I was listening to an episode of Planet Money and, as one does, thought of a completely brand new and in no way derivative idea that would make many billions of dollars for myself and my future investors. It was a very exciting drive home. Of course, the prospects and originality of idea did not survive first contact with Google.

The episode in question, “Of Boxes and Boats” was characteristically delightful and informative. TL;DR: the supply chain is a disaster, ports are backed up, and the US is experiencing an especially acute shortage of warehouse space. A moment that especially caught my attention was warehouse manager expressing that there was, in fact, empty space in his warehouse, but that the firm currently leasing that space wasn’t using it, and the warehouse had no means of offering that space to another client.

That’s interesting. That’s a resource that, in the moment, is suboptimally allocated, even if only for the hour, day, or week. That’s an arbitrage opportunity. In fact, this is exactly what AirBnB did: found real estate that was more valuable to potential short-term renters than current lease holders that could be temporarily exchanged between parties, and as a facilitator for that exchange AirBnB could take a cut. Someone needs to make Warehouse AirBnB! I’m a genius.

No, I’m not.

Meet “The Airbnb of Warehouse Space”

Sigh. I wasn’t even first to the incredibly obvious one-line sales pitch. But my fanciful dreams of buying an English (or at least Belgian) soccer team asside, I honestly can’t decide if I should feel better or worse knowing this idea is already out there. On the one hand, it’s good to be reminded how dynamic and responsive entrpreneurs are in identifying problems and offering solutions.

On the other hand, the supply chain is still very much a mess, warehouses are still out of useable space, and I see no evidence that there is in fact a rich secondary market in warehouse space allocations. Clearly something is getting in the way of the market responding. Is the market over-regulated? The Department of Homeland Security apparently makes entry into the shipping and warehouse business pretty costly. Maybe it’s under-regulated? Perhaps firms are squatting on warehouse space rather than sell it to potential long-term competitors. Maybe the intermediaries, real and hypothesized, are so inefficient that their additional costs as a middlemen are prohibitive. Maybe it’s <Insert Politician You Don’t Like Here>‘s fault. That idiot screwed up everything they touched.

The fact remains though that the idea itself was not the limiting factor, and I suspect it rarely is. I thought of it in ten seconds after listening to a podcast. For the people working in such a field, they probably come up with similar ideas daily. No, the limiting factor isn’t inspiration, or likely even perspiration. It’s being able to identify a path from idea to execution. A path that includes sufficient time, energy, capital, and personnel to make it happen. It’s about resources and risk. All of which is obvious. I’m pretty sure the “It’s About Resources and Risk” banner and bunting gets used more than “Happy Birthday” at your modal MBA program.

But it’s good to be reminded of the obvious every now and then. There are great ideas everywhere. When we’re thinking about any prospective policy regarding an issue we care about, it never hurts to think about whether it will be an aid or hindrance to others when they’re trying to solve the problems upstream and downstream from yours. Sometimes the best idea is to just stay out of the way.

My home province of Quebec in Canada has been under lockdown since the Holidays (again). At 393 days of lockdown since March 11th 2020, Quebec has been in lockdown longer than Italy, Australia and California (areas that come as examples of strong lockdown measures). Public health scientists admit that the Omicron variant is less dangerous. But the issue is not the health danger, but rather the concern that rising hospitalizations will cause an overwhelming of an exhausted health sector.

And to be sure, when one looks at the data on hospital bed capacity and use-rates, you find that the intensity of lockdowns is well-related to hospital capacity. Indeed, Quebec is a strong illustration of this as its public health care system has one of the lowest levels of hospital capacity in the group of countries with similar income-levels. The question then that pops to my mind is “how elastic is the supply of hospital/medical services?”.

In places like my native Quebec, where health care services are largely operated and financed by the government, the answer is “not much”. This is not surprising given that the capacity is determined bureaucratically by the provincial government according to its constraints. And with bureaucratic control comes well-known rigidities and difficulties in responding to changes in demand. But that does not go very far in answering the question. Indeed, the private sector supply could also be quite inelastic.

A few months ago, I came across this working paper by Ghosh, Choudhury and Plemmons on the topic of certificate-of-needs (CON) laws. CON-laws essentially restrict entry into the market for hospital beds by allowing incumbent firms to have a say in determining who has a right to enter a given geographical segment of the market. The object of interest of Ghosh et al. was to determine the effect of CON-laws on early COVID outbreak outcomes. They found that states without such laws performed better than states with such laws (on both non-COVID and COVID mortalities). That is interesting because it tells us the effect of a small variation in the legal ability of private firms to respond to changes in market conditions. Eliminating legal inability to respond to changes leaves us with normal difficulties firms face (e.g. scarce skilled workers such as nurses, time-to-build delays etc.).

But what is more telling in the paper is that Ghosh et al. studied the effect of states with CON-laws that eased those laws because of COVID. This is particularly interesting because it unveils how fast previously regulated firms can start acting like deregulated firms. They find similar results (i.e. fewer deaths from COVID and non-COVID sources).

Are there other works? I found a few extra ones such as this one in the Journal of Risk and Financial Management that find that hospitals were less overcrowded in states without CON-laws. Another one, in the Journal of General Internal Medicine finds that states with CON-laws tended to have more overcrowded installations — notably nursing homes — which meant higher rates of COVID transmission in-hospital.

All of these, taken together, suggest to me that hospital capacity is not as fixed as we think of. Hospitals are capable of adjusting on a great number of margins to increase capacity in the face of adverse exogenous shocks. That is if there are profit-motives tied behind it — which is not the case in my home country of Quebec.

As we noted in September, natural gas prices are sky-high in Europe. Coal-burning power plants have been shut down and the windmills have not spun as fast as expected, which led to a drawdown of European natural gas stocks for electric power generation. The Russians are not sending as much gas as hoped through their pipelines, so Europe is scratching around for (very, very expensive) liquified natural gas to be shipped by ship from the U.S. and the Middle East.

As noted, this hurts European economies in various ways. Fertilizer plants and aluminum smelters have shut down because of too-costly natural gas feedstock, consumers are paying much more in utility bills, and some governments are going deeper into deficit by paying subsidies to partially cushion consumers. This energy shortage also makes Europe very vulnerable to Russia, at a time when Putin is menacing Ukraine with invasion.

France derives about 70% of its electricity from nuclear energy. Due to its low cost of generation, France is the world’s largest net exporter of electricity, earning over €3 billion per year from this. China and other countries are ramping up nuclear. (The U.S. is sadly dysfunctional when it comes to building nukes; we can’t seem to do anything without years of delay and billions in cost overruns).

Like nearly everything in Germany, the German nuclear power plants are well-run. They have never had a serious incident. Nuclear power plants pump out gobs of electric power with essentially no CO2 emission.  If you think that green advocates in Germany would therefore desire to keep these plants running, you would think wrong. Such is the loathing for nuclear power that Germany is shutting them down. Every single one. Katja Hoyer writes:

Just before midnight on Dec. 31, Germany switched off three more of its nuclear power plants [including one in Grohnde]. Once it had 17; now only three are left, and they too will be shut down at the end of the year. Soon Germany will produce no nuclear energy at all. But the activists were wrong to celebrate. Germany’s hasty nuclear retreat is neither safe nor green. It’s a disastrous mistake that will have ramifications well beyond the country’s own borders.

The Grohnde plant is a perfect example of what Germany is giving up. It was one of the most productive nuclear power plants in the world. It provided enough electricity to cover 15 percent of Lower Saxony’s annual energy needs single-handedly, saving 10 million tons of carbon dioxide emissions a year in the process. The site even made headlines in February 2021 for producing more electricity than any other nuclear power plant in the world. Now it will have to be dismantled at a cost of around 1 billion euros.

The loss of these nukes puts further strain on the European-wide grid. The irony of shutting these plants down and therefore buying more power from other countries generated by nuclear power and by burning more gas and coal seems to be lost on the Germans. Their plan to mitigate the effects of calm winds is to build even more windmills, even if that requires deforesting vast tracts of woodland.

Let Them Eat Porridge

The U.K. utility Ovo, which prides itself on providing all-renewable power, sent customers a link with advice for keeping warm whilst turning down their thermostats this winter. These suggestions included cuddling your pets, eating hot porridge, cleaning the house, having a hula hoop contest, doing star jumps (jumping jacks), and leaving the oven open after you are done baking. I leave to your imagination how this advice was received by the British public. In lieu of affordable electricity, the utility company E.ON which shut down one those German nuclear power plants sent out 30,000 pairs of socks to encourage people to get by with less power and heat.

You couldn’t make this stuff up.

I’ve long been a lurker on r/kitchenconfidential. I did a few brief tours in the service industry when I was younger and my partner used to manage a successful upscale restaurant. If you’ve spent anytime in a restaurant after closing in the last ten years, then you probably aren’t surprised by the continuing labor shortage in the service industry. Things have been bad for a while, with a pervasive sense that the industry was dependent on employees with weak outside options (i.e. a criminal record) or high exit costs (i.e. can’t afford to be on entry-level wages in a new career track). As I’ve written before, we’ve been eating on borrowed time: the pandemic game shifted the calculus for a lot of marginal employees who have left the service industry and likely aren’t coming back. The service industry is important, but not such that a great reorganization is likely to have catastrophic short term consequences for broader society.

Which bring us to nursing.

Nurses are burned out.

If the daily threads at on r/nursing subreddit are even mildly representative, the status quo in nursing is unsustainable. It’s not just that the job has become more dangerous, more tiring, and less rewarding. Tough jobs exist all over the place, with employees taking them on in return for higher wages than they might otherwise enjoy. No, the bigger problem in nursing is that it is not what these people signed up for. It has become dangerous and unrelentingly exhausting. It requires increasingly greater education and training that is highly specialized, with little in the way of outside options likely to reward that education and training. Can you think of a job with equivalent background requirements, that places the same physical demands on you, and forces you to interact at a personal level in the general population? I can’t, and if you did, I can almost guarantee that the pay is considerably higher.

The broad shortage of nurses in the US has gotten a fair amount of attention. That article points to a lot of causes, most entirely valid (the idea that travel nurses are a cause, rather than symptom, of the nursing shortage is silly, but we’ll let that slide- the broader point stands), but this is one of those cases where it seems to me the diagnosis is best kept simple: nursing has become a worse a job, in part because of the pandemic, and that has tipped the cost benefit analysis towards labor exiting.

While cooks and nurses decided that the pandemic was a good time to get out, let’s not make the mistake of ignoring one of the most martyred vocations in the US.

Teaching sucks, and this time they mean it.

You could go to r/teachers and read the resignation posts, but there isn’t a lot of new information to be gleaned. Everyone knows teachers are undervalued and underpaid. I was a public school teacher for two years, and I endured lots of third drink questions of “Why?” to go along with daily complaints about pay and “continuing education” requirementss with my colleagues. The rate of exit, was pretty predictable. More than half of teachers left the profession in their first 5 years, the rest stayed for life.

I’ll wait for the data to come out before I make broad pronouncements, but this wave of resignations could be different. If we lose a generation of teachers (>80% of those in their first 5 years), there really will be a massive shortage down the road. The pandemic is interesting because it’s taught us two things:

1. Online teaching is inferior
2. The value of schooling as “mass daycare” is hard to overstate

If we step into massive teaching shortage five years down the road, there’s not going to be a “scale education online” solution. The only solution will be to raise compensation for teachers and bring labor into the industry and, well, the failure to raise teaching salaries is maybe the single greatest of example of the divergence between what people publicly support and what they actually vote for. A mass teacher shortage would certainly given teachers unions across the country the opportunity to negotiate better pay scales, but I’m cynical enough to expect they will find a way to waste it on even more job security for their worst members while ensuring that the best teachers still never see a dime in extra compensation. But hey, prove me wrong, yeah know?

What do Cooks, Nurses, and Teachers have in common?

I can’t help but see what these three vocations have in common in the US labor market – a frequent sense of being trapped. Sure, working grill for $15/hour might not sound like something you couldn’t bring yourself to leave, but if you’re 34 with a high school diploma, a felony drug arrest, and a mortgage to pay, the intermediate stage between the status quo and something better might not seem so great. No, you did not enjoy being threatened by a patient who backed you into a corner and told you he “knows what you are trying to inject in him”, but you have a masters degree in nursing, which makes the pay gap between nursing and not nursing a miserable prospect, especially if you’re going to pay off the student loans that got you the job that makes you miserable. You know you essentially can’t be fired, but you’ve also seen the pay scale by seniority, and the prospect of teaching 5th grade for 25 more years fills you with a dark melancholy you did’t know possible. But your degree is in teaching, which essentially means you’d have to find a way to start from scratch at twenty-six. Or thirty-three. Or forty-one.

But then the pandemic happened and everything you already hated got even worse. So you did it. You quit.

But how many of you quit? How many of you are laying out your exit strategy? What will these industries look like in 2 years? We won’t know for a while, but I do think we’re going to learn which industries have been dependent on squeezing every ounce of juice out of trapped labor pools (with what you might call actual monopsony power), versus those industries where the standard “work sucks” complaints simply get more attention for whatever reason.

Personally, I’m betting on two out of the three, but I’m not telling you which two. Working in two of these industries is going to look very different in the wake of the pandemic, both in terms of labor characteristics and compensation. And one will just return to the previous normal, like it never happened.

It’s a debt we will never be able to pay back, but that doesn’t mean we shouldn’t keep trying.

David Friedman recently got into an online debate with Walter Block that could be seen as a boxing match between “Austrian economics” and the “Chicago School of Economics”. In the wake of this debate, Friedman assembled his thoughts in this piece which is supposed (if I understand properly) to be published as a chapter in an edited volume. Upon reading this piece, I thought it worthy of providing my thoughts in part because I see myself as being both a member of both schools of thought and in part because I specialize in economic history. And here is the claim I want to make: I don’t see any meaningful difference between both and I don’t understand why there are perpetual attempts to create a distinction.

But before that, let’s do a simple summary of the two views according to Friedman (which is the first part of the essay). The “Chicago” version is that you can build theoretical models and then test them. If the model is not confirmed, it could be because a) you used incorrect data, b) relied on incorrect assumptions, c) relied on an incorrect econometric specification. The Austrian version is that you derive axioms of human action and that is it. The real world cannot be in contradiction with the axioms and it only serves to provide pedagogical illustrations. That is the way Friedman puts the differences between the schools of thought. The direct implication from this difference is that there cannot be (or there is no point to) empirical/econometric work in the Austrian school’s thinking.

Now, I understand that this is the viewpoint shared by many — as noticed by a shared distrust of econometrics and mathematical depictions of the economy among Austrian-school scholars. In fact, Rothard was pretty clear about this in an underappreciated book he authored, the A History of Money and Banking in the United States. But I do not understand why.

After all, all models are true if they are logically consistent. I can go to my blackboard and draw up a model of the economy and make predictions about behavior. That is what the Austrians do! The problem is that predictions rely on assumptions. For example, we say that a monopoly grant is welfare-reducing. However, when there are monopolies over common-access resources (fisheries for example), they are welfare-enhancing since the monopoly does not want to deplete the resource and compete against its future self. All we tweaked was one assumption about the type of good being monopolized. Moreover, I can get the same result as the conventional logic regarding monopolies by tweaking one more assumption regarding time discounting. Indeed, a monopoly over a common access resource is welfare-enhancing as long as the monopolist values the future stream of income more than than the future value of the present income. In other words, something on the brink of starvation might not care much about not having fish tomorrow if he makes it to tomorrow.

If I were to test the claims above, I could get a wide variety of results (here are some conflicting examples from Canadian economic history of fisheries) regarding the effects of monopoly. All of these apparent contradictions result from the nature of the assumptions and whether they apply to each case studied. In this case, the empirical part is totally in line with the Austrian view. Indeed, empirical work is simply telling which of these assumptions apply in case X, Y, or Z. In this way of viewing things, all debates about methods (e.g. endogeneity bias, selection bias, measurement, level of data observation) are debates about how to properly represent theories. Nothing more, nothing less.

It is a most Austrian thing to start with a clear model and then test predictions to see if the model applies to a particular question. A good example is the Giffen-good. The Giffen good can theoretically exist but we have yet to find one that convinces a majority of economist. Ergo, the Giffen good is theoretically true but it is also an irrelevant imaginary pink unicorn. Empirically, the Giffen good has simply failed to materialize over hundreds of papers in top journals.

In fact, I see great value to using empirical work in an Austrian lens. Indeed, I have written articles (one is a revise and resubmit at Public Choice, another is published in Review of Austrian Economics and another is forthcoming at Essays in Economic and Business History) using econometric methods such as difference-in-difference and a form of regression discontinuity to test the relevance of the theory of the dynamics of interventionism (which proposes that government intervention is a cumulative process of disequilibrium that planners cannot foresee). n each of these articles, I believe I demonstrated that the theory has some meaningful abilities to predict the destabilizing nature of government interventions. When I started writing these articles, I believed that the body of theory I was using was true because it was logically consistent. However, I was willing to accept that it could be irrelevant or generally not applicable.

In other words, you can see why I fail to perceive any meaningful difference between Austrian theory and other schools of economic thought. For year, I realized I was one of the few to see like this and I never understood why. A few months ago, I think I put my finger on the “why” after reading a forthcoming piece by my colleague Mark Koyama: Austrians assume econometrics to be synonymous with economic planning.

I admit that I have read Mises’ Theory and History and came out not understanding why Austrians think that Mises admonished the use of econometrics. What I read was more of the domain of the reaction to the use econometrics for planning and policy-making. Econometrics can be used to answer questions of applicability without in any way rejecting any of the Austrian framework. Maybe I am an oddball, but I was a fellow Austrian traveler when I entered the LSE and remained one as I learned to use econometrics. I never saw any conflict between using quantitative methods and Austrian theory. I only saw a conflict when I spoke to extreme Rothbardians who seemed to conflate the use of tools to weigh theories and the use of econometrics to make public policy. The former is desirable while the latter is to be shunned. Maybe it is time for Austrians to realize that there is good reason to reject econometrics as a tool to “plan” the economy (which I do) and accept econometrics as a tool of study and test. After all, methods are tools and tools are not inherently bad/good — its how we use them that matters.

That’s it, that’s all I had to say.