Economist Writing Every Day

Inflation During the Pandemic in the OECD

April 13, 2022Jeremy Horpedahl2 Comments

Inflation is definitely here. The latest CPI release puts the annual inflation rate in the US at 8.5% over the past 12 months, the highest 12-month period since May 1981. That’s bad, especially because wages for many workers aren’t keeping up with the price increases (and that’s true in other countries too).

But what about other countries? Many countries are experiencing record inflation too. The same day the US announced the latest CPI data, Germany announced that they also had the highest annual inflation since 1981.

Using data from the OECD, we can make some comparisons across countries during the pandemic. I’ll use data through February 2022, which excludes the most recent (very high!) months for places like the US and Germany, but most countries haven’t released March 2022 data quite yet.

Let’s compare inflation rates and GDP growth (in real terms, also from the OECD), using the end of 2019 as a baseline. We’ll compare the US, the other G-7 countries, and several broad groups of countries (OECD, OECD European countries, and the Euro area). The chart below uses “core inflation,” which excludes food and energy (below I will use total inflation — the basic picture doesn’t change much).

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The Congress That Berated Oil Companies for Producing Oil Is Now Berating Them for Not Producing Oil

April 12, 2022April 12, 2022Scott BuchananLeave a comment

Oil production is a difficult, risky business even under favorable regulatory regimes. For instance, here is a chart of cumulative bankruptcy filings of exploration and production (E&P) companies for 2015-2021:

A few companies go bust every year, but there are some years like 2015-2016 and 2019-2020 when a lot of companies go bust. That happens when the oil industry collectively has overproduced and driven the price of oil below the effective cost of production. Even the mighty ExxonMobil ran deep in the red in 2020, losing an eye-watering 22.4 billion dollars. With all that in mind, shareholders since 2020 have been pressuring companies to show “financial discipline”, which means “drill less”.

Beyond these basic business realities, there is a whole new set of pressures to inhibit petroleum production. Environmental activists have pushed banks to withhold funding from petroleum companies, to strangle further oil production. It was big news in 2020 when activists, alarmed by ExxonMobil’s plans to actually (gasp) increase its oil production, successfully elected several alternative members to the board of directors with the specific goal of curtailing further drilling.

There have been attacks on the oil industry on the political front, as well. Joe Biden ran on a platform of banning drilling on public lands, and one item he checked off his to-do list on his first day in office was to issue an executive order killing a pipeline that would have facilitated imports of oil from the abundant reserves in Canada. One of his nominees for a top financial regulatory post remarked regarding oil producers that “we want them to go bankrupt if we want to tackle climate change”. All these are the sorts of things that make execs less willing to commit capital for expensive drilling programs that may take years to pay back. (The counter-claim by the administration that the U.S. oil industry is just sitting on thousands of unused oil leases is a red herring).

There is only a finite amount of oil in the ground, so it makes sense to move with all deliberate speed toward renewable and nuclear energy (which emits little or no CO2). However, our European friends who have installed lots of solar panels and windmills have discovered that the sun does not shine at night (!) and the wind does not always blow strongly (!!) , and so during their energy transition they need to maintain an adequate supply of fossil fuel power in order to keep the lights on. They elected to let their own oil and gas production dwindle, and rely instead on gas and oil purchased from Russia. We warned back in September that this European policy would give Russia leverage for harassing Ukraine, but apparently not enough EU leaders read this blog. Anyway, even back in the fall of 2021, Russia had restricted natural gas deliveries to Europe, causing sky-high prices there for gas and power.

The European experience ought to have been a cautionary tale for America, but political attacks on oil production continued in the halls of Congress itself. In an October 2021 hearing over climate change prevention, Carolyn Maloney (D-NY) and Ro Khanna (D-CA) insisted that Big Oil commit to reducing US oil and gas production by 3-4% annually (50-70% total by 2050). In a follow-up February 8, 2022 hearing, the two legislators again demanded concrete commitments from oil companies to reduce their domestic production (although, strangely, Mr. Khanna supported President Biden’s call for other regions, such as OPEC and Russia to increase production).

With oil drilling having been curtailed for the past several years (as desired by environmentalists), the world has now flopped from an oil surplus to an oil shortage, exacerbated by Russia’s invasion of Ukraine and subsequent sanctions. And of course world oil prices (which are not under the control of U.S. companies) have gone up in response. Oil companies are actually making money again instead of going bankrupt like two years ago

In 2021 Apple had a 26% net profit margin and an effective tax rate of only 13%, while the oil industry had an average profit margin of 8.9% and an effective tax rate of 26.9%. Yet Congress (mainly Democrats) “investigates” price gouging every time gas prices go up, without hauling in Tim Cook to grill him over the price of each new iPhone model. Repeated previous investigations have shown that domestic gasoline prices are mainly a function of world oil prices, which are not under the control of U.S. companies. Nevertheless, after berating oil execs for increasing oil production, here come the grandstanding Congressional attack dogs, holding a hearing last week titled (wait for it…) “Gouged at the Gas Station: Big Oil and America’s Pain at the Pump”.

The oil producers patiently explained that “We do not control the price of crude oil or natural gas, nor of refined products like gasoline and diesel fuel,” and “”It [the U.S. oil industry] is experiencing severe cost inflation, a labor shortage due to three downturns in 12 years, shortages of drilling rigs, frack fleets, frack sand, steel pipe, and other equipment and materials.” But it is not clear that anyone was listening to the facts.

Religion at its best can protect science from politics at its worst

April 11, 2022April 10, 2022mdmakowsky1 Comment

I choose to believe these tweets are true because I want to write about it. I’m pretty sure they are, but unlike some people, I don’t have “medievalist friends” to verify it and I’m to tired to open Google.

https://twitter.com/mattyglesias/status/1513116740028440576?s=20&t=lVhSvZkdt2w-wvljZHhAYw

Regardless of whether the “the book preciptated witch hunting” is true, I am in full agreement that much of misinformation is demand driven. Even when motivated by an alterior motive, disinformation has to be wrapped in the candy-coating of something people want to believe is true. For all the talk of disinformation though, the connection to witch hunting and religion is what I find most interesting, particularly in our pandemic times. There’s been a lot of frustration over people’s eagerness to believe non-scientific and pseudo-scientific garbage, but what I find most concerning is how rapidly identities solidified around believing experts and not believing experts. My suspicion is that this is, at least partly, a symptom of becoming a more broadly secular society, where political and scientific beliefs have for many people substituted for faith affiliations as group signifiers and shibboleths.

Religion makes for better and safer group identities than science. Why? Because religion is predominantly interested in untestable assertions whose veracity is entirely orthogonal to the quality of our lives and how we function as a society. This isn’t to say that societies can’t just as easily violently fracture as peacefully congeal around these beliefs, but the “truth” of them is entirely irrelevant. Communities and sub-communities can form Russian nesting dolls all the way up to continents and all the way down to Tilda Swinton, and the truth of the individual sets of religious beliefs won’t matter in the slightest.

Science, on the other hand, is a vastly different story. Groups that form around disbelief in the germ theory of disease or the food safety of the Green Revolution in agriculture will face vastly more limited prospects in the lives of members and their future generations. Groups naturally split into insiders and outsiders– that’s how we solve whole swaths of the collective action problems and Prisoner’s Dilemmas we face everyday.

Science needs religion to stake out territory in the ineffable and claim beliefs as their own. From these beliefs religion can provide people with the tools to tell stories, form bonds, and cultivate trust beyond the limits of kinship and familiarity. Religion needs to thrive so that science can work its way unmolested, and unco-opted, through the unending labryinth of truth-seeking, of learning and unlearning, discarding old truths as evidence mounts. It’s hard enough to accept evidence denying old truths when repuations are built around them (science does, after all, advance “one funeral at a time”). But it’s nearly impossible to discard old truths if they are holding a community together. People will cling to them because there’s too much immediately at stake, and in doing so you become trapped at the sclerotic local maximum of a costly falsehood.

I know there’s a tendency to focus on shared social media clips of preachers advocating against vaccines and masks and what not. But I don’t think that’s religion competing with science. I think that’s ostensibly religious leaders giving up on their faith to sell what they see people buying. Yesterday they were selling God, today they’re selling disinformation. Not because God is disinformation, but because they are seeing more demand for disinformation than God.

I don’t have a faith to sell anyone, and I certainly don’t have a policy solution in my back pocket (though I can only assume the answer starts with crypto and ends with profit). But I do think that if we are going to keep science safe from the short-term vicissitudes of our petty political identities, we will have to better resist the urge to call ourselves, our group, pro-science. It inevitably creates an anti-science opposition, cornering people into rallying around ideas that benefit no one in the long run. And we also have to have more faith in our faiths. If you don’t hold that your beliefs, and the community you’ve built around them, are appealing enough on their own merits, then you’re not really a believer. You’re not a scientist either. You’re a salesman, and one with a bad product at that.

Is Las Vegas decadent?

April 9, 2022April 9, 2022Joy Buchanan1 Comment

By one definition of the word, Las Vegas is the textbook example of decadence. Is the physical structure of The Strip evidence of American decline? Ross Douthat specifically mentions Disneyland and Las Vegas together in his book, The Decadent Society. He calls them “consumer sublime” which, along with the iPhone, creates a fake experience rather than building something real (like Space Travel).

In his CWT, Douthat expounds on Vegas explaining that, “it represents a kind of simulated sublimity where you are creating models of all of the great achievements of the human species in the modern world and practicing various forms of entertainment around them. So in that sense, it is under my definition too, not just the chocolates-and-bondage-dens definition. I think it is decadent.”

I wrote about Disney World last month and I happened to have just been to Vegas. These places are nice, especially in Spring when it is sunny but not yet too hot.

The New York-New York resort was built in Las Vegas in 1997, followed by the opulent Bellagio in 1998. Paris and the Venetian, both nods to Old World centers of art and culture, were finished in 1999. This construction explosion was all happening during my childhood, and now it is established in modern culture by films such as Ocean’s 11 and The Hangover.

One thing Vegas has all to itself is its sign.

It also boasts to be a place where you are encouraged to overdose on drugs, alcohol, sex, and gambling. That’s not great, but it’s not what Douthat means by decadent. What I noticed is that it’s a loosely regulated place where they will sell you anything that gets you to take out your credit card. There are marijuana stores right across the street from Gucci stores. You pass slot machines on the way out of fancy restaurants.

Tattoo shop next to weed shop, directly across the street from upscale fashion boutiques.

l’*Arc de Triomphe* brought to you by Martha Stewart

The entertainment-by-spending-money enterprise (Walt Disney World was expensive, too) all takes place in a cool physical setting. The pedestrian bridges on the main streets make it fun and practical to walk around, right past all the stores. The Strip is bordered by shiny tall hotels that each have a theme. The centerpiece, in my opinion, is the Paris resort.

How do you signal that civilization is here, when you are in the middle of Nevada-Mars? Meme the heart of European culture. Considering how yucky activity can get on the Strip, that nod to Europe provides a veneer of respectability to lure in rich people with families. I don’t only think of it in that cynical way. Plenty of Las Vegas is unique and new, but humans can only handle so much new at once. The Eiffel Tower is code. It’s a form of language that people understand. It makes us feel safe and perhaps even makes us safe by setting a tone for the style of partying.

Tourists are in a new place surrounded by strangers. Are we going to attack each other? Are Russian soldiers about to come through and massacre us? Do we agree about what is admirable? Everything feels like it is going to be fine, because we are here in civilization. If Americans ever do settle Mars, we’ll build an Eiffel Tower there, too.

This might all seem trivial, except that I have heard multiple people saying something about how Putin thought he could attack Ukraine at this moment because “he thinks the West is decadent.” That makes investigating the issue seem worthwhile.

As I concluded about Disney World, the problem is not that we have a few nice areas to practice escapism. A progressive society would build more of these places with access for more people. Let’s build a bigger Eiffel Tower in the desert that more people can fit under. If the French object, then make it a fake Empire State building. Big Ben, anyone?

The non-superficial problems Douthat mentions are serious. Our declining birth rate has plunged further since he published his book. Our political system seems just as sclerotic (Vegas is the place where developers got a “yes” while every other American city was saying “no”). As I said in my previous post, everyone should read his book and ponder.

To leave Las Vegas, I took an Uber for a morning flight. My driver came from Afghanistan three years ago. I told him I was glad he made it out before the Taliban took over and he said that it is bad there right now. He had to learn English in 6 months out of dire necessity so that he could get better jobs. Now he dreams, like so many Americans, of “getting out of this town”. What does he think of Las Vegas? His complaints are that it is too sunny and boring.

The destinations of his dreams are San Francisco or New York City. I informed him of the places I know that have less sunny days. I wish we could have talked more, but from what I can tell he has embarked on his American Dream. He was located with his parents (and perhaps more family members) in Las Vegas directly from Afghanistan. He’s young and dreams of leaving. However, he said his parents like where they are and want to stay put now that they have found a secure home. That puts the city in a new perspective. It may not be the aesthetic that Ross prefers, but families have found a home where there used to be uninhabited wilderness.

It’s Still Hard to Find Good Help These Days

April 7, 2022April 13, 2022Zachary Bartsch2 Comments

Consumption is the largest component of GDP. In 2019, it composed 67.5% of all spending in the US. During the Covid-19 recession, real consumption fell about 18% and took just over a year to recover. But consumption of services, composing 69% of consumption spending, hadn’t recovered almost two years after the 2020 pre-recession peak. For those keeping up with the math, service consumption composed 46.5% of the economic spending in 2019.

We can decompose service consumption even further. The table below illustrates the breakdown of service consumption expenditures in 2019.

I argued in my previous post that the Covid-19 pandemic was primarily a demand shock insofar as consumption was concerned, though potential output for services may have fallen somewhat. When something is 67.5% of the economy, ‘somewhat’ can be a big deal. So, below I breakdown services into its components to identify which experienced supply or demand shocks. Macroeconomists often get accused of over-reliance on aggregates and I’ll be a monkey’s uncle if I succumb to the trope (I might, in fact be a monkey’s uncle).

Before I start again with the graphs, what should we expect? Let’s consider that the recession was a pandemic recession. We should expect that services which could be provided remotely to experience an initial negative demand shock and to have recovered quickly. We should expect close-proximity services to experience a negative demand and supply shock due to the symmetrical risk of contagion. Finally, we should expect that services with elastic demand to experience the largest demand shocks (If you want additional details for what the above service categories describe, then you can find out more here, pg. 18).

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Highlights from EAGx Boston

April 7, 2022James BaileyLeave a comment

Last weekend I was at Effective Altruism Global X Boston, a great conference that worked very differently from the academic ones I usually attend. The attendees were younger and the topics were different, but the big innovation was the use of Swapcard to encourage 1-on-1 meetings. At academic conferences I spend most of my time listening to formal presentations or talking to people I already know, but here I talked to 13 new people for a half hour each, and many others more briefly.

That said, the talks I did attend were excellent. Alvea is a 3-month-old company that already has a novel DNA-based Omicron-targeted Covid vaccine in Phase 1 trials. My notes on co-founder Ethan Alley’s talk:

Learning by doing is the way to go. I learned more in 3 months as a founder than 12+ months as an MIT grad student. Like that you have to pay a company $125k to randomize your clinical trial, and they take 8 weeks to do it

Richard Cash talked about the Oral Rehydration Therapy he helped develop that has saved tens of millions of lives. In short, many people who died of diarrheal diseases like Cholera were simply dying from dehydration, and he realized that this can be prevented cheaply and easily in most cases by having them drink a solution of water, glucose, and certain salts (basically Gatorade). He noted that much of the basic research behind this had been done in the US well before it was applied in the developing countries where it has helped most, so it was crucial to simply notice how important and broadly applicable the findings were. On the other hand, some things really did work differently in developing countries; here the medical conventional wisdom was that people shouldn’t eat while they had diarrhea, but if kids are already malnourished it turns out they are better off eating anyway.

Wave is a mobile payment company that is hugely successful in Senegal but has been slow to expand elsewhere. I asked their Chief Technical Officer Ben Kuhn why this was, and his answer made perfect economic sense:

Fixed costs plus local network effects. Fixed costs: need to get approval of a country’s central bank to operate, need to hire local staff, et c. Network effects: our system gets more valuable as more of the people you send money to/from use it, and these are usually within-country. Makes more sense to keep expanding within a country until its nearly totally saturated, and only then move to the next country. There’s also a limit of how much $ we have to expand, especially since we don’t want VCs to control the company.
(My notes, not a verbatim quote)

As I talked to people I was trying to narrow down my post-tenure plans. This didn’t really work, because people gave me good new ideas without convincing me to abandon any of my old ideas. Although I talked to several senior researchers at NGOs, the ideas that stuck with me most came from talking to undergrads, and were all things that sound obvious in hindsight but that I hadn’t actually been planning to do. The one I’ll mention here as a commitment device is to post my research ideas on my website. I have many more paper ideas than I have time to write about them, and I no longer care much about whether I get credit/publications for them or someone else does. This summer I’ll post a list of ideas there, and perhaps a series of posts fleshing them out here.

P.S. If you identify at all with Effective Altruism, I recommend trying to attend a conference. I’m planning to go next to the one in DC in September.

Deficits Are Here to Stay

April 6, 2022Jeremy Horpedahl1 Comment

Last week President Biden released his Fiscal Year 2023 budget proposal. The annual release of the budget proposal is always exciting for economists that study public finance. The president’s proposal is the first step in the federal budgeting process, which in some cases leads to the full passage of a federal budget by the start of the fiscal year in October (though perhaps surprisingly, the process rarely works as intended).

This year’s budget is especially interesting to look at because it gives us our first look at what post-pandemic federal budgeting might look like. And while the budget has a lot of detail on the administration’s priorities, I like to go right to the bottom line: does the budget balance? What are total spending and revenue levels?

The bottom line in the Biden budget this year is that permanently large deficits are here to stay. Keep in mind that a budget proposal is just a proposal, but it’s reasonable to interpret it as what the president wants to see happen with the budget over the next 10 years (even if Congress might want something different). Over the next 10 years, Biden has proposed that budget deficits remain consistently right around 4.5% of GDP, with no plan to balance the budget in the near future.

How does this compare to past budget proposals? For comparison, I looked at the final budget proposals of Biden plus his two predecessors. I start Obama’s in 2021 to match Trump’s first year, and all three overlap for 2023-2026. I put these as a percent of GDP so we don’t have to worry about inflation adjustments (though we might worry about optimistic GDP forecasts, see below).

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The Different Classes of Crypto Stablecoins and Why It Matters

April 5, 2022Scott Buchanan1 Comment

Last month the Biden administration issued an executive order outlining some priorities and aspirational goals regarding government initiatives and future regulations regarding cryptocurrencies.
These goals may be summarized as:

1. Protect Investors in the Crypto Space

2. Mitigate Systemic Risks from Innovations

3. Provide Equitable Access to Affordable Financial Services

4. Ensure Responsible Development of Digital Assets

5. Limit Illicit Use of Digital Assets

6. Research Design Options of a U.S. Central Bank Digital Currency (CBDC)

7. Promote U.S. Leadership in Technology

These positions seem generally reasonable and moderate, and were welcomed by the cryptocurrency community, which had feared a more restrictive stance. (China, for instance, has banned cryptocurrency use altogether).

Why Fear Stablecoins?

Here I’d like to focus on #2, “Mitigate Systemic Risks from Innovations”. Although so-called stablecoins are not explicitly mentioned in the executive order, it is understood that they represent a key area of concern for regulators.

A stablecoin typically has its value pegged 1:1 to a leading national or international currency such as the U.S. dollar or the euro, or to some commodity like gold, or even to other cryptocurrencies. In practice, most of them have generally held pretty well to their pegs. So what’s not to like about them? Why would they be perceived as more of a threat that, say, bitcoin, whose dollar value is all over the map?

I think the reason is that market participants count on them maintaining their (say) dollar peg. These coins are used as dollar substitutes in billions of dollars’ worth of transactions and are depended on to hold their value.The total value of stablecoins in use is nearly $200 billion and is growing fast. If a major stablecoin crashed somehow, it could lead to significant instability, which regulators don’t like.

Four Major Types of Stablecoins

Stablecoins may be classified according to how their “tether” is maintained:

( 1 ) Pegged to fiat currency, maintained by a central stablecoin issuer

The biggest U.S.-based stablecoin is USD Coin (USDC), which is backed by significant financial institutions. There is every reason to believe that there is in fact a dollar backing each USDC. Gemini Dollar (GUSD) is smaller, but also takes great pains to garner trust. Its issuer, Gemini, operates under the regulatory oversight of the New York State Department of Financial Services (NYDFS). It boasts, “The Gemini Dollar is fully backed at a one-to-one ratio with the U.S. dollar. The number of Gemini dollar tokens in circulation is equal to the number of U.S. dollars held at a bank in the United States, and the system is insured with pass-through FDIC deposit insurance as a preventative measure against money laundering, theft, and other illicit activities.”

So far, so good. The huge stinking elephant in the room here is a stablecoin called Tether. Tether is the largest stablecoin by market capitalization (at $79 billion), and is heavily used as a dollar substitute, mainly in Asia. It has been widely criticized as a shady, unaudited operation, operating from shifting off-shore locations to avoid regulation (and prosecution). There are justified doubts as to whether the claimed 1:1 dollar backing for Tether is really there. Tether sort-of disclosed its backing reserves in the form of a sparse pie-chart. Very little was in the form of cash or even “fiduciary deposits”. Some was in the form of “loans” to who-knows-what counterparties. The majority of their holdings were “commercial paper”; but nobody can find any trace of Tether-related commercial paper in the whole rest of the financial universe (it has become a sort of game for financial journalists to try to the be first one to actually locate any legitimate Tether assets).

So, Tether by itself may justify concern on the part of regulators. Also, without diving too deeply into it, a plethora of financial institutions and tech companies are starting to issue their own stablecoins, which again are purported to be as good as cash, and so are vulnerable to abuse.

( 2 ) Stablecoins backed by commodities

Tether Gold (XAUT) and Paxos Gold (PAXG) are two of the most liquid gold-backed stablecoins. Other coins are tied to things like oil or real estate. The holder of these coins is depending the coins issuer to actually have the claimed backing.

( 3 ) Cryptocurrency Collateral (On-Chain)

It is hard to explain in a few words how this type of coin works. A key point here is that your stablecoins are backed by other, leading cryptocurrecies (such as Ethereum), with the process all happening on the decentralized blockchainvia smart contracts. A leading coin here is DAI, an algorithmic stablecoin issued by MakerDAO, that seeks to maintain a ratio of one-to-one with the U.S. dollar. It is primarily used as a means of lending and borrowing crypto assets without the need for an intermediary — creating a permissionless system with transparency and minimal restrictions.

Unlike with the two types of stablecoins discussed above, you are not dependent on the honesty of some central issuer of the stablecoin. On the other hand, Wikipedia notes:

The technical implementation of this type of stablecoins is more complex and varied than that of the fiat-collateralized kind which introduces a greater risks of exploits due to bugs in the smart contract code. With the tethering done on-chain, it is not subject to third-party regulation creating a decentralized solution. The potentially problematic aspect of this type of stablecoins is the change in value of the collateral and the reliance on supplementary instruments. The complexity and non-direct backing of the stablecoin may deter usage, as it may be difficult to comprehend how the price is actually ensured. Due to the nature of the highly volatile and convergent cryptocurrency market, a very large collateral must also be maintained to ensure the stability.

( 4 ) Non-Collateralized Algorithmic Stablecoins

The price stability of such a coin results from the use of specialized algorithms and smart contracts that manage the supply of tokens in circulation, similar to a central bank’s approach to printing and destroying currency. These are a less popular form of stablecoin. The algorithmic coin FEI proved unstable upon launch, although it has since achieved an approximate parity with the dollar.

Some takeaways:

Stablecoins are a big and fast-growing piece of practical finance.

These coins bring a different kind of risk, because (unlike Bitcoin or Ethereum), users depend on them holding a certain value.

For the coins backed by major fiat currencies or commodities, risk is introduced by the need to depend on the honesty and competence of the centralized coin issuers.

For the non-centralized stablecoins like DAI and FEI, there are risks associated with proper automatic functioning of their protocols.

One can understand, therefore, the urge of the federal government to impose regulations in this area. That said, it does not seem to me that the existing system is broken such that the feds need to come in to fix it in a major way. The main shady actor in all this is Tether, which everyone knows to be shady, so caveat emptor (and the vast majority of Tether transactions occur outside the West, in the East Asian shadowlands).

Happiness is Zeno’s hedonic treadmill

April 4, 2022April 4, 2022mdmakowskyLeave a comment

I don’t take Maslow’s Hiearchy of Needs very seriously. I don’t much worry about hedonic treadmills. I don’t worry about a cursed existence where I am forever advancing half-way closer to whatever goal will bring happiness and emotional fulfillment.

I don’t worry about it, but I understand.

I’m struggling to find much inspiration sketching my little ad hoc economic models of daily life with the backdrop of Ukrainians struggling to survive in the face of an invading army. Perspective is a hell of a drug. This struggle has brought to the front of my mind Maslow’s Hierarchy of needs, which lays a psychological layering onto the economic prioritization of needs (food and shelter first, social needs second, “self-actualization” last). It’s the kind of model that gets used and abused because it adds a veneer of psychological depth to absurd reductionist theorizing. Don’t take my petty academic denigration too seriously, though. Just because I think it’s not particularly useful doesn’t mean it’s wrong.

Similarly, I find consternation over hedonic treadmills unnecessary because whenever your result is that utility is declining as resource constraints are loosening, the likely explanation is that you aren’t observing utility correctly. Specifically, there are dimensions to utility you aren’t observing, be it temporal (i.e. the distribution of future possibe utilities), network (i.e. sympathetic utilities of children, spouses, friends, etc), or most likely that you are in fact not observing utility but rather one of many inputs into total utility i.e. there’s more to utility than just “happiness”.

But maybe you’re not interested in how to optimally model the pursuit of happiness under the dual constraints of finite resources and the human condition. Maybe you’re just worried about managing your life under the limitations of your own flawed humanity. Maybe you’re worried about getting stuck on a hedonic treadmill, the carrot of self-actualization dangling forever just out of reach. Now I’m not a licensed therapist or trained psychologist, but I am an economist who has to constantly struggle against my own technical limitations. What that means is that I have a lot of experience solving problems beyond my own mathematical limitations, not through technical elegance but by simply hacking the problem until the problem solves itself.

You know. Cheating.

If you’re on a hedonic treadmill, all that really means is that you’ve defined your units wrong. It’s only a treadmill measured in feet. If you define happiness not as feet advanced but as having a positive first derivative in microns per microsecond, you can establish the model such that you’ll be long dead before you reach the dipping edge on the horizon. Happiness isn’t a destination or a journey. It’s a positive first derivative or, barring that, a sufficiently positive second deriviative. If that’s out of reach, f*** it, there’s a third one you can push into the positive.

Framed this way, Zeno’s paradox is no longer a curse, it’s a blessing. To always be advancing half-way to your goal for all eternity is to live in eternal bliss. To self-actualize. Whether you get there is outside the model. It’s irrelevant.

Which is a really long way of saying that one way you might hack the puzzle of self-actualization is to help support the physiological and safety needs of Ukrainians be transferring some of your resources to them as means of supporting the first-derivative of sympathetic inputs into your utility function.

A paper idea in Stigler (1964) on Oligopoly

April 3, 2022Vincent Geloso1 Comment

Next week, I am teaching collusive agreements in my price theory class. I decided to take a different approach to the discussion than the one usually found in textbook. The approach consists in showing how economic thought on a topic has evolved over time. For collusion, I decided to discuss George Stigler’s 1964 article on the theory of oligopoly published in the Journal of Political Economy.

Simply put, Stigler proposes a simple approach for stating how collusive agreements can break apart by asking how much extra sales a firm can obtain by cutting its prices without being detected by other firms. Stigler argued that detection got easier as the number of buyers increased or as concentration increased. He also argued that detection became harder if buyers do not repeat purchases and if there is growth in the market through the addition of new customers as firms are not able to detect whether the growth of other firms is due to new customers or because old customers are purchasing its wares. Detection also became harder with a greater number of sellers but he also argued that this was of equal (or maybe lesser) importance than low repeat-sales rates or the arrival of new customers into the market.

This is pretty standard price theory and it is well executed. After postulating the theory, Stigler throws the empirical kitchen sink to see if, broadly speaking, his point is confirmed. One interesting regression is from table 5 in the article (which is illustrated below). That regression estimated rates for a line of advertising in newspapers market (i.e., cities) conditional on circulation in 1939 (its a cross-section of 53 markets). The regression itself is uninteresting to Stigler as he wants to consider the residuals. Why? Because he could classify the residuals by the structure of the market (with only one newspapers or with two newspapers. The idea is that more newspapers should be marked with lower rates as collusive agreements tend to be harder to enforce. Stigler thought this confirmed his idea that “that the number of buyers, the proportion of new buyers, and the relative sizes of firms are as important as the number of rivals” (p. 56).