SlateStarCodex and Caplan on ‘Why Are the Prices So D*mn High?’

SlateStarCodex, whose 2017 post on the cost disease was one of the motivations for our investigation, says Why Are the Prices so D*mn High (now available in print, ePub, and PDF) is “the best thing I’ve heard all year. It restores my faith in humanity.” I wouldn’t go that far.

SSC does have some lingering doubts and points to certain areas where the data isn’t clear and where we could have been clearer. I think this is inevitable. A lot has happened in the post World War II era. In dealing with very long run trends so much else is going on that answers will never be conclusive. It’s hard to see the signal in the noise. I think of the Baumol effect as something analogous to global warming. The tides come and go but the sea level is slowly rising.

In contrast, my friend Bryan Caplan is not happy. Bryan’s basic point is to argue, ‘look around at all the stupid ways in which the government prevents health care and education prices from falling. Of course, government is the explanation for higher prices.’ In point of fact, I agree with many of Bryan’s points. Bryan says, for example, that immigration would lower health care prices. Indeed it would. (Aside: it does seem odd for Bryan to argue that if K-12 education were privately funded schools would not continue their insane practice of requiring primary school teachers to have B.A.s when in fact, as Bryan knows, credentialism has occurred throughout the economy)

The problem with Bryan’s critiques is that they miss what we are trying to explain which is why some prices have risen while others have fallen. Immigration would indeed lower health care prices but it would also lower the price of automobiles leaving the net difference unexplained. Bryan, the armchair economist, has a simple syllogism, regulation increases prices, education is regulated, therefore regulation explains higher education prices. The problem is that most industries are regulated. Think about the regulations that govern the manufacture of automobiles. Why do all modern automobiles look the same? As Car and Driver puts it:

In our hyperregulated modern world, the government dictates nearly every aspect of car design, from the size and color of the exterior lighting elements to how sharp the creases stamped into sheet metal can be.

(See Jeffrey Tucker for more). And that’s just design regulation. There are also environmental regulations (e.g. ethanol, catalytic converters, CAFE etc.), engine regulations, made in America regulations, not to mention all the regulations on the inputs like steel and coal. The government even regulates how cars can be sold, preventing Tesla from selling direct to the public! When you put all these regulations together it’s not at all obvious that there is more regulation in education than in auto manufacturing. Indeed, since the major increase in regulation since the 1970s has been in environmental regulation, which impacts manufacturing more than services, it seems plausible that regulation has increased more for auto manufacturing.

As an empirical economist, I am interested in testable hypotheses. A testable hypothesis is that the industries with the biggest increases in regulation have seen the biggest increases in prices over time. Yet, when we test that hypothesis as best we can it appears to be false. Remember, this does not mean that regulation doesn’t increase prices! It can and probably does it’s just that regulation is not the explanation for the differences in prices we see across industries. (Note also that Bryan argues that you don’t need increasing regulation to explain increasing prices, which is true, but I still need a testable hypotheses not an unfalsifiable claim.)

So by all means let’s deregulate, but don’t expect 70+ year price trends to reverse until robots and AI start improving productivity in services faster than in manufacturing.

Let me close with this. What I found most convincing about the Baumol effect is consilience. Here, for example, are two figures which did not make the book. The first shows car prices versus car repair prices. The second shows shoe and clothing prices versus shoe repair, tailors, dry cleaners and hair styling. In both cases, the goods price is way down and the service price is up. The Baumol effect offers a unifying account of trends such as this across many different industries. Other theories tend to be ad hoc, false, or unfalsifiable.

Jungle Bird, NYC

That is my brother’s new restaurant in Chelsea, southeast Asian food, it has made the Approval Matrix and after three weeks is already a big hit.  Billed as a cocktail bar, but the food is truly excellent, and this is not just familial favoritism.  Get the dumplings, the turmeric chicken salad (actually a perfectly musty, stinky Malaysian dish — a highlight), and the betel leaves when they have them.  Jungle Bird serves some of the best southeast Asian food in Manhattan, and yet the chef grew up in New Jersey, fancy that.

You are creating a genetic profile for your entire family…

…if you give away a genetic profile for yourself.  Elizabeth Joh (NYT) writes:

You may decide that the police should use your DNA profile without qualification and may even post your information online with that purpose in mind. But your DNA is also shared in part with your relatives. When you consent to genetic sleuthing, you are also exposing your siblings, parents, cousins, relatives you’ve never met and even future generations of your family.

Unless you are going to gain something very specific, I generally recommend that people should not give away their genetic information.

RIP, Martin Feldstein

In addition to being a great economist, Marty was an institution builder.  He was the early driving force behind the rise of the NBER, he led the development of empirical public finance as a respected field, and also very early on he pushed health care economics, both through his leadership at the NBER and through his own work and mentorship.  He always was reaching out to help others, and Larry Summers, Jim Poterba, David Cutler, Raj Chetty, and Jason Furman were some of those he mentored.  The economics of art museums was yet another topic he had a real interest in, and stimulated research in.

Marty also was one of my oral examiners at Harvard, and he asked only excellent questions.  I thank him for judging my answers to be good enough.

Does trade reform promote economic growth?

Do trade reforms that significantly reduce import barriers lead to faster economic growth? In the two decades since Rodríguez and Rodrik’s (2000) critical survey of empirical work on this question, new research has tried to overcome the various methodological problems that have plagued previous attempts to provide a convincing answer. This paper examines three strands of recent work on this issue: cross-country regressions focusing on within-country growth, synthetic control methods on specific reform episodes, and empirical country studies looking at the channels through which lower trade barriers may increase productivity. A consistent finding is that trade reforms have a positive impact on economic growth, on average, although the effect is heterogeneous across countries. Overall, these research findings should temper some of the previous agnosticism about the empirical link between trade reform and economic performance.

That is the abstract to the new NBER working paper from Douglas Irwin, self-recommending.

My question about Haifa

When visiting Israel, I spent two days in Haifa, Israel’s third largest city at about 279,000.  It seemed to me oddly empty, in a fractal sort of way.  The supermarkets had very little on their shelves.  There weren’t many supermarkets, or for that matter many restaurants.  No part of town seemed to be truly densely populated.  There was neither a center nor a thriving set of edge cities, not that I could see.  There weren’t even many parts of town.

Nothing even remotely resembling a real bookstore, not outside of the university at least.  So what gives?  What is the proper theory of Haifa?

My trip to Israel

I was very pleased to have been sponsored by the Friedberg Economics Institute, who were wonderful hosts and put together great audiences on my behalf.

Here is my interview with Globes, which they helped to arrange, excerpt:

“We started this trade war with China by shooting in all directions. It would have been much wiser to form our alliances first, and then consider doing something versus China. I believe that the current trade war with China is unavoidable. It would have taken place even without Trump as president. There are too many cases of unfair trading by China, of Chinese companies operating unfairly and even spying, of stealing of US ideas, and preventing US or Western businesses from operating in the country. This dam had to burst sooner or later.

“What is happening now is not good for any country: not for the US, not for China, and also not for Israel, which like many other small countries will be harmed by the trade war. We’re in a situation in which everyone loses.

“The US is pressuring, and will pressure, Israel not to cooperate with China. It has already begun, and it will get worse. You can understand Washington – if you have the Sixth Fleet in Haifa and China controls part of the port, US concern is understandable. On the other hand, China depends on oil from the Middle East. It needs reliable partners in the region in order to ensure its regular supply, and Israel is the only country that meets this criterion. Imagine a future in which China exerts strong pressure on Israel to help it conduct its foreign policy. I think that it will be harder and harder for Israel to cope with Chinese pressure on the one hand and US pressure on the other.”

A variety of other topics are covered at the link.

*The Case for Space*

The author is Robert Zubrin and the subtitle is How the Revolution in Spaceflight Opens Up a Future of Limitless Possibility.  I found this book fun, ambitious, and informative, even if I was not entirely convinced.  Zubrin thinks big and bold in an exciting way, here is one bit:

Exploring Mars requires no miraculous new technologies, no orbiting spaceports, and no gigantic interplanetary space cruisers.  We can establish our first small outpost on Mars within a decade.

There is not much talk of the stress space (or for that matter life on Mars) might place on the human body.  Zubrin talks of Mars tours of four or six years or more.

Yet my biggest difference with Zubrin is this: I think of space and planetary exploration as presenting many surprising and difficult problems, ones which cannot be foreseen and fixed in advance by stocking a spacecraft with “just the right materials.”  There are many sentences like this:

Mobile microwave units will be used to extract water from Mars’s abundant permafrost, supporting such agriculture and making possible the manufacture of large amounts of brick and concrete…

But when the problem of missing parts arises, or perhaps missing links between systems, you can’t run to the local hardware store.  Try this one too:

Extracting the He3 from the atmospheres of the giant planets will be difficult, but not impossible.  What is required is a winged transatmospheric vehicle that can use a planet’s atmosphere for propellant, heating it in a nuclear reactor to produce thrust.

My other worry is that if we do not find it profitable to inhabit rural Nevada, Mars might stay empty as well.  Zubrin does make a detailed economic case for the value of space, though to my eye much of it falls on satellites.  Asteroids have valuable minerals, such as uranium, and that might spur mining operations, powered by nuclear fusion.  But is that really the cheapest way to get more uranium, in any case I suspect its price and value would fall rapidly with quantity.

Zubrin puts forward the interesting hypothesis that life in space will encourage a great deal of political freedom:

Historically, the easiest people for a tyrant to oppress are nominally self-sufficient rural peasants, because none of them are individually essential…In a space colony, nearly everyone will be individually essential, and therefore powerful, and all will be capable of being dangerous to those in authority.

Hard to verify, but worth a ponder.

Under another scenario, arks full of large, smart salamanders, genetically programmed to build incubators by instinct, will settle the galaxy at “a speed exceeding 20 percent the speed of light.”

There are many interesting ancillary points, such as using the length of the growing season to estimate global warming, or how pp.284-285 offer an ambitious take on the spin-off benefits from the space program so far, or pp.294-295 on exactly why taking out an asteroid with bombs is so hard.

With plenty of caveats of course, but recommended, the author of this one is never coasting.

Millennials are OK with cars

Whew!

Anecdotes that Millennials fundamentally differ from prior generations are numerous in the popular press. One claim is that Millennials, happy to rely on public transit or ride-hailing, are less likely to own vehicles and travel less in personal vehicles than previous generations. However, in this discussion it is unclear whether these perceived differences are driven by changes in preferences or the impact of forces beyond the control of Millennials, such as the Great Recession. We empirically test whether Millennials’ vehicle ownership and use preferences differ from those of previous generations using data from the US National Household Travel Survey, Census, and American Community Survey. We estimate both regression and nearest-neighbor matching models to control for the confounding effect of demographic and macroeconomic variables. We find little difference in preferences for vehicle ownership between Millennials and prior generations once we control for confounding variables. In contrast to the anecdotes, we find higher usage in terms of vehicle miles traveled (VMT) compared to Baby Boomers. Next we test whether Millennials are altering endogenous life choices that may, themselves, affect vehicles ownership and use. We find that Millennials are more likely to live in urban settings and less likely to marry by age 35, but tend to have larger families, controlling for age. On net, these other choices have a small effect on vehicle ownership, reducing the number of vehicles per household by less than one percent.

That is from new work by Christopher R. Knittel and Elizabeth Murphy.

Something is wrong with construction

Changing sectoral trends in the last 6 decades, translated through the economy’s production network, have on net lowered trend GDP growth by around 2.3 percentage points.  The Construction sector, more than any other sector, stands out for its contribution to the trend decline in GDP growth over the post-war period, accounting for 30 percent of this decline.

That is from a new working paper by Andrew Foerster, Andreas Hornstein, Pierre-Daniel Sarte, and Mark W. Watson, “Aggregate Implications of Changing Sectoral Trends.

Kevin Erdmann, telephone!

Has the division of labor hindered knowledge integration and productivity growth?

…we suggest that this division of innovative labor has not, perhaps, lived up to its promise.  The translation of scientific knowledge generated in universities to productivity enhancing technical progress has proved to be more difficult to accomplish in practice than expected.  Spinoffs, startups, and university licensing offices have not fully filled the gap left by the decline of the corporate lab.  Corporate research has a number of characteristics that make it very valuable for science-based innovation and growth.  Large corporations have access to significant resources, can more easily integrate multiple knowledge streams, and direct their research toward solving specific practical problems, which makes it more likely for them to produce commercial applications.  University research has tended to be curiosity-driven rather than mission-focused.  It has favored insight rather than solutions to specific problems, and partly as a consequence, university research has required additional integration and transformation to become economically useful.  This is not to deny the important contributions that universities and small firms make to American innovation.  Rather, our point is that large corporate labs may have distinct capabilities which have proved to be difficult to replace.

That is from Ashish Arora, Sharon Belenzon, Andrea Patacconi, and Jungkyu Suh, “The Changing Structure of American Innovation: Some Cautionary Remarks for Economic Growth,” recommended, an excellent paper spanning several disciplines.  I would myself note this is further reason not to split up the major tech companies.

What should I ask Hollis Robbins?

I will be doing a Conversations with Tyler with her, no associated public event.  Here is part of her Wikipedia page:

Robbins is a noted expert in the field of nineteenth-century African American literature and recently co-edited with Henry Louis Gates, Jr. an anthology of African American women’s writing. Robbins’ work focuses primarily on nineteenth and early twentieth century black print culture; she is affiliated with the Black Press Research Collective and serves as an advisor to the Black Periodical Literature Project at the W.E.B. Du Bois Institute at Harvard University

…Previously, Robbins edited several other books with Henry Louis Gates, Jr., including The Annotated Uncle Tom’s Cabin (2006) and In Search of Hannah Crafts: Essays on The Bondwoman’s Narrative (2003). She also co-edited The Works of William Wells Brown (2006) with Paula Garrett and an edition of Frances E.W. Harper’s 1892 novel Iola Leroy.

In addition to now being Dean at Sonoma State University, she also has written on film music, the history of post offices, the gold rush, higher education, African-American sonnets, and numerous other topics.  So what should I ask her?

The evolution of successful prediction

Therefore, on balance, our results suggest that Danto was substantively correct. As the number of events being evaluated grows, successful predictions will be increasingly outnumbered by events that seem insignificant at the time, but which come to be viewed as important by future historians in part because of events that have not yet taken place. More generally, our results provide further evidence for the observation that the combination of nonlinearity, stochasticity and competition for scarce attention that is inherent to human systems poses serious difficulties for ex ante predictions—a pattern that has previously been noted in outcomes such as political events, success in cultural markets, the scientific impact of publications and the diffusion of information in social networks. Given that historical significance is typically evaluated on longer time scales than these other examples, it is especially vulnerable to unintended consequences, sensitivity to small fluctuations and reinterpretation of previous information in light of new discoveries or societal concerns. A further complication is that historical significance, even when it can be meaningfully assigned, is specific to observers whose evaluation may depend on their own idiosyncratic interests and priorities. Although we speak of history as a single entity, in reality there may be many histories, within each of which the same set of events may be recalled and evaluated differently.

That is from Joseph Risi, Amit Sharma, Rohan Shah, Matthew Connelly, and Duncan J. Watts in Nature, in their new piece “Predicting History.

Via William A. Benzon.