Category: Law

The real China shock came to Mexico

Mexican manufacturing job loss induced by competition with China increases cocaine trafficking and violence, particularly in municipalities with transnational criminal organizations. When it becomes more lucrative to traffic drugs because changes in local labor markets lower the opportunity cost of criminal employment, criminal organizations plausibly fight to gain control. The evidence supports a Becker-style model in which the elasticity between legitimate and criminal employment is particularly high where criminal organizations lower illicit job search costs, where the drug trade implies higher pecuniary returns to violent crime, and where unemployment disproportionately affects low-skilled men.

That is from a recent paper by Melissa Dell, Benjamin Feigenberg, Kensuke Teshima, forthcoming in AER: Insights.

The Wage Penalty to Undocumented Immigration

This paper examines the determinants of the wage penalty experienced by undocumented workers, defined as the wage gap between observationally equivalent legal and undocumented immigrants. Using recently developed methods that impute undocumented status for foreign-born persons sampled in microdata surveys, the study documents a number of empirical findings. Although the unadjusted gap in the log hourly wage between the average undocumented and legal immigrant is very large (over 35%), almost all of this gap disappears once the calculation adjusts for differences in observable socioeconomic characteristics. The wage penalty to undocumented immigration for men was only about 4% in 2016. Nevertheless, there is sizable variation in the wage penalty over the life cycle, across demographic groups, across different legal environments, and across labor markets. The flat age-earnings profiles of undocumented immigrants, created partly by slower occupational mobility, implies a sizable increase in the wage penalty over the life cycle; the wage penalty falls when legal restrictions on the employment of undocumented immigrants are relaxed (as with DACA) and rises when restrictions are tightened (as with E-Verify); and the wage penalty responds to increases in the number of undocumented workers in the labor market, with the wage penalty being higher in those states with larger undocumented populations.

By George Borjas and Hugh Cassidy, via the excellent Kevin Lewis.

Why firms stay private longer?

Yes, Sarbanes-Oxley is one well-known reason but there are more reasons, most of all stemming from a shift in the balance of power toward founders, boosting their ability to raise private capital:

One such notable deregulation event has been the National Securities Markets Improvement Act (NSMIA), passed in October 1996. NSMIA has made it easier for both private startups and the private funds investing in them to raise capital. First, NSMIA exempts private firms selling unregistered securities under Rule 506 of Regulation D from state securities regulations known as blue sky laws (Rule 506 is one of the exemptions firms can use to issue private shares not registered with the SEC). As a result, NSMIA has made it easier for startups to raise private capital from out-of-state investors by exempting private firms from complying with the blue sky laws of every new state where they issue securities (public firms have long been exempt from blue sky laws). Second, NSMIA has made it easier for private funds such as venture capital (VC) and private equity (PE) funds to raise large amounts of capital by increasing the number of investors in a fund that force the fund to register under the Investment Company Act (ICA).2Registered funds have to regularly disclose their investment portfolio and face leverage and other restrictions, and so VC and PE funds tend to avoid having to register.

That is from a new NBER working paper by Michael Ewens and Joan Farre-Mensa.

Does regulation have a role in the repo rise?

Fed data show large banks are keeping a disproportionate amount in reserves, relative to their assets. The 25 largest US banks held an average of 8 per cent of their total assets in reserves at the end of the second quarter, versus 6 per cent for all other banks. Meanwhile, the four largest US banks — JPMorgan Chase, Bank of America, Citigroup and Wells Fargo — together held $377bn in cash reserves at the end of the second quarter this year, far more than the remaining 21 banks in the top 25.

Since the financial crisis, large banks have been obliged to meet a liquidity coverage ratio (LCR) — a portion of high-quality assets such as cash reserves and Treasuries that can be sold quickly to keep the lights on for a month in a crisis. But regulations also require them to track intraday liquidity — cash they can immediately access — which does not include Treasuries. This additional requirement can vary depending on their business models, which in turn inform supervisors’ and examiners’ bank-specific demands. Executives at several large banks say this puts a de facto premium on reserves that varies by bank..

Second-quarter data from the four largest reserve holders show Wells Fargo held 39 per cent of its high-quality liquid assets in reserves. JPMorgan held 22 per cent, Bank of America held 15 per cent and Citigroup 14 per cent.

“If you have a very large concentration in a few institutions and you lose one or two on any day, then you are losing a major portion of your funding,” said Jim Tabacchi, chief executive at South Street Securities, a broker dealer active in short-term debt markets. “Rates have to skyrocket. It’s simple math.”

Here is the full FT article.

Donor Cycle Dynamics

It’s an ill-wind that blows no good and in Allocating Scarce Organs, Dickert-Conlin, Elder and Teltser find that repealing motorcycle helmet laws generate large increases in the supply of deceased organ transplants. The supply shock, however, is just the experiment that the authors use to measure demand responses. It’s well known that the shortage of transplant organs has led to a long waiting-list. The waiting-list, however, is only the tip of the iceberg. Many people who could benefit from a transplant never bother getting on the list since their prospects are already so low. In addition, some people have access to substitutes for a deceased organ transplant namely a living donor. Finally, there is a quality tradeoff: as more organs become available the quality of the match may increase as people may pass on the first available organ to get a better match. The authors use the supply shock to study all these issues:

We find that transplant candidates respond strongly to local supply shocks, along two dimensions. First, for each new organ that becomes available in a market, roughly five new candidates join the local wait list. With detailed zip code data, we demonstrate that candidates listed in multiple locations and candidates living out-side of the local market disproportionately drive demand responses. Second, kidney transplant recipients substitute away from living-donor transplants. We estimate the largest crowd out of potential transplants from living donors who are neither blood relatives nor spouses, suggesting that these are the marginal cases in which the relative costs of living-donor and deceased-donor transplants are most influential. Taken together, these findings show that increases in the supply of organs generate demand behavior that at least partially offsets a shock’s direct effects. Presumably as a result of this offset, the average waiting time for an organ does not measurably decrease in response to a positive supply shock. However, for livers, hearts, lungs, and pancreases, we find evidence that an increase in the supply of deceased organs increases the probability that a transplant is successful, defined as graft survival. Among kidney transplant recipients, we hypothesize that living donor crowd out mitigates any health outcome gains resulting from increases in deceased-donor transplants.

In other words, increased organ availability increases the quality of the matches for organs that cannot be given by a living donor (hearts, lungs, pancreases, partially liver) but for kidneys some of the benefit of increased organ availability accrues to potential living donors who do not have to donate and this means that match quality does not substantially increase.

The authors also critique the geographic isolation of kidney donation regions. As I wrote when Steve Jobs received a kidney transplant:

Although there is no reason to think that Apple CEO Steve Jobs “jumped the line” to get his recent liver transplant, Jobs did have an advantage: He was able to choose which line to stand in.

Contrary to popular belief, transplant organs are not allocated solely according to medical need. Organs are allocated through a complex system of 58 transplant territories. Patients within each territory typically get first dibs on organs from that territory. That’s great if a patient happens to live in a territory with a lot of organ donors and relatively few demanders, but not so good for a patient living in New York, San Francisco or Los Angeles, where waiting lines are longest.

As a result of these “accidents of geography,” relatively healthy patients in some parts of the country get transplants while sicker patients in other parts of the country die waiting.

Who favors unbreakable commercial encryption?

Governments may be the main threat to big tech companies’ current approach to encryption, but there is another, more surprising threat: their own business interests. The techno-libertarians’ absolutist rejection of lawful access has never been tenable in a commercial context. Barr lambasted Silicon Valley for claiming that government access to consumer devices was never acceptable, even for a purpose as critical as stopping terror attacks, while insisting that its companies had to have access to all their customers’ devices for the purpose of sending them security updates (and, in Apple’s case, promotional copies of unwanted U2 albums). What’s more, Big Tech’s best customers—that is, businesses—don’t want unbreakable end-to-end communications direct to the end user. That encrypted pipe makes it impossible to find and stop malware as it comes in and stolen intellectual property as it goes out. It also thwarts a host of regulatory compliance mandates. So, pace the absolutists, tech companies have found ways to ensure that their business customers can compromise end-to-end security.

And there is this:

…I believe the tech companies are slowly losing the battle over encryption. They’ve been able to bottle up legislation in the United States, where the tech lobby represents a domestic industry producing millions of jobs and trillions in personal wealth. But they have not been strong enough to stop the Justice Department from campaigning for lawful access. And now the department is unabashedly encouraging other countries to keep circling the tech industry, biting off more and more in the form of law enforcement mandates. That’s a lot easier in countries where Silicon Valley is seen as an alien and often hostile force, casually destroying domestic industries and mores.

The Justice Department has learned from its time on the receiving end of such an indirect approach to tech regulation. It has struggled for 30 years against a European campaign to use privacy regulation to prevent tech companies from giving the U.S. government easy access to personal data. But as the tide of opinion turned against U.S. tech companies around the world, the EU was able to impose billions in fines on them in the name of privacy. Soon it really didn’t matter that these companies’ data practices weren’t regulated at home. They had to comply with Europe’s General Data Protection Regulation. And once they accepted that, their will to lobby against similar legislation in the United States was broken. That’s why California—and perhaps the federal government—is inching closer to enacting a privacy law that resembles Europe’s.

Here is the full Stewart Baker post, interesting throughout.

Economists have not exactly screwed things up

The lack of growth response to “Washington Consensus” policy reforms in the 1980s and 1990s led to widespread doubts about the value of such reforms. This paper updates these stylized facts by analyzing moderate to extreme levels of inflation, black market premiums, currency overvaluation, negative real interest rates and abnormally low trade shares to GDP. It finds three new stylized facts: (1) policy outcomes worldwide have improved a lot since the 1990s, (2) improvements in policy outcomes and improvements in growth across countries are correlated with each other (3) growth has been good after reform in Africa and Latin America, in contrast to the “lost decades” of the 80s and 90s. This paper makes no claims about causality. However, if the old stylized facts on disappointing growth accompanying reforms led to doubts about economic reforms, new stylized facts should lead to some positive updating of such beliefs.

That is the abstract of the new Bill Easterly paper.

Autonomous weapons need autonomous lawyers

With the arrival of autonomous weapons systems (AWS) on the 21st century battlefield, the nature of warfare is poised for dramatic change. Overseen by artificial intelligence (AI), fueled by terabytes of data and operating at lightning-fast speed, AWS will be the decisive feature of future military conflicts. Nonetheless, under the American way of war, AWS will operate within existing legal and policy guidelines that establish conditions and criteria for the application of force. Even as the Department of Defense (DoD) places limitations on when and how AWS may take action, the pace of new conflicts and adoption of AWS by peer competitors will ultimately push military leaders to empower AI-enabled weapons to make decisions with less and less human input. As such, timely, accurate, and context-specific legal advice during the planning and operation of AWS missions will be essential. In the face of digital-decision-making, mere human legal advisors will be challenged to keep up!

Here is more, by Colonel Walter “Frank” Coppersmith, via Air Genius Gary Leff.

p.s. What’s with the “Frank”?  How about just Frank?

p.p.s. Don’t ask about the judges.

Who again wants ten percent less democracy?

The Prospect has identified 30 meaningful executive actions, all derived from authority in specific statutes, which could be implemented on Day One by a new president. These would not be executive orders, much less abuses of authority, but strategic exercise of legitimate presidential power.

Without signing a single new law, the next president can lower prescription drug prices, cancel student debt, break up the big banks, give everybody who wants one a bank account, counteract the dominance of monopoly power, protect farmers from price discrimination and unfair dealing, force divestment from fossil fuel projects, close a slew of tax loopholes, hold crooked CEOs accountable, mandate reductions of greenhouse gas emissions, allow the effective legalization of marijuana, make it easier for 800,000 workers to join a union, and much, much more. We have compiled a series of essays to explain precisely how, and under what authority, the next president can accomplish all this.

Here is more from David Dayen.  Here is my previous post on the forthcoming Garett Jones book.

Claims about Italy and its immigrants

Nonetheless, 75% of immigrants integrate into the majoritarian culture over the period of a generation. Interestingly, we show by counterfactual analysis that a lower cultural intolerance of Italians towards minorities would lead to slower cultural integration by allowing immigrants a more widespread use of their own language rather than Italian in heterogamous marriages.

That is from a new NBER paper by Alberto Bisin and Giulia Tura.

Another difference between Pakistan and India

Observing India tends to make people more libertarian.  At least parts of the private sector are quite vibrant, and the heavy hand of government can be seen in many places.  Plus you might think “the country is too big in the first place,” so you will be thinking in terms of decentralization, and devolving power to the states and union territories, rather than strengthening the central authority.

Observing Pakistan tends to make people more statist.  The private sector has fewer well-known successes.  The central authority appears too weak, and problems with insufficient tax revenue are extreme, even for a developing economy.  As for federal income tax, there are only about 1.2 million active taxpayers, in a country of over 200 million people.  The very pleasant Islamabad aside, urban public goods seem underprovided, even relative to Indian cities.

It is an interesting question which countries at least seem to provide evidence for which sets of political views.

Karachi, and the greater violence of New World cities

I like to ask some CWT guests (Charles Mann, Juan Pablo Villarino, and Alain Bertaud) why New World cities are so often so much more violent than Old World cities, including in Europe and Asia.  In the case of Asia, wartime episodes aside, it does seem that so many Asian cities are remarkably safe, especially for men but often for women too.

Recall one of the key principles of reasoning: look for the cross-sectional variation.

While Karachi is relatively safe now, before 2013 it had at least two decades of fairly extreme violence.

And what are some special features of Karachi history, relative to many other Old World and Asian cities?

The city had a very large “new” population, with Hindus (formerly the majority inhabitants) having left and migrants having come from many other parts of Pakistan, Afghanistan and Myanmar too.

The city was hit by a major wave of drug trafficking, heroin in particular.

The city was hit by a major wave of arms trafficking, run by thugs and mafias, often related to the wars in Afghanistan.

This is only one data point, but it supports hypotheses that higher levels of New World violence stem from relatively recent population shifts, drug trafficking, and arms trafficking.  When Old World cities have that blend, they too become quite violent.

More me on Harvard admissions

Now consider that America’s top universities are among the most ideologically “left-wing” institutions in the country. At Harvard, for instance, 84% of faculty donations to political parties and political action committees from 2011 to 2014 went in the Democratic direction. The Democrats, of course, are supposed to be the party opposed to income inequality. So what has gone wrong here? Why should these elites be trusted?

If any institution should be able to buck social trends, it is Harvard. It has an endowment of about $39 billion (circa 2018), its top administrators are employable elsewhere, and most of its significant faculty hold tenured positions. It might also have the world’s best academic reputation, and it could fill its entering class with top students even after taking a big reputational or financial hit.

Here is the rest of my Bloomberg column, some parts in full mood affiliation mode.

My trip to Karachi

Most recently, the city has been beset by a plague of flies — a “bullying force,” says the New York Times, “sparing no one.” The swarm of flies, which I was fortunate enough to miss, was the result of monsoon season, malfunctioning drainage systems clogged with solid waste, and slaughtered animals from the Muslim celebration of Eid. (The same monsoon season, by the way, led to power blackouts of up to 60 hours.) On a livability index, Karachi ranks near the bottom, just ahead of Damascus, Lagos, Dhaka and Tripoli.

There is no subway, and a typical street scene blends cars, auto-rickshaws, motorbikes and the occasional donkey pulling a cart. It’s fun for the visitor, but I wouldn’t call transportation easy.

And yet to see only those negatives is to miss the point. Markets speak more loudly than anecdotes, and the population of Karachi continues to rise — a mark of the city’s success. This market test is more important than the aesthetic test, and Karachi unambiguously passes it.


Most of all, I am impressed by the tenacity of Pakistan. Before going there, I was very familiar with the cliched claim that Pakistan is a fragile tinderbox, barely a proper country, liable to fall apart any moment and collapse into civil war. Neither my visit nor my more focused reading has provided any support for that view, and perhaps it is time to retire it. Pakistan’s national identity may be strongly contested but it is pretty secure, backed by the growing use of Urdu as a national language — and cricket to boot. It has come through the Afghan wars battered but intact.

That is all from my longer than usual Bloomberg column, all about Karachi.

My Conversation with Alain Bertaud

Excellent throughout, Alain put on an amazing performance for the live audience at the top floor of the Observatory at the old World Trade Center site.  Here is the audio and transcript, most of all we talked about cities.  Here is one excerpt:

COWEN: Will America create any new cities in the next century? Or are we just done?

BERTAUD: Cities need a good location. This is a debate I had with Paul Romer when he was interested in charter cities. He had decided that he could create 50 charter cities around the world. And my reaction — maybe I’m wrong — but my reaction is that there are not 50 very good locations for cities around the world. There are not many left. Maybe with Belt and Road, maybe the opening of Central Asia. Maybe the opening of the ocean route on the northern, following the pole, will create the potential for new cities.

But cities like Singapore, Malacca, Mumbai are there for a good reason. And I don’t think there’s that many very good locations.

COWEN: Or Greenland, right?


BERTAUD: Yes. Yes, yes.

COWEN: What is your favorite movie about a city? You mentioned a work of fiction. Movie — I’ll nominate Escape from New York.


BERTAUD: Casablanca.

Here is more:

COWEN: Your own background, coming from Marseille rather than from Paris —

BERTAUD: I would not brag about it normally.


COWEN: But no, maybe you should brag about it. How has that changed how you understand cities?

BERTAUD: I’m very tolerant of messy cities.

COWEN: Messy cities.


COWEN: Why might that be, coming from Marseille?

BERTAUD: When we were schoolchildren in Marseille, we were used to a city which has a . . . There’s only one big avenue. The rest are streets which were created locally. You know, the vernacular architecture.

In our geography book, we had this map of Manhattan. Our first reaction was, the people in Manhattan must have a hard time finding their way because all the streets are exactly the same.


BERTAUD: In Marseille we oriented ourselves by the angle that a street made with another. Some were very narrow, some very, very wide. One not so wide. But some were curved, some were . . . And that’s the way we oriented ourselves. We thought Manhattan must be a terrible place. We must be lost all the time.


COWEN: And what’s your best Le Corbusier story?

BERTAUD: I met Le Corbusier at a conference in Paris twice. Two conferences. At the time, he was at the top of his fame, and he started the conference by saying, “People ask me all the time, what do you think? How do you feel being the most well-known architect in the world?” He was not a very modest man.


BERTAUD: And he said, “You know what it feels? It feels that my ass has been kicked all my life.” That’s the way he started this. He was a very bitter man in spite of his success, and I think that his bitterness is shown in his planning and some of his architecture.

COWEN: Port-au-Prince, Haiti — overrated or underrated?

Strongly recommended, and note that Bertaud is eighty years old and just coming off a major course of chemotherapy, a remarkable performance.

Again, I am very happy to recommend Alain’s superb book Order Without Design: How Markets Shape Cities.