Shruti Rajagopalan update

Next week Dr. Shruti Rajagopalan (also an Emergent Ventures winner) will be joining Mercatus as a senior research fellow, focused on Indian political economy, property rights, and economic development.

Shruti earned her PhD from George Mason in 2013 and most recently she is an associate professor of economics at Purchase College, SUNY. She is also a fellow of the Classical Liberal Institute at NYU, and will be teaching at the newly-formed Indian School of Public Policy in New Delhi.

Welcome Shruti!

You can follow Shruti on Twitter here.

Short Selling Reduces Crashes

Image result for coyote cliffShort sellers are often scapegoated for market crashes but a rational market requires rational buyers and sellers. When the markets are dominated by irrational exuberance only the short sellers are speaking sanity. Short-sellers, therefore, should make prices more informative and reduce the Wile E. Coyote moment when it suddenly dawns on the irrational that gravity exists.

Deng, Gao and Kim test the theory and find it holds up; lifting restrictions on short sales reduces prices crashes.

We examine the relation between short-sale constraints and stock price crash risk. To establish causality, we take advantage of a regulatory change from the Securities and Exchange Commission (SEC)’s Regulation SHO pilot program, which temporarily lifted short-sale constraints for randomly designated stocks. Using Regulation SHO as a natural experiment setting in which to apply a difference-in-differences research design, we find that the lifting of short-sale constraints leads to a significant decrease in stock price crash risk. We further investigate the possible underlying mechanisms through which short-sale constraints affect stock price crash risk. We provide evidence suggesting that lifting of short-sale constraints reduces crash risk by constraining managerial bad news hoarding and improving corporate investment efficiency. The results of our study shed new light on the cause of stock price crash risk as well as the roles that short sellers play in monitoring managerial disclosure strategies and real investment decisions.

Hat tip: Paul Kedrosky.

Marijuana complacency sentences to ponder

…an additional dispensary in a neighborhood leads to a reduction of 17 crimes per month per 10,000 residents, which corresponds to roughly a 19 percent decline relative to the average crime rate over the sample period. Reductions in crime are highly localized, with no evidence of spillover benefits to adjacent neighborhoods.

That is from a newly published paper by Jeffrey Brinkman and David Mok-Lamme, via the excellent Kevin Lewis.

Is the trade war with China a carbon tax?

I know that in my Twitter feed I am told a “carbon tax is GOOD” and the “Trumpian trade war with China is BAD.”  But isn’t Trump’s trade war, at least indirectly, a tax on carbon emissions?

Most Chinese exports are manufactured goods, and they are produced in a fairly carbon-intensive manner.  Furthermore, it doesn’t seem that Vietnam is able to pick up the slack, so it is not just a case of substituting from one dirty carbon emitter to another.  It seems the trade war is genuinely restricting trade, and over time it will restrict the consumption and production of carbon-intensive goods.  China is by far the exporter with the most to lose.

Of course the targeting of these new taxes is far from ideal from an environmental point of view, nor are they contingent on emissions in the proper manner (still, China is hardly on the verge of being able to switch into clean manufacturing, and in that sense contingent may not matter so much).  And it is hardly the case that Trump has “green motives.”

Still, put aside all the imperfections — don’t we finally have a carbon tax — and a framework for improving it — that so many commentators have been wanting all along?  Won’t this give Elizabeth Warren the chance to really fine-tune the apparatus?

On these points I am indebted to some remarks from Ray Lopez.  And here is my earlier 2016 post “Tyrone on why Democrats should vote for Donald Trump.

Paris fact of the day

The number of people living in the Paris departement, or administrative area, dropped by an average of 11,900 people a year between 2011 and 2016, the most recent figures available, according to the national statistics agency. Paris’s urbanism institute, Apur, forecasts that the decline of the inner city population will continue for about another six years.

It is a sharp contrast with the urban renaissance that has taken place in many of the world’s major cities over the past 20 years, but Paris is not alone.

New York City shed a net 39,500 people in 2018 and 37,700 the year before, reversing the previous upward trend.

In London, the population is still growing, bolstered by births and international immigration; but when it comes to internal migration, the net movement of people out of the UK city totalled more than 100,000 in the year to June 2018.

That is from Judith Evans in the FT on shrinking cities.

Addicted to Fines

Governing: Like many other rural jurisdictions, towns in south Georgia have suffered decades of a slow economic decline that’s left them without much of a tax base. But they see a large amount of through-traffic from semi-trucks and Florida-bound tourists. And they’ve grown reliant on ticketing them to meet their expenses. “Georgia is a classic example of a place where you have these inextricable ties between the police, the town and the court,” says Lisa Foster, co-director of the Fines and Fees Justice Center. “Any city that’s short on revenue is going to be tempted to use the judicial system.”

… in hundreds of jurisdictions throughout the country, fines are used to fund a significant portion of the budget…In some extreme cases, local budgets are funded almost exclusively by fines. Georgetown, La., a village of fewer than 500 residents, was the most reliant on fines of all reviewed nationally. Its 2018 financial statement reported nearly $500,000 in fines, accounting for 92 percent of general revenues. Not far behind is Fenton, La., which reported more than $1.2 million in fines, or 91 percent of 2017 general fund revenues.

In To Serve and Collect (forthcoming Journal of Legal Studies) Makowsky, Stratmann and myself find that the allure of fine and forfeiture revenue can distort policing by shifting arrests towards crimes and misdemeanors with greater potential for revenue rather than greater social harm.

There is, however, some good news. The U.S. Supreme Court ruled that the Constitution’s ban on excessive fines applies to states and localities and that is putting pressure of them to reform. My co-author Mike Makowsky has a good suggestion:

The way governments allocate fine revenue also matters. The majority deposit it into their general fund, but many in Oklahoma, for example, route the money to separate police or public safety funds. That’s a mistake, says Michael Makowsky, an economics professor at Clemson University in South Carolina. “You want to separate officer incentives from the revenues they generate,” he says. One solution he proposes is to route fines and fees to state governments. States would then redistribute all the funds back as block grants based on population or other metrics, effectively removing incentives to issue tickets.

The Governing report is good and links to more data.

Tattoos and time preferences

Survey and experimental evidence documents discrimination against tattooed individuals in the labor market and in commercial transactions. Thus, individuals’ decision to get tattooed may reflect short-sighted time preferences. We show that, according to numerous measures, those with tattoos, especially visible ones, are more short-sighted and impulsive than the non-tattooed. Almost nothing mitigates these results, neither the motive for the tattoo, the time contemplated before getting tattooed nor the time elapsed since the last tattoo. Even the expressed intention to get a(nother) tattoo predicts increased short-sightedness and helps establish the direction of causality between tattoos and short-sightedness.

That is from a new paper by Bradley J. Ruffle and Anne E. Wilson, via the excellent Kevin Lewis.

*Good Economics for Hard Times*

Yes, that is the new and forthcoming book by Abhijit Banerjee and Esther Duflo, and it tells you what they really think about everything.  Everything in mainstream economic policy debate, at least.

So far I have read only the first chapter, on migration, but I found it informative, highly readable, and (unlike many other popular books) subtle.  I am excited to read the rest of the book, in the meantime here is one short excerpt:

Mahesh found these would-be [Nepali] migrants were in fact somewhat overoptimistic about their earnings prospects.  Specifically, they overestimated their earning potential by around 25 percent, which could be for any number of reasons, including the possibility the recruiters who go to them with job offers lie to them.  But the really big mistake they made was that they vastly overestimated the chance of dying while they were abroad.  A typical candidate for migration thought that out of a thousand migrants, over a two-year stint, about ten would come back in a box.  The reality is just 1.3.

Here is the table of contents:

1. MEGA: Make Economics Great Again

2. From the Mouth of the Shark

3. The Pains from Trade

4. Likes, Wants and Needs

5. The End of Growth?

6. In Hot Water

7. Player Piano


9. Cash and Care

Due out November 12, you can pre-order here.

*Fully Grown: Why a Stagnant Economy is a Sign of Success*

That is the new book by Dietrich Vollrath, strongly recommended, it is a primer on the current state of knowledge about economic growth.  Tightly argued, and a remarkable amount is covered in 216 pp. of regular text.  Here is one excerpt:

Although there were plenty of changes in the individual markups firms charge, many of them actually fell over the last twenty years.  What explained the overall rise in markups from 1.18 to 1.67 was that spending shifted away from firms with low markups and toward firms with high markups.  Which high markup firms did we shift our spending to?  Well, a lot of service firms, including those involved in communications, technology, health care, and education.  In short, the rise in economic profits and markups we see at the aggregate level is part of the overall shift toward services we discussed a few chapters ago.

Here is where things get a little weirder.  Baqaee and Farhi show that the shift toward high-markup firms was good for productivity growth.  Whatever the source of a high markup, it indicates a product that is very valuable relative to its marginal cost.  If we take the inputs required to produce a low-markup product and use them to instead produce a high-markup product, then we have raised the value of what we produce.  As this increase in value came from reallocating our existing inputs toward a different use, rather than from accumulating new physical or human capital, the shift in spending toward high-markup firms shows up as an increase in productivity growth.

More books should be like this, it actually tries to teach the reader something!  And succeeds.  Definitely recommended.  Due out in January, you can pre-order here.

Saturday assorted links