Category: Economics

The real China shock came to Mexico

Mexican manufacturing job loss induced by competition with China increases cocaine trafficking and violence, particularly in municipalities with transnational criminal organizations. When it becomes more lucrative to traffic drugs because changes in local labor markets lower the opportunity cost of criminal employment, criminal organizations plausibly fight to gain control. The evidence supports a Becker-style model in which the elasticity between legitimate and criminal employment is particularly high where criminal organizations lower illicit job search costs, where the drug trade implies higher pecuniary returns to violent crime, and where unemployment disproportionately affects low-skilled men.

That is from a recent paper by Melissa Dell, Benjamin Feigenberg, Kensuke Teshima, forthcoming in AER: Insights.

The NBA, Daryl Morey, and China

I changed my mind on this issue after pondering it for a while, here is my Bloomberg column on the topic.  Here is one bit:

True to form, I find myself in disagreement with the consensus: Morey committed a blunder, and deleting the tweet was the correct thing to do.

And more:

American politicians and leaders should offer greater support for the more liberal sides of the Hong Kong protest movement. But not all businesspeople are in the same position, especially if they are actively involved with China or other countries whose behavior is under consideration.

To provide a slightly more neutral example, the NBA is currently trying to market its product to India. In the meantime, I don’t think NBA executives should be tweeting or commenting about the status of Kashmir. Those strictures should hold even if the tweets or remarks are entirely correct.

There is simply too much tension between the fiduciary obligations of the potential speakers and the issues under consideration. For better or worse, the NBA is committed to a major expansion in China, and it is entirely normal for the association — like any other business — to demand that its executives do not conduct diplomacy, engage in negotiations or make political commentary on the side. The NBA’s mistake was simply to insist on this in far too clumsy and public a manner.

What they should do is simply pull the training camp out of Xinjiang, no squawking required.  By the way, here are much better American corporate targets than the NBA.  And the close:

As for the practical question of where things go from here, I’ll be watching to see what NBA players — most of all the stars, many of whom have contracts with Chinese companies — say next.

Finally:

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

There is much more at the link, more than usual.  Many of you love the doux commerce thesis, namely that trade ties encourage peace among nations.  Yes that is usually true, but sometimes the role of the corporations is to promote lies, or at least not speak the truth too loudly.  That is part of the Montesquieu bargain, whether one likes it or not.  You are installing an intermediary with incentives for cooperation and good will, not an arbiter of truth.

We are overreacting on this one because it is our main geopolitical rival — China — forcing a major American institution, namely the NBA, to eat crow, because of the sequencing of events.  But in reality, there is nothing wrong with a sports league that steers its major executives away from commenting on external politics and that is very often the norm in the corporate world, in countries both nasty and nice.

The Formative Years

People born between 1963 and 1965 are less likely to drive a car to work, are more likely to commute using public transit and are even less likely to own a car than people born just before or after those years. Why? It’s a great puzzle. Give it a guess.

Severen and van Benthem have a compelling answer:

An individual’s initial experiences with a common good, such as gasoline, can shape their behavior for decades. We first show that the 1979 oil crisis had a persistent negative effect on the likelihood that individuals that came of driving age during this time drove to work in the year 2000 (i.e., in their mid 30s). The effect is stronger for those with lower incomes and those in cities. Combining data on many cohorts, we then show that large increases in gasoline prices between the ages of 15 and 18 significantly reduce both (i) the likelihood of driving a private automobile to work and (ii) total annual vehicle miles traveled later in life, while also increasing public transit use. Differences in driver license age requirements generate additional variation in the formative window. These effects cannot be explained by contemporaneous income and do not appear to be only due to increased costs from delayed driving skill acquisition. Instead, they seem to reflect the formation of preferences for driving or persistent changes in the perceived costs of driving.

Here’s a nice figure from an excellent piece covering the Severen and van Benthem paper in the Washington Post by Van Dam. Van Dam also covers a paper by Malmendier and Shen which shows how unemployment in formative years can change behavior through a lifetime even absent differences in income.

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Does walkability boost economic mobility?

Intergenerational upward economic mobility—the opportunity for children from poorer households to pull themselves up the economic ladder in adulthood—is a hallmark of a just society. In the United States, there are large regional differences in upward social mobility. The present research examined why it is easier to get ahead in some cities and harder in others. We identified the “walkability” of a city, how easy it is to get things done without a car, as a key factor in determining the upward social mobility of its residents. We 1st identified the relationship between walkability and upward mobility using tax data from approximately 10 million Americans born between 1980 and 1982. We found that this relationship is linked to both economic and psychological factors. Using data from the American Community Survey from over 3.66 million Americans, we showed that residents of walkable cities are less reliant on car ownership for employment and wages, significantly reducing 1 barrier to upward mobility. Additionally, in 2 studies, including 1 preregistered study (1,827 Americans; 1,466 Koreans), we found that people living in more walkable neighborhoods felt a greater sense of belonging to their communities, which is associated with actual changes in individual social class.

Here is the paper by Oishi, S., Koo, M., & Buttrick, N. R., via Anecdotal.

The Wage Penalty to Undocumented Immigration

This paper examines the determinants of the wage penalty experienced by undocumented workers, defined as the wage gap between observationally equivalent legal and undocumented immigrants. Using recently developed methods that impute undocumented status for foreign-born persons sampled in microdata surveys, the study documents a number of empirical findings. Although the unadjusted gap in the log hourly wage between the average undocumented and legal immigrant is very large (over 35%), almost all of this gap disappears once the calculation adjusts for differences in observable socioeconomic characteristics. The wage penalty to undocumented immigration for men was only about 4% in 2016. Nevertheless, there is sizable variation in the wage penalty over the life cycle, across demographic groups, across different legal environments, and across labor markets. The flat age-earnings profiles of undocumented immigrants, created partly by slower occupational mobility, implies a sizable increase in the wage penalty over the life cycle; the wage penalty falls when legal restrictions on the employment of undocumented immigrants are relaxed (as with DACA) and rises when restrictions are tightened (as with E-Verify); and the wage penalty responds to increases in the number of undocumented workers in the labor market, with the wage penalty being higher in those states with larger undocumented populations.

By George Borjas and Hugh Cassidy, via the excellent Kevin Lewis.

Why firms stay private longer?

Yes, Sarbanes-Oxley is one well-known reason but there are more reasons, most of all stemming from a shift in the balance of power toward founders, boosting their ability to raise private capital:

One such notable deregulation event has been the National Securities Markets Improvement Act (NSMIA), passed in October 1996. NSMIA has made it easier for both private startups and the private funds investing in them to raise capital. First, NSMIA exempts private firms selling unregistered securities under Rule 506 of Regulation D from state securities regulations known as blue sky laws (Rule 506 is one of the exemptions firms can use to issue private shares not registered with the SEC). As a result, NSMIA has made it easier for startups to raise private capital from out-of-state investors by exempting private firms from complying with the blue sky laws of every new state where they issue securities (public firms have long been exempt from blue sky laws). Second, NSMIA has made it easier for private funds such as venture capital (VC) and private equity (PE) funds to raise large amounts of capital by increasing the number of investors in a fund that force the fund to register under the Investment Company Act (ICA).2Registered funds have to regularly disclose their investment portfolio and face leverage and other restrictions, and so VC and PE funds tend to avoid having to register.

That is from a new NBER working paper by Michael Ewens and Joan Farre-Mensa.

Andrew McAfee Places His Bets!

Andrew McAfee is offering to take a number of bets centered around predictions and implication from his new book More From Less. Here are a few of Andrew’s bold predictions that he is willing to bet on through the Long Bets division of the Long Now Foundation.

  • In 2029, the US will consume less total energy than it did in 2019.
  • In 2029, the US will produce less total CO2 emissions than it did in 2019, even after taking offshoring into account.
  • Over the five years leading up to 2029, the US will use less paper in total than it did over the five years leading up to 2019.

The most famous Long Bet was between Warren Buffett and Protege Partners

  • Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S&P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.

Buffett won that bet and earned over $2 million dollars for his favorite charity.

The purpose of Long Bets is to elicit argument and debate and to better encourage long thinking. All bet winnings go to charity.

Does regulation have a role in the repo rise?

Fed data show large banks are keeping a disproportionate amount in reserves, relative to their assets. The 25 largest US banks held an average of 8 per cent of their total assets in reserves at the end of the second quarter, versus 6 per cent for all other banks. Meanwhile, the four largest US banks — JPMorgan Chase, Bank of America, Citigroup and Wells Fargo — together held $377bn in cash reserves at the end of the second quarter this year, far more than the remaining 21 banks in the top 25.

Since the financial crisis, large banks have been obliged to meet a liquidity coverage ratio (LCR) — a portion of high-quality assets such as cash reserves and Treasuries that can be sold quickly to keep the lights on for a month in a crisis. But regulations also require them to track intraday liquidity — cash they can immediately access — which does not include Treasuries. This additional requirement can vary depending on their business models, which in turn inform supervisors’ and examiners’ bank-specific demands. Executives at several large banks say this puts a de facto premium on reserves that varies by bank..

Second-quarter data from the four largest reserve holders show Wells Fargo held 39 per cent of its high-quality liquid assets in reserves. JPMorgan held 22 per cent, Bank of America held 15 per cent and Citigroup 14 per cent.

“If you have a very large concentration in a few institutions and you lose one or two on any day, then you are losing a major portion of your funding,” said Jim Tabacchi, chief executive at South Street Securities, a broker dealer active in short-term debt markets. “Rates have to skyrocket. It’s simple math.”

Here is the full FT article.

Against central bank digital currencies

That is the theme of my latest Bloomberg column, note that the idea would to some extent cut private banks out of the intermediation equation.  Here is one excerpt:

An alternative scenario is that the central bank decides to enter the commercial lending business, much as your current bank does. Will the central bank be a better lender than the private banks? Probably not. Central banks are conservative by nature, and have few “roots in the community” as the phrase is commonly understood. The end result would be more funds used to buy Treasury bonds and mortgage securities — highly institutionalized investments — and fewer loans to small and mid-sized local businesses.

And:

The problems run deeper yet. Financial regulation makes a relatively tight distinction between banks and non-banks. Banks have access to the payments system directly and enjoy other privileges, and in return their risk-taking is regulated more heavily (by not only the Fed but also other federal agencies and states). A fintech startup, in contrast, avoids most bank regulations, but it must work through banks to make payments. This division of responsibilities is imperfect, but it has allowed many parts of the U.S. economy to grow and innovate without facing all of the regulations imposed on banks.

This leads to my primary objection to an official government e-currency: It would, in effect, make many more economic institutions more like banks. Over time, those institutions would probably be regulated more like banks, too. For instance, if the Fed is directly transmitting payments made by a private company, it might be wary of credit risk and impose capital and reserve requirements on that company, much as it does on banks. Banks also might complain that they are facing unfair competition, and ask that consistent regulations be imposed. In any case, more of the economy likely will be subject to financial regulation, not just the relatively narrow core of the banking system.

Not all innovation is good innovation.

Donor Cycle Dynamics

It’s an ill-wind that blows no good and in Allocating Scarce Organs, Dickert-Conlin, Elder and Teltser find that repealing motorcycle helmet laws generate large increases in the supply of deceased organ transplants. The supply shock, however, is just the experiment that the authors use to measure demand responses. It’s well known that the shortage of transplant organs has led to a long waiting-list. The waiting-list, however, is only the tip of the iceberg. Many people who could benefit from a transplant never bother getting on the list since their prospects are already so low. In addition, some people have access to substitutes for a deceased organ transplant namely a living donor. Finally, there is a quality tradeoff: as more organs become available the quality of the match may increase as people may pass on the first available organ to get a better match. The authors use the supply shock to study all these issues:

We find that transplant candidates respond strongly to local supply shocks, along two dimensions. First, for each new organ that becomes available in a market, roughly five new candidates join the local wait list. With detailed zip code data, we demonstrate that candidates listed in multiple locations and candidates living out-side of the local market disproportionately drive demand responses. Second, kidney transplant recipients substitute away from living-donor transplants. We estimate the largest crowd out of potential transplants from living donors who are neither blood relatives nor spouses, suggesting that these are the marginal cases in which the relative costs of living-donor and deceased-donor transplants are most influential. Taken together, these findings show that increases in the supply of organs generate demand behavior that at least partially offsets a shock’s direct effects. Presumably as a result of this offset, the average waiting time for an organ does not measurably decrease in response to a positive supply shock. However, for livers, hearts, lungs, and pancreases, we find evidence that an increase in the supply of deceased organs increases the probability that a transplant is successful, defined as graft survival. Among kidney transplant recipients, we hypothesize that living donor crowd out mitigates any health outcome gains resulting from increases in deceased-donor transplants.

In other words, increased organ availability increases the quality of the matches for organs that cannot be given by a living donor (hearts, lungs, pancreases, partially liver) but for kidneys some of the benefit of increased organ availability accrues to potential living donors who do not have to donate and this means that match quality does not substantially increase.

The authors also critique the geographic isolation of kidney donation regions. As I wrote when Steve Jobs received a kidney transplant:

Although there is no reason to think that Apple CEO Steve Jobs “jumped the line” to get his recent liver transplant, Jobs did have an advantage: He was able to choose which line to stand in.

Contrary to popular belief, transplant organs are not allocated solely according to medical need. Organs are allocated through a complex system of 58 transplant territories. Patients within each territory typically get first dibs on organs from that territory. That’s great if a patient happens to live in a territory with a lot of organ donors and relatively few demanders, but not so good for a patient living in New York, San Francisco or Los Angeles, where waiting lines are longest.

As a result of these “accidents of geography,” relatively healthy patients in some parts of the country get transplants while sicker patients in other parts of the country die waiting.

New issue of Econ Journal Watch

Volume 16, Issue 2, September 2019

In this issue:

Let facts be submitted to a candid worldRon Michener explains the role of monetary affairs in the hardships that helped to justify the rebellion of the American colonies, and criticizes Farley Grubb’s Journal of Economic History article on the money of colonial New Jersey.

Fads and trends in OECD economic thinking: Using the frequency of terms in the OECD’s Economic SurveysThomas Barnebeck Andersen shows how policy ideas in economics changed over time, including ‘demand management,’ ‘incomes policy,’ ‘output gap,’ ‘potential GDP,’ ‘structural unemployment,’ ‘structural reform,’ ‘macroprudential,’ ‘incentives,’ ‘deregulation,’ ‘liberalisation,’ ‘privatisation,’ ‘human capital,’ ‘education,’ and ‘PISA.’

The economics of economics: Using 291 person-year observations from UCSD Econ, Yifei Lyu and Alexis Akira Toda model Econ faculty compensation on publications and citations and find, among other things, no evidence of a gender gap.

The Liberal Tradition in South Africa, 1910–2019Martin van Staden describes the unique history and current standing of classical liberalism in South Africa, including an extensive account of liberals in the nation’s politics. The article extends the Classical Liberalism in Econ, by Country series to 19 articles.

Lawrence Summers Deserves a Nobel Prize for Reviving the Theory of Secular StagnationJulius Probst makes the case, inaugurating the series on Who Should Get the Nobel Prize in Economics, and Why?

Convention defined: We reproduce by permission a large portion of David K. Lewis’s Convention: A Philosophical Study (1969), wherein he defined coordination equilibriumcoordination problemcommon knowledge, and convention.

Mizuta’s 1967 checklist of Adam Smith’s library: We reproduce by permission the 1967 checklist created by Hiroshi Mizuta of the titles that were owned by Adam Smith. This checklist (supplemented by a list of additional once-elusive titles) provides a handy means for determining whether a title was in Smith’s personal library.

EJW Audio:

Ron Michener on Why It’s Important to Get Colonial U.S. Monetary History Right

Patrick Mardini on the Political Economy of Lebanon

Ivo Welch on Critical Finance Review

Maybe corporations don’t have enough power

In a context of monopsony power, wages at the top of the spectrum would be held lower. Corporations wouldn’t then voluntarily distribute them to workers with lower wages. But if firms lacked monopoly power, they wouldn’t be able to retain the gains from that. The gains would be captured as consumer surplus by the firms’ customers. In order to be competitive in the market for their goods and services, firms would have to assert their monopsonist power just to remain competitive by transferring those gains to the consumer.

…it does match with a context where more skilled workers were captured by powerful firms and less skilled workers benefit indirectly as consumers.  Maybe labor incomes had less variance because firms back then were more powerful.

That is from Kevin Erdmann.

Free Trade and Peace

We investigate the effect of trade integration on interstate military conflict. Our empirical analysis, based on a large panel data set of 243,225 country-pair observations from 1950 to 2000, confirms that an increase in bilateral trade interdependence significantly promotes peace. It also suggests that the peace-promotion effect of bilateral trade integration is significantly higher for contiguous countries that are likely to experience more conflict. More importantly, we find that not only bilateral trade but global trade openness also significantly promotes peace. It shows, however, that an increase in global trade openness reduces the probability of interstate conflict more for countries far apart from each other than it does for countries sharing borders. The main finding of the peace-promotion effect of bilateral and global trade integration holds robust when controlling for the simultaneous determination of trade and peace.

From Lee and Pyun, Does Trade Integration Contribute to Peace?

Economists have not exactly screwed things up

The lack of growth response to “Washington Consensus” policy reforms in the 1980s and 1990s led to widespread doubts about the value of such reforms. This paper updates these stylized facts by analyzing moderate to extreme levels of inflation, black market premiums, currency overvaluation, negative real interest rates and abnormally low trade shares to GDP. It finds three new stylized facts: (1) policy outcomes worldwide have improved a lot since the 1990s, (2) improvements in policy outcomes and improvements in growth across countries are correlated with each other (3) growth has been good after reform in Africa and Latin America, in contrast to the “lost decades” of the 80s and 90s. This paper makes no claims about causality. However, if the old stylized facts on disappointing growth accompanying reforms led to doubts about economic reforms, new stylized facts should lead to some positive updating of such beliefs.

That is the abstract of the new Bill Easterly paper.

Has Australia Really Had a 28-Year Expansion? (Yes!)

It’s often said that Australia hasn’t had a recession in nearly 30 years. Paulina Restrepo-Echavarria and Brian Reinbold of the Federal Reserve Bank of St. Louis take a closer look. If a recession is defined as two quarters of negative growth in GDP then the claim is true but if you define a recession as two quarters of negative growth in GDP per capita then there have been three such recessions since 1991: circa 2000-2001, 2005-2006 and 2018-2019.

Line Chart Showing Australia Real GDP Per Capita Growth Rate from 1960 - 2015

Most countries, however, have had more recessions when measured in GDP per capita than in GDP and Australia still looks comparatively good on this measure. Moreover, the official definition of a US recession is not two quarters of negative growth in real GDP it’s the more holistic

A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

Did Australia have three recession since 1991 by this measure? It’s difficult to say but I would look more to unemployment rates. The following graph shows Australian real GDP growth rates in purple measured quarterly, real GDP per capita in green measured annually and the unemployment rate in blue. (The data is not identical to Restrepo-Echavarria and Reinbold (RER) as I use FRED data and the FRED economists do not!). As per RER the purple line is generally above the green so you are more likely to see recessions in GDP per capita than in GDP. Take a look at the unemployment rate, however. The 2005-2006 Australian “recession” is completely absent in unemployment so I would rule that out. I also do not see any recession as measured by unemployment in 2018-2019, perhaps it is coming but I would rule it out as of today. The unemployment measure clearly identifies recessions circa 2001-2002 which agrees with RER and also in 2008-2009 where RER do not identify a recession!. Thus, the RER identification of recessions doesn’t work very well as it has both false positives and false negatives.

On the larger issue of Australian economic performance, at worst, I would identify two mild recessions since 1991, circa 2001-2002 and 2008-2009. Now look again at the graph. The shading is US recessions! The Australian and US economies are united enough and subject to similar enough shocks that US recession dating clearly picks out Australian recessions as measured by increases in unemployment rates.

The bottom line is that however you measure it, Australian performance looks very good. Moreover RER are correct that one of the reasons for strong Australian economic performance is higher population growth rates. It’s not that higher population growth rates are masking poorer performance in real GDP per capita, however, it’s more in my view that higher population growth rates are contributing to strong performance as measured by both real GDP and real GDP per capita.