Category: Economics

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.

Attention Cycles

Using data from US public firms’ regulatory filings and financial statements, we document that firms’ attention to macroeconomic conditions is counter-cyclical and their propensity to make production mistakes is pro-cyclical. Attentive firms make smaller mistakes, and mistakes of the same size are punished more by financial markets during downturns. We explain these phenomena with a business cycle model in which firms, owned by risk-averse investors, rationally allocate costly attention across states. When aggregate productivity is low, there are higher rewards for delivering profits, and firms optimally pay more attention and make smaller mistakes. Endogenously counter-cyclical attention generates quantitatively significant asymmetric, state-dependent shock propagation and stochastic volatility of output growth.

That paper is by Joel P. Flynn and Karthik A. Sastry of MIT, noting that Sastry is on the job market this year.

The welfare effects of eviction policies

This paper studies the implications of rental market policies that address evictions and homelessness. Policies that make it harder to evict delinquent tenants, for example by providing tax-funded legal counsel in eviction cases (“Right-to-Counsel”) or by instating eviction moratoria, imply eviction and homelessness are less likely given default. But higher default costs to landlords lead to higher equilibrium rents and lower housing supply. I quantify these tradeoffs in a model of rental markets in a city, matched to micro data on rents and evictions as well as shocks to income and family structure. I find that “Right-to-Counsel” drives up rents so much that homelessness increases by 15% and welfare is dampened. Since defaults on rent are driven by persistent income shocks, stronger protections are ineffective in preventing evictions of delinquent tenants, and lead to a large increase in default premia. In contrast, rental assistance lowers renters’ default risk and as a result reduces homelessness by 45% and evictions by 75%, and increases welfare. Eviction moratoria can prevent a spike in evictions following a rare economic downturn, as long as they are used as a temporary measure.

Here is the paper, that is by Boaz Abramson, who is currently on the job market from Stanford.

Revenue Driven Policing

The NYTimes has a good piece on revenue driven policing:

Many municipalities across the country rely heavily on ticket revenue and court fees to pay for government services, and some maintain outsize police departments to help generate that money, according to a review of hundreds of municipal audit reports, town budgets, court files and state highway records.

…In Bratenahl, Ohio, the town government is so dependent on traffic enforcement that the police chief castigated his officers as “badge-wearing slugs” in an email when a downturn in ticket writing jeopardized raises. Ticket revenue helped finance sheriff’s equipment in Amherst County, Va.; a “peace officers annuity and benefit fund” in Doraville, Ga.; and police training in Connecticut, Oklahoma and South Carolina.

Revenue driven policing can be most extreme when the people you are ticketing are not voters.

Newburgh Heights, a frayed industrial village of about a half square mile with 2,000 residents just south of Cleveland, doggedly monitors traffic on the short stretch of Interstate 77 that passes through.

…All told, revenue from traffic citations, which typically accounts for more than half the town’s budget, totaled $3 million in 2019.

My paper, To Serve and Collect (with Mike Makowsky and Thomas Stratmann) shows that there is a notable increase in revenue generating arrests when local governments are facing a deficit. More from Makowsky in this thread.

Tyrone on crypto assets

Egads, what a fool this man is!  Nonetheless he has grown wealthier as of late, so I thought I would give him the indulgence of another MR post.  Little did I know what arrant nonsense he would come up with.  Here is what he started with, the transcription from the Pig Latin being mine:

“Tyler, let’s play the envelope game.  I give you an envelope with $100, and I tell you it is going to either double or half in value.  (Think of it like a floating exchange rate that either will go to 2-1  or 1-2, with equal probability.)  So you will end up with either $200 or $50, the expected value therefore being $125.  That is a good deal for you!  You started with $100, and you can expect now $125.

You would love to keep on playing this envelope game of course, except no one will play that envelope game with you even once.  Until now.

In essence, by “tolerating” cryptocurrency, big-time fiat money holders have agreed to keep on playing this game.  And so, if this continues, over time crypto will absorb more and more of the wealth in an economy.  Just by playing the envelope game!

After all, the indirect utility function is convex in prices and the rest of the world is creating a floating exchange rate game for us for free!  That is why so many different crypto assets keep proliferating!

The only joke about dogecoin is that it isn’t doing even better than it is.

What is philanthropy going to look like in five years’ time?  All life extension technologies?

The envelopes game, of course, doesn’t boost the quantity of real resources, so eventually the purchasing power of non-crypto holders will shrink, shrink, shrink.  That is why we will need a UBI, not because of AI.

Of course you might think that the fiat holders won’t tolerate the crypto game forever.  And maybe not.  But as long as there is any chance whatsoever that crypo assets turn out to have real value, at least some of those fiat money sows will be lining up at the trough to trade at some exchange rate…the envelopes game thus will continue!

At this point I had to push Tyrone down the stairs.  Such fallacies!  Such absurdities!  I even offered him an envelope of his very own if he would shut up, but to no avail.  I demanded that he write down the transversality condition for this fool game he had postulated, but all he could was recite the envelope theorem, another sign of his deep and utter confusion.

As he was falling down the stairs, he kept on insisting that Satoshi really was Satan, that all of the world’s wealth would fall into the hands of The Whales, that we all needed to reread Melville, and Johan Jensen, and ponder the Leviathan from Psalms, Jonah, and Job, and our sins, and that everyone trading with crypto holders was caught in a massive prisoner’s dilemma — collectively handing them volatile exchange rates and thus envelope games for free — and yes this was a long and deep stairwell…

Dear reader, I hope you never have to suffer under such sophistries and indignities again.

I return you now to your regularly scheduled programming, for however long it may last…at the very least writing this blog does not require much money.  Yes, my cherished reader, it is my UBI…and so crypto will be allowed to proceed…

“Potential” and the gender promotion gap

We show that widely-used subjective assessments of employee “potential” contribute to gender gaps in promotion and pay. Using data on 30,000 management-track employees from a large retail chain, we find that women receive substantially lower potential ratings despite receiving higher job performance ratings. Differences in potential ratings account for 30-50% of the gender promotion gap. Women’s lower potential ratings do not appear to be based on accurate forecasts of future performance: women outperform male colleagues with the same potential ratings, both on average and on the margin of promotion. Yet, even when women outperform their previously forecasted potential, their subsequent potential ratings remain low, suggesting that firms persistently underestimate the potential of their female employees.

Here is the paper by Benson, Li, and Shue.  Via the excellent Samir Varma.

Will stablecoins have fluctuating prices?

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

Even if all goes well, why should those different brands of stablecoins remain priced at $1 apiece? In most well-functioning markets, suppliers compete on innovation, quality and price. That diversity is the natural outcome of trying to figure out which coin systems — fully stable or not — are best.

If market prices do not communicate this information, how can you discover it? In my vision, higher prices will signify a coin’s quality and attract more business; the coins with strictly fixed prices will fill a niche; and the coins with lower prices will lose business, or otherwise serve as discount issues for those of lower means.

And:

On a more positive note, if you think stablecoins serve so many new and marvelous functions, you would expect many of those assets to sell for more than a dollar.

And:

For another look at why prices won’t stay fixed, consider the incentives of a stablecoin issuer. Let’s say your issue is currently one-to-one with the U.S. dollar and you are holding 100% reserves of very safe assets. Might you then be tempted to go down to 98% reserves? 95%? If the price of your coin stays at $1, fine, you come out ahead. If the price declines in proportion to the new and higher risk, you as an issuer still have broken even. So it seems that coin issuers will have an incentive to test the one-to-one exchange rates by diluting their backing.

Recommended.

Sex Differences in Work Aspirations

Another important paper from Stoet and Geary

We investigated sex differences in 473,260 adolescents’ aspirations to work in things-oriented (e.g., mechanic), people-oriented (e.g., nurse), and STEM (e.g., mathematician) careers across 80 countries and economic regions using the 2018 Programme for International Student Assessment (PISA). We analyzed student career aspirations in combination with student achievement in mathematics, reading, and science, as well as parental occupations and family wealth. In each country and region, more boys than girls aspired to a things-oriented or STEM occupation and more girls than boys to a people-oriented occupation. These sex differences were larger in countries with a higher level of women’s empowerment. We explain this counter-intuitive finding through the indirect effect of wealth. Women’s empowerment is associated with relatively high levels of national wealth and this wealth allows more students to aspire to occupations they are intrinsically interested in. Implications for better understanding the sources of sex differences in career aspirations and associated policy are discussed.

…it has been four generations since Miner’s [10] assessment of adolescents’ occupational interests and core sex differences have not changed much, despite dramatic social and economic changes since that time. Boys continue to express a greater interest in blue-collar and white-collar things-oriented occupations than do girls, and girls continue to show a greater interest in people-oriented
occupations.

…Policy makers have regularly expressed a desire to reduce the number of students choosing stereotypical careers (e.g., [49]) or to increase the number of girls aspiring to and women entering technical occupations, especially STEM occupations [22]. The results of this study and related ones reveal a policy-relevant conundrum [3,4,6,50]. Generally speaking, more developed and gender equal nations are better than less developed nations in attracting boys to more established things-oriented (often blue-collar) occupations, but they fail to attract girls to these areas. This problem is also occurring for the subset of things-oriented STEM occupations. In fact, the problem for STEM is even more profound, given that interest in STEM declines for both boys and
girls in more developed, innovative, and gender equal nations.

See also my previous post Do Boys Have a Comparative Advantage in Math and Science?

Hat tip: Steve Stewart-Williams.

Markets in everything

In the latest phase of the quest to turn everything into an NFT, crypto traders are now bidding to digitally own a 1,784-lb. cube of tungsten in Willowbrook, Illinois. According to the terms of the sale, which will have the receipt posted to the blockchain for posterity, the “owner” can have one supervised visit to the cube per year to touch or photograph it.

Over the past two weeks, a joke fired off by Coin Center’s Neeraj Agrawal about a nonexistent tungsten shortage thanks to crypto traders buying cubes of tungsten due to a meme actually caused one for Midwest Tungsten Service. The Illinois manufacturer actually creates small cubes of tungsten, and the tweet caused a 300 percent increase in sales that depleted the company’s stock on Amazon, Coindesk reported.

Last week, The Block reported that the company entered a partnership with crypto payment processor OpenNode to accept Bitcoin payments. One explanation as to why this is happening, which doesn’t really explain why this is happening, was offered to The Block by CMS Holdings’ Dan Matuszewski, who said “crypto just has a propensity for the density.” Tungsten is a very dense metal, comparable to uranium or gold, and its surprising weight is, apparently, pleasurable.

Midwest Tungsten told Coindesk that it primarily makes these cubes for industrial firms, and Sean Murray, the company’s director of e-commerce, suggested to Coindesk there would be a 14-inch cube next. The company offers cubes ranging from an 18-gram, 1-centimeter cube that costs $19.99 to a 41-pound, 4-inch cube that costs $2,999.99.

Well, the 14-inch cube is finally here. It weighs 1,784 poinds and is now listed on OpenSea as an NFT. Seemingly, it’s the biggest cube that Midwest Tungsten can create.

“Since we began selling the cube we have constantly asked ourselves, ‘What is the right size?’, and ‘Would anyone buy a bigger cube?’ Only recently has anyone asked us, or have we asked ourselves, ‘What is the biggest cube we can make?’

Here is the full story, via the excellent Samir Varma.  You know, circa 2010 I thought MR was about to run out of startling “Markets in Everything” examples — how wrong I was!

Is inflation eroding monopsony?

I’m not a big advocate of the significance of the labor market monopsony hypothesis, but for the moment let’s just say it is true.

Now let high rates of price inflation enter the picture, say 5.4% a year.  Does this limit the relevance of the initial monopsony assumption?

Presuambly when the price inflation comes, the monopsonistic employers do not have to give their employees offsetting nominal wage hikes, to restore the previous real wage.  After all, by assumption, those employees don’t have anywhere else practical to go.  And normal theories of wage stickiness explain why this real wage reduction had not happened in the first place (it also would have required a nominal wage reduction, without the inflation).

OK, so consider that monopsony assumptions are relative to a prevailing wage.  An assistant professor might be subject to monopsony power if he is paid 95k a year, but not if he is paid 40k a year, as he could replicate that same salary at many alternate employments.  So inflation, by lowering real wages, also lowers the degree of monopsony.

Right?

Newly hired workers might be getting locked into new monopsonistic positions, if new nominal wage contracts reflect the new rate of inflation (will they?), but the older stock of workers is seeing falling real wages and in that sense is becoming more potentially mobile.

OK, so for advocates of the monopsony hypothesis, how much do real wages have to fall before monopsony becomes a minor rather than a major condition?

And…given that answer, if the rate of price inflation is the standard 2% a year, and if a worker stays in a given job, how many years have to pass before that worker’s real wage falls to the point that monopsony does not really apply any more?

Bueller?

Further evidence that mobility shocks are positive

This time the work is from Emi Nakamura, Jósef Sigurdsson, Jón Steinsson, in the Review of Economic Studies:

We exploit a volcanic “experiment” to study the costs and benefits of geographic mobility. In our experiment, a third of the houses in a town were covered by lava. People living in these houses were much more likely to move away permanently. For the dependents in a household (children), our estimates suggest that being induced to move by the “lava shock” dramatically raised lifetime earnings and education. While large, these estimates come with a substantial amount of statistical uncertainty. The benefits of moving were very unequally distributed across generations: the household heads (parents) were made slightly worse off by the shock. These results suggest large barriers to moving for the children, which imply that labour does not flow to locations where it earns the highest returns. The large gains from moving for the young are surprising in light of the fact that the town affected by our volcanic experiment was (and is) a relatively high income town. We interpret our findings as evidence of the importance of comparative advantage: the gains to moving may be very large for those badly matched to the location they happened to be born in, even if differences in average income are small.

And here are some earlier mobility results related to Hurricane Katrina, another exogenous shock that forced many people out.  Make that change in your life!  Now!

Via Paul Novosad.

Why I remain on Team Transitory

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

The case for Team Transitory is not about whether the next pending inflation numbers will come in high or low. Instead it consists of the following two propositions:

  • The Federal Reserve can control the rate of price inflation.
  • The Federal Reserve does not want inflation to be very high.

And:

Perhaps most important, there is the market’s perspective — and the market expects the Fed to bring down inflation rates. As I write, the 10-year Treasury yield is 1.64%. That yield has been rising, but it hardly seems to predict hyperinflation, or even 5% inflation for the next 10 years. The most negative piece of evidence so far is from the TIPS market, which is predicting inflation of about 3% over the next five years.

You might be wondering whether “the market” understands inflation and the Fed. Well, investors are obsessed with the Fed and study it closely. When I encounter Team Transitory skeptics, I ask them: “What is it that you understand about the Fed that the broader market does not?” I have yet to receive a compelling answer.

As an add-on note, properly interpreted those TIPS data probably are suggesting expected inflation rates of less than three percent, perhaps even closer to two percent looking forward.

The religious polity that is Iceland

A proposal to ban clergy from charging or accepting fees for funerals, weddings and baptisms has prompted threats of industrial action by the clergy union of the Church of Iceland (Þjóðkirkjan).

The Church of Iceland is the established Lutheran church of the island nation, and its clergy are paid by the state. Clerical salaries and parochial responsibilities are laid out in a contract negotiated by the Association of Icelandic Clergy and the state. Funerals, baptisms, weddings and confirmations are considered extra work and are governed by a set fee schedule.

On 19 Oct 2022 the Kirkjuráð, the Church of Iceland’s executive council, proposed ending the practice of charging fees. An announcement from the Kirkjuráð said the church would ban priests from charging fees. It believed clergy were sufficiently remunerated for their work, and further stated they believed the ministrations of the church should be available to all, and no one by dint of lack of funds should be denied services. “It is outdated and alienating for the services of the church that priests, who are serving people in moments of joy and sorrow, later send these people a bill for the services. This greatly undermines the credibility of the services of the church,” the Kirkjuráð wrote.

The president of the clergy union, Ninna Sif Svavarsdóttir, issued a statement decrying the proposal and took issue with the tone of Kirkjuráð’s announcement. “It is highly distasteful and indecent for a church council to warn pastors about a lack of Christian love when they exercise their clear fundamental right to collect fees for extra work.”

Ms.Svavarsdóttir stated a collective bargaining agreement had been reached in July 2021, and if the church hierarchy was going to abrogate the contract, the clergy might be compelled to exercise their rights under law and strike.

Here is the full story, via Evan.

Sequoia to go more long-term

Sequoia Capital, one of Silicon Valley’s oldest and largest venture capital firms, has launched a bold restructuring to create a single overarching fund.

The Sequoia Fund will take in capital from investors and funnel it to Sequoia’s traditional venture funds, which invest in US and European start-ups. It will also hold Sequoia’s stakes in publicly listed companies, such as Airbnb. It will also charge a management fee of under 1 per cent, and potential performance fees, adding an extra layer of fees on top of its existing venture funds, a person briefed on the changes said.

Sequoia hopes that the ambitious plan will give it and its investors more flexibility. Its investors will not have to commit their money to a specific VC fund for several years while Sequoia will be able to hold on to its investments for longer than other VC funds, which typically aim to return money to investors within a decade. “Investments will no longer have ‘expiration dates’,” wrote Sequoia partner Roelof Botha in a blog post. “Our sole focus will be to grow value for our companies and limited partners over the long run.”

Sequoia also said it would file with the US Securities and Exchange Commission to become a registered investment adviser, allowing it to invest more money in cryptocurrencies, public stocks and private shares that it does not purchase directly from companies.

It seems we are headed toward a future where the larger, more successful players move closer to being full-service investment houses.  Here is the FT story.  What is the best way to think about which assets they are building upon as the scarce factors behind their successes?  And what are the limits to exploiting those scarce factors?  Which culture clashes need to be overcome for this to work?

This kind of number is not very reliable, but in broad terms it tells you something:

The median US venture capital fund rose by 88.1 per cent in the 12 months through June this year, according to estimates from the investment firm Cambridge Associates.

Here is a useful short Medium essay from Sequoia itself.

Further points on the tax on unrealized capital gains

Put simply, this proposal is biased towards people with inherited wealth, invested in non-traded assets and mature businesses, and against people invested in publicly traded equities in growth companies, many of which they have started and built up. If that is the message that the tax law writers want to send, they should at least have the decency to be up front about that message, and to defend it.

Here is much more from Aswath Damodaran, devastating throughout.  And here is Alan Auerbach on retrospective capital gains taxation, not my favorite but a much better idea than what is being put forward.