The Fed was founded after a spat of banking crises.
We know that the Federal Reserve also has the goals of full employment and steady, moderate inflation. Since the 1990s, that’s meant 2%. But it’s a relatively recent addition to the Fed’s policy goals. The primary purpose was initially and always has been financial system stability.
In 2008, the Fed demonstrated that it’s willing to attain financial stability at the cost of employment. After and during the financial crisis, the Fed purchased mortgage backed securities (MBS) from private banks at a time when their value was highly uncertain (and discounted). The purpose was to replace these assets of uncertain value with less risky assets. At the time, there was resentment that these security holders were insulated from losses while the homeowners whose loans composed the MBS did not get comparable relief. I remember arguing that the Fed, with the cooperation of congress, could have just paid part of the mortgages on behalf of the homeowners such that there were fewer foreclosures and fewer personal bankruptcies. That way, both the borrowers wouldn’t default and the debt holders would enjoy stable returns.
But, the primary goal of the Fed is financial system stability. Pre-financial crisis, banks had loaded-up on securities of uncertain value with the help of regulatory arbitrage and some lending shenanigans. The Fed needed to avoid the ensuing catastrophe that was a consequence of the greater-than-anticipated realized risk. Importantly, catastrophe to the Fed is financial-sector specific. Markets losing liquidity, bank-runs, and financial sector business failures all qualify as the stuff of concern (all of which occurred). While making mortgage payments for specific mortgages would have been popular amongst many debtors, it also would have taken much more time to implement. The Fed wanted to avoid more financial instability than had already occurred. And frankly, the Fed’s first priority isn’t to take care of the public. Given the alternative between a slow popular option and a quick adequate option, the Fed has demonstrated an inclination toward the latter.
The marketfor the assassination of John Wick has absolutely failed, at least through three films. Lots of people want him dead. They keep sending people to kill him. Those people keep getting killed. Why?
John Wick 4 is in theatres now, I enjoyed it thoroughly, this discussion will have no spoilers. The question I want to ask is: how is this character still alive to inhabit a fourth film? Is he immortal? Some sort of demon or demi-god? No.
John Wick survived three films because the market for assassination is run by a oligopsonistic cartel (“The High Table”) with extreme price-setting power. And that cartel is simply not willing to pay the necessary price. John Wick lives because the High Table is a bunch of penny-pinching cheapskates.
Point of fact: trying to kill John Wick is dangerous. Everyone who tries to dies. Through the first three films he has killed 114 people. If you want someone to take on a dangerous job, you have to pay them accordingly. In economics we refer to this as compensating wage differentials. Killing John Wick is more than just dangerous, however. It’s also a tournament. It’s an open contract and only one person, the successful assassin, receives payment. So you, the would-be assassin who is considering entering this market, has to consider both the probability of success and the probability of your own death. The two are, of course, also inextricably related. So how much do you value your own life?
The value of statistical life in 2016 was somewhere around $9.6 million dollars. Updating that into 2023 dollars based on nothing but inflation pushes us to about $12 million. If we are to assume that the 115th person actually is successful in their task (which is a pretty heroic assumption considering the low probability that John Wick dies in the first 5 minutes of a nearly 3 hour 4th film), the you should expect that a less than 1% chance of success and that in your failure you will also lose your life. The appropriate compensating wage differentials should in turn be in the neighborhood of $1.38 billion.
That’s just the additional compensation on top of the standard wages that clear the market for individuals with the kind of skill set and, ahem, demeanor necessary to enter the high end assassin labor market. The market clearing price in question is likely closer to $1.5 billion. By the end of John Wick 3, the bounty on his head reaches a paltry $14 million, which is tells you all you need to know about the High Table. They just don’t get the economics of the situation they are in. You can’t treat killing John Wick like a standard labor market transaction for the same reason you can’t pay uniform wages for cleaning windows. Sometimes you need the first floor cleaned. Sometimes the 80th floor. Sometimes the inside of the windows. Sometimes the outside.
John Wick 4 is in theaters because The High Table ignored the first rule of economics. You get what you pay for.
There’s no getting around the fact, however, that I remain pretty rationally ignorant of what’s happening in my neighborhood. This stands despite my being both a local homeowner and an economist who is intellectually invested in the idea that obstacles to housing construction are a major cause of a wide variety of social ills. The reason for my ignorance remains the same as most peoples: I’m busy.
Many cities have blogs and subreddits that one can follow to keep abreast of local policy. What I really need, though, is a paid liason who’s entire job is to absorb and distill all of these political currents into a single information digest consumable as a quarterly email. Decent chance there are at least 100 homeowners in my area who would pay for such a service. Should you offer such a service?
No, you should not. Why? Because you’d be rendered obsolete within a two years because I’m pretty sure I’m going to be able have a large language model produce exactly that email for me, probably for free.
Everyone keeps looking for “the big use case” for AI and LLMs. Allow me to suggest instead that the big use case is in fact thousands of micro use cases, those tasks for whom we could all use a 3-5 hours per year personal assistant, but such a relationship simply isn’t a net gain given the fixed costs of a retaining an assistant. Some of the big use cases for early AI’s will, in this sense, be similar to Uber or Airbnb: they reduce the fixed costs and transaction costs of personal services.
For me, one of those first personal services provided by Chat GPT or it’s closest rival may simply be telling me who to vote for:
“I am a X year old homeowner in zip code XXXXX. I am single/married with X children of ages [X….X]. I earned X dollars last year. What should I vote for and against in the upcoming election on November 11th?”
Currently, we have software that can write software. What about physical machines that can produce physical machines? Indeed, what about machines that can produce other machines without human direction?
First of all, machines-building machines (MBM) still require resources: energy, transportation, time, and other inputs. A well-programmed machine that self-replicates quickly can grow in number exponentially. But where would the machines get the resources that enable self-replication? They’d have to purchase them (or conquer the world sci-fi style). Where would a machine get the resources to make purchases of necessary inputs? The same place that everyone else gets them.
A the moment, the collapse of Silicon Valley Bank is the dominant story in the news cycle. It seemed like a big deal to me at first, then less of a big deal, then of enormous consequence again. At the moment, my estimation has settled into “A negative event that will hurt some people but will only be of long run consequence unless it yields sufficiently bad new economic policy out of it i.e. receive a bailed that entirely shields them from consequences. But honestly I don’t know. My estimation really shouldn’t move your priors too much unless you were previously sitting at one of the extremes of “Nothing actually happened” or “This is the beginning of a new Great Depression”. I’m quite confident neither of those is correct. If you want a solid accounting, read Noah Smith’s post. I think he probably nailed it.
So here’s a research idea so quarter-baked I haven’t even looked on google scholar to see if it’s been done, let alone would work. What is the relationship between a slow news cycle and pessimistic affect in event coverage? Here’s I’d go about it:
Create an idex of news story variation. Variation in news coverage is an indicator that nothing is happening. When important things happen, they get covered alot, which means there is less variation in stories across outlets.
Run an natural language algorithm for measuring “pessimistic affect” i.e. doomerism in news stories.
Estimate the relationship between lagged news story variation and current pessimistic affect.
?
Publish
The hypothesis is simple: when the news cycle is slow, outlets and pundits have an incentive to not just hype the importance of any event, but accentuate it’s potential negative consequences going forward so they can keep talking about it.
That’s it. Thats the idea. I hope you will include me in the acknowledgments when accepting your various research awards and accolades.
I say what economists are supposed to say. I tell everyone who will listen that they should invest in index funds and then don’t check their balances. I explain that abnormal returns stem from abnormal information. Individuals are unlikely to have abnormal insight about publicly traded companies because other people have more time and resources to find that information. Further, even if a professional has abnormal insight, it’s not likely to persist over time. Index funds get around the problem of idiosyncratic risk and the brevity of abnormal insight by riding on the back of the more informed. I say all of this and I believe it in my heart.
I teach macroeconomics and I’ve published about asset volatility. I know more about inflation and the macroeconomy than the typical investor. From mid-2020 through now the S&P500 has gained 11.3% annually. My personal return has been 21% annually. It’s true, however, that the first half of 2022 was rough. But I can’t help but feel happy and confident.*
Rather than channel my inner, but very real, grumpy old economist, I want to instead reassure you that, yes, the NYT article “Is the entire economy gentrifying?” is as bad, if not worse than you think. I have a duty to link to it, but I’d actually prefer you not click through.
It’s bad in the all the ways that can make you feel crazy and gaslit.
The title is a question even though the entire article is an assertion
The subtitle uses colloquial language to signal condescension and superiority
It makes grievous economic errors that betray the authors broad ignorance of the subject
There’s little doubt that part of why it so blatantaly telegraphs that it’s bad is for the very purpose of pulling in an additional audience of hate-readers. I could grump about the addition of that unnecessary question mark in the title to mitigate any culpability for the meandering anecdote driven assertions that follow. I could whine that describing profits as “fat”, rather than “large”, “growing” or, god forbid, without an adjective at all, let’s us know right away that their story has a villain that you can blame while feeling superior to all the fools who don’t realize they’re being taken advantage of.
I could definitely settle into a cathartic, apoplectic rage at the omission of the G*D D**M MONEY SUPPLY as a potential input into inflation. For such an economic sin they should have to take the train to Paul Krugman’s CUNY office and silently wait in contrition until he shows up to absolve them (pro tip: bring snacks).
I could do any of those things. You probably could, too.
But you shouldn’t. These are professional journalists, but amateur economists, filling column inches in the New York Times. Your sibling might have a marginally worse opinion on the economy tomorrow, but let’s be honest: their opinions were already pretty bad. Just enjoy your week.
There’s a new paper about the minimum wage and its effects on crime. I wrote a paper (with Amanda Agan) about the minimum wage and crime (here’s a slightly older ungated version). I have received several requests to comment on the new paper because, based on the abstracts, our papers appear to generate conflicting results. Spoiler alert: they don’t. Sorry to disappoint those who came looking for an academic blood bath.
I am happy to talk about the new paper, by Fone, Sabia, and Cesur (FSC), but let’s get the big part out of the way. Our paper on the minimum wage looks at criminal recidivism, defined as a return to prison, for those who have been released from prison. These are people whose conviction resulted in them being in incarcerated in a prison (not jail) who, on average, served nearly 2 years and were subsequently released at age 35. The FSC paper uses arrest data. Their principal observation regards property crime arrests committed by 16-24 year olds.
Our two papers identify fundamentally different results about fundamentally different populations that, in my opinion, hinge on completely different mechanisms.
Our paper is old news, so I won’t belabor the point. Succinctly, we found that minimum wage increase of $0.50 reduced the probability an individual returns to prison within 3 years by 2.15%. The availability of state EITCs also reduced recidivism, but only for women.
The FSC paper use’s Uniform Crime Report data to look at arrests. Here’s the figures and tables that I’ll focus on for our discussion:
FSC find that property crime arrests increase for 16-24 year olds in an event study estimate, where an increase in the minimum wage of at least $1 serves as an “event”:
Property crime arrests in their diff-in-diff estimate reaffirm this estimate. They also, however, observe negative effects on property crime arrests on 35-49 year olds, though the coefficient is too noisy to be statistically significant. These results are similar to ours, though because we were looking at individual recidivism we had the benefit of estimating over ~6 million observations (vs the 45 thousand county-years of FSC).
When FSC dig into the crime categories further, there is no effect on burglary, robbery, or auto theft. The property crime effect is entirely in larceny. Let’s also note the positive effect of the minimum wage on vandalism.
Here’s an important tidbit: UCR data does not distinguish between misdemeanor petty (petit) larceny and felony larceny. One last result: employment is noisily declining for 16-24 year-olds who have not yet completed high school.
Let’s add it all up: when a state increases the minimum wage by at least $1, we observe an increase in larceny and vandalism arrests of 16-24 year-olds, without any effect on robbery, burglary, auto theft, or violent crime, all while reducing the employment of 16-24 olds who have not yet completed high school. Can you see where I’m going with this?
Shoplifting. When states significantly increase the minimum wage, employers stop hiring teenagers. Those teenagers, laden with time but bereft of spending money, rediscover the allure of the five-finger discount. That is my interpretation of these results and nothing about these results seems strange to me or at odds with the earlier findings in our paper on the minimum wage and recidivism.
I don’t think the authors have really done anything wrong here. I could manufacture some of the usual gripes if I really wanted too, but the identification strategy seems at least broadly sound and the data is widely used. The estimated magnitudes seem plausible. If I was going to complain about anything, it would probably be the imputed $766 million dollar price tag placed on the externality, but I’m also not well-versed in the costs of shoplifting (and in case you’re reading something into my tone, I do not think shoplifting can be dismissed as unimportant). If I had to hang my hat on something, though, I’d say that’s probably on the hefty side. In footnote 48 they consider a a more conservative estimate of a $128 million dollar externality. That seems more plausible to me.
The minimum wage literature is one we all, every single one of us, bring our own political and economic baggage to. When our paper found that the minimum wage reduced criminal recidivism, a lot of people latched on to it because what they heard was “minimum wages stop crime”. I’m sure a lot of people will latch on to FSC’s new paper because they want to hear “minimum wages cause crime”. The reality, of course, is vastly more nuanced. We should expect these laws to have heterogeneous effects born of complex interactions, particularly when we stratify populations into those interacting with an institution as rife with peculiarities and pathologies as the US criminal justice system.
I think the single most under-considered development in labor economics has been the revolution in the real-time measurement of labor output over last decade (although there was an interesting article recently in AEJ: Applied looking at the shift in the late 70s from standardized to variable wages within firms). A lot of ink has been spilled agonizing over why “no one wants to work” in fast food establishments for $15-$20 an hour, without appreciation for how much those jobs have been transformed by operations monitoring and management. Simply put, there’s no hiding on the line anymore. You’re either producing or you’re not and everyoone knows. Now, whether subpar performance will quickly result in termination is unclear in such a tight labor market, but you can be sure that your inadequate productivity will be quantified and communicated to you. These numbers may create a feeling of shame or inadequacy, perhaps even sufficient to make you work harder, increasing the disutility of labor faster than your earnings increase. Your prospects for advancement or a pay increase will correlate directly with your measured productivity. The spread of such indignities, previously reserved for those working assembly lines, sales, or independent contract work, are not limited to fast food:
“Workers at the plant told Bloomberg News that Tesla monitors keystrokes to track how long employees spend per task and how much of the day they spend actively working.“
There have long been lines of work where work could be paid “piecemeal” i.e. paid per unit output. These jobs were typically limited to those where labor’s output was discrete, easily measured, and where quality could be distilled into sufficient/not sufficient categorization. Great for sewing textiles, bad for writing code or making gourmet food. When you’re working a piecemeal job you can be rewarded for high output, but it’s a double-edged sword. There’s no obscuring your contributions within the uncertainty of productivity or the efforts of others. It’s the difference between singing in a 50 person choir or playing golf. No one listening to that choir will ever know I can’t hit a note, even after dozens of performances. My fraudulence on a golf course is transparent after a single swing.
The revolution in labor measurement has all kinds of ramifications for the nature of work, management-labor relations, and the distribution of income.
1) Being watched is stressful, being measured doubly so.
2) Nobody likes being judged. Always being watched will only heighten labor skepticism and antagonism towards management.
3) Bigger rewards for higher producers can only increase income inequality even if wages rise for everyone
Better measurement could increase labor’s share of their marginal revenue product simply by reducing uncertainty and risk. This increased share, combined with greater productivity, could raise incomes for all laborers. Even under these assumptions, however, greater measurement is can still increase income inequality because it will likely reward the most productive workers more than the least.
It’s hard to usefully speculate on the exact mechanisms through which transitioning to piecemeal work affects labor. Perhaps it’s safer to just be grossly reductionist: increased monitoring and measurement of labor threaten’s every worker’s god-given right to do a half-assed job.
Worker’s, like all of us, are under-appreciated in the guile and sophistication they bring to bear when maximizing their utility. It’s not just where and when we work, it’s how we work. Some want to climb the ladder, some don’t. Some work to live, some live to work. Some jobs sustain us while we participate in high risk-reward labor tournaments in our side-hustles (music, art, indie game design, etc).
Doing a half-assed job is a tried and true strategy to living a great life if you have the tremendous fortune of living in a wealthy country. Employing half-assed workers, however, is a bit trickier and I suspect the rise in monitoring and measurement is a market response that reveals that the conflict between half-assed labor and management has never solved.
How will such conflicts be reconciled? My suspicion is that this will eventually come out as a mutually beneficial gain, on average, for all parties. Workers will be monitored and measured more tightly, which will make work less pleasant, but they will be paid more and work less. I suspect many of us would actually prefer to work 40% harder for half the hours and make double the pay. There will be people who lose in the transition, however. Every workplace has a slacker who floats from job to job, doing far less than the bare minimum, riding the wave of uncertainty that keeps their unemployment at least temporarily intact. For many occupations that strategy will cease to be viable. I’d feel bad for them…but I don’t. Maybe that makes me a grumpy old man, but if if anyone was taking bets I’d put a lot of money down that for the last 50 years it’s been mostly white men riding off the labor of others…and it’s been mostly the over-contribution of women to marginal output that has subsidized their quarter-assed counterparts.
The days of management trying to increase productivity by exhorting motivational platitudes while dangling the carrot of advancement while pretending to know who deserves credit are over. We know who’s doing the work. Which means that even if you are still formally receiving a salary, your salary will so tightly hew to your productivity that it will effectively be a piece rate. That also means, by the way, that management has no excuses anymore, either. You know who’s getting the work done. The same forces undermining a half-assed labor strategy will hopefully continue to undermine casual cronyism and discrimination as well.
But don’t worry, humans are clever. We’ll game each new system along the way. You’ll never find a more whole-assed effort than someone trying to figure out how to half-ass their job.
SMET was the first acronym used by the National Science Foundation to stand for “science, technology, engineering, and mathematics”. There was a re-branding of the name that we owe to the American biologist Judith Ramaley. The STEM acronym sounds much better!
Does a cosmetic change matter? Will more students study STEM than SMET? The US government funds initiatives aimed at encouraging students to study STEM fields, so answering this question is important.
Some of these initiatives date back several decades, such as the National Science Foundation’s (NSF) Advanced Technological Education program, which was started in 1992 to provide funding for two-year colleges to develop programs that promote STEM education and prepare students for technical careers. The National Math and Science Initiative (NMSI) was established in 2007 and offers training and support for teachers to improve STEM instruction in K-12 schools. In 2009, the White House launched the “Educate to Innovate” campaign, which aimed to improve STEM education in American schools and increase the number of students pursuing STEM careers. Additionally, several federal agencies, including NASA and the Department of Energy, have launched initiatives over the years to promote STEM education and provide opportunities for students to engage in STEM-related research and projects. These efforts reflect a recognition of the importance of STEM fields to the country’s future economic competitiveness and national security, and a commitment to ensuring that all students have access to the skills and knowledge needed to succeed in these fields.
There is something to be said for branding and marketing in relation to science education. However, I see this as an open question: How much does branding matter, as opposed to the fundamentals of the pay and quality of available jobs that students can get in STEM fields?
I’m preparing a public lecture on my “Willingness to Be Paid” paper. Using an experiment, I examined what factors affect a student’s decision to do a computer programming job. I tried out an encouraging message which turned out to not work in the sense that it did not increase participation. I’m planning to open my talk with the SMET affair as an example of what is being tried with messaging and the tech labor supply.
Economist Writing Every Day 