Category: Economics

The economics of semaglutide

…while one would certainly like to have these drugs available to these patients, if the price of these drugs doesn’t come down, you can make a good argument their cost will literally break Medicare. Why? Well, roughly 35% of Medicare patients are overweight or obese. Roughly 75% of people over 65 have coronary artery disease. (https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6616540/#:~:text=The%20American%20Heart%20Association%20(AHA,age%20of%2080%20%5B3%5D.)

Even if you assume these numbers are independent of each other, which is very unlikely, because overweight people are more likely to have cardiovascular disease, this means at least 26% of the roughly 31 million Medicare recipients (and likely more) might benefit from these drugs. We have an eligible population for these drugs therefore of more than 8 million people. At current list prices we would be spending 8mil*1350*12 or about 130 billion dollars a year. Total Medicare spending is about 725 billion a year. So, Medicare spending would go up by more than 17% overnight and stay at that level for a long time to come.

Here is more from Gary Cornell, mostly about the degree of effectiveness.

Economic ornithology

But a hundred years ago, birds were seen as the best remedy for the weeds and insect pests that threatened the country’s food supply and cost farmers hundreds of millions of dollars every year. And in order to identify the precise impact that birds had on agriculture, a field called economic ornithology was born. According to one of its leading practitioners, economic ornithology was “the study of birds from the standpoint of dollars and cents … in short, it is the practical application of the knowledge of birds to the affairs of everyday life.”1 And from the 1880s to the 1930s, birds were widely seen as economic agents, working alongside farmers in the fight against the insect hordes.

By the 1940s, economic ornithology had become discredited and obsolete. Effective and affordable pesticides had entirely replaced the birds’ bug-killing role, while economic ornithologists could never prove that their methods actually increased the number of helpful birds. But before their role in agriculture was dismissed, there was a time when we believed that we depended on birds for our food, and for our very survival.

And here was the method of economic ornithology:

In 1916, Gilbert Trafton summarized the primary approach used by economic ornithologists: “The practical value of birds to man, whether helpful or harmful, depends chiefly on their food habits,” and by examining what they eat, “the exact economic status of a bird is determined.” Sometimes this was done by observing the behaviors of birds in the field, but it usually meant dissecting birds and seeing what they had in their stomachs.

Here is the full Substack, by Robert Francis.  Via Philip Wallach.

*The Economist* on Tatu City, Kenya

Take the pig’s ear first. Unveiled in 2008 as a $15bn smart city project, Konza Technopolis was supposed to be the heart of Kenya’s “silicon savannah” that, by 2020, would create 100,000 jobs and add 2% to gdp. Three years and many missed deadlines later, there is still far more evidence of savannah than silicon.

By contrast, Tatu City, on the northern outskirts of Kenya’s capital, Nairobi, is flourishing. Some 23,750 people already live, study or work there and 78 businesses have made it home. Moderna, an American drugmaker, is opening a $500m vaccine manufacturing facility, its first in Africa. Zhende Medical, a Chinese medical-supplies manufacturer, is also setting up shop.

Tatu and Konza were conceived at the same time. Each, at roughly 5,000 acres, is of a similar size. Both aspire to house populations of more than 200,000 people. And both have been designated Special Economic Zones (sezs), meaning that the businesses they house are eligible for tax benefits and other incentives. Why is one more likely to succeed than other? The answer lies not in their similarities, but in their differences, and these provide lessons for other developments in Africa.

The first is ownership. Konza’s proprietor is the state. Tatu City’s is Rendeavour, a big private urban land developer.

Here is the rest of the article.  Here are my three CWT podcasts about Tatu City.  I am pleased at how well it is all going!

For the pointer I thank Kurtis Lockhart of Charter Cities Institute.

My Conversation with the excellent Patrick McKenzie

Here is the audio, video, and transcript.  Here is part of the episode summary:

Tyler sat down with Patrick to discuss signature fields on the back of credit cards, whether bank tellers or waitstaff are more trustworthy, the gremlins behind spurious credit card declines, how debt collection and maple syrup heists should change your model of the world, Twitter’s continued success as the message bus for government and civil society, crypto vs traditional money transfers, the intended desolation of bank parking lots, why he moved to Japan and how it affected his ambition, why Tether hasn’t collapsed, the internet as a Great Work, how he’s experiencing reverse culture shock after returning to the US, what he’ll learn about next, and more.

Excerpt:

COWEN: How did the maple syrup heists change your overall view of the world and of humanity? What’s the model update?

MCKENZIE: Going back to “evil is an actual thing in the world,” I often assume that large, well-regarded, professionalized industries have a rate of crime associated with them which rounds to zero. I would assume agriculture is relatively heavily regulated. Maple syrup is an agricultural product. The only buyers of maple syrup by the containerful are “real companies.” Therefore, I would expect rounds-to-zero supply-chain fraud in maple syrup.

But it turns out that the amount of supply-chain fraud in maple syrup is actually quite higher than zero. The chain of custody for cars of maple syrup is much less regimented than you would expect that chain of custody to be. There are smaller buyers of maple syrup — not on the scale of you or me, but on the scales like a boutique maple syrup refinery — who just don’t do as many checks as the large producers or suppliers, et cetera, do. So, it is possible to steal millions of dollars of maple syrup and sell it on the black market, which blew my mind.

This rhymes with how Tide, the well-known detergent in the United States, is used as a commodity on the criminal and semi-criminal/system deal, less criminal undergrounds, in that Tide can be resold. Online marketplaces are getting a lot of the attention, but the traditional way to use Tide as a currency for people who have less access to dollars was to resell the Tide to a corner bodega.

Since the corner bodega can easily verify that the Tide hasn’t been tampered with because the Tide seal is on it, and has basically unlimited willingness to do small-dollar transactions that make money, that was a way to recycle Tide which had been stolen — or which had been acquired by means that were not stealing, but also not exactly the official way of getting Tide — and recycle it into the more or less legitimate economy, insofar as we think that the corner bodega is more or less legitimate, which I think is a complicated story.

And:

COWEN: Why are bank parking lots usually so empty?

MCKENZIE: Oh, this is a straightforward result from queuing theory, if you can believe it. Queuing theory/operation science, by the way, tremendously under-understood by many people to whom it is professionally relevant, be that as it may. When you think of your typical stop-in at a bank, you go in, perhaps you deposit a check, perhaps you talk to the teller. You probably think, “I will have three minutes of dwell time.” So, you expect to be in and out. But the thing that the bank really wants to optimize for is new account opening.

New account opening requires 30 to 60 minutes plus of dwell time, depending on what type of account you are opening. Then when you back out that variability, it turns out that gratuitously over-provisioning the parking space almost all of the time maximizes for not losing new account opening at a few very limited windows per year. Those very limited windows can make or break the branch’s ability to contribute to their larger financial institution.

The number of accounts a bank actually opens per year in terms of checking accounts per branch — that is a number that one can have access to in various places. Depending on the bank and the locality, et cetera, it’s between 200 and 500. So, if you turn away a single customer or two customers in a row to open accounts because you had three parking spaces where you could have had seven, you’ve done a very outsized amount of damage to your financial institution, and thus over-provision the parking in all the places.

Definitely recommended, interesting throughout.

The efficiency of counterfeiting in 19th century Peru

“The counterfeiter probably didn’t realize that that coin didn’t exist,” Dr. Ortega said.

He said that an influx of low-value coinage would have been welcomed in Peru at the dawn of the 20th century. The country’s economy was reeling from the recent War of the Pacific, and the government was focusing on printing larger-denomination paper bank notes to pay off international loans; in 1899, the Lima Mint produced roughly one-tenth the number of silver coins it produced just five years earlier.

As a result, people in Peru were using coins from neighboring nations or even cutting their own country’s coins in half to conduct small transactions. “Counterfeiters found a field of opportunity,” Dr. Ortega said.

Here is more from Katherine Kornei at the NYT, mostly about finding an old coin that should not exist and cannot be traced.

Hester Peirce on the SEC

As she did on the LBRY case (n.b. I was a LBRY advisor), SEC Commissioner Hester Peirce released a statement about the failings of the SEC with regards to the recently approved Bitcoin spot ETPs. It’s rare to read something this brutal coming from the inside.

We squandered a decade of opportunities to do our job. If we had applied the standard we use for other commodity-based ETPs, we could have approved these products years ago, but we refused to do so until a court called our bluff.

…Today’s order does not undo the many harms created by the disparate treatment of spot bitcoin products.

First, our arbitrary and capricious treatment of applications in this area will continue to harm our reputation far beyond crypto. Diminished trust from the public will inhibit our ability to regulate the markets effectively. This saga will taint future interactions between the industry and our staff and will dampen the rich, informative dialogue that best protects investors.

Second, our disproportionate attention on these filings has diverted limited staff resources away from other mission critical work. Over ten years, likely millions of dollars of staff time has gone toward blocking these applications.

Third, our actions here have muddied people’s understanding of what the SEC’s role is. Congress did not authorize us to tell people whether a particular investment is right for them, but we have abused administrative procedures to withhold investments that we do not like from the public.

Fourth, by failing to follow our normal standards and processes in considering spot bitcoin ETPs, we have created an artificial frenzy around them. Had these products come to market in the way other comparable products typically have, we would have avoided the circus atmosphere in which we now find ourselves.

Fifth, we have alienated a generation of product innovators within our space. Our unreasonable approach to these applications has signaled that regulatory prejudice against new products and services can lead us to sidestep the law and unreasonably delay product launches. The industry has logged hundreds of meetings, has filed submissions, withdrawals and amendments, and ultimately had to resort to a costly legal battle to get us to today.

Although this is a time for reflection, it is also a time for celebration. I am not celebrating bitcoin or bitcoin-related products; what one regulator thinks about bitcoin is irrelevant. I am celebrating the right of American investors to express their thoughts on bitcoin by buying and selling spot bitcoin ETPs.[10] And I am celebrating the perseverance of market participants in trying to bring to market a product they think investors want. I commend applicants’ decade-long persistence in the face of the Commission’s obstruction.

Department of Uh-Oh, economic research edition

We assess statistical power and excess statistical significance among 31 leading economics general interest and field journals using 22,281 parameter estimates from 368 distinct areas of economics research. Median statistical power in leading economics journals is very low (only 7%), and excess statistical significance is quite high (19%). Power this low and excess significance this high raise serious doubts about the credibility of economics research. We find that 26% of all reported results have undergone some process of selection for statistical significance and 56% of statistically significant results were selected to be statistically significant. Selection bias is greater at the top five journals, where 66% of statistically significant results were selected to be statistically significant. A large majority of empirical evidence reported in leading economics journals is potentially misleading. Results reported to be statistically significant are about as likely to be misleading as not (falsely positive) and statistically nonsignificant results are much more likely to be misleading (falsely negative). We also compare observational to experimental research and find that the quality of experimental economic evidence is notably higher.

That is from a new paper by Zohid AskarovAnthony DoucouliagosHristos Doucouliagos, and T. D. Stanley.

Via my colleague Jonathan Schulz.

Are chatbots better than we are?

Maybe so:

We administer a Turing Test to AI Chatbots. We examine how Chatbots behave in a suite of classic behavioral games that are designed to elicit characteristics such as trust, fairness, risk-aversion, cooperation, \textit{etc.}, as well as how they respond to a traditional Big-5 psychological survey that measures personality traits. ChatGPT-4 exhibits behavioral and personality traits that are statistically indistinguishable from a random human from tens of thousands of human subjects from more than 50 countries. Chatbots also modify their behavior based on previous experience and contexts “as if” they were learning from the interactions, and change their behavior in response to different framings of the same strategic situation. Their behaviors are often distinct from average and modal human behaviors, in which case they tend to behave on the more altruistic and cooperative end of the distribution. We estimate that they act as if they are maximizing an average of their own and partner’s payoffs.

That is from a recent paper by Qiaozhu Mei, Yutong Xie, Walter Yuan, and Matthew O. Jackson.  Via the excellent Kevin Lewis.

Back to the Future: Power Dishwashers!

Why do today’s dishwashers typically take more than 2 hours to run through a normal cycle when less than a hour was common in the past? The reason is absurd energy and water “conservation” rules. These rules, imposed on dish and clothes washers, have made these products perform worse than in the past, cleaning less well or much more slowly. One of the best things that the Trump administration did (other than Operation Warp Speed, of course) was creating a product class–superwashers!–that cleaned in under an hour and were not subject to energy and water conservation standards. The Biden administration reversed these rules but the 5th circuit just ruled that the reversal was “arbitrary and capricious.”

The ruling notes

…the record contains historical evidence that dishwasher cycle time has increased from around one hour at the advent of DOE’s conservation program to around two and a half hours in 2020. See CEI Petition, 83 Fed. Reg. at 17773–74. DOE does not appear to contest this data; in fact, DOE in 2020 appeared to agree that the frustratingly slow pace of modern dishwashers caused consumer substitution away from dishwashers and toward handwashing. See 2020 Dishwasher Rule, 85 Fed. Reg. at 68729; see also Record App’x 3 (noting consumers supported efficacious dishwashers by a margin of 2,200 to 16). And nothing wastes water and energy like handwashing: DOE itself estimated in 2011 that handwashing consumes 350% more water and 140% more energy than machine washing. See Record App’x 5 (citing U.S. Dep’t of Energy, Technical Support Document Docket EE-2006-STD-0127: National Impact Analysis 16 (2011), https://perma.cc/849K-NCX8).

…What did DOE say in response? Basically nothing: It acknowledged the concern and moved on. But bare acknowledgment is no substitute for reasoned consideration.

…the Repeal Rule is arbitrary and capricious for two principal reasons. (1) It failed to adequately consider appliance performance, substitution effects, and the ample record evidence that DOE’s conservation standards are causing Americans to use more energy and water rather than less. (2) It rested instead on DOE’s view that the 2020 Rules were legally “invalid”—but even if true, that does not excuse DOE from considering other remedies short of repealing the 2020 Rules in toto.

More generally AnechoicMedia on twitter wrote:

Water usage restrictions on home dishwashers are a complete non-issue from an environmental standpoint and our inability to overthrow this petty regime is why this country sucks. You cannot provide abundance and prosperity while retaining this wartime rationing mindset.

A position with which I wholeheartedly agree.

Political business cycle theory has been neutered

Probably not forever, but we are living in strange times:

Now the theory needs major revision. Political leaders still wish to manipulate economic variables in their favor, of course. But economies, as well as voters, are not going along — and so the standard mechanisms for political business cycle theory are broken…

Under political business cycle theory, this [the IRA] should have helped Biden win favor with voters. Yet it has not worked out that way. Biden’s approval ratings remain anchored at all-time lows — whether these are justified is a separate question — and meanwhile a lot of the money is being spent on manufacturing in red states that Biden is unlikely to win. In political terms, a very large dose of fiscal policy just doesn’t seem to have helped.

Political business cycle theory also implicitly predicted that the Fed would be reluctant to pursue disinflation over the last year, for fear of inducing a recession and damaging re-election prospects for incumbents. The Fed proceeded in any case, even though its staff (incorrectly) expected a recession.

In economic terms as well, fiscal policy is less effective today than in it has been in the past. Many countries have higher debt and deficit levels, which raises the risk of short-run crowding out of private investment. And labor markets in many countries are tight, which limits the ability of fiscal policy to boost employment.

The world’s most radical economic plan currently belongs to President Javier Milei of Argentina. Milei explicitly campaigned on a platform of taking away benefits and limiting the number of commitments the government makes. He is now trying to carry out those promises, even though voters may not like the results. Nonetheless he has cast his lot in opposition to the “free lunch” mentality.

There is much more in the rest of my Bloomberg column.

What if you have a favorable AS shift and a negative AD shift?

The negative AD shift comes from the Fed’s extreme tightening plus the phasing out of fiscal stimulus.  That might hurt housing markets the most, plus whatever consumers were wanting to spend their extra cash on (travel, restaurants?).  It should hurt a lot of service sectors with sticky nominal prices quite a bit.  And, we are told, that is quite a few sectors.

The positive supply shock comes from supply chains untangling, post Russian invasion, plus mopping up the residue from Covid restrictions.  It shouldn’t help most service sectors very much, but a lot of manufactured goods, and resource-intensive goods, and agricultural foodstuffs should boom from this.  Imports too, especially if they come by ship rather than by plane.  Note that foreign trade is not a huge share of the American economy, though, and America is the world’s leading oil exporter.  Falling energy prices may not help us much if at all, not in the aggregate.

You might think these dual shifts can, on net, work out for the better.  Maybe.  But part of the mix should be a fairly extreme volatility across sectors.  You have a lot of service sectors that get hit hard from the negative AD shock and which don’t benefit so much from the supply chain untangling.

Is that what we see in the data?  It seems most service sectors have done fine, and we’ve had a high degree of comovement, though I would note continuing issues in real estate markets and also in banking.

These days the Keynesians think you can get so much general positive comovement from the supply shocks resolving themselves — hilarious!  For decades they have been criticizing the real business cycle theorists along those lines, and that was without a simultaneous major disinflation staring us in the teeth.

No one should be patting themselves on the back for having figured all this out.

Kamil Kovar on the German debt brake (from my email)

I was wondering if you would consider writing a post about the German debt brake in light of recent developments? Personally, I am not a huge fan of discussions about fiscal policy (or even worse, austerity…), as I feel they are mostly Rorschach test without much deep thinking. But I did find the recent developments intriguing because they challenge my priors so I am wondering what whether your thinking has changed as well.

My prior was that some form of constitutional debt break is a reasonable mechanism to deal with the pro-debt bias resulting from democratic political process. Of course, some of the recent German experience has challenged that. For example, debt break legislation lead to a lot of “bad” legislating, which was exposed by the court recently. Similarly, the debt break is leading Germany to cut spending and increase taxes relative to what the government would want; given the weakness in German economy this does not seem like optimal fiscal policy (but might be – monetary policy by choice restrictive, and many have called on fiscal to be too). And more broadly, there is a fair argument to be made that it has constrained government investment during last decade, which was an optimal time to do government investment given the negative interest rates.

Part of this I think is a question of imperfect design/implementation. The deficit threshold of -0.35% is higher than I would imagine. Absence of any relationship to current interest rates or effect on future debt levels ala CBO analysis is probably not what finance theory would suggest. And the cyclical adjustment seems suspicious: my understanding is that currently the cyclical adjustment allows for 0.1% of GDP of extra deficit, corresponding to 1% output gap and 1/10 elasticity, see here.[1] But I suspect imperfect design/implementation will always be a feature of these kind of legalistic rules, so should not be waved away.

At the same time, I find lot of the commentary rather subpar. I have in mind for example arguments in this article. While I can see that investment would likely be higher last decade in absence of debt break, saying that debt break results in “Germany that doesn’t invest and massively falls behind in economic terms” is just shocking, as it implies that investment can be only done through higher deficits. Moreover, arguing that debt break has to be abolished so that Germany can invest to deal with geopolitics and green transition is simply ignoring that Germany already found a legally-sound solution to such kind of problems when it constitutionally created its 100 billion euro defense spending fund. Together with the wise use of debt break suspensions during last 4 years this shows that there is sufficient flexibility built into this, despite what the commentators would suggest (“but in practice it’s too inflexible”), as long as there is consensus on such actions. But maybe this points towards the actual problem: maybe in current society building political consensus has become too hard, so that mechanisms which rely too much on such consensus are doomed to create more problems than their benefit. The US debt ceiling comes to mind. Similarly, I think CDU secretly agrees with some of the governments desires, but will not act on them either because it wishes for the government to collapse or is afraid of voters’ reaction.

Very curious what is your thinking and how it has changed.

Kamil

P.S.: Relatedly, I often see left-of-center economists citing IMF research that austerity does not yield decrease in government debts relative to GDP. While I understand the value of such research, I am not sure what are the people suggesting. If austerity cannot lower debt to GDP, what can? I don’t think that most economists would suggest that large scale government investment is going to lower debt to GDP. So it the conclusion that we can never lower debt to GDP?

Kamil expands on these points in a blog post, concluding:

So maybe this is the main critique of the constitutional debt break: In the older world it might have been an good tool, but given the general unravelling of political process around the world, it adds too much of a constraint leading to worse outcomes. It simply is not fit for the current times. It might not be. As for me, I am currently in state of “not sure”.

My history of economic thought reading list

History of Economic Thought syllabus

The honor code applies to this class. Accommodations will be made for disabilities in accord with the policies of George Mason University.

Your grade is 2/3 based on your paper, 1/3 based on a final exam. You are required to submit short progress reports on your paper on a regular basis.

Reading list:

Commerce, Culture, & Liberty: Readings on Capitalism Before Adam Smith, edited by Henry C. Clark.

Adam Smith, Wealth of Nations.

Tyler Cowen, GOAT: Who is the Greatest Economist of all Time, and Why Does it Matter?, free and on-line.

GPT-4, paid version, mandatory, $20 a month.

Phind (free, good for giving you reliable references)

Perplexity.AI, free, usually better than Google these days

The internet

I will assign other readings, predominantly on-line, depending on the topics we end up covering.

The economic returns to psychological interventions

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

One study of Ethiopia looked at the psychological impact of raising aspirations. The researchers created a randomized control trial, showing one group of people short films about business and entrepreneurial success in the community. Six months later, those who had seen the films had worked more, saved more and invested more in education, relative to those who had not seen the films. Even five years later, households that had seen the films had accumulated more wealth, and their children had on average 0.43 more years of education, which typically is considered an impressive effect.

Not all the results are so positive:

Sometimes psychological interventions produce only temporary effects. One research design taught self-efficacy lessons to women in India. The likelihood of employment rose 32% in the short run — but within a year the effects had dissipated…

None of these results demonstrates that there is a “psychology of poverty” to be overcome by external interventions. They do imply, however, that poorer economies can make marginal gains by investing in what might be called psychological and psychotherapeutic infrastructure. These research designs can be applied to hundreds or thousands of people, but it will never be easy to use them for entire citizenries. Nonetheless, countries can make therapeutic help more accessible and affordable, and foster a culture in which people feel comfortable seeking it out.

Are we in the west at the margins where more counseling and therapy are of zero value, or perhaps negatives?  Perhaps the only choice is either to have too little or too much self-reflection of a particular kind.

My podcast with Brink Lindsey

He is starting a new podcast and I am perhaps the first episode?  There is video and text and audio.  Here is an excerpt:

Lindsey: Did they recognize early on that you were different and that they had a job to do to push you, or no?

Cowen: Well, my father thought I was weird, so he thought I was different, but it would’ve been easier for him if I had, say, been a football player in the way that he was captain of his high school football team. He accepted what I became but I was not obviously doing things he had done. My mother was very open-minded. But when I was quite young, I’m not even sure how young, she took me repeatedly to the public library. At first, it was a Carnegie library in the town of Kearney, New Jersey, but later to Bergen County libraries. And without those library trips, I would’ve been very different. And then my father’s mother, my grandmother, lived with us for a while and she taught my sister how to read. And I was about two and I learned by looking over her shoulder. And so my grandmother had to big influence on me. And my grandmother loved to read. She loved Shakespeare, Victor Hugo, John O’Hara, and also liked Ayn Rand even though she was not a partisan of any one of those things. So my grandmother too was a real influence.

And:

Lindsey: You’re now known for your incredible diversity of intellectual interests. Was that from the start? Did your curiosity just naturally pull you in a million different directions, or was there some point where you recognized, “Hey, my specialty is breadth and I need to lean into that”?

Cowen: Well, I think when I was quite young, I was much more conservative in the small-c sense of that word. I didn’t have an interest in traveling. I was more reserved. If you’re a chess player when you’re a kid, that’s extremely narrow. And that was the main thing I did with a bit of science fiction. So the breadth, I think, came gradually and most of all in my very late teens with classical music, beginning to travel. So I don’t think it was in me at the beginning in any obvious way.

Lindsey: But it came out in adolescence?

Cowen: Yes. But someone looking at me at age seven would not have predicted breadth later on.

Interesting throughout…and do subscribe to Brink’s Substack.