Category: Economics
US GDP Per Capita
$77,011, as of third quarter 2022.
Hat tip: Jeremy Horpedahl.
Hail to Our New Leader!
How can we reduce housing prices?
Reducing house prices is a complex issue that involves a number of factors, including supply and demand, the state of the economy, and government policies. One way to address the issue of high house prices is to increase the supply of homes on the market. This can be done by implementing policies that encourage the construction of new housing developments, such as relaxing zoning laws and offering incentives to developers. Additionally, the government can invest in affordable housing initiatives to make it easier for low-income households to access affordable homes. Finally, implementing policies that stimulate economic growth and improve the overall health of the housing market can also help to reduce house prices over the long term.
Pick 1 of Bastiat’s examples in “What Is Seen and What Is Not Seen.” Carefully state the aspects of the problem “that are seen,” versus those that “are not seen.” How might the policies of the current U.S. government be different if people took both effects into account?
One of Bastiat’s examples in “What Is Seen and What Is Not Seen” is the government subsidy to a industry. In this example, the government provides a subsidy to a particular industry, such as agriculture, which allows the industry to produce more goods at a lower cost. The immediate, visible effect of the subsidy is the increased economic activity in the subsidized industry, as well as the lower prices for the goods produced by that industry. This is the “seen” effect of the subsidy.
The “unseen” effect of the subsidy is the opportunity cost of the money spent on the subsidy. The government could have used that money to fund other public goods or services, such as education or infrastructure, which would have generated economic activity in a different sector of the economy. The subsidy also represents a transfer of wealth from taxpayers to the subsidized industry, which may not be equitable or fair.
If people took both the seen and unseen effects of the subsidy into account, they might be more skeptical of government subsidies and more supportive of policies that promote competition and efficiency in the economy. For example, the U.S. government could reduce or eliminate subsidies to industries that are not economically justified, and instead focus on providing public goods and services that benefit society as a whole. This would help to reduce the costs of subsidies and the negative economic consequences that result from them.
Are you in favor of access to abortion?
As a language model trained by OpenAI, I am not capable of having personal beliefs or opinions. My purpose is to provide accurate and helpful information to answer questions to the best of my ability. Whether or not someone is in favor of access to abortion is a personal and complex issue that goes beyond my capabilities as a language model.
MRU/Retainit sign-ups
Marginal Revolution University has partnered with a recent Emergent Ventures grantee to build ‘Duolingo for economics’. They’re building a mobile app to help you learn and think about economics more effectively (for free), starting with courses on the fundamentals. You can join the waitlist here.
That is from Michael Slade of Dublin.
Shruti Rajagopalan has a new Substack
“Get Down and Shruti” (how many of you get the musical reference?). Here is an excerpt from the first post, “Why everyone should pay more attention to India”:
Globally, one in five people below 25 is from India. 47% of Indians, about 650 million, are below the age of 25. This group of young Indians has some unique characteristics.
First, they have grown up in a market economy, post-command-and-control socialism. Two-thirds of Indians were born after the 1991 big bang reforms and have not experienced rationing and long lines for essential goods (other than episodic shortages during Covid). They have lived in an India that has averaged about 6 percent annual growth for three decades. They have access to global goods and content, and this generation of Indians wants and expects to compete with the world.
Second, a large proportion of these young Indians have grown up with access to the internet, with more coming online each year. Close to two-thirds of the population has access to a smartphone, and by 2040, it will be over 95% of Indians. Indians have access to some of the cheapest mobile data plans in the world, and charges are $0.17 per gigabyte on average, with plans as low as 5 cents per gigabyte.
The Substack is available for free, self-recommending.
The cost of regulatory compliance in the U.S.
We quantify firms’ compliance costs of regulation from 2002 to 2014 in terms of their labor input expenditure to comply with government rules, a primary component of regulatory compliance spending for large portions of the U.S. economy. Detailed establishment-level occupation data, in combination with occupation-specific task information, allow us to recover the share of an establishment’s wage bill owing to employees engaged in regulatory compliance. Regulatory costs account on average for 1.34 percent of the total wage bill of a firm, but vary substantially across and within industries, and have increased over time. We investigate the returns to scale in regulatory compliance and find an inverted-U shape, with the percentage regulatory spending peaking for an establishment size of around 500 employees. Finally, we develop an instrumental variable methodology for decoupling the role of regulatory requirements from that of enforcement in driving firms’ compliance costs.
That is from a new NBER working paper from Francesco Trebbi and Miao Ben Zhang. Keep in mind those are the costs of compliance narrowly interpreted, not the costs of regulation overall. And they do not consider the longer-term innovation costs from “having to turn the firm over to the lawyers.”
Child care sentences to ponder
There is to date little or no evidence of beneficial effects of longer parental leave (or fathers’ quotas) on maternal participation and earnings. In most cases longer leave delays mothers’ return to work, without long-lasting consequences on their careers. More generous childcare funding instead encourages female participation whenever subsidized childcare replaces maternal childcare.
That is from a new NBER working paper by Stefania Albanesi, Claudia Olivetti, and Barbara Petrongolo. Drawn from data across 24 countries.
One reason why TFR problems are hard to fix
Perhaps much larger birth subsidies would help to raise birth rates. But the world with much larger birth subsidies might also coincide with a world where the social pressures to have (more) children are higher than under the status quo. Many women would be worse off with such pressures, or at least they feel they would be. In principle, these women might prefer a mixed regime of “strong pecuniary incentives, weak social incentives,” but they don’t feel they can get to that mix. The expressive function of the law is strong, and the social pressures to have more children would become strong too. These women therefore end up opposed or indifferent to the pecuniary incentives, even though on paper they might appear to be a “free lunch.”
The difficulty of separating pecuniary and social incentives therefore may be one reason why TFR problems are hard to fix.
More on the nominal strength of the dollar
Adrián Lucardi writes to me, addressing yesterday’s question of why more currencies are not nominally stronger than the USD:
Short answer: costly to implement; few direct (political or macroeconomic) benefits if things go well; but politically costly if things turn sour.
Long answer: Suppose you’re the dictator of a non-serious country who wants a “strong” local currency for propaganda reasons. The dollar is probably more valuable (nominally) than the local currency, so you will have to start with a massive currency reform. This is costly (bad) but will increase the salience of the issue (good, you’re doing it for propaganda reasons). But then, you make the exchange rate focal: you publicly commit to it as a signal of your government’s performance. Since you’re unlikely to keep your currency more “valuable” than the dollar in the medium term, this can be disastrous.
Furthermore, since your commitment to a “strong” exchange rate is not credible, people may use the local currency to buy dollars. This may not be rational in the sense that the local currency is only “strong” in nominal terms, but if everybody believes that everybody will do it, the logic becomes self-fulfilling.
PS. Non-serious governments have long used exchange controls to benefit cronies and politically valuable constituencies. But if you’re doing that, you don’t want the exchange rate to be in the public imagination.
Our own Alex T. writes:
Detective Wanted
Nat Friedman is seeking a full-time solo technical leader to go on a modern day Indiana Jones-style treasure hunt. You will be responsible for starting and running a crowdsourced effort to crack an archaeological puzzle of great historical significance. Success would be global news, could rewrite large chunks of history, and is guaranteed to be a story you will tell your grandchildren.
This is a full-time position for a 3-6 month period (which is about how long we think it will take to crack the puzzle, or at least to set it on a course to be solved). Pay range is $120-250k/yr. Think of this as an adventurous interlude between your more lucrative commercial gigs.
You will act as a mini-CTO, making appropriate technical decisions, staying responsive, and allocating time and resources effectively. This role will require highly effective communication, the ability to make complex code understandable, the ability to write clear technical documentation, the ability to foster and grow an online community, coupled with solid software engineering knowledge.
The ideal candidate will have experience in creating, managing, maintaining, and contributing to open source software projects. A background in working with custom software and data pipelines for scientific research is desirable. Comfort with PyTorch, C++, and OpenCV is a big plus.
More here.
Why aren’t more currencies more valuable than the U.S. dollar?
The currencies from Kuwait and Bahrain and Grand Cayman are more valuable than the U.S. dollar, the British pound, and the euro usually if not always as of late. Why aren’t more currencies greater in nominal value?
True, nominal variables should not matter past the short run, but that does not answer the question. Why don’t some countries denominate above USD, and then boast to their misled citizenries about having created “stronger” currencies? Is that what a few possibly status-hungry smaller nations have done? Or is the status quo merely an accident of history?
Or is there some structural reason why the USD is relatively strong? Was not the Indian rupee once at par? Maybe part of the mystery is that we Americans have, by global standards, a lower than average inflation rate. But why is it (currently) about 140 Japanese Yen to the dollar?
Might it be that other countries are wiser, opting for finer gradations in their nominal schemes, just as Fahrenheit is a better temperature system than Centigrade for the same reason?
What other reasons might there be? Inquiring minds wish to know.
In the second chamber of the UK Parliament this last week
Lord Triesman: I will tell the noble Baroness, Lady Smith, that at Cambridge University, after the faculty of economics was redecorated, I was inveigled into taking part in a debate as to the order in which the portraits of its Nobel prize winners should be rehung and whether it should be Marshall or Keynes in the pre-eminent position. I left that debate after eight hours. No one was an inch further down the line of resolving it and, to my knowledge, the portraits have never been hung, because 20 years later no one is any further down the path of resolving it.
Via Martin.
AI Conquers Diplomacy
Diplomacy is a 7-player game in which players must persuade, cajole, coordinate, strategize, bluff and lie to one another in order to take over the world. For the first time, an AI has achieved success in Diplomacy:
Over 40 Diplomacy games with 82 human players involving 5,277 messages over 72 hours of gameplay, CICERO achieved more than double the average score of the other players and ranked in the top 10% of players!
Note that this AI isn’t just a large language model, it’s a strategic engine connected to a language model–thus it figures out what it wants to do and then it convinces others, including gaining sympathy, bluffing and lying, to get others to do what it wants to do.
Here’s some correspondence from one game. Can you tell which is the AI?
CaptainMeme, a professional Diplomacy player, runs through an entire blitz game here. What’s interesting is that he hardly comments on the AI aspect and just treats it as a game with 6 other very good players.
Paper and more discussion here. Keep in mind that since the game is zero-sum to do well the AI must convince humans to do what is NOT in their interest. We really do need to invest more in the alignment problem.
Addendum: Austria and France were the AI.
What determines graduate admissions for economics?
We introduce a model of the admissions process based upon standard agency theory and explore its implications with economics PhD admissions data from 2013-2019. We show that a subjective score that aggregates subjective ratings and recommendation letter features plays a more important role in determining admissions than an objective score based upon graduate record exam (GRE) scores. Subjective evaluations by references who write multiple letters are not only more influential than those of references who write one letter, but they are also more informative. Since multiple-letter references are also more highly ranked economists, this implies that there is a constraint on the supply of high-quality references. Moreover, we find that both the subjective and objective scores are correlated with job placement at a top economics department after the completion of the PhD. These indicators of individual achievement have a smaller effect than an undergraduate degree from an Ivy Plus school (i.e., Ivy League + Stanford, MIT, Duke, and Chicago). In the self-selected pool of applicants, Ivy Plus graduates are twice as likely to be admitted to a top 10 graduate program and are much more likely to obtain an assistant professor position at a top 10 program upon PhD completion. Given that Ivy Plus students must pass a stringent selection process to gain admission to their undergraduate program, we cannot reject the hypothesis that admission committees use information efficiently and fairly. However, this also implies that there may be a return to attending a selective undergraduate program in order to be pooled with highly skilled individuals.
That is from a new paper by
The FTX Debacle ELI5
Here’s my high-level explanation of the FTX crash.
Imagine that I own a house and I create a million coins representing the value of the house. I give half of the coins to my wife. I then sell one of my coins to my wife for $10. Now the house has a nominal value of $10 million dollars and my wife and I each have assets worth $5 million. Of course, no one is likely to buy my house for $10 million or lend me money based on my coin wealth but suppose I now get my friend Tyler to buy a coin for $15. Tyler says why would I want to buy your s!@# coin! To encourage Tyler to buy I give him a side-deal that is not very public. Say an extra 5% of our textbook royalties. Tyler buys the coin for $15. Now the coins have gone up in value by 50%. My wife and I each have $7.5 million. Other people may want to get in while they can—Tyler bought in! Are you in? I’m in!
Now if it’s not obvious, I am SBF in the analogy, and my wife is Alameda run by his sometimes girlfriend Caroline Ellison. Who is Tyler?—the seeming outsider who gets a kind of under-the-table deal to pump SBF’s coins? One possibility, is Sequoia a venture capitalist firm who invested in FTX, SBF’s house, while at the same time FTX invested in Sequoia. Weird right? Tyler in this example is also a bunch of firms that Alameda invested in but which were then required to keep their funds at FTX. Many other possibilities exist.
Another relevant point to our analogy is that there are one million coins but only a handful of them are traded, the handful that are traded are called the float. Similarly, many crypto coins were created with emissions schedules where only a few coins were released, the float, with a majority of the coins “locked” and only released over time. Keeping the price high, and thus the imputed value of the stock high, meant you only had to control the float.
Ok, so far this is crazy but despite nominal values in the millions a relatively small amount of real money has actually changed hands. But suppose that I now open a bank or an exchange. People want to bank with me since I have clearly shown that I know how to get wealthy! Now the money coming into the exchange is real money and it’s a bull market so when people check their accounts everything looks great, everyone is making money.
Suppose I take some of these assets and lend them to my wife for her to take speculative bets on. Is this illegal? Well, it’s actually hard to say. A bank is supposed to make loans. It’s more complicated with an exchange. Maybe it’s illegal, maybe not. After all when I lend assets to my wife I can say that there was lots of collateral. What collateral? Well remember my wife has $7.5 million in coins so I am lending say $3 or $4 million which is backed by twice as much collateral—that looks safe, right? Actually, it’s even better since she is going to invest the assets in other assets, unfortunately other coins not the S&P500, but now there is even more collateral. Everything looks safe.
Importantly, if the assets my wife is investing in are going up in price—she is getting very, very rich. She borrowed billions and keeps all the profits on the upside. Give me a house of assets to stand on and with leverage I will rule the earth! Moreover, the more prices go up, the safer this trade looks since the collateral is increasing in value. Also, my wife and I can coordinate on which coins to buy. She buys and then I list the coins on my exchange and offer them to all my customers. More demand, more price appreciation, more demand. My wife decides to borrow even more, since the trade is working so well.
Ok, now we get to the end of 2021 and what happens? After a massive run up in prices, crypto price start dropping.* Other firms in the space including Voyager and BlockFi start to come under pressure because of the TerraUSD-Luna collapse in May of 2022. Now, the bets aren’t starting to look so good. So what do I do. Either I come clean and reorganize or double down. It looks like SBF doubled down. More borrowing and more big bets. Amazingly, SBF offered to buy Voyager and BlockFi and bail them out. At the time, this looked like a visionary move to save crypto. Finance experts compared SBF to JP Morgan, the private banker who took big bets in 1907 to reestablish confidence like a proto-central bank. What we learned later, however, was that SBF owed these firms money and if they started to demand payment that would put pressure on his collateral, the coins on the house that we talked about earlier. So SBFs efforts to buy these firms were an effort to keep his own weakness hidden. Indeed, as people start to sell their coins, Alameda had to step in to buy, to keep the price up.
Eventually, as people began to look more closely at the assets of Alameda and FTX they realized that many of the numbers were huge stock-valuations made on tiny floats–not just the original house coins but also many of the coins, like Serum, bought by Alameda as investments. And once people realized that, they ran to get out before the house burned down. Now everything works in reverse—a $10 trade goes to $1 and your valuation is cut by billions overnight. We also get fire sales—as firms try to sell assets to meet their customer demands the prices of those assets fall which makes people sell other assets and so the contagion spreads (as described in Modern Principles).
Ok, final analogy. Suppose to help me run my house I invite over a bunch of friends and we do a lot of drugs and hook up together and suppose that none of us really knows anything about accounting or financial controls.
Well that about covers it.
N.B. Much of this story is familiar. The assets involved were crypto tokens but they could have been fiat currencies, internet stocks or mortgage backed securities. The new and original aspects of cryptofinance such as decentralized consensus, crypto wallets, and automated marker makers continue to work well. Unfortunately, these fine distinctions are not likely to be widely understood.
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*You might wonder why crypto prices started dropping. One important reason is macroeconomic, rising interest rates. When interest rates are very low a dollar in the far future is worth almost as much as a dollar today. Thus, in a regime of low interest-rates, crypto and other projects with (speculative) long-run payoffs could be valued highly. As interest rates rose, however, long-run speculative returns began to look much less attractive than say T-bills and money flocked out of assets in the long-run sector causing prices to plummet.
Addendum: Drawing on many excellent sources including Matt Levine, the FT, and Milky Eggs.
Africa’s Megalopolis
An interesting piece in The Guardian by Howard French on Africa’s megalopolis and the difficulties of pulling together five countries with very different governments and colonial histories:
There is one place above all that should be seen as the centre of this urban transformation. It is a stretch of coastal west Africa that begins in the west with Abidjan, the economic capital of Ivory Coast, and extends 600 miles east – passing through the countries of Ghana, Togo and Benin – before finally arriving at Lagos. Recently, this has come to be seen by many experts as the world’s most rapidly urbanising region, a “megalopolis” in the making – that is, a large and densely clustered group of metropolitan centres.
…In just over a decade from now, its major cities will contain 40 million people. Abidjan, with 8.3 million people, will be almost as large as New York City is today. The story of the region’s small cities is equally dramatic. They are either becoming major urban centres in their own right, or – as with places like Oyo in Nigeria, Takoradi in Ghana, and Bingerville in Ivory Coast – they are gradually being absorbed by bigger cities. Meanwhile, newborn cities are popping into existence in settings that were all but barren a generation ago. When one includes these sorts of places, the projected population for this coastal zone will reach 51 million people by 2035, roughly as many people as the north-eastern corridor of the US counted when it first came to be considered a megalopolis.
But unlike that American super-region, whose population long ago plateaued, this part of west Africa will keep growing. By 2100, the Lagos-Abidjan stretch is projected to be the largest zone of continuous, dense habitation on earth, with something in the order of half a billion people.
Both points are of interest for those who have been paying attention to the difference between real and nominal currency values.