Category: Economics

Demographics matters more and explains more than you think

The US economy has undergone a number of puzzling changes in recent decades. Large firms now account for a greater share of economic activity, new firms are being created at a slower rate, and workers are getting paid a smaller share of GDP. This paper shows that changes in population growth provide a unified quantitative explanation for these long-term changes. The mechanism goes through firm entry rates. A decrease in population growth lowers firm entry rates, shifting the firm-age distribution towards older firms. Heterogeneity across firm age groups combined with an aging firm distribution replicates the observed trends. Micro data show that an aging firm distribution fully explains i) the concentration of employment in large firms, ii) and trends in average firm size and exit rates, key determinants of the firm entry rate. An aging firm distribution also explains the decline in labor’s share of GDP. In our model, older firms have lower labor shares because of lower overhead labor to employment ratios. Consistent with our mechanism, we find that the ratio of nonproduction workers to total employment has declined in the US.

That is from a new NBER working paper by Hugo Hopenhayn, Julian Neira, and Rish Singhania, via the excellent Kevin Lewis.

Athletes Don’t Own Their Tattoos

NYTimes: Any creative illustration “fixed in a tangible medium” is eligible for copyright, and, according to the United States Copyright Office, that includes the ink displayed on someone’s skin. What many people don’t realize, legal experts said, is that the copyright is inherently owned by the tattoo artist, not the person with the tattoos.

Some tattoo artists have sold their rights to firms which are now suing video game producers who depict the tattoos on the players likenesses:

The company Solid Oak Sketches obtained the copyrights for five tattoos on three basketball players — including the portrait and area code on Mr. James — before suing in 2016 because they were used in the NBA 2K series.

…Before filing its lawsuit, Solid Oak sought $819,500 for past infringement and proposed a $1.14 million deal for future use of the tattoos.

To avoid this shakedown, players are now being told to get licenses from artists before getting tattooed.

Resource wealth depends on market orientation

This paper explores the effect of market orientation on (known or available) natural resource wealth using a novel dataset of world-wide major hydrocarbon and mineral discoveries. Our empirical estimates based on a large panel of countries show that increased market orientation causes a significant increase in discoveries of natural resources. In a thought experiment where economies in Latin America and sub-Saharan Africa remain closed, they would have only achieved one quarter of the actual increase in discoveries they have experienced since the early 1990s. Our results call into question the commonly held view that known or available natural resource endowments are exogenous.

That is the abstract of a new paper by Rabah Arezki, Frederick van der Ploeg, and Frederik Toscani, via the excellent Kevin Lewis.

Is Islam Compatible with Free-Market Capitalism? An Empirical Analysis, 1970–2010

Are majority-Muslim countries laggards when it comes to developing liberal economic institutions? Using an Index of Economic Freedom and its component parts, this study finds that Muslim-dominant countries (>50% of the population) are positively associated with free-market capitalism. Protestant dominance is also positively correlated, but the association stems from just two components of the index, mainly “legal security and property rights protection.” Surprisingly, Protestant countries correlate negatively with “small government” and “freedom to trade,” two critical components of free-market capitalism. Muslim dominance shows positive correlations with all areas except for “legal security and property rights.” The results are consistent when assessing similar variables measuring property rights and government ownership of the economy collected by the Varieties of Democracy Project. Capitalistic policies and institutions, it seems, may travel across religions more easily than culturalists claim.

That is by Indra de Soysa, I call it speculative but nonetheless an underrated point, via the excellent Kevin Lewis.

Income risk-sharing in baseball

Pando Pooling is a startup headquartered in Palo Alto, Calif. The company’s founders, Charlie Olson and Eric Lax, met in 2015 at Stanford’s Graduate School of Business where they dreamed up an endeavor that would support people in high-volatility careers—entrepreneurs, primarily. (Pando is Latin for “I spread out,” and also refers to a colony of aspen trees, whose roots intertwine to make a massive underground network.) What if, they wondered, a large enough group of entrepreneurs pooled shares of their earnings, ensuring that each entrepreneur stood less chance of going bust? In theory this would allow entrepreneurs to take more risks in pursuing their ideas.

Olson and Lax didn’t start with entrepreneurs, though. They took their idea to a different field—literally. Just as MLB teams pool a third of their revenue to support smaller-market teams, Olson and Lax saw an opportunity to give young baseball players more security. As with entrepreneurs, only a small set of players go on to earn fortunes; many talented, driven players leave with little. (Less than 25% of first-round draft picks play more than three years in the majors.) Unlike tech founders, though, players are paid at regular intervals.

Here’s Pando’s pitch: A young player contributes a fixed share of his salary to his pool after he receives at least $1.6 million in MLB earnings. There is more than one pool, but every member in each pool must agree on every other poolmate, and Pando takes 10% of each pool. Pando recruits players through agents, financial advisers and players who have already signed with the company; Olson says he has 150 members so far. Once a player is on board, Pando then tries to match him with a handful of similar players to form a pool.

Here is the full Sports Illustrated article.  It is a longstanding puzzle why such arrangements never have taken off.  Is it some mix of adverse selection, excess optimism, too high resulting marginal tax rates, and bad PR because it is vaguely reminiscent of slavery?  Still, just think — if this could work the incentive to invest in the talent of other people would be so much higher.

Via Conor Durkin.

From the comments, on Facebook

The problem with this paper is that it excludes, entirely, individuals and businesses who use Facebook as a (or The) e-commerce channel for their commercial activities. That’s a common mistake, especially in the US and Europe, where the platform is widely viewed as a means for non-commercial social interaction. But elsewhere in the world – especially Africa and India – it’s also viewed as a crucial commercial and trading platform (that Facebook is trying to leverage). Ask a Nigerian secondhand goods trader how much he’d accept to give up his account, and I’m pretty sure it’ll be more than $1k! Anyway, I touched on some of this back in April, here:

That is from Adam Minter.

In defense of McKinsey

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

The latest institution to take a big whack from the media, with its well-known negative bias, is McKinsey & Co. A recent article in The New York Times shows how much the consulting company has worked for authoritarian and autocratic countries, including China, Saudi Arabia and Russia.

I would instead frame this story in a broader and far more positive reality: One of the biggest, most positive (and most neglected) global trends over the last 30 years has been the spread of managerial and technocratic expertise to what used to be called “third world governments.” In most countries, the central banks, the public health authorities, the treasuries and many other public-sector institutions now collect good data, hire Western-educated advisers, and try to implement good solutions.


…when I meet entrepreneurs in poorer parts of the world, I am often struck by the fact that they are highly intelligent and conscientious, but they don’t always understand all of the cultural codes of good management. Advice that might appear stupid or trivial to more experienced observers may actually help to build new cultures of business excellence and economic growth.

There is much more at the link.  Here is a good tweet stream on the company.  Here is the McKinsey response to the NYT article.

The Top Ten Marginal Revolution Posts of 2018

As measured by page views the most popular MR post this year was my post on how there is one law for the police and another for the rest of us, Get Out of Jail Free Cards.

Second was Tyler Cowen’s 12 Rules for Life. Number seven on Tyler’s list, “Learn how to learn from those who offend you,” caught my eye today but there’s much wisdom throughout.

The third most popular post was by neither Tyler, myself, nor a guest blogger but rather by a MR commentator, One smart guy’s frank take on working in some of the major tech companies.

One of my favorite posts was fourth, Lessons from “The Profit”. The new season of The Profit has started and continues to be of interest. All IO economists should watch.

Number five was another one of my favorites Why Sexism and Racism Never Diminish–Even When Everyone Becomes Less Sexist and Racist.

Tyler’s excellent analysis of the North Korean deal shows why he is an important thinker in foreign policy, able to see beyond the headlines, The North Korean summit and deal.

A second MR commentator had another top post, Will truckers be automated? (from the comments).

Tyler doesn’t like to write the kind of post that came in at number 8 but these posts are always popular which is one reason Tyler doesn’t like to write them. The five most influential public intellectuals?

Number 9 was a useful post, Why are antiques now so cheap?

Coming in at number 10 was my video and Tyler’s post on Paul Romer’s Nobel Prize, Why Paul Romer Won the Nobel Prize in Economics.

Other notable posts from Tyler included:

Other notable posts from me included:

Overall, I’d say it was a notable year for MR commentators! Congratulations! What were your favorite, or least favorite, MR posts of 2018?

My Conversation with Daniel Kahneman

Here is the transcript and audio, a rollicking time was had by all.  We covered what you would expect us to have covered.  Here is one bit:

COWEN: And that people want to maximize their overall sense of how their life has gone — do you think that is ultimately Darwinian roots? Why is that the equilibrium? Happiness feels good, right?

KAHNEMAN: Yeah, happiness feels good in the moment. But it’s in the moment. What you’re left with are your memories. And that’s a very striking thing — that memories stay with you, and the reality of life is gone in an instant. So memory has a disproportionate weight because it’s with us. It stays with us. It’s the only thing we get to keep.

COWEN: If you think of your own life, have you maximized happiness or the overall sense of how your life has gone?

KAHNEMAN: Neither.


COWEN: Neither. Citations?


And on his new project:

KAHNEMAN: I’ll tell you where the experiment from which my current fascination with noise arose. I was working with an insurance company, and we did a very standard experiment. They constructed cases, very routine, standard cases. Expensive cases — we’re not talking of insuring cars. We’re talking of insuring financial firms for risk of fraud.

So you have people who are specialists in this. This is what they do. Cases were constructed completely realistically, the kind of thing that people encounter every day. You have 50 people reading a case and putting a dollar value on it.

I could ask you, and I asked the executives in the firm, and it’s a number that just about everybody agrees. Suppose you take two people at random, two underwriters at random. You average the premium they set, you take the difference between them, and you divide the difference by the average.

By what percentage do people differ? Well, would you expect people to differ? And there is a common answer that you find, when I just talk to people and ask them, or the executives had the same answer. It’s somewhere around 10 percent. That’s what people expect to see in a well-run firm.

Now, what we found was 50 percent, 5–0, which, by the way, means that those underwriters were absolutely wasting their time, in the sense of assessing risk. So that’s noise, and you find variability across individuals, which is not supposed to exist.

I enjoyed this particular exchange:

COWEN: Do you think of low intelligence as yet a third independent source of error? Or is that somehow subsumed in bias and noise?

KAHNEMAN: You mean plain stupidity?


COWEN: In some cases.

And this:

COWEN: A society such as Argentina that relies so heavily on psychoanalysis — as a psychologist, do you see that as bias? Is it a placebo? Is there a placebo effect in psychoanalysis?

KAHNEMAN: You seem to attribute . . . You seem to think that I think of bias all the time.


COWEN: I can’t imagine why. That’s my bias.

KAHNEMAN: It’s like thinking of sex all the time. I really don’t think of bias that much.


COWEN: Some questions about psychologists outside of what you’ve worked on, but maybe related — Freud. What do you think of Freud’s body of work? And has it influenced you at all?

Definitely recommended, and you will find cameo appearances by Michael Nielsen and Daniel Gross.

*The Economist* picks eight young top economists

They are:

Ms Dell and her Harvard colleagues Isaiah Andrews, Nathaniel Hendren and Stefanie Stantcheva; Parag Pathak and Heidi Williams of the Massachusetts Institute of Technology…Emi Nakamura of the University of California, Berkeley and Amir Sufi of the University of Chicago Booth School of Business…

Mr Pathak and his co-authors have compared pupils who only just made it into elite public schools with others who only just missed out, rather as Ms Dell compared villages on either side of the Pentagon’s bombing thresholds. The study showed that the top schools achieve top-tier results by the simple contrivance of admitting the best students, not necessarily by providing the best education. Ms Dell and her co-author showed that bombing stiffened villages’ resistance rather than breaking their resolve.

Ms Williams has exploited a number of institutional kinks in the American patent system to study medical innovation. Some patent examiners, for example, are known to be harder to impress than others. That allowed her to compare genes that were patented by lenient examiners with largely similar genes denied patents by their stricter colleagues. She and her co-author found that patents did not, as some claimed, inhibit follow-on research by other firms. This suggested that patent-holders were happy to let others use their intellectual property (for a fee).

Here is the article, it is an interesting piece.

Does school spending matter for child outcomes?

It seems it does, here is an excerpt from the conclusion of a new C. Kirabo Jackson paper on this question:

The recent quasi-experimental literature that relates school spending to student outcomes overwhelmingly support a causal relationship between increased school spending and student outcomes. All but one of the several multi-state studies find a strong link between spending and outcomes – indicating that money matters on average. Importantly, this is true across studies that use different data-sets, examine different time periods, rely on different sources of variation, and employ different statistical techniques. While one can poke holes in each individual study, the robustness of the patterns across a variety of settings is compelling evidence of a real positive causal relationship between increased school spending and student outcomes on average. However, an examination of single-state studies suggests that, on average, money matters, but that this is not always so in all settings or in all contexts.

And this:

To better understand why some studies find positive impacts while others do not, an examination of the few studies that are not positive is instructive. Three out of the seven papers that are not significant involve Title I spending, and three out of the seven involve capital spending. Given that 6 out of 7 of the studies that find no significant impact (86%) involve particular spending types may suggest that while overall budget increases may improve outcomes, increased funding tied to particular uses may not. In particular, the evidence is consistent with capital spending and Title I spending being less predictably effective than spending in general.

Here is an earlier and related paper on whether school spending cuts matter.

The actuarial code of conduct, with David Wright

David posts:

While my interview guests are getting settled in I occasionally ask them to read out some of the actuarial code of conduct and we discuss it. I’m assembling those clips into some content for my paid actuarial continuing education channel which all actuaries should check out (and get those CE credits before year-end!).

When I did this with Tyler my little warmup act turned into an impromptu Conversations with Tyler where we explore what it means to be an actuary and whether he and I might start a competitor organization! We end with a discussion of fronting and I missed an opportunity to talk about fronting can enable competition among insurers but that will have to wait for another day!
Listen to the (10 min) clip here!

There is also a transcript at the link.  For some time now I’ve believed that the best podcasts would be the pre-podcast discussions held right before the podcast proper starts.

Stunning Figures on Energy Efficiency

Over the past 60 years, the energy efficiency of ever-less expensive logic engines has improved by over one billion fold. No other machine of any kind has come remotely close to matching that throughout history.

Consider the implications even from 1980, the Apple II era. A single iPhone at 1980 energy-efficiency would require as much power as a Manhattan office building. Similarly, a single data center at circa 1980 efficiency would require as much power as the entire U.S. grid. But because of efficiency gains, the world today has billions of smartphones and thousands of datacenters.

From Mark Mills at Real Clear Energy.