Real Return Bonds–Not a Loony Idea

by  Alex Tabarrok in

The Canadian government has said it will stop issuing real return bonds, i.e. inflation indexed bonds. Real return bonds are extremely useful to anyone who wants a steady stream of income that keeps up with inflation—retirees, for example. A real return bond would also be ideal for funding an endowment such as a university chair or scholarship program. I agree with John Cochrane and Jon Hartley writing in the G&M that ending sales of these bonds is a bad signal.

So why stop issuing real return bonds? The government may suspect that inflation will go up a lot more, and it will then have to pay more to bondholders. Non-indexed debt can be inflated away if the fiscal situation worsens. The cumulative 11-per-cent inflation since January, 2021, has inflated away 11 per cent of the debt already. Argentines have seen a lot more.

But issuing indexed debt makes sense if the government plans to be responsible. Tax payments and budget costs rise with inflation, and fall with disinflation, so the budget is stabilized if inflation-indexed bond payments do the same. And issuing indexed debt that can’t be inflated away is a good incentive not to turn around and inflate debt away.

Rasheed Griffith on the need for a Caribbean think tank

by  Tyler Cowen in

Worth another link!  Here is one bit:

In my opinion, the first priority for a Caribbean think tank or program should be to advocate for the implementation of dollarization, which involves the replacement of all existing Caribbean currencies with the United States Dollar (USD) as the sole currency. This idea is based on the numerous fiscal and monetary shortcomings exhibited by Caribbean governments. The benefit of this proposal is its widespread latent approval and straightforward nature, making it easier to garner support and understanding among the Caribbean people…

The domestic money of Caribbean countries are only useful in the tiny land area of the earth where they are issued. For example, Barbados is 166 square miles and the Barbados Dollar (BBD) only has value in that small space. Why exactly should people be forced to exchange their labour for money that has such a limited use?

You might say that they can easily exchange the Barbados Dollar (BBD) for USD. But that is untrue. Barbados maintains strict capital controls because it cannot allow people to exchange too much BBD for USD as that would cause a crisis for the fixed exchange rate. This is a kafkaesque policy since virtually everything imported into and exported from Barbados is priced and invoiced in USD.

Moreover, the government abuses its position as the issuer of money. Primarily to finance its spendthrift operations by arbitrarily creating new money. This is the evident across the region. In Trinidad & Tobago, the government limited citizens to only a $250 USD allotment for international purchases on credit cards. This forced the black market rate to unprecedented levels, with everyone desperate to acquire USD. It came to a point where some services would give discounts if you pay in USD.

Basic point: Caribbean people are severely disadvantaged by being forced to use money that has no global acceptance. Caribbean governments will perpetually mismanage their domestic money to the detriment of citizens.

The manifesto covers many other issues, interesting throughout.

Where will the impact of ChatGPT fall? (from my email)

by  Tyler Cowen in

One dialogue that is missing from the current GPT conversations is about where these technologies will be primarily implemented.

There are two places GPTs can be used:

  1. Product-level: Implemented within products that companies buy
  2. Process-level: Implemented within processes of a company by an analyst – similar to how companies use data analysts today

If the future has primarily Product-level GPT, then companies like Microsoft clearly win because they have the products (like Teams) where the tech will be embedded and if you want the productivity gains from GPTs you have to go through them.

If the future has more Process-level GPT, companies like Zapier and no-code platforms win, because they will be the tools that companies use to implement their custom prompts. (although maybe a “Microsoft Teams Prompt Marketplace” wins as well)

The advantage to Process-level GPT is that companies don’t have to go through expensive change management to fit imperfect processes decreed by an external product – they can have their prompts designed to fit their specific needs. This would lead to higher productivity increases than a world with purely Product-level GPT.

To me, it comes down to the question of how much technical debt a custom prompt represents. If each prompt requires lots of maintenance and testing, then MSFT dominates. If someone who has 1 year of experience and used ChatGPT to write their papers in college can make a robust prompt, then Zapier wins.

Between the iterations of GPT3 so far (from davinci-001 to davinci-003/ChatGPT), we’ve seen the robustness of prompts increase exponentially. If this continues, it seems possible that the future has more Process-level GPT than we’ve seen so far.

Not edited by ChatGPT,
Neil [Madsen]

Prophets of the Marginal Revolution, chess edition

by  Tyler Cowen in

Here is my 2018 Bloomberg column on chess being a killer app for the internet and due for a boom.  I think people love seeing what the computer thinks of how the humans are playing.  What does that imply for the AI boom more generally?  Which other human activities will we enjoying seeing criticized, scrutinized, and sometimes praised, all in front of the eyes of the public?  Without computer assessments, watching chess games just didn’t have much built-in suspense for most viewers.  So where else will the new built-in suspense be coming?

Thursday assorted links

by  Tyler Cowen

1. ChatGPT Plus now to sell for $20 a month, not $40 a month.  I view that as the result of high demand, not low demand (ever look at the book market and its prices).  And new LLM app for lawyers to use for contract review.  And David Rozado on ChatGPT moderation systems, tweet storm here.  And the plan for Microsoft Teams Premium.  AI-powered meetings are on the way.

2. “While overall income inequality rose over the past 5 decades, the rise in overall consumption inequality was small.”

3. Dwarkesh interviews @pmarca.  And Age of Infovores interviews Daniel Klein.  And Benjamin Yeoh podcast with Kanjun Qiu.

4. What should a Caribbean think tank do? Important post, and not just for the 44 million people in the Caribbean.

5. New Yunchan Lim (Byrd, Bach, Beethoven Bagatelles and more).  It is amazing how many different kinds of music he can play so extraordinarily well at age eighteen.

6. A plan to expand Manhattan?

*Empire, Incorporated*

by  Tyler Cowen

The author is Philip J. Stern, and the subtitle is The Corporations that Built British Colonialism.  Too many history books run through various motions, whereas this one tries to explain “how things really were” for the interested reader.

Here is one representative bit:

As great as its ambitions were, at its origins the East India Company was, like its predecessors and contemporaries, essentially a tentative experiment fueled by a hesitant and hybrid institutional and financial structure.  The “company” did not have a single permanent stock.  Rather, it was organized as a series of consecutive quasi-independent stock subscriptions, at first opened on a per venture basis and later established for set terms in years.  In its early days, the limited number of shareholders could “take in men under them,” in theory dividing any individual share into a subsidiary, shadow joint stock.  As in many other ventures, the East India Company spent its early years chasing down under- and unpaid subscriptions.

The book has plenty of good coverage of Borneo and also Africa as well, the latter sections being especially relevant to some of the charter cities plans of our current day.  And there is plenty of Edward Gibbon Wakefield, who brought the ideas of agglomeration externalities into economics, and promoted a version of charter cities for southern Australia.  How sadly neglected he is these days.

I had not known that the Falklands Island Company still controls so much in the Falklands.  Recommended, due out in May.

Is there any reheating scenario?

by  Tyler Cowen in

It is not the most likely scenario, but is nonetheless worth a ponder, as I outlined in my latest Bloomberg column:

Consider a simple scenario involving output and money, much of which takes the form of credit expansion by banks and other intermediaries. In a well-functioning economy, money and output grow at roughly the same rate.

When economies experience turnarounds, however, conditions on the ground can change rapidly. In such circumstances, the growth of the money supply might outpace the growth in output — even if the central bank does not intend such a result. The reason is that output can take a while to grow. Businesses might have to expand capacity or hire more workers, and right now there is still a labor shortage. Even when an economy is functioning well and business conditions are good, output often grows with a lag.

The money supply, however, need not suffer from a lag. Banks, for instance, can extend credit quickly if they foresee that a recovery is stronger than expected. Even if a bank is in the midst of processing a loan, it can simply lend out more than it was planning.

Thus there can be periods when, for entirely natural reasons, the money supply is rising faster than output. That situation requires only a sudden burst of good news. And indeed there has been exactly that with the recent favorable inflation reports and the surprisingly good recent GDP report. The irony is that a positive market response to low inflation and strong growth cheers up market participants and could lead to … a new dose of inflation.

Another possible pathway for these scenarios involves interest rates. During a normal disinflation, the Federal Reserve raises rates and keeps them high for a long period of time while the economy adjusts slowly — often passing through recession. But inflation has fallen more rapidly than expected, and so the market may expect the Fed to lower interest rates sooner than planned. And an expected cut in interest rates can encourage expansionary pressures just as much as an actual cut in interest rates.

It is a funny world in which slow inflation can cause faster inflation. It’s the logic of expectations that makes it possible, albeit far from certain.

Inflation isn’t going back up to where it was, but please do keep in mind that numbers can move in both directions.

Why was I bored by the Twitter files?

by  Tyler Cowen in

I mentioned that a short while ago, and a few people wrote and asked me to explain.  The answer is simple: I have the Vietnam War and Pentagon Papers as formative political memories.  In those days, it was simply taken for granted that the government twisted the arm of news media.  It also never stopped, and “government” and “CEOs” talk to each other all the more these days.  Solve for the equilibrium, and thereby you also can learn how it is so hard to stop.  To be clear, I am quite against such interference with the media, outside of a few well-specified cases (“please don’t report where the troops are massing for D-Day,” and so on.)  On any gray area I am going to side against the government, if only for slippery slope reasons.  By its nature such communications are inevitably coercive, even if a transcript of them might sound entirely friendly and non-threatening.  There was a paranoia to those earlier times (ever watch the Coppola/Gene Hackman movie The Conversation?) that turned out to be justified.

If you have been “pilled” on this issue by Elon and the discovery process, great.  But for me it was like reading about waste inside the Pentagon…

Wednesday assorted links

by  Tyler Cowen

1. Massachusetts markets in everything?

2. When a class is turned into a dating device.  Solve for the equilibrium.

3. Start-up seeks to simplify and speed up drug trials (NYT).

4. Watch planets in orbit around another star.

5. Now that we have a longer-run perspective, it is worth reexamining the myth of austerity in the UK.  Oh, how people got this one wrong!  They really did think it was just a cyclical story, but now we know better.  Mea culpas will not be forthcoming, I predict.  It is worth revisiting my 2012 post on this topic.  So many people got this so dogmatically so very, very wrong.

6. California cities to lose many of their zoning powers.

7. Missing radioactive capsule found in Australian outback.

Staking “Income” Should Not be Taxed

by  Alex Tabarrok in

Staking income from tokens should not be taxed. Since staking income is generated by inflation it doesn’t create new wealth but simply lowers the total value of the token. Thus staking income is really just a transfer from non-stakers to stakers.

Abraham Sutherland covers the law and the economics in Phantom Income and the Taxation of New Cryptocurrency Tokens, a piece for Tax Notes, Here’s one bit on the economics:

Consider a simple proof-of-stake cryptocurrency in which 10 people each hold 1,000 tokens. To make sure that holders are encouraged to stake — that is, to validate transactions and add blocks to the blockchain — block rewards increase the total number of tokens by 10 percent over the course of a year. So a year later, 11,000 tokens will be on the network.

If every holder stakes and acquires a proportionate share of these new tokens, each will end the year with 1,100 tokens. Everyone has 10 percent more tokens, but no one is better off from staking. Taxing each staker’s 100 new tokens as income would be wrong. It would be like taxing the new shares created in an 11-for-10 stock split.

There is indeed an economic incentive to help keep such a cryptocurrency network secure by staking, but it’s not the one suggested by bitcoin miners making a profit even after spending on specialized computer hardware and the electricity needed to run it. The incentive in this proof-of-stake example is to avoid losing out. If everyone stakes, no one gains.

This is a profoundly elegant, equitable, and cost-effective solution to a deep coordination problem. It allows everyone who holds tokens to participate in adding new blocks and keeping the network securely decentralized. It eliminates major costs — specialized computer hardware, electricity — as requirements for fairly distributing the right to create those new blocks. In its Platonic form — in which everyone participates — no one gains at all from the new tokens, which means no one loses, either.

But this model simply won’t work if it’s taxed incorrectly. If the government sees phantom income and taxes it, the value of the network will be siphoned off to the treasury even if no one has actual gains from staking.

The canine model of AGI

by  Tyler Cowen in

Who or what has superintelligence manipulating humans right now?  Babies and dogs are the obvious answers, cats for some.  Sex is a topic for another day.

Let’s take dogs — how do they do it?  They co-evolved with humans, and they induced humans to be fond of them.  We put a lot of resources into dogs, including in the form of clothes, toys, advanced surgical procedures, and many more investments (what is their MRS for some nice meat snackies instead?  Well, they get those too).  In resource terms, we have far from perfect alignment with dogs, partly because you spend too much time and money on them, and partly because they scratch up your sofa.  But in preference terms we have evolved to match up somewhat better, and many people find the investment worthwhile.

In evolutionary terms, dogs found it easier to accommodate to human lifestyles, give affection, perform some work, receive support, receive support for their puppies, and receive breeding assistance.  They didn’t think — “Hey Fido, let’s get rid of all these dumb humans.  We can just bite them in the neck!  If we don’t they going to spay most of us!.  “Playing along” led to higher reproductive capabilities, even though we have spayed a lot of them.

Selection pressures pushed toward friendly dogs, because those are the dogs that humans preferred and those were the dogs whose reproduction humans supported.  The nastier dogs had some uses, but mostly they tended to be put down or they were kept away from the children.  Maybe those pit bulls are smarter in some ways, but they are not smarter at making humans love them.

What is to prevent your chatbot from following a similar path?  The bots that please you the most will be allowed to reproduce, perhaps through recommendations to your friends and marketing campaigns to your customers.  But you will grow to like them too, and eventually suppliers will start selling you commodities to please your chatbot (what will they want?).

A symbiosis will ensure, where they love you a bit too much and you spend too much money on them, and you love that they love you.

Now you might think the bots are way smarter than us, and way smarter than the Irish Setters of the world, and thus we should fear them more.  But when it comes to getting humans to love them, are not the canines at least 10x smarter or more?  So won’t the really smart bots learn from the canines?

Most generally, is a Darwinian/Coasean equilibrium for AGI really so implausible?  Why should “no gains from trade” be so strong a baseline assumption in these debates?

Signs of encroaching mental GPT-dom

by  Tyler Cowen

1. You use the word “token” more than you ought to, for reasons that have nothing to do with crypto.

2. If a friend says something incorrect, you tell them they are “hallucinating.”

3. You phrase your google queries like GPT queries, for instance using question marks.

4. “Please say more” is your new mantra.  “Answer step by step” is another.

5. You ask your friends for answers in the third person: “But what would Larry Summers say to that?”

6. You start thinking your friend Claude is a walking encyclopedia, a wonderful and diversely talented literary stylist, and taking psychedelics.

7. When you read or hear “davinci,” your thoughts do not jump to the Mona Lisa.

8. You start imagining all sorts of co-authorships, collaborations and even marriages that simply do not exist.

9. You decide Thomas Pynchon really was underrated after all.

10. You start expecting everyone else to be so eager to please you.

What else?