Why a four percent inflation target is a bad idea
That is the topic of my latest Bloomberg column, let us start with part of the case for higher inflation:
A second argument, not usually cited by proponents, is that a higher inflation rate would lower the value of tenure, not just in academia but in bureaucracies more generally. Consider the unproductive employee who continues to work because his employers are afraid to fire him for legal or institutional reasons. With a higher rate of inflation, they could reduce his real wages simply by not giving him a raise, and that might even be enough to induce him to leave. In the meantime, they could redistribute higher wages toward more productive workers.
And yet:
But this second argument for higher inflation also hints at some reasons why a higher inflation target might prove problematic. Most notably, actual wages paid in the workplace do not rise automatically with the inflation rate. In economic theory, money is “neutral” in the long run; wages eventually adjust to the new level of prices. But this doesn’t just happen. Workers have to approach their bosses, ask for raises, bargain and, in some cases, threaten to leave.
t can be debated how smoothly this process runs in normal times. These are not normal times. This is an era of falling labor force participation, and there is talk of an epidemic of “quiet quitting.”
In other words, a lot of workers may not be too happy with their situation. There remains a risk that these workers, in lieu of bargaining for higher wages, will quit the labor force entirely, or perhaps just further disengage from their jobs. There are many margins across which the labor force can adjust.
Higher inflation rates are better for workers in some very particular environments. When the economic rate of growth is high and people are switching jobs at a rapid pace, productive workers will receive raises on a fairly frequent basis. A better job usually brings a higher wage, plus high turnover means employers are very conscious of the risk that workers will leave. Many bosses will offer raises without any bargaining at all.
Today, in contrast, there is a widespread labor shortage, as evidenced by the “Help Wanted” signs everywhere, yet there are also falling after-inflation wages.
We economists cannot fully explain these circumstances. But they may suggest that employers simply are not willing to agree to higher wages, perhaps due to business uncertainty. And if a labor shortage won’t push them to increase real wages, perhaps a higher rate of inflation won’t either.
In short, one of the main effects of a permanently higher inflation target may be lower real wages. It’s not a certainty that real wages would fall, but neither is it certain that, in the current climate, wages would keep pace. Why take the risk?
There is more at the link, including an additional argument why strict monetary neutrality may not hold (namely the four percent regime probably won’t be perceived as permanent).
U.S.A. (Sweden & Norway) fact of the day
US redistributes more to the bottom 50% than Sweden or Norway! pic.twitter.com/5MQXcmPtnG
— Angus “burnt ends" Grier 🦧🍄🚀🥃 (@ez_angus) December 13, 2022
Tuesday assorted links
1. More on Milton Friedman, democracy, and Chile: “…we investigated what he said regarding political freedom during those visits. Our interest is not in what he said many years later, when Pinochet was out of power and democratic rule had been restored. We inquire whether during the dictatorship, and while in Chile, he stated that the military had to grant political freedom to Chilean citizens and had to reinstitute the democratic system. Our conclusion is that although he declared that the political and economic conditions were very negative under President Salvador Allende, he did not provide open support for the coup or the dictatorship. On the contrary, he was explicit about liberty, and during both visits he publicly stated that political and economic freedom had to go hand in hand. During the 1981 visit, Friedman publicly stressed the importance of political freedom to maintain economic freedom in the context of the Chilean promised road to democracy.”
2. Tribute to Jeffrey Friedman.
5. An LLM for your speeding ticket?
6. Hayek’s influence on the EU.
7. How many homes have to be built to make housing affordable?
Fires in San Francisco Lead to More Housing
Kate Pennington looks at the effect of new housing on rents and gentrification in San Francisco.
The clear identification challenge is that the timing and location of new construction are endogenous: developers are likely to build in the same areas that are already experiencing increased rents, displacement, and gentrification (Green et al., 2005; Li, 2019; Asquith et al., 2020).
Thus, she uses a clever identification strategy.
I exploit exogenous variation in the location of new construction caused by serious building fires. Regulation and geography combine to make San Francisco one of the most difficult places to build housing in the United States (Albouy and Ehrlich, 2012; Saiz, 2010). Serious fires, like the one shown in Figure 5, increase the probability of construction on the burned parcel by making it cheaper to build there. Removing incumbent tenants eliminates the need for costly buyouts. Under San Francisco just cause eviction law, landlords who want to sell or redevelop must either wait for tenants to voluntarily leave, or negotiate a buyout agreement to pay the tenant to leave. In 2015, the median buyout per tenant was $18,000 and the maximum was $325,000.19 Serious fires also streamline the permitting and construction process. Controlling for project size, construction on unburned parcels takes nearly a year longer to complete than projects on burned parcels (p=0.007).
I know what you cynical readers are thinking! Some fires are set on purpose to drive the tenants out! Well, that happens in the movies but it’s much rarer in real life when then there are very serious penalities for arson and homicide. In anycase, Pennington looks only at accidental fires, not arsons, and she finds that that the lots on which there were fires have similar rates of rental incrase and gentrification as other lots.
Amazingly, it still takes a long time to build on these burned lots–nearly five years to get a permit approved and 7.2 years before completion! Nevertheless, burned lots are much more likely to be redeveloped than similar unburned lots. The bottom line is that burned lots are a good as-if experiment for what would happen if a random set of lots were developed.
Pennington concludes that new housing has a “hyperlocal” increase in gentrification–basically richer people move into the new housing and there’s some very local increase in things like more up-scale restaurants–but overall rents are reduced and fewer people must move elsewhere to find cheaper housing.
I find that rents fall by 2% for parcels within 100m of new construction. Renters’ risk of displacement to a lower-income neighborhood falls by 17%. Both effects decay linearly to zero within 1.5km….Building more market rate housing benefits all San Francisco renters through spillover effects on rents.
Price behavior for new commodities (from my email)
You made a point in your podcast with Jeremy Grantham about the commodities market being relatively stable over the number of years that we can measure it, but I think when you refer to the commodities market, you’re talking about larger commodities, like copper and steel for which we have a much longer period of history.
In commodity markets some materials are relatively new. The history of markets for things like neodymium, dysprosium, and lithium is not long. These materials only recently became commodified enough that there was even such a thing as a market price.
These advanced refined materials may not fit our historical understanding due to: relative scarcity (geographic and in china, Dy, Nd mostly) specialized & region dependant extraction techniques; specificity in applications, (for example: i don’t know of any application for Dy other than high power magnets and wavelength specific lasers)
Consider that modern commodity markets in highly technological, relatively new, specific materials might not be subject to the same rules as historical commodity markets.
We haven’t seen an “advanced material commodity squeeze” yet, but I think we are due for one even bigger than the RE shock in 2011 (https://www.theguardian.com/business/2011/jun/19/rare-earth-minerals-china). So many technologies are based on a very fragile (geopolitical, economic) supply chain that we are bound to have a problem eventually.
Love the podcast & MR.
That is from Anonymous!
Shruti on Effective Altruism, malaria, India, and air pollution
Look at the decline in malaria deaths in India since the big bang reforms in 1991, which placed India on a higher growth trajectory averaging about 6 percent annual growth for almost three decades. Malaria deaths declined because Indians could afford better sanitation preventing illness and greater access to healthcare in case they contracted malaria. India did not witness a sudden surge in producing, importing or distributing mosquito nets. I grew up in India, in an area that is even today hit by dengue during the monsoon, but I have never seen the shortage of mosquito nets driving the surge in dengue patients. On the contrary, a surge in cases is caused by the municipal government allowing water logging and not maintaining appropriate levels of public sanitation. Or because of overcrowded hospitals that cannot save the lives of dengue patients in time.
There is much more at the link, from Shruti’s new Substack.
Chatting with yourself
I decided to train an AI chatbot on my childhood journal entries to engage in real-time dialogue with my inner child and I discovered how an AI tool can be used for therapeutic benefits.
I kept journals for more than a decade of my life, writing almost everyday — about my dreams, fears, secrets. The content ranged from complaining about homework, to giddiness I felt from talking to my crush. There were a lot of fantastic, ripe data sources for my experiment.
After scribing the journal entries and feeding them into the model, I got working responses that felt eerily similar to how I think I would have responded during that time. I asked if she felt happy with where I ended up or if she was disappointed.
Young Michelle told me: “I’m honestly proud of you for everything you’ve accomplished. It hasn’t been easy, and I know you’ve made a lot of sacrifices to get where you are. I think you’re doing an amazing job, and I hope you continue to pursue your dreams and make a difference in the world.”
I sensed the kindness, understanding and empathy that she was so willing to give other people, but she was so hard on herself. I was tearing up during that exchange.
Placebos work too! Here is the full article by Jyoti Mann, reporting on Michelle Huang, and here is her tutorial for building your own.
Along related lines, Samir Varma emailed me:
One important point about GPT that has not been discussed at all is this: What fraction of a person’s intelligence & personality is expressible? Or, in other words, how much of their inner workings are captured in their various emissions: speech, writing and action?A priori, given the complexity of the brain, you would expect it to be relatively low. The success of these large models suggests that we need to revise that prior. The amount of a “person” you can capture from their “emissions” is higher than one would have originally thought. And let’s bear in mind that this is effectively only via the written word so far and that too, only internet resources. In not very long, we will be capturing almost everything someone says, and likely what someone does as well. When you add to that capturing almost everything someone ever writes (texts, emails, and so on), you are in a situation where you may be able to model someone’s “personality” just from those emissions.Will it be perfect? Of course not. But it is pretty clear that it will be a lot better and a lot likelier than it would have been before GPT.
Are we all so “thin-minded”?
Monday assorted links
1. Can AI identify anonymous chess players?
2. Joseph Kittinger, RIP (NYT).
3. WSJ reviews Garett Jones, The Culture Transplant.
4. Ezra says Quakers are underrated (NYT). And he talks about attention as a public good, still an underrated issue.
5. Why is progress in biology so slow?
6. The way Twitter was. Amazing that people found this tolerable.
7. Will a Peter Thiel-connected consortium buy the Phoenix Suns? (WSJ)
The narrowing gap between human and animal intelligence
Resulting from recent AI advances, how should our perceptions change? From the comments:
Why does it narrow the gap between human and animal intelligence?
Intelligence seems simpler than we thought, just a matter of scaling things up, so human intelligence is more likely a difference in degree rather than a difference in kind/step change. Plus this suggests there’s a wider range of possible intelligences out there, so in the grand scheme, human and animal intelligence will look very similar/closely related (it looked less that way when they were the only games in town. Then they were as far apart as was known to be possible).
*Crack-Up Capitalism*
That is the new book by Quinn Slobodian. Slobodian is very smart, and knows a lot, but…I don’t know. I fear he is continuing to move in the Nancy McLean direction with this work.
This is a tale of how libertarian and libertarian-adjacent movements have embraced various anti-democratic and non-democratic positions. So you can read about seasteading, Hans-Hermann Hoppe, Hong Kong as a charter city, and “decentralization” plans for Ciskei, South Africa.
You won’t hear about the highly successful SEZ reforms for the Dominican Republic, or how the European Union was partly rooted in Hayek’s postwar piece on interstate federalism. In that essay, Hayek was explicit about how much would be done by treaty, rather than direct vote, and that is (mostly) how the European Union has turned out. With reasonable success, I might add. Do only the nuttier episodes of “less democracy” count?
Question one: Is the word “plutocratic” ever illuminating?
Question two: Is this a useful descriptive sentence for Milton Friedman? “He [Patri] had a famous grandfather, perhaps the century’s most notorious economist, both lionized and reviled for his role in offering intellectual scaffolding for ever more radical forms of capitalism and his sideline in advising dictators: Milton Friedman. The two shared a basic lack of commitment to democracy.”
Here is a YouTube clip of Friedman on democracy. Or I asked davinci-003 and received:
Yes, Milton Friedman did believe in democracy. He was an advocate of democracy and free markets, believing that economic freedom would advance both economic and political freedom. He argued that government should be limited in size and scope and that the free market should be allowed to operate with minimal interference.
Or how about engaging with the academic literature on Friedman’s visit to Chile? And more here. Was Friedman, who was elected president of the American Economic Association and won an early Nobel Prize, really “notorious”?
There is valuable content in this book, but it needs to cut way back on the mood affiliation.
Sunday assorted links
1. Current problems in Bangladesh.
2. “how and why to be ladylike (for women with autism)…contains dune quotes as promised”
3. Claims about GPT-4. Claims, mind you.
4. Krugman on sectoral shifts and inflation. Though why have so many prices gone up by so much?
6. Progress in nuclear fusion?
7. Does physical attractiveness correlate with experiencing meaning in life?
Broader implications of ChatGPT
No, it is not converging upon human-like intelligence or for that matter AGI. Still, the broader lesson is you can build a very practical kind of intelligence with fairly simple statistical models and lots of training data. And there is more to come from this direction very soon.
This reality increases the probability that the aliens around the universe are intelligent rather than stupid. They don’t need a “special box” in their heads (?) to become cognitively sophisticated, rather experience can bring them a long way.
That in turn heightens the Fermi paradox. Where are they?
Which in turn, for any particular views about The Great Filter (presumably there is some chance it lies ahead of us), should make us more pessimistic about the future survival of humankind.
It modestly increases the chances that UFOs are drone probes from space aliens.
It also narrows the likely gap between human and animal intelligence.
What else?
I thank a friend for a useful conversation related to these points.
Why Scott Alexander does not hate crypto
Vietnam uses crypto because it’s terrible at banks. 69% of Vietnamese have no bank access, the second highest in the world. I’m not sure why; articles play up rural poverty, but many nations have more rural poor than Vietnam. There’s a history of the government forcing banks to make terrible loans, and then those banks collapsing; maybe this destroyed public trust? In any case, between banklessness and remittances (eg from Vietnamese-Americans), Vietnam leads the world in crypto use.
Ukraine has always been among the top crypto countries: in 2021, NYT called it “the crypto capital of the world”. Again, this owes a lot to its terrible banking system. NYT describes its banks as “so sclerotic that sending or receiving even small amounts of money from another country requires an exasperating obstacle course of paperwork”, and this guy says that if you deposit more than $100,000 in a Ukrainian bank, “the chance that you get it back is very slim”. When Russia invaded, the Ukrainian government doubled down on crypto as a way for friendly Westerners to send donations to support the war effort – $70 million as of March. It proved so helpful that during the first month of the war, in between dodging Russian artillery shells President Zelenskyy found time to pass a law legalizing crypto and strengthening its regulatory framework.
Venezuela’s economy has been in slow motion collapse for the past decade. The inflation is currently in the triple digits (remember, people thought the Democrats would lose the midterms because of a US inflation rate of 8%). If your country has a triple-digit inflation rate, you might prefer to use an alternative currency, which Venezuela’s authoritarian government tries to prevent people from doing. Cryptocurrency provides a hard-to-ban alternative which has caught on among Venezuelan hustlers and small businessmen.
And consider this picture:
Here is the full post.
Patrick Collison’s books of the year picks
The best book I read this year was “The World of Yesterday” by Stefan Zweig. A vivid account of Austria and its pre-WWI cultural vibrancy, it left me sharing his sorrow for what was destroyed. (And his description of Insel Verlag, his publisher, provides good aspirational material for Stripe Press.) Relatedly, Peter Watson’s “The German Genius” provides the first comprehensive account I’ve read of what exactly happened in the 17th and 18th centuries that gave rise to Goethe, Bach, Euler, Kant, von Humboldt, etc. In Ireland, we don’t tend to appreciate Edmund Burke very much, but I found Richard Bourke’s “Empire and Revolution” to be a terrific account of Burke’s thinking. His contributions to the debates around the American and French Revolutions are well known, but he thought his opposition to the colonial abuses in India was more important. We recently started Arc, a new biomedical research organization, and I’ve been digging into the early days of other institutions. Thomas Lee’s “Eugene Braunwald and the Rise of Modern Medicine” stood out. So did “Upstart” by Ed Walsh, the founding president of the University of Limerick.
Here is the link, you will find other people’s picks too.
Saturday assorted links
1. Japan (!) now slated to have the highest birthrate in East Asia.
2. South Koreans have three different ways of counting their ages (NYT).
3. Winter Applied Rationality Program, for high schoolers.
4. Identical twins falsely accused of cheating. Now there is a lawsuit.
6. “The Grinnell men’s basketball team took 111 shots Thursday. Every one was a 3-pointer.”
7. The Free Press, new Bari Weiss project. And Noah’s Ark and Elon Musk.