study on biomedical journal publications times noted a median time of first submission to acceptance of five months but this seemingly included all delays in the publication process (including review time and changes to improving scientific content).” Five months would be unheard of speed in economics where you are lucky if you get referee comments in five months!

Are central banks manipulating asset prices?

That case still needs to be made, here is Cullen Roche:

1) Are Central Banks “pushing money” on people? 

The whole premise of the first paragraph is that Central Banks have implemented QE and forced money onto people which has resulted in a lot of asset chasing.¹ I’ve never understood this mentality to be honest. When the Fed engages in QE they expand their balance sheet and buy a bond from the private sector. In a low inflation environment bonds become increasingly similar to cash so these sellers of bonds are selling one cash-like instrument for another. As a result, the private sector ends up holding more low interest bearing cash-like instruments and the Fed holds higher interest bearing cash-like instruments. So the whole basis of this theory is that if someone who was already holding a risk averse asset then sells that risk averse asset for something very similar then they will suddenly become less risk averse and run out and drive up stocks? That doesn’t even make sense. If I have a moderate risk tolerance and hold a portfolio of 50% bonds and 50% stocks and I want to sell my bonds because I read a scary article about how bonds are super risky because interest rates are going to rise (more on this later) then I will swap out some part of my 50% bonds for cash or something else that’s relatively low risk (to maintain my moderate risk profile). I don’t swap out my whole bond position for a stock position or a role of the dice at the roulette wheel.

Anyhow, the evidence doesn’t even mesh with this. Global Central Banks have been implementing QE for 10 years now. The average annual return of the Vanguard Total World Index is 8.9% per year over that period. That is 0.02% higher than the average 35 year return. So, if investors are acting crazy today then they’ve been crazy for 35 years. Which might be true. It’s probably true. I actually think investors are usually kind of crazy. But they’re not any crazier today than they were 35 years ago.

Sensible throughout.