Chapman Economic Forecast 2021

I watched the Chapman Economic Forecast Update 2021 live on June 16. Anyone can still watch it for free. (Thank you to to sponsors Edwards Lifesciences and BOA.)

Dr. Jim Doti believes inflation will go up. He didn’t present a forecast of wild double-digit inflation for 2022, however he does believe the data points to higher inflation. He and his team have a good track record of being correct.

They suggest that if inflation is going to increase, we can expect house prices to go down because mortgage rates rise. Housing is an excellent long-term inflation hedge. Yet, in the short term rising inflation leads to a decrease in home prices, historically. House prices have been rising for a long time, and their model suggests that there will be a short term minor correction.

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The Research Process: Building and Utilizing a Research Network

This summer I’m writing a series of posts about the curriculum of the research process, from the initial idea to the development of a complete draft. This week, I’m focusing on how to build and utilize a research network to support the development of your project from the initial idea to the data scaffolding of the first draft.

Why do you need a network? Why can’t you just lone wolf this research thing? For starters, going solo necessarily means you’re going to try reinventing the wheel at some point. Beyond that, your network can help you avoid common pitfalls in finding and using specific datasets, alert you to working papers in your general field, expose you to new methods that are being piloted in your discipline, and provide support when the going gets rough (it’s going to at some point). Your network also includes people who could be potential readers for your paper before you submit it to a journal and people who use their platform to boost junior scholars by inviting them to present in conference sessions, seminars, and workshops.

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How Will Rich Country Fertility Ever Get Back Above Replacement?

For population to be steady or rising, the average women needs to have at least two kids. In almost every rich country- including the United States, all of Europe, and all of East Asia- this isn’t happening. In the extreme case of South Korea, where total fertility averages about one child per woman, the population will fall by half each generation. If this were to go on for 10 generations, South Korea would go from a country of 50 million people- larger than any US state- to one of 50 thousand people, far smaller than any US state. This sounds crazy and I don’t expect it will actually happen- but I can’t say what exactly will stop it from happening.

Global population growth has fallen from a peak of 2.1% per year to the current 1%, and is expected to fall to 0 by 2100. The remaining population growth will happen in poor countries, then stop for the same reasons it did in rich countries- the demographic transition from poverty, argicultural work, and high infant mortality to high incomes, high education, and low infant mortality. As the graph below shows, higher income is an incredibly strong predictor of low fertility- and so if economic growth continues, we should expect fertility to continue falling. But where does it stop?

2019 TFR from Population Reference Bureau vs 2019 PPP-adjusted GDP Per Capita fron World Bank

Some have theorized a “J-curve” relationship, where once incomes get high enough, fertility will start rising again. You can see this idea in “Stage 5” of Max Roser’s picture of the demopgraphic transition here:

This makes sense to me in theory. As countries get richer, desired fertility (the number of kids each woman wants to have) has fallen, but realized fertility (the number of kids each woman actually has) has fallen faster. In a typical rich country women would like to have 2-2.5 kids, but actually ends up having about 1.5. There are many reasons for this, but some are clearly economic- the high cost of goods and services that are desired by rich-country parents, like child care, education, and spacious housing near high-paying jobs. Perhaps in a rich enough country all these could be obtained with a single income (maybe even from a part-time job). But it seems we aren’t there yet. Even zooming in on higher-income countries, higher incomes still seem to lead to lower fertility.

TFR vs GDP Per Capita in countries with GDP Per Capita over 30k/yr

The only rich countries with fertility above replacement are Panama and the Seychelles (barely meeting my 30k/yr definition of rich), Kuwait (right at replacement with 2.2 kids per woman), and Israel- the biggest outlier, with 3 children per woman at a 42k/yr GDP. This hints that pro-fertility religious culture could be one way to stay at or above replacement. But in most countries, rising wealth seems to drive a decline in religiousity along with fertility. Will this trend eventually come to Israel? Or will it reverse in other countries, as more “pro-fertility” beliefs and cultures (religious or otherwise) get selected for?

To do one more crazy extrapolation like the disappearance of South Korea, the number of Mormons is currently growing by over 50% per generation from a base of 6 million while the rest of the US is shrinking. If these trends continue (and setting aside immigration), in at most 10 generations the US will be majority-Mormon. Again, I don’t actually expect this, but I don’t know whether it will be falling Mormon fertility, non-Mormon fertility somehow rising back above replacement, or something else entirely that changes our path.

What would a secular pro-fertility culture look like? For my generation, I see two big things that make people hold back from having kids: a desire to consume experiences like travel and nightlife that are harder with kids, and demanding careers. I see more potential for change on the career front. Remote work means that more quality jobs will be available outside of expensive city centers. Remote work, along with other technological and cultural changes, could make it easier to work part-time or to re-enter the work force after a break. Improving educational productivity so that getting better-education doesn’t have to mean more years of school would be a game-changer; in the short run I think people will spend even more time in school but I see green shoots on the horizon.

Looking within the US, we are just beginning to see what looks like the “J-curve” happening. Since about the year 2000, women with advanced degrees began to have more children than those with only undergraduate education (though still fewer than those with no college, and still below replacement):

From Hazan and Zoabi 2015, “Do Highly Educated Women Choose Smaller Families?”

We see a similar change with income. In 1980 women from richer households clearly had fewer children, but by 2010 this is no longer true:

Fertility of married white women, from Bar et al. 2018, “Why did rich families increase their fertility? Inequality and marketization of child care”

The authors of the papers that produced the two graphs above argue that this change is due to “marketization”, the increasing ability to spend money to get childcare and other goods and services that make it easier to take care of kids. If this is true, it could bode well for getting back to replacement- markets first figure out how to make more excellent daycare and kid-related gadgets, then figure out how to make them cheap enough for wide adoption.

Temporary Income Shocks

As a graduate student in 2005, I took macroeconomics from Tyler Cowen. It was a fascinating class, covering not just the sweep of business cycle theories, but also just a good dose of “here is what it means to be an economist.” It was the first class in sequence, and for many incoming PhD students with no economics background (yes, this happens a lot!) it was the first economics class they took.

In that class we read a number of papers by Richard Thaler from his Anomalies series in the Journal of Economic Perspectives. We also read The Winner’s Curse in Bryan Caplan’s micro II course at GMU, the book that collected a lot of those JEP papers (for anyone that thinks the GMU PhD program is just straight Chicago school mixed with libertarianism, think again!).

One of the Thaler papers that always stuck with me was his criticism of the life-cycle theory of savings. That paper opens with a story of Thaler winning $300 in a football betting pool. Thaler, of course, used that income shock to splurge on some temporary indulgence, such as a bottle of champagne or a nice dinner. But a strictly rational agent should just use that extra income to increase their annual lifetime income by an even amount, such as about $20. That’s what the famous life-cycle hypothesis says, which is part of what Modigliani won the Econ Nobel for developing. That was in 1985. The joke is that just 5 years later, Thaler (and presumably other economists) were not personally behaving the way that economic theory says that people behave. (The meta-joke is that Thaler later wins the Econ Nobel too.)

This past week, that theory came full circle for me when Tyler Cowen awarded me an Emergent Ventures prize. It really did come as a shock, both in a real sense and an income sense. I was not expecting this prize in any way, but I am very honored and humbled to receive it. (Side note: this very blog that you are reading also received an EV grant, separate from my personal grant. Hooray for us!). The award was largely for my work on social media and this blog trying to convey good information and data during the pandemic, and to fight bad information.

The question that has been gnawing at me since receiving the award is: what should I do with it? It’s a nice problem to have. I am not complaining in any way. But it’s an especially fascinating question for an economist to think about, and to reconsider how we model human behavior.

The award also intersects with my blog post from last week on “what is income?“. The IRS most definitely considers an award like this to be “income,” and not just any income: it is self-employed income, since it doesn’t come from my employer. If I take it as a cash award, the tax bite will be quite large. However, I could also use the award for some academic purpose: purchasing equipment or software; attending a conference (perhaps one that my University would not normally pay for); or running a small workshop or conference (possibly, in the theme of the award, on how to communicate good information effectively on social media?). In those cases, I might legally avoid some taxes.

I don’t yet know what I want to do with the award. But it’s a really interesting intellectual, professional, and personal challenge to think about. Again, nice problem to have. But thank you again to Tyler, Mercatus, and Emergent Ventures for the honor. And thank you to all my readers out there for making the intellectual journey with me over the past year and a half!

The Internet Knows Everything

About ten years ago, movers showed up to pack up and move our worldly goods across town. Because this was a short move, we went with some local, low-priced labor, instead of name-brand professionals. From a previous move, we knew that the legs of our baby grand piano could and should be removed for transport. Unfortunately, none of the movers knew how to detach the legs, and neither did I. I squirmed underneath and looked up, and did not see how to do it. I only saw some massive screws that looked like they were not about to move.

The internet to the rescue – – a quick search led to a YouTube video showing somebody moving a piano like ours, and just reaching under and knocking something with a rubber mallet, and voila, off came the legs. I could not see exactly what they did, but when I crawled under the piano again to look for something easily knocked aside, which had to be there, it was obvious what to do.

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Rules, Discretion, and Privilege

I’m often wary of personal stories that illustrate an idea too perfectly, but here we go.

I was in a small local grocer purchasing tonic water, which elicited a comment from a White middle-aged man about the importance of never running out of tonic when there is gin to drink, followed quickly by an unsolicited story of his drinking and driving, only to get pulled over by a police officer and be told to “Go straight home, I don’t want to see this car on the road the rest of the night.” This prompted innocent confusion on the part of the young Black cashier, who asked

“Wait, were you drunk?”

“Oh yeah, I was completely hammered”

That’s it, that’s the whole story. The young woman was flabbergasted that an officer would pull over a clearly drunk driver and let them off the hook. I doubt she was unaware of the concept of White Privilege, but rather I suspect she was shocked to find it extended to something as socially stigmatized as drunk driving. She rang up my bill, her face frozen in a “Really?” that for all I know she is still wearing to this day.

The optimal balance of unbending rule adherence/enforcement versus pure discretion in judgement/enforcement will always be an open debate at the level of macro institutions and the day-to-day micro decisions of the agents presiding over our lives. Rather than further adjudicate how much discretion is optimal, I ask that you only grant me that the median voter in nearly every context demands that discretion remains > 0.

In the context of law enforcement, what I would like to contend is that we have chosen the wrong kind of discretion. Or, perhaps more precisely, the emphasized discretion in the wrong direction. With rare exception, our rules dictate overly-harsh punishments, and it is in the agents of enforcements that we have both imbued, and burdened, the power of discretionary lenience. The officer can let you off with a warning or record a speed below a key punishment threshold, the judge can sentence you to probation instead of jail time or suspend your sentence entirely. We are, many of us, comfortable with this construct because at some level we have faith in the humanity, the sympathy, of the enforcer.

This construct has consequences. Most obviously, it means the system will be harsher on groups of people with whom the enforcing agents have less sympathy, in whom they see less in of themselves (or their children). Showing how ticket speeds “bunch” on different sides of a punishment threshold for white and black drivers, Goncalves and Mello neatly show officer discrimination, not in the form of targeting black drivers with additional cruelty, but rather in excluding them from the relief afforded White drivers from a harsh system of rules.

This is an important distinction. In a system with gentle rules, the burden is placed upon the discretionary agent to ensure punishment is sufficient to the transgression. They have to bear the burden of what happens to the punished; they have to be the villain in that person’s story. When the rules are cruel and the system allows for sympathetic lenience, they get to be that person’s hero. Even for those humans with whom officers have less sympathy, it will still be easier for guilt averse officers to fail to be someone’s hero than opt to be their villain. Perhaps most importantly, it displaces accountability for punishment outcomes from the discretionary agent to the system as a whole. Few will ever be fired or shunned for failing to intervene on behalf of a transgressor, but those who opt to dispense additional punishment may be asked to defend their choice. If you want accountability, strictness has to be someone’s choice.

How did we end up with a variety of brutal punishments that we count on discretionary agents to protect us from? I can imagine a variety of origin stories. When Nixon sold White Southern voters on “Law and Order” it was by design a promise to lock away the Black men that White southerners were terrified of. White southerners had every reason to believe they, and more importantly their sons, would be protected from draconian drug laws by, what were then, almost exclusively White officers and judges. I also don’t think we should underestimate how the median American views the prospect of being arrested as something that happens to other people. Strict punishments are exactly what criminals deserve. In the unlikely event you interact with the system, the professionals in the system will quickly see their error or, at worse, will see you as someone who doesn’t deserve to be punished harshly. Discretion will save you.

Lastly, harsh punishments and discretionary lenience allows observers from the privileged group off the psychological hook with a simple bit of reasoning: “They broke the rules, that’s the punishment according to the rules. They made their choice.” But is that the line of reasoning you follow when you interact with an officer?

When you see red and blue flashing lights in your rearview, what runs through your mind? Do you plan your story– the job interview you’re rushing to, the bathroom emergency you’re in the midst of? Do you prime your system for the Stanislavskian production of tears? Or do you get out your license and registration, put them in your left hand, roll down your window, and place both hands squarely at the top of the steering wheel hoping desperately not to spook the officer you expect will unbutton their sidearm as soon as they see the color of your skin?

A post script

When racial discrimination and White privilege are levied as explanations of social phenomena, even though the two are, for all intents and purposes, outcome equivalent, I often can’t help but think that the wrong rhetorical option is chosen. If and when employers discriminate against Black job applicants, this privileges White applicants, but those White applicants don’t actually observe the discrimination first hand. To frame this as an example of White privilege is to tell them they don’t deserve the job they’ve worked hard to acquire– their resistance to the explanation maybe shouldn’t be so surprising. Discrimination, not privilege, is the easier rhetorical sell because you are telling them a story about something negative that happened to someone else that they had no direct part in– they don’t have to be the villain in the story, they simply have to accept the evidence put before them and sympathize with those being harmed.

Conversely, stories of positive discrimination, such as the criminal justice system extending greater lenience to White citizens, are precisely examples of privilege. No one should feel unjustly villainized simply because they are receiving additional benefits when they did in fact break the rules. Furthermore, the policy goal to be pursued here is not to eliminate the privilege of lenience enjoyed by one group, but to extend that lenience to everybody else.

When framed as such – that negative discrimination is something to be eliminated, while positive privilege is something to be expanded, it becomes easier to persuade people because you’re never asking them to give something up or confess to a transgression they don’t recall committing. You’re letting everyone remain a hero in the story they tell themselves everyday.

Unless, of course, they’re just racist and want to use the government and market institutions we live within to cause as much harm as possible to others. There’s no rhetorical fix for that; they’re going to fight the rest of us every step of the way no matter how much evidence is found or how it is presented. But then again, they don’t really matter in this story, do they? They’re just inframarginal obstacles in our quest to persuade the median voter to accept the evidence of positive and negative discrimination, and work together to make the world just a little better, one policy at a time.

Paul Fain Highlights Illiteracy

Paul Fain writes a newsletter called The Job. The newsletter typically presents a few paragraphs one topic and then provides summaries and links to relevant news and current research. I subscribe because I write on and teach labor economics. The title of the letter this week is “Skills and Employability”.

As federal and state governments mull big spending on skills training, some experts say more resources should go toward boosting the literacy and numeracy of Americans without college degrees.

And despite the widespread belief that a quality liberal education in a college degree program is the best way to develop the sort of highly sought skills that pay off in the job market, many college degree holders also lack proficiency in literacy and numeracy.

Fain’s cites a recent essay by Irwin Kirsch calling for more opportunities for illiterate adults to achieve literacy, so that they can take advantage of continuing professional education. Kirsch is calling for more education so that the adults can do yet more education. I’m an educator and find myself sympathetic to Kirsch’s plan.

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Thread on Programming Ability

Ethan Mollick brought this Nature article to my attention. One of the authors Chantel Prat, is also on the thread.

The sample size for this study is only 36, so we should think of it as preliminary work toward understanding how people learn to program.

Their abstract, with emphasis added by me:

This experiment employed an individual differences approach to test the hypothesis that learning modern programming languages resembles second “natural” language learning in adulthood. Behavioral and neural (resting-state EEG) indices of language aptitude were used along with numeracy and fluid cognitive measures (e.g., fluid reasoning, working memory, inhibitory control) as predictors. Rate of learning, programming accuracy, and post-test declarative knowledge were used as outcome measures in 36 individuals who participated in ten 45-minute Python training sessions. The resulting models explained 50–72% of the variance in learning outcomes, with language aptitude measures explaining significant variance in each outcome even when the other factors competed for variance. Across outcome variables, fluid reasoning and working-memory capacity explained 34% of the variance, followed by language aptitude (17%), resting-state EEG power in beta and low-gamma bands (10%), and numeracy (2%). These results provide a novel framework for understanding programming aptitude, suggesting that the importance of numeracy may be overestimated in modern programming education environments.

Learning Python, at least at first, is more like learning a foreign natural language than it is like doing arithmetic problems.

There are still many open questions in this area, so I see this paper as an important small step in the right direction. I have also done a study on this topic.

Endless Frontiers: Old-School Pork or New Cold War Tech Race?

The Endless Frontiers Act passed the Senate Tuesday in a bipartisan 68-32 vote. What was originally a $100 Billion bill to reform and enhance US research in ways lauded by innovation policy experts went through 616 amendments. The bill that emerged has fewer ambitious reforms, more local pork-barrel spending, and some totally unrelated additions like “shark fin sales elimination”. But it does still represent a major increase in US government spending on research and technology- and other than pork, the main theme of this spending is to protect US technological dominance from a rising China. One section of the bill is actually called “Limitation on cooperation with the People’s Republic of China“, and one successful amendment was “To prohibit any Federal funding for the Wuhan Institute of Virology

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What Is Income?

The United States, like nearly all countries, has an income tax. What is an income tax? It’s a tax on income. What is income? That’s actually a very hard question.

The question comes up in a recent report by ProPublica on the taxes that very wealthy Americans pay (I’m not going to link to it, because the data was likely illegally obtained, and almost certainly immorally obtained, but you can easily find it). What’s really interesting is that never define income, but they do have an implicit definition which includes changes in net wealth. More on this later, but it does raise an important question under an income tax: what exactly should count as income?

For most wage and salary workers, income is fairly straightforward. It’s the compensation that your employer pays you in exchange for your labor services. Easy enough. There are some wrinkles. For example, most non-cash compensation is not considering income for tax purposes. And even some cash compensation, such as contributions to retirement plans, are not considered income. Still, pretty straightforward.

But what if you own a business? It gets a little more complicated. We could define your income as all of the money you receive when you sell goods and services to your customers. But that has a few problems. Let’s say you run a restaurant. You sell burgers for $5. Should you pay income tax on every $5 burger you sell? Keep in mind that you probably had $4.50 in expenses to sell that burger. You bought the beef, buns, and condiments. You paid your workers. You paid to “keep the lights on” (that’s how small business owners refer to utilities and other overheard). So our income tax system will only tax you on the $0.50 difference, which we usually call profit (in some years, of course, businesses have costs that exceed their sales revenue, in which case they owe no income tax).

Now for the really hard question: what if most of your income is derived from assets that you own? That’s where things get even more complicated, and both legal and philosophical questions come up.

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