Category: Economics

On the persistence of the China Shock

Here are new results from Autor, Dorn, and Hanson:

We evaluate the duration of the China trade shock and its impact on a wide range of outcomes over the period 2000 to 2019. The shock plateaued in 2010, enabling analysis of its effects for nearly a decade past its culmination. Adverse impacts of import competition on manufacturing employment, overall employment-population ratios, and income per capita in more trade-exposed U.S. commuting zones are present out to 2019. Over the full study period, greater import competition implies a reduction in the manufacturing employment-population ratio of 1.54 percentage points, which is 55% of the observed change in the value, and the absorption of 86% of this net job loss via a corresponding decrease in the overall employment rate. Reductions in population headcounts, which indicate net out-migration, register only for foreign-born workers and the native-born 25-39 years old, implying that exit from work is a primary means of adjustment to trade-induced contractions in labor demand. More negatively affected regions see modest increases in the uptake of government transfers, but these transfers primarily take the form of Social Security and Medicare benefits. Adverse outcomes are more acute in regions that initially had fewer college-educated workers and were more industrially specialized. Impacts are qualitatively—but not quantitatively—similar to those caused by the decline of employment in coal production since the 1980s, indicating that the China trade shock holds lessons for other episodes of localized job loss. Import competition from China induced changes in income per capita across local labor markets that are much larger than the spatial heterogeneity of income effects predicted by standard quantitative trade models. Even using higher-end estimates of the consumer benefits of rising trade with China, a substantial fraction of commuting zones appears to have suffered absolute declines in average real incomes.

The economic consequences of the Opium War

That is a new NBER working paper by Wolfgang Keller and Caroline H. Shiue, here is the abstract:

This paper studies the economic consequences of the West’s foray into China after the Opium War (1839-42), when Western colonial influence was introduced in dozens of so-called treaty ports. We document a turnaround during the 19th century in the nature of China’s capital markets. Whereas before the Opium War, coastal cities were of relatively minor importance, the treaty port system of the West transformed China into an economy focused on coastal areas and on international trade that aligned with the trading interests of the West. We show, first, that the West had a positive impact on China’s economy during the 19th century. It brought down local interest rates, and regions under Western influence exhibited both higher rates of industry growth and technology adoption. Second, the geographic scope of influence went far beyond the ports, impacting most of China. Interest rates fell by more than a quarter in the immediate vicinity of the ports and still by almost ten percent at distances of 450 kilometers from treaty ports. The development of China was not simply propelled by its own pre-1800 history, or by post-1978 reforms. The nearly 100 years of semi-colonization have shaped China’s economy today as one focused on the coastal areas.

As both Alex and I have said before, economics is still a discipline where you can put forward non-PC results without being destroyed for it.

The tax on unrealized capital gains

Maybe I don’t understand how the supposed plan is supposed to work.  There is no tax credit for unrealized capital losses, right?  So you won’t want to hold volatile asset classes any more, right?  Imagine the value going up, you pay some tax, and then the value falls and you move into loss territory.  You still paid the tax!  You get nothing back.  By exactly how much do the prices of these assets have to fall, ex ante, so that holding them is a good idea in the first place?  Or maybe the wealthy investors subject to this tax are not significant enough to on their own move market prices, in which cases they are just pushed out of these very risk asset classes?

If you can deduct unrealized losses, just how much revenue will the bill raise?  Might the wealthy be incentized to hold ever yet riskier assets in that case?  And how will debt assets be treated?  What exactly is equity anyway?  Do all options and derivatives positions have to be considered as well?  (If not there is a massive arbitrage opportunity, hold some assets with a big chance to take losses but hedge your position with derivatives.)

Has anyone estimated all this and figured it out?  Should we pass such a tax bill without such estimates and public debate?  Isn’t that kind of democracy “good”?  What would The Party of Science say?

What am I missing here?

Janos Kornai and the soft budget constraint

The most developed thesis of that book was that capitalist economies were in a state of constant excess supply (overproduction) whereas centrally planned economies were in a state of constant excess demand (shortage), and he drew out with minute detail all the implications of this analysis. I remember raising arguments from his book in my general equilibrium class in university, surely annoying the professor. Olivier Blanchard once told me he had a similar experience. Kornai’s book was extremely popular among young rebellious economists who wanted to change the world.

In 1980, his magnum opus, Economics of Shortage, came out. Whereas his earlier work on the economics of planning was mostly theoretical (all that literature was very remote from how planning was done in reality), this was the first book to propose a systematic and powerful analysis of how the socialist economy really worked in practice. Starting with the concept of the soft budget constraint (state-owned enterprises in socialist economies that were making losses would never shut down), he explained how this led to increasing demand by enterprises, making them barely responsive to price variations. These increased demands led to generalised shortages that deeply influenced the behaviour of enterprise managers, consumers and planners.

That is from a broader appreciation by Gérard Roland.  Here is one original Kornai piece on the topic.  Here is a later ungated piece.  Here is Eric Maskin on different theories of the soft budget constraint.

The Price of COVID-19 Risk In A Public University

Wow. Duha Altindag, Samuel Cole and R. Alan Seals Jr, three professors in the economics department at Auburn University, study their own university’s COVID policies. The administration defied the Alabama Governor’s public health order on social distancing and created their own policy which caused enrollment in about half of the face-to-face classes to exceed legal limits. Professors assigned to teach these riskier classes were less powerful, albeit they were paid more to take on the risk. I am told that the administration is not happy. I hope the authors have tenure.

We study a “market” for occupational COVID-19 risk at Auburn University, a large public school in the US. The university’s practices in Spring 2021 caused approximately half of the face-to-face classes to have enrollments above the legal capacity allowed by state law, which followed CDC’s social distancing guidelines. Our results suggest that the politically less powerful instructors, such as graduate student teaching assistants and adjunct instructors, as well as women, were systematically recruited to deliver their courses in riskier classrooms. Using the dispersibility of each class as an instrument for classroom risk, our IV estimates obtained from hedonic wage regressions show that instructors who taught at least one risky class were paid more than those who exclusively taught safe courses. We estimate a COVID-19 risk premium of $8,400 per class.

Optimism about Mexico a story of compounding returns

Current per capital income measures at about 19k PPP.  Apply 2.2% growth for 30-35 years and Mexico then approaches the living standard of today’s UK or South Korea!  Since 1994, Mexico’s average growth rate has been 2.09%, including Covid times, so that is hardly outlandish as an assumption.

Here is my latest Bloomberg column on that topic.  Here is one excerpt:

In the meantime, there are reasons to be bullish on Mexico right now. One is that economic globalization has been somewhat halted, and in some areas even reversed. To the extent Americans do not trust Chinese supply chains, the Mexican economy will pick up some of the slack. Mexico is also the natural lower-wage supplier to North American industry. (Its main problem in this regard is that its wages are no longer so low, but that too reflects its progress.)

And if tourism in Asia and Europe remains difficult or inconvenient, Americans will visit Mexico more and grow accustomed to holidaying in locales other than Cancun. Some of those habits are likely to stick.

I do also cover the ifs, and, or buts.  And:

Mexico, like much of Latin America, also has a burgeoning startup scene, especially in ecommerce and fintech. Mexico City might end up as the technology capital of [Spanish-speaking] Latin America. That would help with one of Mexico’s chronic economic problems, namely that small firms decide to stay small to escape regulations and taxes. Successful tech startups, in contrast, can scale more easily and face fewer regulations on average than manufacturing firms.

Recommended.

Make TeleMedicine Permanent

One of the silver linings of the pandemic was the ability to see a doctor and be prescribed medicine online. I used telemedicine multiple times during the pandemic and it was great–telemedicine saved me at least an hour each visit and I think my medical care was as good as if I had been in person. I already knew I had poison ivy! No need for the doctor to get it also.

Telemedicine has been possible for a long time. What allowed it to take off during the pandemic wasn’t new technology but deregulation. HIPAA rules, for example, were waived for good faith use of standard communication technologies such as Zoom and Facetime even though these would ordinarily have been prohibited.

The Federal Ryan Haight Act was lifted which let physicians prescribe controlled substances (narcotics, depressants, stimulants, hallucinogens, and anabolic steroids) in a telemedicine appointment–prior to COVID an in-person appointment was required.

Prior to COVID Medicaid and Medicare wouldn’t pay for many services delivered over the internet. But during the pandemic the list of telemedicine approved services was expanded. Tennessee, for example, allowed speech therapists to bill for an online session. Alaska allowed mental health and counseling services and West Virginia allowed psychological testing to be delivered via telemedicine. Wisconsin allowed durable medical equipment such as prosthetics and orthotics to be prescribed without a face-to-face meeting.

Another very important lifting of regulation was allowing cross-state licensing which let out-of-state physicians have appointments with in-state patients (so long, of course, as the physicians were licensed in their state of residence.)

The kicker is that almost all of these changes are temporary. Regulatory burdens that were lifted for COVID will all be reinstated once the Public Health Emergency (PHE) expires. The PHE has been repeatedly extended but that will only push off the crux of the issue which is whether many of the innovations that we were forced to adopt during the pandemic shouldn’t be made permanent.

Working from home has worked better and been much more popular than anyone anticipated. Not everyone who was forced to work at home because of COVID wants to continue to work at home but many businesses are finding that allowing some work from home as an option is a valuable benefit they can offer their workers without a loss in productivity.

In the same way, many telemedicine innovations pioneered during the pandemic should remain as options. No one doubts that some medical services are better performed in-person nor that requiring in-person visits limits some types of fraud and abuse. Nevertheless, the goal should be to ensure quality by regulating the provider of medical services not regulating how they perform their services. Communications technology is improving at a record pace. We have moved from telephones to Facetime and soon will have even more sophisticated virtual presence technology that can be integrated with next generation Apple watches and Fitbits that gather medical information. We want medical care to build on the progress in other industries and not be bound to 19th and 20th century technology.

The growth of telemedicine is one of the few benefits of the pandemic. As the pandemic ends, let’s make this silver lining permanent.

Is this the uh-oh moment for renewable energy?

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

American elites like to argue for a carbon tax and other means of raising the price of carbon emissions, and I fall into that camp myself. Yet higher energy prices are extremely unpopular with many voters. A recent study found that most Americans would vote against a mere $24 annual climate tax on their energy bills. Many countries now have to ask themselves if they really are ready to start paying the bills for a transition away from carbon.

And:

…the Biden administration has been playing a two-sided game. Policies strongly discourage domestic producers from adding fossil-fuel capacity, and indeed those investments remain depressed. Perhaps that is how it should be. Yet when it comes to global capacity, America is talking and playing a very different hand.

For instance, the Biden administration has criticized OPEC for insufficient production of crude oil. National security adviser Jake Sullivan said bluntly: “At a critical moment in the global recovery, this is simply not enough.” That kind of policy talk is hard to square coming from the same government that has revoked permits for the Keystone XL pipeline, limited oil and gas leases on federal land and in Alaska, and used the Endangered Species Act to limit energy development on private lands in the West.

The federal government’s strategy seems clear. It is discouraging fossil-fuel capacity in the U.S. and Canada, but to keep energy prices low it will tolerate and indeed encourage high fossil-fuel spending in other, more distant nations. That would give the U.S. some domestic “trophies” in the fight to limit fossil fuels, yet without higher energy prices for the world at large.

The problem is that the same mix of policies won’t do much to limit overall carbon emissions. It will hurt American industry, by penalizing domestic energy production, and also damage U.S. energy independence.

So far I am not seeing a lot of evidence that the world really is willing to tolerate higher energy prices.  Countries all over are rushing back to coal — what are we supposed to conclude from that?

Fasten your seat belts…

New Stablecoin Charter Could Hinge on National Bank Act Rewrite

A special-purpose banking charter for stablecoin issuers – one of the potential options for federal regulators to rein in the risks posed by the digital asset – may require a revamp of the National Bank Act, the statute that defines the “business of banking,” analysts said in an American Banker piece this week. The prospect of the Biden Administration urging Congress to authorize such a charter was recently reported by the Wall Street Journal. The National Bank Act stipulates that the core activities for national banks are taking deposits, making loans and facilitating payments. The same statute is at the center of legal disputes over the OCC’s FinTech charter that would allow firms engaging in only one of those activities to receive a banking charter and essentially act as a bank.

That is from an email I received from BPInsights.

Why the IMF is intrinsically conservative and hard to reform

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

The IMF is used by the G-5 nations and their allies to put their reputational capital behind the international monetary order. Obviously, the backing countries are only going to underwrite a system that they largely approve of and benefit from.

If the IMF didn’t exist, failed nations still periodically would be bailed out by rich ones, if only because the G-5 politicians wouldn’t wish to endanger the stability of the global financial order. But problems would arise as the bailouts would have to be organized anew each time. Which nation would put in how much? Who would pull the plug on failing nations and when? Who or what would enforce repayment? All those questions are regularized and institutionalized through the existence of the IMF.

The cronyist element is that the G-5 nations use the IMF and its lending facilities to protect the creditworthiness of their own banks and financial systems. In contrast, an IMF serving “the citizens of the world,” whatever that might mean, would be an IMF without much support from the biggest and most important financial players. It would be more like the undercapitalized Unicef than an institution that can move world markets or help preserve them…

If the directorship and board governance of the IMF were picked by a vote from all 190 member countries, the leading G-5 nations would put much less of their reputational capital behind the institution. The IMF is an international public good, but such public goods only get produced when it is in somebody’s selfish interest to do so.

And to close:

Successful international economic orders typically have been based on a fair degree of hegemony, whether it was the British-led gold standard of the 19th century, or the more recent post-World War II American dominance. Once you realize that, a lot of the current questions about the IMF answer themselves rather automatically. The real issue isn’t how to improve the IMF, but how we are going to cope as current hegemonies continue to lose their sway.

Recommended.

Rising Markups and the Role of Consumer Preferences

That is a new paper by Hendrik Döpper, Alexander MacKay, Nathan Miller, and Joel Stiebale, with striking results:

We characterize the evolution of markups for consumer products in the United States from 2006 to 2019. We use detailed data on prices and quantities for products in more than 100 distinct product categories to estimate demand systems with flexible consumer preferences. We recover markups under an assumption that firms set prices to maximize profit. Within each product category, we recover separate yearly estimates for consumer preferences and marginal costs. We find that markups increase by about 25 percent on average over the sample period. The change is attributable to decreases in marginal costs that are not passed through to consumers in the form of lower prices. Our estimates indicate that consumers have become less price sensitive over time.

Of course under this hypothesis, the supposed increase in monopoly is not so daunting after all.  It would be an interesting question, however, why elasticity of demand might have fallen.  Better matching to consumers?  More complacency?  Goods and services are these days more addictive?

Model these Sweden Denmark lower inflation rates

Sweden’s annual inflation rate rose to 2.5 percent in September of 2021 from 2.1 percent in August but below market expectations of 2.7 percent. It was the highest since November of 2011, mainly due to prices of housing & utilities (5.1 percent vs 3.8 percent in August), namely electricity and transport (6.2 percent vs 6.4 percent), of which fuels. Additional upward pressure came from education (2.5 percent vs 2 percent); restaurants & hotels (2.4 percent vs 2.6 percent); miscellaneous goods & services (2 percent vs 1.4 percent) and food & non-alcoholic beverages (0.9 percent vs 0.3 percent). Consumer prices, measured with a fixed interest rate, rose 2.8 percent year-on-year in September, the fastest pace since October of 2008, below market expectations of 3 percent but above the central bank’s target of 2 percent. On a monthly basis, both the CPI and the CPIF rose 0.5 percent.

Here is the link, they are an open economy facing lots of supply shocks, right?  So what is up?

And Denmark:

Denmark’s annual inflation increased to 2.2% in September of 2021 from 1.8% in the previous month. It was the highest inflation rate since November 2012, due to a rise in both prices of electricity (15.2%), pointing to the highest annual increase since December 2008 and gas (52.8%), which is the highest annual increase since July 1980.

I thank Vero for the pointer.  In an email to me she asks:

“If supply issues are the only cause of our inflation woes, then why is it that countries that spent less than 5% of GDP on the pandemic are experiencing average inflation of 2.15%? While countries that spent over 15% of GDP are experiencing average inflation of 3.94%? I don’t know the answer but I think it is worth asking this question.”

Anyone?

Stripe v. Elrond! Crypto and the Payments System

Recently Elrond, the blockchain startup for which I am an advisor, bought a payments processor (conditional on approval from the Romanian government). On the same day, Stripe, the payments processor, announced that they are moving into crypto. None of this is coincidental. Elrond understand that the payments market is a multi-trillion dollar opportunity. Stripe knows that crypto innovation could undercut them very quickly if they aren’t prepared.

How did Stripe turn into a multi-billion dollar firm almost overnight? Obviously, Stripe is a great firm, led by the brilliant Collison brothers, CEO Patrick Collison and President John Collison. But it’s also important to understand that the payments market in the United States is a $100 trillion dollar market. Yes, $100 trillion. Any firm that captures even a small share of this market is going to be big. Credit cards are actually a small part of payments, about $7 trillion with roughly a 2% transaction fee or a $140 billion market. (Quick check. Credit card companies had 2020 revenues of $176 billion).  ACH debit and credit transfers are the big market, $65 trillion, which at a .5% transaction fee amounts to a $325 billion market (this is retail price, wholesale is lower). Thus, payments revenue is on the order of $465 billion. A small share of $465 billion is a very big market (and that is just the US market).

Now consider the following. Crypto payments are in principle at least an order of magnitude cheaper than ACH payments. On Elrond, for example, a very fast and low cost blockchain compared to Ethereum or Bitcoin, someone recently transferred $17.5 million for less than a penny. Moreover, crypto payments are global while every other payments system gets much more expensive as you cross borders. I recently sent $1500 to India and it cost me $100 in transaction fees! To be sure, payments made through the banking system have to obey “Know Your Customer” regulations and also include invoicing and billing services which adds both to value and cost. The main reason, however, that payments through the banking system are expensive is because the banking system rails are taped together with two hundred years of spit and duct tape.

Crypto payments are the future. Stripe knows it. Elrond knows it. The race is on.

NIMBY vs. YIMBY sentences to ponder

CZs means “commuting zones”:

We find that larger and higher‐earnings CZs have much higher housing costs than smaller or lower‐earnings CZs, enough so to more than completely offset their larger effects on nominal earnings. Thus, movements to larger or to higher earnings locations mean reductions in real income.

That is from a new paper by David Card, Jesse Rothstein, and Moises Yi.  Via Adam Ozimek.  Maybe this is a problem!

How do low real interest rates affect optimal tax policy?

Alan Auerbach and William Gale have a new paper on this topic:

Interest rates on government debt have fallen in many countries over the last several decades, with markets indicating that rates may stay low well into the future. It is by now well understood that sustained low interest rates can change the nature of long-run fiscal policy choices. In this paper, we examine a related issue: the implications of sustained low interest rates for the structure of tax policy. We show that low interest rates (a) reduce the differences between consumption and income taxes; (b) make wealth taxes less efficient relative to capital income taxes, at given rates of tax; (c) reduce the value of firm-level investment incentives, and (d) substantially raise the valuation of benefits of carbon abatement policies relative to their costs.

One core intuition here is that as the safe return goes to zero, capital taxes are not especially burdensome compared to consumption taxes.  Of course “the safe return” may not be entirely well-defined within a corporate context, and capital taxes often hit returns to risk as well, so this is a bit more complicated than the abstract alone would indicate.

The authors also offer this intuition, which I do not quite follow:

In simplified environments, a wealth tax can be written as an equivalent tax on capital income. As the rate of return falls, the equivalent income tax rate of any given wealth tax rises. That is, a given wealth tax rate becomes more distortionary relative to a given capital income tax as the rate of return falls.

One of my biggest worries about a wealth tax is that it takes resources away from people who at the margin seem to be good at generating extra-normal returns.  That comparative advantage might be more important as the safe rate goes to zero.  So I am fine with the conclusion of the authors, but not sure if their intuition is equivalent to mine (I suspect it is not).

This one is clearer to me:

A major focus of potential tax reform has been the treatment of capital gains, given their tax-favored status, their high concentration among the very wealthy, and the distortions that the current method of taxation causes. A key element of the current system of capital gains taxation
is the lock-in effect, which discourages the realization of gains to take advantage of deferral of taxation. With very low interest rates, the deferral advantage loses much of its relevance, and this can make relatively simple reforms (such as taxing capital gains at death) achieve results very similar to more complicated schemes (such as taxing capital gains on accrual, even when not realized).

Overall this paper is very interesting and thought-provoking.  Nonetheless, until we understand better why the safe rate of return has diverged so radically from “typical” (but still risky) corporate rates of return, I am not sure what implications we can draw from the model.