*Kaput: The End of the German Miracle*
By Wolfgang Münchau, this book is the best and most detailed account of the German economic decline to date. Excerpt:
In 2018, the federal government promised that Germany would become a world leader in artificial intelligence.
As if they don’t understand that such efforts are more than just a play toy. The overall lesson I took away from this book (my interpretation, not the author’s) is that if a country does not have enough ambition and seriousness in its businesses and education systems, sooner or later it will not have that in its government either.
Another lesson is that the world, overall, is working less well than you might think.
I am sad to recommend this one. My primary reservation is that the author does not do enough to diagnose Germany’s obvious cultural malaise as an underlying root cause.
Let’s reform taxation for expats
That is the topic of my latest Bloomberg column. We should tax on the basis of residency, not citizenship. Only Eritrea shares with us the practice of doing the latter. Here is one excerpt:
There is another possible gain, one which may have more appeal to the incoming administration than to economists like me. Trump and his advisers have long worried about the US trade deficit, and there has been talk of taxing foreign direct investment to weaken the dollar and boost US exports. Rather than discourage foreign investment in the US, why not do something more positive — and encourage US investment abroad?
If Americans leave and start new businesses around the world, using previously domestic capital, that too will bring downward pressure on the dollar. Thus could Trumpian ends be achieved by more constructive means. As a bonus, such a plan would not alienate foreign countries, as they tend to view a tax on FDI as a tax on their citizens.
This tax reform also might benefit US exports more directly. Say a US company wants to send an employee abroad to do market research and explore distribution channels for future sales. The US tax system should not turn this into a difficult ordeal.
Encouraging more Americans to work abroad also is a form of foreign aid, as many of them will grow or start businesses, creating jobs and tax revenue for the foreign country. And it is a form of foreign aid that benefits US citizens rather than costing them money. In fact, given the prowess of US business, it may be one of America’s most effective forms of foreign aid.
This one we should just do.
*Bubbles and the End of Stagnation*
By Byrne Hobart and Tobias Huber, a new Stripe Press book.
Thursday assorted links
1. Dwarkesh podcast with Gwern, self-recommending.
2. Gila monster venom (NYT).
4. Magnus on chess.
Austrian economics and AI scaling
As many of you know, I grew up reading (on knowledge) Hayek, Michael Polanyi, Ludwig Lachmann, Mario Rizzo, and others in that tradition. For these Austrian and Austrian-related thinkers, knowledge is about how different parts of a system fit together, rather than being a homegeneous metric easily expressed on a linear scale. There is no legible way to assess the smarts of any single unit in the system, taken on its own. Furthermore, there are many “walls,” meaning knowledge is bumpy and lumpy under the best of circumstances. It thus makes little sense to assert that an entity is “3x smarter” than before. In my early 20s I received a second “dose” of related ideas through complexity theory and non-linear dynamics, some of those frameworks having Hayekian roots.
When people came along and made various predictions about AI following “scaling laws,” I was never extremely impressed. I did not feel I had the technical background to contradict them, I just was never sure they were measuring the social import of that knowledge in a meaningful way.
That is one (not the only) reason I have never been much persuaded by either the AI doomsters nor the AI utopians. Both seemed to me misguided rationalists, operating with a fundamentally pre-Hayekian understanding of knowledge. Furthermore, Ludwig Lachmann frequently told me that capital was a structure based on relationships of complementarity, mirroring the Hayekian knowledge insight in capital theory.
I find Matt Clifford’s observation “There is no AI-shaped hole in most organizations” to be a very useful starting point for analysis.
I am also much influenced by the history of artistic and scientific revolutions. Consider the Florentine artistic Renaissance, or say the blossoming of Germanic classical music in the 18th century. There were thick markets of rivalrous creators, sophisticated audiences, new technologies to work with, a diversity of funding sources, and strong beliefs that something very important was at stake, among other preconditions. Do we find similar preconditions active in AI worlds today? I would argue yes, but of course that could be contested. In any case, it is another and very different way of trying to understand the likely future pace of AI progress. “Does this feel like the environment that produced the Beatles and Bob Dylan?” “The Scot tinkerers of the Industrial Revolution?” “The German Romantics?”
Now in the last two days we have seen various media accounts (Bloomberg), some citing AI experts, claiming that scaling has slowed down or is no longer working. Put aside whether these claims are correct. I remain bullish on AI progress, because the AI world is showing so many signs of significant ferment. Ask yourself for instance — is it attracting the best minds and most ambitious people? Just as the postulation of AI scaling never so much excited me, neither does talk of its possible diminution much discourage me.
It is still a question of whether and at what pace we can find or create “AI-shaped holes” in organizations, or with individuals. And that is up to us.
My Conversation with the excellent Neal Stephenson
Here is the audio, video, and transcript. Here is part of the episode summary:
In Neal’s second appearance, Tyler asks him why he sometimes shifts from envisioning the future to illustrating the past, the rise of history autodidacts, the implications of leaked secrets from the atomic age to today’s AI, the logistics of faking one’s death, why he still drafts novels in longhand, Soviet idealism among Western intellectuals, which Soviet achievements he admires, the lag in AR development, how LLMs might boost AR, whether social media is increasingly giving way to private group chats, his continuing influence on technologists, why AI-generated art might struggle to connect with readers, the primer from The Diamond Age in light of today’s LLMs, the prospect of AGI becoming an unnoticed background tool, what Neal believes the world really needs more of, what lies ahead in Polostan and the broader “Bomb Light” series, and more.
Excerpt:
COWEN: How effectively could you stage your own death? You. Say you really want to do it, and you’re willing to do it.
STEPHENSON: To fake it or to actually —
COWEN: Fake it, but everyone thinks it’s real. I read about it in the papers. “Neal is gone.” I nod my head, I weep, and then I forget about it. I don’t mean I forget about you, but you understand what I’m saying.
STEPHENSON: Wait, there’s not that many circumstances under which all physical traces of someone can be obliterated. That’s a fairly hard thing to do. It would have been easier a hundred years ago, but now we’ve got cameras everywhere, and we’ve got DNA testing and other ways to prove or to disprove that somebody’s actually dead. I guess it would have to be something like a plane crash into the ocean.
COWEN: But then how do you survive it?
STEPHENSON: Oh, yes. Okay.
COWEN: To kill yourself is one thing, but to pretend you’ve killed yourself and stay alive seems harder.
STEPHENSON: You could parachute out if it was a small plane, not a jet airline full of people, but a single-seater. I guess that might work.
COWEN: So, hire a private plane, have it crash, parachute out into somewhere where you —
STEPHENSON: You’re witnessed getting into the plane and taking off, but then there’s no way to recover the evidence for some reason. It’s pretty hard to do. If someone really wanted to, if they were just determined to go and find the . . . You see the efforts that people have gone to to go down to the Titanic. Well, if you can go find that thing and check it out with a submarine, then it’s pretty hard to really find a place that can’t be accessed in that way.
I very much enjoyed Neal’s new book Polostan. And here is my first Conversation with Neal Stephenson.
Wednesday assorted links
1. The Indonesian energy trajectory. A new Substack.
2. Emily Oster on fluoride, vaccines, and raw milk (NYT).
3. Why didn’t people smile in old photos?
4. Fukuyama on how to make government more efficient.
5. Did a New Zealand start-up in a Wellington apartment just make major progress on nuclear fusion? (FT)
6. Christina Kirchner to prison for six years? (in Spanish)
Does declining fertility lower the gender pay gap?
Using a descriptive decomposition and data from the Panel Study of Income Dynamics, we show that, in gross terms, fertility decline can explain almost one-quarter of gender pay convergence from 1980 to 2018. Even net of a host of controls for human capital and job characteristics, fertility decline explains 8 percent of the attenuation of the US gender pay gap 1980–2018—about half as much as changes in education and about a quarter as much as changes in full-time work experience and job tenure combined. Finally, we show that employees’ fertility decline was fastest in the 1980s and subsequently slowed; this, in conjunction with persistent gender differences in parenthood–wage associations, helps explain stalled progress toward gender pay parity.
That is from a newly published article by Alexandra Killewald and Nino José Cricco. Via the excellent Kevin Lewis.
Signaling Quality in Crowdfunding Projects with Refund Bonuses
My latest paper, Signaling Quality: How Refund Bonuses Can Overcome Information Asymmetries in Crowdfunding (with the excellent Tim Cason and Robertas Zubrickas) is just published in Management Science.
Many promising crowdfunding projects fail due to a fundamental issue: trust. Potential backers often hesitate because they lack confidence in the credibility or viability of the projects. This gap is natural, as traditional bank financing involves a bank acting as an intermediary, vetting the project, assessing its risk, and effectively endorsing it with their reputation. In contrast, crowdfunding operates without such intermediaries. Backers rely on limited, often one-sided information provided by project creators, making it challenging to assess risks or validate claims. Unlike banks, which can access financial records, credit histories, and industry expertise, individual backers typically lack the time, resources, or skills to conduct rigorous due diligence. Moreover, assessing risk is expensive. So how can we convey information about the true value of a crowdfunding project to investors?
Here my co-authors and I turn to refund bonuses. We have previously shown in lab experiments that refund bonuses can dramatically increase the rate of success of crowdfunding contracts and, more generally, make it possible to produce public goods privately. The idea of a refund bonus is simple. In an ordinary Kickstarter-like contract, if a project fails to raise enough funds to reach its threshold, the funds are returned to the investors. In a refund bonus contract, if a project fails to reach its threshold the investors get their money back plus a refund bonus. The effect of the refund bonus is to make investing in socially valuable projects a no-lose proposition. Either the project succeeds which is great because the project is worth more than its cost or it fails and you get a refund bonus. The investor is better off either way.
Now consider the refund bonus from the point of view of the entrepreneurs. An entrepreneur who offers a refund bonus has a special reason to want their project to succeed, namely, if the project succeeds they don’t have to pay the refund bonus. Entrepreneurs know more about the quality of their project than investors. The entrepreneurs, for example, know the truth about their advertising campaign. Does the cool demo really work or was it puffery or worse? Entrepreneurs who offer refund bonuses are thus implicitly offering a kind of testament or bond–I am so confident that this project will succeed that I am willing to offer a refund bonus if it doesn’t succeed. As with a warrantee, the point of the warrantee is not that consumers will use it but that they won’t. The warrantee is a signal of quality. Similarly, we show that offering refund bonuses can signal quality.
Working out the equilibrium requires some game theory because if refund bonuses 100% guaranteed high-quality (i.e. if only entrepreneurs with high quality projects offered refund bonuses) then every project that offered refund bonuses would succeed but then entrepreneurs with lower quality projects wouldn’t fear offering refund bonuses. Thus, the equilibrium is mixed, all entrepreneurs with high quality projects offer refund bonuses but some entrepreneurs with low quality projects also offer refund bonuses. Nevertheless, the equilibrium is such that on average refund bonuses signal quality. We test the theory in a lab experiment and it works. Investors were significantly more likely to put their money into projects where the entrepreneurs chose to offer refund bonuses (n.b. this is in comparison to experiments where refund bonuses were imposed, i.e. we specifically test the signaling role of refund bonuses.)
Thus, refund bonus for crowdfunding provide a decentralized method of reducing asymmetric information. The refund bonus credibly allows information about quality to be transmitted from the entrepreneur to the investors. The bottom line is that refund bonuses increase the power of crowdfunding finance making it more competitive with intermediated finance.
Addendum: Here is an excellent podcast on refund bonuses and crowdfunding. “Refund bonuses could revolutionize crowd funding!”
J. Zachary Mazlish on median wages under Biden
An excellent post, one of the best things written this year in economics. Here is part of the bottom line:
Inflation did make the median voter poorer during Biden’s term.
- In no part of the income distribution did wages grow faster while Biden was President than they did 2012-2020.
- This is true in the raw data, and even more stark after compositional adjustment.
- In particular, the change in median incomes was well below its 2012-20 run-rate.
- But, the change in median wages is not what matters; it is the median change in wages that does. And this metric was even weaker under Biden: lower than any period in the last 30 years other than the Great Recession.
- People do not feel wages, they feel total income. And median growth in total income — post taxes and transfers — was not just historically low: it collapsed and was deeply negative from 2021 onwards.
- Much of this decline is due to timing of pandemic stimulus and even less the “fault of Biden” than other things.
Here is the full post, plenty of detail and distinctions throughout.
Big business is better than you think (rooftops)
We characterize optimal product market policy in an unequal economy in which firm ownership is concentrated and markups increase with firm market shares. We study the problem of a utilitarian regulator who designs revenue-neutral interventions in the product market. We show that optimal policy increases product market concentration. This is because policies that encourage larger producers to expand improve allocative efficiency, increase the demand for labour and equilibrium wages. We derive these results both in a static Mirrleesian setting in which we impose no constraints on the shape of interventions, as well as in a dynamic economy with wealth accumulation. In our dynamic economy optimal policy reduces wealth and income inequality by redistributing market share and profits from medium-sized businesses, which are primarily owned by relatively rich entrepreneurs, to larger diversified corporate firms.
That is a recent piece from Review of Economic Studies, by Corina Boar and Virgiliu Midrigan.
*Blitz* (no spoilers)
This is the Steve McQueen movie about the Nazi blitz against London. I found it visually superb, countering clichés (mostly), showing a different and more varied side of civilian life in wartime, and perhaps the best screen treatment (ever?) of what life was like in the earlier “world of atoms”. I objected to the overuse of Dickensian references. In any case one of the best movies of this year, please note we live in a charmed time I hope you are enjoying it.
Tuesday assorted links
1. LDS on AI. And likely AI policy under Trump.
2. The Zvi on sports gambling.
3. Thoughts on limiting the administrative state.
5. George Packer on Thomas Mann’s Magic Mountain.
6. Trump on higher education. And an insightful comment.
7. Auren Hoffman on the Dallas Cowboys new training facility, I was there and I agree.
The 1970s Crime Wave
Tyler and I wrap up our series of podcasts on the 1970s with The 1970s Crime Wave. Here’s one bit:
TABARROK: …people think that mass incarceration is a peculiarly American phenomena, or that it came out of nowhere, or was due solely to racism. Michelle Alexander’s, The New Jim Crow, takes his view. In fact, the United States was not a mass incarceration society in the 1960s.
It became one in the 1980s and 1990s due to the crime wave of the 1970s. It was not simply due to racism. It is true Blacks do commit more crimes relative to their population than whites, but Blacks are also overrepresented as victims. The simple fact of the matter is that Black victims of crime, the majority group, demanded more incarceration of Black criminals. In 1973, the NAACP demanded that the government lengthen minimum prison terms for muggers, pushers, and first-degree murders.
The Black newspaper, the Amsterdam News, advocated mandatory life sentences for “the non-addict drug pusher of hard drugs.” The Black columnist, Carl Rowan, wrote that “locking up thugs is not vindictive.” Eric Holder, under Obama, he was the secretary of—
COWEN: Of something.
TABARROK: Yes, of something. He called for stop and frisk. Eric Holder called for stop and frisk. Back then, the criminal justice system was also called racist, but the racism that people were pointing to was that Black criminals were let back on the streets to terrorize Black victims, and that Black criminals were given sentences which were too light. That was the criticism back then. It was Black and white victims together who drove the punishment of criminals. I think this actually tells you about two falsehoods. First, the primary driver of mass imprisonment was not racism. It was violent crime.
Second, this also puts the lie, sometimes you hear from conservatives, to this idea that Black leaders don’t care about Black-on-Black crime. That’s a lie. Many Black leaders have been, and were, and are tough on crime. Now, it’s true, as crime began to fall in the 1990s, many Blacks and whites began to have misgivings about mass incarceration. Crime was a huge problem in the 1970s and 1980s, and it hit the United States like a brick. It seemed to come out of nowhere. You can’t blame people for seeking solutions, even if the solutions come with their own problems.
A lot of amazing stuff in this episode. Here’s our Marginal Revolution Podcast 1970s trilogy
- 1970s Inflation: The Economic Fever That Changed America
- Oil Shocks, Price Controls and War
- The 1970s Crime Wave
Subscribe now to take a small step toward a much better world: Apple Podcasts | Spotify | YouTube.
How well does bar exam performance predict subsequent success as a lawyer?
Eh:
How well does bar exam performance predict lawyering effectiveness? Is performance on some components of the bar exam more predictive? The current study, the first of its kind to measure the relationship between bar exam scores and a new lawyer’s effectiveness, evaluates these questions by combining three unique datasets—bar results from the State Bar of Nevada, a survey of recently admitted lawyers, and a survey of supervisors, peers, and judges who were asked to evaluate the effectiveness of recently-admitted lawyers. We find that performance on both the Multistate Bar Examination (MBE) and essay components of the Nevada Bar have little relationship with the assessed lawyering effectiveness of new lawyers, calling into question the usefulness of these tests.
Here is the full article by Jason M. Scott, Stephen N. Goggin, and David Faigman. Via the excellent Kevin Lewis.