Michael Pettis responds in the FT

Robert Armstrong at the FT gives him a chance to respond to Noah and Krugman and me, here are links to the originals:

[Armstrong] Cowen argues that intervention in the short term, as you have proposed, is counterproductive because demand shortfalls will resolve themselves as price adjustments. What is your response?

Pettis: While I understand Cowen’s reliance on the “Econ 101” model, which assumes that prices always adjust to balance supply and demand, this framework isn’t relevant in the context of current global economic conditions. Prices have not adjusted in the US or many other countries over several decades. Take China as an example, where price deflation has persisted and consumption has remained exceedingly low for years. To manage the gap between production and consumption, China has had to resort to extraordinarily high levels of investment and, as the cost of this wasteful investment has recently shown up in the form of the fastest- growing debt burden in history, to the highest trade surpluses in history.

So why hasn’t the demand shortfall “gone away”, as Cowen’s model would predict? The answer lies in China’s trade and industrial policies, which enhance global manufacturing competitiveness at the expense of domestic consumption. These policies include an undervalued currency, repressed interest rates, highly directed credit, and, yes, tariffs. These policies, together with strict controls on trade and even stricter controls on the capital account, have prevented any natural adjustment from taking place. This matters, because a country’s internal imbalances created by domestic policies lead automatically to its external imbalances which, in turn, must be reflected in the external imbalances of the trade and investment partners of that country. That is how internal policies in one country will lead automatically to changes in the internal conditions in other countries. Cowen’s models may well be internally consistent, but they are based on simplified assumptions that clearly fail to describe the real-world factors that shape trade imbalances.

I’ll say a few points in response:

1. Pettis says “While I understand Cowen’s reliance on the “Econ 101” model, which assumes that prices always adjust to balance supply and demand, this framework isn’t relevant in the context of current global economic conditions. Prices have not adjusted in the US or many other countries over several decades.”  The first sentence there is just the usual anti-economics slur.  In fact the (numerous) models I have in mind are workhorses from PhD level international macroeconomics, not from “Econ 101.”  And can he really mean “Prices have not adjusted in the US or many other countries over several decades”?  Run that one through o1 pro if you have any doubts, it is about as flat out wrong as a proposition about economics can get.

2. The rest of the answer just repeats his usual about China.  It does not even attempt to answer why, in the medium-term or long-term, as prices adjust, demand imbalances in the United States do not go away.

3. In another part of the interview, which I will not reproduce for reasons of copyright, Pettis responds to my criticism of his claim that America had weak [sic] demand during 2022-2023.  His answer is to focus on this: “Contrary to Cowen’s claim, US business investment is not constrained by a lack of American savings.”  That is not something I ever said or wrote, it is something I do not believe, and it completely fails to answer my rather obviously correct criticism of Pettis on U.S. demand.

4. I will let Noah handle the rebuttals to him, if he so chooses.  I will however mark his response to Krugman and Smith, on the counterproductive nature of tariffs on intermediate goods, as just abysmally bad and off point.  This is one of the most obtuse rebuttals I have read, ever.

5. If you are curious, here is Maurice Obstfeld, a Nobel-quality international economist, on Pettis and related issues.

Friday assorted links

1. Using AI to cut government spending.

2. “I built RPLY to never miss a text again. Staying in touch should be effortless—RPLY finds your unanswered texts, instantly suggests AI-powered drafts, and syncs across all your Apple devices, meeting you where you already are.”  Link here.  Techcrunch article here.  Much more of this on the way.

3. Katherine Rundell on children’s books.

4. Allen Sanderson has passed away.

5. The Trump Executive Orders as radical constitutionalism?

6. High school summer program at Princeton and Swarthmore.

7. Comments on US AID and its current status.

8. Fast-track approvals starts for New Zealand.

9. What about the horses?

10. Fergus annotates my Conversation with Ross Douthat, from an Evangelical Christian point of view.

Alex and I consider how to reform the NSF in economics

Here is a redux of our 2016 Journal of Economic Perspectives piece.  Here is the abstract:

We can imagine a plausible case for government support of science based on traditional economic reasons of externalities and public goods. Yet when it comes to government support of grants from the National Science Foundation (NSF) for economic research, our sense is that many economists avoid critical questions, skimp on analysis, and move straight to advocacy. In this essay, we take a more skeptical attitude toward the efforts of the NSF to subsidize economic research. We offer two main sets of arguments. First, a key question is not whether NSF funding is justified relative to laissez-faire, but rather, what is the marginal value of NSF funding given already existing government and nongovernment support for economic research? Second, we consider whether NSF funding might more productively be shifted in various directions that remain within the legal and traditional purview of the NSF. Such alternative focuses might include data availability, prizes rather than grants, broader dissemination of economic insights, and more. Given these critiques, we suggest some possible ways in which the pattern of NSF funding, and the arguments for such funding, might be improved.

Relevant for today’s debates of course.

My excellent Conversation with Ross Douthat on God and religion

Here is the audio, video, and transcript.  I am very glad Ross flew down from Connecticut to do it, we ended up cutting about 2x the normal length.  Here is part of the episode summary:

Ross joined Tyler to discuss what getting routed by Christopher Hitchens taught him about religious debate, why the simulation hypothesis resembles ancient Gnostic religion, what Mexican folk Catholicism reveals about spiritual intermediaries, his evolving views on papal authority in the Francis era, what UFO sightings might tell us about supernatural reality, why he’s less apocalyptic than Peter Thiel about the Antichrist, and why he’s publishing a fantasy novel on Substack before AI potentially transforms creative writing.

Here is one excerpt:

COWEN: In general, you weigh personal testimony higher than I do. Let me see if you can talk me into it a bit. Something is recorded in data sensors and confirmed across multiple sensors. Maybe I don’t know what it is, but I’ll believe there’s something there. But if people say X, Y, and Z — there’re all sorts of religions neither you nor I would sign onto, and plenty of humans who will assert, insist that there’s direct evidence for that particular religion.

The story of Joseph Smith, the plates from LDS would be one example, but there’re plenty of religions that don’t even exist anymore, where there’re very particular stories that people have attested to. We really do dismiss them in the numbers of the tens of millions or maybe even billions. So, if we’re willing to dismiss all those stories, isn’t David Hume right? We should not dismiss the stories, but they’re not going to budge us out of a more commonsensical worldview.

DOUTHAT: Yes. I don’t dismiss all of those stories. I guess that’s part of my strong departure from Humean assumptions. I think that certainly there are fakes and frauds and charlatans in religion, and there are people who are just sincerely mistaken, who think that they had a religious experience when really, they have a diagnosis or they should get a diagnosis of some form of mental illness or insanity.

At the same time, I think that the wide range of attested spiritual, just frankly bizarre experiences that human beings have — of which, UFO encounters are a subset — that, again, has familiar antecedents going back millennia — I think we should take those seriously and have a theory of what they are that is more complex than fraud meets insanity meets delusion.

Part of this is just knowing people who’ve had those kinds of experiences, reading a lot about those kinds of experiences — not just in my own tradition, but in other religious traditions. I think that they correspond to something real, even if the interpretation that people give to them is wrong or deluded or misguided. I don’t think that Joseph Smith was in fact chosen by God to restore the lost truths about Jesus Christ, polygamy, and the ancient civilizations of the New World. I don’t think that’s true.

Do I think that Joseph Smith didn’t have some weird supernatural encounter? I’m less confident about saying that. The same would go . . . I don’t think that Muhammad is the Seal of the Prophets. Do I think that Muhammad either hallucinated or made it all up? Again, I’m certainly much less confident than you would be in saying that. I do not —

COWEN: It’s almost an Islamic doctrine you’re holding. There are these various tiers of prophets, and they’re imperfectly right, but they’re getting at the divine.

DOUTHAT: Yes. I think any coherent theory of supernatural experience — given what you can encounter just by reading William James — has to say either there’re infinite realms of deception out there . . . This is something that some religious believers would say. There’s one subset of totally authentic, trustworthy religious experiences, and then there’s a vast realm where it’s all demonic deception.

Or you have to say that there’s just a range of ways in which people encounter God and the supernatural that do get filtered through cultural assumptions and through — I don’t want to say imperfect prophets — let’s just say imperfect human beings. And that helps yield the diversity of religions in the world today.

But you can also see patterns in those things like near-death experiences. The range — there is cross-cultural variation in near-death experiences. If you have a near-death experience as a Tibetan Buddhist, you are more likely to see the Buddha. If you have a near-death experience as a Catholic, you’re more likely to maybe see an archangel or a Catholic saint or something. But at the same time, there are some pretty clear commonalities to suggest that people in Tibet and people in Indiana are having the same kind of experience when they die and are resuscitated and report the lights, the tunnel, all the strange things associated with those experiences.

Yes, there’s a challenge here, obviously, for any kind of dogmatic religion. You do have to figure out, “Okay, why is there this consistency but also this variation?” But there’s also a challenge for the Humeans to say, “Well, we’re just writing off this fairly consistent cross-cultural realm of human experience because it’s all supposed to be myth and hallucination?” The people who have these experiences are not generally the kinds of people who you would describe as prone to hallucination and insanity. There are of course cases, but that’s not the norm.

On the Humean point — if you go back and read Hume, he doesn’t exactly say this, but you really have the strong impression that Hume thinks that once you get rid of established religious authorities and the universal teachings of antique stories from the Bible, that a big swath of supernatural stuff will just go away. Now, he says humans still —

Interesting throughout, definitely recommended.  And again, I am happy to recommend Ross’s new book Believe: Why Everyone Should be Religious.

What should I ask Sheilagh Ogilvie?

She is a Canadian economic historian at Oxford, here is from her home page:

I am an economic historian. I explore the lives of ordinary people in the past and try to explain how poor economies get richer and improve human well-being. I’m interested in how social institutions – the formal and informal constraints on economic activity – shaped economic development between the Middle Ages and the present day.

And:

My current research focusses on serfdom, human capital, state capacity, and epidemic disease. Past projects analysed guilds, merchants, communities, the family, gender, consumption, finance, proto-industry, historical demography, childhood, and social capital. I have a particular interest in the economic and social history of Central and Eastern Europe.

Here is her Wikipedia page.  Her book on guilds is well known, and her latest is Controlling Contagion: Epidemics and Institutions from the Black Death to Covid.  Here are her main research papers.

So what should I ask her?

I wonder if he enjoyed our Markets in Everything series?

Now he is in it:

A former senior adviser to the Federal Reserve Board of Governors was arrested Friday and accused of leaking inside information from the Fed to the Chinese government over a period of several years, at one point receiving a $450,000 payment, and then lying about it to Fed investigators.

Economist John Harold Rogers, 63, of Vienna, Virginia, worked in the Division of International Finance of the Fed from 2010 until 2021, according to an indictment unsealed Friday in federal court in the District. Last year, he told a podcaster that he had retired from the Fed in May 2021, approximately a year after he had been questioned by investigators for the Fed’s inspector general and allegedly lied about how he accessed and transmitted sensitive information to two unnamed Chinese co-conspirators.

After leaving the Fed, Rogers moved his family to Shanghai and began working as a professor at Fudan University, according to comments he made to the EconVue podcast last year and posted in online biographies.

Here is the full story.

Wednesday assorted links

1. Douglas Irwin on dismantling the Indian license raj.  And Indians praying for visas under Trump.  And podcast on Indian biotech potential.

2. New data on LLMs refereeing economics papers.

3. Do LLMs use trigonometry to do addition?

4. Is Occam’s Razor obsolete?

5. Oliver Kim on exchange rates.

6. New asteroid risk.

7. Heat and economic decision-making.

8. Czech beaver DOGE.

9. Zvi on Deep Research.

10. Is the Peter Principle actually true?

Deep Research

I have had it write a number of ten-page papers for me, each of them outstanding.  I think of the quality as comparable to having a good PhD-level research assistant, and sending that person away with a task for a week or two, or maybe more.

Except Deep Research does the work in five or six minutes.  And it does not seem to make errors, due to the quality of the embedded o3 model.

It seems it can cover just about any topic?

I asked for a ten-page paper explaining Ricardo’s theory of rent, and how it fits into his broader theory of distribution.  It is a little long, but that was my fault, here is the result.  I compared it to a number of other sources on line, and thought it was better, and so I am using it for my history of economic thought class.

I do not currently see signs of originality, but the level of accuracy and clarity is stunning, and it can write and analyze at any level you request.  The work also shows the model can engage in a kind of long-term planning, and that will generalize to some very different contexts and problems as well — that is some of the biggest news associated with this release.

Sometimes the model stops in the middle of its calculations and you need to kick it in the shins a bit to get it going again, but I assume that problem will be cleared up soon enough.

If you pay for o1 pro, you get I think 100 queries per month with Deep Research.

Solve for the equilibrium, people, solve for the equilibrium.

Tuesday assorted links

1. Congestion Pricing Tracker update, sigh…Economists like to think they are useful, but if the initial policy is not right you can expect the results to be disappointing, as these are so far.  It is true congestion prices that work, not “cordon prices.”

2. How is GPT-4o as a judge?

3. North Koreans at McDonald’s.

4. Redux of my sovereign wealth fund column for Bloomberg.  I am against the idea for the United States, while recognizing that any arbitrarily small version of it will appear to make sense.

5. Trump’s CEA nominee wrote a long memo on how to restructure the global trading system.  I turned to o1 pro for comment.

6. Peter Coy is ending his NYT newsletter.

7. Scott Alexander update on model cities.

8. My Bloomberg column on the economics of the Luka trade.

9. Economist Richard Nelson has passed away.

Gradual Empowerment?

The subtitle is “Systemic Existential Risks from Incremental AI Development,” and the authors are Jan Kulveit, et.al.  Several of you have asked me for comments on this paper.  Here is the abstract:

This paper examines the systemic risks posed by incremental advancements in artificial intelligence, developing the concept of `gradual disempowerment’, in contrast to the abrupt takeover scenarios commonly discussed in AI safety. We analyze how even incremental improvements in AI capabilities can undermine human influence over large-scale systems that society depends on, including the economy, culture, and nation-states. As AI increasingly replaces human labor and cognition in these domains, it can weaken both explicit human control mechanisms (like voting and consumer choice) and the implicit alignments with human interests that often arise from societal systems’ reliance on human participation to function. Furthermore, to the extent that these systems incentivise outcomes that do not line up with human preferences, AIs may optimize for those outcomes more aggressively. These effects may be mutually reinforcing across different domains: economic power shapes cultural narratives and political decisions, while cultural shifts alter economic and political behavior. We argue that this dynamic could lead to an effectively irreversible loss of human influence over crucial societal systems, precipitating an existential catastrophe through the permanent disempowerment of humanity. This suggests the need for both technical research and governance approaches that specifically address the risk of incremental erosion of human influence across interconnected societal systems.

This is one of the smarter arguments I have seen, but I am very far from convinced.  When were humans ever in control to begin with?  (Robin Hanson realized this a few years ago and is still worried about it, as I suppose he should be.  There is not exactly a reliable competitive process for cultural evolution — boo hoo!)

Note the argument here is not that a few rich people will own all the AI.  Rather, humans seem to lose power altogether.  But aren’t people cloning DeepSeek for ridiculously small sums of money?  Why won’t our AI future be fairly decentralized, with lots of checks and balances, and plenty of human ownership to boot?

Rather than focusing on “humans in general,” I say look at the marginal individual human being.  That individual — forever as far as I can tell — has near-zero bargaining power against a coordinating, cartelized society aligned against him.  With or without AI.  Yet that hardly ever happens, extreme criminals being one exception.  There simply isn’t enough collusion to extract much from the (non-criminal) potentially vulnerable lone individuals.

I do not in this paper see a real argument that a critical mass of the AIs are going to collude against humans.  It seems already that “AIs in China” and “AIs in America” are unlikely to collude much with each other.  Similarly, “the evil rich people” do not collude with each other all that much either, much less across borders.

I feel if the paper made a serious attempt to model the likelihood of worldwide AI collusion, the results would come out in the opposite direction.  So, to my eye, “checks and balances forever” is by far the more likely equilibrium.

Emergent Ventures Africa and Caribbean winners, sixth cohort

Maya Chouikrat, Algeria, to support training for an international olympiad of informatics team.

Mercy Muwanguzi and Kwesiga Pather, Uganda, for sanitation robotics to be used in medical centers.

Johan Fourie, South Africa,  Professor of Economics at Stellenbosch University, to write a graphics novel on classical liberalism in a South African context.

Ken Opalo, Associate Professor, Georgetown University, for blogging on African economic development.

Katharine Patterson, Botswana, to support graduate internship in robotics research at NASA Jet Propulsion Laboratory.

Cyril Narh, Ghana, for general career development.

Jon Ortega, travel grant to Silicon Valley.

Alex Kyabarongo, Uganda, Doctor of Veterinary Medicine from Makerere University, to pursue graduate school in the USA for biosecurity.

Joshua Regrello, Trinidad and Tobago, first Steelpannist to perform on the Great Wall of China, Guinness Record Holder for longest steelpan performance, for general career development.

Liam O’Dea, London/Argentina, data science research into parliamentary records of the Caribbean for the last 200 years.

Joshua Payne, undergrad at University of Chicago, for research into mRNA vaccine optimisation, and career development.

Abdoulaye Faye, Senegal, developing Catyu, a firm that designs remotely operated robots.

Devaron Bruce, Barbados, PhD candidate at UWI, to support research in political reform in the Caribbean.

Tony Odhiambo, Kenya, undergrad at MIT, for enhanced training of top performers in mathematics olympiads in Kenya.

Sebastian Naranjo, Panama, PhD candidate at Renmin University of China, to support research on the diplomatic relations of China in Central America.

Ivoine Strachan, Bahamas, for research into designing and developing a VR bodysuit

Phumiani Majozi, South Africa, to establish a think tank promoting classical liberalism in South Africa

Pearl Karungi, Rwanda, for research into redesigning menstrual products.

Emmanuel Nnadi, Nigeria, Microbiologist, to support visiting research at the University of Waterloo in phage therapies.

Youhana Nassif, Egypt, to support an animation and arts showcase in Cairo.

Frida Andalu, Tanzania, to support visiting research in petroleum engineering at the University of Aberdeen.

Rupert Tawiah-Quashie, Ghana, to support his research internship at Harvard University concerning symbolic reasoning in AI models.

I thank Rasheed Griffith for his excellent work on this, and again Nabeel has created excellent software to help organize the list of winners, using AI.

Those unfamiliar with Emergent Ventures can learn more here and here. The EV African and the Caribbean announcement is here and you can see previous cohorts here. If you are interested in supporting this tranche of Emergent Ventures, please write to me or to Rasheed.

Does the Gender Wage Gap Actually Reflect Taste Discrimination Against Women?

One explanation of the gender wage gap is taste discrimination, as in Becker (1957). We test for taste discrimination by constructing a novel measure of misogyny using Google Trends data on searches that include derogatory terms for women. We find—surprisingly, in our view—that misogyny is an economically meaningful and statistically significant predictor of the wage gap. We also test more explicit implications of taste discrimination. The data are inconsistent with the Becker taste discrimination model, based on the tests used in Charles and Guryan (2008). But the data are consistent with the effects of taste discrimination against women in search models (Black, 1995), in which discrimination on the part of even a small group of misogynists can result in a wage gap.

That is a new NBER working paper by Molly Maloney and David Neumark.

Monday assorted links

1. The world’s most elite sober coach? (FT…his fees seem low to me?)

2. El Salvador planning on releasing many from prison?

3. An early version of portfolio theory, from the late 19th century.  French, of course.

4. Deep Research okie-dokie.  It is amazing.  And a wee bit of data.  And another relevant comment.

5. Ezra on the blitzkrieg strategy (NYT).

6. Medieval trade routes.

7. “525-Lb. Bear Discovered Under Evacuated Altadena Home Too Fat to Tranquilize.

8. Gemini and Cursor in the federal government?