Year: 2022

Economics of the Russia-Ukraine Conflict

James Bailey4 Comments

Russia launched a full invasion of Ukraine last night. Most of the discussion I’ve seen has naturally focused on the fighting itself- what is happening, what is likely to happen, how did it come to this.

Since there are plenty of better sources to follow about that, I’ll simply offer a few observations on the economics of the conflict:

  1. Russia is not only more than 3 times as populous as Ukraine, it also more than twice as well off on a per-capita basis. This means its overall economy is more than 6 times the size of Ukraine’s. This gap has been growing since the fall of the Soviet Union, as Russia’s per-capita GDP growth has been much stronger, while its population has shrunk much less than Ukraine’s. Putting this together, Ukraine’s measured real GDP is actually smaller than it was in 1990, while Russia’s is larger.

2. Russia’s much larger economy allows it to spend much more on its military. Russia spends $60 billion per year, the 4th most of any country (after the US, China and India). Ukraine spends only $6 billion per year on its military. So Russia is starting with a big economic advantage here, though Ukraine has some of its own advantages, like fighting on their own ground and receiving more foreign support.

3. War is bad for business. Russian stocks are down 33% in a day, their biggest-ever loss; Ukraine shut down trading entirely, and their bonds are being hit even worse than Russia’s. Regardless of which side “wins” the fight for territory, both countries will be economically worse off for years as a result of the war.

4. Russia, though, expected that the war would lead to sanctions from the West that would harm their economy, and prepared for this by building up hundreds of billions of dollars worth of foreign reserves over many years.

5. US markets are down only slightly, much less than they would be if traders thought the US would get involved directly in the fighting. But this slight overall decline conceals huge swings. Companies that do business in Ukraine or Russia are big losers. But those that compete with Russian exports see their value rising given the expected sanctions. Because Russia’s biggest exports are oil and natural gas, the value of US-based oil & gas companies is rising, while alternatives like solar are also up substantially.

6. There is still some hope for Ukraine to expel Russian troops, but its not looking good, and even a victory would involve huge costs. This leaves people all over the world wondering, how did it come to this? How might future conflicts like this be avoided? There is of course a lot to say about military preparedness, nuclear umbrellas, and ways the West can impose costs on Russia as a deterrent. But what stands out to me is that a stagnant economy and shrinking population make a country weak and vulnerable. Ukraine has a worse economic freedom score than Russia; this combined with its relative lack of natural resources explains much of the stagnation. Political elites often focus on grabbing a large share of the pie, rather than growing the pie and risk empowering domestic opponents. But we’re now seeing how stagnation carries its own risks. A growing economy, and especially growing energy sources that don’t depend on hostile nations, is the path to independence and survival.

Home(r) Economics

Jeremy Horpedahl5 Comments

Is it harder to buy a home today than in the past? Many seem to think so. Lately, some people have used the example of the fictional Simpsons family to make this claim. A recent Tweet with around 100,000 likes expressed the sentiment:

The unspoken implication is that today a “single salary from a husband who didn’t go to college” couldn’t buy a typical home in the US. Or at least, it would stretch your budget so thin that you would have to give up something else or need two incomes to support that lifestyle (famously dubbed “the two-income trap” by Elizabeth Warren).

And it’s not just a Tweet that caught fire. A December 2020 article in the Atlantic claimed “The Life in The Simpsons Is No Longer Attainable” and used housing as a prime example. And while a 2016 Vox article on Homer’s many jobs doesn’t mention the cost of housing, they draw a similar conclusion and implication: “Homer Simpson has gone nowhere in the past 27 years — and the same could be said of actual middle-class Americans.”

But is this an accurate picture of the Simpsons family over time? And does that picture accurately represent a typical family in the US? Let’s investigate. And let’s start by pointing out that as measured by the availability of consumption goods, the Simpsons do see rising prosperity over time. They have flat screen TVs now, instead of consoles with rabbit ears, as the late Steve Horwitz and Stewart Dompe point out in their contribution to the edited volume Homer Economicus. But with all due respect to my friends Steve and Stewart, I don’t think many would deny that TVs, cell phones, and computers are cheaper today than in the 1990s. The familiar refrain is “but what about housing, education, and health care?”

In this post I want to take on the question of housing, partially by using the Simpsons as an example. My main result is this chart, which I will present first and then explain.

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Economics of an Alabama Small Farm Homestead

Scott BuchananLeave a comment

When I took a trip to Alabama a couple of months ago, I visited a small farm about an hour’s drive south of Birmingham. The proprietor of Rora Valley Farms, Noah Sanders, makes a living for his family mainly by selling vegetables from a garden plot, plus raising chickens for selling eggs and meat. I was curious as to how he manages to do this, since the usual model of agriculture is to operate at large scale, with big machines efficiently  plowing and harvesting hundreds and thousands of acres.

I had read online about a low tech, compost-intensive method of farming developed in Zimbabwe called Foundations for Farming. This method  has proven extremely successful in southern Africa at mitigating food insecurity; I posted a longish description of it at   “Pfumvudza” Planting Technique Revolutionizes Crop Yields in Zimbabwe.   Noah is listed as the U.S. representative for Foundations for Farming, which led me to contact him.

The Modern Homesteading Movement

The most fundamental aspect of his operation is not the specific crops he grows. Rather, it is the overall vision than he and his wife have for their lives and their family. Trying to start up a small farm is not something folks do just for the money. There are much, much easier ways to make a buck.

The Sanders are part of a small but growing homesteading movement. It is hard to pin down precisely what that means these days, but in general it denotes a lifestyle aimed at self-sufficiency. Thus, homesteaders grow a large portion of the food they eat, and often install solar panels and rain catchment systems to reduce dependence on the electrical and water grids. Raising chickens for eggs and meat is common. All this can be done in a suburban or even an urban back yard; nearly anyone can put in a garden, and some cities allow a few egg-laying hens to be kept (but no roosters, because of the noise nuisance). More typically, homesteading is done in a rural setting, on maybe 3-10 acres. Most of that acreage would be pasture, to support some larger animals, such as goats, sheep, and pigs, all the way up to cows.

Besides producing more of what you consume, part of the homesteading ethos is to consume less. Instead of buying yet more made-in-China stuff and watching hours of contrived mass media and movies, homesteaders are found making cheese or canning vegetables, or maybe just sitting on the back porch watching the ever-entertaining chickens. To keep overall investment down, a homestead dwelling itself is typically no-frills. You are more likely to see pine boards than designer ceramic tile when you look down at a homestead kitchen floor. Hopefully all this producing more/consuming less allows the adults to spend less time working away from home, and more time with their families. Most homesteaders still need to drive off to work “in town” to make ends meet. Holding down an outside job plus running a farm operation plus doing home-schooling can lead to stress and burnout, even for a strong young couple. A homesteading ideal, therefore, is to be able to support oneself entirely from home-based activities.

A big driver for homesteading is to raise children in a situation where they can see their parents daily working productively, and where the children themselves make genuine contributions to the family’s welfare, rather than being merely consumers that cost the family time and money to entertain and occupy them.   This small-scale, subsistence-type agricultural activity runs contrary to the conventional wisdom that economic welfare consists of increasing specialization and then exchange of goods/services that are produced by efficient specialists.    

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Fame makes for poor human capital

mdmakowsky2 Comments

There’s a concept sometimes floated in academia of being “overqualified”. The story usually starts with a PhD in something either extremely narrow in focus or difficult to imagine having an application in the private sector, and ends with the subject either excluding the PhD from their resume or driving a taxi. The idea is simple – this advanced degree that took years of intense study and effort to acquire has negative signal value in the broader marketplace. It’s the most brutal anecdote highlighting the failure of the Labor Theory of Value I know of.

I think something similar happens with reality television stars. They acquire a level of public awareness and notariety a rung below classic celebrities, but still multiple orders of magnitude more than the average citizen. If they become sufficiently famous they can earn rents off this notariety, at least in the short run. In the long run, however, the source of their fame is external to them (i.e. the show they were featured in), but have no immediate means to keep generating the exposure and public interest. The real problem, however, arrives if they try to re-enter the traditional labor force. They have a huge gap in their resume that requires explanation and haven’t been building human capital in any classic trade (and I very much include acting as a classic trade). Fame makes for fleeting human capital. Fame as capital decays rapidly, while the associated notariety serves as a tax that persists long after that fame has dissipated. This tax most often takes the form of casual harassment, but also includes threats to their privacy and safety. They may find themselves presented with opportunities to appear at bars, concerts, or county fairs for small fees, but these financial stop gap solutions only serve to further maintain what is now costly notariety while still failing to invest in any human capital with long run value.

Which brings me, of course, to JD Vance.

https://twitter.com/EggerDC/status/1495391630668578819?s=20&t=MG7JgWlcefO-kxOBr4-gHw

Cards on the table, I suspect Mr. Vance is not particularly brilliant, but I also doubt he is a complete fool. What I do think is that he has trapped himself in a career path not dissimilar to a reality TV star. Much in a way that a lot of bachelors and bachelorettes think they can build a Kardashian-esque career, Vance thought he could be another Trump. He wrote a successful book and that was made into a film. He dabbled in venture capital and, much like Trump, probably failed (though I can’t really say). What he saw, like Trump, was a path from fame to a career being compensated for that fame. There’s a real chance that it’s not going to work, and forwards inducting from a failed political bid that has included consistently foolish proclamations in an effort to pantomime populist-Trumpism, he doesn’t like what he forsees. Being fame-trapped into a red state fairground fear-mongering stooge might be a way to make a living, but it’s not a living he is particularly excited about.

Fame is a zero-sum tournament, and like a lot of such tournaments the top prize is extremely lucrative. Unlike the basketball or golf, however, the losing here isn’t just costly, its potentially scarring. In this way, it’s a bit more like selling cocaine. You can live a very good life for a while, but if you lose you’re going to have a tough time succeeding at anything else down the line. JD is a shooting his shot, but I don’t think he’s making these sort of aggressive attacks on public figures because he’s excited about being a Senator so much as he’s scared of trying set up a quiet law practice in Ohio and spending the rest of his life explaining to folks he knew in high school what went wrong.

Context and age and soft skills

Joy Buchanan4 Comments

It is hard to know when oneself does not have enough context to appreciate a piece of art. When someone else lacks context, it is easier to see.

Consider my children watching last week’s Super Bowl halftime show. Snoop Dogg was performing on a stylized urban-themed stage. My kids could see the same thing I could see. They did not, remotely, “get it”.

You better lose yourself in the music…

“Lose Yourself” performed by Eminem

Children have little context for anything. But this half time show was a cultural moment. Millennials and Gen X experienced an awakening, or perhaps a collective crisis.

The following tweet got 60 thousand likes about how old the performers are. Everyone was calculating how many years had gone by since this hip hop and rap music was new. Decades have passed and now we who have the context to understand this music are feeling old.

In some nursing home in the year 2070, school children will trudge in and sing “Lose Yourself” because it makes the old people happy. The kids will not understand the appeal.

https://twitter.com/mattyglesias/status/1493037594237489156

Matt and Ben are tweeting about music in code, but it happens to be a code I know. There are many codes that I do not know. I think that is part of what Tyler means in his latest posts about how “context is scarce”.

The real reason for writing about context this week is not the Super Bowl. I was reading yet more articles about tech skills and labor demand.* Once again, I came across the issue of soft skills. Could we say, “Soft skills are that which is scarce”?

When workers lack hard skills, it seems straight-forward to pack them off to a bootcamp. Teach them, for example, some functions in a programming language. The solution to a lack of soft skills is less clear, although maybe that is what decades of modern education is for. Corporate workers today need to know when to apply their skills and what tone to use in their email communication. They must not embarrass the company.

If a manager tells a worker to do “X task,” they cannot explain every detail. The worker needs to have the context to carry out the work on their own. Workers need to know the code.**

Could that be why so many employers desire a bachelor’s degree? Tyler wrote:

9. So much of education is teaching people context.  That is why it is hard, and also why it often does not seem like real learning.

Does this explain why there is simultaneously age discrimination and the ubiquitous “5 years of experience” hurdle for good jobs? Managers are looking for the sweet spot of current technical savvy and institutional context.

* I was reading a report by Quinn Burke. Here’s a published paper on soft skills and STEM. Here’s a blog of mine in which I wrote, “Trust falls and Tolkien is the prescription for this workforce.”

**funny Elf clip on The Code and dating

Asymmetric Liability, Common Law, & Urbanization

Zachary Bartsch1 Comment

Tort law is interesting. You can argue that someone harmed you, and you can cite almost no legislation in the process. Torte law in the US uses case law – the precedent set by previous rulings in the context of social norms. But, what cases did the early cases cite? They also cited earlier cases and social norms, though we may no longer have a record. The beauty of tort law it allows for changing relative costs in prudence and negligence.

Can you imagine a legislature attempting to codify the appropriate amount of neglect by, say, a painter? The standards would quickly go out of date. The relative cost of resources including labor, communications, materials, and the price differences among competitors of differing quality all change over time. Multiply these factors by 20 and then again by the number of occupations and regions in a country. You will quickly see that legislating the appropriate degree of prudence and neglect through congress is a fool’s errand. The challenge is too complicated and the world changes too quickly. In fact, attempting to legislate definitions for neglect and prudence could even backfire and result in regulatory arbitrage, which occurs when firms comply with de jur rules while avoiding them de facto.*

Externalizing Costs

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Health Insurance Benefit Mandates and Health Care Affordability

James BaileyLeave a comment

My article on benefit mandates was published today at the Journal of Risk and Financial Management. It begins:

Every US state requires private health insurers to cover certain conditions, treatments, and providers. These benefit mandates were rare as recently as the 1960s, but the average state now has more than forty. These mandates are intended to promote the affordability of necessary health care. This study aims to determine the extent to which benefit mandates succeed at this goal

I began my research career by writing about these mandates, and my goal with this article was to tie up that whole chapter. I realized that all my articles on benefit mandates, as well as most of what other economists write about them, simply try to measure their costs- how much they raise health insurance premiums, raise employee contributions to premiums, lower wages, lower employment, or harm smaller businesses. Its good to know their costs, but to really evaluate a policy we should learn about its benefits too so that we can compare costs and benefits.

One key benefit that had yet to be measured was how much a typical mandate lowers out-of-pocket health care costs. In this article, I estimate that the average benefit mandate lowers costs by 0.8%-1%. I argue that combining this with a measure of how mandates affect total health spending by households could provide a sufficient statistic for the net benefits of mandates for households. I’m not totally confident this works in theory though, and it has a big challenge in practice- one of my empirical strategies finds that mandates reduce total spending, but the other finds they don’t. So I think the main contribution of the article ends up being the first estimate of how the average state health insurance benefit mandate affects out-of-pocket costs.

I’m currently planning to move on from writing about mandates- other topics are catching my eye, state policymakers don’t seem to particularly care what the research says about mandates, and changes in how economists use difference-in-difference methods are making it harder to publish articles like this that study continuous treatments. But I think there are still big opportunities here for anyone who wants to take up the torch. First, the ACA Essential Health Benefits provision changed the game for state mandates in a way that I have yet to see the empirical literature grapple with. Second, there are more than a hundred separate types of state benefit mandates; in most of my articles I aggregate them but they should really be studied separately. A handful have been, such as mandates for autism treatments, infertility treatments, and telemedicine. But the vast majority appear to be completely unstudied.

P.S. Writing this article gave me two wildly varying opinions of our federal bureaucracy. I tried to get both data and funding from the Agency for Healthcare Research and Quality for this article. The data side worked well- they were surprisingly fast, efficient and reasonable about the process of accessing restricted data. On the other hand, I applied for funding from AHRQ in March 2019 and still have yet to officially hear back about it (it is “pending council review” in NIH Commons). This sort of thing is why nimble organizations like Fast Grants can do so much good despite having much smaller budgets.

P.P.S. This article is part of a special issue on Health Economics and Insurance that is still accepting submissions. I’m the guest editor and would handle your submission, though my own got handled by other editors and put though multiple rounds of revisions.

Is Global Capitalism Increasing Poverty?

Jeremy HorpedahlLeave a comment

A few days ago on Twitter, Nathan Robinson made the claim that global capitalism wasn’t reducing poverty. In fact, it appears that poverty, using the threshold of $10/day (rather than the usual lower numbers) has increased from 1981 to 2017:

While there were a lot of critical responses to him on Twitter, he’s not wrong about the data: in 2017, there were 1.3 billion more people living on less than $10 per day (we’re going to assume in this post that the underlying data is basically correct, and correctly adjusted for inflation and purchasing power). It’s also true that at lower thresholds, such as $1.90 and $3.20, the absolute number of poor people has declined. And as a proportion of the world population, fewer people are under $10 per day. But in absolute terms there are more people under $10 per day. And not just a few: over a billion! There are also a lot more people above $10/day in the world than in 1981 (1.7 billion more!), but I agree that we should be concerned if there are more poor people too.

So how should we think about these numbers? Here’s what I think is the fundamental problem with Robinson’s claim: he asserts that the entire world has experienced something called “global capitalism” during this time period. But there has been considerable variation in the extent to which countries have experienced something we would call “capitalism,” and the degree to which it has increased in the past 40 years (I wrote a series of Tweets on this too).

The easiest way to see this is to break down that 1.3 billion people into different countries. Where were the biggest increases? Also, did any countries experience decreases in poverty? (Spoiler alert: YES!)

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Half of Deliberately Exposed Unvaccinated Volunteers in UK Study Did Not Get COVID; Why?

Scott BuchananLeave a comment

A British study by Ben Killingley and 31 co-authors recently appeared in pre-print form, where 36 (heroic) healthy young adult volunteers were deliberately exposed to the Covid virus by nasal drops. These volunteers then went into quarantine for 14 days, and logged their symptoms and were subjected to various tests for a total of 28 days.


Of the 36 subjects, only 18 (53%) became infected with the virus, as determined by PCR testing (the gold standard for Covid tests) and by direct counting of viral loads in mucus cells by FFA.

The study found that viral shedding (as estimated by mucus viral loads) begins within two days of exposure and rapidly reaches high levels, then declines. Viable virus is still detectible up to 12 days post-inoculation. This result supports the practice of people quarantining for at least 10 days after they first exhibit symptoms of infection. There were significant higher viral loads in the nose than in the throat,  which supports the practice of wearing masks that cover the nose as well as the mouth.


The cheap, fast, LFA rapid antigen test method (used in home tests) performed fairly well. Because it is less sensitive, it did not it did not yield positive results for infected individuals until an average of four days after infection, or about two days after viral shedding may have begun. But from four days onward, the LFA method was sensitive and reasonably accurate which supports the ongoing use of these quick, cheap tests.

These direct inclusions from the paper are helpful, but not earthshaking. The elephant in the room, which the paper did not seem to directly address, is why nearly half of the people who were exposed did NOT become infected. This raises all kinds of issues about what mechanisms the human body may have to naturally fight off COVID or similar viral infections. Gaining insight on this could lead to breakthroughs in preventing or mitigating this pernicious virus.

An article by Eileen O’Reilly at Axios probes these questions. There is nothing conclusive out there, but four ideas that are under investigation are:

1. Cross-immunity from the four endemic human coronaviruses is one hypothesis. Those other coronaviruses cause many of the colds people catch and could prime B-cell and T-cell response to this new coronavirus in some people.

2. Multiple genetic variations may make someone’s immune system more or less susceptible to the virus.  Some 20 different genes have been identified which affect the likelihood of severe infection, and a genetic predisposition to not getting infected is seen in other diseases where people have one or multiple factors that interfere with the virus binding to cells or being transported within.

3. Mucosal immunity may play an underrecognized role in mounting a defense.

This suggests nasal vaccines might have a chance at stopping a virus before it invades the whole body.

4. Where the virus settled on the human body, how large the particle was, the amount and length of exposure, how good the ventilation was and other environmental circumstances may also play a role.

These considerations support continuing with the usual recommendations of social distancing, wearing facemasks, and ventilating buildings, especially when caseloads are peaking. Also, the doses administered to the volunteers in the study were considered quite small by clinical standards. It was surprising that such a low dose was effective as it was in causing full-blown infections; and the particular strain used in the experiment was not necessarily one of the more recent highly virulent variants. After reading these results,  it is more understandable to me why so many reasonably careful friends and family members of mine (nearly all vaccinated, fortunately) have come down with (presumably) omicron COVID in the past two months. Just a little dab will do ya.

We’re all paying the Karen tax

mdmakowsky1 Comment

Headlines have moved on from the The Great Resignation to the The Return of Inflation, which is completely normal as far as news trends go. But I think it’s worth reflecting on how the two can be related.

I was privy to a conversation with a local food+retail business owner yesterday where she revealed she was no longer comfortable hiring teenagers for summer and after-school jobs. Not because they were inadequate to the task, but because they had to endure too much abuse from customers eager to take advantage of young people in a service position. She was confronted with a decision: either operate understaffed, increase prices to cover the cost of older employees, or completely reorganize her business model.

Behind the wave of Great Resignation articles and opinion pieces, there has been a subcurrent of related articles about increasing customer predilection for abusing employees. Whether the rate has increased or simply its observation is hard to say, but the phenomenon itself appears to be real and non-trivial. Working in retail and food service jobs has in many ways deteriorated in job quality. The first line of investigaton and blame is always management, but it looks like customers are on the hook this time as well. Karen-wants-to-speak-to-the-manager memes didn’t emerge from nothing, folks.

No shortage of ink has been spilled about stagnating wages, particularly for workers without college degrees. Such discussions, however, always exist within a framework that holds the work, and what it entails, constant. If the quality of life on the job declines without an increase in compensating wage differentials, then the true (net) wage compensation has actually decreased even when nominal or real wages remain ostensibly constant. Combined with a pandemic that made service industry work more dangerous, the precipitous increase in wages necessary to maintain a labor supply sufficient to production demands makes all the more sense. Did we really think we could live in a world where McDonald’s is offering $20/hr to start but prices would stay the same?

Now, let’s be clear, I’m not suggesting that current inflation is being driven by crappy customers eager to abuse anyone they can in a fit of narcisstic rage. But I am suggesting that it, and factors similar to it, is a non-trivial part of the recipe. The market is very good about pricing-in everything associated with the supply of a good, but that doesn’t mean there aren’t frictions and associated lags along the way. Employees and their lives are sticky, and sometimes it takes an exogenous shock to dislodge them from one equilibrium to the next. If we were so eager to accept the hypothesis that the stimulus checks and health concerns were sufficient to get people to quit, we should be no more surprised that they are returning with higher reservation wages than previously, and that these new reservation wages are getting priced into the market. Combined with an utterly flummoxed set of global supply chains and growing geo-political uncertainty, all on top of nearly $2 trillion in stimulus spending, growing prices seem a fairly natural outcome.

Returning to the original thesis: compensating wage differentials are as unavoidable as every other economic phenomenon borne of people making rational decisions given the information at hand. A generation of employees have discovered that bosses may be dour, insensitive, and obsessed with bottom lines at the expense of their employees well-being, but at least they need you. They have to see you at work tomorrow and reap the relationship they’ve sowed. There is an equilibrium of mutual respect and shared objectives to be reached there that is best for everyone, even if a lot of bosses can’t seem to get out of their way when building it.

Customer are a different beast altogether. It’s hard for us coordinate and there’s little we can individually do to punish those who opt to abuse the people serving us. We’ve got a common pool resource problem – a subset get all their gross benefit of being jerks while the cost is spread across everyone. Whether it’s refusing to wear masks, threatening violence, or verbally abusing young people, each and every one of those incidents gets steadily priced in, until one day we’re all just staring in shock at $6 hamburgers and asking what happened. I tell you what happened: the Karen Tax, and we’re all paying it.

I’m not delusional. I know we can’t boycott our family, co-workers, and acquaintences who abuse service workers. But maybe we can all agree to give them just a little more sideeye. Invite them to fewer lunches. Leave them out of the will. Because that’s the price that really needs to increase.

It’s time they paid the Karen Tax.