Category: Economics

Where We Stand

There is good news and there is bad news.

Let’s start with the good news.The early results from the Pfizer vaccine are very good, 90% efficacy. That will probably fall a bit but it’s very good news not just for the Pfizer vaccine but for most of the vaccines in the pipeline which target the spike protein.

The Pfizer vaccine does require very cold storage which means it won’t work for large parts of the world. A distribution plan is in place for most of the United States and Pfizer already has 50 million doses, which can cover ~25 million people, in storage.

Many thousands of people are dying every week so Pfizer should apply for and the FDA should issue a EUA without further delay.

One issue is, given limited supply, how to distribute the vaccine. I have suggested we randomize distribution across hospitals, police and fire stations, and nursing homes (see also my piece in Bloomberg with Scott Kominers, The Case for a COVID Vaccine Lottery.) A vaccine lottery is fair, it will make distribution easier by limiting the number of vaccination locations and it will in essence create a very large clinical trial. With millions of participants we will be better able to make fine distinctions between the vaccine’s safety and efficacy in different populations and the results will come in quickly. Thus, if we randomize and collect data, limited capacity has a silver lining.

Second issue. Manufacturing capacity. Pfizer will have enough capacity to produce 1.3 billion doses in 2021 which sounds like a lot but it’s a two dose vaccine and there will be losses in distribution so maybe 500 million people vaccinated. We need to vaccinate billions.

The cost to the world economy of COVID is in the trillions so we want to vaccine a lot faster. Faster than private markets are willing to go. There are other vaccines in the pipeline but we still need to ramp up capacity. Increasing capacity is something that Michael Kremer, Susan Athey, myself and others at Accelerating Health Technologies have been working on since the beginning of the crisis. It’s not too late to do more.

Third issue is testing. Trump got it into his head that more tests means more cases when in fact a lot more tests means fewer cases. There is a Laffer curve for testing. Our failure to get ahead of the virus with tests has meant hundreds of thousands of excess deaths. We are still failing this test. Winter is coming. Infections and deaths are both rising.

Biden won’t be president until late January but there are things he can do now. In particular, Congress already allocated $25 billion to testing in April—that was far too little. We spent trillions on relief and comparatively little fighting the virus. But here is the real shocker, most of the $25 billion allocated in April hasn’t been spent. Let me say that again, most of the money allocated for testing in April has not been spent. Biden can signal today that that money and more will be spent. He can also signal, as in fact he has, that he wants rapid antigen tests approved.

Rapid antigen tests are cheap, paper strip tests that can check for infectiousness and are ideal to getting things like the schools running again.

Even if we start vaccinating this year, we won’t vaccinate a majority of the US population until well into 2021. That’s true but what’s underappreciated is that testing, masks, social distancing and vaccines are complementary. The more people are vaccinated, for example, the greater our testing capacity rises relative to the population at risk.

The pandemic is getting worse not better but we did flatten the curve, albeit imperfectly, and now if we can summon the will, we have the tools including rapid antigen tests, vaccines and monoclonal antibodies to really crush the virus.

Should the young fear Covid more than the old?

Probably not quite, but I think people often get this calculation wrong.  The chances for long-term damage seem to be as high for the young as for anyone (this is not certain, but these costs do not skew in the same way that chance of death does, and quite possibly they are distributed in accord with genetic mutations, not age).

If you are 70 years old, and incur long-term damage costs, that wrecks your life for only say ten or twelve years, on average.  You will die or go senile anyway, and pretty soon.

If you are 30 and incur long-term damage costs, it could wreck your life for say fifty additional years, about five times more.

I am not sure how we should weight death costs vs. long-term damage costs, but in expected value terms it seems the latter are much worse for the relatively young, not for the old.

Graduating in a Recession Can Be Rough

Graduating in a recession can be rough. Wages start lower and advance more slowly. It’s hard to get hired at a top firm which means it takes longer to get on a rapid ascent career path. As Till von Wachter notes in a review of the long-term consequences of initial labor market conditions, failure to takeoff leads to choices which often makes things worse.

…initial labor market conditions persistently increases excessive alcohol consumption (Maclean 2015) and leads to higher obesity and more smoking and drinking in middle age (Cutler, Huang, and Lleras-Muney 2015)…College graduates entering during the 1980s recession experience higher incidence of heart attacks in middle age (Maclean 2013). Following all labor market entrants from these cohorts, Schwandt and von Wachter (2020) find that starting in their late 30s, unlucky entrants begin experiencing a gap in mortality compared to luckier peers that keeps increasing in their 40s, driven by higher rates of heart disease, liver disease, lung cancer, and drug overdoses.

…Marital patterns of unlucky cohorts are affected from the time they enter the labor market up into middle age, when these cohorts have fewer children (Currie and Schwandt 2014), are more likely to have experienced a divorce, and are more likely to live on their own (Schwandt and von Wachter 2020). Initial labor market conditions also have been found to have effects on attitudes towards economic success and the role of the government (Giuliano and Spilimbergo 2014) and to lead to increasingly lowering individuals’ self esteem (Maclean and Hill 2015).

Don Peck had a good popular survey of these effects in The Atlantic in 2010 that remains vital:

Andrew Oswald, an economist at the University of Warwick, in the U.K., and a pioneer in the field of happiness studies, says no other circumstance produces a larger decline in mental health and well-being than being involuntarily out of work for six months or more. It is the worst thing that can happen, he says, equivalent to the death of a spouse, and “a kind of bereavement” in its own right. Only a small fraction of the decline can be tied directly to losing a paycheck, Oswald says; most of it appears to be the result of a tarnished identity and a loss of self-worth. Unemployment leaves psychological scars that remain even after work is found again, and, because the happiness of husbands and the happiness of wives are usually closely related, the misery spreads throughout the home.

Especially in middle-aged men, long accustomed to the routine of the office or factory, unemployment seems to produce a crippling disorientation. At a series of workshops for the unemployed that I attended around Philadelphia last fall, the participants were overwhelmingly male, and the men in particular described the erosion of their identities, the isolation of being jobless, and the indignities of downward mobility.

Of course, most people who graduate during a recession do just fine in the grand scheme of things.You could have graduated in Sierra Leone. But if you want to be on a rapid ascent career path remember that your first job is not your last job, look for opportunity, and be prepared to take a risk and switch jobs early. Stay off drugs and alcohol.

The local amenities effect of Prohibition

Comparing same-state early and late adopters of county dry laws in a difference-in-differences design, we find that early Prohibition adoption increased population and farm real estate values. Moreover, we find strong effects on farm productivity consistent with increased investment due to a land price channel. In equilibrium, the amenity change disproportionately attracted immigrants and African-Americans.

That is from a new paper by Greg Howard and Arianna Ornaghi, revise and resubmit at Journal of Economic History.  Arianna is on the job market from MIT, here is her job market paper and broader portfolio.  Here is her paper on civil service reforms for U.S. police departments.

Efficiency wages for warehouse workers

The firm gains $1.10 from increased productivity for a $1 increase in wages.


…we estimate that over half of the turnover reductions and productivity increases arise from behavioral responses as opposed to compositional differences. These aggregate patterns mask considerable heterogeneity by gender: women’s productivity responds more and their turnover responds less to wage changes than men’s, which can lead to occupational pay gaps.

That is from a new paper by Natalia Emanuel, a job market candidate from Harvard University.  The paper is co-authored with Emma Harrington (also on the job market), here is their other paper on the efficiencies and inefficiencies of working from home.

I had previously reported on Natalia’s very good paper, with Valentin Bolotnyy, on why women are paid less.

She has work in progress on school closures and family violence: “After three-day weekends and snow-days, reports of family violence increase. I further show that these effects are concentrated in counties with low median income.”

Love and Liberty: A Short History of Adam Smith in Love

The author devotes his full scholarly attention to the mystery of Adam Smith’s love life by carefully re-assembling all the admissible amorous evidence, by subjecting such facts to critical lawyerly scrutiny, and by drawing reasonable inferences from these sundry proofs. Part 1 of this paper will set the stage by revisiting several intriguing hypotheses concerning Doctor Smith’s sexuality and romantic attachments. Next, Part 2 presents four pieces of evidence regarding Adam Smith’s lost loves: (i) an obscure but intriguing footnote in Dugald Stewart’s 1793 biography of Smith’s life and writings, (ii) a letter dated July 14, 1784 addressed to Professor Stewart, (iii) a brief anecdote by Henry Mackenzie, a prominent Scottish lawyer and writer, as well as (iv) a letter dated 18 September 1766 containing key corroborating details about Adam Smith’s lost loves. Part 3 then speculates about the whereabouts of Adam Smith’s lost diary and also about why Smith instructed his literary executors as early as 1773 to destroy his private papers and correspondence. Next, Parts 4 and 5 of this paper will consider two additional clues that may shed light on this amorous enigma. Specifically, Part 4 will revisit Adam Smith’s analysis of romantic love in The Theory of Moral Sentiments, while Part 5 will discuss the legal and ecclesiastical regulation of sex in 18th Century Scotland and France–the locales of Smith’s love affairs. Part 6 then presents one last and potentially relevant clue: the notorious case of the Chevalier de La Barre, which played out during Adam Smith’s sojourns in Paris and Abbeville, and Part 7 concludes with observations for future research. In short, contrary to the conventional biographical wisdom, reports of Adam Smith’s love life are not mere rumors or unfounded speculations. Although Adam Smith’s lifelong devotion to his intellectual life and to his widowed mother Margaret Douglas may have ultimately prevented him from getting married and forming his own household, the evidence will show that it is “more likely than not” that Adam Smith was deeply in love at least twice in his life.

That is a new working paper by F.E. Guerra-Pujol.

The Wisdom of the Inner Crowd

Abstract: Many decisions rest upon people’s ability to make estimates of some unknown quantities. In these judgments, the aggregate estimate of the group is often more accurate than most individual estimates. Remarkably, similar principles apply when aggregating multiple estimates made by the same person – a phenomenon known as the “wisdom of the inner crowd”. The potential contained in such an intervention is enormous and a key challenge is to identify strategies that improve the accuracy of people’s aggregate estimates. Here, we propose the following strategy: combine people’s first estimate with their second estimate made from the perspective of a person they often disagree with. In five pre-registered experiments (total N = 6425, with more than 53,000 estimates), we find that such a strategy produces highly accurate inner crowds (as compared to when people simply make a second guess, or when a second estimate is made from the perspective of someone they often agree with). In explaining its accuracy, we find that taking a disagreeing perspective prompts people to consider and adopt second estimates they normally would not consider as viable option, resulting in first- and second estimates that are highly diverse (and by extension more accurate when aggregated). However, this strategy backfires in situations where second estimates are likely to be made in the wrong direction. Our results suggest that disagreement, often highlighted for its negative impact, can be a powerful tool in producing accurate judgments.

From a paper by Van de Calseyde and Efendić.

What this means is that diversity can improve group thinking but you need cognitive diversity, i.e. you need people in the group who disagree with one another not people who all agree despite superficial differences.

Another simple tool to make judgment more accurate is the premortem.

Hat tip: The excellent Steve Stewart-Williams.

Vitalik Buterin’s Conversation with me

He is interviewing me, and yes he does close with a bout of Overrated vs. Underrated.  Here is the YouTube link, it starts at about 7:00, give or take a few seconds.  I thought it was very interesting, on both of our sides, more of a dialogue than an interview, the points of focus being crypto and tech utopianism.

Perhaps the next time we will get to The New Monetary Economics…

What housing bubble was that again?

Value of housing market at all time high: Home equity has driven up value of US houses since 2012 to a current record value of $32.8 trillion ($11.3 trillion debt, $21.5 trillion equity) 28% higher than the pre-crisis peak in 2006

That is from David Wessel on Twitter, here is the cited research.  Of course there were local housing bubbles in Las Vegas, Orlando, and so on, but was there really a national housing bubble?  Was not the real problem an “anti-bubble” of panic in 2007-2008?  I believe Alex T. was the first to raise this point, and he remains underappreciated for this observation.

Wessel himself wrote in 2008: “We had a housing bubble; that’s now obvious.”  Scott Sumner, telephone!

Christina Romer!

Christina Romer is excellent in this video on her work and influence. Obama had a great line. When Romer, clearly upset, told Obama that the economy was much worse than expected and heading downwards he replied, “Christy, it’s not your fault….yet.”

An interesting tension in Romer’s work. Her early work suggests that macroeconomic policy has not done much to stabilize the economy. Yet her later work has been in trying to stabilize the economy!

Rational Criminals, Irrational Lawmakers

Columnist Phil Matier writes in the SFChroncile about rampant, brazen shoplifting in San Francisco.

After months of seeing its shelves repeatedly cleaned out by brazen shoplifters, the Walgreens at Van Ness and Eddy in San Francisco is getting ready to close.

…“All of us knew it was coming. Whenever we go in there, they always have problems with shoplifters, ” said longtime customer Sebastian Luke, who lives a block away and is a frequent customer who has been posting photos of the thefts for months. The other day, Luke photographed a man casually clearing a couple of shelves and placing the goods into a backpack.

Most of the remaining products were locked behind plastic theft guards, which have become increasingly common at drugstores in recent years.

But at Van Ness Avenue and Eddy Street, even the jugs of clothing detergent on display were looped with locked anti-theft cables.

When a clerk was asked where all the goods had gone, he said, “Go ask the people in the alleys, they have it all.”

No sooner had the clerk spoken than a man wearing a virus mask walked in, emptied two shelves of snacks into a bag, then headed back for the door. As he walked past the checkout line, a customer called out, “Sure you don’t want a drink with that?”

…Under California law, theft of less than $950 in goods is treated as a nonviolent misdemeanor. The maximum sentence for petty theft is six months in county jail. But most of the time the suspect is released with conditions attached.

Some stores have hired private security firms or off-duty police officers to deter would-be thieves. But security is expensive and can cost upward of $1,000 a day. Add in the losses from theft, and the cost of doing business can become too high for a store to stay open.

Perhaps San Francisco helps us with Tyler’s “solve for the Seattle Equilibrium” challenge.

Soon they will seek to cancel the rooftops

Based on a simple and intuitive point, the title of the paper is: “How Should Tax Progressivity Respond to Rising Income Inequality?”, and the answer is something you hardly ever hear acknowledged:

When facing shifts in the income distribution like those observed in the US, a utilitarian planner chooses higher progressivity in response to larger residual inequality but lower progressivity in response to widening skill price dispersion reflecting technical change. Overall, optimal progressivity is approximately unchanged between 1980 and 2016. We document that the progressivity of the actual US tax and transfer system has similarly changed little since 1980, in line with the model prescription.

That is from a new NBER working paper by Jonathan Heathcote, Kjetil Storesletten, and Giovanni L. Violante.

The biggest cost of the trade war — less access to Chinese vaccines

From my Bloomberg column:

The current portfolio is multinational, including investments in Pfizer, Sanofi, AstraZeneca and Johnson & Johnson. Ideally, there should be at least one Chinese vaccine included, but there is not.

Obviously, given the rhetoric of the current administration, using a Chinese vaccine would be politically difficult. You can’t call it “the Chinese virus” and then tell Americans they ought to take a Chinese vaccine. So the Trump administration has made no serious effort to make a vaccine-sharing deal with China.


The matter is hardly settled, but at the very least the Chinese vaccines are not dropping out of contention.

Note that a year’s worth of partial protection still could go a long way.  Recommended.

The window tax

The window tax in Great Britain (1696–1851) provides a remarkable case of tax-induced distortions in resource allocation. Tax liabilities on dwelling units depended on the number of windows in the unit. As a consequence, people boarded up windows and built houses with very few windows, to the detriment of both health and aesthetics. Using data from local tax records on individual houses, the analysis in the paper finds compelling evidence of such tax-avoidance and goes on to make a rough calculation of the excess burden associated with the tax.

Here is the full paper by Robert M. Schwab and Wallace E. Oates.