Category: Economics

Against Regulatory Nationalism

I’ve long argued that if a drug or medical device is approved in another country with a Stringent Regulatory Authority it ought to be approved in the United States. But, of course, the argument is even stronger in the other direction. Drugs and devices approved in the United States ought to be approved elsewhere. Indeed, this is how much of the world actually works because most countries do not have capability to evaluate drugs and devices the way the FDA or say the EMA does. Although it’s the way the world works, few will admit it because that would violate pretensions of regulatory nationalism. Moreover, keeping up with pretenses means transaction costs and unnecessary delays.

The price of such regulatory nationalism can be very high as indicated in this interview with Adar Poonawalla, chief executive of the Serum Institute of India (SII), the world’s largest producer of vaccines.

Some people think the reason that rollout has been slow in many countries is because the developers who hold the patents on the vaccines have licensed too few manufacturers to make them. Do you agree?

No. There are enough manufacturers, it just takes time to scale up. And by the way, I have been blown away by the cooperation between the public and private sectors in the last year, in developing these vaccines. What I find really disappointing, what has added a few months to vaccine delivery – not just ours – is the lack of global regulatory harmonisation. Over the last seven months, while I’ve been busy making vaccines, what have the US, UK and European regulators been doing? How hard would it have been to get together with the World Health Organization and agree that if a vaccine is approved in the half-dozen or so major manufacturing countries, it is approved to send anywhere on the planet?

Instead we have a patchwork of approvals and I have 70m doses that I can’t ship because they have been purchased but not approved. They have a shelf life of six months; these expire in April.

Did you get that? Regulatory nationalism has added months to vaccine delivery and now threatens to put to waste millions of stockpiled doses.

Addendum: See also Scott Sumner on the costs of regulatory nationalism.

Diversity and Inclusion in Economics

We congratulate the Department of Economics at the University of Missouri-Columbia for winning the AEA’s inaugural Award for Outstanding Achievement in Diversity and Inclusion.

Eric Parson’s, one of the leaders of the initiative, credits our textbook, Modern Principles of Economics, with providing the springboard for fruitful discussions and explorations of these ideas. He writes:

[The Economics, Ethics, and Public Policy chapter] really illustrates the authors’ willingness to address these important issues and make them part of the economic conversation. It is also a chapter that I think is unique among Principles textbooks (at least the ones that I have examined, which covers quite a few). This chapter directly exposes students to questions of exploitation and fair and equal treatment and also introduces them to the work of John Rawls, as well as other social justice paradigms. It also includes a discussion of whose views generally count the most in the policy process (in the context of immigration) and, with some additional questioning along these lines, allows students the opportunity to explore their own (sometimes contradictory) viewpoints on this question. Hence, overall the chapter provides a great springboard for thinking about these issues and how these ideas compare and contrast with the typical economic viewpoint.

I always tell the students that this chapter is more about getting them to think critically about the topics and begin asking questions than it is about providing answers. It also gives another nice opportunity to highlight the positive versus normative distinction that we take so seriously in economics and hopefully provides students with some of the tools they will need to discuss these issues intelligently and civilly with one another while considering other viewpoints and worldviews. In fact, I think this chapter is so important that I save it until the end of the term, as it provides an excellent bookend to our semester’s worth of economic study.

Full employment and the output gap

I’ve never accepted the standard story about “being at full employment” vs. “having unemployed resources” around, though often I write in that framework for reasons of intelligibility.  That said, I do not reject this story in ways that make current debate participants very happy, or would create the potential for a policy free lunch.

I take a finance perspective on the output gap.  If you are at what others call “full employment,” you can indeed do better, or at least try to do better.  Start 300 companies that aim to be the next Stripe, Facebook, SpaceX — whatever.  In the short run, you will create jobs, people at jobs will work harder, and so on.  Employment, output, and also tax revenue will rise.  You can pat yourself on the back and say you were not at full employment.

The thing is, you have accepted a higher level of risk.  Many of those companies are likely to fail.  And since they were started by humans consuming a broadly common set of cultural and media inputs, those risks will to some extent be correlated as well.  Of course it might pay off big time as well.

You can always move “beyond full employment” by accepting more risk.  Alternatively, you could deploy some common sense and suggest that no single point on the risk-return frontier corresponds to “full employment.”

And should you be happy about moving beyond full employment?  Was the ex ante level of risk too low, too high, or just right?  Depends!  Even if you think ordinary Americans are too complacent, it does not follow the same is true for the marginal entrepreneurs.

In this setting, failure does not have to mean the gambles were bad ex ante, nor does success validate the initial fervor, as maybe everyone just got lucky.

Addendum: Don’t get too encouraged by what I am saying.  The Lucas Supply curve is still pretty weak, as we have known for decades (only on Twitter is this not known).  Bad nominal shocks do destroy jobs, but as time passes there is still no reason to think that “mere inflation” does more than a small amount to bring them back.  No matter where you are on this risk-return curve.

My Conversation with Brian Armstrong

He is the co-founder and CEO of Coinbase, here is the video, audio, and transcript.  Here is part of the CWTeam summary:

Brian joined Tyler to discuss how he prevents Coinbase from being run by its lawyers, the value of having a mission statement, what a world with many more crypto billionaires would look like, why the volatility of cryptocurrencies like Bitcoin is more feature than bug, the potential for scalability in Ethereum 2.0, his best guess on the real identity of Satoshi, the biggest obstacle facing new charter cities, the meta rules he’d institute for new Martian colony, the importance of bridging the gap between academics and entrepreneurs, the future of crypto regulation, the benefits of stablecoin for the unbanked, his strongest and weakest interpersonal skill, what he hopes to learn from composing electronic music, and more.

And an excerpt:

COWEN: Recently, you cited an estimate that if bitcoin were priced at $200,000, that about half the world’s billionaires would be from crypto. How is that world different? What does it look like? How does it feel different from the world we have?

ARMSTRONG: That’s a big question. I guess the most honest answer is, I don’t know for sure. One thought I’ve had, though, is that if there are more people who generate a lot of wealth with crypto — which I think is already happening, and it will probably keep happening. Most of the people who bought crypto early on — they’re believers in the power of technology to change the world. They’re interested in the ethos of crypto in many cases, and I suspect that they would allocate their capital towards more things in that vein.

You could almost have this — I don’t know if you’d call it a renaissance or a golden age or something, of people who are technology believers. They want to see a better future coming from science and technology, and they’re going to use their capital for good in that direction. That could be one outcome.

There is much more at the link, interesting throughout.

Canada Needs a New Vaccination Strategy

The US vaccination rollout has been deadly slow, inefficient, and chaotic. It has also been one of the best in the world. Canada, for example, is far behind the US on vaccination.

The Canadian deficit is mostly because they don’t have enough vaccine. Canada bought doses but they didn’t invest in capacity and a deal with China fell through. As a result, Canada won’t be getting lots of vaccine until March or April. Operation Warp Speed invested billions in the Modern vaccine and in early purchases of the Pfizer vaccine and thus got first dibs. The Americans are also not allowing vaccine to be exported to Canada. (We could at least give them access to our AstraZeneca factory!).

Regardless of blame, this puts Canada in a precarious situation. Death rates aren’t as high as in the United States but with new variants exploding, Canada is running a big risk. To get Canadians vaccinated more quickly–including my mother–Canada needs to find ways to stretch their vaccine supply–that means First Doses First, half dosing, intradermal delivery and other dose stretching strategies should be considered.

Many other countries are in a much more worse position than either the United States or Canada.

Decentralized Finance and Innovation

Decentralized finance to date seems mostly to be about speculatively trading one cryptocurrency for another. I see little real investment. But in my post on Elrond, I also wrote, “The DeX’s or decentralized exchanges have shown that automated market makers can perform the services of market order books used by the traditional exchanges like the NYSE at lower cost while being easily accessible from anywhere in the world and operating 24/7/365. Thus, every exchange in the world is vulnerable to a DeX.”

One of the reasons that I think DeFi has a big future is that there is much more innovation in the space than in traditional finance. Decentralization is really not a big deal for consumers–it’s even a negative in some respects–but it’s a huge factor for producing innovation.

As an illustration the excellent Bartley Madden (note my biases!) has an interesting idea for reformulating order books on size rather than time.

  • One patented concept is that at a specified limit price, priority is based, not on the time when the order was received, but on order size, which incentivizes placing larger orders.
  • Additional issued patent claims concern variable prices on limit orders depending on the number of shares traded and other technical details for new ways to facilitate the matching of institutional orders with large retail orders.
  • The reason this platform would actually build liquidity is because of the preference given to the largest orders. In operation, a slight price advantage is achieved by the larger investors while the counterparty smaller investors achieve a very quick fill of their entire order.

Or consider the Budish, Crampton, Shim idea for batch auctions to avoid resource waste (rent-seeking) from high-frequency trading. Are these good ideas? I don’t know. But what I do know is that there is little chance that either will be adopted by a major exchange–the transactions costs, including bureaucracy, fear and complacency (why rock the boat?) make it very difficult to innovate. But these ideas could be implemented very quickly by a DeX.

DeFi illustrates “the perennial gale of creative destruction,” and right now we are in the creative phase. New ideas about how to exchange assets are being rapidly deployed and destroyed but a few will prove robust and then watch out. The destruction phase has yet to be begin. Wall Street is unprepared for the onslaught.

Addendum: See also Tyler’s post Will the Future be Decentralized?

Investment, investment, investment — how to think about the Biden stimulus proposal

Here is my Bloomberg column on the stimulus, excerpt for those who are arguing for aid rather than stimulus:

Leave aside the political question of how aggressively to pursue an agenda of a larger, more activist government (and keep in mind that I am more libertarian than many of the participants in this debate). Take a Big Government as a given. History shows that consumption still ought not be the priority.

First, wise public-sector investments are better for the poor than one-time wealth transfers. The U.S. is still reaping the benefits of the great public-health and public-works achievements of the 20th century. Second, the most enduring and beneficial government-transfer programs, such as Social Security, have been built on sustainable majorities.

Progressive societies are fundamentally based on a valorization of investment — in physical structures, in software, in sustainable policies. This argues against a “Let’s grab this policy win while we can” attitude, no matter how popular that stance may currently be on social media. It’s foolish to think that no other policy combination is politically feasible, and if the president’s advisers and supporters really believe that, they are in for a long and unsatisfying four years.

It’s not as if there aren’t obvious candidates for alternative investment: green energy, broadband and public-health infrastructure for the next pandemic, to name a few. Yes, I am familiar with the argument that spending the extra trillion or so now will make it possible to spend more trillions later, including on such policies. But whatever kind of complicated political story you might tell, the basic laws of economics have not been repealed. Increasing current expenditures does, in fact, involve foregone future opportunities.

Another possible direction would be to rework Senator Mitt Romney’s proposed child support plan and turn it into an enduring policy. It is an expensive idea, but at least it would represent a greater investment in America’s future than mere one-off cash transfers.

The defenders of the president’s plan argue that inflation and an overheated economy are not major risks. Maybe so, maybe not — but that is not the crucial issue. Instead, ask yourself this question: Does this program, or this rhetoric, recognize the paramount importance of investment, whether public or private? If not, you needn’t look much further.

I say you can divide the commenters here into two groups.  Those who produce complicated arguments about why opportunity cost reasoning does not apply here, and those who stress the relevance of the opportunity cost of allocating another trillion dollars or two.  I believe that once you recognize that distinction, you know what to do with it next.

From the comments, on the stimulus

The people were grumpy yesterday!

I’m pretty sure that the “stimulus” package isn’t really about stimulus. I think it’s more to do with trying to compensate or mollify a citizenry that is rightly angry about the incompetent pandemic response. The government can’t come out and openly say “hey we screwed up so here’s $2,000”, so they call it stimulus instead.

I also think the Democrats are keen to refight the global financial crisis of 2008. It’s embarrassing to them that Trump was able to inject such massive stimulus into the economy.

Economists are quite right to object to all this as being way too much, way too late. But, well, here we are. Maybe we’ll see inflation after all.

That is from Brad F., and from B.B.:

Let’s bring James Buchanan into this.

Politicians have figured how to get away with handing out checks to get votes. It has nothing to do with stimulus. Biden would have done it without a pandemic if he could get away with it. But he couldn’t, so he used the pandemic. Never let a crisis go to waste.

He added the largest percent rise in the minimum wage in history to the “stimulus.” Is that going to boost employment? Of course not. Economists express frustration that politicians don’t under economics. They do, they don’t care.

Unions don’t want competition from lower-wage workers. So they want both minimum wage hikes and protectionism along with legislation to promote unionization. The unions understand their self-interest. Biden understands his self-interest; he gets union support.

Economists are supposed to understand self-interest. Why won’t we apply it to politicians?

And from Moral Panic:

I think he’s partly complaining that one can argue Biden’s proposal is way, way off, and yet we can barely discuss it. And the autopilot is not because there are minor differences, so come on, let’s get on with it. No, the alleged bill of goods has major issues.

I appreciate what Summers and a few others are saying. This seems similar to Obamacare’s passage. No debate allowed, and we’ll figure out what it means eventually. I find the straight-up endorsement by elite media especially disappointing, with the only notable dissent in true progressive form being about not giving stimulus $ to affluent people.

To be clear, no one is arguing for doing nothing, or questioning the value of automatic stabilizers.  Most of all, it is to the credit of Summers that we are debating this at all.

Stimulus sentences to ponder

Estimates by Harvard economics professor Raj Chetty and his colleagues suggest that consumer spending by low-income consumers is up more than 13 percent from January 2020 to January 2021, before any new stimulus. Researchers working with data from the JPMorgan Chase Institute find household cash balances have risen across the income distribution during the pandemic. At the proposed level of unemployment benefits, more than half of laid-off workers will see their incomes rise. Proposed expenditure levels for school support exceed $2,000 per student.

That is from Lawrence H. Summers, answering further questions about his stimulus stance.  Do read the whole thing.  Again people, you are being sold a bill of goods on this one…

Larry Summers, Right Again

No surprise but in can case you were wondering, retail investors trade mostly on noise. A little bit more surprising is that the effect is to make markets less liquid since some models suggest that noise traders make markets more liquid and accurate by bringing in the sharks.

Contrasting with recent evidence that retail traders are informed, we find that Robinhood ownership changes are unrelated with future returns, suggesting that zero-commission investors behave as noise traders. We exploit Robinhood platform outages to identify the causal effects of commission-free traders on financial markets. Exogenous negative shocks to Robinhood participation are associated with increased market liquidity and lower return volatility among stocks favored by Robinhood investors, as proxied by WallStreetBets mentions. Platform outages are also associated with reduced high frequency trader (HFT) activity, indicative of payments for order flow. However, outages have the strongest effect on stocks neglected by HFTs, suggesting that zerocommission traders have direct negative effects on market quality.

Here is the paper by Eaton, Green, Roseman and Wu.

The wisdom of Matt Levine, payment for order flow

I feel like most of what I read about payment for order flow is insane? Otherwise normal people will start out mainstream explainer articles by saying, like, “Robinhood sells your order to Citadel so Citadel can front-run it.” No! First of all, it is illegal to front-run your order, and the Securities and Exchange Commission does, you know, keep an eye on this stuff. Second, the wholesaler is ordinarily filling your order at a price that is better than what’s available in the public market, so “front-running”—going out and buying on the stock exchange and then turning around and selling to you at a profit—doesn’t work. Third, because retail orders are generally uninformative, the wholesaler is not rubbing its hands together being like “bwahahaha now I know that Matt Levine is buying GameStop, it will definitely go up, I must buy a ton of it before he gets any!” The whole story is widely accepted but also completely transparent nonsense.

Here is the full article, with some extra footnotes in the original.

Danish minimum wage data (it ain’t monopsony)

This paper estimates the long-run impact of youth minimum wages on youth employment by exploiting a large discontinuity in Danish minimum wage rules at age 18 and using monthly payroll records for the Danish population. We show theoretically how the discontinuity in the minimum wage may be exploited to estimate the casual effect of a change in the minimum wage of youth on their employment. On average, the hourly wage rate jumps up by 40 percent when individuals turn eighteen years old. Employment (extensive margin) falls by 33 percent and total labor input (extensive and intensive margin) decreases by around 45 percent, leaving the aggregate wage payment nearly unchanged. Data on flows into and out of employment show that the drop in employment is driven almost entirely by job loss when individuals turn 18 years old. We estimate that the relevant elasticity for evaluating the effect on youth employment of changes in their minimum wage is about -0.8.

Here is the paper by Claus Thustrup Kreiner, Daniel Reck, and Peer Ebbesen Skov.  For Mississippi it might be worse.

I’ll suggest a general methodological approach here.  I think that for Mississippi the chances for this kind of outcome are at least 0.8.  Maybe for many of the richer states it would be 0.4?  Based on those probabilities, I don’t want to do it, even if you think it is “more likely” that in most areas a higher minimum wage won’t destroy many jobs.  What probabilities would be offered by those who defend a minimum wage hike?

Via Bob B.

The anti-science presidency?

…recent Congressional Budget Office estimates suggest that with the already enacted $900 billion package — but without any new stimulus — the gap between actual and potential output will decline from about $50 billion a month at the beginning of the year to $20 billion a month at its end. The proposed stimulus will total in the neighborhood of $150 billion a month, even before consideration of any follow-on measures. That is at least three times the size of the output shortfall.

In other words, whereas the Obama stimulus was about half as large as the output shortfall, the proposed Biden stimulus is three times as large as the projected shortfall…

Looking at incremental deficits relative to GDP gaps is only one way of assessing the scale of a fiscal program. Another is to look at family income losses and compare them to benefit increases and tax credits. Wage and salary incomes are now running about $30 billion a month below pre-covid-19 forecasts, and this gap will likely decline during 2021. Yet increased benefit payments and tax credits in 2021 with proposed stimulus measures would total about $150 billion — a ratio of 5 to 1. The ratio is likely even greater for low-income individuals and families, given the targeting of stimulus measures…

If the stimulus proposal is enacted, Congress will have committed 15 percent of GDP with essentially no increase in public investment to address these challenges. After resolving the coronavirus crisis, how will political and economic space be found for the public investments that should be the nation’s highest priority?

Here is more from L. Summers.  And just wondering — what is it you all think the multiplier is these days?  Asking for a friend.