Category: Uncategorized

How should the Fed respond to Trump’s comments?

The president tempered his criticism by saying that Chairman Jerome Powell — his own appointee — is a “very good man.” He also stopped short of directly calling on the Fed to stop raising interest rates.

“I’m not thrilled,” he said. “Because we go up and every time you go up they want to raise rates again. I don’t really — I am not happy about it. But at the same time, I’m letting them do what they feel is best.”

Here is the story.

It is probably best for the Fed to simply pretend he did not say this.  Trying to respond simply escalates the dispute and risks a repeat comment.  That said, the Fed may make its future plans concerning interest rates hazier, thereby offering less forward guidance.  That will give Trump less of a target in the short run, and furthermore “the market,” with fuzzier expectations to begin with, won’t be able to estimate whether the Fed was swayed by Trump or not.

In any case, the end result will be a modest increase in economic uncertainty.

I would stress, however, that we do not have a politically independent Fed to begin with.  Such an arrangement is impossible in a democracy, given that current institutional protections for the Fed always can be taken away by Congress and the president.  What we do have is bounds for independence, and those bounds just narrowed, and not for the better.  If I were going to narrow the political independence of the Fed (and I am not advocating this), interest rates are not even the correct variable to choose.  Why not some measure of how much the Fed is aiding the economy in a downturn?  Interest rates may or may not be the most powerful tool there.

The White House itself is trying to pretend the event didn’t happen:

Shortly afterward, the White House issued a statement saying Trump’s comments were merely a “reiteration” of his “long-held positions,” and that his “views on interest rates are well known.”

“Of course the President respects the independence of the Fed,” it said. “He is not interfering with Fed policy decisions.“

And here is another recent remark by Trump, or was it?

Thursday assorted links

1. Does legalizing marijuana boost housing values?

2. the subtext covers innovation in Africa.

3. Secret life of an autistic stripper.

4. Why people like exaggerated stories.

5. “They also revealed that the eventual decision about who should leave the cave first was not based on strength, but decided by the boys themselves. It was based on who lived furthest away from the cave and therefore would have the longest cycle back home.”  Link here.

6. Lawn average is over (WSJ).

Mice treat sunk costs as real

From Erica Goode at The New York Times:

In a study published on Thursday in the journal Science, investigators at the University of Minnesota reported that mice and rats were just as likely as humans to be influenced by sunk costs.

The more time they invested in waiting for a reward — in the case of the rodents, flavored pellets; in the case of the humans, entertaining videos — the less likely they were to quit the pursuit before the delay ended.

“Whatever is going on in the humans is also going on in the nonhuman animals,” said A. David Redish, a professor of neuroscience at the University of Minnesota and an author of the study.

Via Michelle Dawson, here is another study with a differing emphasis:

We found that the sunk cost effect was lower in the ASD [autism spectrum disorder] group than in the control group.

Here are previous MR posts on sunk costs.

My Conversation with Vitalik Buterin

Obviously his talents in crypto and programming are well-known, but he is also a first-rate thinker on both economics and what you broadly might call sociology.  You could take away the crypto contributions altogether, and he still would be one of the very smartest people I have met.  Here is the audio and transcript.  The CWT team summarized it as follows:

Tyler sat down with Vitalik to discuss the many things he’s thinking about and working on, including the nascent field of cryptoeconomics, the best analogy for understanding the blockchain, his desire for more social science fiction, why belief in progress is our most useful delusion, best places to visit in time and space, how he picks up languages, why centralization’s not all bad, the best ways to value crypto assets, whether P = NP, and much more.

Here is one excerpt:

COWEN: If you could go back into the distant past for a year, a time and place of your choosing, you have the linguistic skills and immunity against disease to the extent you need it, maybe some money in your pocket, where would you pick to satisfy your own curiosity?

BUTERIN: Where would I pick? To do what? To spend a year there, or . . . ?

COWEN: Spend a year as a “tourist.” You could pick ancient Athens or preconquest Mexico or medieval Russia. It’s a kind of social science fiction, right?

BUTERIN: Yeah, totally. Let’s see. Possibly first year of World War II — obviously, one of those areas that’s close to it but still reasonably safe from it…

Basically, experience more of what human behavior and what collective human behavior would look like once you pushed humans further into extremes, and people aren’t as comfortable as they are today.

I started the whole dialogue with this:

I went back and I reread all of the papers on your home page. I found it quite striking that there were two very important economics results, one based on menu costs associated with the name of Greg Mankiw. Another is a paper on the indeterminacy of monetary equilibrium associated with Fischer Black.

These are famous papers. On your own, you appear to rediscover these results without knowing about the papers at all. So how would you describe how you teach yourself economics?

Highly recommended, whether or not you understand blockchain.  Oh, and there is this:

COWEN: If you had to explain blockchain to a very smart person from 40 years ago, who knew computers but had no idea of crypto, what would be the best short explanation you could give them, basically, for what you do?

BUTERIN: Sure. One of the analogies I keep going back to is this idea of a “world computer.” The idea, basically, is that a blockchain, as a whole, functions like a computer. It has a hard drive, and on that hard drive, it stores what all the accounts are.

It stores what the code of all the smart contracts is, what the memory of all these smart contracts is. It accepts incoming instructions — and these incoming instructions are signed transactions sent by a bunch of different users — and processes them according to a set of rules.

Tuesday assorted links

1. “Novels, when they work, use lies to tell the truth. The information marketplace, battling for an audience, tends, more and more, to transform intolerable truths into novelistic, riveting, enjoyable lies.”  From Elena Ferrante.

2. Marginal Revolution poem.

3. Health care cross subsidies.

4. Ancestral characteristics of modern populations.

5. The economics of postcards.

6. “In all technological fields, the number of patents per inventor has declined near-monotonically, except for large increases in inventor productivity in software and semiconductors in the late 1990s.

7. Management advice improved firm performance, unless it was being received by an MBA.

Madagascar fact of the day

Madagascar, one of world’s poorest countries, has the fastest broadband internet speed in Africa and has average speeds much faster than some of the world’s wealthiest nations, according to a broadband speed league table from UK analytics firm Cable, which collects data from 200 countries.

At 24.9 megabits per second, Madagascar’s broadband speed is more than twice the global average. Not only does this mean the African island nation has the fastest internet speed on the continent, but it places 22nd in the world, out-pacing Canada, France, and the UK.

Here is the full story.  Here is the previous installment of Madagascar fact of the day, namely that per capita income was almost twice as high in 1960.

Crack cocaine as a cause of violence

Crack cocaine markets were associated with substantial increases in violence in the U.S. during the 1980s and 1990s. Using cross-city variation in the emergence of these markets, we show that the resulting violence has important long-term implications for understanding current levels of murder rates by age, sex and race. We estimate that the murder rate of young black males doubled soon after crack’s entrance into a city, and that these rates were still 70 percent higher 17 years after crack’s arrival. We document the role of increased gun possession as a mechanism for this increase. Following previous work, we show that the fraction of suicides by firearms is a good proxy for gun availability and that this variable among young black males follows a similar trajectory to murder rates. Access to guns by young black males explains their elevated murder rates today compared to older cohorts. The long run effects of this increase in violence are large. We attribute nearly eight percent of the murders in 2000 to the long-run effects of the emergence of crack markets. Elevated murder rates for younger black males continue through to today and can explain approximately one tenth of the gap in life expectancy between black and white males.

That is from William N. Evans, Craig Garthwaite, and Timothy J. Moore.

Is NIH funding seeing diminishing returns?

Scientific output is not a linear function of amounts of federal grant support to individual investigators. As funding per investigator increases beyond a certain point, productivity decreases. This study reports that such diminishing marginal returns also apply for National Institutes of Health (NIH) research project grant funding to institutions. Analyses of data (2006-2015) for a representative cross-section of institutions, whose amounts of funding ranged from $3 million to $440 million per year, revealed robust inverse correlations between funding (per institution, per award, per investigator) and scientific output (publication productivity and citation impact productivity). Interestingly, prestigious institutions had on average 65% higher grant application success rates and 50% larger award sizes, whereas less-prestigious institutions produced 65% more publications and had a 35% higher citation impact per dollar of funding. These findings suggest that implicit biases and social prestige mechanisms (e.g., the Matthew effect) have a powerful impact on where NIH grant dollars go and the net return on taxpayers investments. They support evidence-based changes in funding policy geared towards a more equitable, more diverse and more productive distribution of federal support for scientific research. Success rate/productivity metrics developed for this study provide an impartial, empirically based mechanism to do so.

That is by Wayne P. Wals, via Michelle Dawson.

Monday assorted links

1. How not to scout for soccer talent.

2. NIMBY isn’t just CA: “Philly’s 43,000 vacant lots face a fresh political battle.

3. The new economics of Chinatowns: “Chinese restaurant jobs tend not to be in places with a high concentration of Chinese immigrants, but rather in places with a high proportion of non-Hispanic whites. In addition, the farther the jobs are from New York City, the higher the salary.”

4. MIE: Board game about alpacas.

5. IQ predicts how you vote in Denmark (multi-party system) but not America.  But note this: “In both countries, higher ability predicts left-wing social and right-wing economic views.”

6. Why Sacha Baron Cohen won’t be funny any more.

Good-bye soccer moms? (and dads)

Or U.S.A. fact of the day:

Over the past three years, the percentage of 6- to 12-year-olds playing soccer regularly has dropped nearly 14 percent, to 2.3 million players, according to a study by the Sports & Fitness Industry Association, which has analyzed youth athletic trends for 40 years. The number of children who touched a soccer ball even once during the year, in organized play or otherwise, also has fallen significantly.

…In general, participation in youth sports nationwide has declined in the past decade, as children gravitate to electronic diversions and other distractions…

“It’s lost more child participants than any other sport — about 600,000 of them,” said Tom Farrey, executive director of the Aspen Institute Sports & Society Program.

That is from Joe Drape at the NYT.

Are wages rising slowly because of a pool of reserve labor?

I see this claim in my Twitter feed pretty often, but I don’t get how it is supposed to run.  Let’s try an analogy with the non-human animal kingdom.

Right now there are many cows in the world, and even more potential cows to be bred, or cows in low-value situations that could be moved around by boat or even helicopter, if need be.  Call it the “moo reserve army of the unemployed.”  If the market as a whole increased its demand for cows, the price of cows would go up.  It would not make sense to say “that happens only when all the cows are busy all the time and there are no extra cows or potential cows left.”  Very likely, there is an upward-sloping cost curve for mobilizing more cows.

To be sure, under a constant cost assumption, the price of cows would not go up, following an increase in demand.  The quantity of eligible, working cows would rise, stifling upward price pressure, and possibly this would take the form of a Malthusian equilibrium.  But note: in this situation you should expect the price of cows never to go up, as the cost structure is preventing that.

Alternatively, you might think that demand for cows and the cost structure for cow expansions interact in some very particular way.  If you pinned this down in just the right manner, you could model a situation where an increase in demand for cows won’t boost the price of cows now, but in broader situations the price of cows can sustainably rise.  Indeed that is possible, I just don’t see particular reason to believe that such a convoluted construction is doing most of the explanatory work for current labor markets.

I look at it this way: measured wages for male labor near the median haven’t gone up much in decades, and this is poorly understood (you may or may not think the same is true for actual real wages, and for women the story is somewhat more complicated).  So if measured wages for non-supervisors are not going up much now, that is hardly a huge shock.  The fact that we don’t understand it well doesn’t mean some remaining particular hypothesis — in this case about the size of reserve armies — has to be the true one.

Most cow parables, upon closer examination, collapse into structural explanations anyway.  And in labor markets, it is almost always both blades of the scissors that matter.

Addendum: You might try a matching model.  Imagine that potential workers are fully passive, stoned so to speak, but will accept credible good offers from well-capitalized employers.  The cost structure of the workers, or worker search, does not influence the outcome.  Over the course of the recovery, employers invest more in searching for the right workers because their profits are higher and they make a successively greater number of offers to well-suited workers, but at constant wages.  The number of employed keeps on rising, wages stay flat, but longer-run wages nonetheless may rise with productivity (and with enough bids for their labor, workers move out of passive strategies).  I’m not saying this is a good representation, only that it might capture the claimed mix of flat wages and a large reserve pool of labor, yet without forcing wages into a longer-run flatness.  It also suggests, by the way, that some measure of monopoly/high profits has been good for social welfare, as it has boosted employment.

Facts about British exports (and imports)

Yes, I am continuing to read David Edgerton’s The Rise and Fall of the British Nation: A Twentieth Century History, and it is one of the must-read non-fiction books of this year.  Here are a few points I gleaned from my time spent with the book on the plane last evening:

1. During WWII, British imports kept to their pre-war levels, with imports of munitions picking up the slack.  The book stresses how much the British empire did in fact pay off, as Britain through a variety of mechanisms forced or induced its colonies to lend it resources during this critical time.  Along some  dimensions, the British economy became more global due to the conflict.

2. In 1942, exports from Malaya (mostly rubber) to the U.S. were higher than UK exports to the U.S. at that time.

3. Early in the 20th century, wheat in Great Britain was about ten times more expensive than coal.  Britain was the largest importer of food, and in essence sold coal for foodstuffs.

4. British coal was centered in rural areas, and this kept British country life economically vital.  Furthermore this mining was largely horse-powered.

5. From the end of WWII to the 1980s, more people left Britain than migrated to it.

6. Goods trade as a percentage of gdp was about 32% for Britain around 1920, and then lower at about 20% in 2000.

I hope to write about this book more, but I’ll tell you two of the overall messages right now.  One is that the history of British economic globalization is more lurching and back and forth than you might think.  Another is that British industry was more successful, innovative, and scientific during periods of supposed decline than you might think.

And by the way, while we are on the topic of must-read books, here is another rave review for Varlam Shalamov.

Sunday assorted links

1. “We find that ridesharing services resulted in a two percent decline in the overall demand for new cars, and that the impact varied by product segment.  The entry-level compact segment was affected the most, with sales declining by almost eight percent…” (see p.53)

2. Eleven (wrong) theses on civility.

3. “All employees (not just entry level employees) should strive to have at least 70% of their time doing things that are really difficult.”  From Auren Hofmann.  While the number seems a little high to me, the point is an important one nonetheless.

4. Michiko Kakutani By the Book (NYT).

5. Was Houllebecq right about sex?

6. Singlish under siege?