Vernon Smith on Behavioral in 2008

Like last week, this post is adjacent to the internet chattering over whether behavioral economics is “dead”.

Vernon Smith wrote a book Rationality in Economics that came out in 2008. I’m going to pull some quotes from that book that I think are relevant. This is not an attempt to summarize the main point of the book.

I began developing and applying experimental economics methods to the study of behavior and market performance in the 1950s and 1960s…

Preface, pg xiii

Repetitive or real-time action in incomplete information environments is an operating skill different from modeling based on the “given” information postulated to drive the economic environment that one seeks to understand in the sense of equilibrium, optimality, and welfare. This decision skill is based on a deep human capacity to acquire tacit knowledge that defies all but fragmentary articulation in natural or written language.

Preface, pg xv

I think that improved understanding of various forms of ecological rationality will be born of a far better appreciation that most of human knowledge of “how,” as opposed to knowledge of “that,” depends heavily on autonomic functions of the brain. Human sociality leads to much unconscious learning in which the rules and norms of our socioeconomic skills are learned with little specific instructions… Humans are not “thinking machines” in the sense that we always rely on self-aware cognitive processes…

Introduction, pg 5, emphasis his

Research in economic psychology[footnote 6] has prominently reported examples where “fairness” and other considerations are said to contradict the rationality assumptions… Footnote 6: I will use the term “economic psychology” generally to refer to cognitive psychology as it has been applied to economics questions, and to a third subfield of experimental methods in economics and recently product-differentiated as “behavioral economics”… Behavioral economists have made a cottage industry of showing that SSSM assumptions seem to apply almost nowhere… their research program has been a candidly deliberate search “Identifying the ways in which behavior differs from the standard model…”

Introduction, pg 22, italics mine

Vernon Smith doesn’t always like the direction of the behavioral economics literature as a whole, however he agrees in the book that humans don’t always behave rationally. Chapter 6 has the very un-fuzzy title FCC Spectrum Auctions and Combinatorial Designs. Here’s an example of the way Vernon uses the word behavioral, which I offer like I did last week as an example of how “behavioral” is never going away.

I will provide a brief review of the theoretical issues and some… experimental findings that bear most directly on the conceptual and behavioral foundation of the FCC design problem.

Chapter 6, pg 116

Unfortunately, the popular press… has often interpreted the contributions of Kahneman as proving that people are “irrational,” in the popular sense of stupid… In the Nobel interview, Kahneman seems clearly to be uncomfortable with this popular interpretation and is trying to correct it.

Chapter 7, pg 150

Chapter 7 is about loss aversion and fairness and any other “behavioral” phenomenon of interest. I recommend anyone who is following the current conversation to read all of Chapter 7 for yourself. Vernon sees the best in all whenever possible, despite being annoyed that certain academics have used a tool he developed to make points that he believes are wrong. He forges a way forward for everyone in this book.

Experiments help us understand how human beings who are prone to error can arrive at good outcomes when they are working within good/effective institutions.

Why Do We Care About Inflation?

The title question may seem obvious. “We” care about inflation because, ultimately, any dollars we have saved will purchase fewer real goods and services. Additionally, we might worry that our incomes are not keeping pace with the increase in the prices of good and services that we want to purchase.

But the answer to that question is a little more nuanced. “We” also care about why prices are increasing. I keep putting “we” in quotation marks because who the we is crucial for answering the question. For example, individuals and families primarily care about inflation for the reasons I stated in the first paragraph.

But central bankers care about inflation for different reasons. In broad terms, monetary policy is an attempt to smooth out the fluctuations in the economy, especially to make recessions shorter and less deep. But monetary officials want to know: is the policy they are putting in place leading to prices rising in general? If so, especially if inflation gets above certain target levels, it may mean that monetary has been “too loose.”

However, if particular prices are rising, say the price of cars (due to a lack of computer chips), central bankers don’t really care about this: it gives them no indication of whether they’ve done “too much” or “too little” with regards to stimulating the economy. Similarly, if gasoline prices rise, consumers really care about this. Central bankers, not so much: it doesn’t really tell them much about their goal (stimulating the economy with stimulating it too much).

And because some prices are so volatile, historical context is important for understanding what a recent increase or decrease means. For example, gasoline prices are up 45% in the past 12 months. That’s a lot! But it’s an increase from a very low base, and the historical reality is that gasoline prices today (around $3.00/gallon on average) are at similar levels to what they were way back in 2006, and are lower than they were for almost all of 2011-2014. And these are all in nominal terms, median household income has gone up a lot since 2006 (up 40% in nominal terms) and even since 2014 (up 25%).

All of this is important background for thinking about the latest release of the CPI-U data this week. The headline inflation number of 5.3% is indeed startling, similar to last month. We haven’t touched that level since mid-2008, and that was only for a few months. If consumer price inflation were to stay at around 5% for a sustained period of time, it would be a new, harsh reality for most consumers today: we haven’t had a year with 5% inflation since 1990, and for the past decade the average has hung around 2%.

So will it stay this high? Sadly, I have no crystal ball and I will just reiterate what I said last month: the picture is just too muddled right now to say anything concrete. Perhaps by the end of the year we will have a better picture. But is there anything we can say right now even with the muddled picture? I continue to like this chart from the Council of Economic Advisors:

Image

Bottom line: if we strip out the unusual supply chain disruptions to automobiles as well as airline/hotel prices making up for lost ground during the pandemic, inflation is at completely normal levels. It’s almost exactly 2%

But is this cheating? Can we really strip out the things that are increasing at rapid rates?

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In States that Ended the Extra $300/Week Unemployment Benefits, People Returned to Work at Over Twice the Rate than in the Other States

Anecdote # 1. In June we stayed a couple nights in a motel in western Massachusetts. The proprietor was outside watering flowers and trimming shrubs. I asked about business. He told me, “Well, we are starting to get customers back, though we are still hurting. But my bigger problem is that I cannot find a single person who wants to come back and work. Between federal and state unemployment benefits, they are making $850 a week, which is over $21 per hour. Anybody can claim those benefits, you don’t even have to prove that you were laid off. I cannot match that money, much less beat it.  My wife and I are doing all the work. I don’t know how we will manage long term.”

I murmured something sympathetic, and opined hopefully that if these benefits run out in September, folks might come back to work. This area has been economically depressed for decades, and normally people would jump at any kind of job. He shook his head and said that the state benefits would continue, and that his key workers have told him that they have saved so much money from unemployment and stimulus funds (and perhaps being allowed to skip rent or mortgage payments due to federal “forbearance” laws) that they may never come back to work.

Anecdote #2. In July my wife and I went into a hardware store in northern Virginia to buy some stuff. The employees were helpful and efficient. My wife complimented them, and said something like it must be nice working in an environment where everyone seemed to have a good attitude. The clerk’s response was yes, but they were having to work more overtime than they really wanted. And why was that? Because  the other workers won’t come in, because they were making about as much money staying home on unemployment – – so why should they bother working?

Those are a few personal data points on the effects extending the big unemployment benefits. I have read numerous other anecdotes from small businessmen and women that they cannot operate as fully as they would like because they cannot get help. And really, anybody with eyeballs can see the Help Wanted signs everywhere today.

Deeper thinkers than I will have to tease out all the ramifications of this situation. In GDP growth terms, it seems clear that incentivizing people to not work is a bad thing. On the one hand, we could say, “Just pay the workers more and they will come”. That is fine, if a business can raise the prices it charges for its products to cover the added labor costs, but that can only go so far. What is more likely is that businesses will figure out ways to get by permanently with fewer workers. This may lead to higher nominal productivity per worker, but also more structural unemployment.

Without further ado, here are some data which may illuminate the extent to which extended unemployment benefits have kept people from working. The nation has been running a real time experiment over the past several months. 27 states (“red” states, as you would have guessed) stopped the extra $300/week benefits in June, while 23 states and DC retained them.

Wolf Richter has compiled some numbers on unemployment insurance (UI) claims by state, reported weekly by the Department of Labor. A data point of “continued claims” reflects the number of people that have claimed UI for at least one week. A drop in continued claims would indicate that they have started working again. He lumped the states into two groups, “Enders” who terminated the extra unemployment benefits, and “Keepers” who retained them. Here are the results through the end of August:

These results seem to speak for themselves. Far more people went back to work in the “Ender” states (32% vs. 14%).  Here are the same results, reported as four-week rolling averages for smoothing, though that introduces a time lag:

Richter quotes the Wall Street Journal to the effect that:

Economists at Goldman Sachs analyzed the behavior of workers in the July jobs report after adjusting for age, gender, marital status, education, household income, industry and occupation of a respondent’s current or prior job. They said they found “clear evidence that benefit expiration increased the rate at which unemployed workers became employed.”

Goldman Sachs estimated that if all states had ended benefits, July payroll growth would have been 400,000 stronger. Economists at the firm projected the nationwide benefit cutoff this month will account for 1.5 million job gains through the end of the year.

Richter notes that after the federal cutoff, some states will continue to offer the $300/week funded with leftover stimulus money, but he expects overall more people to report for work this fall. I think that is likely, but I am concerned that conditioning a lot of people to not work for 1.5 years may have given us a long-lasting step downward in the percentage of adults who are willing to work. Some other post, some other time, maybe I will explore how we saw that effect in the wake of the 2008-2009 Great Recession where again people got conditioned to getting by without working.

P.S. Zachary Bartsch’s recent post on this blog, Redesigning Unemployment Insurance, speaks to some of these issues of incentivizing people to (not) work.

Behavioral Economics Conversation: Cutler and Glaeser

I haven’t written a formal response, yet, to the “behavioral economics is dead” claim going around Twitter. I’m too busy doing my referee reports on behavioral papers to write in depth about why behavioral is not dead. Incidentally, I’m not loving the most recent paper I was sent, so maybe that’s a point in the column of Team Death. I’ll write a few posts intersecting with the arguments being had.

First, I’ll point out two places in a CWT discussion of health and cities where the phrase “behavioral” was used. This is obviously a current conversation. David Cutler probably wouldn’t say that behavioral economics is his field, but here’s how he describes puzzles in decision making over health issues. (bold emphasis mine)

Everything that we know in healthcare is that people have difficulty choosing on the basis of price and quality. It goes back a little bit to some of the behavioral issues that we were talking about, but I think it’s slightly different. If you go to the doctor, and the doctor says you should take medication X, and you go to the pharmacy, and the pharmacy says that’ll be $30, a fair number of people will walk away and say, “I don’t have $30.”

What we would hope they would do is go to their doctor and say, “Doctor, is there any way that there could be a cheaper medicine that might work because $30 is hard for me this month?” In practice, people are extremely uncomfortable doing that. They really don’t like to go to their doctor and say, “Doctor, how do I trade off the money here versus the medicine?”

David Cutler

The previous issues Cutler mentioned had to do with time preference and delayed gratification. The turmoil over dieting alone is evidence that people don’t always make the best decisions.

Here’s the second of two appearances of the word “behavioral”, in response to Tyler’s question about how to make cities healthier.

I certainly join the crowd of economists who have argued that congestion pricing is the best way to deal with urban traffic jams. There’s no reason not to charge people for the social cost of their actions on that. And giving away street space for free is just crazy, especially since we now have technologies that can handle this.

And if we introduce autonomous vehicles without congestion pricing, you have just lowered the cost of sitting in traffic, which means the first-order behavioral response is that more people will sit in traffic, and our congestion will get even worse unless we introduce this from the beginning. So I think pricing is really good.

Ed Glaeser

In the second use of the word, it sounds like an individually-rational decision to sit in your autonomous vehicle and read blogs until your arrive at your destination. Maybe we can use mechanism design to reduce traffic congestion and improve life for all.

Whether or not you think behavioral economics is dead, economists are going to keep using the word “behavioral” for a long time.

I did a quick Ngram to get a sense of how common the word is, although this does not restrict the search to books about economics. Ngrams are easier to interpret if there is a comparison word. I choose the word “clustering” because it’s also a relatively new technical term. Both words were quite rare before 1930.

If you missed the small discussion about behavioral econ, Mike Munger did a link round-up here. Tomorrow’s post will be Vernon Smith’s view of behavioral economics.

Redesigning Unemployment Insurance

How does unemployment insurance work?

From the worker’s perspective, unemployment insurance isn’t detectable unless the worker loses their job. Once that’s happened, the person can apply for benefits – a check that you can cash or deposit into your bank account. These benefits vary by state, with the composition of your family, and your income prior to separation. The most generous maximum benefit is provided by Massachusetts at $823 per week for an individual and the least generous is provided by Mississippi at $235 per week. States also vary by the length of time for which a person can collect benefits. Montana is the most generous at 28 weeks and North Carolina ties with Florida for the least generous at 12 weeks. If you find a job and become employed before the maximum benefit duration, then you stop receiving payments.

From the employer’s perspective, unemployment insurance is the premium that you pay per employee each year. The premium is not optional – so it’s a tax. Employers pay it for the privilege employing workers. There are two components of the tax: a state and federal portion. The federal portion is more or less constant per employee. The state portion changes with the incidence of unemployment claims and payments that a state makes in the prior year. When a lot of people get fired, state unemployment taxes rise as a policy response.

Why provide UI benefits?

There are two typical reasons for governments to provide unemployment benefits – and a 3rd not-so-typical reason. The first is as a matter of relief. People often lose a job through no fault of their own, and we don’t want those people to become destitute or to forego the bare essentials that money can afford. The second reason to provide benefits is as a matter of macroeconomic spending stimulus. Contrary to popular belief, this stimulus is not about encouraging greater production through greater sales. The stimulus is meant to encourage total spending in the economy to be higher than it would have been otherwise (See Irving Fisher on debt deflation and Scott Sumner on NGDP targeting). The 3rd and not so typical reason for governments to provide unemployment insurance is to keep people from going to work (See Tyler Cowen for why this might be desirable during a pandemic).

Incentives Matter

The 3rd reason above hints at a problem. People lose benefits when they become employed again. It is exactly because benefits provide relief that they reduce the incentive to find a job. Importantly, this is not a judgment of propriety or moral chastisement. It simply is the case that UI payments make being unemployed a little more tolerable. The tenacity with which people search for a job becomes a little less urgent. Anyone well acquainted with human nature (outside of a textbook) will tell you that it is good for humans to work. There are economic, social, and psychological benefits – not to mention the material benefits enjoyed by society. So, longer periods of unemployment are a problem.

Not only does the receiving UI benefits cause longer unemployment spells, losing benefits when you find a job acts as a penalty to finding a labor market match. It’s not happenstance that people who lose their UI benefits tend to become employed shortly thereafter. In terms of economic activity and gains from trade, society is materially better off when people find jobs more quickly (probably socially better off too). If you can get people to acknowledge the above logic, then there is plenty of room for people to disagree on the propriety of the UI benefits system.

Remove Disincentives – Keep the Relief

As Thomas Sowell is known for saying “There are no solutions – only trade-offs.”  That’s true. It’s also true that there is also no such thing as a free lunch. But some things are a lot more like a free lunch than others.

Wouldn’t it be nice if we could just help unemployed people and not disincentivize them from finding a job? In part it’s impossible. The UI payments do both and there is no separating them. But, the disincentive provided by removing payments when a job is found can be addressed. Why not just permit UI benefits even after someone has found a job?

An Outlay Neutral Prescription

What does the social program designer consider? Simply, the policy maker considers government outlays, government revenues, and economic impact. All else constant, policy makers like small outlays, high revenues, and good economic impacts.

I propose that states adopt the following policy. First, eliminate variables benefits. This part of the policy is not essential, but it clarifies the exposition. Now, it doesn’t matter whether you were an executive at a bank or a janitor at the bank – both receive the same weekly UI payment if they lose their job. What should the benefit be? For the purposes of outlay neutrality, the new benefit is the same as the average benefit was last year. The average benefit and total outlay across all claimants is unchanged.

When a person finds a job under the current system they are paying an implicit tax when their benefits get pulled. Let’s eliminate the employment disqualification. That’s right. When a person finds a job, they just continue to receive benefits. They don’t receive UI benefits indefinitely, however. In order to maintain outlay neutrality, the duration of UI benefit payments will be equal to the average duration last year.

Say what?!

Put yourself in the shoes of the person looking for a job under the current system. Say that your UI benefit is $800 per week and that you job-search for 10 hours each week. Say that you find a job that pays $1,000 per week. If you take the job, then you will go from working 10 hours per week to working 40 hours per week. And, you go from having an income of $800 per week to having an income of $1,000 per week. In other words, you get to work 30 more hours per week for $200 more income. The unemployed person is making the decision to take the job at $25 per hour, or stay home at $80 per hour ($1,000/40 Vs $800/10).

But what’s the perspective under the outlay neutral proposal in which the benefits continue even after employment? The decision is substantially different.  The unemployed person is making the decision to take the job at an average of $45 per hour, or stay home at $80 per hour ($1,800/40 Vs $800/10).

Of course, staying home still might look attractive. But it looks relatively less attractive than it did under the standard system of work-disqualifying benefits. If a person has 4 weeks of remaining benefits when they find the job, then continuing to receive UI benefits would mean that the total income over that month would be $7,200, versus $3,200 from staying home, or $4,000 under the standard system. Again putting yourself in the shoes of the unemployed, doesn’t this decision look different? Might you feel enticed to accept the job?

Under the proposed policy, government outlays are constant – there is no change in expenditures. Revenues increase because more employed workers means more employer-paid UI tax payments (not to mention other tax payments). Economic performance improves because greater employment increases total output. Let’s go ahead and throw in the additional social benefits too.

People Have Feelings

…And they’re complicated. Part of the sympathetic idea of unemployment insurance benefits is to provide relief. As a matter of gut instinct, this is why many people favor the UI transfer program over others. They can imagine themselves in such a circumstance through no wrong-doing of their own. But once we say that benefits will continue – even after someone finds their job – the UI program becomes less obviously a matter of sympathy-inducing relief. There is a political problem.

I say: put your feelings aside. Let’s get people employed again. Let’s increase tax revenues and increase economic activity. Let’s address the problem of unemployment in a better way – and spend not a dime more doing it.

Why do Costa Ricans outlive Americans?

Which country in the Western Hemisphere has the longest life expectancy?

Unsurprisingly its Canada, at 82.2 years (pre-Covid).

But which country in the Americas comes in second?

Surprisingly, its Costa Rica at 80.8 years.

Source

The United States, by far the richest country in the Americas, had a life expectancy of 78.4 years that was falling even before Covid.

How is it that Costa Rica outperforms not only the much richer United States, but also other somewhat richer countries like Panama, Mexico, Argentina, and the Dominican Republic?

Clearly they don’t do it by outspending us- Costa Rica spends the equivalent of $1600 dollars per person per year on health care, compared to nearly $12000 in the US (7.3% of their GDP goes to health care vs 16.8% for the US).

Source

So what exactly is Costa Rica doing right? Atul Gawande tackles this question in his latest article for the New Yorker.

He argues that the key has been Costa Rica’s investment in primary care and public health. The US might may have many more of the world’s best (and most expensive) hospitals, but the easiest and cheapest health benefits come from keeping people out of hospitals in the first place.

the country has made public health—measures to improve the health of the population as a whole—central to the delivery of medical care. Even in countries with robust universal health care, public health is usually an add-on; the vast majority of spending goes to treat the ailments of individuals. In Costa Rica, though, public health has been a priority for decades.

In the nineteen-seventies, Costa Rica identified maternal and child mortality as its biggest source of lost years of life. The public-health units directed pregnant women to prenatal care and delivery in hospitals, where officials made sure that personnel were prepared to prevent and manage the most frequent dangers, such as maternal hemorrhage, newborn respiratory failure, and sepsis. Nutrition programs helped reduce food shortages and underweight births; sanitation and vaccination campaigns reduced infectious diseases, from cholera to diphtheria; and a network of primary-care clinics delivered better treatment for children who did fall sick. Clinics also provided better access to contraception; by 1990, the average family size had dropped to just over three children.

The strategy demonstrated rapid and dramatic results. In 1970, seven per cent of children died before their first birthday. By 1980, only two per cent did. In the course of the decade, maternal deaths fell by eighty per cent. The nation’s over-all life expectancy became the longest in Latin America, and kept growing. By 1985, Costa Rica’s life expectancy matched that of the United States.

Gawande goes on to describe how every Costa Rican gets a home visit from a health care worker at least once per year. This is quite the contrast to the US, where even getting primary care doctors to let you see them in their office can be a fight. I moved to Rhode Island last year and this week finally tried getting a primary care doctor here. I looked through the list of doctors covered by my insurance that my insurer said were accepting new patients and started making calls (by the way, why calls? do any doctors book appointments online?). 2 said that they actually weren’t taking new patients. 9 never answered the phone. The 12th doctor I tried, one farther away and lower-rated than I’d like, finally agreed to see me- in 3 months.

For anyone with less free time, determination, or insurance coverage, it would be natural to just give up after the 5th or the 10th “no”. Clearly many Americans do, leading manageable conditions like diabetes or high blood pressure to turn into acute health crises and expensive hospital visits.

I do think individual doctors could do better here by thinking through their appointment process from the patient’s perspective. But at its core this is simply a numbers issue- we don’t have enough primary care doctors to go around. We actually have fewer doctors per capita than Costa Rica, and relatively high share of specialists means that we have even fewer primary care doctors to go around. More medical school spots, more primary care residency spots, and fewer restrictions on immigrant doctors could go a long way way toward helping to US catch up to…. Costa Rica.

That, or their secret is just the volcanoes. This is surprisingly plausible- the US state with the longest life expectancy is also the one best known for volcanoes, Hawaii.

GDP Losses and COVID Deaths (6 month update)

Back in March of this year, I wrote blog posts providing data on GDP losses and COVID-19 deaths for 2020, both for selected countries and US states. Since we’ve now had another 6 months of GDP data and the pandemic continues to take lives, I thought it would be useful to update that data.

I will update the data for US states in a future post, but here is the most recent data for about 3 dozen countries (mostly European and North American countries, since they have the most believe COVID data).

*indicates that the GDP data is only through the first quarter of 2021
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Streaming Content: Scattering Vs Dumping

Like a good millennial, I don’t have cable. Instead I have Netflix, Amazon, Hulu, Disney+, YouTube, and a free trial of Apple TV. And before you say that I’m spending just as much as I would have spent on cable, just – no. First, I am not. Second, I have way more capability and discretion than I ever had with cable. Each of these streaming services now has their own studio(s) and competition is causing them to produce some content of exceptional quality. And, they differ in their decisions scatter vs dump. Amazon and Apple TV scatter their new episodes on a weekly schedule. You can still watch the episodes whenever your heart desires once they’re released. But if you are up-to-date, then you must wait 7 days until new episodes are available. Netflix, on the other hand, dumps out a new series all at once. You can spend the afternoon (or morning, or night) watching an entire season of the newest content from a high-end studio.

If we take a look through the way-way-back machine, then we can observe must-see-TV on NBC in the 1990s. Networks followed the scattering model. Most people didn’t own a DVR and on demand wasn’t really a thing except for pay-per-view. VCR (video cassette recorders) were ubiquitous, but people enjoyed watching their shows as they were released rather than later watching a recording. The 90s and early 00s were a special time for NBC in particular: Friends, Seinfeld, Frasier, 3rd Rock from the Sun, and ER were all a part of the weekly line-up – with Will & Grace and Scrubs soon following the finale of Seinfeld.

New weekly episodes that were released during a literal ‘season’ of the year had been the model for as long as television signals had been broadcasted. Several of today’s streaming services still adhere to the 80-year-old practice.

Why?

I’ve got 3 reasons for why streaming services still scatter new releases. The first is the one I that have the least to say about: Buzz. It’s good marketing for a show to be released over a longer period of time. In a world of social media, the longer the time that a show is salient in your life, the greater the opportunity for you to share the show with your friends or for critics to acclaim (or pan, as the case may be). It’s a marketing tactic. If all of the episodes in a season were released all at once, then a show would be in-and-out of your life like a stray ice cube that goes rogue from the refrigerator ice-dispenser. You care for a bit. But soon, it’ll evaporate and never be a concern again. I’m not an expert in marketing. So I’ll just leave it at that.

The second reason is due to the time value of money. The sooner that we can enjoy revenues and the later that we can push costs, the better. It’s true for multiple reasons. Financially, every day sooner that you receive a dollar is an additional day during which you can earn a return by investing it elsewhere. For ease, let’s hold the schedule of costs constant and just worry about the revenues. If a streaming service releases episodes weekly, then episodes can start dropping before the season finale is even completed. There’s nothing that says that the whole season has to be ready by the time the first episode is released.  And, when episodes are released earlier, would-be viewers are sooner willing to sign-up and become paying customers. Releasing episodes weekly allows a studio to increase revenues before the whole product has finished production.

The 3rd and final reason for streaming services to release on a weekly schedule is due to the subscription structure of marginal revenue. Streaming services earn *no* additional revenue per episode viewed by customers. The marginal revenue earned from paying customers comes from subscriptions. That is, each month of a subscription is revenue for the streaming service provider – no matter how many episodes a subscriber watches. Therefore, if a season is released piecemeal, then it increases the number of weeks during which the streaming service receives revenues from the customer. Of course, people could just wait until all of the episodes are released and then subscribe for a single weekend of lethargic binging. But that can only happen when a viewer is comfortable with forsaking the frontier of new video content. That would mean that a viewer is out of fashion and out of the conversation that their friends and co-workers are having. And if this sounds like small potatoes, then keep in mind that such conversations are often about signaling belonging, comradery, and cultural sophistication. Many people are inclined to stay up-to-date on TV, the news, and sports and therefore have a greater willingness to pay.

There you have it. The 3 reasons for streaming by scattering over weeks rather than dumping all at once are 1) More persistent saliency among viewers and potential viewers, 2) Sooner rather than delayed revenues, and 3) More periods for which streaming service can charge their customers for new content.

I only have one explanation for why some streaming services do in fact dump an entire season at once. Netflix does it on the regular and Amazon started doing it in the past several years too. I suspect that they do it as a means of attracting a particular market segment: binge-watchers. There being two players who compete on this margin may make either provider appear less attractive for consumers who desire new, binge-worthy content. But, luckily for Netflix, streaming content providers aren’t in a perfectly competitive market. That content an imperfect substitute means that it’s monopolistically competitive. And, for the moment, that means higher profits. The keen reader will recognize, however, that zero long run economic profits are also implied.

Who is the Wealthiest Generation?

Have you seen this chart?

I have seen it many times. It comes from this Washington Post article, but it seems to go viral on Twitter about every 6 months or so.

The implication of the chart seems to confirm what many young people feel in their bones: Boomers had it much easier, and it’s getting harder and harder for later generations to catch up and build wealth. For many the graph… explains a lot, as one recent viral Tweet put it (in the weird world of social media, 5 short words and a recycled chart are all it takes for 20,000 retweets).

But wait. A few questions probably come to mind. For example, when Boomers were young they comprised a much larger share of the population. The original article makes an attempt to adjust for this, by calculating a few ratios towards the end of the article. However, there’s a much more straightforward way to adjust for this, which also nicely fits into a chart: put wealth in per capita terms!

If we do that, here’s the chart we get (also, of course, adjusted for inflation).

Data is for 1989-2021 from the Federal Reserve’s Distributional Financial Accounts, but only the first quarter is available right now for 2021. For 1989, it is the average of the third and fourth quarters. Population data comes from Census single-year of age estimates for various years. 2020 and 2021 population estimated using growth rate from 2010-2019.
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We need City-States

What happens when the world changes sufficiently that a subset of the institutions that laid the groundwork for the most successful nation of the last 200 years becomes becomes maladapted to their context? Well, thanks to a couple billion year of evolutionary biology, we know the possible outcomes. The classic evolutionary answer is that the species in question will either adapt, migrate, or die. Repurposed for the modern nation-state, the country in question will either:

  1. Adapt it institutions
  2. Change the context (i.e. whole nations can’t migrate)
  3. Steadily decline into some combination of irrelevance or chaos

Omar Wasow put together a nice thread, where each individual tweet stands wholly on it’s own as an acute observation, on the current state of the Senate as an elected institution:

So let’s think about our options here.

Decline into Irrelevance and Chaos

I mean, it’s a choice, but it’s not one I’m particularly excited about.

Adaptation

We could amend the constitution to change how the Senate is apportioned in some clever way that still maintains the mandated suffrage of every state. We could change/abolish the electoral college. I’ll be blunt: I don’t ever see a path forward for constitutional change that will entirely undermine the political power of the one of the major parties (good luck getting 2/3 of Senators to push through an Amendment that will undercut the careers of at least half of them). The resistance to it, at every level, will be extreme. The last time we tried to make an institutional change with that much impact on the balance of power, we had to fight a war to resolve it. There may be a path forward here, but not on a timescale that I’m interested in. I’m only interested in solutions that could be feasibly enacted in my lifetime.

Change the Circumstances

Unlike your typical seed-eating bird of the Galapagos Islands, we do have the means to change the map upon which the Senate is selected. In other words, more states. I don’t mean just granting statehood to Puerto Rico and DC (though it is mildly unconscionable that we haven’t done so already). And I don’t just mean (the very good and perfectly reasonable idea) of splitting California and Texas into 5 and 3 states. I mean a lot more states.

Let’s think about the underlying problem for a second. The Senate biasing representation towards a small minority of voters is a symptom of a larger phenomenon: the continued movement of Americans to dense urban areas. People keep moving to cities, and often from states without a major urban center, and into states with multiple large cities. The rural areas that they are emptying out from maintain their pool of slots for elected Senators, while the cities gain none. So what’s the answer?

Welcome to the great state of Seattle! [state motto: “If it’s not caffeinated, send it back”]

The Vinegar-Tomato Sauce State of Raleigh! [state color: halfway between Duke blue and UNC blue]

The Beechwood Aged State of St. Louis![ state left fielder: Lou Brock]

The Always Hustling State of Atlanta [state anthem: written and performed by Outkast]

City-states. Remember city-states!? Yes, I know, when we speak historically of city-states we mean entities independent of any other nation state – classic Venice, current Singapore or Monaco, but that doesn’t mean we can’t piggyback on their awesomeness. Texans already joke about the “People’s Republic of Austin” – let’s make it official! We can set a size minimum as either an explicit population threshold (e.g. 500k) or a moving bar, such as the population of the smallest state in the previous census. It’s essentially adding another option for a city to apply for inclusion in the next tier of our federalist system.

This is more feasible than you might think and vastly more feasible than amending the constitution.

Consider:

  1. These cities already have government infrastructures. The governor on day 1 is the current sitting mayor.
  2. The citizens of most medium- and large-sized cities derive the bulk of their regional identity from their city, not their state. Most urbanites will be thrilled at the notion of elevating the political status of their city while losing the affiliation of their previous state.
  3. New state coffers will be heavily subsidized with flag and swag sales the first few years (only mostly kidding)
  4. The remaining rural states will have the far more manageable task of trying to serve rural citizens without having to serve an urban voter base with radically different needs and preferences. Public goods will be better matched with the citizens of rural states as well.
  5. States will often look like Swiss cheese, which will be both hilarious and, slightly less importantly, will allow for constituents to even more easily vote with their feet when elected officials fall short in their duties.

Are there downsides? Sure.

  1. The speed traps before you enter and as you exit city-states into their rural envelopers will be aggressively extractive. There will be rampant attempts at exporting taxes across borders.
  2. Reconstituting water supplies as special districts supporting multiple states will be tricky.
  3. Coordinating interstate public goods will, no doubt, at times become even more farcical than the status quo.
  4. Decent chance this turns into a Neal Stephenson novel within 100 years.

But, in the medium and long run, I believe the benefits will greatly outweigh the costs. Throughout the pandemic there has been a constant tension, particularly in “red states”, between the public goods desired by the citizens in cities versus rural areas. While urbanites have been desperate for mask and vaccine mandates, rural citizens have been far more interested in consuming personal liberty and symbolic group-identity goods, at the expense of greater Covid cases and deaths for those in denser areas.

I’ve said it before and I’ll keep saying it tomorrow: there isn’t a red-blue divide, a religious divide, or a class divide. America is currently defined by an urban-rural divide. If we don’t adapt our institutions to reflect it and balance the equal political enfranchisement of people on both sides of that divide, it will continue to erode the integrity of our political infrastructure.

I imagine I don’t have to persuade many people that the integrity of the franchise is not something to be taken lightly. Regardless of the mathematical salience of an individual vote to any election, the fact remains that the less people believe their vote has at least the potential to be realized in the form of representation that serves them, the more they will look to alternative channels to the political process. And maybe, for the libertarian inside of you, the alternative you imagine might exist in the private marketplace for goods and services. But history informs us that the dominant alternatives to democracy are heritable lineage and bloodshed, and I don’t see any benevolent American scions laying in wait.