Bailouts of insolvent banks don’t lead to hyperinflation
Let’s say there is a big hole in the solvency of a banking system. Left unaddressed, that is radically deflationary. Demand (and other) deposits will disappear, crushing aggregate demand. Cascading financial failures will occur elsewhere, again with negative demand effects. If a government “prints money,” or more likely creates new electronic bookkeeping entries, that offsets the deflationary pressures. These bailouts may have other negative effects, such as on future moral hazard and rent-seeking, but they won’t bring hyperinflation. If you wanted to create hyperinflation, the bailout would have to look something like “for every dollar you used to have in your bank account, the Fed says you now have five!” But that is not on the agenda.
Saturday assorted links
1. Who should next run the NIH?
2. Did 18th century British firefighters just let buildings burn if they hadn’t paid up? Short video.
3. “Developers demolished a historic pub. They must rebuild from the rubble.” The heritage culture that is England. I recommend the photo of the pile of rubble. Was the original building so attractive in the first place?
4. “The Microsoft Copilot “future of work” demo is incredible. Your boss will soon be able to ask their Copilot to create a summary of who does the least work on average and have their termination letter already drafted in Outlook.” Here is the Sam Hammond tweet.
5. Ethan Mollick paper on effective teaching strategies with GPT. And GPT-4 is playing chess at an OK level, though it was never taught that skill.
Teaching and Learning Economics with the AIs
Tyler and I have a new paper, How to Learn and Teach Economics with Large Language Models, Including GPT:
GPTs, such as ChatGPT and Bing Chat, are capable of answering economics questions, solving specific economic models, creating exams, assisting with research, generating ideas, and enhancing writing, among other tasks. This paper highlights how these innovative tools differ from prior software and necessitate novel methods of interaction. By providing examples, tips, and guidance, we aim to optimize the use of GPTs and LLMs for learning and teaching economics effectively.
Most of the paper is about how to use GPTs effectively but we also make some substantive points that many people are missing:
GPTs are not simply a chatty front end to the internet. Some GPTs like ChatGPT have no ability to search the internet. Others, like Bing Chat, can search the internet and might do so to aid in answering a question, but that is not fundamentally how they work. It is possible to ask a GPT questions that no one has ever asked before. For example, we asked how Fred Flintstone was like Hamlet, and ChatGPT responded (in part):
Fred Flintstone and Hamlet are two vastly different characters from different time periods, cultures, and mediums of storytelling. It is difficult to draw direct comparisons between the two.
However, one possible point of similarity is that both characters face existential dilemmas and struggles with their sense of purpose and identity. Hamlet is plagued by doubts about his ability to avenge his father’s murder, and his own worthiness as a human being. Similarly, Fred Flintstone often grapples with his place in society and his ability to provide for his family and live up to his own expectations.
Not a bad answer for a silly question and one that (as far as we can tell) cannot be found on the internet.
GPTs have “read” or “absorbed” a great amount of text but that text isn’t stored in a database; instead the text was used to weight the billions of parameters in the neural net. It is thus possible to run a GPT on a powerful home computer. It would be very slow, since computing each word requires billions of calculations, but unlike storing the internet on your home computer, it is feasible to run a GPT on a home computer or even (fairly soon) on a mobile device.
GPTs work by predicting the next word in a sequence. If you hear the phrase “the Star-Spangled”, for example, you and a GPT might predict that the word “Banner” is likely to come next. This is what GPTs are doing but it would be a mistake to conclude that GPTs are simply “autocompletes” or even autocompletes on steroids.
Autocompletes are primarily statistical guesses based on previously asked questions. GPTs in contrast have some understanding (recall the as if modifier) of the meaning of words. Thus GPTs understand that Red, Green, and Blue are related concepts that King, Queen, Man and Woman are related in a specific way such that a woman cannot be a King. It also understands that fast and slow are related concepts, such that a car cannot be going fast and slow at the same time but can be fast and red and so forth. Thus GPTs are able to “autocomplete” sentences which have never been written before, as we described earlier.2 More generally, it seems likely that GPTs are building internal models to help them predict the next word in a sentence (e.g. Li et al. 2023).
The paper is a work in progress so comments are welcome.
What do I think of the economists’ Israel petition?
It is signed by many luminaries, and it opens with this:
The governing coalition in Israel is considering an array of legislative acts that would weaken the independence of the judiciary and its power to constrain governmental actions. Numerous Israeli economists, in an open letter that some of us joined, expressed concerns that such a reform would adversely affect the Israeli economy by weakening the rule of law and thereby moving Israel in the direction of Hungary and Poland. Although we significantly vary in our views on public policy and on the challenges facing Israeli society, we all share these concerns. A strong and independent judiciary is a critical part of a system of checks and balances. Undermining it would be detrimental not only to democracy but also to economic prosperity and growth.
I would say I haven’t made up my mind on the substantive issue, as I have seen credible (not saying they are true, I don’t know) arguments that the current Israeli judiciary has too much power. The proposed reforms still might be a badly timed and significant overreach, but my intuition is that the arguments are more complicated than this petition is making them out to be. As economists, are they not at least obliged to tell us what the relevant trade-off is?
I also wonder if these outside voices have influence in Israeli politics, or whether they might occasion backlash. Again, I don’t know, but I do see an argument for reserving collective petitions for very clear cut cases when the transmitted signal will be positive. Is the binding constraint here “not having enough elite academic foreigners in opposition to Netanyahu”?
More generally and perhaps most importantly, will this petition be effective? Many kinds of petitions should be saved up for when they will change something. If they are not going to matter, in essence the signers are signaling their weakness rather than their strength. They are spending down their reputational capital, rather than building it up. And in those cases, why have the petition at all?
Steven Pinker on existential risk
He is harsh, but my view is not far from his:
The AI-existential-threat discussions are unmoored from evolutionary biology, cognitive psychology, real AI, sociology, the history of technology and other sources of knowledge outside the theater of the imagination. I think this points to a meta-problem. The AI-ET community shares a bad epistemic habit (not to mention membership) with parts of the Rationality and EA communities, at least since they jumped the shark from preventing malaria in the developing world to seeding the galaxy with supercomputers hosting trillions of consciousnesses from uploaded connectomes. They start with a couple of assumptions, and lay out a chain of abstract reasoning, throwing in one dubious assumption after another, till they end up way beyond the land of experience or plausibility. The whole deduction exponentiates our ignorance with each link in the chain of hypotheticals, and depends on blowing off the countless messy and unanticipatable nuisances of the human and physical world. It’s an occupational hazard of belonging to a “community” that distinguishes itself by raw brainpower. OK, enough for today – hope you find some of it interesting.
That is by no means the only harsh paragraph. Here is the entire dialogue with Richard Hanania. And be careful what you write in the MR comments section, the AIs are reading you!
What should I ask Jonathan Swift?
Yes, I would like to do a Conversation with Jonathan “G.P.T.” Swift. Here is Wikipedia on Swift, excerpt:
Jonathan Swift (30 November 1667 – 19 October 1745) was an Anglo-Irish satirist, author, essayist, political pamphleteer (first for the Whigs, then for the Tories), poet, and Anglican cleric who became Dean of St Patrick’s Cathedral, Dublin, hence his common sobriquet, “Dean Swift”.
Swift is remembered for works such as A Tale of a Tub (1704), An Argument Against Abolishing Christianity (1712), Gulliver’s Travels (1726), and A Modest Proposal (1729). He is regarded by the Encyclopædia Britannica as the foremost prose satirist in the English language.[1] He originally published all of his works under pseudonyms—such as Lemuel Gulliver, Isaac Bickerstaff, M. B. Drapier—or anonymously. He was a master of two styles of satire, the Horatian and Juvenalian styles.
His deadpan, ironic writing style, particularly in A Modest Proposal, has led to such satire being subsequently termed “Swiftian”.
So what should I ask him? I thank you in advance for your suggestions.
First book written with GPT-4?
I wrote a new book with @OpenAI’s latest, most powerful large language model.
It’s called Impromptu: Amplifying our Humanity through AI.
This, as far as I know, is the first book written with GPT-4.
Here’s how it all began… https://t.co/M19e1ISGpb
— Reid Hoffman (@reidhoffman) March 15, 2023
Friday assorted links
Singaporean hawker centre in Manhattan
Urban Hawker, On 135 W.50th, 17 vendors Here is a NYT review, good photos of the key dishes. The Hainanese chicken rice was amazing, worthy of Singapore, get it poached of course. Condiments! The Malaysian lontong was quite good, the beef rendang decent. The lamb biryani I enjoyed, with a thick sauce than you would not find in Hyderabad, laden with cloves and cinnamon. Most of the people there are not Singaporean, but many have “that Singaporean look,” so it feels fairly authentic, except for the prices, which run about $20 a course. Ordering your meal and finding/keeping a table can be difficult, also making it authentic. (Choping needed!) Ordering a meal and getting a drink of water on the same trip can be difficult, making it more authentic yet. Overall, not as good as it could be but better than you might be expecting. Some of the vendors verge on Pan-Asian rather than Singaporean proper, but ultimately Singapore itself is headed in that direction. So I will go again, though I can’t imagine the chili crab is worth the price. Most of all, you need to go early rather than at peak times.
And if you are wondering what “that Singaporean look” means, I suppose it refers to looking down a bit, earnest, and seeming not entirely happy, all the while focused on getting some excellent food.
How will AI transform childhood?
That is the topic of my latest Bloomberg column, here is one excerpt:
In the future, every middle-class kid will grow up with a personalized AI assistant — so long as the parents are OK with that.
As for the children, most of them will be willing if not downright eager. When I was 4 years old, I had an imaginary friend who lived under the refrigerator, called (ironically) Bing Bing. I would talk to him and report his opinions to my parents and sister.
In the near future, such friends will be quite real, albeit automated, and they will talk back to our children as directly as we wish. Having an AI service for your child will be as normal as having a pet, except the AI service will never bite. It will be carried around in something like a tablet, though with a design that is oriented toward the AI.
Recent developments suggest that AI models can be both commoditized and customized more easily and cheaply than expected. So parents will be able to choose what kind of companion they want their kids to have — in contrast to the free-for-all of the internet. The available services likely will include education and tutoring, text or vocalizations of what the family pet might be thinking, dancing cartoon avatars, and much more. Companies will compete to offer products that parents think will be good for their kids. Some of the AIs might even read bedtime stories (in fact, I’ve already heard some of them).
Many parents may be reluctant to let their kids become attached to an AI. But I predict that most families will welcome it. For one, parents will be able to turn off the connection whenever they wish. Simply clicking a button is easier than yanking an iPad out of a kid’s grasp.
Most of all, letting your kid have an AI companion will bring big advantages. Your child will learn to read and write much faster and better, and will do better in school. Or maybe you want your kid to master Spanish or Chinese, but you can’t afford an expensive tutor who comes only twice a week. Do you want your child to learn how to read music? The AI services will be as limited or as expansive as you want them to be.
It is an open question how quickly schools will embrace these new methods of learning. At some point, however, they will become part of the curriculum. Competitive pressures will make parents reluctant to withhold AI from their kids. Even if the AIs are not present in the classroom, some kids will use them to help do their homework, gaining a big advantage, and the practice will likely spread.
Of course children will use these AIs for purposes far beyond what their parents intend. They will become playthings, companions, entertainers and much more. When I was a kid, with no internet and mediocre TV, I created imaginary worlds in the dirt, or with simple household items, and my parents often had no clue. The AI services will become part of this model of spontaneous play, even if parents try to make them purely educational.
What about teenagers? Well, many parents may allow their kids to speak with AI therapists. It might be better than nothing, and perhaps better than many human therapists.
Recommended, and I do discuss some potential risks as well.
Evading your local monopsonist
By Matthew E. Kahn and Joseph Tracy:
Over the last thirty years, there has been a rise in several empirical measures of local labor market monopsony power. The monopsonist has a profit incentive to offer lower wages to local workers. Mobile high skill workers can avoid the lower monopsony wages by moving to other more competitive local labor markets featuring a higher skill price vector. We develop a Roy Model of heterogeneous worker sorting across local labor markets that has several empirical implications. Monopsony markets are predicted to experience a “brain drain” over time. Using data over four decades we document this deskilling associated with local monopsony power. This means that observed cross-sectional wage gaps in monopsony markets partially reflects sorting on worker ability. The rise of work from home may act as a substitute for high-skill worker migration from monopsony markets.
Here is the full NBER working paper. Many university faculty of course are subject to monopsony power…
What the new Microsoft Copilot will do for you
Thursday assorted links
UK to Adopt Pharmaceutical Reciprocity!
More than twenty years ago I wrote:
If the United States and, say, Great Britain had drug-approval reciprocity, then drugs approved in Britain would gain immediate approval in the United States, and drugs approved in the United States would gain immediate approval in Great Britain. Some countries such as Australia and New Zealand already take into account U.S. approvals when making their own approval decisions. The U.S. government should establish reciprocity with countries that have a proven record of approving safe drugs—including most west European countries, Canada, Japan, and Australia. Such an arrangement would reduce delay and eliminate duplication and wasted resources. By relieving itself of having to review drugs already approved in partner countries, the FDA could review and investigate NDAs more quickly and thoroughly.
Well, it’s happening! After Brexit, there were concerns that drugs would take longer to get approved in the UK because the EU was a much larger market. To address this, the UK introduced the “reliance procedure” which recognized the EU as a stringent regulator and guaranteed approval in the UK within 67 days for any drug approved in the EU. The Reliance Procedure essentially kept the UK in the pre-Brexit situation, and was supposed to be temporary. However, recognizing the logic of recognizing the EU, the UK is now saying that it will recognize other countries.
Our aim is to extend the countries whose assessments we will take account of, increasing routes to market in the UK. We will communicate who these additional regulators are and publish detailed guidance about this new framework in due course, including any transition arrangements for applications received under existing frameworks.
The UK is already participating in a mutual recognition agreement with the FDA over some cancer drugs. Therefore, it seems likely that the FDA will be among the regulatory authorities that the UK recognizes. If the UK does recognize the FDA, then we only need the FDA to recognize the UK for my scenario from more than 20 years ago to be fulfilled.
It’s thus time to revisit the Lee-Cruz bill of 2015, which proposed the Result Act (I was an influence).
Reciprocity Ensures Streamlined Use of Lifesaving Treatments Act (S. 2388), or the RESULT Act,” which would amend the Food, Drug and Cosmetic Act to allow for reciprocal approval of drugs.
Addendum: Many previous posts on FDA reciprocity.
Why Matt Yglesias should be a classical liberal
Matt recently wrote a (gated) piece arguing that we should raise American taxes and increase the American welfare state. I never understand how this squares with this desire to reach one billion Americans in the not too distant future. To be clear, I also favor a much larger population.
If you ever have done hiring, and I believe Matt has at Vox, you will understand that so, so often selection is more important than ex post incentives. That is, you need to get the right people into your firm, start-up, media venture, non-profit, or whatever. And the right people can be very hard to find and attract, as I think Matt also has noted.
Now, on which basis do you wish to select people arriving into your country? Do you wish to offer them a lower-risk, more secure, more egalitarian, less upside option? Or do you want to reward ambition to a disproportionate degree? Don’t forget you are building up the home base for most of the world’s TFP!
To me it is obvious that you should prefer the structure of rewards that attracts the harder-working, more ambitious people. You want to send out the inegalitarian bat signal.
Of course, if America is headed toward one billion people (or even much less) in the foreseeable future, most of the country will end up being relatively recent immigrants and their descendants. So the selection of those immigrants really is of vital importance. The more open is immigration, the more important it is to have the right incentives for selection and to be sending out the right bat signal. Furthermore, the less immigration selects on formal credentials and a points system, the more important it is to attract the properly ambitious by setting the right incentives and the right bat signal in place.
Oddly, it is anti-immigration conservatives who should be more complacent about increasing welfare spending. If few people are entering, and if you require formal credentials to enter and stay, selection problems will be correspondingly smaller.
And that is why Matt should be a classical liberal. We are rebuilding the nation all the time, most of all if we listen to Matt Yglesias.