Category: Economics

Is the Great Stagnation over?

– A working mRNA vaccine (first ever in humans!),

– Apple M1 chip,

– SpaceX rocket launch,

– GPT-3,

– Tons of cool companies IPO’ing and tons more getting started,

– V-shaped recovery

– Electric cars

– Crypto going mainstream

That is from a tweet by Nabeel S.Qureshi.  One could add warp speed, affordable solar power, the eggplant, and distanced work to that list, the latter also implying significant rent declines and child care cost declines for many people.

Around the time The Great Stagnation came out in 2011, I predicted that it was most likely to end within the next twenty years.  We are not there yet, but that claim is no longer looking so absurd.

Note that the vaccine-driven recovery will measure as a rise in labor inputs, but in reality it will be pure TFP.  In 2021 (but which quarter?), true TFP will be remarkably high, maybe the highest ever?

What should I ask Benjamin M. Friedman?

As noted, Ben has a new and very interesting book coming out Religion and the Rise of Capitalism.  He is also the author of the superb The Moral Consequences of Economic Growth, and the earlier Day of Reckoning, about the economic policies of the Reagan administration.  Ben has been a leading macroeconomist since the 1970s, and he taught me Ph.D. macro at Harvard in 1984, one of my favorite professors I might add.  Here is Ben on scholar.google.com.

So what should I ask him?

International Trade in Modern Principles

The Trump tariffs are the biggest change in trade policy since Smoot-Hawley. Whatever the economic merits of the Trump tariffs, they make great material for textbook authors! As we illustrate in the new edition of Modern Principles, drawing on a great paper by Flaaen, Hortaçsu and Tintelnot. The excerpt illustrates our approach throughout our textbook, Modern Principles, modern applications.

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Now that you know how to analyze international trade using demand and supply, let’s see how well the theory holds up by looking at what happened in the market for washing machines after the Trump tariffs were put into place in January of 2018. The tariff came in two parts. The first 1.2 million washing machines were taxed at a rate of 20% and all remaining imports were taxed at a rate of 50%. The tariffs were put in place for three years with slight declines (to 18% and 45% and 16% and 40%) in the 2nd and 3rd year respectively. A 50% tariff on washing machine parts was also included to prevent manufacturers from avoiding the duty by shipping parts to the United States for quick assembly.

Before the tariffs were put into place, about 3.8 million washing machines were imported per year. Once the tariffs began, imports declined by 1.2 million units to approximately 2.6 million washing machines per year. Figure X shows the price index for laundry equipment in the United States. Prices for washer and dryers had been declining since at least 2013, but the moment tariffs were imposed prices jumped dramatically. (Slight declines in prices were also seen in 2019 when the tariff rate decreased modestly).

Economists estimate that the tariff increased the price of washing machines by about 12%. That’s actually a smaller increase in price than one might guess from the size of the tariff but it turns out that dryer prices also increased by about 12%. Dryers were not subject to the tariff. So why did dryer prices increase? Washers and dryers are typically bought together in a package. Manufacturers, therefore, tend to focus on the package price and they “smoothed” out the washer tariff over both washers and dryers. Looking at thousands of goods, economists estimated that the Trump tariffs were on average entirely passed on to consumers, just as the simple supply and demand model predicts.

Another important prediction of the supply and demand model is that the tariff will increase the prices of all washing machines, whether produced domestically or imported. When the tariff is first put into place, domestic producers have lower costs than foreign producers and, as a result, they sell more and increase output. As domestic producers increase their output, however, their costs rise until in equilibrium domestic and foreign producers are, once again, selling for the same price. In fact, this is exactly what happened. Domestic producers like Whirlpool raised their prices at least as much as did foreign producers.

The Trump tariffs did have one unexpected consequence. In the model, it’s natural to think of domestic producers as being domestically owned firms, but that is not necessarily the case. Whirlpool, a domestic producer of washing machines, did produce more because of the tariffs but something else happened. The foreign producers, Samsung and LG, expanded their US factories! That’s good for US workers in the washer and dryer industry. Nevertheless, the expansion of Samsung and LG was probably an unwelcome surprise to Whirlpool, which may have expected that the tariffs would give them more of a competitive advantage in the domestic market than they ended up getting.

The increase in domestic production from both domestically owned and foreign owned firms resulted in about 1800 new jobs in the washer and dryer industry. Remember trade policy does not influence the total number of jobs in an economy. The jobs created in the washer and dryer industry came at the expense of jobs lost in US export industries. The new jobs in the protected industry, however, are visible and they are important politically, because the President can point to them as a benefit of his policies. Thus, it’s an interesting question to ask, how much did consumers pay to create these jobs?

The tariffs increased washer and dryer prices by about 12% or $88 each on combined sales of 17.4 million units. The total cost to consumers, therefore, was approximately $1.56 billion per year. The government took in an extra $82.2 million in tariff revenues, which we count as a plus, so the total cost was about $1.46 billion per year. The cost per job created was therefore a whopping $811,000 per job (1.46 billion/1800). Instead of creating jobs by paying more for washers and dryers, US consumers would have been much better off paying each new worker in the laundry industry $100,000 to enjoy a nice vacation!

David Splinter responds to Saez and Zucman

When estimating income inequality with tax data, accounting for missing income presents many challenges. Researchers have adopted different approaches to address these challenges. Saez and Zucman (2020) discuss differences between the national income distributions of Piketty, Saez, and Zucman (PSZ, 2018) and Auten and Splinter (AS, 2019a). Saez and Zucman also make updates to their estimates for retirement income, partially responding to one of the concerns raised in AS. In this reply, I explain that SZ only partly correct this problem and do not address other issues raised by AS. For the allocation of underreported income—the most consequential difference between AS and PSZ—I show that the AS approach conforms with special audit studies in five ways, while the PSZ approach is inconsistent with them. I also provide historical background on the two projects, respond to technical points raised, and discuss estimates of tax progressivity.

Here is the link to the paper.

Bt Eggplant is Great

A very important result from Ahmed, Hoddinott, Abedin and Hossain in The American Journal of Agricultural Economics. Bt eggplant offers a 51% increase in yield, a 37.5% decrease in pesticide use, increased farmer profits and decreased farmer sickness. Wow!

We implemented a cluster randomized controlled trial to assess the impact of genetically modified eggplant (Bt brinjal) in Bangladesh. Our two primary outcomes were changes in yield and in pesticide costs. Cultivation of Bt brinjal raises yields by 3,564 kg/ha. This statistically significant impact is equivalent to a 51% increase relative to the control group. There is a statistically significant fall in pesticide costs, 7,175 Taka per hectare (85 USD per ha), a 37.5% reduction. Yield increases arise because Bt farmers harvest more eggplant and because fewer fruits are discarded because they are damaged. Bt brinjal farmers sell more eggplant and receive a higher price for the output they sell while incurring lower input costs, resulting in a 128% increase in net revenues. Bt brinjal farmers used smaller quantities of pesticides and sprayed less frequently. Bt brinjal reduced the toxicity of pesticides as much as 76%. Farmers growing Bt brinjal and who had pre‐existing chronic conditions consistent with pesticide poisoning were 11.5% points less likely to report a symptom of pesticide poisoning and were less likely to incur cash medical expenses to treat these symptoms. Our results are robust to changes in model specification and adjustment for multiple hypothesis testing. We did not find evidence of heterogeneous effects by farmer age, schooling, or land cultivated. Bt brinjal is a publicly developed genetically modified organism that conveys significant productivity and income benefits while reducing the use of pesticides damaging to human and ecological health.

Hat tip: Marc Bellemare.

The Chilean pension system is in crisis

Chile’s celebrated $200bn private pensions system has served as a model for dozens of emerging markets since it was introduced in the 1980s. Now, it faces an existential crisis as public support for the model fades and populist politicians allow savers to withdraw funds during the coronavirus crisis.

The lower house of congress voted to allow Chileans to withdraw another 10 per cent of their pension funds last week, following a similar measure in July that saw withdrawals of some $17bn.

Congress could yet approve a third withdrawal next year, putting at risk a pool of savings that has driven the growth of Chile’s capital markets and jeopardising future returns.

That is from Benedict Mander and Michael Stott at the FT.  Of course you can say “Ah, they shouldn’t do that!”  And they should not.  Still, at the end of the day if you leave surpluses sitting around to be grabbed or handed out, don’t be surprised if they are grabbed or handed out.  Arguably the famed Chilean scheme has been shown to be time-inconsistent.  It was, however, nice while it lasted.

Platform Economics in Modern Principles

Why is Facebook free? Why are credit cards less than free? Why do singles bars sometimes have women drink free nights but never men drink free nights? All of these questions are in the domain of platform economics. Platform economics is new. Tirole and Rochet practically invented the field with a seminal paper in 2003–and that paper was one of the reasons Tirole won the Nobel prize in 2014. Despite being new, platform economics deals with goods which are fundamental to the modern economy. Thus, Tyler and I thought that it was incumbent upon us to teach some of the intuition behind platform economics in Modern Principles of Economics. But students have enough new material to learn, so we set ourselves a challenge–explain the intuition of platform economics using principles that the students already know. Surprisingly, platform economics can be taught with just two principles: externalities and elasticities.

In our chapter on externalities we offer the students a puzzle. Why do some firms offer their workers free flu shots? The answer, as memorably illustrated in this video, is that the firm “internalizes the externality.” When one worker gets a flu shot, other workers at the firm are less likely to get sick. In principle, the workers could subsidize one another to achieve the efficient outcome but transactions costs makes that solution impractical (the Coase theorem). The firm, however, is already involved in transactions with all the workers and, as a result, it can subsidize flu shots and reap the benefits of workers taking fewer sick days. How much the firm should subsidize flu shots depends on the elasticity of flu shots with respect to the price and on the elasticity of sick days with respect to vaccinated workers.

Now what does this have to do with Facebook? Well think about seeing ads as a bit like getting a flu shot–seeing ads has a benefit to you but it’s also a bit of a pain so if you had a choice you might not watch that many ads. But advertisers want you to see ads–in other words, Facebook users who see ads create a positive externality for advertisers. The platform firm, Facebook, internalizes this externality and that means subsidizing ad-seeing by selling Facebook at a zero price to readers and instead charging advertisers. As we put it in Modern Principles:

Imagine that Facebook begins with a positive price for both readers and advertisers (PR>0 and PA>0). Readers, however, are likely to be sensitive to the price so a small decrease in price will cause a large increase in readers (very elastic demand). Thus, imagine that Facebook lowers the price to readers and thus increases the number of readers. With more readers, Facebook can charge its advertisers more, so PA increases. Indeed, if the demand for advertisers increases enough, it can even pay Facebook to lower the price to readers to zero! Thus, the key to Facebook’s decision is how many more readers it will get when it lowers the price (the reader elasticity), how much those readers are worth to advertisers (the externality of readers to advertisers) and how high can it increase the price to advertisers (the advertiser elasticity).

More in the textbook!

Modern Principles, New Edition!

The new edition of Modern Principles is here! We take our title, Modern Principles of Economics, seriously. Other textbooks stick with the market for ice cream year after year but when it comes to new editions we don’t just add a box or two–we rewrite entire chapters with new examples and applications and we cut older material to make way for the new.

In the new edition we introduce platform economics and we use it to explain why Facebook is free; we have new material applying the elasticity of supply to understand why housing is so expensive in some cities; we have rewritten the chapter on trade to take into account the China shock and the China trade-war shock including the implications for politics; we have new material on pollution and a carbon tax; new material on the declining labor force participation rate of men and new material on supply chains and bottlenecks. Of course, there is also new material on pandemics although we had material on pandemics in the very first edition!

Modern Principles of Economics is by far the best textbook for teaching online (or offline!). Not only do you get over a hundred professionally produced videos, like this one on price ceilings and price coordination, you also get Achieve, the excellent new course management system that integrates e-book, tutorials, quizzes, exams, assessment and much more so that you can get up and running online overnight.

I’ll be covering some of the new material in Modern Principles this week.

Intertemporal substitution remains underrated (Covid in Scotland)

He suggested the announcement that the roll-out of a vaccine within weeks had persuaded people to break the rules and take risks.

“People maybe think the battle is over because the vaccine is coming…”

Here is the Times of London story.  Of course economics suggests the exact opposite course of action, namely that when a good vaccine is coming you should play it safer in the meantime.  Beware!

Economics and epidemiology, revisited

The Economist was kind enough to reference my earlier blog post on this topic, from April 12, so I thought we should look at it again.  Please do reread it!  Here are my first two points:

1. They [epidemiologists] do not sufficiently grasp that long-run elasticities of adjustment are more powerful than short-run elasticites.  In the short run you socially distance, but in the long run you learn which methods of social distance protect you the most.  Or you move from doing “half home delivery of food” to “full home delivery of food” once you get that extra credit card or learn the best sites.  In this regard the epidemiological models end up being too pessimistic, and it seems that “the natural disaster economist complaints about the epidemiologists” (yes there is such a thing) are largely correct on this count.  On this question economic models really do better, though not the models of everybody.

2. They do not sufficiently incorporate public choice considerations.  An epidemic path, for instance, may be politically infeasible, which leads to adjustments along the way, and very often those adjustments are stupid policy moves from impatient politicians.  This is not built into the models I am seeing, nor are such factors built into most economic macro models, even though there is a large independent branch of public choice research.  It is hard to integrate.  Still, it means that epidemiological models will be too optimistic, rather than too pessimistic as in #1.  Epidemiologists might protest that it is not the purpose of their science or models to incorporate politics, but these factors are relevant for prediction, and if you try to wash your hands of them (no pun intended) you will be wrong a lot.

And:

I have not yet seen a Straussian dimension in the models, though you might argue many epidemiologists are “naive Straussian” in their public rhetoric, saying what is good for us rather than telling the whole truth.

Many people took umbrage at my points, but:

On this list, I think my #1 comes closest to being an actual criticism, the other points are more like observations about doing science in a messy, imperfect world.

I also queried about the political orientation of epidemiologists (among other matters), and that occasioned a great deal of pushback and outrage. Yet we saw during the summer that many of them were explicitly political and favoring the Left, willing to abandon their earlier recommendations to endorse demonstrations for a cause they strongly favored.  I am not sure how big was the resulting boost in cases or fatalities, but it did seem the American people concluded that you could ignore the rules if something was sufficiently important to you.  Like visiting your relatives for Thanksgiving, and we will be reaping that harvest rather soon.

Sunny Days Protect Against Flu

Vitamin D supplementation is cheap. Walking in sunlight is even cheaper. I’ve been doing more of both since the beginnings of the pandemic. Slusky and Zekhauser add to the evidence:

Sunlight, likely operating through the well-established channel of producing vitamin D, has the potential to play a significant role in reducing flu incidence. A recent meta-analysis of 25 randomized controlled trials of vitamin D supplementation (Martineau et al. 2017) demonstrated significant benefits of such supplements for reducing the likelihood that an individual will contract an acute upper respiratory infection. The current study considers sunlight as an alternate, natural path through which humans can and do secure vitamin D. This study’s findings complement and reinforce the Martineau et al. findings.

Our major result is that incremental sunlight in the late summer and early fall has the potential to reduce the incidence of influenza. Sunlight had a dramatic effect in 2009, when sunlight was well below average at the national level, and the flu came early. Our result is potentially relevant not just to the current COVID-19 pandemic, but also to a future outlier H1N1 pandemic. The threat is there; some H1N1 viruses already exist in animals (Sun et al. 2020). One must be cautious, though, with generalizations, given the unique economic circumstances (e.g., a 25-year high unemployment rate) in the fall of 2009.

A remaining question is whether sunlight matters more broadly for flu, or whether it is unique to H1N1. While we lack a counterfactual of an early flu from a different strain, we do have two pieces of evidence to suggest that the effect is broader than just H1N1. First, as described throughout the paper, the Martineau et al. study about the relationship between Vitamin D and upper respiratory infections are not specific to H1N1. Second, with granular, county level data, we do see strongly statistically significant negative effects of fall sunlight on influenza for years other than 2009 (see Columns (2) and (3) of Panel of Table 7). Therefore, apart from its methodological contributions, this study reinforces the long-held assertion that vitamin D protects against acute upper respiratory infections. One can secure vitamin D through supplements, or through a walk outdoors, particularly on a day when the sun shines brightly. When most walk, herd protection provides benefit to all.

The Scots are giving out free vitamin D to people stuck indoors. My view is that Vitamin D supplementation is worthwhile but where and when possible the sunlight approach is better as the effect may work through mechanisms beyond vitamin D.

Coincidentally neuroscience says this is one of the happiest songs ever.

Hat tip: The sunny Kevin Lewis.

Judge Richard Neely, RIP

Judge Richard Neely, former head of the WV Supreme Court, held a special place in my heart. I never met the man but early on in my career, Eric Helland and I wrote a paper on elected judges and tort awards (PDF):

We argue that partisan elected judges have an incentive to redistribute wealth from out‐of‐state defendants (nonvoters) to in‐state plaintiffs (voters). We first test the hypothesis by using cross‐state data. We find a significant partisan effect after controlling for differences in injuries, state incomes, poverty levels, selection effects, and other factors. One difference that appears difficult to control for is that each state has its own tort law. In cases involving citizens of different states, federal judges decide disputes by using state law. Using these diversity‐of‐citizenship cases, we conclude that differences in awards are caused by differences in electoral systems, not by differences in state law.

While researching the paper I found this quote from Neely and when I read it I knew we were going to be published in a good journal:

As long as I am allowed to redistribute wealth from out-of-state companies to injured in-state plaintiffs, I shall continue to do so. Not only is my sleep enhanced when I give someone’s else money away, but so is my job security, because the in-state plaintiffs, their families, and their friends will reelect me. (Neely 1988, p. 4).

That is what you call anecdotal gold.

To be clear, when Neely was looking for a law clerk he advertised:

“America’s laziest and dumbest judge” seeks “a bright person to keep (the judge) from looking stupid,” and gave preference to University of Virginia law students “who studied interesting but useless subjects at snobby schools.”

Neely spoke brutally honestly to break conventions and reveal underlying truths. Thank you Judge Neely for your candor as it surely helped me in my career.

Paige Harden on Genetic Differences and the Left

Paige Harden, the left-leaning behavioral geneticist, brings the fire in comments on an AEON article about her work:

In this article, Erik Parens urges me and other scientists working in the field of social genomics to “curb [our] optimism” regarding how genetic discoveries could be used to advance progressive and egalitarian social goals. In my view, however, it is Parens and other critics of social genomics who need to curb their optimism, in two ways.

First, Parens is overly optimistic that social science can ever hope to be successful without genetics. In reality, social scientists have failed, time and time again, to produce interventions that bring about lasting improvements in people’s lives. There are many reasons for that failure. But one reason is that many scientists continue to engage in what the sociologist Jeremy Freese has called a “tacit collusion” to avoid reckoning, in their research designs and in their causal inferences, with the fact that people are genetically different from one another.

All interventions and policies are built on a model of how the world works: “If I change x, then y will happen.” A model of the world that pretends all people are genetically the same, or that the only thing people inherit from their parents is their environment, is a wrong model of how the world works. The more often our models of the world are wrong, the more often we will continue to fail in designing interventions and policies that do what they intend to do. The goal of integrating genetics into the social sciences is not to design boutique educational interventions tailored for children’s genotypes. It is to help rescue us from our current situation, where most educational interventions tested don’t work for anyone. This track record of failure plays directly into the hands of a right-wing that touts the ineffectiveness of intervention as evidence for its false narrative of genetic determinism.

Second, Parens and other critics are overly optimistic that their strategy of disapproval, discouragement, and disavowal of genetic research will be effective in neutralizing the pernicious ideologies of the far-right. What is the evidence that this strategy actually works? Herrnstein and Murray published “The Bell Curve” when I was 12 years old; Murray published “Human Diversity” when I was 37 years old; and in all that time, the predominant response from the political left has remained pretty much exactly the same – emphasize people’s genetic sameness, question the wisdom of doing genetic research at all, urge caution. Yet, the far-right is ascendant. In my view, the left’s response to genetic science simply preaches to its own choir. Meanwhile, this strategy of minimization allows right-wing ideologues to offer to “red-pill” people with the “forbidden knowledge” of genetic results.

What the left hasn’t done (yet) is formulate a messaging strategy that (a) reconciles the existence of human genetic differences with people’s moral and political commitments to human equality, and (b) is readily comprehensible outside the confines of the ivory tower. Reminding people that genes are a source of luck in their lives has the potential to be that message. Parens characterizes me as making a “generous hearted but large leap” to expect that portraying genes as luck will change people’s minds, but economic research suggests that reminding people of the role of luck in their lives does, in fact, make them more supportive of redistribution.

Overall, this article portrays me and others working in this space as “soft-pedaling” the dangers of social genomics being appropriated by the far right. But I am fully cognizant of the dangers. Parens is the one who is soft-pedaling. He is soft-pedaling the enormous damage done to progress in psychology, sociology, and other social sciences – fields that are tasked with improving people’s lives – by their refusal to engage with genetics. And, he is soft-pedaling the danger of simply continuing the left’s decades-old, easily-“red-pilled” rhetorical strategy at a time with right-wing ideologies are on the rise globally.