Category: Economics

The Child Care tax credit may have unfavorable incidence

Child care tax credits are intended to relieve the financial burden of child care for working families, yet the benefit incidence may fall on child care providers if they increase prices in response to credit generosity. Using policy-induced variation in the Child and Dependent Care Credit, this paper presents evidence of substantial pass-through: over half of every dollar is passed through to providers in the form of higher prices and wages. Increased non-refundable credit generosity may have the unintended effect of making child care less affordable for low-income families, a result with distributional and spatial implications due to income sorting of families within an urban area.

That is from a new paper by Luke P. Rogers, via the excellent Kevin Lewis.

Who will win the Nobel Prize in economics this year?

I’ve never once gotten it right, at least not for exact timing, so my apologies to anyone I pick (sorry Bill Baumol!).  Nonetheless this year I am in for Esther Duflo and Abihijit Banerjee, possibly with Michael Kremer, for randomized control trials in development economics.

Maybe they are too young, as Tim Harford points out, so my back-up pick remains an environmental prize for Bill Nordhaus, Partha Dasgupta, and Marty Weitzman.

What do you all predict?

What is a good name for a trade deal?

When I see USMCA, I also think of “United States Marine Corps,” a connection Donald Trump himself has noted. Of course the Marines have nothing to do with international trade policy, but given the public’s longstanding confidence in the military, the association is unlikely to hurt politically. Other people may confuse USMCA with USCMA, or the United States Catholic Mission Association, another positive connotation.

This next point may sound slightly cynical, but here goes: Perhaps being so easy to say and remember has been part of Nafta’s problem. The sad reality is that voters do not love the idea of free trade once it is made concrete to them, and both Barack Obama and Trump campaigned against Nafta in its current form. So maybe every time people heard the name Nafta, they were reminded of how much they disliked it.

I recall, more than a decade ago, hearing talk of a supposed “Nafta superhighway,” a series of roads that would supposedly bring the three Nafta countries under some kind of joint, conspiratorial rule, enforced by the movement of vehicles on these connector roads and sometimes in league with Satan himself. The alternative phrase — “USMCA Superhighway” — doesn’t roll off the tongue as easily, so maybe it will be harder to drum up fake news about the new deal.

Here is the rest of my Bloomberg column on the topic.  And this:

Looking back, the General Agreement on Tariffs and Trade (Gatt) had a pretty good name for its time. It conveyed that there was in fact a general agreement, and that branding sold well enough in an earlier, more multilateral era. It might have sounded dull and technocratic, but that was OK for policies which were … dull and technocratic. Much worse, however, was the 1995 relabeling into the World Trade Organization, a name which to many people sounds globalist, faceless and sinister. They might as well have called it SPECTRE, the name of the criminal group in many James Bond novels and films.

I even quote a Canadian quoting Shakespeare…

Improving But Not Learning by Doing

In the excellent The Secret of Our Success Joe Henrich gives many examples of complex technological products and practices which were not the product of intelligence but rather of many, small, poorly understood improvements that were transmitted culturally down the generations. Derex et al. offer an ingenious experimental test of the cultural generation hypothesis.

Participants in the experiment were presented with a wheel with some weights that could be moved along four axis and they were asked to place the weights to maximize the speed at which the wheel moved down a track. The problem isn’t trivial since an optimal solution requires placing the weights in different spots to take advantage of both inertial and potential energy. Participants were organized into chains of five. Each participant was given 5 trials. The weight configuration and the results of the last two trials were passed on to the next person in the chain. Thus, people farther down the chain potentially “inherit” more cultural knowledge.

What were the results? First, the average wheel speed increased down the generations from an average of 123.6 m/h for the final trial of the first generation/participant to 145.7 m/h by the last trial of the fifth generation. The researchers also tested whether participants improved their understanding of the causes of wheel speed by asking them to predict which of a series of wheel configurations would spin the fastest. If the faster speed of the fifth generation reflected learning by doing we would expect the fifth generation to make better predictions. In fact, there was no learning over time. Technology improved, understanding did not.

The authors then did an especially clever test. They allowed each generation/participant to leave the next generation a “theory” of wheel speed. Did this “book learning” speed up the evolution of technology? It did not. Moreover, theory transmission didn’t even result in much learning! Indeed, in some respects theories actually reduced learning because people who inherited a theory tended to believe it to the exclusion of other theories and, as a result, they reduced their exploration of the design space.

Of the 56 participants who received a theory… 15 received an inertia-related theory, 17 received an energy-related theory, 6 received a full theory and 18 received diverse, irrelevant theories

…inherited theories strongly affected participant’s understanding of the wheel system. Participants who did not inherit any theory (“Configurations” treatment) scored similarly (and better than chance) on questions about inertia and questions about energy (Fig. 3I). In comparison, participants who inherited an inertia- or energy- related theory showed skewed understanding patterns. Inheriting an inertia-related theory increased their understanding of inertia, but decreased their understanding of energy; symmetrically, inheriting an energy-related theory increased their understanding of energy, but decreased their understanding about inertia. One explanation for this pattern is that inheriting a unidimensional theory makes individuals focus on the effect of one parameter while blinding them to the effects of others. However, participants’ understanding may also result from different exploration patterns. For instance, participants who received an inertia-related theory mainly produced balanced wheels (Fig. 3F), which could have prevented them from observing the effect of varying the position of the wheel’s center of mass.

…These results suggest that the understanding patterns observed in participants who received unidimensional theories is likely the result of the canalizing effect of theory transmission on exploration. Note that in the present case, this canalizing effect is performance-neutral: with our 2-dimensional problem, better understanding of one dimension and worse understanding of one dimension simply compensate each other. For a many-dimensional problem, though, better understanding of one dimension is unlikely to compensate for worse understanding of all the others.

One aspect of knowledge transmission which is more difficult to study is the role of the genius. Cultural generation can get stuck in local optima. Only the genius can see over the valley to the mountain. The occasional genius may have been important even in knowledge generation in the pre-science era. In addition, these kinds of cultural evolution processes work best when feedback is quick and clear. Lengthen the time between input and output and all bets are off. Still this peculiar experiment illustrates how much cultural transmission can achieve and how theory can so dominate our thinking that it reduces vital experimentation.

Publicly traded firms do not have an investment deficit

Using data from U.S. corporate tax returns, which provide a sample representative of the universe of U.S. corporations, we investigate the differential investment propensities of public and private firms. Re-weighting the data to generate observationally comparable sets of public and private firms, we find robust evidence that public firms invest more overall, particularly in R&D. Exploiting within-firm variation in public status, we find that firms dedicate more of their investment to R&D following IPO, and reduce these investments upon going private. Our findings suggest that public stock markets facilitate greater investment, on average, particularly in risky, uncollateralized investments.

That is by Naomi Feldman, et.al., from the Fed.  Via Andrew McAfee and Matt Yglesias.  Of course, this is very much the opposite of what you usually hear from other sources.

Robert Pindyck on climate change models

Pindyck, from MIT, is a leading expert in this area, here is part of his summary conclusion:

It would certainly be nice if the problems with IAMs [integrated assessment models] simply boiled down to an imprecise knowledge of certain parameters, because then uncertainty could be handled by assigning probability distributions to those parameters and then running Monte Carlo simulations. Unfortunately, not only do we not know the correct probability distributions that should be applied to these parameters, we don’t even know the correct equations to which those parameters apply. Thus the best one can do at this point is to conduct a simple sensitivity analysis on key parameters, which would be more informative and transparent than a Monte Carlo simulation using ad hoc probability distributions. This does not mean that IAMs are of no use. As I discussed earlier, IAMs can be valuable as analytical and pedagogical devices to help us better understand climate dynamics and climate–economy interactions, as well as some of the uncertainties involved. But it is crucial that we are clear and up-front about the limitations of these models so that they are not misused or oversold to policymakers. Likewise, the limitations of IAMs do not imply that we have to throw up our hands and give up entirely on estimating the SCC [social costs of carbon] and analyzing climate change policy more generally.

The entire essay is of interest, via Matt Kahn.

The Nobel Laureate who is not a full professor

Donna Strickland (at right) was on Tuesday named one of the three winners of the 2018 Nobel Prize in Physics. Many have noted that she is the first woman in 55 years to win the prize. The BBC noted in a radio interview that Strickland is an associate professor at the University of Waterloo and asked why she was not a full professor. She said she never applied. She laughed when asked if she would apply now.

Link here.

It’s a lot of work to apply for full professor, in terms of compiling one’s dossier, writing a research and teaching statement, cultivating letter writers, and so on.  At many schools you might get a raise of say $1500 for the promotion?  Apply Canadian tax rates to that.  That could be accompanied by more administrative responsibilities, such as pressure to become department chair at some point.

Hail Donna Strickland!

They solved for the equilibrium, China equilibrium of the day

China will be less severe with its smog curbs this winter as it grapples with slower economic growth and a trade war with the United States, according to a government plan released on Thursday.

Instead of imposing blanket bans on industrial production in the Beijing-Tianjin-Hebei area as it did last winter, the Ministry of Ecology and Environment said it would let steel plants continue production as long as their emissions met standards.

Targets for overall emissions cuts have also been revised down. In the next six months, 28 cities in northern China are required to cut levels of PM2.5 – the tiny airborne particles that are most harmful to human health – by about 3 per cent from a year ago.

That is less than the 5 per cent cut proposed in an initial plan seen by the South China Morning Post last month.

Meanwhile, the new plan stipulates that the number of days of severe air pollution should be reduced by about 3 per cent, also revised down from 5 per cent in last month’s draft.

Here is more from Orange Wang at SCMP.  As I am sure you all know, air pollution (and I don’t just mean carbon emissions) is one of the great underrated problems in the world today.  The trade war with China is making it worse.

New issue of Econ Journal Watch

In this issue

And the IMF said: LET THERE BE DATA. And there was dataRyan Murphy and Colin O’Reilly unearth assumptions behind the International Monetary Fund’s numbers for private capital stocks by country.

Hayek’s Divorce and Move to ChicagoLanny Ebenstein draws together new information to reinterpret Hayek’s personal life and how it related to his move to the United States, especially from 1945 to 1955.

The Russian pupils of Adam SmithAn essay from 1937 tells of the two Glasgow students of the 1760s who returned home and launched a tradition of Smithian liberal thought in Russia.

Ideological Profiles of the Economics Laureates: We resume the project with two of the 2013 laureates—Eugene Fama, who responded to our questionnaire, and Lars Peter Hansen.

An Icelandic sagaHannes Gissurarson responds to his compatriot Stefán Ólafsson on the proper way to tell their country’s story since 1991.

Against the Incorporation of BarbersA remarkable, forgotten pamphlet of 1758 argues that the restriction, which today would be termed occupational licensing, left those in need of a haircut at the mercy of “a greasy Barber, covered all over with Suds, and the excrementitious Parts of the Beards of nasty Mechanicks.”

EJW Audio:

Lanny Ebenstein on Hayek’s Personal Affairs

Dwight Lee on Teaching Econ and the Two Moralities

Is it better to have more corporations?

A reduction in the corporate income tax burden encourages adoption of the C corporation legal form, which reduces capital constraints on firms. Improved capital reallocation increases overall productive efficiency in the economy and therefore expands the labor market. Relative to the benchmark economy, a corporate income tax cut can reduce the non-employment rate by up to 7 percent.

That is from the new AEJ: Macroeconomics, by Daphne Chen, Shi Qi, and Don Schlagenhauf.

The excellent David C. Wright podcasts me on *Stubborn Attachments*, and on other things

It starts with an extended discussion of Tyrone and more or less ends with a take on the meaning of Straussianism and the Straussian reading of my own books.  (If you read the transcript, the sentence in the middle about my believing in God as a teenager is a transcription error, it will be corrected.)  David is one of the best, and best prepared, interviewers I have interacted with.  Here is the audio and transcript.

Here is one bit from the middle:

David: …should academics or people who seek to influence the world, and according to your value system should they try and boost economic growth more? I’m thinking of in your podcast, you’ve had venture capitalists. I think of these in some ways as public intellectuals who are trying to boost economic growth.

[00:39:12] Tyler: They think very conceptually venture capitalists.

[00:39:14] David: They do.

[00:39:15] Tyler: They’re generalists.

[00:39:15] David: They are. Are they similar to university professors?

[00:39:19] Tyler: Well, they’re much better.

[00:39:20] David: Better at?

[00:39:21] Tyler: Almost everything. They’re smarter than we are. They’re playing with real stakes. They understand more different things, they’re better at judging people, they’ve created better for the world in most cases, and so we should feel ashamed of ourselves if we sit down with venture capitalists.

[00:39:35] David: Yet they don’t win a Nobel Prize, and they can’t become call it historically famous or much less so. Obviously–

[00:39:41] Tyler: I think they will become historically famous.

[00:39:43] David: Do you?

[00:39:43] Tyler: Well, they already. Well, like Mike Moritz or Marc Andreessen or Sam Altman Y Combinator. I think they will go down in history as major figures of great import.

Definitely recommended.

Economists in the tech sector

…led by Pat Bajari, Amazon has hired more than 150 Ph.D. economists in the past five years, making them the largest employer of tech economists.  In fact, Amazon now has several times more full time economists than the largest academic economics department, and continues to grow at a rapid pace.

That is from the new Susan Athey and Michael Luca paper “Economists (and Economics) In Tech Companies.”

Vitalik Buterin and Glen Weyl dialog

The following is a series emails Vitalik Buterin and I [Glen] exchanged over the last day about RadicalxChange ideas. We thought the discussion might be useful to some as a) it covers a number of issues not discussed elsewhere that we consider important, b) it represents some of our latest thinking about these issues and c) it shows a bit of “the sausage being made” that some may find interesting. However, be aware that this is an internal communication and thus is at a pretty high level of specialization; there will be many parts that those not already well steeped in some combination of RadicalxChange ideas, economics, sociology, intellectual history, philosophy and cryptography may find hard to follow.

Here is the link.  There are many excellent bits, here is one from Buterin:

Effect on centralization of physical power — one thing that scares me about more complex systems of property rights is that they would require more complex centralized infrastructure, including surveillance into people’s private activities, to be able to correctly enforce. Taxes already have this problem (you may recall Adam Smith believing that income taxes would be impossible because they would require an unacceptable level of intrusion into people’s private lives to enforce), and I wonder if the various proposals that we have for changing them would make things better or worse in this regard. I like Harberger taxes because they don’t require infrastructure to police whether or not undeclared transactions took place, though I worry in other cases, eg. your comment that your immigration proposal would require stronger enforcement of immigration rules, which realistically means stronger efforts to find and kick out people who overstay, which requires more surveillance of various kinds. All in all, I don’t think the radical markets ideas altogether fare that bad, but I guess my comment would be that non-panopticon-dependence should be an explicit desideratum to a greater degree than it is now.

Self-recommending…and which one of them do you think wrote this?:

The last couple of weeks talking to economists, sociologists and philosophers I have felt like they are hacking through a forest with pen knife and this perspective enables me to look from above (things still fuzzy) and have a crew of chainsaws at my command.

An email from Glen Weyl

I won’t do an extra indent, but this is all Glen, noting I added a link to the post of mine he referred to:

“Tyler, I hope all is well for you.  I am writing to try to somewhat more coherently respond to our various exchanges, partly at the encouragement of Mark Lutter, whom I copy.  As I understand it (but please correct me if I am wrong), you have two specific objections to the COST and QV and one general objection to the project of the book.  If I have missed other things, please point me to them.  Let me very briefly respond to these points:

  • On the COST: you wrote (I cannot actually find the post at this point…not sure where it went) that human capital investments that are complementary with assets may be discouraged or otherwise prejudices by the COST.  However, as we explain in the paper with Anthony (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2744810), it has been known since at least Rogerson’s paper (https://academic.oup.com/restud/article-abstract/59/4/777/1542650) that VCG leads to first-best investment, including in human capital, as long as those investments are privately valued; we show that this property extends to the COST.  You seem to focus on examples in your post where those human capital investments are privately valued.  I thus do not see an economic efficiency objection to the COST on these grounds.
  • On QV: you write (https://marginalrevolution.com/marginalrevolution/2015/01/my-thoughts-on-quadratic-voting-and-politics-as-education.html) that democracy is about far more than decision-making; it is about what people learn and are induced to learn through the democratic process.  This is a deep and critical point and central to what Sen has called the “constitutive” role of democracy.  And this objection has been lodged not just by you but, for example, by Danielle Allen.  It is one I greatly respect and have struggled with.  A fundamental problem here is that no one to my knowledge has managed to model this information acquisition process in a formal model in a way that allows comparison across systems; I have tried, but things get very messy very quickly.  Nonetheless, I have not been able to understand the informal arguments that suggest this would be systematically worse under QV and there are several suggestive arguments that it would be better.  For example, under QV people have the ability to specialize in certain areas of issue or candidate expertise, which in turn should allow for deeper education and for advertising campaigns targeted at those who actually know and care about an issue, rather than those who are hardly paying attention.  Perhaps some would argue that this is a bug, not a feature, because we want every citizen to be informed about every issue; but this seems to be as implausible as suggesting that the division of labor degrades our ability to perform a variety of household tasks.  For more on these, Eric and I have written several articles that discuss: https://www.vanderbiltlawreview.org/2015/03/voting-squared-quadratic-voting-in-democratic-politics/ [and] https://www.springerprofessional.de/en/public-choice-1-2-2017/12454020.
  • There is a broader Burkean argument that you seem to be making, namely that these institutions are extremely different than those we have historically used and may well have very bad, unintended consequences.  Here, I don’t think we disagree, but I think nonetheless there are at least two reasons I don’t see this as greatly diminishing the value of the ideas.  First, all novel improvements, whether to technology or social institutions, must confront this objection.  And they should confront it, I think, by experimenting at small scales and gradually scaling up and/or course-correcting as we learn about them.  The questions are then a) does the innovation have enough promise to be worth experimenting with, b) is it so risky to experiment with at small scales even that this vitiates a) and c) does it seem like these experiments will teach us something about broader scale applicability.  It seems to me that designs that so clearly address failures that economic theory we both accept says are very large, that are not just worked out in a narrow model but that we have studied from a range of not just economic but sociological and philosophical perspectives and which have caught the imagination of a broad set of entrepreneurs, activists and artists who are really interested in such experiments satisfies a).  I don’t see any objections you or others have raised as raising significant concerns on b).  And on c), it seems to me we will learn quite a lot from even relatively modest experiments (and already have) about the objections I hear most frequently (such as those related to collusion for QV or instability for the COST) that at very least will allow us to incrementally improve and scale a bit larger. So, it seems to me, the strong interest in experimenting with these ideas should be encouraged.

Finally, it seems to me that even if you remain convinced that there are unsurmountable practical difficulties with these mechanisms, that they play an important role in illustrating some pretty sharp divergences between what basic allocative efficiency calls for (and what the marginal revolutionaries like Jevons and Walras were quite explicit about their theories implying) and the outcomes we would expect to arise in the classic libertarian world.  I think the liberal radicalism mechanism makes this sharpest.  This seems instructive even if there is no way to remedy the limitations in these mechanisms because it suggests that the ideal toward which we should be steering societies using mechanisms that are not so dangerous are quite different than the ideal envisioned in standard libertarian theory.  For example, the ideal would seem to involve a much greater role for a range of collective organizations at different community scales with some ability to receive tax-based support than standard libertarian theory would allow.

I am interested in your thoughts on these matters and continuing the exchange.  Sorry for the length of this email, but I felt that I owed you a single, coherent and fairly detailed response.”

TC again: For further detail, I refer you to Glen’s book with Eric Posner.  For background, here are my earlier posts on their work.