Category: Economics

Facts about UBI

A UBI would direct much larger shares of transfers to childless, non-elderly, non-disabled households than existing programs, and much more to middle-income rather than poor households. A UBI large enough to increase transfers to low-income families would be enormously expensive. We review the labor supply literature for evidence on the likely impacts of a UBI. We argue that the ongoing UBI pilot studies will do little to resolve the major outstanding questions.

That is from a new NBER working paper by Hilary W. Hoynes and Jesse Rothstein.

The wisdom of Ramez Naam, on climate change

From his tweetstorm here are a few bits:

Our biggest climate problems – the sectors that are both large and that lack obvious solutions, are: a) Agriculture and land use changes (AFOLU in the graphic) and b) Manufacturing / Industry. Together, these are 45% of global emissions. And solutions are scarce. 11/

I’m not saying that clean electricity or transport are solved. They’re not. But in electricity, we have solar, wind, batteries growing & getting cheaper & on path for 70-80% decarbonization *at least*. Same with electric cars and trucks. We have momentum in those sectors. 12/

We do NOT have momentum in reducing carbon emissions of agriculture or manufacturing. In agriculture, livestock methane emissions + deforestation to graze livestock are biggest problems. And meat consumption is doubling in next 40 yrs. This should scare you more than coal. 13/

In industry, despite progress in recycling steel, *primary* steel production is still incredibly carbon intensive. As is cement. As is much of manufacturing. We haven’t reached the “solar cheaper than coal” or “EVs cheaper than gasoline” tipping points there. We need to. 14/

If the US is serious about climate policy, it ought to focus on these two sectors – agriculture and industry – that are soon to be the two largest emissions sources, and lack solutions. We should press to invent solutions, drive them down in price, and spread them globally. 16/

Do read the whole thing.

Biblical Adverse Selection

And Jesus said, Behold, two men went forth each to buy a new car.

And the car of the first man was good and served its owner well; but the second man’s was like unto a lemon, and worked not.

But in time both men grew tired of their cars, and wished to be rid of them. Thus the two men went down unto the market, to sell their cars.

The first spoke to the crowd that had gathered there, saying honestly, My car is good, and you should pay well for it;

But the second man went alongside him, and bearing false witness, said also, My car is good, and you should pay well for it.

Then the crowd looked between the cars, and said unto them, How can we know which of ye telleth the truth, and which wisheth falsely to pass on his lemon?

And they resolved themselves not to pay for either car as if it were good, but to pay a little less than this price.

Now the man with a good car, hearing this, took his car away from the market, saying to the crowd, If ye will not pay full price for my good car, then I wish not to sell it to you;

But the man with a bad car said, I will sell you my car for this price; for he knew that his car was bad and was worth less than this price.

But as the first man left, the crowd returned to the second man and said, If thy car is good, why then dost thou not leave to keep the car, when we will pay less than it is worth? Thy car must be a lemon, and we will pay only the price of a lemon.

The second man was upset that his deception had been uncovered; but he could not gainsay the conclusion of the market, and so he sold his car for just the price of a lemon.

And the crowd reasoned, If any man cometh now to sell his car unto us, that car must be a lemon; since we will pay only the price of a lemon.

And Lo, the market reached its Nash equilibrium.

From username42 on Reddit. Hat tip: Michael Lane.

Your challenge: Explain an economics principle the King James Way.

The meaning of death, from an economist’s point of view

A few days ago Garett Jones came to my office door and asked “what do we really know about labor supply?”  I said we might as well extend the query to labor demand.  In any case, here was part of my answer, paraphrased of course:

I’ve been much influenced by having kept a dining guide blog/website for almost thirty years, and seeing so many places come and go.  On one hand, I see the stickiness of plans.  A restaurant opens up, and the proprietor has the intent to be a certain thing.  They’re not going to take the pupusas off the menu, just because the price of corn has gone up.  Similarly, increases in the minimum wage might not much alter the hiring plans of the restaurant.  The very act of starting a business selects, to some extent, for people who stick to their plans.  The dishes still need to be washed, and many owners are not at the margins of considering serious automation.

That said, sooner or later these restaurants pass from the scene.  And when the El Salvadoran place closes, there is a real competition across competing food visions.  Will it be pupusas, roast chicken, or kebab?  Once again, relative prices will exert their influence, on both the supply and demand sides of the market.  In fact, pupusa places are slightly in retreat, as they cannot always bid for their higher area rents — it is hard to sell a pupusa for more than a few dollars and at the same time the requisite labor is harder not easier to come by and demand seems stagnant at best.

Similarly, if the minimum wage is high, the new restaurant, if indeed it is even a restaurant, will economize on the number of laborers required to make the food.  The plan for a true Bengali sweets shop will not get off the ground.  You might see storage space or a less labor intensive means of food preparation.

We thus come to a truth that is both happy and sad: death and turnover are how relative prices imprint their impact on the world.

And that, to an economist, is the meaning of death.

Further new results on the marginal rate of income taxation

I study optimal income taxation when human capital investment is imperfectly observable by employers. In my model, Bayesian employer inference about worker productivity drives a wedge between the private and social returns to human capital investment by compressing the wage distribution. The resulting positive externality from worker investment implies lower optimal marginal tax rates, all else being equal. To quantify the significance of this externality for optimal taxation, I calibrate the model to match empirical moments from the United States, including new evidence on how the speed of employer learning about new labor market entrants varies over the worker productivity distribution. Taking into account the spillover from human capital investment introduced by employer inference reduces optimal marginal tax rates by 13 percentage points at around 100,000 dollars of income, with little change in the tails of the income distribution. The welfare gain from this adjustment is equivalent to raising every worker’s consumption by one percent.

That is from the Harvard job market paper of Ashley C. Craig, via Steven Hamilton.

If the gdp deflator is off, which financial investments should you make?

Many people suggest that we are under-measuring the benefits of innovation, and thus real rates of economic growth are much higher than we think.  That in turn means the gdp deflator is off and real rates of interest are considerably higher than we think.  Someday we will all realize the truth and asset prices will adjust.

Let’s say that view is correct (not my view, by the way), how should that change your investment decisions?

One implication, it seems to me, is that you should short the goods and services which are being produced so rapidly under this regime.  If that is hard to do, short their substitutes.  Say the new innovative growth is coming from the internet sector, and internet activity is a good substitute for collecting stamps (which seems to be true), well short stamps if you can.  At least get them out of your diversified portfolio.

Similarly, you may wish to invest in companies which produce goods not easily substituted for over the internet.  One observer has mentioned “perfume” to me in this connection, though I do not have the expertise to render a judgment.

More generally, if real rates of return are high, but not perceived as high by most investors (who are still victims of fallacious “great stagnation” arguments and the like), at some point those investors will learn.  With more rapid growth enriching the future, and with the realization of such, there will be a sudden demand to shift funds into the present, so as to equalize marginal utilities.  So bond prices will fall and that means you should short bonds and buy puts on bonds.

Don’t load up on land and public utilities.  Incumbent firms also may fall in value.

You also might fear this new technological progress will bring some fantastic but hard-to-afford new goods and services.  How about life extension or immortality but priced at $10 million?  The way to hedge that risk is to invest in life extension companies, but even more than their earnings prospects might dictate.  That is the best way to insure against life extension being too costly to afford.  Note that poorer investors should do this, but the very wealthy do not need to.

What else?

I thank B. and S. and Alex T. for relevant discussions connected to this post.

Valentine’s day markets in everything

Looking to get yourself a present this Valentine’s Day? The El Paso Zoo has you covered. It will name a cockroach after your ex and then feed it to a meerkat live on camera.

You can message the zoo on Facebook with your ex’s name, then wait patiently for February 14 to watch the roach get devoured during the “Quit Bugging Me” meerkat event, which will live-stream on Facebook and the zoo’s website. The names of those exes will also be displayed around the meerkat exhibit and on social media starting February 11. The zoo calls it “the perfect Valentine’s Day gift.”

Here is the story, via LegalNomads.  Just when I think I have all of these covered, one comes along that is worse than anything I was expecting…

A new idea (really)

I am not convinced by the argument which follows (see Cowen’s Third Law), but I am committed to passing new ideas along, and the researchers — Liu, Mian, and Sufi — have a strong track record.  Here goes:

A unique prediction of the model is that the value of industry leaders increases more than the value of industry followers in response to a decline in the interest rate, and, importantly, the magnitude of the relative increase in value of the leaders versus followers when the interest rate declines is larger at a lower initial level of the interest rate.

And:

The model’s prediction is confirmed in the data.

And finally:

The model provides a unified explanation for why the decline in long-term interest rates has been associated with rising market concentration, reduced dynamism, a widening productivity gap between leaders and followers, and slower productivity growth.

I will ponder this further, anyway here is the link to the paper, 88 pp. long.  If they are right, this is big, big news.  Here is a WSJ summary.

For further background, see also Alex’s earlier post about population/labor force decline and economic stagnation.  It is easier for me to believe that their real interest rate effect is working through the propagation mechanism of population and labor force participation.  Furthermore, I have read too many papers which seem to imply that real interest rates do not much, within normal limits, have a big effect on firm investment decisions.  Their model would seem to imply the opposite, and I would like them to test their implied elasticity against the actual elasticities other researchers have measured.

Paul Romer’s advice for the World Bank

First, outsource the bank’s research upon which it depends for identifying problems and proposing solutions. Diplomacy and science cannot both thrive under the same roof. One consequence of the bank’s commitment to diplomacy is its necessary embrace of the helpful ambiguity that makes it possible for multilateral institutions to allow “Chinese Taipei” compete in the Olympic Games without “Taiwan, China” having a seat in the UN. Dispassionate examination makes clear that what the bank does to maintain conformity on the diplomatic front is not compatible with scientific research.

All that matter in science are the facts. When complex political sensitivities are allowed to influence research by stifling open disagreement, it ceases to be scientific. For good reasons, the bank’s shareholders have chosen to protect its diplomatic function, at the expense of its research.

Outsourcing research would be a better, more efficient way for the bank to establish the facts needed to do its job. This would also be an investment in the universities that make the discoveries that drive human progress.

Here is the full piece.  What do you all think?

Women in Economics

Tyler and I are very pleased to announce a new series at MRU, Women in Economics.

Women in Economics highlights the groundbreaking and inspiring work of female economists – not only to recognize the important work they’ve done but to also share their inspirational journeys.

Our first major video on Elinor Ostrom will be released on February 12 followed by videos on Janet Yellen (featuring Christina Romer and Ben Bernanke), Anna Schwartz (featuring Claudia Goldin), Joan Robinson and more. We also have some more informal “mini-testimonials” discussing the work of some major contemporary economists who have been inspirational. In the video below I discuss the work of Petra Moser. (I should have cleaned my office.)

Tyler and I also want to take a moment to thank the fantastic team at MRU for a huge amount of creativity, inspiration and hard work in putting this series together. Lots of thanks and appreciation to Roman Hardgrave, Alexandra Tooley, Mary Clare Peate, Brandon Davis, Justin Dile, Lindsay Moss and William Nava. You too can join the team!

More here.

The optimal rate of income taxation

An established view is that the revenue maximizing top tax rate for the US is approximately 73 percent. The revenue maximizing top tax rate is approximately 49 percent in a quantitative human capital model. The key reason for the lower top tax rate is the presence of two new forces not captured by the model underlying the established view. These new forces are strengthened by the endogenous response of top earners’ human capital to a change in the top tax rate.

That is from a recent paper by Badel, Huggett, and Luo, via Scott Winship.

Why have countries moved away from wealth taxes?

From the excellent Timothy Taylor:

Back in 1990, 12 high-income countries had wealth taxes. By 2017, that had dropped to four: France, Norway, Spain, and Switzerland (In 2018, France changed its wealth tax so that it applied only to real estate, not to financial assets.)  The OECD describes the reasons why other countries have been dropping wealth taxes, along with providing a balanced pro-and-con of the arguments over wealth taxes, in its report The Role and Design of Net Wealth Taxes in the OECD (April 2018).

For the OECD, the bottom line is that it is reasonable for policy-makers to be concerned about the rising inequality of wealth and large concentrations of wealth But it also points out that if a country has reasonable methods of taxing capital gains, inheritances, intergenerational gifts, and property, a combination of these approaches are typically preferable to a wealth tax.  The report notes: “Overall … from both an efficiency and an equity perspective, there are limited arguments for having a net wealth tax on top of well-designed capital income taxes –including taxes on capital gains – and inheritance taxes, but that there are arguments for having a net wealth tax as an (imperfect) substitute for these taxes.”

Here, I want to use the OECD report to dig a little deeper into what wealth taxes mean, and some of the practical problems they present.

The most prominent proposals for a US wealth tax would apply only to those with extreme wealth, like those with more than $50 million in wealth.  However, European countries typically imposed wealth taxes at much lower levels of wealth…

It’s interesting, then, that in these European countries the wealth tax generally accounted for only a small amount of government revenue. The OECD writes: “In 2016, tax revenues from individual net wealth taxes ranged from 0.2% of GDP in Spain to 1.0% of GDP in Switzerland. As a share of total tax revenues, they ranged from 0.5% in France to 3.7% in Switzerland … Switzerland has always stood out as an exception, with tax revenues from individual net wealth taxes which have been consistently higher than in other countries …” However, Switzerland apparently has no property tax, and instead uses the wealth tax as a substitute.

The fact that wealth taxes collect relative little is part of the reason that a number of countries decided that they weren’t worth the bother. In addition, it suggests that a US wealth tax which doesn’t kick in until $50 million in wealth or more will not raise meaningfully large amounts of revenue.

There are many more excellent points at the link.  Here is another:

A wealth tax will tend to encourage borrowing. Total wealth is equal to the value of assets minus the value of debts. Thus, one way to avoid a wealth tax is to borrow a lot of money, in ways that may or may not be socially beneficial.

Tim concludes:

To me, many of the endorsements of a wealth tax feels more like expressions of righteous exasperation than like serious and considered policy proposals.

Recommended.  If you would like another point of view, Saez and Zucman respond to some criticisms here.

The New Zealand real estate problem, with reference to Palmerston North

From my email, from Ryan Reynolds:

I’ve worked in Palmerston North, as well as Tauranga and Auckland (all briefly). I’m Australian too, so my perspective may be shaded vs what a Kiwi or someone from further afield might say.

The major issue is just supply of new dwellings and the permitting and development process. All the rest of the factors noted point to increases in demand (immigration, natural population growth, easy credit, real income growth, tax structures, chinese buyers) – but without a limit on supply you would have expected those factors to result in a building boom not a rapid price appreciation. That’s obviously not the way reality has played out.

From a permitting side, the Resource Management Act heavily constrains lots of building decisions and imposes a lot of bureaucracy (and time delays and uncertainty). Less specifically, Kiwi’s appear to have strong preferences for careful building and urban sprawl in lots of dimensions. That includes specific issues like building heights, overshadowing, retaining views of specific hills or valleys (including Maori heritage sites) and retaining its environmental and cultural heritage (however brief it may seem to outsiders). These preferences are captured in major urban plans which set out acceptable terms for developments, but often even urban plans won’t contain enough zoned land to meet demand (see the bun fight over the Auckland Unitary Plan from 2016), and even then those plans took years to put together. This plays out in a strong community undercurrent and politicians of both stripes use scare campaigns about the horrors of inappropriate development. Anything two stories or over can count as ‘inappropriate’.

From a policy perspective there seems to be no understanding of the practical trade off between housing demand and conservation, except from economists outside the planning departments (see NZ Initative or Michael Reddell, ex RBNZ) or from the central government threatening to unwind urban plans.

The second issue is that NZ also has a lot of partly and wholly government owned and operated utilities (water supply, networks and wastewater; electricity and gas networks; electricity generation) and services provided under government monopolies required for new developments (roads, education, healthcare, and other social services). In many cases the entities charged with providing these services are capital and/or budget constrained and they don’t have the funds to provide major new capex works in the short to medium term. Furthermore, the revenues earned from providing these services are often inadequate to cover economic costs. For instance, water supply and wastewater is provided at below cost price in many cases in NZ, and in large parts of the country water supply is un-metered. And there is serious community opposition to either privatization or changes in tariffs. As a consequence though, capex projects in the water sector are effectively large donations of capital for no return for the water corporation. As is the case for virtually all roads, schools, or hospital projects, any of which could prevent or stall major new urban developments. So even if new land was zoned as ‘fit for development’ (which it won’t be), the entities required to facilitate that development don’t have the funds to do so and nobody else is allowed to fill that gap.

And yes, Palmerston North is still dull. But then people say that Switzerland is dull too. I’ve seen much worse.

Poor Sleep Makes People Poor: The Costs of India Standard Time

After Independence, India adopted a single time zone for the entire country. India spans as much 1,822 miles in the East-West direction or 29 degrees longitude. If India followed the convention of a new time zone every 15 degrees it would have at least two time zones. With just one zone the sun can rise two hours earlier in the East than in the far West.

In an original and surprising paper, Maulik Jagnani, argues that India’s single time zone reduces the quality of sleep, especially of poor children and this reduces the quality of their education. Why does a nominal change impact real variables? The school day starts at more or less the same clock-hour everywhere in India but children go to bed later in places where the sun sets later. Thus, children in the west get less sleep than children in the east and this shows up in their education levels and later even in their wages!

I find that later sunset causes school-age children to begin sleep later, but does not affect wake-up times. An hour (approximately two standard deviation) delay in sunset time reduces children’s sleep by 30 minutes. I also show that later sunset reduces students’ time spent on homework or studying, and time spent on formal and informal work by child laborers,while increasing time spent on indoor leisure for all children. This result is consistent with a model where sleep is productivity-enhancing and increases the marginal returns of study effort for students and work effort for child laborers.

The second part of the paper examines the consequent lifetime impacts of later sunset on stock indicators of children’s academic outcomes. I use nationally-representative data from the 2015 India Demographic and Health Survey (DHS) to estimate how children’s education outcomes co-vary with annual average sunset time across eastern and western locations within a district. I find that an hour (approximately two standard deviation)delay in annual average sunset time reduces years of education by 0.8 years, and children in geographic locations with later sunset are less likely to complete primary and middle school.

Addendum: The importance of sleep and coordination of sleep with circadian rhythms is also illustrated by the phenomena of teenagers who get more sleep and do better in school when school opening is better timed with adolescent sleep patterns. As a result, we are seeing a movement to push school opening times later for teenagers. Perhaps India will adopt a second time zone.