Category: Economics

Which changes in economic policy are actually going to happen?

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

A second pattern from U.S. history is that the federal government generally likes to hand out benefits perceived as “free.” This dates at least as far back as the establishment of Social Security in the Great Depression, when the initial benefit recipients weren’t paying taxes into the system.

I therefore expect federal government action on subsidized child care, preschool programs and paid family leave, all financed by increases in budget deficits rather than higher taxes. Such policies would hand out goodies to millions of families, and appeal to women in particular.

Again, ask the basic questions. Is there “pro-family” rhetoric emanating from both left and right? Yes, whether it is the socialist proposals from Matt Bruenig or paid family leave bills introduced by congressional Republicans. Can you imagine members from both parties claiming these issues as their own? Yes. Is there the possibility of free goodies being handed out? Again, yes, as the national debt held by the public is now over $16 trillion.

I consider also tech regulation, trade issues, immigration, Medicare for All, and the Green New Deal, with only the first of those likely to see big changes.

My Conversation with Sam Altman

Yes, the Sam Altman of Y Combinator and Open AI.  We even got around to Harry Potter, James Bond (and Q), Spiderman, Antarctica, and Napoleon, what is wrong with San Francisco, in addition to venture capital and the hunt for talent.  Here is the transcript and audio.  Here is one excerpt:

ALTMAN: I think our greatest differentiator is not how we identify talent, although I will answer that question, but the fact that we treat our own business — we run Y Combinator in the way that we tell our startups to run as a successful startup, which almost no venture capital firm does.

Almost every venture capital firm gives advice they never follow themselves. They don’t build differentiated products. They are not network-affected businesses. They don’t try to build a brand and a community. And they don’t try to make something that gets better the bigger it gets and have the scale effects that anyone would tell you they want in a business.

We at Y Combinator always say we want to get a lot bigger because this is a network effect, this is a network that matters. Most venture capital firms will say out of one side of their mouth, “Oh no, smaller is better,” because they don’t want to work more. Then they’ll tell all their businesses, “The network effect is the only thing that matters.”

Many people are as smart as we are, think about the world in similar ways. But I think we have internalized that we run our firm the same way we tell our startups to operate, and we view the most important thing that we do is to build a network and a network effect.

And:

COWEN: Let me play venture capital skeptic, and you can talk me back into optimism.

ALTMAN: I might not.

COWEN: Let’s say I say, tech has had a stream of big hits: personal computer, internet, cell phone, mobile. You’ve had a lot of rapidly scalable innovations become possible in a short period of time. We’re now in a slight lull. We’re not sure what the next big thing is or when it will come. Without that next big thing, won’t the current equilibrium require a higher rate of picking the right talent than venture capitalists are, in fact, able to do?

ALTMAN: I will talk you out of that one, happily. The most expensive investing mistake in the world to make is to be a pessimist, and it’s a common one. I think that’s actually the most common mistake to make in life. It is true that we are in a lull right now, but it is absolutely, categorically false that — unless the world gets destroyed in a very short term — that we will not have a bigger technological wave then we’ve ever had before.

COWEN: Why can’t I be an optimist but not an optimist about VC? I think new ideas will come through established companies. They’ll be funded by private equity. They’ll happen in China. But the exact formula where you can afford to make so many mistakes because the hits are so big — to what extent does VC rely on that kind of rapid scalability that may not come back?

And:

COWEN: Young Napoleon shows up. What do you think after 5 minutes?

ALTMAN: How young? Like 18-year-old Napoleon or 5-year-old?

COWEN: Before he’s famous, 21-year-old Napoleon.

ALTMAN: From everything I’ve read that would be a definite yes. In fact, the best book I read last year is called The Mind of Napoleon, which is a book of quotes about his views on everything. Just that thick on Napoleon quotes. Obviously deeply flawed human, but man, impressive.

Definitely recommended.

Indian and Pakistani stock markets

Right now the Indian market is up a small amount for the week, of course that may change.

I know you all love to yelp that markets don’t predict well (not what markets do!…that word “predict” is loaded) and that stock markets did not predict WWII, etc.  The lack of an Indian market reaction here is fully consistent with the fact that prediction is very hard.  Investors might simply be unsure which priors to update, and thus prices haven’t changed much.  That is consistent with the work of Philip Tetlock, also indicating that prediction is very hard.  So this kind of market result does not have to conflict with the best knowledge we have from political science and the other social sciences.

The Pakistan stock exchange, by the way, is down a few percentage points but not seeing massive carnage.

Could wage decoupling be because of health insurance?

From Scott Alexander:

There are a few lines of argument that suggest it’s not true.

First, wage growth has been worst for the lowest-paid workers. But the lowest-paid workers don’t usually get insurance at all.

Second, the numbers don’t really add up. Median household income in 1973 was about $48,000 in today’s dollars. Since then, productivity has increased by between 70% and 140% (EVERYBODY DISAGREES ON THIS NUMBER), so if median income had kept pace with productivity it should be between $82,000 and $115,000. Instead, it is $59,000. So there are between $23,000 and $67,000 of missing income to explain.

The average health insurance policy costs about $7000 per individual or $20000 per family, of which employers pay $6000 and $14000 respectively. But as mentioned above, many people do not have employer-paid insurance at all, so the average per person cost is less than that. Usually only one member of a household will pay for family insurance, even if both members work; sometimes only one member of a household will buy insurance at all. So the average cost of insurance to a company per employee is well below the $6000 to $14000 number. If we round it off to $6000 per person, that only explains a quarter of the lowest estimate of the productivity gap, and less than a tenth of the highest estimate. So it’s unlikely that this is the main cause.

I don’t agree with all of his framing (are there different deflators floating around in those estimates?  Scott does discuss that later in the post), but those points are worth considering nonetheless.  On Scott’s broader points (not discussed in my excerpt), I think he is underemphasizing the possibility that productivity may be measuring better than it really performed, and thus there is not so much decoupling at all.

For the pointer I thank Benjamin Cole.

The effect of banning payday loans

n November 2008, Ohio enacted the Short-Term Loan Law which imposed a 28% APR on payday loans, effectively banning the industry. Using licensing records from 2006 to 2010, I examine if there are changes in the supply side of the pawnbroker, precious-metals, small-loan, and second-mortgage lending industries during periods when the ban is effective. Seemingly unrelated regression results show the ban increases the average county-level operating small-loan, second-mortgage, and pawnbroker licensees per million by 156, 43, and 97%, respectively.

That is from Stefanie R. Ramirez, via the excellent Kevin Lewis.

*Not Working: Where Have All the Good Jobs Gone?*

That is the new and forthcoming book by David G. Blanchflower, here is one excerpt:

The high-paying union private-sector jobs for the less educated are long gone.  Real weekly wages in April 2018 in the United States were around 10 percent below their 1973 peak for private-sector production and non-supervisory workers in constant 1982-84 dollars.  In the UK real wages in 2018 are 6 percent below their 2008 level.

And:

In the post-recession period underemployment has replaced unemployment as the main indicator of labor market slack.

This is a very good book for anyone wishing to rethink what is going on in labor markets today.  In his view there is plenty more slack, as evidence by sluggish wage behavior.  You can pre-order here, due out in June.

*Big Business: A Love Letter to an American Anti-Hero*

I am very excited about my next book, due out April 9:

I view this work as an antidote to many of the less than stellar arguments circulating today.  It looks like this:

Table of contents

1. A new pro-business manifesto

2. Are businesses more fraudulent than the rest of us?

3. Are CEOs paid too much?

4. Is work fun?

5. How monopolistic is American big business?

6. Are the big tech companies evil?

7. What is Wall Street good for, anyway?

8. Crony capitalism: How much does big business control the American government?

9. If business is so good, why is it disliked?

Here is part of the Amazon description:

An against-the-grain polemic on American capitalism from New York Times bestselling author Tyler Cowen.

We love to hate the 800-pound gorilla. Walmart and Amazon destroy communities and small businesses. Facebook turns us into addicts while putting our personal data at risk. From skeptical politicians like Bernie Sanders who, at a 2016 presidential campaign rally said, “If a bank is too big to fail, it is too big to exist,” to millennials, only 42 percent of whom support capitalism, belief in big business is at an all-time low. But are big companies inherently evil? If business is so bad, why does it remain so integral to the basic functioning of America? Economist and bestselling author Tyler Cowen says our biggest problem is that we don’t love business enough.

In Big Business, Cowen puts forth an impassioned defense of corporations and their essential role in a balanced, productive, and progressive society. He dismantles common misconceptions and untangles conflicting intuitions.

You can pre-order here on Amazon.  Here at Barnes & Noble.  Here at Books a Million.  Here at Itunes.  Here at IndieBound.  From PlayGoogle.  From Kobo.

Here is the publisher’s home page.  Definitely recommended…and if you are a regular MR reader, no more than five to ten percent of this book has already appeared on this blog.

NY State Budget Director on Amazon

The open letter on Amazon from Robert Mujica, New York State’s Budget Director, is on fire. It shines an unflattering light on many people involved in the Amazon decision but its analysis of twitter mobs goes well beyond Amazon.

In my 23 years in the State Capitol, three as Budget Director, Amazon was the single greatest economic development opportunity we have had. Amazon chose New York and Virginia after a year-long national competition with 234 cities and states vying for the 25,000-40,000 jobs. For a sense of scale, the next largest economic development project the state has completed was for approximately 1,000 jobs. People have been asking me for the past week what killed the Amazon deal. There were several factors.

First, some labor unions attempted to exploit Amazon’s New York entry. The RWDSU Union was interested in organizing the Whole Foods grocery store workers, a subsidiary owned by Amazon, and they deployed several ‘community based organizations’ (which RWDSU funds) to oppose the Amazon transaction as negotiation leverage. It backfired.

…Organizing Amazon, or Whole Foods workers, or any company for that matter, is better pursued by allowing them to locate here and then making an effort to unionize the workers, rather than making unionization a bar to entrance. If New York only allows unionized companies to enter, our economy is unsustainable, and if one union becomes the enemy of other unions, the entire union movement – already in decline – is undermined and damaged.

Second, some Queens politicians catered to minor, but vocal local political forces in opposition to the Amazon government incentives as ‘corporate welfare.’ Ironically, much of the visible ‘local’ opposition, which was happy to appear at press conferences and protest at City Council hearings during work hours, were actual organizers paid by one union: RWDSU. (If you are wondering if that is even legal, probably not). Even more ironic is these same elected officials all signed a letter of support for Amazon at the Long Island City location and in support of the application. They were all for it before Twitter convinced them to be against it.

…Furthermore, opposing Amazon was not even good politics, as the politicians have learned since Amazon pulled out. They are like the dog that caught the car. They are now desperately and incredibly trying to explain their actions. They cannot.

…Third, in retrospect, the State and the City could have done more to communicate the facts of the project and more aggressively correct the distortions. We assumed the benefits to be evident: 25,000-40,000 jobs located in a part of Queens that has not seen any significant commercial development in decades and a giant step forward in the tech sector, further diversifying our economy away from Wall Street and Real Estate. The polls showing seventy percent of New Yorkers supported Amazon provided false comfort that the political process would act responsibly and on behalf of all of their constituents, not just the vocal minority. We underestimated the effect of the opposition’s distortions and overestimated the intelligence and integrity of local elected officials.

Incredibly, I have heard city and state elected officials who were opponents of the project claim that Amazon was getting $3 billion in government subsidies that could have been better spent on housing or transportation. This is either a blatant untruth or fundamental ignorance of basic math by a group of elected officials. The city and state ‘gave’ Amazon nothing. Amazon was to build their headquarters with union jobs and pay the city and state $27 billion in revenues. The city, through existing as-of-right tax credits, and the state through Excelsior Tax credits – a program approved by the same legislators railing against it – would provide up to $3 billion in tax relief, IF Amazon created the 25,000-40,000 jobs and thus generated $27 billion in revenue. You don’t need to be the State’s Budget Director to know that a nine to one return on your investment is a winner.

The seventy percent of New Yorkers who supported Amazon and now vent their anger also bear responsibility and must learn that the silent majority should not be silent because they can lose to the vocal minority and self-interested politicians.

…Make no mistake, at the end of the day we lost $27 billion, 25,000-40,000 jobs and a blow to our reputation of being ‘open for business.’ The union that opposed the project gained nothing and cost other union members 11,000 good, high-paying jobs. The local politicians that catered to the hyper-political opposition hurt their own government colleagues and the economic interest of every constituent in their district. The true local residents who actually supported the project and its benefits for their community are badly hurt. Nothing was gained and much was lost. This should never happen again.

Even if you think the end result was fine, as I do, this was a political fiasco for New York. Amazon was wise to exit when they did because the pecking of the chickens would only have intensified as they sunk investments.

*Law and Macroeconomics: Legal Remedies for Recessions*

That is the new and interesting book by Yair Listokin.  He argues that during a downturn regulators perhaps should be slower to approve utility rate increases, the IRS should run tax policy in a more stimulative manner, construction expenditures should be less regulated, and some environmental review should be eased.  Perhaps during the Greek financial crisis, all prices and debt contracts should have been lowered, by law, an immediate ten percent, to ease the deflation.

Should so many different parts of government, including at the state and local level, have macroeconomic goals added to their missions?  I am not sure, but I am glad to see an entire book devoted to the idea.

The Georgist equilibrium comes to Greece?

The 63-year-old has been been trying to buy an apartment ever since she was evicted from the home she rented for 32 years – when it was bought by Chinese investors two years ago.

“I want some security in case the same thing happens again,” says Ms Hynes, originally from Ireland. She earns a modest salary as an English teacher, while her Greek husband’s monthly pension was cut from €1,500 (£1,315; $1,690) to €500 during the country’s economic crisis, which began in 2010.

“When we were evicted there were still apartments selling nearby for €100,000. Now I can’t find anything under €250,000. These are Chinese and Russian prices. Not Greek.”

Greece’s financial crisis a decade ago shrank the country’s economy by more than 25% in the following years, but there are finally signs of improvement.

The property market, once completely dead, is on the rise – house prices in Athens rose 3.7% last year…

The boom appears to be driven by a controversial “golden visa” scheme, in which non-EU citizens receive residency and free movement in the EU’s Schengen zone, in exchange for investing in property.

The worry is that foreign investors are benefiting while ordinary Greeks miss out.

Many EU countries including the UK, Portugal and Spain, have golden visa schemes, but Greece has the lowest threshold. Investors receive five-year residency after purchasing €250,000 of property, making the country a new hotspot for foreign buyers.

Here is the full Jessica Bateman BBC story, via Ray Lopez.  Does a culture of renters bring a bohemian, non-complacent dynamic urban core?  Or a bunch of whiners who oppose economic progress?  Or both?

Are the New York subsidies to Amazon really so outrageous?

No, as I explain in my latest Bloomberg column, I do not think New York should have offered Amazon the tax break.  Still, the polemical outrage over this proposed policy seems to me out of hand.  It simply wasn’t that costly, unusual, or unfair.  Here is one bit:

Consider, by way of illustration, entitlement and discretionary spending on the federal level. A program such as Social Security or Medicare is done entirely by formula, as it should be; large companies cannot lobby for higher payments or lower taxes for their workers. Much of discretionary spending, by contrast, is research grants and procurement contracts. One company or researcher wins, and the others do not. Furthermore, the government will usually offer different prices and terms, based on how much value it thinks the winning bidder can bring to the project. All of which is to say: Discretionary spending requires … government discretion.

Viewed in the context, critics of local development subsidies are also critics of government discretion. Or, to frame the issue in a duller way: They do not believe local governments should treat economic development as a procurement problem. That’s a defensible position, but it is not obviously correct.

Another analogy is with private shopping malls, which commonly charge much lower per-unit rents to anchor tenants, maybe even subsidizing them. That is based on the view that a famous retail chain or movie theater can help other businesses in the mall by attracting customers and burnishing the overall image of the place. When a local government offers tax incentives to relocating businesses, it is in a sense acting like a shopping mall, which treats tenant recruitment as a kind of procurement problem. Offering differential rewards to prospective tenants is standard practice.

And note this point about fixed assets:

When a large company is going to make a significant investment in an urban area, it is hoping for support in terms of infrastructure maintenance or improvement, and indeed it invests on that basis. The reality is that municipalities often have difficulty fulfilling their obligations anyway. (This also holds true, unfortunately, for even basic promises to ordinary citizens. Ridden the New York City subway lately?)

In other words, Amazon cannot walk away from NYC the way a street vendor can move to South Carolina and set up a barbecue shop.  So they will be taxed harder ex post, if only in “in kind” terms, namely inferior services for the company and its employees.  The lower tax rate upfront is in large part an offset to this expected time consistency problem.

By the way, Singapore, Singapore, Singapore.  And I thank Garett Jones for the shopping malls point.

Peremptory Challenges

During the jury selection process, attorneys may request that a potential juror be stricken for cause, e.g. the juror is related to the defendant. Attorneys also have a limited number of peremptory challenges, typically between 3 and 20 depending on the state and the seriousness of the charges, which are essentially accepted without question. In Batson v. Kentucky the Supreme Court ruled that peremptory challenges may not be based solely on race but it’s widely acknowledged that Batson has no teeth because attorneys can easily come up with pretexts–which need not rise to the level of causes–to strike.

Next month the Supreme Court will revisit peremptory challenges and race. I don’t have strong opinions on the issue, although a small number of peremptory challenges seem fine to me, if only to keep the system moving and reduce the time and resources spent on jury selection. One reason I don’t have strong opinions is that I don’t think peremptory challenges are as biased as a NYTimes article seems to suggests.The NYTimes article, for example, never mentions that defendants also get peremptory challenges!  A second more subtle reason is that diversity of the jury pool constrains the jury even when there are no minorities on the jury. Here, from an earlier post, I comment on the findings of The Impact of Jury Race in Criminal Trials:

What the authors discover is that all white juries are 16% more likely to convict black defendants than white defendants but the presence of just a single black person in the jury pool equalizes conviction rates by race. The effect is large and remarkably it occurs even when the black person is not picked for the jury. The latter may not seem possible but the authors develop an elegant model of voir dire that shows how using up a veto on a black member of the pool shifts the characteristics of remaining pool members from which the lawyers must pick; that is, a diverse jury pool can make for a more “ideologically” balanced jury even when the jury is not racially balanced.

Thus, diversity of the jury pool may be as important as diversity of the jury–in a way that’s fortunate since it’s easier to make the jury pool diverse (as we have done with required randomization) than the jury. Instead of eliminating peremptory challenges, I’d raise their cost. For example, suppose that both sides get 3 “free” peremptory challenges but if they wanted one more they would have to give two to the opposing side.

Addendum: Justice Kavanaugh has written in favor of restricting peremptory challenges.

Amazon and taxes: a simple primer

The main reason Amazon as a corporate entity does not pay much in taxes is because the company so vigorously reinvests its profit.  The resulting expensing provisions lower their tax liabilities, in some cases down to zero or near-zero.  That is in fact the kind of incentive our tax system is supposed to create, and does so only imperfectly, noting that many economists have suggested moving to full expensing.

(NB: You can’t hate both share buybacks and profit reinvestment!)

Amazon pays plenty in terms of payroll taxes and also state and local taxes.  Nor should you forget the taxes paid by Amazon’s employees on their wages.  Not only is that direct revenue to various levels of government, but the incidence of those taxes falls somewhat on Amazon, which now must pay higher wages to offset the tax burden faced by their employees.  Not everyone wants to live in NYC or Queens!  (Do you agree with Paul Krugman’s charge that the Trump tax cuts are mainly a giveaway to capital?  If so, you probably also should believe that the wage taxes paid by Amazon employees fall largely on capital.)

There is no $3 billion that NYC gets to keep if Amazon does not show up.  That “money” was a pledged reduction in Amazon’s future tax burden at the state and local level.

When it comes to the discussion surrounding Amazon and taxes, I can only sigh…

RadicalXChange, March 22-24

Robert Wiblin of 80,000 hours has an excellent podcast with Glen Weyl on Radical institutional reforms that make capitalism & democracy work better. Weyl’s diagnosis of the problems of capitalism and democracy strike me as wrongheaded but on the other hand his solutions are interesting.and original. Wiblin does a good job of gently but decisively pushing back in places, e.g. in the discussion of high modernism.

RadicalXChange is hosting a big conference March 22-24 in Detroit. In addition to Weyl, speakers include Vitalik Buterin, Margaret Levi and Zooko Wilcox among others. I will be talking about open borders and also about city development on a panel with Devon Zuegel, Mwiya Musokotwane and Mark Lutter.

Corporate Law Before the FCA (or SEC)

In the late nineteenth century Britain had almost no mandatory shareholder protections, but had very developed financial markets. We argue that private contracting between shareholders and corporations meant that the absence of statutory protections was immaterial. Using approximately 500 articles of association from before 1900, we code the protections offered to shareholders in these private contracts. We find that firms voluntarily offered shareholders many of the protections that were subsequently included in statutory corporate law. We also find that companies offering better protection to shareholders had less concentrated ownership.

Acheson, Campbell and Turner writing in the Review of Financial Studies. Interesting implications for the US system of competitive federalism in corporate law.

Hat tip: Kevin Lewis.