La Dolce Vita Economica

mdmakowskyLeave a comment

I thought about writing about soccer (again). I thought about writing about time management and personal production functions. I considered writing about Lebron James or how I manage multiple research projects. I thought about writing about a classic, and entirely addictive to the point of career ruination, video game. They all seem a little redundant at the moment, though, because they are all the same basic story.

One soccer manager is over-exhausting their resources because of a confluence of bad contractual incentives while another team is witnessing a renaissance in a player they essentially forced to take 7 weeks off. While so many NBA careers of the 80s evaporated in a cloud of cocaine and clubbing, Lebron James’ entire life is built around managing the only two resources whose limits are salient to his life: his body and relationship with his family. Playing baseball growing up I watched pitchers blow out their arms before they finished puberty in service to Little League glory, while modern professional pitchers are (finally) on strictly managed pitch counts to maximize their expected output.

There are two manners in which I armchair quarterback the rest of the world. One is the things in which I have just enough knowledge to be frustrated by others decisions, but no so much as to actually know what I am talking about. These frustrations are ephemeral, they flatter myself to the point of mild embarrassment upon reflection, and, if I am being honest with myself, are fun.

The other manner is resource management. These are the times when armchair quarterbacking is less fun and more exasperating because they are the moments when outsiders, with inferior levels of narrowly-applicable expertise, are often actually right. Which is not to say the knowledge that resources are being poorly managed is uniquely held by outsiders. Insiders are more often than not quite aware of the suboptimal deployment and conservation of resources, but are unable to overcome the status quo institutions, incentives, or inertia of decision-making power loci. It’s obvious to lots of people that athletes, CEOs, doctors, and congressional representatives are over-extended. What’s not obvious is how to get out of these equilibria.

When I see most attempts at self-improvement, I am generally skeptical of anything that doesn’t start with the identification of a key resource that is salient to outcomes and the options available to better manage it. Maybe its calories and how to budget them. Maybe its time and how to better partition and conserve it. It could always be money, but in general I find that money is so immediately identifiable as a finite resource and entirely fungible that people who ostensibly are managing it poorly are, in actuality, failing at managing a different resource (time, emotional energy, vices, etc) that is intertwined with financial resources.

When I see successful firms, teams, and individuals, what I most often find myself admiring is not (just) a worldly talent, but a facility with managing resources that others haven’t yet adopted or mimicked. An appreciation for sleep, a protection of time blocked for creativity, an adeptness trading low opportunity competitive minutes for higher opportunity cost moments on the biggest stages. Or even just the ability to recognize that this is the moment to savor a 600 calorie dessert with a loved one because the emotional sustenance will make it easier to walk away from three vending machine Hostess pies during the high-stress moments in the week to come.

Once you learn to manage your donut-based caloric intake, the spreadsheet of your life will be revealed before you, an endless cascade of resources to be managed and optimized. A life with the right donuts at the right time. The dolce vita economica.

Reading Slavery and American Economic Development

Joy BuchananLeave a comment

Slavery is a bad and we should rid ourselves of it. One of the arguments made by abolitionists before the Civil War in the United States is that slaves make poor workers and therefore it’s not that costly to get rid of slavery. Of course, it doesn’t matter if slaves worked hard or not. Slavery was a moral abomination, regardless. However, it does make it easier to argue that we should direct government resources to fight enslavers when we can make a case that slavery makes the entire country poorer.

On the one hand, there were many non-slave workers and farmers in North America, demonstrating that products including cotton could be produced by free labor. On the other hand, slavery as an institution expanded into the South and the West, presumably because of the economic advantage it gave to slave-owners.

In Slavery and American Economic Development, economist Gavin Wright states that whether or not slaves were as productive as free/wage labor is hard to measure and also is not hugely important. Slavery might have provided wealth to slave owners in the South, but that is only because of the institutional setting that was created explicitly to maintain the slave society.

The American South had some of the best land in the world for growing cotton and cotton became a lucrative export crop thanks to British demand before the Civil War. Before the Civil War, there were some extremely profitable plantations on which slaves worked. It is true that some enslavers became rich and that drives up what appears to be the GDP per capita in the South at the time.

Wright explains that a slave owner living closer to the East Coast was better able to go on an entrepreneurial venture into Alabama to clear a large plantation for cotton farming than a typical free family farmer. The slave owner could obtain large loans and had a future guarantee of workers (thanks to the local laws and police state). So, something like a modern corporation employing free labor could also have accomplished the venture. But, at the time, it was an opportunity that was easier for enslavers to take advantage of. Free farmers also expanded West into the United States, but they tended to move more slowly and focus on subsistence (e.g. wheat for consumption). That is, partly, what Wright means when he speaks of slavery as a “system of property” as opposed to just a “system of production”. That helps explain why slavery was on the rise in the American South.

Wright also examines slavery as a political regime. In a place with many slaves, resources had to be allocated to policing and preventing revolts. It might have been individually rational for a landowner to offer freedom to slaves as a form of compensation for work, but this was disallowed by that broader political environment. So, everyone was somewhat trapped. Most importantly, the slaves were abused and trapped. But the free residents of the South had to live in a stagnant society. Governments did not invest in schooling, even for white children.

Municipalities in the North were booming and attracting free migrants with public investments. These investments set the North on a path to overtake the South economically and demonstrate which system is superior for creating wealth. Wright blames property owners in the South for continuing to fail to vote for good institutions that foster economic growth after the Civil War.

Polarized Americans in 1840

Joy Buchanan1 Comment

I’m reading a new book Liberty Power by historian Corey Brooks. It is about how abolition was accomplished through American politics. Something that stood out to me in the introduction is that abolitionists claimed that they had been “cancelled” by proslavery dominant powers in Congress. Americans did not like to see someone getting cancelled, and it created sympathy for abolitionists.

The (Employment) Depressing Child Tax Credit

Zachary BartschLeave a comment

For those who didn’t know, as part of the American Rescue Plan, there were some changes made to the Child Tax Credit (CTC) for the tax year 2021.

  • First, the credit was expanded from $2k to $3,600 per child for children under 6 years of age (to $3k otherwise). It’s also fully refundable.
  • Second, half of the credit is being disbursed to tax-filers early: over the latter 6 months of 2021.

What does this mean?

For context, I have 3 children all under that age of 6. My total 2021 CTC is $10,800. Half of that is being distributed as monthly checks from July through December. For me, that’s a check for $900 per month that I had not anticipated. While it is true that I will see less of a remaining credit when I file my taxes by April of 2022, I strongly suspect that most similar households are somewhat short-sighted about these funds.

Depending on the number of children in a household, the monthly check from the IRS can be quite significant. From the parent point of view, there has been a lump-sum transfer. There is no endogenous response to obtain more children – there’s no time for that. The transfer also occurs regardless of any activities, economic or otherwise. In essence, tax-filers with children have experienced a positive income shock.

The big question is: What is the effect on employment?  

In one sense, the effect is ambiguous and depends on preferences: People can now afford more leisure and more consumption. How they engage in more of each is a matter of preference. But, given that both are goods, both will increase by some amount.

That’s my simple model. I hereby make multiple predictions:

  1. Parents with children will have consumed more in the 3rd and 4th quarters of 2021.  
  2. Parents with children will have lower employment growth for those quarters.
  3. The effects will be stronger for parents with children under 6 years of age.
  4. The employment rebound in the 1st quarter of 2022 will be stronger for these groups (and stronger than forecasted overall).
  5. Finally, while I’m feeling silly enough to make predictions publicly, I predict slower growth in consumer durable expenditures in 2022 Q1.

I looked at the BLS for data to corroborate my predictions. Excitingly, the Current Population Survey (CPS) does slice the data by sex, age, and age of own children (conveniently by younger than 6 and 6-17 years of age). This is where I post the great visual to demonstrate the veracity of my claims, right?

WOMP WOMP.

The relevant data is currently only available annually as recent as 2020…

The Credibility Revolution: A Nobel for Taking (some of) the CON out of Econometrics

James Bailey1 Comment

Yesterday Jeremy pointed out that while the 2021 economics Nobelists have reached various conclusions in their study of labor economics, the prize was really awarded to the methods they developed and used.

I find the best explanation of the value of these methods to be this 2010 article by Angrist and Pischke in the Journal of Economic Perspectives: The Credibility Revolution in Empirical Economics: How Better Research Design Is Taking the Con out of Econometrics

Like Jeremy, they think that empirical economic research (that is, research using econometrics) was most quite bad up to the 1980’s; as Ed Leamer put it in his paper “Let’s take the CON out of Econometrics”:

This is a sad and decidedly unscientific state of affairs we find ourselves in. Hardly anyone takes data analyses seriously. Or perhaps more accurately, hardly anyone takes anyone else’s data analyses seriously.

Angrist and Pischke argue that the field is in much better shape today:

empirical researchers in economics have increasingly looked to the ideal of a randomized experiment to justify causal inference. In applied micro fields such as development, education, environmental economics, health, labor, and public finance, researchers seek real experiments where feasible, and useful natural experiments if real experiments seem (at least for a time) infeasible. In either case, a hallmark of contemporary applied microeconometrics is a conceptual framework that highlights specific sources of variation. These studies can be said to be design based in that they give the research design underlying any sort of study the attention it would command in a real experiment.

The econometric methods that feature most prominently in quasi-experimental studies are instrumental variables, regression discontinuity methods, and differences-in-differences-style policy analysis

Our field still has big problems: the replication crisis looms, and the credibility revolution’s focus on the experimental ideal leads economists to avoid important questions that can’t be answered by natural experiments. But I do think that the average empirical economics paper today is much more credible than one from 1980, and that the 3 Nobelists are part of the reason why, so cheers to them.

A Nobel for What?

Jeremy Horpedahl1 Comment

The Nobel Prize in Economics was announced this week. As usual, Alex Tabarrok has a great description of the contributions of the winners. But I have seen a number of commentators, mostly on “the right,” question this award, especially for David Card. Mostly they have focused on the highlighting of Card’s paper (with the late Alan Krueger) on minimum wages, saying that this paper has been heavily criticized and debunked, or as evidence that “economics has degenerated into socialist propaganda.”

Yikes! If true, these are serious charges against a profession in decline.

But hang on. What’s really going on with the award for David Card? Again, Tabarrok sums it up nicely: “what really made the paper great was the clarity of the methods that Card and Krueger used to study the problem.” What was this clarity?

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Growing/Shrinking Jobs of Next Decade: Good Times Ahead for Nurse Practitioners, Wind Turbine Technicians, and Animal Trainers

Scott BuchananLeave a comment

The good folks at Visual Capitalist have put together a big juicy infographic depicting employment trends over the next decade, based on projections from the Bureau of Labor Statistics. The vertical axis is % decadal growth for each category, the horizontal axis is 2020 median annual wage for that category, and the size of the bubble indicates the absolute numbers of change. The color of each bubble is keyed to “Occupational Group”, i.e.,  “Health related”, “Computer and mathematical”, etc.

Below I snipped part of the infographic which shows occupations which will be growing. The horizontal positioning (median annual wage) runs from $20,000 on the left to $120,000 on the far right; nurse practitioners fall in the $105,000-120,000 range. The fastest growing, percentagewise, are wind turbine service technicians (68%), followed by nurse practitioners and solar installers tied at about 52%. The biggest absolute numbers of job growth are in “Home health and personal care aides”, to tend aging baby boomers.

From the color coding, we can see at a glance that job growth is mainly in the Health Related and Computer and Mathematical categories, with a smattering of “Other”, including Animal Trainers (for dog obedience schools ??) and Crematory Operators, as those baby boomers age all the way out.

Some of the losing professions are shown below. Most of these are in the “Office and Admin Support” (purple) category and Production workers (including nuclear power reactor operators). Some “Other” categories will get hit hard, such as parking officers and door-to-door salesmen.

Most of these shrinking jobs are lower paid, while many of the growing jobs are better paid. Bottom line: advise your kids to consider careers like data security/analysis, or a health care specialty, including management.

Soccer has become a Tragedy of the Commons

mdmakowsky2 Comments

Players are breaking down breaking down, which may not be of any particular interest to you, but it seems odd considering that modern nutrition and sports medicine has NBA and NFL players competing at later ages than previously considered possible. I’ll go farther and suggest there is a growing sense in soccer that outfield players (i.e. not goalies) are peaking earlier, particularly in the physically demanding English Premier League. What is happening in soccer that isn’t happening in other sports?

A professional soccer players runs about 6 miles (10 km) a game. They do so in a series of sprints and stops, all while humans with deadly pistons for legs kick at them repeatedly. Even without getting into the costs of repeatedly of striking the ball (and sometimes other craniums) with your skull, it is hard to overstate the cumulative toll on soccer players and their bodies.

Over the course of the 2020-21 English Premier league season, Pierre Emil-Hojbjerg played 53 games for his club and 12 games for the Danish national team. Son Heung-Min has flown 140,000 miles over the past 3 years to play for his club and the South Korean national team. The most prominent coaches in the world are adamant that their players are being asked to do too much. So, if we know that the players are breaking down, some of the most prominent figures in the sport think they know why they are breaking down, and the players are highly compensated employees who are themselves highly valued assets for their contracting clubs, why hasn’t this problem already been fixed? In two words: property rights.

Professional footballers have become a common pool resource. And if there is one thing we know about commons is that they often suffer a tragic outcome. See what I did there?

Long story short, the “Tragedy of the Commons” occurs when property rights to a good are either lacking entirely (i.e. fishing rights in the Atlantic Ocean) or incomplete (i.e. irrigation systems, professional soccer players). While it would be everyone’s interest to limit total usage to maintain the long-run sustainability of the resource in question, without property rights any individual has incentive to claim as large a portion of the resource as possible in the short run (i.e. catch as many fish as much as possible, use a player as much as possible), even if that means the resource in question is destroyed, preventing future use.

The English Football Association pays it’s national team players about 2,000 pounds per match played. When you consider that nearly all of it’s players earn in excess of 100k pounds per week from their club teams, it’s a pittance. How does the English FA get these players so cheap? Partly because they are paying the players in honor and prestige and glory and even more honor, partly because of the stigma and shame that would be levied against them if they refused the social obligation to play for their country. It’s a pretty amazing racket for FIFA (International) and UEFA (European) associations, through which 100s of millions of dollars/pounds are funneled while paying pennies to the players.

For a top player, each year is filled with final and qualifying matches for international tournaments (World Cup, European Championships, Confederations Cup, the League of Nations,…), two or three different league tournaments, and 38 games of regular league play. On top of this are the international “friendlies” that are played whenever the players might actually enjoy a break. As if designed to prove my point, FIFA has proposed having the World Cup every 2 years (instead of 4), which would only increase the load. If this sounds ridiculous, consider it from FIFA’s point of view. As far as they are concerned, player bodies are the lowest cost input in their enterprise. They don’t value the players because they don’t have to.

We shouldn’t let the clubs off the hook completely, either. Yes, they have contracts with the players, which makes them an resource that should be valued accordingly. But that assumes that the managers of a team’s resources have time horizon’s aligned with the team and it’s players, which is often very much not the case. Coaches last less than 3 years on average. Sporting Directors come and go. Even ownership can find itself looking to add short-term shine to a club so they can sell it today, even at the expense of it’s long term value. Don’t be shocked when a coach who needs to win this year to keep his or her job runs their players into the ground. What do they care about preserving their star forward’s rapidly decaying ankles if they can’t count on being around to benefit from their long term value? Hell, it’s more likely the coach will be playing against those ankles in 5 years!

At some point clubs will begin to push back – they simply have too much capital invested in these players, and international tournaments are imposing too much risk on them as franchises. But don’t expect this problem to be solved quickly or easily. The Tragedy of the Commons is an economic cliché for a reason, doubly so when one side stands to lose a lot from the (re) establishment of property rights. Fortunately in this case, there are two parties that stand to benefit from a better property rights: players and their employers. The only side that stands to lose are the wasteful grifters of FIFA and the individual national team associations, and all they have on their side is nationalist pride and populist indifference to professional athlete health….

Oh no.

Calling Behavioral Economics a Fad

Joy Buchanan1 Comment

Josh Hendrickson and Brian Albrecht have a Substack called Economic Forces that is a source of economics news and examples. We have linked to EF before at EWED.

Albrecht just published an op-ed titled “Behavioral Economics Is Fine. Just Keep It Away from Our Kids”. I’ll to respond to this, just as I responded to that other blog. I think the group of people who are pitting themselves against “behavioral economics” is small. They might even think of themselves as a minority embattled against the mainstream. So, why bother responding? That’s what blogs are good for.

I agree with Albrecht’s main point. The first thing an undergraduate should learn in economics classes is the classic theory of supply and demand. Even in its simplest form, the idea that demand curves slope down and supply curves slope up is powerful and important.*

Albrecht points out that there are some results that have been published in the behavioral economics literature that turned out not to replicate or, in the recent case of Dan Ariely, might be fraudulent. Then he makes a jump from there by calling the behavioral field of inquiry a “fad”. That’s not accurate. (See Scott Alexander on Ariely and related complaints.)

In his op-ed, Albrecht names the asset bubble as a faddish behavioral idea. Vernon Smith (with Suchanek and Williams) published “Bubbles, Crashes and Endogenous Expectations in Experimental Spot Asset Markets” in Econometrica in 1988. Bubbles have been replicated all around the world many times.  There is no doubt in anyone’s mind that the “dot com” bubble had an element of speculation that became irrational at a certain point. This is not a niche topic or a very rare occurrence. Bubbles are observed in the lab and out in the naturally occurring economy.

Should we start undergrads on bubbles before explaining the normal function of capital markets? No. Lots of people think that stock markets generally work well, communicate reliable information, and should be allowed to function with minimal regulation.  Behavioral Finance is usually right where it should be in the college curriculum, which is to be offered as an upper-division elective class for finance and economics majors. I am not going to do research on this, but I looked up courses at Cornell, and there it is: Behavioral Economics is one of many advanced elective classes offered for economics students. I don’t know how they teach ECON101 at Cornell, but it would seem like they are binning most of the behavioral content into later optional courses.

In a social media exchange, Albrecht pointed me to one of the posts by Hendrickson on how they handle the situations where it seems like economic forces are not explaining everything. Currently, for example, it seems like the labor market is not clearing right now because firms want to hire but wages are not rising. The quantity supplied seems lower than the quantity demanded at the market wage. Hendrickson claims that this market condition is temporary. He says that firms are cleverly paying bonuses to attract workers so that they won’t have to lower wages in the future when conditions return to normal post-Covid. This would be a perfect time to discuss downward nominal wage rigidity, a pervasive behavioral phenomenon.** It has been studied extensively in lab settings. Nominal wage rigidity has implications for monetary policy. Wage rigidity might be a “temporary” thing, but it helps to explain unemployment. Some of the research done by behavioral economists in this area follow the Akerlof 1982 paper on the gift exchange model. It was published 40 years ago by a Nobel prize winner and cited extensively.*** The seminal lab study of that theory is Fehr et al. 1993. There have been hundreds of replications of the main result that people will trade out of equilibrium due to positive reciprocity.

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Forecasting that Job Growth Would Continue

Joy BuchananLeave a comment

The number of new jobs is being heralded (example in picture) as disappointing relative to the expectation that we would march steadily back to pre-Covid employment levels. (Ben Casselman is a good Twitter source for the data.)

One of the reasons for a slow recovery is that the Delta variant of Covid hit hard at the end of the summer and people are not getting vaccinated, so the health threat of going out to work and consume did not decline as much as we had expected. Covid was hard on family caregivers, often women. The disruptions to childcare from Covid still are not over. We are seeing a reversal of the massive influx of women into the formal workforce that started in the previous century.

Some people are saying that workers no longer want “dead end jobs,” and there has been a permanent shift in the labor supply, although it is hard to disentangle that from the effect of temporary Covid subsidies.

I am reminded of two very different sources who claimed, before 2019, that what we had in the early 21st century was not sustainable.

First, there were agitators for a $15/hr minimum wage. They marched in the streets while leading Democrats voiced approval. They were pointing out that families in America who depend on $8/hr jobs do not feel like they have a part of the American Dream.

Someone who, I am certain, would be against a federally mandated $15/hr minimum wage was also pointing this out. Tyler Cowen published Average is Over in 2013, when unemployment was still high following the Great Recession. Chapter 1 of Average is Over is called “Work and Wages”. Tyler was concerned that market forces were creating a world where some people have the best jobs that humanity has ever conceived of, by virtue of their compatibility with intelligent machines, while the rest of the workforce is left with jobs that are not so great. At the time, I don’t think people realized how many jobs could be done from the comfort of home or from a hip coffee shop. Covid exposed that. The “not so great” jobs feel especially crappy when you know that people in your city get paid 6 figures to sit at a laptop.

Tyler might have been surprised when unemployment dropped so low in 2019, right after he had written The Complacent Class, which warns us that America isn’t working well for a large group of people.

We are not great at predicting the future.* Some of Tyler’s predictions have come true already, but even he did not try to put a date on things. The point is that maybe the latest job numbers are not as surprising for the reason that the forecasts were more wrong than we thought. Covid has moved us far out of equilibrium, so it is still hard to tell where we are going to land.

Personally, I thought prices at the grocery store, one of the few places you could go in early 2020, would shoot up faster. It seemed to me like we would need to start paying cashiers more as hazard pay.

*In one of my experiments, I asked subjects in the role of employers to predict what their employees would do. They failed to predict how strongly employees would respond to wage cuts. We are not great at predicting.