The manufacture of credibility?

Israel and Iran bombed each other like three weeks ago and now oil prices are low enough that the SPR [Strategic Petroleum Reserve] is looking at buying

That is from Matthew Zeitlin.  One read of the current equilibrium is that both Iran and Israel have shown they really do not want to escalate, or perhaps are not able to escalate.  Arguably that was less obvious two months ago.

It is hard to establish such credibility unless things get really hairy, and then both parties pull back from the brink.

I don’t think that is the only way to read recent events.  An alternative would be “We are witnessing widening concentric circles of violence, and the next round is going to be a doozy.”

Maybe, but so far markets seem to believe the more optimistic scenario.

The US has Low Electricity Prices

The US has some of the lowest electricity prices in the world. Shown below are industrial retail electricity prices in EU27, USA, UK, China and Japan. Electricity is critical for AI compute, electric cars and more generally reducing carbon footprints. The US needs to build much more electricity infrastructure, by some estimates tripling or quadrupling production. That’s quite possible with deregulation and permitting reform. I am pleased to learn, moreover, that we are starting from a better base than I had imagined.

Did World War II pull America out of the Great Depression?

Maybe by less than people had thought, here is a new ReStat paper by Gillian Brunet:

I use newly-digitized contract data on U.S. war production spending over 1940-1945 to analyze the macroeconomic effects of U.S. military spending in World War II. I find personal income multipliers of 0.34 over two years and 0.49 over three years. Personal income multipliers may substantially understate GDP multipliers, perhaps by as much as 50%. Employment estimates imply costs per job-year over the same time horizons of $405,013 and $232,268 in 2015 dollars, suggesting job creation was limited. I also find evidence of negative scale effects: larger positive spending shocks are associated with systematically smaller multiplier estimates.

Via Alexander Berger.  The author’s title is “Stimulus on the Home Front: The State-Level Effects of WWII Spending.”

GPT-4 beats psychologists on a new test of social intelligence

There were significant differences in SI between psychologists and AI’s ChatGPT-4 and Bing. ChatGPT-4 exceeded 100% of all the psychologists, and Bing outperformed 50% of PhD holders and 90% of bachelor’s holders. The differences in SI between Google Bard and bachelor students were not significant, whereas the differences with PhDs were significant; Where 90% of PhD holders excel on Google Bird.

That is from a new paper by Nabil Saleh Sufyan,  In the “good ol’ days” we thought that was the task where AI would never have much of a fighting chance.  Now the bets models are just outright beating the humans.

Note that all the subjects were men.  Via Christopher Altman.

Wednesday assorted links

1. “Authors who were perceived as female responded at similar rates regardless of the pronouns in the requester’s email. Authors who were perceived as male were less likely to respond to emails from requesters with they/them pronouns than all other conditions. This work finds that people who use they/them pronouns experience bias in real-world situations due solely to their gender pronouns.”  Link here.

2. U.S. murder rates are plummeting.

3. Sam Hammond’s 95 theses on AI, not my views but interesting.

4. Do sperm whale songs have an alphabet of sorts? (NYT)

5. Preference falsification at Dartmouth?

6. “AlphaFold 3 predicts the structure and interactions of all of life’s molecules.

7. More on Luka.

*Scarce and Valuable Economic Tracts*

Three big volumes, about 1800 pp., these books reprint the true classics behind the origins of economic thought.  These are the best works of economics published before Adam Smith, and essentially they founded economic science.  The originals were edited by the classical economist John Ramsay McCulloch, but they now have been reprinted by Classical Liberal Press.  I don’t know of any comparably easy way to read these works, or anything close.

Here is one volume, here is another, here is a third.  Each is priced below $20, definitely recommended.

FTX Customers Poised to Recover All Funds Lost in Collapse

Some of the recoveries stemmed from successful investments that Mr. Bankman-Fried made during his FTX tenure. In 2021, the company had put $500 million into the artificial intelligence company Anthropic. A boom in the A.I. industry made those shares much more valuable. This year, Mr. Ray’s team sold about two-thirds of FTX’s stake for $884 million.

FTX also reached a deal to recover more than $400 million from Modulo Capital, a hedge fund that Mr. Bankman-Fried had financed. And lawyers for FTX filed lawsuits to claw back funds from former company executives and others, including Mr. Bankman-Fried’s parents.

Here is the full NYT story, noting that account holders did not receive (significant) gains in the value of bitcoin that otherwise would have accrued.

IQ matters more at the very top

We document a convex relationship between earnings rank and cognitive ability for men in Finland and Norway using administrative data on over 350,000 men in each country: the top earnings percentile score on average 1 standard deviation higher than median earners, while median earners score about 0.5 standard deviation higher than the bottom percentile of earners. Top earners also have substantially less variation in cognitive test scores. While some high-scoring men are observed to have very low earnings, the lowest cognitive scores are almost absent among the top earners. Overall, the joint distribution of earnings rank and ability is very similar in Finland and Norway. We find that the slope of the ability curve across earnings ranks is steepest in the upper tail, as is the slope of the earnings curve across cognitive ability. The steep slope of the ability curve across the top earnings percentiles differs markedly from the flat or declining slope recently reported for Sweden.

That is from a new paper by Bernt Bratsberg, Ole Rogeberg, and Marko Terviö.  You may recall that Daniel Gross and I made a similar claim in our book Talent, namely that the very top performers in virtually any field are extremely smart, even if the field is not an intellectual one in the traditional sense.

The new economics of gold investment?

The real, inflation-adjusted, price of gold is high. Historically, a high real gold price has been associated with low inflation-adjusted gold returns over the subsequent 10 years. Further, historically the realized 10-year rate of inflation has had close to no impact on realized 10-year nominal and real gold returns. An influx of investment in gold (from gold-owning ETFs, Costco shoppers, “de-dollarizing” central banks and possibly others) has seemingly doubled the real price of gold relative to pre-influx times. Today’s golden dilemma is yesterday’s golden dilemma: has an influx of gold buying ushered in a new age of permanently higher “this time is different” real gold prices or is this simply the latest “wash, rinse, repeat” cycle setting-up a significant fall in real gold prices?

That is a new working paper from Claude B. Erb and Campbell R. Harvey.

Tuesday assorted links

1. “Taken together, our findings confirm that restricting future fossil fuel use will accelerate current-day consumption.

2. New survey of genonomics, NBER.

3. Dmitri Alperovitch on Taiwan and Ukraine.

4. “The top immigration authority in Mexico is now operating as its own criminal entity extorting, kidnapping and smuggling migrants all across the country.

5. Scriabin, Opus 42, no.5.

The Fiscal Impact of Low-Skill Immigration

Low-skill immigrants have low wages and thus don’t pay much in taxes but they do use some government services, especially education for their children. What’s the net fiscal impact? The National Academy of Sciences did a detailed scenario analysis looking at the impact over 75 years, thus including second and third generations. Overall the NAS concluded that the net fiscal impact of the average immigrant was positive. The impact was negative, however, for immigrants with just a high school education and even more so for immigrants with less than a high-school education.

Two recent papers qualify this conclusion. The NAS study estimated the direct fiscal effects of an immigrant–what do they pay in taxes and what do they take out in services? Immigration, however, has indirect effects on the native born population. In the The Case for Getting Rid of Borders I wrote:

The immigrant who mows the lawn of the nuclear physicist indirectly helps to unlock the secrets of the universe.

More prosaically, low-skill immigrants can complement higher-skilled native labor, increasing native productivity. Go to any fine restaurant in DC, for example, and you will typically see a native-born front of the house and a Mexican born back-of-the house. As Tyler quipped at lunch recently, all restaurants in the United States are Mexican restaurants only the type of food they are cooking changes. The opportunity to hire Mexican cooks increases the number of restaurants and the opportunities and wages of the native-born front of the house. Higher native wages mean higher taxes so there is a beneficial indirect fiscal effect of low-skill immigration.

A recent paper by Colas and Sachs, The Indirect Benefits of Low-Skilled Immigration finds that under plausible assumptions the indirect effects are large enough to make the net effects of immigration positive for almost all US immigrants.

My excellent colleague Michael Clemens makes another similar point about capital. When a profit-maximizing firm hires more labor it also hires more capital. Capital pays taxes. Thus, immigration raises the taxes paid by capital and when you add that indirect effect to the calculation it also shows that the net fiscal impacts of low-skilled immigration are plausibly positive.

The fiscal benefits of low-skilled immigration aren’t a big reason to support low-skill immigration but the new literature on the indirect effects should take one worry off the table.

As a takeaway, it’s important to recognize that the fiscal benefits arise because low-skilled immigrants are gainfully employed. The U.S. excels at integrating people into the workforce. We need to keep this in mind when thinking about labor policy including minimum wages, occupational licensing, E-Verify, access to banking, education, and driver’s licenses and so forth. We could easily turn fiscal benefits into fiscal costs by making it more difficult to employ immigrants (and workers more generally). Employing immigrants benefits both them and native citizens. America’s open markets play a pivotal role in this success. Let’s keep it going.

When are mental health interventions counterproductive?

The researchers point to unexpected results in trials of school-based mental health interventions in the United Kingdom and Australia: Students who underwent training in the basics of mindfulnesscognitive behavioral therapy and dialectical behavior therapy did not emerge healthier than peers who did not participate, and some were worse off, at least for a while.

And new research from the United States shows that among young people, “self-labeling” as having depression or anxiety is associated with poor coping skills, like avoidance or rumination.

In a paper published last year, two research psychologists at the University of Oxford, Lucy Foulkes and Jack Andrews, coined the term “prevalence inflation” — driven by the reporting of mild or transient symptoms as mental health disorders — and suggested that awareness campaigns were contributing to it.

“It’s creating this message that teenagers are vulnerable, they’re likely to have problems, and the solution is to outsource them to a professional,” said Dr. Foulkes, a Prudence Trust Research Fellow in Oxford’s department of experimental psychology, who has written two books on mental health and adolescence.

Here is more from Ellen Barry at the NYT.

The evolution of university governance

This David Pozen piece is excellent, non-partisan, and uses plenty of economic reasoning.  Here is just one excerpt from a much broader treatment:

For all the talk of how the modern university has been corporatizedneoliberalized, and so on, there hasn’t been as much attention paid to the ways in which it has been presidentialized.

The presidentialization of Columbia dates back well before the current moment. Our last president, Lee Bollinger, ran the university for over two decades. During his tenure, Bollinger oversaw the rise of a substantial administrative apparatus—the ten highest paid Columbia employees, apart from surgeons, are now all senior executives—as well as the creation of a dizzying array of research centers, policy institutes, and global programs that operate more or less independently of the academic departments. Bollinger’s office also launched countless smaller projects with discretionary funds. After the insurrection at the Capitol on January 6, 2021, for instance, he came up with the idea for a Constitutional Democracy Initiative (with which I am affiliated) and, within weeks, an impressive new outfit was up and running. Meanwhile, the most broadly representative body on campus, the University Senate, seemed to become less relevant with every passing year.

And on endowments:

Over the past generation or so, having a large endowment has become something more than a means to support longstanding institutional goals; it has become an end in itself, a key measure of a university’s prestige and its president’s performance. And because most philanthropists don’t like to fund boring old operating budgets, expanding the endowment is often accomplished through conditional gifts for enticing new endeavors, as reflected in the proliferation of extra-departmental centers, institutes, and programs referred to above. Once launched, these non-tuition-receiving entities—and all the jobs, faculty fiefdoms, and student opportunities that come with them—only tend to increase the demand for ongoing donations.

There are further interesting points at the link, including about Title IX, recommended.  For the pointer I thank Anecdotal.