Argentina Milei reform impressions

by  Tyler Cowen in

I didn’t have much time in Argentina, but I can pass along a few impressions about how Milei is doing, noting I hold these with “weak belief”:

1. He is pretty popular with the general population.  He is also popular in B.A. in particular.  People are fed up with what they have been experiencing.  It is incorrect to think of him as mainly a candidate for the elites.

2. Even if you think he “plays a clown on TV,” he is not a clown.  He is a serious thinker who has facility with economic arguments, including at the academic level.

3. If he can lick hyperinflation, but that causes a recession for a year or two, the population will accept that trade-off.

4. Licking hyperinflation will not be so easy.  The currency is still declining in value, and Milei has to solve major fiscal problems with 10-15 percent representation in the two-house legislature.  For this reason alone, the whole project still could very easily fail, and it would be a long time before libertarian-style ideas would be given another chance in Argentina.

4b. Right now Argentina is auctioning off (FT) $3.6 billion USD worth (but denominated in pesos) in fresh debt.  The goal is to clear off central bank debt, and to put fiscal instruments where fiscal instruments ought to be, and sever them from the monetary authority.  Right now short-term central bank debt is about 10% of the country’s gdp, a bad place to be.  But how well will this new borrowing go?  How far can it be extended?  The fate of the whole plan may rest on the efficacy of this very particular transition, and if more central government borrowing in Argentina makes you nervous it should.  Keep in mind hyperinflation is not just “money printing” (though it is that too), it is after a while an entire interwoven web of corrupt and malfunctioning institutional arrangements.  Just how easily and how quickly can those be untangled?

5. Milei’s political enemies are not entirely keen to seize power right now, since they would have to deal with a hyperinflation and possibly a recession.  This is operating in his favor.

6. Some of his support is based in a kind of “free lunch” voter desire to simply have more dollars, as some of the populace expects  “dollarization” to bring.  That is one reason why he won, but it is worrying for his ability to sustain support.

7. What I understand from his deregulatory measures I am very much in support of.  But until a broader business confidence is restored, they may not help economic growth much.  I don’t think we are going to see a Ludwig Erhard-style economic miracle in Argentina.

8. So far he has yet to make an obvious mistake.

9. Fossil fuel megaprojects (WSJ), such as “Vaca Muerta” may prove Milei’s ace in the hole, if he can hold on long enough.

10. U.S. mainstream media are not doing a good job covering these developments, or even devoting much attention to them.

I will continue to follow this issue.

Friday assorted links

by  Tyler Cowen

1. Curtis Yarvin on techno-optimism.

2. The economics of time travel.

3. Ken Regan on statistically detecting cheating.

4. India fact of the day: “Solar and wind were 92% of India’s generation additions in 2022. It deployed as much solar in 2022 as the UK has ever built. Coal also was down 78%.”

5. The Catalan gridlock.  The role of (Catalonian) economists in encouraging and sometimes leading this movement remains an underreported story.

6. New Sam Altman blog post.

7. “I’m excited to share News Déjà Vu (newsdejavu.github.io), which uses a custom large language model to retrieve historical news articles that are the most similar to modern news articles.” From Melissa Dell.

Why Do Poor People Commit More Crime?

by  Alex Tabarrok in

It’s well known that people with lower incomes commit more crime. Call this the cross-sectional result. But why? One set of explanations suggests that it’s precisely the lack of financial resources that causes crime. Crudely put, maybe poorer people commit crime to get money. Or, poorer people face greater strains–anger, frustration, resentment–which leads them to lash out or poorer people live in communities that are less integrated and well-policed or poorer people have access to worse medical care or education and so forth and that leads to more crime. These theories all imply that giving people money will reduce their crime rate.

A different set of theories suggests that the negative correlation between income and crime (more income, less crime) is not causal but is caused by a third variable correlated with both income and crime. For example, higher IQ or greater conscientiousness could increase income while also reducing crime. These theories imply that giving people money will not reduce their crime rate.

The two theories can be distinguished by an experiment that randomly allocates money. In a remarkable paper, Cesarini, Lindqvist, Ostling and Schroder report on the results of just such an experiment in Sweden.

Cesarini et al. look at Swedes who win the lottery and they compare their subsequent crime rates to similar non-winners. The basic result is that, if anything, there is a slight increase in crime from winning the lottery but more importantly the authors can statistically reject that the bulk of the cross-sectional result is causal. In other words, since randomly increasing a person’s income does not reduce their crime rate, the first set of theories are falsified.

A couple of notes. First, you might object that lottery players are not a random sample. A substantial part of Cesarini et al.’s lottery data, however, comes from prize linked savings accounts, savings accounts that pay big prizes in return for lower interest payments. Prize linked savings accounts are common in Sweden and about 50% of Swedes have a PLS account. Thus, lottery players in Sweden look quite representative of the population. Second, Cesarini et al. have data on some 280 thousand lottery winners and they have the universe of criminal convictions; that is any conviction of an individual aged 15 or higher from 1975-2017. Wow! Third, a few people might object that the correlation we observe is between convictions and income and perhaps convictions don’t reflect actual crime. I don’t think that is plausible for a variety of reasons but the authors also find no statistically significant evidence that wealth reduces the probability one is suspect in a crime investigation (god bless the Swedes for extreme data collection). Fourth, the analysis was preregistered and corrections are made for multiple hypothesis testing. I do worry somewhat that the lottery winnings, most of which are on the order of 20k or less are not large enough and I wish the authors had said more about their size relative to cross sectional differences. Overall, however, this looks to be a very credible paper.

In their most important result, shown below, Cesarini et al. convert lottery wins to equivalent permanent income shocks (using a 2% interest rate over 20 years) to causally estimate the effect of permanent income shocks on crime (solid squares below) and they compare with the cross-sectional results for lottery players in their sample (circle) or similar people in Sweden (triangle). The cross-sectional results are all negative and different from zero. The causal lottery results are mostly positive, but none reject zero. In other words, randomly increasing people’s income does not reduce their crime rate. Thus, the negative correlation between income and crime must be due to a third variable. As the authors summarize rather modestly:

Although our results should not be casually extrapolated to other countries or segments of the population, Sweden is not distinguished by particularly low crime rates relative to comparable countries, and the crime rate in our sample of lottery players is only slightly lower than in the Swedish population at large. Additionally, there is a strong, negative cross-sectional relationship between crime and income, both in our sample of Swedish lottery players and in our representative sample. Our results therefore challenge the view that the relationship between crime and economic status reflects a causal effect of financial resources on adult offending.

Supply Chain Resilience: Should Policy Promote International Diversification or Reshoring?

by  Tyler Cowen in

Little is known about optimal policy in the face of global supply chain disruptions. Should governments promote resilience by subsidizing backup sources of input supply in multiple countries? Should they encourage firms to source from safer domestic suppliers? We address these questions in a model of production with a critical input and exogenous risks of supply disturbances. With constant elasticity of substitution preferences, a subsidy for diversification achieves the constrained social optimum. When the demand elasticity rises with price, private investments in resilience may be socially excessive and the social planner may wish to discourage diversification while favoring sourcing from abroad.

That is forthcoming from the JPE by Grossman, Helpman, and Lluillier.  On general point here is that the usual arguments for protectionism, namely securing national supply chains, often actually stand as arguments for more trade, namely trade with a more diverse set of nations.

The new *Pedro Páramo* translation

by  Tyler Cowen in

By Juan Rulfo, first published in 1955.  The previous English-language translation was abysmal, so this is perhaps the least read piece of truly great world literature?  In the English-speaking world at least.  It took me a long time and a lot of effort to read this short novel in Spanish.  The vocabulary is not difficult, it is simply difficult in any language to know exactly what is going on.  What exactly are the borders between the living and the dead, for instance?  Which character is doing what?  What is Rulfo telling us about Dante?  As first-tier literature should, it strains our capabilities to the utmost.  A knowledge of rural Mexico helps, for sure.

García Márquez compared the work to that of Sophocles in import.  Carlos Fuentes called it “the essential Mexican novel.”  For me it is in the top 25 novels of all time.  Susan Sontag thought it was one of the essential works of 20th century literature.

The new Douglas J. Weatherford translation is probably as good as it is going to get.  The work is intrinsically difficult to translate, so try the Spanish if you can, or read the two jointly together, switching back and forth.  And as they like to say in Haiti, “if you’re not confused, you don’t know what’s going on.”

Recommended, essential, and kudos to Weatherford for making this available.  I’ve addended it to my favorite fiction of 2023 list.

Thursday assorted links

by  Tyler Cowen

1. The Milei deregulation announcements (in Spanish).  Here is the recorded message, with subtitles.

2. “Nearly 4% of Cuba’s population reached the U.S.-Mexico border in fiscal years ‘22-23.”  Link here, have you noticed that Latin America is central to the news again?

3. AI discovers a new structural class of antibiotics.  And “The authors got GPT-4 to autonomously research, plan, and conduct chemical experiments, including learning how to use lab equipment by reading documentation (most were operated by code, but one task had to be done by humans)”, link here.

4. Cowen’s Second Law: “The survival time of chocolates on hospital wards: covert observational study.”

5. AI quantification rat races you might get caught up in.

6. Zola and why we shop.

How university governance works

by  Tyler Cowen in

Penn’s board has 48 voting participants, and a further 36 longstanding emeritus members who have reached the retirement age of 70 but are still allowed to attend and speak at meetings.  MIT has 74 board members, Cornell 64.  Harvard has a “corporation” of 12, and then 32 overseers.  Of course that is done in part to keep donors involved and perhaps also reward them.  It does not lead to good governance or a strong ability to make substantive decisions.

I very much enjoyed this FT article on these themes.  Faculty members are upset that their governing boards want to govern.

I almost split my gut over this part: “…said Lynn Pasquerella, president of the American Association of Colleges and Universities and former head of Mount Holyoke College. “Often people from the corporate world don’t understand the culture of collegiality, transparency and shared governance.”

It is amazing how the faculty are trying to portray themselves as the defenders of academic freedom against their boards, when over the last few decades they have been the primary enemies of academic freedom (along with staff, and sometimes students).

I do not see university faculty or administrators as being in a position to turn around the PR on this issue in their favor anytime soon.

Stephen Keese on coachability (from my email)

by  Tyler Cowen in
You wrote that sports often teaches students how to be a team member and coordinate with others.  True enough, but I think there is a more important educational benefit from sports that does not require team participation or competition nor risk injury. That is learning to be coachable.  Historically coaching was a fundamental part of higher education.  In English universities, coaches are called tutors.  Elsewhere they were/are known as mentors and guides,Being coachable or mentorable is one of the most valuable traits of students and adults, whether as a solo practitioner, group leader, or team member.

Moving to Opportunity?

by  Tyler Cowen in

But inside the lab, Chetty and his colleagues have not always practiced what their research preaches, several former employees say. When hiring for their prestigious “pre-doctoral fellowship” program, for instance, the lab uses a rubric that explicitly favors students from the very colleges that its own research has called out for reinforcing elitist systems. Opportunity Insights didn’t have its first Black pre-doc until 2021. Seven former employees who spoke to The Chronicle about their experiences were bothered by what they saw as contradictions between the lab’s practices and its stated values.

After landing the fellowship, some employees said they were also disturbed to find a culture of overwork that left them fried but feeling forced to impress in order to secure a letter of recommendation to a top Ph.D. program. For some employees, it took a toll on their health. Harvard even reviewed the lab following claims of unsustainable working hours.

That is excerpted from the (gated) Chronicle of Higher Education.

Of course I am with Chetty here, noting I have no idea how good their personnel selections are (though a priori I would be surprised if they were not very good).  In any case, once again you can see the tension between the meritocratic elements of the top schools and the rhetoric they claim to live by.  This is reaching an absurd point.  “Culture of overwork”?  C’mon people, no one has to join up.  You don’t think Chetty “overworks” very very hard?  Isn’t that exactly the opportunity on tap, admittedly not for everyone?

How about “feeling forced to impress in order to secure a letter of recommendation to a top Ph.D. program”?  I am in fact opposed to this whole pre-doc thing, but I don’t blame Chetty and co.  “Forced to impress”?  On what basis are good letters supposed to be handed out?   Are we not also “forced to impress” the people we want to date and marry?  Do start-ups with?

Someone needs to “go the full Ayn Rand” on this whole thing.  Part of the real shame is that Chetty and co. are in no real position to do that.

My first Paraguayan restaurant, and a test of GPT-4

by  Tyler Cowen in

That was the menu from Tal Cual!, in Buenos Aires, the first Paraguayan food I have had.  I showed GPT-4 that menu and asked why there were no posted prices on it.  It responded that the restaurant wanted to economize on the cost of price changes, and afterwards mentioned a fixed price menu as an alternative explanation.  I then added that I was in Argentina, and would that help improve the answer any?  GPT responded that high inflation was likely the reason why the restaurant might want to economize on the cost of frequent price changes.  Not bad.

A fun time was had by all.

John Stuart Mill on empirical economics and causal inference

by  Tyler Cowen in

Written by me, here is a passage from GOAT: Who is the Greatest Economist of All Time, and Why Should We Care?

A System of Logic covers many different topics, but for our purposes the most important discussion is Mill’s treatment “Of the Four Methods of Experimental Inquiry,” sometimes called “Mill’s Methods” and indeed receiving their own Wikipedia page. Mill outlines different manners in which causes and effects might be correlated, or not, and what we can infer from such patterns, and how difficult it can be to sort out actual cause and effect from the data. He refers to the “direct method of agreement,” the “method of difference,” “joint method of agreement difference,” the “method of residue,” and the “method of concomitant variations,” all as ways of trying to make correct or at least better inferences from the data.

I’ll spare you the details on the full argument, but in essence Mill was trying to figure out how to do causal inference econometrics, but with words only. That enterprise was doomed to fail, but it gives us insight into what Mill thought was by far the most important question in social science, namely causal inference when faced with complex underlying chains of cause and effect. For Mill, everything is what we would now call “an identification problem,” and this understanding is clearest in Mill’s chapters “Fallacies of Generalization” and “Fallacies of Ratiocination.” Mill also serves up a remarkably on-target discussion of how the different nature of social science problems, and their possibly greater complexity, can lead to identification problems that are not necessarily present in the natural sciences – see his chapter “Of the Chemical, or Experimental, Method in the Social Science.” That entire approach is remarkably 2020s in orientation, and you won’t find earlier history of thought books giving Mill much if any credit for this.

In a funny way, Mill was ahead of Milton Friedman in his understanding here. Friedman knew much more statistics, but in his economics he often presented causal inference as fairly straightforward. In his Monetary History of the United States, co-authored with Anna Schwartz, the reader does get the impression that the historical correlations, and ordinary least squares techniques, do in fact show that the money supply is a central driver of nominal income, given the relative stability of money demand. Later, the real business cycle theorists were to challenge that inference, and suggest that often it was income that was causing the money supply. That is a kind of complex challenge Mill seemed quite comfortable with in A System of Logic, whereas Friedman and Schwartz assigned higher power to common sense approaches to cause and effect.

Mill remains in my eyes one of the most underrated thinkers.