Category: Economics

What would a world with very cheap energy look like?

I am indebted to Jason Crawford and Matt Yglesias for the inspiration on this topic, here is an excerpt from my Bloomberg column:

One second-order effect is that countries with good infrastructure planning would reap a significant relative gain. The fast train from Paris to Nice would become faster yet, but would trains on the Acela corridor?

Next in line: Desalinating water would become cheap and easy, enabling the transformation and terraforming of many landscapes. Nevada would boom, though a vigorous environmental debate might ensue: Just how many deserts should we keep around? Over time, Mali and the Middle East would become much greener.

How about heating and cooling? It might be possible to manipulate temperatures outdoors, so Denmark in January and Dubai in August would no longer be so unbearable. It wouldn’t be too hard to melt snow or generate a cooling breeze.

Wages would also rise significantly. Not only would more goods and services be available, but the demand for labor would also skyrocket. If flying to Tokyo is easier, demand for pilots will be higher. Eventually, more flying would be automated. Robots would become far more plentiful, which would set off yet more second- and third-order effects.

Cheap energy would also make supercomputing more available, crypto more convenient, and nanotechnology more likely.

And this:

And limiting climate change would not be as simple as it might at first seem. Yes, nuclear fusion could replace all of those coal plants. But the secondary consequences do not stop there. As water desalination became more feasible, for example, irrigation would become less expensive. Many areas would be far more verdant, and people might raise more cows and eat more beef. Those cows, in turn, might release far more methane into the air, worsening one significant set of climate-related problems.

But all is not lost! Because energy would be so cheap, protective technologies — to remove methane (and carbon) from the air, for instance — are also likely to be more feasible and affordable.

In general, in a carbon-free energy world, the stakes would be higher for a large subset of decisions. If we can clean up the air, great. If not, the overall increase in radical change would create a whole host of new problems, one of which would be more methane emissions. The “race” between the destructive and restorative powers of technology would become all the more consequential. The value of high quality institutions would be much greater,  which might be a worry in many parts of the world.

This is a thought exercise, and I would say you are wasting your breath if you fume against fusion power in the comments.

Legal Systems and Economic Performance in Colonial Shanghai, 1903-1934

Abstract: How important are legal systems to economic performance? To address this question, I focus on a historical period from colonial Shanghai, where quite different legal systems operated in the International Settlement andFrench Concession. In particular, employing novel historical data, I examine 1903–1934 land value discontinuities at the border between these Settlements. Substantial discontinuities were found in the 1900s, with higher land values associated with the International Settlement. However, by the 1930s, this land value advantage of the International Settlement had disappeared. A closer look at the institutions reveals that the French Concession adapted its operation to be more business friendly, under competition from the neighboring International Settlement. This suggests that the French legal system per se was not a barrier to economic growth, but rather it could function well if interpreted and implemented properly. This paper thus adds to evidence that formal legal system is not a key determinant of economic performance.

That is from Mingxi Li, who is on the job market this year from UC Davis.

Explaining NFTs

Writing at the Harvard Business Review, Steve Kaczynski and Scott Duke Kominers have en excellent explanation of how NFTs create value–the best I have read.

NFTs don’t just provide a kind of digital “deed.” Because blockchains are programmable, it’s possible to endow NFTs with features that enable them to expand their purpose over time, or even to provide direct utility to their holders. In other words, NFTs can do things — or let their owners do things — in both digital spaces and the physical world.

In this sense, NFTs can function like membership cards or tickets, providing access to events, exclusive merchandise, and special discounts — as well as serving as digital keys to online spaces where holders can engage with each other. Moreover, because the blockchain is public, it’s even possible to send additional products directly to anyone who owns a given token. All of this gives NFT holders value over and above simple ownership — and provides creators with a vector to build a highly engaged community around their brands.

It’s not uncommon to see creators organize in-person meetups for their NFT holders, as many did at the recent NFT NYC conference. In other cases, having a specific NFT in your online wallet might be necessary in order to gain access to an online game, chat room, or merchandise store. And creator teams sometimes grant additional tokens to their NFT holders in ways that expand the product ecosystem: owners of a particular goat NFT, for example, were recently able to claim a free baby goat NFT that gives benefits beyond the original token; holders of a particular bear NFT, meanwhile, just received honey.

Thus owning an NFT effectively makes you an investor, a member of a club, a brand shareholder, and a participant in a loyalty program all at once. At the same time, NFTs’ programmability supports new business and profit models — for example, NFTs have enabled a new type of royalty contract, whereby each time a work is resold, a share of the transaction goes back to the original creator.

This all means that NFT-based markets can emerge and gain traction quickly, especially relative to other crypto products. This is both because the NFTs themselves have standalone value — you might buy an art NFT simply because you like it — and because NFTs just need to establish value among a community of potential owners (which can be relatively small), whereas cryptocurrencies need wide acceptance in order to become useful as a store of value and/or medium of exchange.

Read the whole thing. Kaczynski and Kominers also offer good advice to firms and organizations interested in creating NFTs. It remains true, of course, that there is a lot of foolish and wasted spending in the space–that’s typical of most new asset classes where the rush to get into the space throws up a lot of noise making the signal more difficult to detect.

Addendum: Don’t forget you can buy the Marginal Revolution NFT! You will be purchasing from the new owner (we sold it) but I believe we get a royalty which also illustrates an advantage of the NFT model.

Image: SupDucks6484.

Real consumption must at some point fall

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

The best way to adjudicate competing claims about today’s economy is to consider opportunities for consumption. Over much of the last two years, labor supply contracted significantly, in large part due to the pandemic. That means the economy produced less. If you produce less, sooner or later you have to consume less, too. And if you consume less, you will be dissatisfied with economic conditions, especially in America, where the consumer typically is considered to be king (or queen).

There isn’t any way around this basic logic, no matter what the data say. Even if measured consumption is currently high, at some point it will have to fall relative to expectations. And indeed there are a host of problems, with shortages, supply-chain delays and a sluggish service sector. In a normal year, more Americans would have seen “Dune” on the big screen and gone to concerts. Americans are not quite able to get what they want, and that is obscured in the aggregate statistics.

The biggest messenger for consumption losses is the rate of consumer price inflation, which measured at 6.2% on last reading. Not so many Americans expect to get an offsetting raise…in return, and above-average inflation is likely to continue for a year or two, some would say for longer. So real wages for many millions of Americans will be noticeably lower for the near future, too. That will translate into lower levels of consumption, with the timing of those losses depending on the spending and borrowing plans of individual households.

Add to all this growing and unprecedentedly high debt for the federal government, plus unfunded liabilities in Medicare and Social Security.

Even if they don’t understand the exact economic logic here, most Americans grasp the common-sense truth that inflation and deficits are bad — for them, for their real wages, and for their future opportunities. They are happy to have higher savings in the bank, but they see the treadmill turning ever faster.

Some parts of the labor shortage also qualify as a decline in consumption. One reason for the “great resignation” is that people cannot get the kinds of jobs they want. That too is a manner of enduring lower consumption, even though it does not show up in consumption statistics. It’s not just the unemployed, as many people took jobs they were only marginally happy with. A job might involve a higher risk of Covid exposure than a worker feels comfortable with, or an internship might take place in a largely empty office.

Here is the James Brown song “The Payback.”

China fact of the day

Global concerns over inflation were also inflamed by data released earlier on Wednesday, showing that Chinese producer price inflation — the measure of what businesses pay each other for goods — rose 13.5 per cent in October from the same time last year, its biggest leap in 26 years as factories absorbed higher energy prices.

Here is more from the FT, mostly about domestic U.S. inflationary pressures.

Germany fact of the day

German industrial output in August was about 9% below its 2015 level, compared with a 2% increase for the eurozone as a whole, according to the European Union’s statistics agency. In Italy, whose manufacturers are closely tied with Germany’s, industrial output rose about 5% over the six-year period…

The weakness in Germany’s economy predates the Covid-19 pandemic. German industrial output and exports began stagnating in 2017, posing a problem for an economy where some 30% of jobs and output are tied to overseas demand, roughly four times the share in the U.S.

Here is more from the WSJ.

The Role of Property Tax in California’s Housing Crisis

From Paul J. Fisher, who is on the job market from University of Arizona:

California faces a shortage of housing according to politicians, activists, and residents. In his paper, I leverage differential exposure to the Proposition 13 tax laws to understand the impact of this policy on the production of housing in Southern California. Proposition 13 restricts property tax growth as long as the owner doesn’t sell or redevelop the property, which allows me to exploit differences in market conditions at the time of prior purchase to identify the effect of these property tax limits on property redevelopment. I find that Proposition 13 discourages redevelopment and sales. In a dynamic discrete choice model of land use, I find that adopting a land value tax that replaces Proposition 13 based property taxes would increase housing production by 35% generating a similar or greater amount of new housing as other policies under consideration in California.

Patrick Wolff, telephone!

How to Increase Effective Altruism

Caviola, Schubert and Greene have a good review of the reasons why effective and ineffective altruism attract donations. First, they note the large gains from making altruism more effective.

A US$100 donation can save a person in the developing world from trachoma, a disease that causes blindness [1]. By contrast, it costs US$50 000 to train a guide dog to help a blind person in the developed world. This large difference in impact per dollar is not unusual. According to expert estimates, the most effective charities are often 100 times more effective than typical charities [2].

…Most research on charitable giving focuses on the amounts that donors give [4]. However, if the societal goal of charitable giving is to improve human (or animal) well-being, it is probably more important to focus on the effectiveness of giving….you can double your impact by doubling the amount that you give to typical charities, but you can multiply your impact by a factor of ten, 100, or even 1000 by choosing to support more effective charities [2].

The authors then consider a number of cognitive factors or biases that allow or encourage ineffective altruism. For example, people tend to give to charities that they are emotionally connected with regardless of effectiveness and they also like to split donations across multiple charities in part because they have scope neglect (“a single death is a tragedy, a million deaths are a statistic.” to quote Stalin who correctly identified the principle even though he was more concerned about how to get away with killing millions than saving millions).

One particular feature of the paper that I like is that instead of simply advocating overcoming these biases they think about ways to use them. For example, you can’t stop people giving to ineffective but emotionally attractive charities but because people like to split and don’t pay attention to scope you can get them to split their donation with an effective charity.

…people tend to support charities that are emotionally appealing, paying little attention to effectiveness. However, there is evidence that many people do care about effectiveness and that information about effectiveness can make giving more effective [2,21]. Combining these insights suggests a new strategy to increase the effectiveness of charitable giving: many donors may be amenable to splitting their donations between an emotionally appealing charity and a highly effective charity, especially if provided with effectiveness information.

This strategy can work especially well if you combine it with matching funds or funds to “cover overhead” which are given by a relatively small number of rich people who can be swayed by philosophical arguments in favor of effective altruism.

Hat tip: Steve Stewart-Williams.

Daddy’s girl?

That is the title of a new paper by Maddelena Ronchi and Nina Smith:

We study the role of managers’ gender attitudes in shaping gender inequality within the workplace. Using Danish registry data, we exploit the birth of a daughter as opposed to a son as a plausibly exogeneous shock to male managers’ gender attitudes and compare within-firm changes in women’s labor outcomes depending on the manager’s newborn gender. We find that women’s relative earnings and employment increase by 4.4% and 2.9% respectively following the birth of the manager’s first daughter. These effects are driven by an increase in managers’ propensity to replace male workers by hiring women with comparable education, hours worked, and earnings. In line with managers’ ability to substitute men with comparable women, we do not detect any significant effect on firm performance. Finally, we find evidence of rapid behavioral responses which intensify over time, suggesting that both salience and direct exposure to themes of gender equality contribute to our results.

Note that Ronchi is on the job market this year.  Via Jennifer Doleac.  I am not sure of the last part of that last sentence (are other mechanisms possible?  Maybe these fathers simply become better at understanding female talent?), but still this is an interesting result.

ProPublica on FDA Delay

If you have been following MR for the last 18 months (or 18 years!) you won’t find much new in this ProPublica piece on FDA delay in approving rapid tests but, other than being late to the game, it’s a good piece. Two points are worth emphasizing. First, some of the problem has been simple bureaucratic delay and inefficiency.

In late May, WHPM head of international sales Chris Patterson said, the company got a confusing email from its FDA reviewer asking for information that had in fact already been provided. WHPM responded within two days. Months passed. In September, after a bit more back and forth, the FDA wrote to say it had identified other deficiencies, and wouldn’t review the rest of the application. Even if WHPM fixed the issues, the application would be “deprioritized,” or moved to the back of the line.

“We spent our own million dollars developing this thing, at their encouragement, and then they just treat you like a criminal,” said Patterson. Meanwhile, the WHPM rapid test has been approved in Mexico and the European Union, where the company has received large orders.

An FDA scientist who vetted COVID-19 test applications told ProPublica he became so frustrated by delays that he quit the agency earlier this year. “They’re neither denying the bad ones or approving the good ones,” he said, asking to remain anonymous because his current work requires dealing with the agency.

Recall my review of Joseph Gulfo’s Innovation Breakdown.

Second, the FDA has engaged in regulatory nationalism–refusing to look at trial data from patients in other countries. This is madness when India does it and madness when the US does it.

For example, the biopharmaceutical giant Roche told ProPublica that it submitted a home test in early 2021, but it was rejected by the FDA because the trials had been done partly in Europe. The test had compared favorably with Abbott’s rapid test, and received European Union approval in June. The company plans to resubmit an application by the end of the year.

A smaller company, which didn’t want to be named because it has other contracts with the U.S. government, withdrew its pre-application for a rapid antigen test with integrated smartphone-based reporting because it heard its trial data from India — collected as the delta variant was surging there — wouldn’t be accepted. Doing the trials in the U.S. would have cost millions.

Photo credit: MaxPixel.

The teleshock

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

If you have had a relatively comfortable job during the pandemic, it might now be time to worry.

The more culturally specific your knowledge and skills, however, the more protected you will be. Doing math and writing code are universal skills. But if you are a wedding consultant, even an online wedding consultant, you’re probably not going to lose business to a competitor from Zimbabwe, no matter how sharp. On the whole, more people will end up in jobs that feel very “American,” for lack of a better word. Legally protected sectors — law, medicine and other professions requiring occupational licenses — will also get more crowded.

Among the winners will be American managers, shareholders and consumers. Managers will be able to hire the world’s best talent, at least from the English-speaking world, while productivity gains will translate into more profitable companies and better and cheaper products.

Big business will likely benefit more than small business. The larger companies have the networks and the brand names to attract the best overseas talent. And if a worker overseas cannot perform all the functions of a particular job, a larger company can more easily fill in the gaps with other talent.

It will also be very good for American U.S. soft power. The U.S. has a lot of successful, well-known multinational corporations. Think of all the many people around the world who might like to work for Apple, for example. American culture also seems to produce highly talented managers, and U.S. business is used to working with people from many different cultures. (This is in contrast to, say, Japan, which will not benefit as much as the U.S. from the teleshock, while Anglophone-friendly countries such as Sweden and the Netherlands may do well.)

The teleshock is likely to continue for a considerable period of time, perhaps longer than the China shock. It is conventional wisdom that “software is eating the world.” As software and tech become larger and more important, more of their jobs can be outsourced. The process will have no natural end. Furthermore, more people in the world will learn English, including in low-wage countries, so the potential competitive supply of affordable workers will not be exhausted anytime soon.

Recommended.

Claims about the costs of global warming

We quantify global and regional aggregate damages from global warming of 1.5 to 4 °C above pre-industrial levels using a well-established integrated assessment model, PAGE09. We find mean global aggregate damages in 2100 of 0.29% of GDP if global warming is limited to about 1.5 °C (90% confidence interval 0.09–0.60%) and 0.40% for 2 °C (range 0.12–0.91%). These are, respectively, 92% and 89% lower than mean losses of 3.67% of GDP (range 0.64–10.77%) associated with global warming of 4 °C. The net present value of global aggregate damages for the 2008–2200 period is estimated at $48.7 trillion for ~ 1.5 °C global warming (range $13–108 trillion) and $60.7 trillion for 2 °C (range $15–140 trillion). These are, respectively, 92% and 90% lower than the mean NPV of $591.7 trillion of GDP for 4 °C warming (range $70–1920 trillion). This leads to a mean social cost of CO2 emitted in 2020 of ~ $150 for 4 °C warming as compared to $30 at ~ 1.5 °C warming. The benefits of limiting warming to 1.5 °C rather than 2 °C might be underestimated since PAGE09 is not recalibrated to reflect the recent understanding of the full range of risks at 1.5 °C warming.

That is from a new paper by R. Warren, et.al.  The model does cover uncertainty, quadratic damages, and other features to steer it away from denialism.  At the end of the calculation, however, for a temperature rise of three degrees Centigrade they still find a mean damage of 2% of global gdp, and a range leading up to three percent of global gdp in terms of foregone consumption.  That is plausibly one year’s global growth.

If I understand them correctly, and I am not sure I do: “These give initial mean consumption discount rates of around 3% per year in developed regions and 48% [!] in developing ones.”  And what are the non-initial rates?  I just don’t follow the paper here, but probably I do not agree with it.  Perhaps at least for the developed nations this is a useful upper bound for costs?  And it is not insanely high.

Here is a piece by Johannes Ackva and John Halstead, “Good news on climate change.”  Excerpt:

However, for a variety of reasons, SSP5-RCP8.5 [a kind of worst case default path] now looks increasingly unlikely as a ‘business as usual’ emissions pathway. There are several reasons for this. Firstly, the costs of renewables and batteries have declined extremely quickly. Historically, models have been too pessimistic on cost declines for solar, wind and batteries: out of nearly 3,000 Integrated Assessment Models, none projected that solar investment costs (different to the levelised costs shown below) would decline by more than 6% per year between 2010 and 2020. In fact, they declined by 15% per year.

And:

Fundamentally, existing mainstream economic models of climate change consistently fail to model exponential cost declines, as shown on the chart below. The left pane below shows historical declines in solar costs compared to Integrated Assessment Model projections of costs. The pane on the right shows the cost of solar compared to Integrated Assessment Model assessments of ‘floor costs’ for solar – the lowest that solar could go. Real world solar prices have consistently smashed through these supposed floors.

…in order for us to follow SSP5-RCP8.5, there would have to be very fast economic growth and technological progress, but meagre progress on low carbon technologies. This does not seem very plausible. In order to reproduce SSP5-8.5 with newer models, the models had to assume that average global income per person will rise to $140,000 by 2100 and also that we would burn large amounts of coal.

And: “Global CO2 emissions have been flat for a decade, new data reveals.”  Again, better than previous projections.

As I said in the title of this post, these are “Claims.”  But overall I would say that the new results are slanting modestly in the less negative direction, though I am not sure that the headlines of the last two weeks are equally encouraging.

My Conversation with David Salle

I was honored to visit his home and painting studio, here is the audio, video, and transcript.  Here is part of the CWT summary:

David joined Tyler to discuss the fifteen (or so) functions of good art, why it’s easier to write about money than art, what’s gone wrong with art criticism today, how to cultivate good taste, the reasons museum curators tend to be risk-averse, the effect of modern artistic training on contemporary art, the evolution of Cézanne, how the centrality of photography is changing fine art, what makes some artists’ retrospectives more compelling than others, the physical challenges of painting on a large scale, how artists view museums differently, how a painting goes wrong, where his paintings end up, what great collectors have in common, how artists collect art differently, why Frank O’Hara was so important to Alex Katz and himself, what he loves about the films of Preston Sturges, why The Sopranos is a model of artistic expression, how we should change intellectual property law for artists, the disappointing puritanism of the avant-garde, and more.

And excerpt:

COWEN: Yes, but just to be very concrete, let’s say someone asks you, “I want to take one actionable step tomorrow to learn more about art.” And they are a smart, highly educated person, but have not spent much time in the art world. What should they actually do other than look at art, on the reading level?

SALLE: On the reading level? Oh God, Tyler, that’s hard. I’ll have to think about it. I’ll have to come back with an answer in a few minutes. I’m not sure there’s anything concretely to do on the reading level. There probably is — just not coming to mind.

There’s Henry Geldzahler, who wrote a book very late in his life, at the end of his life. I can’t remember the title, but he addresses the problem of something which is almost a taboo — how do you acquire taste? — which is, in a sense, what we’re talking about. It’s something one can’t even speak about in polite society among art historians or art critics.

Taste is considered to be something not worth discussing. It’s simply, we’re all above that. Taste is, in a sense, something that has to do with Hallmark greeting cards — but it’s not true. Taste is what we have to work with. It’s a way of describing human experience.

Henry, who was the first curator of modern and contemporary art at the Metropolitan Museum in New York, was a wonderful guy and a wonderful raconteur. Henry basically answers your question: find ways, start collecting. “Okay, but I don’t have any money. How can I collect art?” You don’t have to collect great paintings. Just go to the flea market and buy a vase for 5 bucks. Bring it back to your room, live with it, and look at it.

Pretty soon, you’ll start to make distinctions about it. Eventually, if you’re really paying attention to your own reactions, you’ll use it up. You’ll give that to somebody else, and you’ll go back to the flea market, and you buy another, slightly better vase, and you bring that home and live with that. And so the process goes. That’s very real. It’s very concrete.

And:

COWEN: As you know, the 17th century in European painting is a quite special time. You have Velásquez, you have Rubens, you have Bruegel, much, much more. And there are so many talented painters today. Why can they not paint in that style anymore? Or can they? What stops them?

SALLE: Artists are trained in such a vastly different way than in the 17th, 18th, or even the 19th century. We didn’t have the training. We’re not trained in an apprentice guild situation where the apprenticeship starts very early in life, and people who exhibit talent in drawing or painting are moved on to the next level.

Today painters are trained in professional art schools. People reach school at the normal age — 18, 20, 22, something in grad school, and then they’re in a big hurry. If it’s something you can’t master or show proficiency in quickly, let’s just drop it and move on.

There are other reasons as well, cultural reasons. For many years or decades, painting in, let’s say, the style of Velásquez or even the style of Manet — what would have been the reason for it? What would have been the motivation for it, even assuming that one could do it? Modernism, from whenever we date it, from 1900 to 1990, was such a persuasive argument. It was such an inclusive and exciting and dynamic argument that what possibly could have been the reason to want to take a step back 200 years in history and paint like an earlier painter?

It is a bit slow at the very beginning, otherwise excellent throughout.

The Treasury report on stablecoin regulation

I’ve now read it, and I don’t get it.  OK, so stablecoins should be Fed regulated, brought into the FDIC network, and prohibited from mixing with commerce.  In essence, the stablecoin issuers become like banks in the regulatory sense.  Let’s put aside whether or not you think that is a good idea and ask a simpler question: what about “all of crypto”?  Does that have to be put through the same legal ringer?  What does it mean to ban general crypto from affiliating with commerce at the institutional level?  To guarantee crypto issues with the FDIC?

You might say this is only for “stablecoins,” but does the document give a rigorous legal definition of that term?  No.  How stable does it have to be, to be a stablecoin?  What if there is no stability guarantee, but the issuer acts to create an expectation of relative stability.  Is that a stablecoin?  Or just crypto?  What if the price fluctuates “a bit”?

You may feel “I know a stablecoin when I see one,” and maybe you do, but I very much suspect that under these proposed regulations you either kill all of crypto, or hardly anything ends up being legally classified as a stablecoin, though it still might be pretty stable!

What about a “not quite stable coin,” but you buy a separate contract with a “separately capitalized” intermediary, so that you are each time made whole, and can de facto treat the value as really quite stable?

Maybe they have clever answers to these questions, and just didn’t see fit to include them in a 26-page document.  But I am sooner inclined to think that Treasury is not currently handling this issue at a sufficiently high conceptual level.