The Ramaswamy plan for a commodity-backed dollar
I am not convinced by it, here is one excerpt from my latest Bloomberg column:
Ramaswamy has called for the US Federal Reserve to stabilize the dollar in relation to the price of commodities, rather than to the consumer price index. That formula is unlikely to bring monetary stability (or tame business cycles) in part because commodity prices themselves are notoriously unstable.
Consider the five years leading up to 1994, when consumer prices increased more than 19% but most commodity prices fell. Or the years from 2004 to 2008, when commodity prices rose by about three times but US price inflation rates were roughly constant, in the range of 2%. In other time periods, the relationship between commodity prices and consumer inflation is murky…
I am reminded of economist Robert Hall’s 1982 “ANCAP” proposal to stabilize the dollar with a commodity basket. Hall argued that a bundle of ammonium nitrate, copper, aluminum and plywood (thus ANCAP) had proved stable in terms of the dollar in times past. He was right about that. But the rise of China and other nations brought an unprecedented commodity price boom. Had the US tried to stabilize the value of the dollar in terms of those commodities, the Fed would have had to apply significant deflationary pressure to stabilize the relevant commodity price index. Actual monetary policy would have been a disaster.
There is much more at the link.
State Capacity as an Organizational Problem
We study how the organization of the state evolves over the process of development of a nation, using a new dataset on the internal organization of the U.S. federal bureaucracy over 1817-1905. First, we show a series of facts, describing how the size of the state, its presence across the territory, and its key organizational features evolved over the nineteenth century. Second, exploiting the staggered expansion of the railroad and telegraph networks across space, we show that the ability of politicians to monitor state agents throughout the territory is an important driver of these facts: locations with lower transportation and communication costs with Washington DC have more state presence, are delegated more decision power, and have lower employee turnover. The results suggest that high monitoring costs are associated with small, personalistic state organizations based on networks of trust; technological shocks lowering monitoring costs facilitate the emergence of modern bureaucratic states.
That is from a new NBER working paper by Nicola Mastrorocco and Edoardo Teso.
Every now and then Bryan Caplan writes a short essay (and here), dumping on the idea of state capacity, suggesting instead the alternative of “state priorities,” but I don’t think his argument is coherent. I think of state priorities as the demand side, and state capacity as the supply side. Of course both matter. Sometimes, in a partial equilibrium setting, state priorities will seem to be the only thing that matters. For instance, when the I-95 bridge collapsed outside of Philadelphia, it was repaired very quickly, in part because the governor made repair a priority. Enough resources were at hand, including enough legal resources to manage the changes in procedure. Most systems have some amount of slack. But when America tries to upgrade its infrastructure more generally, it is limited by both the supply side and the demand side, or in other words state capacity really matters. It’s not just that we don’t have a Mars colony, we don’t have enough lawyers and bureaucrats to lawfully repeal a large number of regulations at once.
Wednesday assorted links
1. Lucidity.
2. The culture that is Washington, D.C.: Little League cheating allegations.
3. Human Challenge Trial for malaria?
5. Dan Klein on Big Brother and the digital dollar (WSJ).
6. Howard S. Becker, RIP (NYT).
Conversations with Tyler 20th year of MR anniversary episode
CWT producer Jeff Holmes is the moderator, the panel of guests is Tyler, Alex, Vitalik Buterin, and Ben Casnocha — self-recommending!
Here is the audio, video, and transcript. Topics include:
…the golden age of blogging in the mid-2000s, the decline of independent blogs and the rise of social media, why Tyler usually has a post at 1 AM, the consistent design of the site, the peak of the blogosphere in the Great Recession, the robust community — and even marriage — forged through MR, the site’s most underrated feature, Alex and Tyler’s favorite commenters, how MR catalyzed separate real-world pandemic responses by each of them, the cessation of book clubs, Alex and Tyler’s distinct writing style, iconic MR memes, what’s happened to Tyrone, whether the site’s popularity has tempted them into self-censoring, why it was Alex and Tyler who paired up amongst the other Mason econ bloggers, and more.
And here is one excerpt:
COWEN: There’s an MR marriage.
CASNOCHA: There is an MR marriage.
COWEN: Kathleen and Eric, who at the time lived in the state of Texas. I think they still do. It turns out it’s legal in Texas, that if you pledge marriage through a backtrack feature of blogging which goes back, that it counts as a legally binding pledge, and they literally legally married on Marginal Revolution…
BUTERIN: Wow, you guys are almost beating the blockchain here.
And this excerpt:
COWEN: We have no plans to change.
Tyrone seconds that claim.
Twenty Years of Marginal Revolution!
Who would have guessed that after twenty years Tyler and I would still be writing Marginal Revolution! Thanks especially to Tyler, we have had multiple new posts every single day for twenty years! Incredible.
We had some idea when starting Marginal Revolution that it would provide the foundation for our eventual textbook, Modern Principles of Economics, but we didn’t imagine that it would also become the foundation for our online platform for economics education, Marginal Revolution University and Conversations with Tyler, Emergent Ventures and various other projects of Tyler and myself.
We never imagined that Marginal Revolution would one day be archived by the Library of Congress or become one of the world’s nexus points for debating and understanding events like the Financial Crisis and the Covid Pandemic. It was a shock when the first undergrad told us that they had been reading MR since the age of 12. Today, there are multiple PhD economists who grew up reading Marginal Revolution.
In this conversation, with David Perell, we reflect on 20 years and talk about our process of writing and working together. Tyler is very funny. Tyrone makes an appearance or two, albeit never announced. (Apple podcast, Spotify).
We also thank our many readers and the commentators. You all make MR better (ok, most of you make MR better).
We are still excited to write about economics every day and we don’t think we have peaked! Let’s see what happens over the next 20 years. Thank you all.
*Landscape with Invisible Hand*
Despite its only middling at best reviews, I found this one of the most original and intriguing movies of the year. The formula “African-American family movie plus Only Fans for space aliens” isn’t exactly exhausted, or for that matter even plausible as the basis for anything. Yet the whole production comes off surprisingly well once you accept the absurdist premise, and it feels freshly cinematic. The movie also has a lot of economics, and self-consciously so, though not exactly in a free market direction. Here is the trailer.
Macro illusions — which ones are you suffering under?
Before Milton Friedman, a significant percentage of top macroeconomists in the United States were convinced the money supply does not matter very much.
Friedman, working with David Meiselman and Anna Schwartz, produced a lot of good evidence that the money supply matters a great deal. Many people were convinced, even if they did not become hard-core monetarists.
Monetarist ideas start fading as early as 1982, when money supply control techniques did not work out so wonderfully. Litterman and Weiss (1983) raised doubts about whether money matters at all.
During the 1990s, many people thought we were in a productivity boom.
During the 2011-2013 period, many people became convinced that we had been in a productivity slowdown.
During the Clinton years, it was believed that investment crowding out was a big problem, and that Clinton fiscal reforms had limited that problem. Later it was believed that crowding out is not much of a problem at all, as deficits rose and real interest rates remained low.
Throughout the 1990s, the evidence showed that the Fed can influence real interest rates only small amounts and with difficulty. Circa 2023, it is believed that the Fed has a great deal of influence over real interest rates.
Leading up to 2008, the idea of “the Great Moderation” was popular.
Post-2008, Minsky-like and bubble ideas became extremely popular. The notion of a Great Moderation was dead.
Post 2009, it was believed that “liquidity trap economics” were highly relevant.
Post 2009, it was argued that “structural imbalances” were very important, in part due to liquidity trap conditions. Today, Pettis and Krugman still promote the relevance of structural imbalances for the medium- and long-term, even though the liquidity trap conditions are long since gone.
“Secular stagnation” was a popular idea in macro until recently, but no longer, in part due to high inflation and in part due to the investment boom.
Very recently, the doctrine of immaculate disinflation is gaining in credibility, after a long period of disbelief in it.
To be clear, I am not saying all of these (or even most of these) are wrong. I am saying that various doctrines appeared to be “quite true” on a temporary basis, and yes I stress that word temporary. Then they are not true, or at least not obviously true any more.
So which are the macro delusions of our current time? I would nominate a clear winner for number one:
1. Enough government action on the demand side can fix macroeconomic problems and ensure full employment
Maybe sometimes that is true. But it is not always true, and I hope you all can be wiser than the people who got caught up in earlier macroeconomic illusions, or should I call them delusions?
Furthermore, all discussions of the Phillips curve — no matter what the point of view — should be conducted with this blog post in mind.
In which sector are the top performers stupidest?
One of my core views is that the most successful performers in most (not all) areas are extremely smart and talented. So if you are one of the (let’s say) top fifty global performers in an area, you are likely to be one sharp cookie, even if the form of your intelligence is quite different from that in say academia or the tech world.
You might that a sport such as basketball selects for height, and thus its top performers are not all that mentally impressive. But I’ve spent a lot of time consuming the words of Lebron James, Magic Johnson, Michael Jordan, and Kareem Abdul-Jabbar (including a podcast and a dinner with the latter), and I am firmly convinced they are all extremely intelligent. From what I’ve read about supermodels, they are also an extremely intelligent group at the very top. There are many good-looking women, but managing your career to get to the top in a non-self-destructive fashion still requires extreme talent.
In general, most forms of top achievement involve knowing how to practice and knowing how to manage your career, both of which are likely to select for both smarts and determination.
So what then is the area where top performers are just not that smart? Comments are open.
Tuesday assorted links
1. Has the Queen song “Fat Bottomed Girls” been cancelled?
3. By one measure, the countries with the most rapid diffusion of AI skills are (in order) Singapore, Finland, Ireland, India, and Canada.
4. The free merch tax system that is Japan.
YouTube does not polarize, yet further results in this direction
We find that while the [YouTube] algorithm pulls users away from political extremes, this pull is asymmetric, with users being pulled away from Far Right content stronger than from Far Left. Furthermore, we show that the recommendations made by the algorithm skew left even when the user does not have a watch history.
That is from a new research paper by Hazem Ibrahim, et.al. For further cites showing that YouTube does not polarize, see this CWT. Via Matt Grossman.
Austin Vernon on the IRA (from my email)
I’ve thought about this some, but honestly some of the subsidies are so mind bogglingly large that I find myself constantly going back to read the rules to make sure I’m not getting it wrong.
So I think the first thing is that the law is not fiscally sustainable because the subsidies are large and uncapped. I would expect it to quickly get into the trillions over the ten year period without adjustments.
One example is that with all the adders, solar panels get a $26/MWh subsidy when using the production tax credit. Lazard says solar can cost as little as $24/MWh in the best spots in its latest release. So it will spark a boom and all kinds of inflation in the solar supply chain, while also favoring utility scale solar over distributed solar since distributed is more hamstrung by regulation so the impact isn’t so dramatic. The process of selling these tax credits can be pretty complicated, though there are provisions to make it slightly easier in the bill. So the finance industry should earn a lot of new business.
Most attention has gone to the factories, but batteries already made sense before the IRA and you can see this in pre IRA announcements. So I think a lot of those factories would have happened, anyway. Car makers like to have their suppliers local and with batteries being such a big portion of cost there was no other way to do it. And naturally these factories are going near car manufacturing regions like the southeast or the upper midwest. There is no reason to ship batteries further than necessary.
Solar panel factories are a different bag of worms. I think we would have gotten more module assembly and possibly more polysilicon. That is because most of the module weight and volume is low value stuff like aluminum or glass that is expensive to ship. And we have restrictions on using Chinese polysilicon from the Uyghur provinces. But wafers and cells would have been slower to come over. Also some module assembly might have been in Mexico instead of the US. Of course these factories are going to states with lower labor costs where it is easier to build, which happen to be Republican. Another wrinkle with solar factories is that they depreciate at an extreme rate. Usually they are obsolete after 2-3 years and need to shut down. So there is a real possibility at the end of the law that you see a massive drop in solar deployment because the inflated supply chain will have to rationalize to non-subsidy conditions and then our factories will not have the revenue to upgrade to the next generation. That will then kill the supplier ecosystem, etc. So the earlier the subsidies get ratcheted down to prevent the boom-bust cycle, the better for long term health. It may also be like the wind PTC a decade ago where things collapsed after lapse of the subsidies and they brought them back.
Hydrogen also has crazy subsidies similar in magnitude to the solar PTC, especially because you can stack the solar PTC on top of the hydrogen one. Who knows where that will show up. But it will be frothy. We should be able to tell how crazy these were because I imagine few other countries will be so generous and we’ll be able to see what use cases happened here that made sense nowhere else. Hydrogen is the lazy answer to decarbonization problems and there is almost always a better way. Free of subsidies hydrogen demand would probably fall because refining lighter fuels like gasoline and diesel is the main use case. I’m optimistic about hydrogen and CO2 feedstocks for chemicals on longer horizons, but the US is the last place they make sense because of our inexpensive natural gas.
So overall you have inflationary/budget pressure on the negative side while support could be relatively bipartisan at the national level because of a climate/economic development alliance. I don’t think local and state will align as well. Probably there will be more local bans if people are building solar to mostly farm subsidies. And state utility regulators and ISOs might resist further solar+wind deployment where the natural gas lobby is strong (you could rename IRA “natural gas demand destruction bill”). The sweet spot would be solar + wind directly powering local industry by providing things like process heat (sorry geothermal!).
Here is the Substack of Austin Vernon.
Monday assorted links
1. What happens to your returns? (New Yorker)
2. “The hobby of “collecting” had the highest average IQ.”
3. Is there a new accent developing in Antarctica?
4. How one man created a multimillion-dollar resale market for Buc-ee’s snacks (Texan throughout).
5. More Heidi Williams (and others) on speeding scientific progress, and the co-authored (various luminaries) Nature article is here.
6. One take on the roots of China’s current problems. And “Also a widely published poet, his [Gewirtz’s] achievements echo the polymath scholar-officials in the Chinese tradition, including major historian poets from Ban Gu (32–92 CE) through Ouyang Xiu (1007–72 CE) and beyond.” Link here.
The Jones Act Enforcer
The Offshore Marine Service Association has a ship, the Jones Act Enforcer, whose only job is to spy on and harass European vessels that are installing wind farms off the coast of New England.
BostonGlobe: To get Vineyard Wind done, developers are turning to vehicles such as the Sea Installer, which arrived in Salem in early August. Owned by the Danish firm DEME Group, the vessel is one of the few on the planet capable of installing GE Haliade-X wind turbines that are the size of a skyscraper into the ocean floor.
Measuring more than 430 feet in length and 150 feet wide, Sea Installer is a “jack up” vessel that lifts itself out of the water on legs more than 300 feet long. Once elevated, the vessel becomes a platform where an immense crane, capable of lifting more than 1,600 tons, can install the tower sections, nacelle, and blades for each turbine.
The Jones Act Enforcer does not board the suspected ships. Instead, as it did this day with the Sea Installer, the crew photographs the vessels from about half a nautical mile away and, if they suspect violations, files complaints with US Customs and Border Protection and the Coast Guard. The outcomes of the complaints are confidential, Smith said.
…The law prohibits foreign ships from transporting goods between two points within the US. But the actions that ships can and can’t take on American waters gets very technical.
For example, the Jones Act Enforcer observed Go Liberty, an American ship, perched beneath the Sea Installer. Smith said the American vessel was most likely transporting materials to the site so the Sea Installer could place a monopile — the bright yellow steel piles that support the turbines — into the ocean.
However, if the Sea Installer received material from the Go Liberty and then physically moved to another monopile in a different location, that act could violate the Jones Act.
The Jones Act Enforcer also observed the Italian ship Giulio Verne, which was working to connect underseas cables to an electric substation that would power the wind turbines. In this case, Smith claimed the Italian ship was violating the law because it was moving the cables from one point (the sea bed) to another point (the substation).
The stupidity, it burns. But Biden supports the Jones Act.
Return to the Econ
Joshua Gans revisits life among the econ, 50 years after the classic investigation by Axel Leijonhufvud.
In Leijonhufvud’s time, economics was dominated by two super-castes which worshipped different totems.
Today, however, the super-castes are hardly to be seen and the old totems have been replaced by a singular new totem:
The technology powering the Econ runs on one precious resource, d’ta, and the work of obtaining that d’ta rests with the grads. Upon arrival in the dept, they are immediately sent into the D’ta Mines and tasked with collecting seemingly impossible quantities of the resource. They toil in dirty and unsanitary conditions. Ironically, their next task is to painstakingly clean and polish the d’ta they have extracted one at a time — sometimes millions of individual items — so they can then be sorted and made available for processing. With luck, the grads may be assigned processing tasks that take place in windowless rooms twenty-four hours a day operating a single machine. The hope is that they can then produce the new high achievement of the Econ, a tabl. It is hard to describe what a tabl is to outsiders, but it represents the outcome of finely processed d’ta. The more the tabl contains bright, bejewelling in the form of star-like symbols (*), the more valuable it is. Failure to create a sufficiently dazzled tabl means being sent back to the mines.
Which businesses mix the classes best?
Casual restaurant chains, like Olive Garden and Applebee’s, have the largest positive impact on cross-class encounters through both scale and their diversity of visitors. Dollar stores and local pharmacies like CVS deepen isolation. Among publicly-funded spaces, libraries and parks are more redistributive than museums and historical sites. And, despite prominent restrictions on chain stores in some large US cities, chains are more class diverse than independent stores. The mix of establishments in a neighborhood is strongly associated with cross-class Facebook friendships (Chetty et al., 2022).
That is from a new paper by Maxim Massenkoff and Nathan Wilmers. Via Scott Lincicome.