Category: Uncategorized

Structural adjustment for thee but not allowed for me

by  Tyler Cowen in

The economy has not bounced back to prepandemic employment levels, even as G.D.P. effectively has.

Some blame unemployment benefits for keeping workers at home, while others claim that it is the virus still holding back customers and therefore employers from adding jobs. Yet there is a third factor that is likely the labor market’s primary challenge: We are undergoing an enormous reallocation of people and jobs. People need time to find their new position in the labor market.

The early hope among policymakers and economists was that the pandemic aid offered to businesses and families would mean that once we recovered from the pandemic, workers would simply return to their old jobs, sending millions back to work each month and closing the employment gap quickly.

The problem is that old jobs are long gone for the vast majority of those who remain unemployed.

That is from Betsey Stevenson (NYT), and I am not taking issue with her arguments.  Note that if you look about the debate over 2021 more broadly, pretty much everyone agrees there might be too much AD rather than too little.  And yet these matching problems are still around?  Hmm….once you are in a mess, supply-side labor adjustment problems just cannot be fixed so easily by nominal demand and nominal demand only.  See my earlier recent post on this point, namely that business cycle recoveries tend to look the same on the labor side for supply-side reasons.  During recoveries a lot of people just don’t want to go back to work or even look for a job!  That was true in the last recession as well, read this paper, or this research.  People hate the idea if you call them ZMP, but it’s right there in the numbers…how can someone be MP > 0 if they won’t even show up for an interview?

You might notice, by the way, I am not a huge fan of the NAIRU concept and you won’t see me cite it very often (occasionally it is useful shorthand for a less controversial concept.)  The following notion, however, is well-defined: “What the rate of unemployment would be if there were no major negative shocks for a decade and people had seven, eight, or even more years to search for the right job match.”  Yes that is indeed a well-defined number, and that number is pretty low.  I’m just not sure that is very “natural.”  What would John Gray say?  The Marquis de Sade?

The new proposal on corporate tax synchronization

by  Tyler Cowen in

The G-7 nations have coordinated (NYT, FT here) to announce a minimum corporate tax rate of 15%.  Even if seen through, that doesn’t mean all rates must be at 15% or higher, rather if a rate is at 5% another country (the home base country?  the countries where the customers are?) gets to tack on another 10% to make the total take 15%.  That limits the incentive to post very low rates in the first place, by checking the gains from tax haven strategies.

One perennial question is whether the 15% rate is defined over gross or net income.  You don’t want to tax gross income, especially if the business under consideration actually is making a loss.  In any case, you basically end up taxing business income acquisition per se.

If it is net income you are taxing at minimum 15%, you haven’t done as much to limit tax arbitrage as you thought at first.  Especially if the multinational and its subsidiaries engage at arm’s length transactions with shadow pricing, etc.  Net income is a major object of the actual manipulations, and would become all the more so under this new plan, assuming it is applied to net income.  Won’t countries wanting to play the tax haven game end up with very lax definitions of “net income”?  (Or for that matter gross income?)  Or does that get regulated as well?

I don’t think this whole plan should make “the Left” happy.  David Fickling wrote for Bloomberg:

The more likely outcome of the current round of reform will be a continuation of the decline in corporate rates that we’ve seen for four decades. Even amid the push to prevent tax-base erosion in recent years, 24 of the 37 members of the Organization for Economic Cooperation and Development have cut their corporate tax rates since 2008, while just seven have raised them. Statutory corporate tax rates have trended downward by about 5% a decade since 1980 to the current situation, where the average sits at around 24%. Nations that want to compete with lower-taxed jurisdictions may find the pull of 15% irresistible.

And then:

The risk now is that 15% becomes not just a minimum, but an anchor for maximum tax rates as well.

In other words, the tax haven tax competition game is redone with a 15% floor, but the agreement also pinpoints a corporate tax rate that is “good enough” and would come to be seen as “best possible treatment.”  Neither of those are forcing moves which would require countries to drop their rates to 15% in the resulting equilibrium, but yes I agree with Fickling that there might be a good deal of clustering right at or near 15%, accelerated by this plan of course.

Note also that, under the plan, the 100 largest corporations would have to pay tax in proportion to where they sell their goods and services, even if they are not formally located in those countries (will there be a literal notch right at “company #100”?).  Ireland loses big on that provision, as in essence more corporate tax revenue would be routed to larger countries such as France and Germany.  In how serious a manner would companies have to keep track of their customers?  (What happened to privacy law here?  Or did they never really care much about privacy to begin with!?  What are crypto companies supposed to do about this?)

Biden wants to raise the U.S. corporate tax rate to 28 percent, and Ireland, one of the major supposed villains in this game, has a rate of 12.5%.  So fifteen percent just isn’t that outrageously high, even if companies do end up having the pay that actual rate (though see above about gross vs. net income, and what other “outs” will there be?).

The European digital taxes may be scrapped as well (with the details under negotiation and no one wanting to “move first”), which would ease a wee bit of the burden on the major tech companies from the broader change.

Here are various observations from Soumaya Keynes.

Is the underlying view that the U.S. Congress is supposed to approve this without further renegotiations?  How about the other countries?

*The Economist* on digital money

by  Tyler Cowen in

This multi-article section from a few weeks ago was very good.  Here is one excerpt:

“It feels very significant that the countries which, apart from China, are most advanced, most active and most interested in cbdcs are the medium-sized emerging economies,” says Mr Landau. “They are too big to accept the loss of monetary autonomy, and sufficiently small to be exposed to the risk of foreign-currency competition.” They may feel they have no choice.

Here is another:

The rise of intangible capital may explain several capital-market trends, including the fact that private firms are tending to stay private for longer and the popularity of mergers. Software companies find it easier to protect intellectual property in private markets. Rigid accounting rules do not cope well with intangible capital, for instance by mostly booking spending on research as an expense, discouraging it.

The shift has other broad implications. Lenders like collateral: whenever financiers make loans they worry about being repaid, but they can take valuable property in case of default. Most consumer lending is secured against houses or cars.But businesses that create intangible assets do not have such collateral. This can make it harder to secure debt-financing, which is often not available unsecured for new businesses at a reasonable rate. Stephen Cecchetti, an economist at Brandeis University, calls this the “tyranny of collateral”.

In those settings, data can matter more than the ability to pin down collateral…

The regulatory cicada culture that is American

by  Tyler Cowen in

As millions of cicadas began emerging in Loudoun County about two weeks ago, Chef Tobias Padovano at Cocina on Market in Leesburg began foraging for the noisy insects and serving them in tacos.

That is, until last week when a customer ordered and ate the cicada tacos, only to later complain to the Loudoun County Health Department, which then forced the restaurant to temporarily stop serving them.

Victor Avitto, an environmental health supervisor with the Loudoun County Health Department, told the Times-Mirror that the cicadas needed to be sourced from an approved food source, and only then it would it be fine to serve them.

“They need to be sourced from a farm that is inspected and certified,” he said.

On Wednesday, Padovano said he found an online source for cicadas from Dubai which was approved by Avitto, allowing for the sought-after cicada tacos to again be served.

Here is the full story, via HHL.

Workers aren’t coming back

by  Tyler Cowen in

Data released by the Labor Department this morning show that last month, 61.6 percent of the working-age population were active in the labor force, either working in jobs or looking for them. That is essentially unchanged from the summer of 2020.

The second most significant statistic is that wages are soaring. In May, average wages grew at a 6.1 percent annual rate. In April, they grew at an 8.7 percent annual rate.

Combined, these two statistics tell much of the story of the economy this spring: Employers are boosting wage offers in order to attract and retain workers, who are increasingly difficult to attract and retain. This is a situation you’d expect with employers’ demand for workers growing much faster than workers are returning to the labor market. Labor demand is booming, and labor supply is not keeping up.

Here is more from Michael Strain.

Friday assorted conspiracy links

by  Tyler Cowen

1. Vanity Fair on lab leak, with autistic hero.

2. NYT previews the UFO report (based on leaks, presumably).  USG is still puzzled, reports it is not “their stuff,” so I guess your “p” on alien origin should go up modestly.  Here is how the NYT web headline evolved.  The paper edition has the most accurate “U.S. Concedes It Can’t Identify Flying Objects.”

3. Model this: “A bride collapsed and died at her wedding. The groom then married the woman’s sister with her dead body lying in the next room.”

3. 63 pp. of price theory problems.

My Conversation with the very very smart David Deutsch

by  Tyler Cowen in

I think this episode came off as “weird and testy,” as I described it to one friend, but I like weird and testy!  Here is the audio, video, and transcript.  Here is one excerpt:

COWEN: How do you think the many-worlds interpretation of quantum mechanics relates to the view that, just in terms of space, the size of our current universe is infinite, and therefore everything possible is happening in it?

DEUTSCH: It complicates the discussion of probability, but there’s no overlap between that notion of infinity and the Everettian notion of infinity, if we are infinite there, because the differentiation (as I prefer to call what used to be called splitting) — when I perform an experiment which can go one of two ways, the influence of that spreads out. First, I see it. I may write it down; I may write a scientific paper. When I write a paper about it and report the results, that will cause the journal to split or to differentiate into two journals, and so on. This influence cannot spread out faster than the speed of light.

So an Everett universe is really a misnomer because what we see in real life is an Everett bubble within the universe. Everything outside the bubble is as it was; it’s undifferentiated, or, to be exact, it’s exactly as differentiated as it was before. Then, as the bubble spreads out, the universe becomes or the multiverse becomes more differentiated, but the bubble is always finite.

COWEN: How do your views relate to the philosophical modal realism of David Lewis?

DEUTSCH: There are interesting parallels. As a physicist, I’m interested in what the laws of physics tell us is so, rather than in philosophical reasoning about things, unless they impinge on a problem that I have. So yes, I’m interested in, for example, the continuity of the self — whether, if there’s another version of me a very large number of light-years away in an infinite universe, and it’s identical, is that really me? Are there two of me, one of me? I don’t entirely know the answer to that. It’s why I don’t entirely know the answer to whether I would go in a Star Trek transporter.

The modal realism certainly involves a lot of things that I don’t think exist — at least, not physically. I’m open to the idea that nonphysical things do exist: like the natural numbers, I think, exist. There’s a difference between the second even prime, which doesn’t exist, and the infinite number of prime numbers, which I think do exist. I think that there is more than one mode of existence, but the theory that all modes of existence are equally real — I see no point in that. The overlap between Everett and David Lewis is, I think, more coincidental than illuminating.

COWEN: If the universe is infinite and if David Lewis is correct, should I feel closer to the David Lewis copies of me? The copies or near copies of me in this universe? Or the near copies of me in the multiverse? It seems very crowded all of a sudden. Something whose purpose was to be economical doesn’t feel that way to me by the end of the metaphysics.

DEUTSCH: It doesn’t feel like that to you. . . . Well, as Wittgenstein is supposed to have said (I don’t know whether he really did), if it were true, what would it feel like? It would feel just like this.

Much more at the link.  And:

COWEN: Are we living in a simulation?

DEUTSCH: No, because living in a simulation is precisely a case of there being a barrier beyond which we cannot understand. If we’re living in a simulation that’s running on some computer, we can’t tell whether that computer is made of silicon or iron, or whether it obeys the same laws of computation, like Turing computability and quantum computability and so on, as ours. We can’t know anything about the physics there.

Well, we can know that it is at least a superset of our physics, but that’s not saying very much; it’s not telling us very much. It’s a typical example of a theory that can be rejected out of hand for the same reason that the supernatural ones — if somebody says, “Zeus did it,” then I’m going to say, “How should I respond? If I take that on board, how should I respond to the next person that comes along and tells me that Odin did it?”

COWEN: But it seems you’re rejecting an empirical claim on methodological grounds, and I get very suspicious. Philosophers typically reject transcendental arguments like, “Oh, we must be able to perceive reality, because if we couldn’t, how could we know that we couldn’t perceive reality?” It doesn’t prove you can perceive reality, right?

And this:

COWEN: A few very practical questions to close. Given the way British elections seem to have been running, that the Tories win every time, does that mean the error-correction mechanism of the British system of government now is weaker?

DEUTSCH: No. Unfortunately, the — so, as you probably know, I favor the first-past-the-post system in the purest possible form, as it is implemented in Britain. I think that is the most error-correcting possible electoral system, although I must add that the electoral system is only a tiny facet of the institutions of criticism and consent. In general, it’s just a tiny thing, but it is the best one.

It’s not perfect. It has some of the defects of, for example, proportional representation. Proportional representation has the defect that it causes coalitions all the time. Coalitions are bad.

COWEN: You have a delegated monitor with the coalition, right? With a coalition, say in the Netherlands (which is richer than the United Kingdom), you typically have coalition governments. Some parties in the coalition are delegated monitors of the other parties. Parties are better informed than voters. Isn’t that a better Popperian mechanism for error correction?

I also tried to sum up what I think he is all about, and he reacted with scorn.  That was an excellent part of the conversation.  And here is a good Twitter thread from Michael Nielsen about the Conversation.

Wednesday assorted links

by  Tyler Cowen

1. Todd Kashdan criticizing his own work.

2. “The American Economic Journal: Microeconomics (one of the very top journals that isn’t part of the holy Top-5, hallowed be thy names) managed to go an entire year without accepting a paper!”  (out of 415 submissions).

3. How the NIH behaves during an emergency.

4. Increase of women in personnel management.

5. There is no Argentine bola great stagnation.

6. Speculative.

7. Sheilagh Ogilvie does Five Books on the Industrial Revolution.

Two Vaccine Updates

by  Alex Tabarrok

First, in an article on new vaccine boosters in USA today there is this revealing statement:

Any revised Moderna vaccine would include a lower dose than the original, Moore said. The company went with a high dose in its initial vaccine to guarantee effectiveness, but she said the company is confident the dose can come down, reducing side effects without compromising protection.

Arrgh! Why wait for a new vaccine??? Fractional dosing now!

A microneedle patch for vaccines.

The same article also notes:

One of Moderna’s co-founders, MIT professor Robert Langer, is known for his research on microneedles, tiny Band-Aid-like patches that can deliver medications without the pain of a shot. Moderna has said nothing about delivery plans, but it’s conceivable the company might try to combine the two technologies to provide a booster that doesn’t require an injection.

The skin is highly immunologically active so you can give lower doses with a microneedle patch. The microneedles are sometimes made from sugar and don’t hurt. Microneedle delivery, however, can cause scars but I say apply the patch where the sun don’t shine and let’s go!

Second, Canada’s NACI has now endorsed mix and match for the AZ and Pfizer and Moderna vaccines. First Doses First has put Canada in very good shape (now ahead of the US in percent of the population with at least one dose) and this was always part of the FDF plan–delay second doses to get out more first doses and then, when supplies increase, give second doses, possibly with a better vaccine.

Do individuals make more rational decisions when the stakes are higher?

by  Tyler Cowen in

Often yes, but this is a shibboleth of economics that doesn’t always fit the facts, as has been illustrated starkly by our behaviors during the pandemic.  Many people have taken too much risk, or been too risk-averse, even with high stakes on the line.  Here is one excerpt from my recent Bloomberg column:

You might wonder why we are getting these big, important decisions so wrong. I have at least two hypotheses. One is that anxiety causes people to make worse decisions. Facing the danger of a deadly pandemic, for example, the higher stakes might induce me to shift into denial, if only to protect my sanity and peace of mind. I might make worse decisions than if I were simply trying to avoid the common cold, for which the stakes are far lower.

My other hypothesis involves identity and the desire for belonging. It is no accident that red states in the U.S. are under-vaccinated relative to blue states; vaccine skepticism is in part an identity marker for Trump supporters. People tend to see big decisions as more important in shaping their identity than small ones. In essence, the significance of a decision induces all kinds of surrounding social forces to “infect” that decision with partisan influences, and that decision in turn becomes a truly credible signal of what we believe.

For most economic decisions, people do still make better choices when the stakes are higher — but this isn’t a universal principle. Are you so sure, for example, that decisions about who to marry are made more rationally than those about which TV show to watch? Maybe they are, but it’s not entirely obvious.

Note that it is now much easier to make good small stakes decisions, largely because of the internet:

An accompanying change is that low-stakes decisions are easier than ever, due largely to the internet, with one crucial caveat: The decision-maker must be relatively rational. Several decades ago, if you wanted to figure out the best paper towels to buy, you might have asked around and then collated a lot of information yourself. These days it is easy enough to search the internet for the answer. Or consider the example of credit-card rewards, which are far easier to collect, manipulate and use because of the internet.

The danger of course is that the sum of all these smaller triumphs convinces people that they are rational about big dilemmas too — despite the fact that they choose rather poorly on some of them. We are not used to a world where we are worse at big decisions than the small ones. But it has been hurtling our way for some while now.

Recommended.  I also cite this: “Bryan Caplan, a colleague who studies human rationality, has put the individual Covid response in only the second percentile of “my initially mediocre expectations.””

Tuesday assorted links

by  Tyler Cowen

1. The resilience of the U.S. corporate bond market.  And who needs a flying car?

2. Famous economists’ grave sites.

3. “Measured intelligence did not predict increased mate appeal in either study, whereas perceived intelligence and funniness did.”  Speculative.

4. Blockchain-based smart contract for Kenyan crop insurance (speculative).

5. David Beckworth podcast with Mark Carney, mostly macro.

6. Winning probabilities of horses with fast-sounding names are overstated.

7. How they used to dance, starring Doris Day.