The Quantity Theory of Money is underrated
That is the theme of my latest Bloomberg column. Here is one short bit:
Consider the recent spurt of 8% to 9% inflation in the US. The simple fact is that M2 — one broad measure of the money supply — went up about 40% between February 2020 and February 2022. In the quantity theory approach, that would be reason to expect additional inflation, and of course that is exactly what happened.
The quantity theory has never held exactly, one reason being that the velocity (or rate of turnover) of money can vary as well. Early on in the pandemic, spending on many services was difficult or even dangerous, and so savings skyrocketed. Yet those days did not last, and when the new money supply increase was unleashed on the US economy, there were inflationary consequences.
I do think there are plenty of indeterminacies in macro, but letting M2 rise at such a pace is not one of them!
My Conversation with Byron Auguste
Here is the audio, video, and transcript. Here is my introduction:
TYLER COWEN: Today I am here…with Byron Auguste, who is president and co-founder of Opportunity@Work, a civic enterprise which aims to improve the US labor market. Byron served for two years in the White House as deputy assistant to the president for economic policy and deputy director to the National Economic Council. Until 2013, he was senior partner at McKinsey and worked there for many years. He has also been an economist at LMC International, Oxford University, and the African Development Bank.
He is author of a 1995 book called The Economics of International Payments Unions and Clearing Houses. He has a doctorate of philosophy and economics from Oxford University, an undergraduate econ degree from Yale, and has been a Marshall Scholar. Welcome.
Here is one excerpt:
COWEN: As you know, more and more top universities are moving away from requiring standardized testing for people applying. Is this good or bad from your point of view?
AUGUSTE: I think it’s really too early to tell because the question is —
COWEN: But you want alternative markers, not just what kind of family you came from, what kind of prep you had. If you’re just smart, why shouldn’t we let you standardize test?
AUGUSTE: I think alternative markers are key. This is actually a pretty complicated issue, and I’ve talked to university administrators and admissions people, and it’s interesting, the variety of different ways they’re trying to work on this.
But I will say this. If you think about something like the SAT, when it first started — I’m talking about in the 1930s essentially — it was an alternative route into a college. It started with the Ivies. It was started with James Conant and Harvard and the Ivies and the Seven Sisters and the rest, and then it gradually moved out.
The problem they were trying to solve back in the ’30s was that up until that point, the way you got into, say, Dartmouth is the headmaster of Choate would write to Dartmouth and say, “Here’s our 15 candidates for Dartmouth.” Dartmouth would mostly take them because Choate knew what Dartmouth wanted. Then you had the high school movement in the US, where between 1909 and 1939, you went from 9 percent of American teenagers going to high school to 79 percent going to high school.
Now, suddenly, you had high school students applying to college. They were at Dubuque Normal School in Iowa. How does Dartmouth know whether this person was . . . The people from Choate didn’t start taking the SATs, but the SAT — even though it was a pretty terrible test at the time, it was better than nothing. It was a way that someone who was out there — not in the normal feeder schools — could distinguish themselves.
I think that is a very valuable role to play. As you know, Tyler, the SAT does, to some extent, still play that role. But also, because now that everybody has had to use it, it also is something that can be gamed more — test prep and all the rest of it.
COWEN: But it tracks IQ pretty closely. And a lot of Asian schools way overemphasize standard testing, I would say, and they’ve risen to very high levels of quality very quickly. It just seems like a good thing to do.
Most of all we cover jobs, training/retraining, and education. Interesting throughout.
Introducing Whisper
The Martha’s Vineyard saga
I take slaps at both sides, in my latest Bloomberg column, and here is one of the salvos:
Vineyard residents were certainly very kind and hospitable to the new arrivals before they were moved to the mainland. But altruism can only go so far. A true commitment to egalitarianism would mean constructing more affordable housing, for example, making it possible for not just immigrants but lower-income people to live and work there.
Even before the modest number of Venezuelan arrivals, the island was known for its extreme income inequality. Wages there are below the Massachusetts average, and living expenses prohibitively expensive. Those realities stem from decisions about land use made by the island’s population.
And this:
The larger point, of course, is that the US has too many arrivals living in “immigration limbo.” They can cross the border with an asylum claim and then live in the country while they wait for a slow and somewhat arbitrary judicial system to hear their claim. The US would do better with a system of more ex ante immigration approvals, and fewer hanging cases ex post.
I have never been to Martha’s Vineyard — maybe someday!
Wednesday assorted links
1. Big Think does a “progress issue,” including yours truly.
2. Why did it take so long to deploy wind power?
3. Bradley Tusk tries to answer the interview questions from Talent. Would you hire him?
4. The Gatsby Curve is not what it seems.
5. The rise (and diffusion) of Stable Diffusion.
6. The Show So Far (Truss).
Hermann Goering on the American war effort
At first, however, we could not believe the speed with which your Merchant Marine was growing. Claims of eight to 10 days to launch a ship seemed fantastic. Even when we realized it referred to the assembly of prefabricated parts, a mere 10 days to put it together was still unthinkable. Our shipbuilding industry was very thorough and painstaking, but very slow, disturbingly slow, in comparison. It took nine months to build a Danube vessel.
Here is the entire (previously overlooked) interview. Via D., interesting throughout.
Masking in Korea
Things have to get a touch anecdotal here, still, try running an experiment in your head. In front of you is a neat cross-section of Korean life: 100 people, touching all demographics. And, in line with those same societal trends, 95 are wearing masks, while five are not.
Can you picture what those five look like? What they sound like? I bet you can!
Chances are, they are either very old men, very old women, young children naive to the virus or youngish men in their late teens/early 20s (also foreigners, but this is slightly cheating). What they definitely are not, are young-to-middle-age women.
A society which balances unachievable financial burdens on its men, against unhealthy beauty standards on its women, the Korean obsession with female appearance has always been problematic.
Even before the pandemic hit the peninsula, it was common enough for young women and girls to wear masks ― blaming allergies, pollution or fine dust; anything for an excuse to hide away for a day or two, and get some temporary relief from all that pressure.
So no doubt the mask mandates originally came as a happy escape for such people. Still, this is no more of a solution to vanity and judgment, than heroin is to physical pain. And in the case of masks, they cannot even be said to ease that underlying agony.
Here is more from Jed Lea-Henry. And yes, in the absence of a mandate, even outside in Seoul most people are masked, over 90 percent I would say.
The evolution of single payer health insurance
This is one of the big underreported stories these days, namely that single payer systems are working far less well than they used to, including during the pandemic but not only. Eventually the blame will shift and will be put on something like “austerity,” whereas the deeper understanding was that those systems were bound to end up understaffed and undercapitalized all along. In any case, here is the latest from Sweden, circa summer 2022:
In 2000, around 100,000 Swedes had private health insurance. Today, there are seven times as many, in a country of 10 million people. In 60% of cases, the insurance is paid for by the employer. According to the Swedish insurers’ organization Svensk Försäkring, the rate can vary from 300 to 600 crowns on average per month. For those dealing with health problems, the advantages are quicker consultations and avoiding long waiting lines.
And that is from Le Monde, not the Heritage Foundation. The Canadian, British, and New Zealand systems are all in crisis too. But that narrative is not exactly tailor-made for today’s media environment…
Tuesday assorted links
1. China fact of the day — what if China stops buying Treasuries?
2. “A few fire ants spaced well apart behave like individual ants. But pack enough of them close together, and they act more like a single unit, exhibiting both solid and liquid properties. They can form rafts to survive flash floods, arrange themselves into towers, and you can even pour them from a teapot like a fluid.” Link here.
3. Donald Kohn on Sumner and ngdp targeting. And Sumner’s response.
4. Is 20 quadrillion the correct number of ants? The optimal number of ants?
5. Supply curves slope upward.
6. Niger projection of the day (FT): “On current trends, Niger’s population is on course to nearly triple from about 24mn in 2020 to a projected 68mn in 2050, according to the UN Development Programme’s latest forecast. If that projection proves correct, Niger’s population will have grown 25 times in the century to 2050, a period over which the global population will have risen a relatively modest fourfold.”
Cognitive ability predicts economic extremism
Conservative economic attitudes have been theorized as symptoms of low cognitive ability. Studies suggest the opposite, linking more conservative views weakly to higher, not lower, cognitive ability, but with very large between-study variability. Here, we propose and replicate a new model linking cognitive ability not to liberal or conservative economics, but to economic extremism: How far individuals deviate from prevailing centrist views. Two large pre-registered studies in the UK (N = 700 & 700) and the British Cohort Study dataset (N = 11,563) replicated the predicted association of intelligence with economic deviance (β = 0.4 to 0.12). These findings were robust and expand the role of cognitive ability from tracking the economic consensus to influencing support for (relatively) extremist views. They suggest opportunities to understand the generation and mainstreaming of radical fringe social attitudes.
That is from a new paper by Chien-An Lin and Timothy C. Bates. I would frame it a little differently! For one thing, the extreme views are sufficiently complex that perhaps the smarter people are more likely to pick them up and understand them, whether those views are correct or not.
Via Michelle Dawson.
Who are the odious figures?
Tyler: But even that phrase, odious figures, I’m made uncomfortable by. Like okay, you can cite Hitler. Hitler’s odious. I think we make ourselves stupider. I like to ask this question: does this person favor price controls on prescription drugs? Well, they might, they might not. To me, that’s a terrible view that will kill many thousands of people, maybe more. But I don’t think of those people as odious. I think, they’re wrong about something. If someone’s called odious, I’ll just ask myself, well, are their views worse than the views of someone who wants price controls on prescription drugs? [laughter] Like, who’s odious? I know there’s the Hitler thing, and Godwin’s law, but we have got to mostly move past that, and just focus on the ideas and being more analytical.
That is from my podcast dialogue with Richard Hanania from a few weeks ago. Don’t forget that Columbia researcher Frank Lichtenberg calculates the average pharmaceutical expenditure per life-year saved (globally) at $2,837. Let’s spend more on this one! And in multiple ways. In the meantime, don’t be so obsessed with what other people think and write — focus on the issues themselves.
#chessdrama splat
Chess.com, which has alleged many more instances of on-line cheating, is the fat lady that will sing (or not). It strikes me as highly unlikely that they simply would have made up the existence of their further charges, especially since they claim to have produced a report and sent it to Niemann. (You don’t have to think the report is correct, but I am betting it exists.) In the meantime, chess.com did the right thing by sending their report to Niemann first, as they claim, rather than releasing it to the general public. This way Niemann has a chance to rebut or defuse the allegations.
Note that Niemann, for all of his various denials, has not, to the best of my knowledge, denied that the chess.com report exists. Nor do I see any direct evidence or statement that he will be providing a rebuttal.
In the meantime, I don’t think Carlsen is obliged to produce his own report. I don’t understand why so many in the chess world or on Twitter are urging him to do this. There may be libel issues in play as well, but arguably he is waiting for the chess.com report to come out, in addition to any possible rebuttal or lack thereof. That is the information channel already in play, so to speak.
If a player has cheated repeatedly in on-line chess, should we let that same player participate in top-tier over-the-board tournaments? To me the answer is an obvious no, and presumably Carlsen agrees. Even if over-the-board cheating is very difficult or impossible to pull off, major distractions are created by the player’s history. Or that same player might prove untrustworthy in other regards.
So the key elements here are the chess.com report and any possible Niemann rebuttal. I am waiting for those. Magnus is patient, and I am patient too. The current state of imperfect information will not last forever.
Monday assorted links
1. New book by Natasha Lance Rogoff, Muppets in Moscow: The Unexpected Crazy True Story of Making Sesame Street in Russia.
2. Newfoundland gannets diving for fish.
3. “Those who are unable to be vaccinated or boosted for health or religious reasons should contact [email protected] for information about an exemption.” AEA adds vaccine exemptions.
4. Why are contracts hard to read? And New Zealand tries to eliminate jargon from legislation (WSJ).
5. Do old people enjoy spending money less?
Taxing Mechanical Engineers and Subsidizing Drama Majors
In The Student Loan Giveaway is Much Bigger Than You Think I argued that the Biden student loan plan would incentivize students to take on more debt and incentivize schools to raise tuition with most of the increased costs being passed on to taxpayers through generous income based repayment plans. Adam Looney at Brookings takes a deep dive into the IDR plan and concludes that it’s even worse than I thought. Here are some of Looney’s key points:
- As recently as 2017, CBO projected that student loan borrowers would, on average, repay close to $1.11 per dollar they borrowed (including interest). Borrowing was often perceived to be the least favorable way to pay for college. But under the administration’s IDR proposal (and other regulatory changes), undergraduate borrowers who enroll in the plan might be expected to pay approximately $0.50 for each $1 borrowed—and some can reliably expect to pay zero. As a result, borrowing will be the best way to pay for college. If there’s a chance you’ll not need to repay all of the loan—and it’s likely that a majority of undergraduate students will be in that boat—it will be a financial no-brainer to take out the maximum student loan.
- The data shows that roughly half of Americans with some college experience but not a BA would qualify for zero payments under the proposal, as would about 25% of BA graduates. However, the vast majority of students (including more than 80% of BA recipients) would qualify for reduced payments.
- [A] lot of student debt represents borrowing for living expenses, and thus a sizable share of the value of loans forgiven under the IDR proposal will be for such expenses…A graduate student at Columbia University can borrow $30,827 each year for living expenses, personal expenses, and other costs above and beyond how much they borrow for tuition. A significant number of those graduates can expect those borrowed amounts to be forgiven. That means that the federal government will pay twice as much to subsidize the rent of a Columbia graduate student than it will for a low-income individual under the Section 8 housing voucher program…
Looney agrees that the incentive to increase tuition will apply to some graduate and professional programs but he thinks there is less room to increase tuition at undergraduate programs because borrowing is capped (currently! AT) at fairly low rates. But he offers an even more plausible but disheartening scenario that takes us in exactly the wrong direction.
Because the IDR subsidy is based primarily on post-college earnings, programs that leave students without a degree or that don’t lead to a good job will get a larger subsidy. Students at good schools and high-return programs will be asked to repay their loans nearly in full. Want a free ride to college? You can have one, but only if you study cosmetology, liberal arts, or drama, preferably at a for-profit school. Want to be a nurse, an engineer, or major in computer science or math? You’ll have to pay full price (especially at the best programs in each field). This is a problem because most student outcomes—both bad and good—are highly predictable based on the quality, value, completion rate, and post-graduation earnings of the program attended. IDR can work if designed well, but this IDR imposed on the current U.S. system of higher education means programs and institutions with the worst outcomes and highest debts will accrue the largest subsidies.
Looney does a back of the envelope calculation and estimates that typical graduates in Mechanical Engineering will on average get a 0% subsidy but graduates in Music will get a 96% subsidy, in Drama a 99% subsidy and Masseuses a 100% subsidy on average. This of course is exactly the wrong approach. If we are going to subsidize, we should subsidize degrees with plausible positive spillovers not masseues.
The problem is not just the subsidy but the encouragement this gives to create low-value programs:
- …institutions will have an incentive to create valueless programs and aggressively recruit students into those programs with promises they will be free under an IDR plan….The fact that a student can take a loan for living expenses (or even enroll in a program for purposes of taking out such a loan) makes the loan program easy to abuse. Some borrowers will use the loan system as an ATM, taking out student loans knowing they’ll qualify for forgiveness, and receiving the proceeds in cash, expecting not to repay the loan….I suspect that such abuses will be facilitated by predatory institutions.
Overall, the student loan program, as currently written, is looking to be one of the most costly, inefficient and unwise government programs of the 21st century. As I said in my first post, “fixing” the program is likely to drive ever more increasing intervention into higher education much as has happened with health care. My guess is that no one really thought this albatross through.
Nigeria facts of the day
On the supply side, dollar revenues from oil have plummeted because of massive theft, pushing down official daily production of crude to 1.1mn barrels, far below Nigeria’s Opec quota of 1.8mn b/d. Angola has now usurped Nigeria as Africa’s biggest oil producer.
Nigeria’s petrol subsidy, under which its car owners enjoy among the cheapest fuel in the world ($0.40/litre), means the federal government receives less revenue. The higher the oil price, the bigger the gap between the real and the subsidised price and the higher the bill for the government. Nigeria will spend an estimated $9.6bn on petroleum subsidies this year, about 2 per cent of gross domestic product and almost 10 times the budgeted amount.
Here is more from the FT, in other words Nigeria is failing to benefit from much higher oil prices.