Economics

Venezuelans Vote Overwhelmingly Against Maduro

James Bailey1 Comment

Venezuela held an election this week; President Maduro says he won, while the opposition and independent observers say he lost. Disputed elections like this are fairly common across the world, but where Venezuela really stands out is not how people vote at the ballot box- it is how they vote with their feet.

Reuters notes that “A Maduro win could spur more migration from Venezuela, once the continent’s wealthiest country, which in recent years has seen a third of its population leave.”

I don’t think we emphasize enough how crazy the scale of this is. After every US Presidential election, you hear some people who supported the losing side talk about leaving the country, but they almost never do. Leaving your home country behind is a dramatic step, one people only want to take if they think things are much better elsewhere. The US, even with a party you don’t like in power, has generally stayed a good place to live. The total number of Americans who have moved abroad for any reason (I would guess most feel more pulled by the host country rather than pushed by the US) is about 3 million. That is less than 1% of all Americans; by contrast more than 46 million people have immigrated to the US from other countries, and many more would come if we allowed it.

Even in poor countries, seeing anything like one third of the population leave is dramatic, especially when almost all the migration happens in only 10 years as in Venezuela:

Source. Note this only goes through 2020, and emigration has grown since

This makes Venezuela the largest refugee crisis in the history of the Americas, and depending on how you count the partition of India, perhaps the largest refugee crisis in human history that was not triggered by an invasion or civil war.

Instead, it has been triggered by the Maduro regime choosing terrible policies that have needlessly and dramatically impoverished the country:

I hope that the Venezuelan government will soon come to represent the will of its people. I’m not sure how that is likely to happen, though I guess positive change is mostly likely to come from Venezuelans themselves (perhaps with help from Colombia and Brazil); when the US tries to play a bigger role we often make things worse. But what has happened in Venezuela for the past 10 years is clearly much worse than the “normal” bad economic policies and even democratic backsliding that we see elsewhere. People everywhere complain about election results and economic policy, but nowhere else have I seen such a case of people going past simple cheap talk, taking the very expensive step of voting against the regime with their feet.

Fiscal Illusion: It’s Real (People Underestimate How Much They Pay in Taxes)

Jeremy HorpedahlLeave a comment

The concept of “fiscal illusion” has long existed in public finance, but it is difficult to test. The basic theory is that people will underestimate how much they pay in taxes, as well as underestimate government expenditures. A forthcoming paper in Public Choice by Kaetana Numa uses survey data from the United Kingdom to test the theory, and finds support. From the abstract of “Fiscal illusion at the individual level“:

“providing personalized fiscal information reduces support for higher taxes and spending and increases support for lower taxes and spending. These findings indicate that taxpayers underestimate both their tax liabilities and the costs of public services.”

The paper uses a “novel personalized fiscal calculator” to estimate how much tax an individual would actually owe. It then randomizes which taxpayers get this information, and finds that “the treated respondents… were less supportive of raising taxes and more supportive of cutting taxes than the respondents in the control condition.”

And the results are large. For all taxes, in the treated group that saw their personalized fiscal calculator, 61 percent support cutting taxes, versus just 50 percent in the control group. The differences show up across the major taxes that individuals pay in the UK, including the income tax, national insurance contributions (both employer and employee sides), and the VAT. There is no tax category where the treatment group is more likely to want to increase the tax, though the VAT and the smaller Fuel duty and Council tax are about equal on the percent wanting an increase (but the median response for these last two is to decrease the tax — in both the control and treatment groups).

Do these results from the UK hold up in other developed nations? Possibly. In a 2014 Eurobarometer survey, the percent of EU citizens that could correctly identify their nation’s VAT rate varied widely. The high was 89 percent in Germany correctly identifying the rate, down to 31 percent in Ireland. The average was 65 percent — though the UK was at the low end with only about 47 percent correctly identifying the VAT rate.

Fiscal illusion appears to be a real issue, and probably an important one in the UK.

You, Parent, Should have a Robot Vacuum

Zachary BartschLeave a comment

Do you have a robot vacuum? The first model was introduced in 2002 for $199. I don’t know how good that first model was, but I remember seeing plenty of ads for them by 2010 or so. My family was the cost-cutting kind of family that didn’t buy such things. I wondered how well they actually performed ‘in real life’. Given that they were on the shelves for $400-$1,200 dollars, I had the impression that there was a lot of quality difference among them. I didn’t need one, given that I rented or had a small floor area to clean, and I sure didn’t want to spend money on one that didn’t actually clean the floors. I lacked domain-specific knowledge. So I didn’t bother with them.

Fast forward to 2024: I’ve got four kids, a larger floor area, and less time. My wife and I agreed early in our marriage that we would be a ‘no shoes in the house’ kind of family.  That said, we have different views when it comes to floor cleanliness. Mine is: if the floors are dirty, then let’s wait until the source of crumbs is gone, and then clean them when they will remain clean. In practice, this means sweeping or vacuuming after the kids go to bed, and then steam mopping (we have tile) after parties (not before). My wife, in contrast, feels the crumbs on her feet now and wants it to stop ASAP. Not to mention that it makes her stressed about non-floor clutter or chaos too.

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When Beer is Safer than Water

James BaileyLeave a comment

I’ve often heard that before modern water treatment, it was safer to drink beer; but I’ve also heard people call this a historical myth. A new paper in the Journal of Development Economics by Francisca Antman and James Flynn comes down strongly on the side of “beer really was safer”:

This paper provides the first quantitative estimates into another well-known water alternative during the Industrial Revolution in England.

Although beer in the present day is regarded as being worse for health than water, several features of both beer and water available during this historical period suggest the opposite was likely to be true. First, brewing beer requires boiling the water, which kills many dangerous pathogens often found in drinking water. As Bamforth (2004) puts it, “the boiling and the hopping were inadvertently water purification techniques”. Second, alcohol itself has antiseptic qualities. Homan (2004) notes that “because the alcohol killed many detrimental microorganisms, it was safer to drink than water” in the ancient near-east.

They use several identification strategies to establish this, for instance when a tax on malt was increased and mortality went up:

But did this mean people were drunk all the time? Probably not:

beer in this period was generally much weaker than it is today, and thus would have been closer to purified water. Accum (1820) found that common beers in late 18th and early 19th century England averaged just 0.75% alcohol by volume, a fraction of the content of the beers of today. Beer in this period was therefore far less harmful to the liver. Taken together, these facts suggest that beer had many of the benefits of purified water with fewer of the health risks associated with beer consumption today.

In fact, people at the time didn’t necessarily know that beer was healthier:

Thus, even though people did not recognize beer as a safer choice, drinking beer would have been an unintentional improvement over water, and thus may have contributed to improvements in human health and economic development over the period we investigate

Though as usual, Adam Smith was ahead of his time. Here’s what he had to say in his 1776 Wealth of Nations, in a chapter on malt taxes:

Spirituous liquors might remain as dear as ever, while at the same time the wholesome and invigorating liquors of beer and ale might be considerably reduced in their price.

Inflation in the G7 and Russia

Jeremy HorpedahlLeave a comment

Among the former G8 countries, Russia has by far the highest cumulative inflation rate since January 2020, almost double the amount of inflation we’ve seen in the US and in most G7 countries. No doubt the effects of the wartime economy are contributing to this, but even in February 2022 before they invaded Ukraine, their inflation still had clearly been worse.

The US is on the high end for this group, but pretty close to the median. Japan looks really good on inflation, but that’s probably not much comfort to them since their economy is still smaller than before the pandemic. By this measure, the US looks pretty good (chart from Joey Politano):

GDP estimates for Russia are a little tricky because of the war, but according to IMF estimates, Russia’s economy in 2023 was about 5.6% larger than 2019 in real terms.

See also: Food Inflation in the G7 and Russia

MSNE Echoes PSNE

Zachary Bartsch1 Comment

Let’s talk game theory. I’ve written in the past about Pure Strategy Nash Equilibria (PSNE). They identify possible equilibrium strategies, even if players are unlikely to adopt those strategies in real life. Students don’t like the implausibility of many PSNE strategies, and they sometimes struggle to limit their conclusions to the premises that yield PSNE. Students have a similar dissonance to Mixed Strategy Nash Equilibria (MSNE).

What is MSNE? A set of MSNE strategies allow a player to choose some strategies probabilistically – with probabilities that are less than 100%. That’s the feature of MSNE that distinguishes it from PSNE. In PSNE, a strategy is chosen with 0% or 100% probability.

Here’s an example to illustrate. Imagine that you are shopping at the grocery store with your shopping cart. You’re at one end of the aisle and another shopper is at the other end and your heading straight toward one another at a snail’s pace. Ideally, you’d not hit each other or awkwardly arrive in each other’s path. For simplicity, let’s say that each of you can walk on the right or the left side of the aisle only.* Below is a simultaneous normal form game with arbitrary payoffs.

There are two PSNE in the above game: each person walks on their right or their left side of the aisle. If you and the other person are both walking on your respective rights or lefts, then neither of you has an incentive to deviate. The alternative is that you are heading straight for one another and one of you must veer from their path or play an awkwardly low stakes game of chicken.

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From Cubicles to Code – Evolving Investment Priorities from 1990 to 2022

Zachary BartschLeave a comment

I’ve written before about how we can afford about 50% more consumption now that we could in 1990. But it’s not all bread and circuses. We can also afford more capital. In fact, adding to our capital stock helps us produce the abundant consumption that we enjoy today. In order to explore this idea I’m using the BEA Saving and Investment accounts. The population data is from FRED.

The tricky thing about investment spending is that we need to differentiate between gross investment and net investment. Gross investment includes spending on the maintenance of current capital. Net investment is the change in the capital stock after depreciation – it’s investment in additional capital not just new capital.  Below are two pie charts that illustrate how the composition of our *gross investment* spending has changed over the past 30 years. Residential investment costs us about the same proportion of our investment budget as it did historically. A smaller proportion of our investment budget is going toward commercial structures and equipment (I’ve omitted the change in inventories). The big mover is the proportion of our investment that goes toward intellectual property, which has almost doubled.

It’s easiest for us to think about the quantities of investment that we can afford in 2022 as a proportion of 1990. Below are the inflation-adjusted quantities of investment per capita. On a per-person basis, we invest more in all capital types in 2022 than we did in 1990. Intellectual property investment has risen more than 600% over the past 30 years. The investment that produces the most value has moved toward digital products, including software. We also invest 250% more in equipment per person than we did in 1990. The average worker has far more productive tools at their disposal – both physical and digital. Overall real private investment is 3.5 times higher than it was 30 years ago.

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“Cheapflation”: Inflation Really Does Hit the Bottom Harder

James Bailey1 Comment

During the peak of the Covid inflation in 2022 I speculated that food inflation was worst for the cheapest products:

a typical McDouble now costs well over $2 in most of the US, while a typical Big Mac is still well under $6. You used to be able to get 4-5 McDoubles for the price of a Big Mac; now you typically get less than 3 and sometimes, as in Keene, less than 2.

What’s going on here? First, the McDouble was always absurdly cheap. Second, prices rise most quickly where demand is inelastic, and demand is less elastic for goods that are cheaper and goods that are more like “necessities” than “luxuries”.

That post was just based on a couple anecdotes from my personal experience, but a new NBER working paper by Alberto Cavallo and Oleksiy Kryvtsov confirms that this really was a general trend:

We use micro price data for food products sold by 91 large multi-channel retailers in ten countries between 2018 and 2024. Measuring unit prices within narrowly defined product categories, we analyze two key sources of variation in prices within a store: temporary price discounts and differences across similar products. Price changes associated with discounts grew at a much lower average rate than regular prices, helping to mitigate the inflation burden. By contrast, cheapflation—a faster rise in prices of cheaper goods relative to prices of more expensive varieties of the same good—exacerbated it. Using Canadian Homescan Panel Data, we estimate that spending on discounts reduced the change in the average unit price by 4.1 percentage points, but expenditure switching to cheaper brands raised it by 2.8 percentage points….

The prices of cheaper brands grew between 1.3 to 1.9 times faster than the prices of more expensive brands—and only when inflation surged, not before or after.

Zoning Matters for Rising Housing Costs, Especially After 1980

Jeremy HorpedahlLeave a comment

From a new working paper “The Price of Housing in the United States, 1890-2006” by Ronan C. Lyons, Allison Shertzer, Rowena Gray & David N. Agorastos (emphasis added):

“Zoning was adopted by almost every city in our sample during the 1920s. We see a slightly steeper gradient over the next two periods (coefficients of .48 and .29, respectively). In these periods it is possible both that the existing zoning regimes were causing higher price growth and that home price appreciation was incentivizing cities to adopt even more restrictive measures, particularly by the 1970s (Fischel, 2015; Molloy et al., 2020). The gradient in the final period (1980-2006) is even steeper, however (coefficient of .67), suggesting a closer relationship between zoning and home price appreciation towards the end of the 20th century.”

The authors acknowledge that they cannot establish causality with their data, but this is consistent with existing research, such as a paper by Gyourko and Krimmel that I previously discussed.

Market Preserving Federalism in the USA

Zachary Bartsch3 Comments

One of my favorite economic journal articles is by Barry Weingast and has the short title “Market Preserving Federalism” (MPF). In this paper, Weingast lays out the conditions necessary for two tenuous equilibria: A) Federalism  & B) Federalism that preserves a market economy.  Given that we just celebrated Independence Day in the USA, it seems to me like a good opportunity to share some brief thoughts on this paper. I’ll speak in terms of the US for ease.

Weingast enumerates 5 features for MPF, starting with two that characterize a stable federalism:

F1) A hierarchy of governments, that is, at least “two levels of governments rule the same land and people,” each with a delineated scope of authority so that each level of government is autonomous in its own, well-defined sphere of political authority

F2) The autonomy of each government is institutionalized in a manner that makes federalism’s restrictions self-enforcing

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