Productivity

Covid Evidence: Supply Vs Demand Shock

Zachary Bartsch4 Comments

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

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

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

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

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

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

The big questions are:

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

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

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Post Tenure Agenda

James Bailey7 Comments

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

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

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

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

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

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

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

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

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

Disney World is not Decadent

Joy Buchanan3 Comments

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

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

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

He specifically mentions Disneyland on page 36-37:

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

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

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

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

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

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How to Set Working Directory in R for Replication Packages

Joy BuchananLeave a comment

The AEA Data Editor kicked it all off with this tweet:

“Please stop using “cd” (in Stata) or “setwd()” (in R) all over the place. Once (maybe, not really), that’s enough.”

Replies proliferated on #EconTwitter this week. In this blog post I am collecting solutions for R.   These days you might share the code used to generate your results for an empirical paper. That code would ideally be easy for other people to run on their own computers. File paths are hard (as I blogged previously).

A project for a single paper might have multiple code files. The code interacts with data stored somewhere. Part of the task of the code is to point the statistical program to the data set. It is frustrating if an outsider is trying to replicate a result and must alter the code in multiple places to point to their own location of the data.

Here is a concise summary of good practice, for any code language: “cd and setwd() specify the directory. When you share code and run on a different computer, they don’t work. Therefore, good practice to only specify once, at the beginning”

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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

“Pfumvudza” Planting Technique Revolutionizes Crop Yields in Zimbabwe

Scott Buchanan2 Comments

Birth of a New Farming Method

Brian Oldreive is a Zimbabwean, born there in 1943. A star cricket player as a young man, he moved on to become a successful tobacco farmer. In 1978, he became convinced (given the harm that tobacco causes) that he should no longer grow tobacco. When he tried to switch to food crops like corn (called maize in Africa), using standard agricultural practices, he could not make a go of it. He ended up losing his farm and his livelihood due to his moral stand against growing tobacco. He went to work for another large farm, but even there it was a struggle to grow food at a profit. Soil was eroding and crop yields were falling.

He began to think that maybe there was a better way to farm than the usual Western model. One day in 1984 when he was walking in the forest, he noticed that the trees and bushes there grew just fine, with no help from humans, no plowing or irrigation. How was that possible? He observed two things. First, the ground was covered with a thick layer of leaves and other debris, which formed a natural mulch. Beneath this mulch layer (“God’s blanket”), the soil was moist. This was while the region was experiencing drought, and regular farmers’ fields were parched. Secondly, the undisturbed mulch layer naturally decayed to return nutrients to the soil.

Oldreive parlayed those observations into a system of no-till agriculture which mimics the created order. He called this “Farming God’s Way”. The emphasis is on high productivity from a small plot. This involves precision planting at the proper time, crop rotation (corn/beans), and deep mulching to retain moisture and keep weeds down. Nutrients are supplied by both compost and chemical fertilizers.

This method can be practiced by farmers owning no tool other than a hoe. This breaks the cycle of farmers or nations going into debt to purchase expensive Western agricultural machinery, which then may become useless due to inadequate maintenance out in the bush.    

This approach contrasts with conventional farming practice which plows up the soil, leaving it to erode away when it rains and to dry out when it doesn’t rain. Plowing also disturbs the natural ordering of the microbial communities within the upper and lower soil layers. (There is aerobic metabolism near the surface, and a whole different anaerobic community in the soil lower down).

Oldreive started by planting one small plot using this approach in the estate he was then managing:

I decided to copy what God does in natural creation and I observed that the leaves fall down on the ground and the grass dies down and there is a protective blanket over the earth, and that is how God preserves soil to infiltrate the water that we receive…

Many people did not believe me and said I was wasting time. But I was not deterred because I was convinced that this method would work. I decided to put the model into practice by starting with just two hectares. I prayed for wisdom and God showed me how to plant maize into wheat straw residue. This is just the same as what God does in nature.

That two-hectare (about 5 acre) plot confounded the skeptics, yielding about ten times more corn per hectare than the local average yields. He then planted more acreage using this approach. Over the next few years, while a number of conventionally-run farms around him went broke, he kept expanding and growing more food with his system.

Oldreive believed these insights were gifts from God which were meant to be shared with others. Therefore, he shifted his effort towards teaching other Africans how to farm with this method.

Things Fall Apart in Zimbabwe

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The Return of Independent Research

James Bailey2 Comments

Universities have been around for about a thousand years, but for much of that time it was typical for cutting-edge research to happen outside of them. Copernicus wasn’t a professor, Darwin wasn’t a professor. Others like Isaac Newton, Robert Hooke, and Albert Einstein became professors only after completing some of their best work. Scientists didn’t need the resources of a university, they simply needed a means of support that gave them enough time to think. Many were independently wealthy (Robert Boyle, Antoine Lavoisier) or supported by the church (Gregor Mendel). Some worked “real jobs”, David Ricardo as a banker, Einstein famously as a patent clerk.

Over time academia grew and an increasing share of research was done by professors, with most of the rest happening inside the few non-academic institutions that paid people to do full time research: national labs, government agencies, and a few companies like Xerox Parc, Bell Labs and 3M. In many fields research came to require expensive equipment that was only available in the best-funded labs. “Researcher” became a job, and research conducted by those without that job became viewed with suspicion over the 20th century.

But the Internet Age is leading to the growth in opportunities outside academia, opportunities not just economic but intellectual. Anyone with a laptop and internet can access most of the key tools that professors use, often for free- scientific articles, seminars, supercomputers, data, data analysis. Particularly outside of the lab sciences, the only remaining barrier to independent research is again what it was before the 20th century- finding a means of support that gives you time to think. This will never be easy, but becoming a professor isn’t either, and a growing number of people are either becoming independently wealthy, able to support themselves with fewer work hours (even vs academics), or finding jobs that encourage part time research. If you work for the right company you might even get better data than the academics have.

Particularly in artificial intelligence and machine learning, the frontier seems to be outside academia, with many of the best professors getting offers from industry they can’t refuse.

Even in the lab sciences, money is increasingly pouring in for those who want to leave academia to run a start-up instead:

I think it’s great for science that these new opportunities are opening up. A natural advantage of independent research is that it allows people to work on topics or use methods they couldn’t in academia because they are seen as too high risk, too out there, make too many enemies, or otherwise fall into an academic “blind spot“.

I’m still happy to be in academia, and independent research clearly has its challenges too. But over my lifetime it seems like we have shifted from academia being the obvious best place to do research, to academia being one of several good options. Even as research has begun to move elsewhere though, universities still seem to be doing well at their original purpose of teaching students. Almost all of the people I’ve highlighted as great independent researchers were still trained at universities; most of the modern ones I linked to even have PhDs. There are always exceptions and the internet could still change this, but for now universities retain a near-monopoly on training good researchers even as the employment of good researchers becomes competitive.

As an academic I may not be the right person to write about all this, so I’ll leave you with the suggestion to listen to this podcast where Spencer Greenberg and Andy Matuschak discuss their world of “para-academic research”. Spencer is a great example of everything I’ve said- an Applied Math PhD who makes money in private sector finance/tech but has the time to publish great research, partly in math/CS where a university lab is unnecessary, but more interestingly in psychology where being a professor would actually slow him down- independent researchers don’t need to wait weeks for permission from an institutional review board every time they want to run a survey.

Using Economics to Save Presents from the Economists

Zachary Bartsch3 Comments

Economists like to hate on gift giving. Many of them consider purchasing a gift for another person as a futile attempt at imagining the preferences of another person. Given that you can’t perfectly know another person’s preferences, your gift selection will be sub-optimal. The argument goes that your friend or spouse or whomever would have been better off if you had given them money instead. Then they could have made the gift decision fully equipped with the information that is necessary to make them happiest.

There are some obvious things that are glossed over. Purchasing a good gift – or even writing a card – carries a big load of signaling value. People like to be liked and receiving a good gift signals that the giver cared enough to research appropriate gifts. Also, receiving money as a gift puts the onus of research and transaction costs on the receiver. If the recipient’s value of time is adequately high, then cash payments are even more resource destructive than giving a non-pecuniary gift. Especially if there is an expectation that the giver will later enquire about how the funds were used. At that point, the giver is saddling the recipient with all of the anxieties and costs of choosing a gift that makes another person happy.

But I want to talk about a non-obvious benefit of gift giving.

First, I want to talk about student loans (I promise, it’s relevant). Plenty of people argue that college students don’t understand debt and that they therefore don’t understand the future cost that they will bear by borrowing. When the lender is the department of education, there is no defaulting with the hope of bankruptcy. The debt will get repaid…. So far anyway.

If it’s true that students don’t understand debt, then we can appropriately construe future student loan payments as lump-sum costs. Of course there is deferment and forbearance – but put those to the side. The bottom line is that, almost regardless of a debtor’s activities, they must repay their debt. It doesn’t matter how the debtor earns or consumes, the debt must be paid. This fits the description of a lump-sum cost. Usually, things like lump-sum taxes are hypothetical and unpopular among the laity. But, if we accept that the decision-making-student has incomplete information in regard to the debt’s future payment implications, then the debt payments are exogenous and unavoidable from the future debtor’s perspective.

This is a good thing for the productivity of our economy. Because people are making tradeoffs between the two goods of leisure and consumption, a lump-sum tax causes individuals to work more than they would have worked otherwise. Lump-sum taxes don’t reduce the marginal benefit of working. Essentially, a debtor’s first several hours of work pay-off his debt first and then he gets to work for his own consumption.

Importantly, this ignores any human capital effects of the education. It doesn’t matter whether education actually makes people more productive. The seemingly exogenous debt payments cause debtors to work more and produce more for others. The RGDP per capita of our economy rises and we know that most of the benefits of work do not accrue to producers. Student debt, with the accompanying assumptions laid out above, therefore increases our incomes because it acts as a lump-sum tax.

Now it’s time to save presents from the economists.

As families get older and siblings drift apart, gift-giving begins to become less exciting. I’m tempted to say there is a natural process in which the first couple of adult-sibling Christmases include decent gifts. Then, the gifts become not-so-great as siblings become less familiar with each others’ preferences. Knowing this and still wanting to give a suitable gift, siblings may turn to gift cards. The less that a sibling knows the preferences of another, the more general the gift card.

If you’ve grown more distant from your brothers/sisters and you know that you’ll receive a gift, then it’ll probably be an Amazon, or Walmart, or some other gift card that permits spending on a broad variety of gifts. There comes a point when you’re spending $X on gift cards each year where $X = $x(n). That is, you’re spending some amount on each sibling for a total of $X each year. And for the sake of social cohesion and norms, all of your siblings are doing the same thing and spending the same amounts.

Importantly, you don’t control the social norms, nor your number of siblings. It might seem like you’re all just trading dollar bills at a unitary exchange rate, leaving no-one better or worse-off. But, trading cash is gauche. So, distant siblings trade broadly attractive gift cards in order to achieve that gift-like aura.

Social norms also say that gift giving is not a trade. If you don’t receive a gift, then you’re supposed to be ‘ok’ with that. So, each year you will spend $X on gift cards for your distant siblings and there is some probability that you get nothing in return. If you can’t control the number of siblings that you have and you can’t control whether you receive a gift card in return, then giving cash or cash-like gift cards to your siblings each year is a lot like a lump-sum cost. Socially – or maybe morally – you shouldn’t just ignore your siblings and it is incumbent upon you to give a gift.

Having to give away a lump-sum of money or money-like things no matter what else you do is a lump-sum cost. If people bear lump-sum costs, then they will work a little bit more and produce a little bit more for society. If gifts suboptimal but at least considered a ‘good’, then we’re better off: we work more to make others somewhat better off with resources that wouldn’t exist if we hadn’t chosen to give to others.

There are some caveats, of course. Economists are often not so popular at parties for a variety of reasons. One reason is that they flout social conventions. An economist might scoff at the social constraints as unbinding. Others would disagree. Another point of contention may be that an individual can choose to work no more, but to invest less instead. But this really just pushes the problem off until the individual has less income in the future and works more to compensate for it at a later time. A 3rd caveat is that we can choose the amount that we spend in others. But that just implies that at least part of the gift giving ritual isn’t a lump-sum cost. It does not imply that none of gifting giving is a lump sum cost.

Regardless, the social convention of giving gifts can provide for a Schelling point that makes us a more productive as a society. We spend on others, to a great degree beyond our individual control, in order to avoid severe social stigma. And, if we can’t control all of who counts as a worthy recipient of gifts, then we have a lump-sum cost to some degree. Giving gifts makes sense as a productive convention because it makes us a richer as part of a general equilibrium – if not a partial equilibrium. Merry Christmas.

Watching Get Back

Joy Buchanan5 Comments

I enjoyed watching Get Back, the new documentary about making a Beatles album. Sometimes I skipped over rehearsal scenes. The streaming format allows you to treat Get Back like a coffee table book, if you choose, as opposed to a feature film that you watch all the way through in one sitting.

I know very little about The Beatles, aside from recognizing their hit songs. Here are my impressions after watching most of Get Back.

Paul McCartney is a rock star. His hair could have its own line in the closing credits. When Paul goofs off, he appears to be entertaining his bandmates because he loves playing for any audience. Conversely, John Lennon seems to joke around because he does not take their music seriously. Paul is motivated to make the Beatles excellent. Ringo’s ability to show up and be quiet is almost as important as Paul’s ability to lead.

I’ll put up my tribute. Then I’ll add more casual observations.

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Has Economic Growth Really Slowed Since 1970?

Jeremy Horpedahl2 Comments

In the post-WW2 era, by many different measures the US economy performed better before about 1970 than after. You can apparently see this in many different statistics. For example, the productivity slowdown is a well-known and well-studied phenomenon. And even given the productivity slowdown, median wages don’t seem to have kept pace with productivity growth.

I think there are good reasons to doubt these particular statistics. For example, on wages and productivity see this working paper by Stansbury and Summers.

But even considering all these criticisms of the statistics, we do observe that overall GDP growth has been slower since about 1970. Why might this be?

In an NBER summary of his research, Nicholas Muller argues that a big part of the GDP growth slowdown is because we aren’t including environmental damage in the calculation. This is not a new argument (Muller is an important contributor to this literature), and the exclusion of environmental damage is a well-known flaw of GDP, but Muller’s paper does a great job of quantifying how much we are mismeasuring GDP. The following figure is a nice summary of what GDP growth looks like when we consider environmental damage.

2021number3_muller1.jpg

If we use the standard measure of GDP, growth indeed slowed down after 1970. If instead we augment GDP for environmental damages, the period after 1970 was actually faster! The adjustment both slows down growth from 1957-1970, and speeds up growth after 1970.

There are lots of things we can draw from this, but if the results are close to accurate, there is a clear implication: environmental regulations (such as the Clean Air Act) do reduce GDP growth, as traditionally measured. So the skeptics of regulation are partially right: regulation reduces growth!

However, this seems to be a clear case where standard critiques of GDP (as you can find in just about any Econ 101 textbook — yes, really!) need to be incorporated into the complete cost-benefit analysis of the impacts of environmental regulation.