Category: Economics

A Regression Puzzle

Here’s a regression puzzle courtesy of Advanced NFL Stats from a few years ago and pointed to recently by Holden Karnofsky from his interesting new blog, ColdTakes. The nominal issue is how to figure our whether Aaron Rodgers is underpaid or overpaid given data on salaries and expected points added per game. Assume that these are the right stats and correctly calculated. The real issue is which is the best graph to answer this question:

Brian 1: …just look at this super scatterplot I made of all veteran/free-agent QBs. The chart plots Expected Points Added (EPA) per Game versus adjusted salary cap hit. Both measures are averaged over the veteran periods of each player’s contracts. I added an Ordinary Least Squares (OLS) best-fit regression line to illustrate my point (r=0.46, p=0.002).

Rodgers’ production, measured by his career average Expected Points Added (EPA) per game is far higher than the trend line says would be worth his $21M/yr cost. The vertical distance between his new contract numbers, $21M/yr and about 11 EPA/G illustrates the surplus performance the Packers will likely get from Rodgers.

https://web.archive.org/web/20210701003025if_/http://1.bp.blogspot.com/-9-P3K8HQvGk/UYcWeZaliqI/AAAAAAAAK0c/O6dacdopocI/s1600/rodgers+epa+vs+cap.png

According to this analysis, Rodgers would be worth something like $25M or more per season. If we extend  his 11 EPA/G number horizontally to the right, it would intercept the trend line at $25M. He’s literally off the chart.

Brian 2: Brian, you ignorant slut. Aaron Rodgers can’t possibly be worth that much money….I’ve made my own scatterplot and regression. Using the exact same methodology and exact same data, I’ve plotted average adjusted cap hit versus EPA/G. The only difference from your chart above is that I swapped the vertical and horizontal axes. Even the correlation and significance are exactly the same.

As you can see, you idiot, Rodgers’ new contract is about twice as expensive as it should be. The value of an 11 EPA/yr QB should be about $10M.

Ok, so which is the best graph for answering this question? Show your work. Bonus points: What is the other graph useful for? Holden points to Phil Birnbaum’s helpful analysis in the comments.

More puzzles at cold-takes.

Why did Portugal decline?

Davis Kedrosky and Nuno Palma blame Brazil:

As late as 1750, Portugal had an output per head considerably higher than those of France or Spain. Yet just a century later, Portugal was Western Europe’s poorest country. In this paper we show that the discovery of massive quantities of gold in Brazil over the eighteenth century played a key role for the long-run development of Portugal’s economy. We focus on the economic resource curse: the loss of competitiveness of the tradables sector manifested in the rise of the price of non-traded goods relative to traded imports. Using original price data from archives for four Portuguese regions between 1650 and 1800, we show that a real exchange rate appreciation of about 30 percent occurred during the eighteenth century, which led to a loss of the competitiveness of national industry from which the country did not recover until considerably later.

Via Ilya Novak.  Oh Thiago!

Self Recommending Links

1. I had a fun and wide-ranging conversation with Jonah Goldberg on the Remnant. We covered the economy, immigration, cyborgs and the Baumol effect among other topics.

2. Tim Harford covers fractional dosing at the FT:

The concept of a standard or full dose is fuzzier than one might imagine. These vaccines were developed at great speed, with a focus on effectiveness that meant erring towards high doses. Melissa Moore, a chief scientific officer at Moderna, has acknowledged this. It is plausible that we will come to regard the current doses as needlessly high.

3. The Brunswick Group interviews me:

Act like you’re in a crisis. That has been economist Alex Tabarrok’s advice since the start of the COVID-19 pandemic. Tabarrok was among the earliest and loudest voices arguing for urgency and risk-taking when it came to increasing rapid testing, investing in vaccine capacity, and employing flexible vaccine dosing. In hindsight, he has been proven regularly right when most health experts were wrong.

“The Crypto Revolution Will Not be Public”

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

In a remarkably honest yet radical speech last month about stablecoins, Fed Governor Randal Quarles argued that current payments systems already incorporate a great deal of information technology — and they are improving rapidly. The implication is that a central bank digital currency, or CBDC, is a solution in search of a problem.

Quarles also suggested that the Fed tolerate stablecoins, just as central banking has coexisted and indeed thrived with numerous other private-sector innovations. Stablecoins can serve as a private-sector experiment to see if individuals and institutions truly desire a radically different payments system, in this case based on crypto and blockchains. If they do, the system can evolve by having some but not all transactions shift toward stablecoin.

There need not be any “do or die” date of transition requiring a perfectly functioning CBDC. But insofar as those stablecoins can achieve the very simple methods of funds transfer outlined above, market participants will continue to use them more.

Quarles argued that with suitable but non-extraordinary regulation of stablecoin issuers, such a system could prove stable. He even seems to prefer the private-sector alternative: “It seems to me that there has been considerable private-sector innovation in the payments industry without a CBDC, and it is conceivable that a Fed CBDC, or even plans for one, might deter private-sector innovation by effectively ‘occupying the field.’”

In essence, Quarles is willing to tolerate a system in which privately issued dollar equivalents become a major means of consummating payments outside of the Fed’s traditional institutions. Presumably capital requirements would be used to ensure solvency.

For many onlookers, even hearing of innovation in finance raises worries about systemic risk. But perhaps the U.S. would do better by letting information technology advance than trying to shut it down. And if you are afraid of instability, are you really so keen to see foreign central bank digital currencies fill up this space?

If you are still skeptical, ask yourself two final questions. First, which has been more innovative on these issues: the private sector or the public sector? Second, how realistic are the prospects that Congress takes any effective action at all?

This is now a world in which radical monetary ideas are produced and consumed like potato chips. I say, pass the bag.

Recommended.

Why Do Women Earn Less Than Men? Evidence from Bus and Train Operators

From a forthcoming issue of the Journal of Labor Economics (ungated) by Valentin Bolotnyy and Natalia Emanuel, both excellent labor economists.

We show that a gender earnings gap can exist even in an environment where work tasks are similar, wages are identical, and tenure dictates promotions. The 11 percent earnings gap in our setting arises from female operators taking fewer overtime hours and more unpaid time off than do male operators. Consequently, we observe that gender neutral policies can have differential effects on the two sexes.

We find that female operators value time, as well as schedule controllability, conventionality, and predictability more than male operators. Male and female operators choose to work similar hours of overtime when they are scheduled months in advance, but male operators work nearly twice as many overtime hours when they are scheduled on short notice. Moreover, male operators game the overtime system more than female operators: when faced with an undesirable schedule, male operators take unpaid time off, but also work more overtime during the rest of the week, resulting in an increase over base income.

Thus, the 11% wage difference wasn’t a result of employer discrimination. One might say the wage gap was a result of “systematic sexism” in family roles but if so is the sexism hurting women, who earn less, or men, who spend less time with their families? If all partners were unisex wouldn’t it still make sense for one partner to be more work-flexible than the other due to increasing returns?

One positive lesson is that employers who can increase schedule controllability might be able to make workers better off and lower wages making employers better off. It’s not clear, however, if such bills are left on the sidewalk but it’s not impossible.

It’s interesting that similar results were found for the gender wage gap among Uber drivers–men made more but not because of employer discrimination, which isn’t even possible in this context, but because on average there are small differences in how men and women drive, men drive a bit faster for example.

Photo Credit: FCPS.

Welfare Costs of Idiosyncratic and Aggregate Consumption Shocks

Big numbers:

I estimate welfare benefits of eliminating idiosyncratic consumption shocks unrelated to the business cycle as 47.3% of household utility and benefits of eliminating idiosyncratic shocks related to the business cycle as 3.4% of utility. Estimates of the former substantially exceed earlier ones because I distinguish between idiosyncratic shocks related/unrelated to the business cycle, estimate the negative skewness of shocks, target moments of idiosyncratic shocks from household-level CEX data, and target market moments. Benefits of eliminating aggregate shocks are 7.7% of utility. Policy should focus on insuring idiosyncratic shocks unrelated to the business cycle, such as the death of a household’s prime wage earner and job layoffs not necessarily related to recessions.

By George M. Constantinides.

Towards a COVAX Exchange

Israel had vaccine that was about to expire before it could be administered. South Korea needed vaccine immediately to stop a surge. They arranged a deal.

South Korea said it will receive 700,000 doses of Pfizer-BioNTech’s coronavirus vaccine from Israel on loan this week, in an attempt to speed up immunisation following a surge in infections around the capital Seoul.

…Under the vaccine swap arrangement announced by both governments on Tuesday, South Korea will give Israel back the same number of shots, already on order from Pfizer, in September and October.
South Korea has quickly distributed the COVID-19 vaccines it has, but has struggled to obtain enough doses in a timely manner as global supplies are tight, particularly in Asia.

“This is a win-win deal,”  [Israeli Prime Minister Naftali Bennett] said in an earlier statement.

One of the weaknesses of the COVAX facility for distributing vaccines is that distribution is primarily based on population with all countries guaranteed that “no country will receive enough doses to vaccinate more than 20% of its population until all countries in the financing group have been offered this amount.” That’s equitable, but it has dynamic challenges: different countries may have different needs and capabilities at different points in time. A country may be given vaccines, for example, when it may not yet be ready to administer them — and that can potentially lead to waste. The Israel-South Korea deal, for example, only narrowly averted 700,000 Pfizer doses from being tossed.  Countries may also have different preferences for vaccines, as different vaccines may fit better with their healthcare systems. A fixed distribution schedule doesn’t adapt to the unique circumstances of time and place, as Hayek might have said.

It’s not surprising that COVAX chose a fixed distribution rule as many people wouldn’t trust a centralized authority to decide who gets what vaccines when. But what about guaranteeing each country a right to vaccine but allowing them to trade? Trade wouldn’t be vaccines for dollars which could introduce ethical and agency issues but vaccine at time 1 for vaccine at time 2 as in the Israel-South Korea exchange or across other factors such as vaccine type. My colleagues on the Kremer team, most notably Eric Budish, Scott Duke Kominers and Canice Prendergast, have been helping think through the design of just such a system. Prendergast designed the now-famous distribution system for Feeding America, Budish helped to design Wharton’s Course Match system and Kominers has worked on mechanisms for allocating convalescent plasma, vaccines and many other goods.

A suitably designed exchange can increase efficiency while maintaining equity. The Israel-South Korea deal reminds us that this is a priority. Greater efficiency in this context means fewer vaccine doses wasted, and more lives saved.

The Biden Executive Order on promoting competition

Here is the text, I won’t attempt a summary but here are some running comments:

1. The beginning of the piece suggests that concentration is rising in the American economy.  But this probably isn’t true.  See also these comments by me.

2. Industry concentration has not driven wages down by “as much as 17%” — that’s a porky!  OK, they say “advertised wages,” but come on…

3. I am happy to see the document take on occupational licensing.

4. Contra to the recommendation, we should not ban non-compete agreements outright.  Many non-compete agreements are perfectly normal institutions designed to protect corporate assets against IP theft, client lists for instance.  We should restrict non-compete agreements in some more sophisticated manner, still to be determined.

5. Lower prescription drug prices?  Maybe.  Do they estimate the elasticity of supply?  No.  Thus this discussion would fail my Econ 101 class.  We do know, however, that prescription drugs are one of the very cheapest ways our health care system saves lives, so this is not obviously a good idea.

6. Right to repair laws?  Again, maybe.  But show me the trade-off and cite a cost-benefit analysis.  If software gives more consumer surplus to consumers (again, a maybe), should we be wanting to tax it with contractual restrictions?  Should we be wanting to tax Tesla right now?

7. Portability of bank account information is a good idea.

8. “Empower family farmers…” — do you even need to know what comes next?  Aarghh!!!

9. The order “encourages” the DOJ and FTC to take various actions.  I won’t blame Biden for this, but we’ve way overstepped what executive orders should be doing, some time ago.  The net feeling the honest reader of this section receives is that our antitrust policies toward the large tech companies are not based in much of a notion of rule of law.

10. Should HHS “standardize plan options” in the NHIM to make price shopping easier?  Makes me nervous — diverse market offerings can be good.

11. Lots of tired and not typically true claims and insinuations about concentration in airline markets; see my book Big Business or read Gary Leff.  And shouldn’t airlines charge for bags?  Maybe yes, maybe no, but prices per item are not in general a bad thing.

12. We are warned that farmers and ranchers take in an ever-smaller share of the food dollar spent — thank goodness!  And there are a bunch of other selective, scattered observations about food prices (“corn seed prices have gone up as much as 30% annually…”), but nothing close to systematic or showing an actual market failure (corn prices by the way have been plummeting since 2012).

13. Broadband policy should indeed be improved, but this section reads as messy, should do more to emphasize the notion of competition and common carrier platforms, and how about a mention of StarLink?

14. There’s not really any point in marching through a discussion of the “Big Tech” section.

15. Is there a problem with bank concentration in this country?  Not where I live.  Maybe in some rural areas?

16. YIMBY > NIMBY would do more to limit market power than just about anything else, by the way.

17. Is there even a peep about this country’s biggest and worst-performing monopoly in K-12?  Of course not.  It is Amazon you have to worry about!

So overall this is not great economics.  It is good to see the Biden administration pick up on a few pro-competition issues, but much of the document is not clearly pro-competition either.  The reasoning and evidence are pretty much politicized from start to finish.

Tabarrok on RADVAC, the DIY Vaccine

The RadVac vaccine, as you may recall, is the open-source, do-it-yourself vaccine. Here’s Technology Review from one year ago (July of 2020):

Preston Estep was alone in a borrowed laboratory, somewhere in Boston. No big company, no board meetings, no billion-dollar payout from Operation Warp Speed, the US government’s covid-19 vaccine funding program. No animal data. No ethics approval.

What he did have: ingredients for a vaccine. And one willing volunteer.

Estep swirled together the mixture and spritzed it up his nose.

…Estep and at least 20 other researchers, technologists, or science enthusiasts, many connected to Harvard University and MIT, have volunteered as lab rats for a do-it-yourself inoculation against the coronavirus. They say it’s their only chance to become immune without waiting a year or more for a vaccine to be formally approved.

Among those who’ve taken the DIY vaccine is George Church, the celebrity geneticist at Harvard University, who took two doses a week apart earlier this month. The doses were dropped in his mailbox, and he mixed the ingredients himself.

Church say…he believes the vaccine designed by Estep, his former graduate student at Harvard and one of his protégés, is extremely safe. “I think we are at much bigger risk from covid considering how many ways you can get it, and how highly variable the consequences are,” he says.

I’m a big fan of the RadVac vaccine and was recently asked to give a talk about the vaccine and the pluses and minuses of the open source approach. In my talk I cover patents, when it was rational to take an unapproved vaccine, the FDA, paternal medicine versus the Consumer Reports model and more. I’m especially pleased with this talk.

Addendum: Great set of posts from johnswentworth from LessWrong on making the vaccine and then testing it.

Why are some recoveries short and others long?

Because of real factors, in a nutshell:

Using the recession recovery point equal to the month when private payrolls first exceeded their previous peak level, this paper argues that it was the negative secular trend in manufacturing jobs that was the most important determinant of the length and depth of the last three recessions/recoveries. This negative secular trend changed the layoff/recall pattern of jobs in manufacturing into permanent displacements, a malady that lengthened the recovery periods and that is not the explicit target of either traditional monetary policy or traditional fiscal policy. Using the ideas gathered from an examination of the US two-digit sectoral data for the US overall, attention turns to the recession/recoveries of the 50 US states in the last three national recession periods. Regressions that explain the lengths and depths of the recessions in 50 US states reveal the importance of construction jobs, but the most important predictor was manufacturing jobs: the greater the share of manufacturing jobs prior to the recession, the worse was the recession/recovery.

That is a new NBER working paper by Ed Leamer.  This of course bears on current monetary policy debates.  A very firmly held view on Twitter is that our post-2012 (or so) recovery could have been quicker, had the Fed been more aggressive, and thus we cannot afford to make the same mistake again.  Yet after a certain point it was real factors responsible for the recovery problems, and this new Leamer paper shows that (money still should be have been looser earlier on, in my view).  See also my previous coverage of papers by Marianna Kudylak (and co-authors), and Bob Hall directs my attention to this recent paper on why employment right now is recovering as fast as it is.  The evidence really is piling up very rapidly and decisively that mainly real factors are/were the problem after a certain point.

What should be taught more in the first-year graduate sequence in economics?

Or maybe just taught more period?  For microeconomics, I have two very definite picks:

1. Price discrimination.  They do it to you more and more!  Or perhaps you are striving to do it to others.  This is typically covered in a first-year sequence, but how many second-year students really have mastered when it is welfare-improving or not?  How it relates to product tying?  When it is sustainable against entry or not?

This seems like a highly relevant real world topic covered only in passing, noting that at the Principles level Cowen and Tabarrok give it full attention.

2. Tax incidence.  Covered thoroughly in public finance sequences, but usually only in passing in first-year sequences.  But just about everything is a problem in tax incidence!  Any change in relative prices gives rise to tax incidence issues, and aren’t relative price changes central to economics?

How can you analyze minimum wage economics, for instance, without a strong background in tax incidence theory (and empirics)?  What if someone says “that minimum wage hike — the associated gains are just captured by the landlords!”  Right or wrong?  Under what conditions?  Good luck!

Grad students these days aren’t learning enough micro theory.

And for macroeconomics?  I have a definite nomination:

3. Say’s Law.  Yes I have read Keynes, and furthermore John Stuart Mill understood as early as 1829 that Say’s Law doesn’t hold if there is a big increase in money hoardings.  But often there isn’t a big increase in money hoardings!  And then what people call “increases in aggregate demand” very often are more fundamentally “increases in aggregate supply.”  Long-, medium- and short-term considerations to be tossed in as further complexities.  Ngdp boosts can come through either nominal or real variables, etc.

There are still lots and lots of people — at all levels — who don’t have a firm handle on these matters.  And Twitter has made this worse.

Which topics do you think should be given additional coverage?

In which ways are Democratic economists Democrats? (or not)

In a series of tweets (try this one), Matt Yglesias has been arguing that academic economists are far more Democratic than the U.S. population as a whole, though less left-wing than most other academics.  I agree with his claims, which are backed by plenty of data, but I wish to add some further thoughts.

Very often political views follow our socioeconomic class and the peer groups we are trying to impress or join.  Thus those claims from Matt are true for American policies only.  If you took a leftish (but not Marxist radical) Democratic U.S. economist, and asked that person what Mexico should do to improve, I think the answers would include the following:

1. Build state capacity to win the drug war, legalize or decriminalize some drugs too.

2. Make it easier for firms in the informal sector to enter the formal, taxed sector, and thus make it easier for them to grow.

3. Invest more in education for underprivileged Mexican youth.

4. End the state monopolies in industrial products.

5. Do something about corruption (but what?).

6. Diversify the economy away from Pemex and fossil fuels.

7. Maintain NAFTA and try to maintain and indeed rebuild the health of the earlier democratization.

Now, that is pretty much the same as my list!  To be sure, the rhetoric on some of these proposals, such as #2 and #3, would be different coming from this imaginary leftish Democratic economist.  (Lots more talk about “inequality” on #2 and more about the benefits of regulation on #3, for instance, whereas I would stress the benefits of firm growth.)  But I don’t think the substance of the proposals would be all that different.

Whether you wish to say the leftish economist has a right-wing perspective on Mexico, or vice versa, is a moot point.  Or are we all centrists on Mexico?  There is in any case a reasonable coincidence of policy recommendations once you remove people from their immediate socioeconomic environment.  And surely that makes the Democratic economists just a little suspicious to the non-economist intellectual Democrats, as you can see from the Twitter fury directed at Matt Y. for what were purely factual claims.

There is a reason why they call it “the Washington Consensus.”  I can assure you that the World Bank and IMF economists are not a bunch of Republican wanna-bees.  But the Washington Consensus works, at least on average.

If you asked a non-economist Democratic voter what Mexico should do, I am not sure what answers you would get.  But it is hardly obvious you would get the above list (I’d love to see this done as a study and compared to the Republican answers).  Maybe the non-economist would talk about foreign aid more?  Immigration more?  I really don’t know.  But they probably are not very aware of the dismal productivity performance of Mexican SMEs and what a problem that is, and probably not very aware of the various state monopolies.  They probably would mention corruption, however, and also public safety and winning the fight against the drug gangs.

When it comes to U.S. disputes, the Democratic economist probably would be more “off the rails” than the typical Democratic voter (sorry, you’ll have to find your own links here, there are plenty), if only because that person is more aware of the socioeconomic conflicts and more aware of what one is supposed to believe.  The more symbolic the dispute, the further from the median voter the Democratic economist is likely to be.  But that is the education doing the work, not the economics background.

If you want to get a Democratic economist making sense, just get that person talking about some other country, follow most of the policy advice, and remove the word “inequality” and a few other catch phrases.

Interestingly, there is a subset of Republican economists who don’t talk sense no matter what the country under consideration.  For instance, they might think that “income tax cuts for Mexico” would do a lot of good.  In this sense they are the more consistent “cosmopolitan ideologues,” taking that phrase as a truly joint concept.  Since most economists are Democrats, perhaps examining “the remnant Republicans” is selecting for excessively consistent ideology.  The remnant Republicans are less likely to insist that “every country is different,” a’ la Dani Rodrik.  If they were so flexible, they probably wouldn’t still be Republicans.

As a final note, I fear we are entering a world so “well-informed” about affective polarization, and with Woke concepts so globalized, that at some point the majority of the Democratic economists won’t talk sense on Mexico any more either.  But we are not yet there — maybe in five to ten years?  Maybe never?  And where will the Republican remnant end up?