Hyperinflationary Efficiency?

I’m advising a senior thesis for a student who is examining the strength of Purchasing Power Parity in hyper-inflationary countries. Beautifully, the results are consistent with another author* who uses a more sophisticated method.

For those who don’t know, absolute purchasing power parity (PPP) depends on arbitrage among traders to cause a unit of currency to have the same ability to acquire goods in two different countries. If after converting your currency you can afford more stuff in foreign country, then there is a profit opportunity to purchase there and even to re-sell it in your home country.

Essentially, when you make that decision, you are reducing demand for the good in your home country and increasing demand in the foreign country (re-selling affects the domestic supply too). Eventually, the changes in demand cause the prices to converge and the arbitrage opportunities disappear. At this point the two currencies are said to have purchasing power parity – it doesn’t matter where you purchase the good.

So does PPP hold? One way that economists measure the strength of PPP is by measuring the time that it takes for a typical purchasing power difference to be arbitraged away by 50% – its ‘half-life’.  The more time that is required, the less efficient the markets are said to be.

The ex-ante question is: Is PPP be stronger or weaker during hyperinflationary periods?

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Are Poor Americans Really as Rich as Average Canadians?

Have you seen this chart? I certainly have. It floats around on social media a lot. The chart seems to indicate that poor Americans are better off than the average person in most other rich countries. Roughly equal to Canada and France, and better off than Denmark or New Zealand.

When I’ve asked for sources in the past, people usually aren’t sure. They remember downloading it from somewhere, but they can’t recall where.

But I think I found the source: it’s this article from JustFacts. After seeing how they calculated it, I’m skeptical that it provides a good comparison of poor Americans to other countries.

Here’s what the chart does. For most countries, it uses a World Bank measure of consumption per capita. They then convert that to US dollars using PPP adjustments. For the poor in the US, they use a consumption estimate for the bottom 20% of households (Table 6), and then divide by the average number of people per household. For the poor in the US, the average consumption for 2010 was an amazing $57,049, more than double the poverty line! That’s about $21,000 per poor person.

How is this possible?

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The Top Shot Blockchain Phenomenon

Samford Business student Wes Crane writes: Remember when people used to buy and sell physical sports trading cards? Recently the NBA has partnered with Dapper Labs, a company that specializes in blockchain (the same technology used for Bitcoin and Ethereum), to create and sell a digital art form of non-fungible tokens, or “NFT”s, that contain video clips of highlight moments which can be traded online at https://nbatopshot.com.

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I could do better

My favorite soccer team has been badly coached for 2 years and I am regularly convinced I could do better.

These are not the thoughts of a rational man and its causing me no small amount of consternation, bordering on intellectual crisis. Which is, of course, a lie, but adding a touch of intellectual melodrama never hurts when you’re trying your damnedest to write something new every week.

It is a puzzle, to be sure. There have been two coaches in the last two years, the second having only been there a week. The first was experienced, accomplished, and internationally famous. I’m quite confident he was wrong in the majority of decisions he made, but I at least had a model for why he was so often wrong.

When an ostensible expert appears to be failing at their job far worse than a hypothetically cheaper replacement, I always look for the rational reason why someone might be choosing to fail. In this case, we were observing an individual who could achieve mediocrity without effort. His past accomplishments gave him credibility with the players and his stock of knowledge as of 2011 was sufficient to carry him to large pay checks. To achieve mediocrity required near minimal effort. Could he update his tactics, both within the structure of the game and his management of personnel? Of course. But doing so would require enormous amounts of effort. His salary had peaked, his future managerial prospects dimmed by age and recent results, and as such the returns to effort were dwarfed by the returns to leisure. Allow me to enter ego into the calculus. What sounds more cognitively costly: acquiescing to reality that your human capital has been rendered obsolete and rebuilding your modus operandi from scratch with the full knowledge that you may spend your wealth-laden golden years failing in public? Or denying it fully, shifting all blame for failure onto the personnel, and bemoaning that it is not your human capital that is obsolete, but rather that the labor pool available to you is fundamentally flawed? To me its a no-brainer, and it’s why I am fully of the belief that there actually are bloggers in their mom‘s basement who could have better managed a team.

The new manager is a temp. He’s never managed a team before. Then again, neither have I. He has, however, played professional soccer at the highest level. He has been placed on the management training track by a world-class organization. He has none of the maladapted human capital or rational-addiction-adjacent reasons to fail at his job. He has all of the local and tacit knowledge from being on the training pitch and in the locker room that I don’t.

I’m still confident I could have done a better job than he did today. Why is that?

I can construct a model to rationalize my beliefs, but that model gets awfully “just-so” very quickly. It relies on assumptions I can’t justify and broad generalizations that, if evenly applied, would hurt the case for myself as superior even more so than the current job holder. Of course, I can invent a narrative where I am the superior sports team manager, but that narrative would have to rewrite my entire personal history going back so far as to render me a completely differ human, and one who no doubt would have just as many (and possibly the same) blind spots.

I guess what I’m saying is that I know I shouldn’t be the manager. Every rational bone in my body knows that is a silly idea and I would fail miserably. But I think there is a case to be made that sometimes we can look at the person making decisions for our favorite team, look at their track record, and confidently say “They would be making better decisions if they talked it over with me.” When the armchair quarterback says ‘the coach is an idiot” they’re not saying they want to be the coach. They’re saying they want to be in the room. They want a voice because they think they could contribute.

Someone tell Tottenham Hotspur that I’m available. I’m not free, but I can be had.

Current Research on the Gig Economy – Palagashvili

Online platforms are allowing us to trade used goods more easily than before. Similarly, sites like UpWork and Uber are making it easier to trade small blocks of human labor. Since the gig economy is growing (as documented by Dimitri Koustas), it’s important to understand how it is affecting workers.

Liya Palagashvili of Mercatus has a working paper with Paoula Suarez “Women as Independent Workers in the Gig Economy” examining particularly how the growing opportunities to work on a gig basis has affected women in different ways than men. They note, for example, that (in 2014–2015) 87 percent of independent workers on the Etsy platform were female, while 14 percent of workers on Uber’s platform were female.

Abstract: New technologies and digital platforms have ushered in a rise of gig, freelance, contract, and other types of independent work. Although independent workers and the gig economy as a whole have received plenty of attention, little research has examined the heterogeneity of work characteristics among different independent work opportunities, specifically as it relates to the participation of women in this workforce. Existing data indicate that some digital platforms are more male dominated, whereas others are more female dominated. What accounts for these differences? In this paper, we empirically examine the heterogeneity of work within independent work opportunities in relation to female participation by analyzing work characteristics in the United States from the Occupational Information Network (O*Net) database that reflect greater temporal flexibility, which has been shown to vary across occupations and to attract more female workers. Our findings suggest that women in the independent work context do self-select into the types of independent work jobs that reflect greater temporal flexibility, as is the case for women working in traditional employment. However, our findings also reveal that the way in which the existing literature measures temporal flexibility in traditional work settings may not be the same as the way it is measured in the context of independent work. We discuss the implications of our findings for public policy and labor laws. (emphasis mine)

Current Research on the Gig Economy – Koustas

Dmitri Koustas of U. Chicago has a forthcoming paper “Is New Platform Work Different than Other Freelancing?”

Abstract: The rise of freelance work in the online platform economy (OPE) has received considerable media and policy attention in recent years, but freelance work is by no means a new phenomenon. In this paper, we draw on I.R.S. tax records to identify instances when workers begin doing online platform work versus other freelance/independent contractor “gig” work for firms. We find gig work occurs around major reductions in outside income, and document usage over the lifecycle. Our results provide suggestive evidence on motivations for entering into each type of work. (emphasis mine)

His work was cited in the LA Times last year

people take on this work primarily because they’ve lost a job or some of their income — and particularly for younger workers, app-based services have been significantly more lucrative than more traditional side hustles.

I got to (virtually) talk to Dmitri Koustas, who is now a leading expert on gig work, this week. He became interested in the gig economy when he was thinking through a more traditional econ. question of generally how people modulate their labor supply in response to income shocks.

He also has a working paper “Is Gig Work Replacing Traditional Employment? Evidence from Two Decades of Tax Returns”

First half of the Abstract: We examine the universe of tax returns in order to reconcile seemingly contradictory facts about the rise of alternative work arrangements in the United States. Focusing on workers in the “1099 workforce,” we document the share of the workforce with income from alternative, non-employee work arrangements has grown by 1.9 percentage points of the workforce from 2000 to 2016. More than half of this increase occurred over 2013 to 2016 and can be attributed almost entirely to dramatic growth among gigs mediated through online labor platforms. We find that the rise in online platform work for labor is driven by earnings that are secondary and supplemental sources of income. Many of these jobs do not show up in self-employment tax records… (emphasis mine)

Singing IPUMS Praises

This is a late post, but I just want to sing the praises of IPUMS.

I first encountered IPUMs data in Sacerdote’s paper on intergenerational human capital transfers in which he showed literacy rates by birth cohort throughout the 19th century (figure 4 is downright beautiful). I’ve since dug-in myself concerning school attendance and human capital.

In the papers that students write in our econ elective classes, it’s not unusual for them to contain FRED data. Given that we don’t teach time-series, the papers are usually empirically weak. But this semester in my Wester Economic History course, I’ve encouraged student to utilize IPUMS. There are 4 students who are using it whose ideas I will surely publicize in the future:

  • Historical patterns of deaf employment, education, human capital, & income
  • The economic impact of the Brooklyn bridge
  • The composition of US interstate migrants relative to their host state
  • Patterns compulsory schooling

IPUMS is so darn rich. I strongly recommend it if you haven’t yet taken advantage of it.

Old Lives Matter

Bryan Caplan has kindly responded to my latest blog post, which was in turn a response to his blog post on the relative value of human lives by age. Caplan has always been kind in his responses, even when responding to pesky graduate students — kind in both his approach and the time he dedicates to responding thoughtfully. So I appreciate his taking the time to respond to me, and I will offer a few more thoughts on the matter.

To briefly summarize: Caplan believes that young lives (10 year olds) are worth 100-1,000 as much as old lives (80 year olds). I contend that they are closer to roughly equally valued. My disagreement with Caplan can be broken down into two categories:

  • A. Caplan’s three reasons why young lives are worth more (a lot more!) than old lives. I didn’t respond to that directly, but I will do so here. I think Caplan is narrowing the goalposts.
  • B. A disagreement over the shape of the VSL curve over the lifetime, specifically whether an inverted-U-shaped curve makes sense. I’ll say more about this too, but Caplan doesn’t just have a beef with me, but with almost everyone in the VSL literature!

Let’s start with Caplan’s three reasons, which he calls “iron-clad”: young people have more years to live, those years are generally healthier, and young people will be missed more when they are gone. The first in undeniably true on average, the second is probably true almost all the time, and I’m not sure on the third, but I’m willing to admit it’s not a slam dunk either way.

So how can I disagree? These are only three things. There are many other considerations, and we can imagine other reasons that old lives are valued as much or more than younger lives! I’ll call mine 4-6 to go with Caplan’s 1-3:

  1. Old age spending is the largest component of public budgets in developed countries (and this is unlikely mostly due to rent seeking or the self interest of younger generations).
  2. The elderly possess wisdom which is highly valuable and that the young benefit from.
  3. The last years of your life are, on average, worth a lot more — you are usually very wealthy, have no employment obligations, you have grandchildren you love (without the responsibilities of parenting), and are (until the very end) generally healthy too.

Taken as a whole, I think these three reasons present a strong counterargument to Caplan’s three reasons. And I think we could certainly come up with more! My point being that Caplan has picked three areas where clearly young lives have the advantage, but ignored all the good reasons why old lives are more valuable. These is what I mean by we shouldn’t rely on our intuitions. Neither of our lists are exhaustive, but let me elaborate on a few of these.

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Stoned Age Cave Paintings

It has long been argued that many of the artists drawing on cave walls were not merely trying to draw the external world as accurately as possible. Rather cave art was:

A deliberate mix of rituals inducing altered states for participants, coupled with brain chemistry that elicits certain visual patterns for humanity’s early chroniclers.

The cave painters had rituals that involved taking drugs (undoubtedly plants) that they consumed in a frenzy to get to this creative state. This behavior and the same results were noted by 1960s-era academics studying the effects of peyote, a hallucinogenic cactus found in North America.

Some drawings which illustrate these patterns are:

There seem to be a number of geometric patterns like honeycombs, tunnels and funnels, cobwebs, and spirals which show up repeatedly across different continents. This has fueled speculation that those prehistorics were tripping out on veggies like peyote and magic mushrooms. In his “Stoned Ape” theory, the late Terrence McKenna proposed that consumption of shrooms gave the earliest humans higher energy and group cohesion and helped humanity to evolve the use of language.

A more recent study by Tel Aviv University researchers suggests that another way that Stone Age artists got into an altered state was plain oxygen deprivation. Many sites of cave art, particularly in France and Spain, are at the end of long, narrow passages. If a couple of guys got into one of those rooms, with a blazing torch or two, the oxygen level would soon be significantly depleted:

They found that oxygen concentration depended on the height of the passageways, with the shorter passageways having less oxygen. In most of the simulations, oxygen concentrations dropped from the natural atmosphere level of 21% to 18% after being inside the caves for only about 15 minutes. 

Such low levels of oxygen can induce hypoxia in the body, a condition that can cause headache, shortness of breath, confusion and restlessness; but hypoxia also increases the hormone dopamine in the brain, which can sometimes lead to hallucinations and out-of-body experiences, according to the study.

Drawings like the following from the Altimira cave are pretty impressive under those circumstances:

Don’t arbitrage time with friends

As you may have already heard, the US suicide rate dropped 6% last year. During a pandemic. During a lockdown. During a time when rates of depression have reportedly increased. This is all quite surprising to many people, myself included. I don’t have a convincing explanation, only a single relevant thought.

I think we’ve rediscovered regular long-distance communication with people that have drifted out of our lives and many of us are better for it. I know I am.

While I think that loneliness and isolation are major force behind a lot of social ills, I also know that the “loneliness epidemic” was always a poorly constructed metaphor at best, and possibly only weakly observed at worst. But I also suspect that loneliness and isolation are phenomena in the tails of the distribution. Isolation doesn’t happen to people with average or even below-average social networks. It happens to people entirely without them, for whom their strongest connections with other humans have dissolved. Such things do not always reveal themselves statistically, at least not without looking really hard.

We have observed the emergence, and now dominance, of asynchronous communication. We text, email, tweet. We post on Instagram, Facebook, Snapchat, or TikTok. These are all means of communication, but (with the possible exception of texting) these forms of communication exist outside of real-time. They don’t command chunks of contiguous time– they arbitrage the fractions of time that previously existed between activities and went uncommitted to a narrowly defined task.

I don’t know what causes loneliness, but I do know that its much easier to not feel lonely when you are spending fully committed time, and not arbitraged fractions, communicating with another human being. If you’re under the age of 40, its almost socially illegal to voice call a friend to talk. For many it would be viewed as an act of emotional aggression, an imposition of social need, if not anxiety, on another. The irony of this millennial norm I’ve unfairly placed on them through nothing but my own unreliable observations is that it strikes me as an accelerated path to friendless boomer sad-dad suburban isolation.

The pandemic hit and many of us had to start Zooming in to work. And we had to explain Zoom and Google Meetings to our parents so we could talk to them. But I think a lot of us started catching up with old school buddies, too. Folks you sent Christmas cards to or caught up with at a cookout the Sunday after Thanksgiving. It became completely normal to schedule a call in advance – to put it on a calendar and reserve that time. And I think a lot of people who moved for work or relationships, who after 10 years changed to a new office where they didn’t know anyone, who maybe had simply fallen out of step with friends after the first four years of trying to keep triplets fed — I think a lot of people really enjoyed the pandemic-driven need for reserving time for contiguous social interaction in a manner entirely unconstrained by geography. And maybe they ended up feeling less lonely for it.

Keep Zooming your friends far away. Keep putting it on the calendar. Do it forever.