Might a Georgist land tax help revive Detroit?
That is the topic of my Bloomberg column. Maybe they should try it for federalism/discovery purposes, but overall I am skeptical. Here is one excerpt:
The history of “enterprise zones,” which are specially designated areas (usually urban) with lower taxes and fewer regulations, offers a cautionary tale. Enterprise zones have at best mixed results in revitalizing declining areas. Could fiddling with the marginal incentives embedded in the property tax code really make that much more of a difference? Most economic decisions are made on the basis of broad criteria such as labor force quality, nearby markets and the ease of doing business.
By itself, the uneven record of enterprise zones is no reason not to experiment with land value taxation. But it does limit the upside from any change.
A possible downside from land value taxation is that it discourages land speculation. Land speculators do not, I concede, have the best reputation — but speculation can be either a positive or negative, depending on whether entrepreneurs have good foresight. On the plus side, speculation can keep land from being developed prematurely, or from being locked into uses that later turn out to be too low in value.
If dormant land in Detroit is taxed at a higher rate, that might encourage property owners to develop low-quality housing or retail to lower their tax burden. A landowner might build a small house, for example, rather than holding out for a large, higher-quality apartment complex. The city might get modest growth, but lose out on the chance for a bigger economic redevelopment. Detroit has in recent times shown signs of a revival, so perhaps waiting for the right opportunity is sometimes best.
Of course, speculators can also make mistakes, for example by failing to develop their property more quickly. Still, whether the tax authorities have the foresight and flexibility to do better than property speculators is an open question. In the meantime, some speculators may abandon their holdings to avoid the tax, putting more property in the hands of the municipal government — hardly an ideal outcome.
Note also that the proposal is revenue neutral by design (taxes on developments are supposed to go down), but over time it might simply evolve into a flat-out tax increase.
Wednesday assorted links
1. “That work suggested it was not how many times a word was repeated that predicted whether Roy’s son learned it early, but whether it was uttered in an unusual spot in the house, a surprising time or in a distinctive linguistic context.” Link here.
2. Neruda update (New Yorker). The poor Tamil maid.
3. Positive rather than adverse selection into life insurance.
4. Deutsche Bahn is still using Windows 3.11 (auf deutsch).
5. The Norwegian Century is indeed upon us (in Norwegian).
Is Science a Public Good?
Science seems like a public good; in theory, ideas are non-rivalrous and non-excludable. But the closer we look at how ideas actually spread and are used in the world, the less they seem like public goods. As I am fond of pointing out, Thomas Keller wrote a literal recipe book for the dishes he served at his world famous French Laundry restaurant and yet, the French Laundry did not go out of business. Ideas are in heads and if you don’t move the heads, often the ideas don’t move either.
In a new NBER working paper, The Effect of Public Science on Corporate R&D by Arora, Belenzon, Cioaca, Sheer & Zhang, (Tyler mentioned it briefly earlier) the authors make a similar point:
…the history of technical progress teaches us that abstract ideas are also difficult to use. Ideas have to be tailored for specific uses, and frequently, have to be embodied in people and artifacts before they can be absorbed by firms. However, such embodiment also makes ideas less potent sources of increasing returns, turning non-rival ideas into rival inputs, whose use by rivals is easier to restrict. Our findings confirm that firms, especially those not on the technological frontier, appear to lack the absorptive capacity to use externally supplied ideas unless they are embodied in human capital or inventions. The limit on growth is not the creation of useful ideas but rather the rate at which those ideas can be embodied in human capital and inventions, and then allocated to firms to convert them into innovations.
The question of whether science is a public good is not merely technical but has significant implications. If science is a public good, markets will likely underproduce it, making government subsidies to universities crucial for stimulating R&D and economic growth. Conversely, if ideas are embodied and thus closely tied to their application, government funding for university research might not only fail to enhance economic growth but could also hinder it. This occurs as subsidies draw scientists away from firms, where their knowledge directly contributes to product development, towards universities, where their insights risk becoming lost in the ivory tower. (Teaching scientists who then go on to careers in the private sector is much more likely to be complementary to productivity growth than funding research which pulls scientists away from the private sector.)
In a commentary on Arora et al., the Economist notes that growth in universities and government science has coincided with a slowdown in productivity.
Universities have boomed in recent decades. Higher-education institutions across the world now employ on the order of 15m researchers, up from 4m in 1980. These workers produce five times the number of papers each year. Governments have ramped up spending on the sector. The justification for this rapid expansion has, in part, followed sound economic principles. Universities are supposed to produce intellectual and scientific breakthroughs that can be employed by businesses, the government and regular folk. Such ideas are placed in the public domain, available to all. In theory, therefore, universities should be an excellent source of productivity growth.
In practice, however, the great expansion of higher education has coincided with a productivity slowdown.
Arora et al. present detailed empirical evidence causally linking the productivity slowdown to the expansion of government science. Government science has yielded smaller-than-expected productivity improvements due to significant trade-offs. Subsidies have moved heads out of firms and into universities and for many firms this shift of talent has not only reduced the firms’ capacity to generate ideas (crowding out) but has also impaired their ability to adopt academic innovations. As the authors write:
…productivity growth may have slowed down because the potential users—private corporations—lack the absorptive capacity to understand and use those ideas.
The great Terence Kealey made many of these points much earlier in his important book, The Economic Laws of Scientific Research (here is an online precis). Kealey, however, was challenging a beautiful theory, supported by the great and good of the economics profession, by pointing to an ugly practice. Arora et al. show that the beauty of the theory may have misguided us and that “the vast fiscal resources devoted to public science…probably make businesses across the rich world less innovative” (quoting the Economist).
Will the Argentina province of La Rioja print its own currency?
Maybe so:
Milei’s austerity is biting hard in La Rioja, an olive and wine region home to 384,000 people — out of a population of 46mn — where intense heat pushes many businesses to take a siesta from 1 to 6pm. Almost 75 per cent of the province’s budget comes from redistributed taxes collected by the national government, and 67 per cent of registered workers are employed by the state.
The province’s finances had been “decimated” in recent months, governor Ricardo Quintela said in an interview, citing Milei’s halting of public works projects and his refusal to transfer the 20.8bn pesos ($26mn) that he says La Rioja is owed based on historical agreements with the central government…
In an effort to pay public workers, La Rioja’s state legislature, dominated by Quintela’s left-leaning Peronist movement, has approved a plan to issue 22.5bn pesos ($28mn) worth of so-called “bocades”. These provincial government bonds can be used to pay local taxes, bills for public services such as energy and water and — in theory — to buy goods from private companies. Bocades — nicknamed a “quasi-currency” in Argentina — will be used to top up public employees’ salaries by 30 per cent. Quintela said they would start to be issued within 90 days, though La Rioja may opt to issue them only digitally.
Quintela said that Bocades would be exchangeable for pesos at the provincially-owned bank. However, given the province’s scarce supply of pesos, the plan relies on “people starting to trust in the bonds’ value” so that they don’t exchange them immediately.
And:
Argentina’s provinces have dabbled in quasi-currencies before. In the early 2000s, amid a severe recession and several years of deflation, more than a dozen provinces including La Rioja issued bonds that functioned as currencies.
The logic of this is not surprising. When very strong disinflationary pressures are in place, liquidity is quite scarce. Suppliers will step into the void to try to supply it, even if the overall macroeconomic consequences are negative. Such “local currencies” were common in the 1930s, though most of them did not last long. Expect scrip and gift certificates to make a comeback as well, although this version of the idea transfers seigniorage to a very strapped local government.
Here is more from the FT.
Addendum: Congress just dealt with Milei agenda further setbacks.
One reason why the disinflation proved so manageable
From a new and important paper by Xiwen Bai, Jesús Fernández-Villaverde, Yiliang Li, and Francesco Zanetti:
Our analysis shows that supply chain disruptions generate stagflation, accompanied by an increase in spare capacity for producers. This higher spare capacity curtails the supply of goods to retailers and results in a surge in prices, leading to a tighter retail market. We show that, in this situation, prices become highly sensitive to changes in demand, while output remains relatively inelastic. In other words, disruptions to the supply chain enhance the effectiveness of contractionary monetary policy in taming inflation while reducing the sensitivity of output to the policy. Our results reinforce the general findings on the state-dependence of the efficacy of monetary policy.
Progress! And arguably this is a Keynesian result:
In fact, our result resembles the celebrated analysis by Keynes (1940). Keynes argued that when output is constrained (in our case, because of supply chain disruptions, in Britain’s case in 1940, because of resources employed in World War II), policymakers can lower aggregate demand aggressively to prevent inflation without much fear of lowering production.
As I mention in GOAT, How to Pay for the War remains a neglected and underrated work by Keynes. Note this as well:
We document how supply chain shocks drove inflation during 2021 but that, in 2022, traditional demand and supply shocks also played an important role in explaining inflation.
The pure supply-side story, as you have been hearing from Krugman just isn’t going to work, it is time to give it up.
By the way, yet another advance in this lengthy paper is this (from JFV): “…we have satellite information about every single container ship of the world in real time (ID, geolocation, speed, draft, heading,…), which allows us to do tons of things in terms of machine learning and time series econometrics that people have not been able to do before.”
Comparing Large Language Models Against Lawyers
This paper presents a groundbreaking comparison between Large Language Models and traditional legal contract reviewers, Junior Lawyers and Legal Process Outsourcers. We dissect whether LLMs can outperform humans in accuracy, speed, and cost efficiency during contract review. Our empirical analysis benchmarks LLMs against a ground truth set by Senior Lawyers, uncovering that advanced models match or exceed human accuracy in determining legal issues. In speed, LLMs complete reviews in mere seconds, eclipsing the hours required by their human counterparts. Cost wise, LLMs operate at a fraction of the price, offering a staggering 99.97 percent reduction in cost over traditional methods. These results are not just statistics, they signal a seismic shift in legal practice. LLMs stand poised to disrupt the legal industry, enhancing accessibility and efficiency of legal services. Our research asserts that the era of LLM dominance in legal contract review is upon us, challenging the status quo and calling for a reimagined future of legal workflows.
That is from a new paper by Lauren Martin, Nick Whitehouse, Stephanie Yiu, Lizzie Catterson, and Rivindu Perera. Via Malinga.
The Global Distribution of College Graduate Quality
We measure college graduate quality—the average human capital of a college’s graduates—for graduates from 2,800 colleges in 48 countries. Graduates of colleges in the richest countries have 50% more human capital than graduates of colleges in the poorest countries. Migration reinforces these differences: emigrants from poorer countries are highly positively selected on human capital. Finally, we show that these stocks and flows matter for growth and development by showing that college graduate quality predicts the share of a college’s students who become inventors, engage in entrepreneurship, and become top executives both within and across countries.
That is a new JPE piece by Paolo Martellini, Todd Schoellman, and Jason Sockin.
Tuesday assorted links
2. How is AI helping ornithology?
3. Vesuvius Challenge Prize awarded, we can read the first scroll. And a background Bloomberg piece.
4. Seafood as a resilient food solution after a nuclear war.
5. Nabeel Qureshi on whether there is a Moore’s Law for intelligence: “The shocking implication of what we have seen in this piece so far is that there may be no great, transformative breakthroughs needed to get to the critical inflection point. We already have the ingredients. As Ilya Sutskever likes to say, “the machine just wants to learn” – data, compute, and the right algorithms result in intelligence of a particular kind, and more of those inputs results in more intelligence as an output!”
My Upstream podcast with Erik Torenberg
Tyler, here are links to your appearance on Upstream, titled “Tyler Cowen on Harvard, the GOAT Economist, and Ending Stagnation.”
Spotify: https://open.spotify.com/episode/2AtAP42KpRdCxhioJSR9KY?si=bf643df853da4ec1Apple: https://podcasts.apple.com/us/podcast/tyler-cowen-on-harvard-the-goat-economist-and/id1678893467?i=1000643908309YouTube: https://www.youtube.com/watch?v=zS6B9LHRHKw
The Gershwins on free trade (that was then, this is now)
In 1927, George and Ira Gershwin put on a musical satire about trade and war entitled Strike Up the Band. The plot centres around a middle-aged US cheesemaker, Horace J. Fletcher of Connecticut, who wants to corner the domestic dairy market. When Fletcher hears that the US government has just slapped a fifty per cent tariff on foreign-made cheese, he sees dollar signs. High tariffs mean his fellow citizens will have little choice but to ‘buy American’. What’s more, the tariff’s impact soon reaches beyond the national market to sour the country’s trade relationships.. Swiss cheesemakers are particularly sharp in their demands for retaliation. Fletcher surmises that a prolonged Swiss-American military conflict would provide the necessary fiscal and nationalistic incentives to maintain the costly tariff on foreign cheese in perpetuity.
To make his monopolistic dream of market control a reality, Fletcher sees to it that the tariff spat between the two countries leads to an all-out war. He first creates the Very Patriotic League to drum up support for the Alpine military adventure, as well as to weed out any ‘un-American’ agitation at home. The Very Patriotic League’s members, donning white hoods reminiscent of the Ku Klux Klan, go about excising all things Swiss from the nativist nation. Not even the classic adventure The Swiss Family Robinson escapes notice: it gets rebranded The American Family Robinson. With domestic anti-war dissent quelled, Fletcher next orchestrates a military invasion of Switzerland. The farcical imperial intervention ends with a US victory. But just as the war with Switzerland winds down and a peaceful League of Cheese established, an ultimatum arrives from Russia objecting to a US tariff on caviar. And, it’s implied, the militant cycle repeats.
That is from the new and interesting Pax Economica: Left-Wing Visions of a Free Trade World, by Marc-William Palen.
Monday assorted links
Nominal wages are sticky in prison
“The only problem I have with my job is the pay hasn’t increased in over two decades,” wrote Nelson. At the time, she worked in a prison factory where she was forced to save two weeks’ pay “to buy one 18-pack of feminine hygiene pads,” a basic necessity.
Here is the full story, via The Browser.
New data on media bias
In this study, we propose a novel approach to detect supply-side media bias, independent of external factors like ownership or editors’ ideological leanings. Analyzing over 100,000 articles from The New York Times (NYT) and The Wall Street Journal (WSJ), complemented by data from 22 million tweets, we assess the factors influencing article duration on their digital homepages. By flexibly controlling for demand-side preferences, we attribute extended homepage presence of ideologically slanted articles to supply-side biases. Utilizing a machine learning model, we assign “pro-Democrat” scores to articles, revealing that both tweets count and ideological orientation significantly impact homepage longevity. Our findings show that liberal articles tend to remain longer on the NYT homepage, while conservative ones persist on the WSJ. Further analysis into articles’ transition to print and podcasts suggests that increased competition may reduce media bias, indicating a potential direction for future theoretical exploration.
That is from a recent paper by Tin Cheuk Leung and Koleman Strumpf.
John Stuart Mill on women, as explained by TC
It’s interesting to think of Mill’s argument as it relates to Hayek. So Mill is arguing you can see more than just the local information. So keep in mind, when Mill wrote, every society that he knew of, at least treated women very poorly, oppressed women. Women, because they were physically weaker, were at a big disadvantage. If you think there are some matrilineal exceptions, Mill didn’t know about them, so it appeared universal. And Mill’s chief argument is to say, you’re making a big mistake if you overly aggregate information from this one observation, that behind it is a lot of structure, and a lot of the structure is contingent, and that if I, Mill, unpack the contingency for you, you will see behind the signals. So Mill is much more rationalist than Hayek. It’s one reason why Hayek hated Mill. But clearly, on the issue of women, Mill was completely correct that women can do much better, will do much better. It’s not clear what the end of this process will be. It will just continue for a long time. Women achieving in excellent ways. And it’s Mill’s greatest work. I think it’s one of the greatest pieces of social science, and it is anti-Hayekian. It’s anti-small c conservatism.
That is from my podcast with Dwarkesh.
Amsterdam urban engineering
An average of 18 people a year reportedly drown in the city’s canals: often men, late at night, falling to their deaths while apparently taking a “wild wee”.
Last week, councillors demanded answers to questions on water safety, prompted by the death of Sam van Grondelle, a 29-year-old Amsterdammer who disappeared in October and whose body was discovered three days later in the Veemkade waterway.
As part of a multibillion-euro renovation of the city, the authorities are putting in extra ladders and grab ropes along 200km of crumbling canal wall. However, most of the walls remain high, are poorly lit and are often flanked by an ankle-high “car rail” to stop vehicles rolling in. They form a perfect trip hazard for distracted wanderers.
The authorities are focused on: “…prevention techniques and safety campaigns in the UK and Ireland.” About ten percent of the drowned men had their flies open. Here is the full Times of London story.