Category: Economics

Libra as a medium of exchange

I’ve already outlined the case for how Libra might be able to significantly lower the 7-8% costs and commissions currently charged for making remittances.  That would make Libra a widely used means of payment.  I am less optimistic, however, about Libra being widely used as a medium of exchange.

Let’s say the core rate of inflation in a country is eight percent, which is about the current rate of price inflation in Myanmar.  It is still not the case that an unbanked farmer holds currency for the entire year (he is more likely to buy land or animals as a means of large-scale saving).  I am not sure what monetary velocity is for this group of people (readers?), but say currency turns over four times a year on average.  That is in essence a two percent tax on currency holdings, not an eight percent tax.  I don’t think that individuals will switch monies for such a small gain, noting that decreasing their demand for money (i.e., increasing currency velocity) is another possible response.

If an unbanked farmer is in debt, I would think the velocity of currency would be well over 4x a year (consider monthly microcredit borrowings and repayments), although certainly some MR readers can enlighten us here.

A few decades ago, when inflation was much more common, it was generally believed that people were not very interested in switching monies until inflation rates hit about forty percent.  I am not sure if that same number would hold today, but of course that is pretty high.  Furthermore, the countries with the highest inflation rates, such as Venezuela, can be impossible to do business in.

Don’t forget that Libras are specified as paying zero nominal interest throughout.

You might think that Libras have some advantages over current e-monies and smart phone banking systems.  It is hard to make that judgment for a product which does not exist yet, but it is unlikely those advantages will run close to the range of seven to eight percent.

For those reasons I am more optimistic about Libra as a means of payment — most of all for remittances — than as a general medium of exchange.

Libra and remittances

Dante Disparte, as interviewed by Ben Thompson ($$, but you should subscribe to Ben):

One example is the use case of international money transfers or remittances. Globally, the remittance cash flow is projected to be about $715 billion in 2019, and on average…you are seeing between seven and ten percent of transfer costs, and in some instances much higher than that in the teens. For a product and an outcome from the sender and receiver point of view, that is not only very slow, it often takes a few days to clear on the receiving end, it is [extremely expensive]. There are direct payment rails that are just technology powered that do a lot in terms of advancing efficiency, but pre-blockchain it would have been very, very hard to conceive of a network of international payments that could do that at near zero cost instantaneously while at the same time not sacrificing the type of ledgering and transaction information that would enable the world to begin to do that securely. So that would be one amazing use case that could put billions and billions of dollars back into the market by eliminating as many of these fees as possible, while at the same time putting billions of dollars into the hands of people around the world in real time.

Here is my current understanding of Libra/Calibra, at least within this particular context, noting again that my understanding may be wrong or incomplete.  These transfers would not go through the current banking system as we know it, but rather through a blockchain with say 100 or so (quite legitimate) participants enforcing some kind of “proof of stake” standard.  Some form of “proof of stake-equivalent of mining fees” would have to be paid, either explicitly or implicitly, and those arguably could be much lower than current remittance costs, noting that the actual operation of proof of stake in this setting remains to me murky.  Still, it would largely avoid the current mining fees associated with Bitcoin.  On net, one is trading in the current regulatory and clearing and Western Union branch costs for these future proof of stake costs.  Do you think the Libra Association can run a proof of stake system for less say than $100 billion?

“But don’t you have to convert your Libras back into mainstream fiat currencies?”  Well, maybe you might, but that is simply the cost of showing up at the relevant financial institutions and claiming redemption.  Those costs also could be much lower than the current fees associated with remittances.  What is sent through the blockchain network simply can be Libras, as I understand it, with varying assumptions on how much people will hold Libras rather than converting them.

To use a historical analogy, think of this as substituting “the transfer of paper claims to gold” for “claims to gold,” but in a one hundred percent reserves setting.  It can be (and indeed was) much cheaper to send around the paper than the gold, and yet the paper still was a claim to the gold.  The Libra is a kind of parallel, redeemable currency, legally not within standard banking systems, but still redeemable in terms of mainstream fiat currencies which are within standard banking systems.  “Create a synthetic claim which can be traded more cheaply” would be my version of the ten-word slogan.

Another slightly wordier slogan might be: “let’s actually separate the means of payment from the medium of exchange by creating a new synthetic asset, because those two things actually should not be the exact same asset.”

Of course it still remains to be seen in which countries regulators will allow this to happen.  How persuasive is the promise of one hundred percent reserves?  I don’t mean to speak for Libra/Calibra here, but I believe they are suggesting (or implying?) that the proof of stake system for making and validating transfers could in essence enforce relevant regulations against money laundering, illegal transfers, and the like.

It is a quite separate (but possible) claim to believe that libras could serve as an effective medium of exchange at a retail level, and perhaps I will cover that in a separate post.  That would mean that both the medium of exchange and means of payment should be new and different assets, a much stronger claim.

Here are my earlier questions about Libra, with responses.

How to fight neo-Nazis is beer supply really so inelastic in the short run?

Residents in Ostritz, Germany, banned together recently to stick it to a group of neo-Nazis in the only way they know how — by buying up all the town’s beer before they do.

More than 200 crates were scooped up by locals as they prepared for the arrival of “Shield and Sword” (SS) festival attendees, who have a notorious reputation for being far-right activists obsessed with Nazi culture, the BBC reports

Residents began buying up all the booze because they were worried that festivalgoers would try to purchase some at local stores and supermarkets, according to the BBC, which cited interviews with the German newspaper Bild.

Here is the full article, via Ian Bremmer.

Will price transparency in health care markets work?

The scholarship suggests that more transparency in health care could backfire, causing prices to rise instead of fall…

“I don’t know if you have had the misfortune of having health economists tell you about Danish cement,” said Amanda Starc, an associate professor of strategy at the Kellogg School of Management at Northwestern, one of several scholars who mentioned a paper with a punny name: “Government-Assisted Oligopoly Coordination? A Concrete Case.”

“Everybody loves the Danish concrete example!” said Matthew Grennan, an assistant professor of health care management at Wharton, who has studied the effects of price transparency on hospital purchases.

The Danish government, in an effort to improve competition in the early 1990s, required manufacturers of ready-mix concrete to disclose their negotiated prices with their customers. Prices for the product then rose 15 percent to 20 percent.

The reason, scholars concluded, is that there were few manufacturers competing for business. Once companies knew what their competitors were charging, it was easy for them to all raise their prices in concert. They could collude without the sort of direct communication that would make such behavior illegal. It wasn’t easy for new companies to undercut the existing ones, because the material hardens so fast that you can’t ship it far…

Research on gasoline markets has likewise found that publicizing prices appears to enable collusion in places where there are only a few competitors. But among more plentiful Israeli supermarkets, a database of prices appears to have lowered them.

Scholars at the Federal Trade Commission put out a paper in 2015 cautioning against the kind of price transparency that the president is embracing.

That is all from Margot Sanger-Katz (NYT).  And via Ilya Novak, here is a recent piece by Zach Y. Brown:

This paper examines whether information frictions in the market for medical procedures lead to higher prices and price dispersion in equilibrium. I use detailed data on medical imaging visits to examine the introduction of a state-run website
providing information about out-of-pocket prices for a subset of procedures. Unlike other price transparency tools, the website could be used by all privately insured individuals in the state, potentially generating both demand- and supply-side effects. Exploiting variation across procedures available on the website as well as the timing of the introduction, estimates imply a 3 percent reduction in spending for visits with information available on the website. This is due in part to a shift to lower cost providers, especially for patients paying the highest proportion of costs. Furthermore, supply-side effects play a significant role—there are lower negotiated prices in the long-run, benefiting all insured individuals even if they do not use the website. Supply-side effects reduce price dispersion and are especially relevant when medical providers operate in concentrated markets. The supply-side effects of price transparency are important given that high prices are thought to be the primary cause of high private health care spending in the US.

I hope we learn more about this soon.

Are quality-adjusted medical prices declining for chronic disease?

At least for diabetes care, the answer seems to be yes, according to Karen Eggleson, et.al.:

We analyze individual-level panel data on medical spending and health outcomes for 123,548 patients with type 2 diabetes in four health systems. Using a “cost-of-living” method that measures value based on improved survival, we find a positive net value of diabetes care: the value of improved survival outweighs the added costs of care in each of the four health systems. This finding is robust to accounting for selective survival, end-of-life spending, and a range of values for a life-year or, equivalently, to attributing only a fraction of survival improvements to medical care.

That is from a new NBER working paper.  One way to read this paper is to be especially optimistic about medical progress, and also the U.S. health care system and furthermore the net contribution of science and medicine to economic growth.  Another way to read this paper is to be especially pessimistic about human discipline and the ability to follow doctor’s orders.

Tearing Up an Economics Textbook

Robert Samuelson, the economics columnist, has written a column titled, It’s time we tear up our economics textbooks and start over. What he actually says is we should tear up Greg Mankiw’s Principles of Economics:

But as a teaching device, [Mankiw’s] “Principles of Economics” has fallen behind. There’s little analysis of the impact of the Internet and digitalization on competition and markets. I couldn’t find either Apple or Facebook in the index; Google gets a few mentions.

Likewise, little attention is paid to the 2007-2009 Great Recession, the worst business downturn since the Great Depression, which also receives scant coverage relative to its significance. (Together, the two recessions receive about three pages, from 725 to 727.)

There’s some misleading information about the Great Recession and parallel financial crisis. On Page 691, we have this: “Today, bank runs are not a major problem for the U.S. banking system or the Fed.” This would surely surprise the Fed, which poured trillions of dollars into the economy to prevent financial collapse.

Mankiw’s assertion can be defended on narrow, technical grounds. There was no run by retail depositors (people like you and me) against commercial banks. We were protected by deposit insurance. But there was a huge run — a panic — by institutional investors (pension funds, hedge funds, insurance companies, endowments) that withdrew funds from traditional banks, investment banks and the commercial paper market.

…Mankiw’s textbook needs more than a touch-up; it needs a major overhaul. It has very little history: for example, the industrialization of the 19th century. Nor is there much about the expansion of the global economy. China gets a few mentions.

The market for principles textbooks, however, is competitive and there are alternatives to Mankiw. Krugman and Wells, for example, have a lot of very interesting boxes on the world economy and historical events. Modern Principles of Economics doesn’t use boxes but we illustrate the principles of economics with historical events and, of course, we use tech companies such as Facebook and Apple to discuss network effects and coordination games. Samuelson is a bit harsh on Mankiw, however, because it’s very easy to overwhelm students with details. Like physics, economics is powerful because it explains many things with a handful of principles. It’s true that Mankiw’s book doesn’t have much history or color–his paradigmatic market is the market for ice cream–but abstraction can focus attention. The tradeoff, of course, is that it can also lead to vanilla economics. But the Mankiw text is clearly written and the micro text is especially well organized, one reason we chose a similar organization for Modern Principles.

In Modern Principles we illustrate the ideas with more interesting markets but we work with them repeatedly so students don’t become overwhelmed. Our paradigmatic market is the market for oil. We use it to teach supply and demand, cartels, and the importance of real macroeconomic shocks. Using the market for oil also lets us teach about some important events in world history such as the OPEC oil crisis and the industrialization of China.

Samuelson is correct that the financial crisis was a run on the shadow banks but he’s incorrect that this isn’t taught to students of Econ 101. Here’s Tyler on the financial crisis. He covers leverage, securitization, asymmetric information, bank runs, fire sales and the rise of the shadow banking system. Students with the right textbook are well informed about the financial crisis and the economic principles that can help us to understand, analyze and perhaps avoid future financial crises.

The Economist covers Why Are the Prices So D*mn High?

The Economist does a very nice job covering Why Are the Prices So D*mn High.

Baumol’s earliest work on the subject, written with William Bowen, was published in 1965. Analyses like that of Messrs Helland and Tabarrok nonetheless feel novel, because the implications of cost disease remain so underappreciated in policy circles. For instance, the steadily rising expense of education and health care is almost universally deplored as an economic scourge, despite being caused by something indubitably good: rapid, if unevenly spread, productivity growth. Higher prices, if driven by cost disease, need not mean reduced affordability, since they reflect greater productive capacity elsewhere in the economy. The authors use an analogy: as a person’s salary increases, the cost of doing things other than work—like gardening, for example—rises, since each hour off the job means more forgone income. But that does not mean that time spent gardening has become less affordable.

It’s an implication of the Baumol effect that everyone ends up working in a low productivity industry!

The only true solution to cost disease is an economy-wide productivity slowdown—and one may be in the offing. Technological progress pushes employment into the sectors most resistant to productivity growth. Eventually, nearly everyone may have jobs that are valued for their inefficiency: as concert musicians, or artisanal cheesemakers, or members of the household staff of the very rich. If there is no high-productivity sector to lure such workers away, then the problem does not arise.

Misunderstanding the Baumol effect can lead to a cure worse than the “disease”:

These possibilities reveal the real threat from Baumol’s disease: not that work will flow toward less-productive industries, which is inevitable, but that gains from rising productivity are unevenly shared. When firms in highly productive industries crave highly credentialed workers, it is the pay of similar workers elsewhere in the economy—of doctors, say—that rises in response. That worsens inequality, as low-income workers must still pay higher prices for essential services like health care. Even so, the productivity growth that drives cost disease could make everyone better off. But governments often do too little to tax the winners and compensate the losers. And politicians who do not understand the Baumol effect sometimes cap spending on education and health. Unsurprisingly, since they misunderstand the diagnosis, the treatment they prescribe makes the ailment worse.

My only complaint is that the excellent reviewer has not followed our lead and called it the Baumol effect–cost disease is a misleading name!

Addendum: Other posts in this series.

Is the generalist returning?

It would be supremely ironic if the advance of the knowledge economy had the effect of devaluing knowledge. But that’s what I heard, recurrently, while reporting this story…If that’s the case, I asked John Sullivan, a prominent Silicon Valley talent adviser, why should anyone take the time to master anything at all? ‘You shouldn’t!’ he replied.

That is from a new Atlantic piece by Jerry Useem.  In essence, the division of labor may be running in reverse in some endeavors.  In Adam Smith’s argument, division of labor and specialization increase with the size of the market.  But say a mix of Moore’s Law and globalization means that software (output and operations) expands rapidly, yet companies seek to shed labor costs due to competition.  At the margin the new demand might be for generalists, who can step in whenever unforeseen problems arise which need fixing.  Or in other words, you may not wish to specialize with your truly scarce factor, namely labor.  In contrast, in Smith’s time, demographics were favorable and labor was pouring into cities from the countryside.

As for the Navy:

The LCS was the first class of Navy ship that, because of technological change and the high cost of personnel, turned away from specialists in favor of “hybrid sailors” who have the ability to acquire skills rapidly. It was designed to operate with a mere 40 souls on board—one-fifth the number aboard comparably sized “legacy” ships and a far cry from the 350 aboard a World War II destroyer. The small size of the crew means that each sailor must be like the ship itself: a jack of many trades and not, as 240 years of tradition have prescribed, a master of just one.

And:

Minimal manning—and with it, the replacement of specialized workers with problem-solving generalists—isn’t a particularly nautical concept. Indeed, it will sound familiar to anyone in an organization who’s been asked to “do more with less”—which, these days, seems to be just about everyone. Ten years from now, the Deloitte consultant Erica Volini projects, 70 to 90 percent of workers will be in so-called hybrid jobs or superjobs—that is, positions combining tasks once performed by people in two or more traditional roles.

Via the excellent Kevin Lewis.

Why aren’t remote interviews as useful as face-to-face interactions?

Skype and Zoom aren’t quite as good as meeting in the physical world. But why? Pioneer and Emergent Ventures are looking to fund research on exactly how and why video conferencing interactions are different. Apply at and mention this tweet…Given the rise of remote work, the economic impact of this research could be Nobel-worthy.

That is from Daniel Gross, and here you can apply for Emergent Ventures.

Civic honesty around the globe

I am a bit late to this party, having been traveling, but I will serve this one up anyway:

Civic honesty is essential to social capital and economic development, but is often in conflict with material self-interest. We examine the trade-off between honesty and self-interest using field experiments in 355 cities spanning 40 countries around the globe. We turned in over 17,000 lost wallets with varying amounts of money at public and private institutions, and measured whether recipients contacted the owner to return the wallets. In virtually all countries citizens were more likely to return wallets that contained more money. Both non-experts and professional economists were unable to predict this result. Additional data suggest our main findings can be explained by a combination of altruistic concerns and an aversion to viewing oneself as a thief, which increase with the material benefits of dishonesty.

That is the abstract of a new paper by Alain Cohn, Michel André Maréchal, David Tannenbaum, and Christian Lukas Zünd.  It is easy to say this ex post, but I find this intuitive.  Here is the famed country-by-country picture which is circulating:

Here is a picture of the actual vs. the predicted reporting rate.  Experts predicted more overall cooperation than turned out to be the case, most of all for the wallets with no money in them, but basically got it right for wallets with lots of money.  Non-experts got it backwards altogether.

For the pointer to this one I thank many different MR readers.

Labor market polarization and the fertility decline

In the years since the Great Recession, social scientists have anticipated that economic recovery in the United States, characterized by gains in employment and median household income, would augur a reversal of declining fertility trends. However, the expected post-recession rebound in fertility rates has yet to materialize. In this study, I propose an economic explanation for why fertility rates have continued to decline regardless of improvements in conventional economic indicators. I argue that ongoing structural changes in U.S. labor markets have prolonged the financial uncertainty that leads women and couples to delay or forgo childbearing. Combining statistical and survey data with restricted-use vital registration records, I examine how cyclical and structural changes in metropolitan-area labor markets were associated with changes in total fertility rates (TFRs) across racial/ethnic groups from the early 1990s to the present day, with a particular focus on the 2006–2014 period. The findings suggest that changes in industry composition—specifically, the loss of manufacturing and other goods-producing businesses—have a larger effect on TFRs than changes in the unemployment rate for all racial/ethnic groups. Because structural changes in labor markets are more likely to be sustained over time—in contrast to unemployment rates, which fluctuate with economic cycles—further reductions in unemployment are unlikely to reverse declining fertility trends.

That is from a new paper by Nathan Seltzer, via the excellent Kevin Lewis.

The politics of order in informal markets: Evidence from Lagos

That is the title of a new paper by Shelby Grossman, here is the abstract:

Property rights are important for economic exchange, but in much of the world they are not publicly guaranteed. Private market associations can fill this gap by providing an institutional structure to enforce agreements, but with this power comes the ability to extort from group members. Under what circumstances do private associations provide a stable environment for economic activity? Using survey data collected from 1,179 randomly sampled traders across 199 markets in Lagos, I find that markets maintain institutions to support trade not in the absence of government, but rather in response to active government interference. I argue that associations develop pro-trade institutions when threatened by politicians they perceive to be predatory, and when the organization can respond with threats of its own; the latter is easier when traders are not competing with each other. In order to maintain this balance of power, the association will not extort because it needs trader support to maintain the credibility of its threats to mobilize against predatory politicians.

Via Henry Farrell, that abstract reminds me of my earlier essay, and critique of libertarian anarchy, “Law as a Public Good,” shorter version of the argument here.

Glenn Loury Speaks

On a Thursday evening in April, Glenn Loury is talking about race, ethics, and affirmative action. And he’s getting emotional. “Don’t patronize my people,” he told an audience at the College of the Holy Cross, in Massachusetts. “Don’t judge us by a different standard. Don’t lower the bar! Why are you lowering the bar? What’s going on there? Is that about guilt or pity?” He let the question hang in silence for a moment. “Tell me a pathway to equality that is rooted in either one of those things.”

That’s the opening to a sharp and very candid interview of Glenn Loury by Evan Goldstein in the Chronicle of Higher Education. Loury continues on affirmative action:

Equality is the only legitimate long-term goal — racial equality, not head-counting. I’m talking about equality of dignity, respect, standing, accomplishment, achievement, honor. People have to earn these things. What do I want to do? I want to reorient the discussion around the development of African-American capacities to compete.

On his personal life:

Q: By the late 1990s, you’d broken with many former friends on the right. You’d undergone a political conversion. Where did you land?

A: There’s an arc to this thing, and it’s odd. I describe myself today as right of center.

What happened is that I went through a trauma. I was accused of assaulting a woman with whom I was having an extramarital affair. I was publicly humiliated. I had to withdraw an appointment as undersecretary of education in the last years of Reagan’s second term. I was a crack-cocaine addict; it almost killed me. My wife at the time, God bless her, stayed with me, and we subsequently had two fine sons. But at the time, I was dying.

I found Jesus. I got my life together.

Read the whole thing.

G. Warren Nutter and Chile

In 1969, Warren Nutter left the University of Virginia Department of Economics to serve as the Assistant Secretary of Defense for International Security Affairs in the Nixon administration. During his time in the Defense Department, Nutter was deeply involved in laying the groundwork for a military coup against the democratically elected president of Chile, Salvador Allende. Although Nutter left the Pentagon several months before the successful 1973 coup, his role in the ascendance of the Pinochet regime was far more direct than the better-known cases of Friedrich Hayek, Milton Friedman, James Buchanan, and Arnold Harberger. This paper describes Nutter’s role in Chile policy planning and generating a “coup climate.” It shows how Nutter’s criticisms of Henry Kissinger are grounded in his economics, and compares and contrasts Nutter with other economists who have been connected to Pinochet’s dictatorship.

That is a new paper by Daniel Peter Kuehn.  You should note that Friedman and Buchanan have a truly scant connection to Pinochet and the coup (Harberger I do not know, Hayek was too skeptical of democracy in his thinking and informal remarks later in his life).

How to Become a Federal Criminal

Mike Chase, author of the excellent twitter feed @CrimeADay, has now written the illustrated handbook, How to Become a Federal Criminal. In truth, a handbook wasn’t necessary because it is very easy to become a federal criminal.

You may know that you are required to report if you are traveling to or from the United States with $10,000 or more in cash. Don’t hop over the Canadian border to buy a used car, for example, or the Feds may confiscate your cash (millions of dollars are confiscated every year). DiImage result for how to become a federal criminal chased you also know that you can’t leave the United States with more than $5 in nickels??? That’s a federal crime punishable by up to five years in prison. How about carrying a metal detector in a national park–up to six months in prison. And God forbid you should use your metal detector and find something more than 100 years old, that can put you away for up to a year. Also illegal in a national park? Making unreasonable gestures to a passing horse.

The expansion of Federal criminal law into every nook and cranny of life can be amusing but there is a darker side.

The feds also have unbelievably powerful tools at their disposal. They can subpoena your bank records, listen to your phone calls, indict you in a secret proceeding called a grand jury, an, if they think you lied to them, they can charge you for that alone. Then, if you can get a jury to find you guilty on just one charge, the judges is allowed to sentence you up to the statutory maximum based on things you were never charged with, or even things a jury acquitted you of, so long as the judge decides you probably did them. (italics added).

Moreover, when anyone can be charged with a crime, the application of criminal law becomes discretionary and that discretion may be used to suppress the free exercise of other rights. Indeed, the recent Supreme Court case, Nieves v. Bartlett, makes it easier for the police to arrest people even if the reason for the arrest is retaliation for lawful behavior.

Slate: The First Amendment makes it unconstitutional for government officials to retaliate against you because they dislike your speech. At the same time, federal law gives you the right to sue state officials for compensation if they violate constitutional rights such as your right to free speech. But on Tuesday, the Supreme Court invented a rule that will often allow police officers to arrest people in retaliation for disfavored speech without liability.

….Because local laws are full of minor infractions, like “loitering,” that are frequently violated without incident, police will often have a pretext to arrest people engaged in speech the officers don’t like. By immunizing such abuse, Nieves may have devastating effects on demonstrators, press photographers, and anyone who wants to exercise their speech rights in public, like the right to film the police or verbally challenge officer misconduct. The power to arrest is a potent tool for suppressing speech because even if charges are later dropped, arrestees must undergo the ordeal—and dangers—of being booked and jailed, and they may have to disclose the arrest on future job and housing applications, among other ramifications.