2022 – Page 24 – Economist Writing Every Day

Counting the missing poor in pre-industrial societies

March 27, 2022March 29, 2022Vincent GelosoLeave a comment

There is a new paper available at Cliometrica. It is co-authored by Mathieu Lefebvre, Pierre Pestieau and Gregory Ponthiere and it deals with how the poor were counted in the past. More precisely, if the poor had “a survival disadvantage” they would die. As the authors make clear “poor individuals, facing worse survival conditions than non-poor ones, are under-represented in the studied populations, which
pushes poverty measures downwards.” However, any good economist would agree that people who died in a year X (say 1688) ought to have their living standards considered before they died in that same year (Amartya Sen made the same point about missing women). If not, you will undercount the poor and misestimate their actual material misery.

So what do Lefebvre et al. do deal with this? They adapt what looks like a population transition matrix (which is generally used to study in-,out-migration alongside natural changes in population — see example 10.15 in this favorite mathematical economics textbook of mine) to correctly estimate what the poor population would have been in a given years. Obviously, some assumptions have to be used regarding fertility and mortality differentials with the rich — but ranges can allow for differing estimates to get a “rough idea” of the problem’s size. What is particularly neat — and something I had never thought of — is that the author recognize that “it is not necessarily the case that a higher evolutionary advantage for the non-poor over the poor pushes measured poverty down”. Indeed, they point out that “when downward social mobility is high”, poverty measures can be artificially increased upward by “a stronger evolutionary advantage for the non-poor”. Indeed, if the rich can become poor, then the bias could work in the opposite direction (overstating rather than understating poverty). This is further added to their “transition matrix” (I do not have a better term and I am using the term I use in classes).

What is their results? Under assumptions of low downward mobility, pre-industrial poverty in England is understated by 10 to 50 percentage points (that is huge — as it means that 75% of England at worse was poor circa 1688 — I am very skeptical about this proportion at the high-end but I can buy a 35-40% figure without a sweat). What is interesting though is that they find that higher downward mobility would bring down the proportion by 5 percentage points. The authors do not speculate much as to how likely was downward mobility but I am going to assume that it was low and their results would be more relevant if the methodology was applied to 19th century America (which was highly mobile up and down — a fact that many fail to appreciate).

The Carousel of Stupid

March 26, 2022March 25, 2022Joy BuchananLeave a comment

The destruction of value is graphic and tragic, caused by Russia invading Ukraine this month. Of course violence is common, around the world and throughout history. Violence and repression lead to poverty. Only in rare circumstances have autocracy and despotism been escaped, so that commerce can flourish and wealth can be shared.

Last week I blogged about my nice experience at Disney World. I was happy to see them telling the story of technological growth at The Carousel of Progress ride. At Disney, people really commit to their stories. Adults don’t wear mouse ears or Jedi robes ironically, in the park. The Carousel of Progress message is 100% optimistic about our future, without any cynicism or hedging. There is no mention of government institutions or which legal arrangements will allow progress to continue.

Here is some political economy that is missing from the ride. I quote, without indenting, from the late P.J. O’Rourke’s book On the Wealth of Nations. O’Rourke explains, sometimes using Adam Smith’s words, how in rare circumstances humans managed to rise out of poverty and subjugation.

Beginning of Chapter 7: The first two books of The Wealth of Nations are Adam Smith’s creed of economic progress. Smith placed his faith… in the logic of common sense. We are required to care for ourselves. We act upon this requirement. Our actions are demonstrably beneficial to others. The economy progresses, QED. Or it would, Smith wrote, “if human institutions had never thwarted those natural inclinations.”

More from Chapter 7, on pre-Medieval history of Europe: Smith wrote that the “rapine and violence which the barbarians exercised” left Western Europe “sunk into the lowest state of poverty.” Commerce was destroyed, towns were deserted, fields were left uncultivated. But although the rule of law and the legal title to property that goes with it were destroyed, the result was not “Imagine no possessions/ I wonder if you can.”

End of Chapter 7, an explanation of how economic progress started in the West when the merchants gained some freedom: Adam Smith argued that the inclination of the feudal overlords to be selfish was so strong that it overwhelmed their instinct for self-preservation:

All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind. As soon, therefore, as they could find a method of consuming the whole value of their rents themselves, they had no disposition to share them with other persons. For a pair of diamond buckles… they exchanged… the price of the maintenance of a thousand men for a year, and with it the weight and authority which it could give them. The buckles, however, were to be all their own… whereas in the more ancient method of experience they must have shared with at least a thousand people… and thus, for the gratification of… vanities, they gradually bartered their whole power and authority.

Never complain that the people in power are stupid. It is their best trait.

Joy writing again: “Stupid” refers to the fact that the European lords could have maintained their own power if they had been willing to keep themselves and everyone else poor through continued violence. Consider who is currently being being crazy versus “stupid,” in Europe and elsewhere.

In Disney World’s Magic Kingdom, you can get off the Carousel of Progress and walk across the park, past the Main Street shops, to a dark scary ride called The Pirates of the Caribbean. Someone could teach a travel course where students do both rides and then discuss wealth creation. It would pair nicely with a Doug North reading. Then, everyone could ride “It’s Small World” ironically.

My view from the “It’s a Small World” ride

Covid Evidence: Supply Vs Demand Shock

March 24, 2022March 25, 2022Zachary Bartsch4 Comments

By the time most students exit undergrad, they get acquainted with the Aggregate Supply – Aggregate Demand model. I think that this model is so important that my Principles of Macro class spends twice the amount of time on it as on any other topic. The model is nice because it uses the familiar tools of Supply & Demand and throws a macro twist on them. Below is a graph of the short-run AS-AD model.

Quick primer: The AD curve increases to the right and decreases to the left. The Federal Reserve and Federal government can both affect AD by increasing or decreasing total spending in the economy. Economists differ on the circumstances in which one authority is more relevant than another.

The AS curve reflects inflation expectations, short-run productivity (intercept), and nominal rigidity (slope). If inflation expectations rise, then the AS curve shifts up vertically. If there is transitory decline in productivity, then it shifts up vertically and left horizontally.

Nominal rigidity refers to the total spending elasticity of the quantity produced. In laymen’s terms, nominal rigidity describes how production changes when there is a short-run increase in total spending. The figure above displays 3 possible SR-AS’s. AS0 reflects that firms will simply produce more when there is greater spending and they will not raise their prices. AS2 reflects that producers mostly raise prices and increase output only somewhat. AS1 is an intermediate case. One of the things that determines nominal rigidity is how accurate the inflation expectations are. The more accurate the inflation expectations, the more vertical the SR-AS curve appears.*

The AS-AD model has many of the typical S&D features. The initial equilibrium is the intersection between the original AS and AD curves. There is a price and quantity implication when one of the curves move. An increase in AD results in some combination of higher prices and greater output – depending on nominal rigidities. An increase in the SR-AS curve results in some combination of lower prices and higher output – depending on the slope of aggregate demand.

Of course, the real world is complicated – sometimes multiple shocks occur and multiple curves move simultaneously. If that is the case, then we can simply say which curve ‘moved more’. We should also expect that the long-run productive capacity of the economy increased over the past two years, say due to technological improvements, such that the new equilibrium output is several percentage points to the right. We can’t observe the AD and AS curves directly, but we can observe their results.

The big questions are:

What happened during and after the 2020 recession?
Was there more than one shock?
When did any shocks occur?

Below is a graph of real consumption and consumption prices as a percent of the business cycle peak in February prior to the recession (See this post that I did last week exploring the real side only). What can we tell from this figure?

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Post Tenure Agenda

March 24, 2022December 5, 2025James Bailey7 Comments

To get anywhere new, you need to step off the treadmill

Before tenure, most academics need to publish their work in peer-reviewed journals if they want to keep their jobs. After tenure, most can publish their work anywhere or nowhere and still keep their jobs. This is a dramatic change in incentives, and you’d think it would lead to dramatic changes in behavior, particularly in a field like economics that studies incentives. In some ways it does- most professors spend less time on research after tenure. But if they do keep doing research, it is generally the same kind they did before- it seems surprisingly rare for economists to change what kind of research they do in response to their changed incentives.

On Monday the President of Providence College told me I’ve been promoted to tenured Associate Professor. I spent much of the last 10 years focused on publishing the 26 academic articles that got me here. So now I’m wondering, what do I change when freed from constraints? I’m planning a pivot toward higher-risk, longer time-horizon, potentially higher-reward research:

Different venues– publish things where people will read them, not where its most prestigious. More white papers, working papers, open access. More blog posts and popular articles, more books– not everything needs to be a peer-reviewed academic paper.

Different topics and methods– focus on work that might have policy impact even if it doesn’t publish well. Do more replications, forecasting and related work that moves us toward being a real science that establishes real truths, even if it doesn’t publish well and might anger some people. Make a point of posting data and code publicly so that its easy for others to use.

New skills– develop generalist skills or a 2nd specialty, ideally in a young/developing field like metascience or superforecasting. Breakthroughs are more likely to come that way, especially for someone not at the top of their 1st field. Create slack so that when big opportunities or needs arise, I’m not “too busy” working on old articles to do anything about it (like I was with Covid in February 2020, Bitcoin mining in 2011, et c). Of course, many of the directions I’m considering (prediction markets, consulting, angel investing, hanging around the state house) might never be “research” even if they do pan out.

The GMU economists are good role models here, though they are such outliers now that people don’t realize they often started their careers focused on publishing journal articles (admittedly some weird ones). For instance, Bryan Caplan’s first book came out 4 years after he got tenure. I’d like to hear more examples of people whose research changed for the better after tenure if you have them. I’d also like to hear about the projects you wish someone not concerned about career risk would take on.

I’m happy to be an Associate Professor at Providence College. While I wouldn’t mind hitting some higher rungs of the academic career/prestige ladder (full professor, endowed chair, NBER invitations, et c), I don’t view these as incentives strong enough to distort my choices the way needing to get a job and get tenure did. Now the goal is simply to do the best work I’m capable of, as I see it. As you can tell I’m pulled in a lot of different directions about what this will look like, but I hope that within 5 years it will be clear I’m doing quality work beyond standard applied microeconomics I’ve been exclusively focused on till now. If not, you’ll have this post to hold over me.

“I consider the “wasting of tenure” to be one of the aesthetic crimes one can commit with a wealthy life, and yet I see it all the time” –Tyler Cowen

West’s Seizing of Russian Foreign Reserves May Lead to Rise of Commodities as Money

March 22, 2022Scott Buchanan2 Comments

Some eighteen months ago, I wrote here on “Money as a Social Construct“. Most civilizations over the millennia have found it expeditious to move from simple, immediate barter of physical objects like cows to some system involving “money”. But what is money? Wikipedia gives the following standard definition:

Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given socio-economic context or country. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value.

For convenience, the “thing” used as money is best if it is portable and durable and of limited amount. Gold and silver have historically served these purposes. Even though these are physical objects, their actual value in usage (e.g. how much gold does it take to buy a cow) is arbitrary. Its value in usage is whatever is agreed upon by the users.

For this system of money to work, the key players all have to believe in the value of the gold coins. Thus, money is a mainly social construct, an article of mutual faith. If people lose faith in the value of some form of non-commodity money, it will in fact become valueless.

We have moved from useful commodities like cows, to gold coins and bars, to printed dollar bills redeemable in gold, and now to fiat currencies not formally tied to any physical objects. And in the twenty-first century, most “money” is not even tangible printed bills, but is in the form of digital entries in accounts “somewhere”.

Trillions of dollars’ worth of transactions take place every year, on the supposition that the dollar you deposit in a major bank will be there next week or next year. At my own personal level, nearly all of my life savings exists in the form of investments in stocks or bonds of corporate entities, which are held in accounts that I only ever access from my computer. Thus, I rely on on-going functional, reasonably honest government to enforce rules on the stewardship of those funds at multiple levels. So I am betting everything on the supposition that law and order prevail.

Well, in war sometimes “law and order” do break down and the normal rules of stewardship are over-ridden. Such has been the case with Russian foreign reserves. The central banks of major nations hold assets in the form of accounts at other central banks. Russia, as a big net exporter, has accumulated reserves of dollars and other currencies at the central banks of various nations in the West. In the wake of Russia’s invasion of Ukraine, the Western banks froze some 630 million of Russian assets held in these banks. There has even been discussion of redeploying these assets to pay for assistance to Ukraine.

(Sadly, as I noted in How Overzealous Green Policies Force Europe to Bankroll Putin’s Military, these seemingly dramatic fund seizures and SWIFT sanctions are annoying but not crippling for Russia. Europe is still funneling billions of euros a month to Russia, because Europe has made itself utterly dependent on Russian natural gas due to prematurely chopping its own nuclear and coal power generation and banning the fracking process that has unlocked such enormous oil and gas production in the U.S.)

It is understandable why the West has taken such a step, in view of the unjustified Russian attack on Ukraine, and the ongoing atrocities such as the bombing of a maternity hospital and a clearly-marked children’s shelter. However, this action may lead to worldwide reappraisals of what is money and how net export nations choose to store their monetary surpluses.

The Wall Street Journal ran a piece called, “If Russian Currency Reserves Aren’t Really Money, the World Is in For a Shock.” It is suggested that central banks may be motivated to accumulate more of their reserves in the form of physical gold, held in their own countries, which cannot be confiscated by some outside forces. Or we may even go back to using “cows” as a store of value, with central banks gaining title to piles of useful commodities such as wheat or nickel or palladium.

Good hockey players skate to where the puck is heading. I bought into a fund of corn futures yesterday. After posting this article, I think I will log into my brokerage account and buy some shares in a fund holding physical gold.

College sports are better when they’re worse

March 21, 2022mdmakowskyLeave a comment

It’s spring break and that means catching up on both research and my social network. It also means college basketball. I remain firmly in the camp that college athletes should be paid for their incredibly high-value labor and, in turn, recapture a huge share of the surplus currently enjoyed by schools and coaches. What I am beginning to rethink, however, is the way that “professionalization” can and will play out.

This rethinking began with the the realization that my enjoyment of the product is largely insensitive to the presence of great players. The gap between NBA and NCAA basketball, in terms of quality of play, is so great that I simply don’t watch the sports in the same way. I consume the NBA the way I do Denis Villeneuve films: enjoying an artform in its closest approximation to perfection at the bleeding edge of innovation. NCAA basketball, in contrast, is a soap opera for genre aficionados. It’s Battlestar Galactica for sports fans.

There is a floating, ever-changing cast of characters supporting a handful of recurring leads. Clans and sub-clans. Rises and falls. Tragic failures and heroic redemption arcs. And, much like the latest show about wizards or post-apocaplyptic alien invasion survivors on the SciFy channel, the enjoyment of this product doesn’t require high level precision or execution. Quite frankly, the show is more enjoyable when the actors aren’t famous or especially elite; it keeps me squarely focused on the shlocky fun, rather than getting distracted by any urge to pick apart the film composition, story logic, or actor subtext. College basketball, in much the same way, keeps me squarely focused on the drama of gifted athletes doing their best to help their team achieve success in a limited window before moving on to the rest of their lives. Trying to get a little slice of glory now, while their knees will allow for greatness, before getting on with the endless particulars of adult life later.

Which brings me back to the eventual professionalization of college sports with athlete compensation. Schools will find themselves faced with a decision of whether they should spend money on the very best athletes or try to compete with less expensive players. Athletes will have to decide where the best opportunities to develop their professional game are, and how much of their human capital investment portfolio they want to dedicate to sports. What might the equilibrium look like?

We can coarsely reduce the pool of athlete’s into three categories: all-in on athletics, those looking to purely subsidize secondary education, and those aiming for a mix of both. Currently schools capture the most rents from the pure athletics all-ins, who dedicate nothing but the bare minimum to schooling while maximizing their athletic preparation. The all-ins will often be the best players, who get the most media attention and contribute the most to winning glory, attracting applications from young fans and donations from nostalgic alumni. You might expect that compensation would shift the most suprlus to them. We have to consider, however, the possibility that a proper market for elite college athletic labor would provide the prices needed to accelerate the formation of pre-professional academies and player futures contracts. The very best 18-year old basketball players may find it far more lucrative to take a $120K in income and full-time coaching today in exchange for 2% of future professional earnings.

At the same time, college basketball may similarly learn the true nature of their collective good: that it is, in fact, a zero-sum competition where the total amount of talent isn’t nearly as important for earnings as they think. While a small number of schools absorbing all of the top talent might be exciting for covers of no longer existent sports magazines, in reality 120 teams competing for a less skewed distribution of talent more predominantly interested in subsidizing the full cost of college (i.e. tuition, lost wages, etc) may actually make for more drama, which means more ratings, which means more money. Why try to compete with the academies for 1 year of the next Lebron when those same resources, will get you 5 good players for 4 years? Combined with the fact that this bundle of athletes will place greater value on (nearly) marginally costless scholarships, teams looking to compete in the long-term with a maximimally effcient allocation of resources could shift the competitive equiibrium could actually shift away from the top talent.

Sports are fun when they are played at the highest level. They are also fun, however, when a little chaos is injected into the drama. It’s great when Steph Curry casually hits shots 40 feet from the basket, when Lebron James or Nikola Jokic make Matrix-esque passes through impossible angles. But it’s also great watching players struggle at the edge of far more human limitations to a find to win on the biggest stage of their lives while wearing the jersey of one of hundreds of colleges. The highest drama includes players making shots, but sometimes it needs players to dribble off their foot, too.

We don’t have to limit earnings to capture that glory. We don’t have to take money from young people whose particular talents put them in the sliver of the human population whose greatest earning potential might be age 20. We don’t need to appeal to platitudes or false nostalgia to explain why they’re being compensated with something better than money. We can just pay them. Some things will change, but I think you’ll be shocked to see how little the experience of college basketball will change. College sports will remain largely the same, but it will be a bit less shady, a bit less hypocritical. It will place greater value on, and care for, the players they have directly invested in.

Which, at least to me, would be a little more fun.

The price of nails since 1695 and its lessons

March 20, 2022Vincent GelosoLeave a comment

There is a new paper in Journal of Economic Perspectives. Its author, Dan Sichel, studies the price of nails since 1695 (image below). Most of you have already tuned off your attention by now. Please don’t do that: the price of nails is full of lessons about economic growth.

Indeed, Sichel is clear in the title in the subtitle about why we should care — nail prices offer “a window into economic change”. Why? Because we can use them to track the evolution of productivity over centuries.

Take a profit-maximizing firm and set up a constrained optimization problem like the one below. For simplicity, assume that there is only one input, labor. Assume also that a firm is in a relatively competitive market so as to remove the firm’s ability to affect prices so that, when you try to do your solutions, all the quantity-related variables will be subsumed into a n term that represent’s the firm share of the market which inches close to zero.

If you take your first order conditions and solve for A (the technological scalar). You will find this this identity

What does this mean? Ignore the n and consider only w and p. If wages go up, marginal costs also increase. From a profit-maximizing firm’s standpoint trying to produce a given quantity, if prices (i.e. marginal revenue) remained the same, there must have been an increase in total factor productivity *(A).* Express in log-form, this means that changes in total factor productivity are equal to αW – αP. This means that, if you have estimates of output and input prices, you can estimate total factor productivity with minimal data. This is what Sichel essentially does (and Douglas North did the same in 1968 when estimating shipping productivity). All that Sichel needs to do is rearrange the identity above to explain price changes. This is how he gets the table below.

The table above showcases the strength of Sichel’s application of a relatively simple tool. Consider for example the period from 1791 to 1820. Real nail prices declined about 0.4 percent a year even though the cost of all inputs increased noticeably. This means that total factor productivity played a powerful role in pushing prices down (he estimates that advances in multifactor productivity pulled down nail prices by an average of 1.5 percentage points per year). This is massive and suggestive of great efficiency gains in America’s nail industry! In fact, this efficiency increases continued and accelerated to 1860 (reinforcing the thesis of economic historians like Lindert and Williamson in Unequal Gains that American had caught up to Britain by the Civil War).

I know you probably think that the price of nails is boring, but this is a great paper to teach how profit-maximizing (and constrained optimization) logic can be used to deal with problems of data paucity to speak to important economic changes in the past.

Disney World is not Decadent

March 19, 2022March 19, 2022Joy Buchanan3 Comments

Last week I went to Disney World for the first time. The decorations live up to the hype. The whole enterprise down to the efficient parking systems was impressive.

Galaxy’s Edge is a new Star Wars themed area in Hollywood Studios

In his book The Decadent Society, Ross Douthat argues that following the Apollo mission, Americans underwent a period of economic stagnation, demographic decline, and intellectual and cultural repetition. I think he makes good points, and every American should grapple with his proposition.

He specifically mentions Disneyland on page 36-37:

But has anything that fits this description happened since the moon mission? … There has been a growth in what [David] Nye calls “the consumer’s sublime” of Disneyland and Las Vegas. … But the hyperloop is a blueprint, Las Vegas is a simulacrum…

Has Douthat been to Orlando recently? Walt Disney was not complacent, and neither are the Disney employees who continue to carry out his vision. Orlando is a place where Americans have built stuff in the past few decades instead of trying to veto all progress.

Perhaps it is a decadent society that overvalues the Disney World pilgrimage. My parents never took me, so I am proof that you can have a good childhood without it. However, to build this zone and enjoy it seems like a perfectly legitimate peacetime activity for a country. People desire to stroll down a safe, beautiful, clean, walkable street with their families. The problem is that so many Americans can only do that for a few days per decade and empty their savings to Disney for the privilege.

There is a pernicious idea that respectable Americans live in towns that look just like 1950 and they do tourism at sites that look like 1850. Walt Disney obviously did not think that way. On Twitter, @EliDourado and @mnolangray are agitating every day to build more better stuff. We don’t need Donald Duck on every corner, but we could create cities that serve families better.

One surprise I found inside of the Tomorrowland zone of Magic Kingdom is an old ride called The Carousel of Progress.

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This Time was Way Different

March 18, 2022March 18, 2022Zachary Bartsch5 Comments

The financial crisis recession that started in late 2007 was very different from the 2020 pandemic recession. Even now, 15 years later, we don’t all agree on the causes of the 2007 recession. Maybe it was due to the housing crisis, maybe due to the policy of allowing NGDP to fall, or maybe due to financial contagion. I watched Vernon Smith give a lecture in 2012 in which he explained that it was a housing crisis. Scott Sumner believes that a housing sectoral decline would have occurred, and that the economy-wide deep recession and subsequent slow recovery was caused by poor monetary policy.

Everyone agrees, however, that the 2007 recession was fundamentally different from the 2020 recession. The latter, many believe, reflected a supply shock or a technology shock. Performing social activities, including work, in close proximity to others became much less safe. As a result, we traded off productivity for safety.

The policy responses to each of the two were also different. In 2020, monetary policy was far more targeted in its interventions and the fiscal stimulus was much bigger. I’ll save the policy response differences for another post. In this post, I want to display a few graphs that broadly reflect the speed and magnitude of the recoveries. Because the recessions had different causes, I use broad measures that are applicable to both.

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