Monday assorted links
1. Contemporary art exhibit for dogs, via Yana.
2. “Tyler Cowen asks what I think the five biggest open questions are in the current economic debate.” That is from Adam Ozimek, those are pretty close to my own list, I would toss in some China too like “what the hell is going on there?”.
3. Smart tattoos can control your phone — and what else?
4. Taxidermist robotic deer there is no great stagnation.
5. I’ve been telling you that foreign agents will continue to be a big and growing issue (NYT, #Ukraine, #Russia, #Manafort).
6. Iran fact of the day: per gdp, they are number one in medial count, USA is number three.
Testing for Racial Discrimination in Police Searches of Motor Vehicles
That is a new paper by Camelia Simoiu, Sam Corbett-Davies, and Sharad Goel, the abstract is familiar but depressing:
In the course of conducting traffic stops, officers have discretion to search motorists for drugs, weapons, and other contraband. There is concern that these search decisions are prone to racial bias, but it has proven difficult to rigorously assess claims of discrimination. Here we develop a new statistical method—the threshold test—to test for racial discrimination in motor vehicle searches. We use geographic variation in stop outcomes to infer the effective race-specific standards of evidence that officers apply when deciding whom to search, an approach we formalize with a hierarchical Bayesian latent variable model. This technique mitigates the problems of omitted variables and infra-marginality associated with benchmark and outcome tests for discrimination. On a dataset of 4.5 million police stops in North Carolina, we find that the standard for searching black and Hispanic drivers is considerably lower than the standard for searching white and Asian drivers, a pattern that holds consistently across the 100 largest police departments in the state.
For the pointer I thank the excellent Samir Varma.
Faroe islands fact of the day
A lot of the women go away to study and don’t come back:
There are already 2,000 more men than women on the Faroes – which has a total population of just under 50,000 – and some of those men have taken matters into their own hands by importing wives and companions from the Philippines and Thailand.
Filipinos and Thais make up two of the largest groups of foreigners on the Faroe Islands . There are now 200 Thais and Filipinos – mostly women – spread out over the islands.
In the tiny hamlet of Klaksvík located in the northern part of the islands, there are already 15 women from Asia.
Bjarni Ziska Dahl, who married his Filipino wife in 2010, said that the foreign women could well be the answer to the issues facing the Faros.
“We must recognise that there is a problem, and welcome these strangers with dignity,” Dahl told DR Nyheder. “We need these people.”
Both Dahl and his wife Che said that they have a lot in common: island life, a dedication to family and a longing for simplicity. Dahl said that Asian woman are often willing to take jobs that Faroese women will not do.
Here is the full report, one Faorese woman does not like having to say hello to everyone she meets in the street there. And this is not just a news story, the married and younger Asian women were one of the first things I noticed getting on the plane to Faroe. (They looked not unhappy by the way. The other thing I noticed right away was how many disparate groups on the flight seemed to know each other. And that you have to be careful not to assume that people who look somewhat alike are brothers, or sisters, or parents and children.)
You might consider this a metaphor for some broader social trends around the world, albeit in this case unusually concentrated along the dimensions of geography and nation/territory. Some women just don’t want to hang out with the guys — even the best guys — who are selling to a market of 50,000 people. Other women are happy to move into that situation. Solve for the equilibrium.
Sunday assorted links
1. Mistakes people make with publishing academic books.
2. What makes a McMansion bad architecture? Great piece.
3. Why so many lottery jackpots this year? (NYT)
4. The US and UK versions of Cloud Atlas are quite different.
5. So far the worst predictions about Brazil’s Olympics have not come true. And which are the most popular Olympic sports? I didn’t know people enjoy watching volleyball so much.
6. “The FDA wants to make it harder to buy and sell poop.” Are the pro-choice forces lining up against this one? I hope they will. There is in fact a new saying “My colon. My choice.” You don’t even have to worry about the status of the fetus…
Further research on the limits of solar energy
There is yet another paper on this topic, called Buffering Volatility: A Study on the Limits of Germany’s Energy Revolution, by Hans-Werner Sinn. Here is the abstract:
Based on German hourly feed-in and consumption data for electric power, this paper studies the storage and buffering needs resulting from the volatility of wind and solar energy. It shows that joint buffers for wind and solar energy require less storage capacity than would be necessary to buffer wind or solar energy alone. The storage requirement of over 6,000 pumped storage plants, which is 183 times Germany’s current capacity, would nevertheless be huge. Taking the volatility of demand into account would further increase storage needs, and managing demand by way of peak-load pricing would only marginally reduce the storage capacity required. Thus, only a buffering strategy based on dual structures, i.e. conventional energy filling the gaps left in windless and dark periods, seems feasible. Green and fossil plants would then be complements, rather than substitutes, contrary to widespread assumptions. Unfortunately, however, this buffering strategy loses its effectiveness when wind and solar production overshoots electricity demand, which happens beyond coverage of about a third of aggregate electricity production. Voluminous, costly and inefficient storage devices will then be unavoidable. This will make it difficult for Germany to pursue its energy revolution beyond merely replacing nuclear fuel towards a territory where it can also crowd out fossil fuel.
Here is yet another NBER paper on this topic. You may recall the recent JPE paper estimating that the costs of solar intermittency are higher than the costs of carbon.
Overall the message seems to be that not going nuclear was an even bigger mistake than we had been thinking.
What I’ve been reading
1. Samuel Fleischacker, The Good and the Good Book: Revelation as a Guide to Life. A nice, articulate, and well-reasoned account of how a reasonable person might turn to faith and believe that faith and reason are compatible. The author is a well-known Adam Smith scholar.
2. Abraham Hoffman, Unwanted Mexican Americans in the Great Depression. The best and most readable book I have found on the deportation of Mexicans during the Great Depression, most of all during the 1931-1935 period. Reading up on this era puts today’s America in useful perspective.
3. The Curse of Cash, by Kenneth Rogoff. The quality of argumentation and presentation is high, as one would expect from a Ken Rogoff book. Still, I don’t think it has so much to convince those who might be worried about a currency-less surveillance Panopticon, or those who think negative interest rates are mostly a contractionary and not-so-useful tax on financial intermediation.
4. Mats Lundahl, The Political Economy of Disaster: Destitution, plunder and earthquake in Haiti. More of a potpourri of Haitian economic history than what the titles indicates, the best 20 percent of this book has insights you won’t find in other places. For me that is a high hit rate, I liked it.
5. John Hardman, The Life of Louis XVI. I’m only about fifty pages into this one, but so far it is a first-rate biography, both detailed and conceptual in nature, likely to make the list of the year’s best non-fiction books.
*Common Sense Economics*
The third edition is now out, and the authors are James D. Gwartney, Richard L. Stroup, Dwight R. Lee, Tawni H. Ferrarini, and Joseph P. Calhoun.
Self-recommending, this is a very good introduction to economics for say a smart high school student who reads books. Sadly, more and more politicians and indeed professional Ph.d. economists need this wisdom too.
Saturday assorted links
1. “Real witchcraft” shop won’t sell to Harry Potter fans.
2. Virtual reality and the theory of moral sentiments.
3. French swimwear banned for excessive modesty. Photo at the link.
4. World Bank staff vs. World Bank president.
5. Coasean don’t you wear our Lacoste shirts you crummy cumbia band failed markets in everything, Spanish language only. Coase didn’t hold.
6. Birds on a wire the spooky cormorants of Tokyo. And will Trump discredit conservatism or populism?
Does inefficient risk-bearing change the opportunity cost of government borrowing?
Let’s say the private sector is using a hurdle rate of five percent and the government a rate of one percent. (Those numbers are illustrative only.)
Furthermore say the private sector uses five percent because it faces private risk which is in fact not social risk from a welfarist point of view. In other words, the private sector ought to use a one percent hurdle rate, even though it does not, but people worry about their own portfolios rather than the broader social portfolio of projects in toto. If the private sector switched to the one percent rate, of course, it would invest much more and lower the marginal rate of return on capital from five percent down to one percent, adjusting for all the required adjustments (taxes, transactions costs, etc.).
In such a world, if a new government project displaced private capital, the opportunity cost would be one percent at the margin.
But we are not in such a world, even if you think we ought to be. If a new government project displaces some private sector capital, the marginal cost there is still five percent.
You can read Brad DeLong’s take on my post yesterday on the opportunity cost of extra government projects. Brad longs for that cross-sector equalization down to one percent on both sides of the ledger and he makes many fine points. But there is nothing in his argument which rebuts, or even tries to rebut, the claim that, given current imperfections the marginal opportunity cost is still five percent.
So the message of my original post stands as well, and you will note that is simply the mainstream micro take on this question which has been around since the 1970s, with the commonly understood answers pretty much crystallized by the early 1980s.
Addendum: Here is me, from the comments: “It is amazing how much “free lunch” economics one can read in these comments. Of course we should in fact apply multiplier analysis to the percentage of previously unemployed resources targeted by the new project, and a higher hurdle rate to the rest. You can argue over what is the percentage mix here, but please don’t pretend scarcity is no longer a ruling economic principle.”
Xenophon paragraphs to ponder
Australia’s government needs to scrap its “free trade Taliban mentality”, buy more local products and properly scrutinise foreign investment, says Nick Xenophon, the leader of one of the minor parties that holds considerable sway following last month’s election.
Most of all, it hurts that he is called Xenophon; some of you will know that Xenophon from ancient Greece was the first (surviving) author to point out the phenomenon of division of labor.
Apparently there is a “Great Xenophon stagnation” or even retrogression. This passage notwithstanding, the Taliban, by the way, did not favor free trade.
Here is the full FT piece by Jamie Smythe.
The culture and polity that is Singapore, Germany, and Belarus
Singapore leads the way, offering three-quarters of a million U.S. dollars to gold-medal winners, followed by Indonesia ($383,000), Azerbaijan ($255,000), Kazakhstan ($230,000) and Italy ($185,000).
I would say Italy should not be on that list, as they have some fiscal troubles, plus plenty of other sources of national pride. And there is this:
…other countries offer alternative bait — like military exemptions (South Korea), a lifetime supply of beer (Germany) and unlimited sausages (Belarus).
Here is the article, via James Crabtree.
The roots of Trump support
It seems to be living near failure, not necessarily experiencing it yourself:
Yet a major new analysis from Gallup, based on 87,000 interviews the polling company conducted over the past year, suggests this narrative is not complete. According to this new analysis, those who view Trump favorably have not been disproportionately affected by foreign trade or immigration, compared to people with unfavorable views of the Republican presidential nominee. The results suggest that his supporters, on average, do not have lower incomes than other Americans, nor are they more likely to be unemployed.
Yet while Trump’s supporters might be comparatively well off themselves, they come from places where their neighbors endure other forms of hardship. In their communities, white residents are dying younger, and it is harder for young people who grow up poor to get ahead.
The Gallup analysis is the most comprehensive statistical profile of Trump’s supporters so far. Jonathan Rothwell, the economist at Gallup who conducted the analysis, sorted the respondents by their Zip code and then compared those findings with a host of other data from a variety of sources.
That is from Max Ehrenfreund and Jeff Guo at the always-excellent Wonkblog. And there is this:
White households tend be more affluent than other households, and Trump’s supporters are overwhelmingly white. The same is true of Republicans in general. Yet when Rothwell focused only on white Republicans, he also found that demographically similar respondents who were more affluent viewed Trump more favorably.
These results suggest that personal finances cannot account alone for Trump’s appeal. His popularity with less educated men is probably due to some other trait that these supporters share.
Rothwell’s results also very much downplay the roles of trade and China, compared to some other estimates. Here is a link to Rothwell summarizing some of these results, I am not sure if there is a link to the full study proper.
Friday assorted links
1. Why is Russia escalating in Ukraine?
2. Those new service sector jobs: consultant to autodidact physicists.
3. Do Greenland sharks live for 400 years? And it seems they don’t reach sexual maturity until 150, and their age is dated with reference to the “golden age” of nuclear bomb testing.
4. “About your cat(s)…”
6. Yes, yes The Great Satan but John Cochrane is right too.
Collective Property in Palo Alto
Kate Downing, a member of the Palo Alto Planning and Transportation Commission, has resigned in protest at its no-growth policies. She writes:
After many years of trying to make it work in Palo Alto, my husband and I cannot see a way to stay in Palo Alto and raise a family here. We rent our current home with another couple for $6200 a month; if we wanted to buy the same home and share it with children and not roommates, it would cost $2.7M and our monthly payment would be $12,177 a month in mortgage, taxes, and insurance. That’s $146,127 per year — an entire professional’s income before taxes. This is unaffordable even for an attorney and a software engineer.
…I have repeatedly made recommendations to the Council to expand the housing supply…Small steps like allowing 2 floors of housing instead of 1 in mixed use developments, enforcing minimum density requirements so that developers build apartments instead of penthouses, legalizing duplexes, easing restrictions on granny units, leveraging the residential parking permit program to experiment with housing for people who don’t want or need two cars, and allowing single-use areas like the Stanford shopping center to add housing on top of shops (or offices), would go a long way in adding desperately needed housing units while maintaining the character of our neighborhoods and preserving historic structures throughout.
The vituperative responses to her letter in the local paper (quite a few now deleted for language) included many like the following:
What with everything going on I have come to realize there is a vast difference between Baby-Boomers, X-Generation, and Millennials. Not sure where Kate falls into that, suspect she is a Millennial, but her overall lack of experience regarding city planning shouts out. “Disruption” is code for the Millennials, not so for Baby-Boomers. We are not going to turn ourselves on our heads because the younger group demands change.
And another:
I’m so glad we have one less inexperienced, new resident on the Planning and Transportation Commission that is demanding that long-time residents sacrifice their hard-earned quality of life for young, new residents that want the benefits without the sacrifice and hard work.
These kinds of claims are perfectly sensible. The people who bought their homes a long time ago lucked into a windfall and they resentfully lash out at anyone trying to cut in on that windfall. But notice how un-American these claims are. The current residents want to protect their gains by telling other people how they can use their property. When a new restaurant starts to take patrons from an old restaurant we generally don’t think that the old restaurant–the long-term resident–has the right to prevent the new restaurant from opening. The same is true, by and large, for new technologies and ways of doing business. Yet when it comes to residential land we give the old residents a veto on the new.
We have collectivized property in the United States (unlike in say laissez-faire Tokyo). Property is not fully collectivized, of course, but a person’s land is not their own–it’s subject to the dictates of the collective. Collectivization has been tried in many other times and places and the results are by now predictable. Collectivization in Palo Alto has produced inefficiency, high costs and a politicization of choice that makes for ill-will and endless conflict.
What is the opportunity cost of additional government borrowing?
No, it is not zero, not even if government borrowing rates were literally at zero. Yet I’ve seen that claim a few dozen times in the last year or two, so let’s walk through some arguments that were fully standard by the 1970s.
Opportunity cost is ultimately defined in real resource terms, converted into value. So if the government borrows more money and mobilizes robots to do some work, that means fewer robots to do work elsewhere.
So what is the marginal private rate of return on capital? That’s a bottomless pit sort of question, but it’s not unusual to find sources which suggest a number for the average return in the range of 15% or so, see p..53 from this Stern School study here (pdf), with the median estimate running at about 12% (p.54). The papers from the 1980s found about the same, sometimes higher.
That’s way too high, says this stagnationist! Let’s instead cut it down to historic U.S. equity returns and say seven percent for the return at the margin.
Now, even today there are some unemployed resources. But most government fiscal policy works through well-known, fairly large contractors that at the margin have already well-established networks of capital and labor. So circa 2016, I don’t think that is a significant factor. Even in more down times, fiscal policy doesn’t always target unemployed resources so well.
That means a government project faces a seven percent hurdle rate. You may wish to up that for risk (the value of government output covaries positively with national income), and more yet for irreversibility. Let’s say that brings us up to a ten percent hurdle rate, and that’s being quite conservative. Sometimes irreversibility premia can multiply hurdle rates by 2x or 3x.
So that’s a (hypothetical) hurdle rate of ten percent, not zero percent. Of course it’s not unusual for private companies to use hurdle rates of twenty or more for their investment decisions.
There are further complications if the borrowing is financed by foreign finance capital. But there is still likely a real resource displacement in the home market as robots are shifted from one line of work to another. In addition, foreign ownership of the debt is about one-third of the total, noting the average and marginal here may diverge. Still, the domestic capital case seems to be the dominant effect.
You really can bicker about the right number here, and I’ve elided the question of whether some of the crowding out might come from consumption through a positive elasticity of robot supply; check the early papers of Martin Feldstein on related questions. But if someone tells you zero percent is the correct hurdle rate for government infrastructure investment, they are wrong.
Opportunity cost remains an underrated idea in economics.