Economics

Leave Me Alone and I’ll Make You Rich

James Bailey2 Comments

That is the title of a 2020 book by Dierdre McCloskey and Art Carden. It attempts to sum up McCloskey’s trilogy of huge books on the “Bourgeois Virtues” in one short, relatively easy to read book. I haven’t read the full trilogy, so I can’t say how good the new book is as a distillation, but I found that it was easy to read and at least makes me think I understand McCloskey’s basic thesis for why the world got rich. I share some highlights here.

Part 1 of the book aims to establish that the world did in fact get richer over recent centuries, plus give a basic explanation of liberal political thought. If you already know this you could skip this part and cut down an easy 189 page read to a very easy 106 page read (part 1 is for some reason written in a way that assumes you disagree with the authors, which grates when you don’t, or perhaps also if you do).

Part 2 gets to what I at least came for- digging into the history to solve the puzzle of why the Industrial Revolution / Great Enrichment took off when and where it did. Which means first, explaining why many things people think made 18th century England special were actually common elsewhere, like markets:

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Grocery Inflation Since 2019: BLS Data is Probably About Right

Jeremy Horpedahl10 Comments

Grocery prices are definitely up a lot in the past few years. I’ve wrote about this several times before. But lately there has been a trend on social media to “post your receipts” and show how much your grocery prices have gone up. Unfortunately, very few people actually post the full receipts, often just showing the total, which leads to wild claims like prices being up 250% in just the past 2 years! That’s a huge contrast to BLS “food at home” category of the CPI, which shows an increase of 4.7% from July 2022 to July 2024 (it’s also unclear in the video what the exact date of the receipt is, he just says “2 years”). Depending on the exact base month, you’re going to be in the 20-25% compared with pre-pandemic or early pandemic using BLS data.

What if we actually looked at receipts? I tried such an exercise in November 2023, when there was another round of social media videos claiming prices had doubled in just a single year. My own personal receipt matched the corresponding BLS data pretty closely, but that was just one receipt with only eight items from Sam’s Club (which might not match grocery stores, for various reasons). At the time, I couldn’t find any good receipts from 2019 or 2020 (Kroger and Walmart drop old receipts in your account after about 2 years), but after scouring an old email account, I discovered two more receipts to compare. These are both from Walmart, in 2019 and 2020, and they contain a larger number of items than my Sam’s Club receipt (each with about a dozen and half items that are fairly typical grocery purchases, and I was able to find matching products today).

I present… the receipts!

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People Are Paying for Music Again

James Bailey2 Comments

Recorded music sales peaked in 1999- then came Napster and other ways to listen to the exact music you want for free. Recorded music sales still haven’t fully recovered, but with the rapid growth of paid streaming since 2014, they have been increasing again:

Meanwhile, live music sales have exploded since the ’90s:

Source: https://www.statista.com/statistics/306065/concert-ticket-sales-revenue-in-north-america/

The latest report from Pollstar on the top live tours is positively glowing:

2023 was a colossus, the likes of which the live industry has never before seen. If 2022 was a historic record-setting year, which it was, then this year completely blew it out of the water— by double digits. Total grosses for the 2023 Worldwide Top 100 Tours were up 46% to $9.17 billion

When you combine live and recorded sales, total spending on music has now passed the 1999 peak; this is the biggest the market for music has ever been. Of course, this doesn’t mean its an easy time to be a musician; touring is hard work and, as always, record labels and others are taking a big share of the money before it gets to artists. And opinions differ about whether today’s environment is good for creating good new music.

There are dozens of songs about how the road is hard, and the more time you spend on the road, the less they sound like cliches than like a simple and sometimes stark description of your life. Sooner or later everybody spots the exit that has their name on it –John Darnielle

The BLS data is noisy but suggests that the number of musicians in the US has been fairly flat and is projected to stay that way. A lot will depend on whether live music continues to grow, how much of that is captured by a few superstars, and whether the current streaming paradigm continues, or goes in a more or less artist-friendly direction. But now that consumers are willing to pay for music again, artists at least have a fighting chance.

Did 818,000 jobs vanish?

Jeremy Horpedahl8 Comments

This morning the Bureau of Labor Statistics released the latest quarterly data for their Quarterly Census of Employment and Wages for the first quarter of 2024. Along with this release is the announcement of their preliminary “benchmark estimate” for March 2024, which will eventually (next year) be used to revise employment data for the Current Employment Statistics program. To keep all of the alphabet soup of programs clear in year head, CES is the more familiar “nonfarm jobs” data that is released each month, usually with some media fanfare.

Benchmarking is an important part of the process for many data releases, because the monthly CES data is based on a survey of employers, a subset of the total. But the QCEW data is the universe of employees — at least the universe of the those covered by Unemployment Insurance law, which is something like 97-98% of workers in the US. So the numbers will never match exactly (CES is supposed to be measuring all workers, not just the 97-98% covered by UI), but they should be pretty close. The media reports the CES monthly data more prominently, because it is more timely and usually pretty close to correct — but benchmarking is the process to see just how correct those initial surveys were.

That brings us to the release today, which is the preliminary estimate of the benchmark adjustment for March 2024 (it will be finalized early in 2025). And that preliminary estimate was a big number, with a downward revision projected of 818,000 jobs. To put this in perspective, the current CES data shows 2.9 million jobs were added between March 2023 and March 2024, so this estimate suggest that the job growth was overstated by perhaps 40 percent. That’s a big revision, though large revisions are not unheard of: the same figure for March 2022 was an estimated 468,000 jobs higher, while March 2019 was 501,000 jobs lower. But this year is a big one (largest absolute number since 2009). Here’s a chart summarizing recent years revisions from Bloomberg:

I’ve covered this topic before, such as an April 2024 post where I noted that as of September 2023, there was an 880,000 gap in job growth between the CES and QCEW over the prior year. So this was not unexpected, and in the days leading up to the report, close followers of the data were forecasting that the revision could be up to 1 million jobs.

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Sticky Prices as Coordination Failure Working Paper

Joy BuchananLeave a comment

“Sticky Prices as Coordination Failure: An Experimental Investigation” is my new paper with David Munro of Middlebury, up at SSRN.

We ask whether coordination failures are a source of nominal rigidities. This was suggested in a recent speech by ECB President Christine Lagarde. She said, “In the recent decades of low inflation, firms that faced relative price increases often feared to raise prices and lose market share. But this changed during the pandemic as firms faced large, common shocks, which acted as an implicit coordination mechanism vis-à-vis their competitors.”

Coordination failure was suggested as a possible cause of price rigidity in a theory paper by Ball and Romer (1991). They demonstrated the possibility for multiple equilibria, and we perform the first laboratory test to observe equilibrium selection in this environment.

We theoretically solve a monopolistically competitive pricing game and show that a range of multiple equilibria emerges when there are price adjustment costs (menu costs). We explore equilibrium selection in laboratory price setting games with two treatments: one without menu costs where price adjustment is always an equilibrium, and one with menu costs where both rigidity and flexibility are possible equilibria.

In plain language, for our general audience, the idea is that the prices you set might depend on what other people are doing. If other people are responding to a shock (for example, Covid driving up labor costs all over town might cause retail prices to rise) then you will, too. If every other store in town is afraid to raise prices, then there is a certain situation where you might resist adjusting your prices, too (price rigidity).

Results: First, when there is only one theoretical equilibrium, subjects usually conform to it. When cost shocks are large, price adjustment is a unique equilibrium regardless of the presence of menu costs, and we see that subjects almost always adjust prices. When cost shocks are small and there are menu costs rigidity is a unique equilibrium and subjects almost never adjust. Conversely, with small cost shocks subjects almost always adjust when there are no menu costs.

The more interesting cases are when the parameters allow for either rigidity or flexibility to be selected. We find that groups do not settle at the rigidity equilibrium. Rather, depending on the specific nature of the shock, between half and 80% of subjects adjust in response to a shock. The intermediate levels of adjustment are represented here in this figure as the red circles that fall between the red and green bands where multiple equilibria are possible.

In the figure above, the red circles are higher when the production cost shock gets further from zero in absolute value. We see that the proportion of subjects adjusting prices is proportional to the size of the cost shocks. This is consistent with the interpretation that the large post-COVID cost shocks acted as an implicit coordination mechanism for firms raising prices. Our results provide a number of interesting insights on nominal rigidities. We document more nuance in the paper regarding heterogeneity and asymmetry. Comments and feedback are appreciated! If it’s not clear from the EWED blog how to email me (Joy), find my professional contact info here. 

Services, and Goods, and Software (Oh My!)

Zachary BartschLeave a comment

When I was in high school I remember talking about video game consumption. Yes, an Xbox was more than two hundred dollars, but one could enjoy the next hour of that video game play at a cost of almost zero. Video games lowered the marginal cost and increased the marginal utility of what is measured as leisure. Similarly, the 20th century was the time of mass production. Labor-saving devices and a deluge of goods pervaded. Remember servants? That’s a pre-20th century technology. Domestic work in another person’s house was very popular in the 1800s. Less so as the 20th century progressed. Now we devices that save on both labor and physical resources. Software helps us surpass the historical limits of moving physical objects in the real world.


There’s something that I think about a lot and I’ve been thinking about it for 20 years. It’s simple and not comprehensive, but I still think that it makes sense.

  • Labor is highly regulated and costly.
  • Physical capital is less regulated than labor.
  • Software and writing more generally is less regulated than physical capital.


I think that just about anyone would agree with the above. Labor is regulated by health and safety standards, “human resource” concerns, legal compliance and preemption, environmental impact, and transportation infrastructure, etc. It’s expensive to employ someone, and it’s especially expensive to have them employ their physical labor.

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On Average, American Wage Earners are Better Off Than They Were Four Years Ago

Jeremy Horpedahl5 Comments

As I wrote last November, the question “are you better off than you were four years ago?” is a common benchmark for evaluating Presidential reelection prospects. And even though Biden is no longer running for reelection, voters will no doubt be considering the economic performance of his first term when thinking about their vote in November.

The good news for American wage earners (and possibly Harris’ election prospects) is that average wages have now outpaced average price inflation since January 2021. Despite some of that time period containing the worst price inflation in a generation, wages have continued to grow even as price growth has moderated. Key chart:

For most of Biden’s term, it was true that prices had outpaced wages. But no longer.

The real growth in wages, admittedly, is not very robust, despite being slightly positive. How does this compare to past performance under recent Presidents? Surprisingly, pretty well! (Lots of caveats here, but this is what the raw data shows.)

Behind Last Week’s Stock Minicrash: Unwind of the Yen Carry Trade

Scott BuchananLeave a comment

Last Monday, August 5, the S&P 500 crashed by 3.5% from the previous close. That is a huge daily move, which seems to have been a surprise to most market watchers. The VIX index, a measure of the cost of options and widely seen as a measure of fear in the markets, went off the charts that day. What happened?

The previous week, there was an employment report that showed higher than expected jobless claims. Although that led to angst over a recession, a genuine serious dent in employment would bring the Fed roaring in with interest rate cuts, and the stock market loves rate cuts. In addition, as we have highlighted in recent posts (here and here), there is increasing skepticism that the monster spends on AI will produce the profits that Big Tech hopes. However, the AI skepticism and the employment worries seemed already baked into stock prices by the Friday close.

What apparently happened over the weekend was the unwinding of a big part of the yen carry trade.

What is that, you ask? To frame this, imagine you have $100 to invest in something very safe, like short term Treasury securities. In the simplest case, you go buy a 1-year T-bill which yields 4.5%. You will make $ 4.50 in a year, from this transaction. If you had $100 million to invest, you would make $ 4.5 million.

Now suppose that you could use that $100 as collateral to borrow $1000 at 0.05%. You then take that $1000 and buy $1000 worth of 4.5% T-bills. Voila, instead of making a measly $ 4.50, you can now make  1000*(4.5% – 0.05%) = $44.5. This is nearly ten times as much, a 44.5% return on your $100. Financial alchemy at its finest!

Now, if instead of investing in boring 4.5% T-bills, you had been buying Microsoft and Apple shares (up 25% and 21%, respectively, in the past twelve months), just imagine the profits from this 10X leveraged trade. Especially if you started with a $100 million hedge fund instead of $100.

Where, you may ask, could you borrow money at 0.05%? The answer is Japan. The central bank there has kept rates essentially zero for many years, for reasons we will not canvass here. This scheme of borrowing in yen, and investing (mainly in the US) in dollars is termed the yen carry trade. Besides this borrowing/investing, simply betting that the Japanese yen would decline against the dollar has been profitable for the past 18 months.

What could possibly go wrong with such a scheme? Well, you have to do this borrowing in Japanese yen. So, if you borrow in yen and then convert it to dollars and invest in the dollar world, you can be in a world of hurt if the value of yen in dollars goes up by the time you need to close out this whole trade (i.e. cash in your T-Bills into dollars, convert back to yen, and pay off your yen borrowings.

What happened on Wednesday, July 31 was the Bank of Japan unexpectedly raised its key interest rate target from 0-0.1% to around 0.25%, and announced they would scale back their QE bond-buying, in an effort to address inflation. As may be expected, that raised the value of the yen on Thursday and Friday, though not by much. But the yen made a surge up at the end of Friday’s trading.

Apparently, that caused enough angst in the carry trade community that participants in the carry trade started running for the exits, selling dollar-denominated assets (including stocks) and scrambling to buy yen. Naturally, that shot the price of yen up even more, so on Monday, Aug 5, we had a disorderly market rout.

Bad news sells, and so all the finance headlines on Monday were blaring about the stock price collapse and start of an awful bear market. However, nothing substantive had really changed. By Friday, the S&P 500 had recovered from this big head-fake.

As usual, investors sold stocks (at a low price) on Monday, and presumably bought them back at a higher price later in the week. This is why the average investor’s returns fall well below a simple buy and hold. But that is another subject for another time.

A Continually Updated Bernanke-Taylor Rule

James Bailey4 Comments

Despite its many flaws*, I always like to check in on what the Taylor Rule suggests for the Fed. Its virtues are that it gives a definite precise answer, and that it has been agreed upon ahead of time by a variety of economists as giving a decent answer for what the Fed should do. Without something like the Taylor Rule, everyone tends to grasp for reasons that This Time Is Different. Academics seek novelty, so would rather come up with some new complex new theory of what to do instead of something undergrads have been taught for years. Finance types tend to push whatever would benefit them in the short term, which is typically rate cuts. Political types push whatever benefits their party; typically rate cuts if they are in power and hikes if not, though often those in power simply want to emphasize good economic news while those out of power emphasize the bad news.

The Taylor Rule can cut through all this by considering the same factors every time, regardless of whether it makes you look clever, helps your party, or helps your returns this quarter. So what is it saying now? It recommends a 6.05% Fed funds rate:

Fed Funds Rate Suggested by the Bernanke Version of the Taylor Rule
Source: My calculation using FRED data, continually updated here

I continue to use the Bernanke version of the Taylor Rule, which says that the Fed Funds rate should be equal to:

Core PCE + Output Gap + 0.5*(Core PCE – 2) +2

*What are the flaws of the Taylor Rule? It sees interest rates as the main instrument of monetary policy; it relies on the Output Gap, which can only really be guessed at; and it incorporates no measures of expectations. If I were coming up with my own rule I would probably replace the Output Gap with a labor market measure like unemployment, and add measures of money supply shifts and inflation expectations. Perhaps someday I will, but like everyone else I would naturally be tempted to overfit it to the concerns of the moment; I like that the Taylor Rule was developed at a time when Taylor had no idea what it might mean for, say, the 2024 election or the Q3 2024 returns of any particular hedge fund.

That said, people have now created enough different versions of the Taylor Rule that they can produce quite a range of answers, undermining one of its main virtues. The Atlanta Fed maintains a site that calculates 3 alternative versions of the rule, and makes it easy for you to create even more alternatives:

Two of their rules suggest that Fed Funds should currently be about 4%, implying a major cut at a time that the Bernanke version of the rule suggests a rate hike. On the other other hand, perhaps this variety is a virtue in that it accurately indicates that the current best path is not obvious; and the true signal comes in times like late 2021 when essentially every version of the rule is screaming that the Fed is way off target.

Taxes, Children, and the Zero Bracket

Jeremy HorpedahlLeave a comment

Recently there has been some discussion in the Presidential race about the taxation of parents vs. childless taxpayers. The discussion has been ongoing, but it was kicked up again when a 2021 video of J.D. Vance resurfaced where he said that taxpayers with children should be lower tax rates than those without children. There was some political back-and-forth about this idea, much of it tied up in the framing of the issue, with the usual bad faith on both sides about the fundamental issue (in short: most Democrats and a small but growing number of Republicans support increasing the size of the Child Tax Credit).

Let’s leave the politicking aside for a moment and focus on policy. As many pointed out in response to Vance’s idea, we already do this. In fact, we have almost always done this in the history of the US income tax — “this” meaning giving taxpayers at least some break for having kids. For most of the 20th century, this was done through personal exemptions which usually included some tax deduction for children, and later in the century the Child Tax Credit was added (after 2017, the exemptions were eliminated in favor of a large CTC). Other features of the tax code also make some accounting for the number of children, most notably the size of the Earned Income Credit.

The chart below is my attempt to show how the tax breaks for children have affected four sample taxpaying households. What I show here is sometimes called the “zero bracket” — that is, how much income you can earn without paying any federal income taxes. The four households are: a single person with no children, a married couple with no children, a single person with two children (“head of household”), and a married couple with two children. All dollar amounts are inflation-adjusted to current dollars

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