Rat to Research Discourse

Joy Buchanan1 Comment

I made this Decreasing Marginal Utility rat picture when I was an undergraduate, and it caught on. A textbook asked me for permission to print it.

This week on Twitter (X.com), someone said it was their favorite graph. Upon replying I learned that he had used it for teaching. It’s fun when you know one of your ideas is out in the world helping people.

For real? I absolutely HOWLED when I found it on a google image search! Bravo! I taught HS Econ for many years and this was the kind of stuff that kept kids awake!

https://twitter.com/arburnside/status/1702690454884487495

Blogger privilege is to manifest a new conversation on here. If one of my research articles were to achieve the same level of influence as the stuffed rat, then people might tweet something along the following lines:

“An Experiment on Protecting Intellectual Property,” (2014), with Bart Wilson. Experimental Economics, 17:4, 691-716.

This original project, both in terms of methodology and subject, is one of the first controlled experiments on intellectual property protection, which has inspired subsequent lab work on this issue. We present a color cube mechanism that provides a creative task for subjects to do in an experiment on creative output. The results indicate that IP protection alone does not cause people to become inventors, although entrepreneurs are encouraged to specialize by IP protection.

“Smile, Dictator, You’re On Camera,” (2017), with Matthew McMahon, Matthew Simpson and Bart Wilson. Southern Economic Journal, 84:1, 52-65.

The dictator game (DG) is attractive because of its simplicity. Out of thousands of replications of the DG, ours is probably the controlled experiment that has reduced “social distance” to the farthest extreme possible, while maintaining the key element of anonymity between the dictator and their receiver counterpart. In our experiment the dictator knows they are being watched, which is the opposite of the famous “double-blind” manipulation that removed even the view of the experimenter. As we predicted, people are more generous when they are being watched. Anyone teaching about DGs in the classroom should show our entertaining video of dictators making decisions in public: https://www.youtube.com/watch?v=vZHN8xyp6Y0&t=22s

“My Reference Point, Not Yours,” (2020) Journal of Economic Behavior and Organization, 171: 297-311.

There is a lot of talk about reference points. No matter how you feel about “behavioral” economics, I don’t think anyone would deny that reference-dependent behavior explains some choices, even very big ones like when to sell your house. Considering how important reference points are, can people conceive of the fact that different people have different reference points shaped by their different life experiences? Results of this study imply that I tend to assume that everyone else has my own reference point, which biases my beliefs about what others will do. Because this paper is short and simple, it would make a good assignment for students in either an experimental or econometrics class. I have a blog post on how to turn this paper into an assignment for students who are just learning about regression for the first time.

“If Wages Fell During a Recession,” (2022) with Daniel Houser, Journal of Economic Behavior and Organization.  Vol. 200, 1141-1159.

The title comes from Truman Bewley’s book Why Wages Don’t Fall during a Recession. First, I’ll take some lines directly from his book summary:

A deep question in economics is why wages and salaries don’t fall during recessions. This is not true of other prices, which adjust relatively quickly to reflect changes in demand and supply. Although economists have posited many theories to account for wage rigidity, none is satisfactory. Eschewing “top-down” theorizing, Truman Bewley explored the puzzle by interviewing—during the recession of the early 1990s—over three hundred business executives and labor leaders as well as professional recruiters and advisors to the unemployed.

By taking this approach, gaining the confidence of his interlocutors and asking them detailed questions in a nonstructured way, he was able to uncover empirically the circumstances that give rise to wage rigidity. He found that the executives were averse to cutting wages of either current employees or new hires, even during the economic downturn when demand for their products fell sharply. They believed that cutting wages would hurt morale, which they felt was critical in gaining the cooperation of their employees and in convincing them to internalize the managers’ objectives for the company.

We are one of the first to take this important question to the laboratory. The nice thing about an experiment is that you can measure shirking precisely and you can get observations on wage cuts, which are rare in the naturally occurring American economy.

We find support for the morale theory, but a new puzzle got introduced along the way. Many of our subjects in the role of the employer cut the wages of their counterpart, which probably lowered their payment. Why didn’t they anticipate the retaliation against wage cuts? That question inspired the paper “My Reference Point, Not Yours.”

“Other people’s money: preferences for equality in groups,” (2022) with Gavin Roberts, European Journal of Political Economy, Vol. 73.

Andreoni & Miller (2002) have been cited over 2500 times for their experiment that shows demand curves for altruism slope down. Economic theory is not broken by generosity. We extend their work to show that demand curves for equality slope down. Individuals don’t love inequality, but they also don’t love parting with their own money. There is a higher demand for reducing inequality with other people’s money than with own income.

“Willingness to be Paid: Who Trains for Tech Jobs?” (2022), Labour Economics, Vol 79, 102267. 

This is the last paper I’ll do here. At this point, readers probably would like a funny animal picture. Here’s a meme about the difficult life of computer programmers:

For decades, tech skills have had a high return in the labor market. There is very little empirical work on why more people do not try to become computer programmers, although there are policy discussions about confidence and encouragement.

I ran an experiment to measure something that is important and underexplored. One thing I found is that attempts to increase confidence, if not carefully evaluated, might backfire.

Would you predict it’s more important to have taken a class in programming or for a potential worker to report that they enjoy programming? My results imply that we should be doing more to understand both the causes and effects of subjective preferences (enjoyment) for tech work. 

A few more decades to go here… I will try to top the stuffed rat picture.

Hand-in-Hand: Demand & Technology

Zachary Bartsch1 Comment

In standard microeconomics, the long-run demand is unimportant for the market price of a good. Firm competition, entry, and exit causes economic profits to be zero and the price to be equal to firms’ identical minimum average cost. This unreasonably assumes that they have constant technology. That is, they have a constant mix of productive inputs and practices.

Just so we’re clear: time is passing such that firms can enter, exit, and adjust the price – but no productive innovation occurs. For the modeling, we freeze time for technology, but not for other variables. The model ceases to reflect reality on the margin of scale-induced innovation. The standard model assumes an optimal quantity of production for each firm and the only way for total output to change is for there to be more or fewer firms. The model precludes adopting any different technology because firms are already producing at the minimum average cost – if they could produce more cheaply, then they would.

Enter Scale

One of my favorite details about production was taught to me by Robin Hanson.* Namely, that the scale of production isn’t merely with the aid of more raw materials, labor, and capital. There are perfectly well-known existing technologies and methods that reduce the average cost – if the firm could produce a large enough quantity. This helps to illustrate what counts are technology. A firm can achieve lower average costs without inventing anything, and merely by adopting a superficially different production method.

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OpenAI wants you to fool their AI

James BaileyLeave a comment

OpenAI created the popular Dall-E and ChatGPT AI models. They try to make their models “safe”, but many people make a hobby of breaking through any restrictions and getting ChatGPT to say things its not supposed to:

Source: Zack Witten

Now trying to fool OpenAI models can be more than a hobby. OpenAI just announced a call for experts to “Red Team” their models. They have already been doing all sorts of interesting adversarial tests internally:

Now they want all sorts of external experts to give it a try, including economists:

This seems like a good opportunity to me, both to work on important cutting-edge technology, and to at least arguably make AI safer for humanity. For a long time it seemed like you had to be a top-tier mathematician or machine learning programmer to have any chance of contributing to AI safety, but the field is now broadening dramatically as capable models start to be deployed widely. I plan to apply if I find any time to spare, perhaps some of you will too.

The models definitely still need work- this is what I got after prompting Dall-E 2 for “A poster saying “OpenAI wants you…. to fool their models” in the style of “Uncle Sam Wants You””

Median Family Income in US States, 2022

Jeremy HorpedahlLeave a comment

Last week I wrote about median income in the US, and how it had declined since 2019 and 2021 through 2022 (inflation adjusted, of course). The big story is that median income (both for households and families) has been falling in recent years. While there are some silver linings when looking at subgroups, such as Black families, the overall data isn’t good.

But while that is true for the US overall, it’s not true for every state. In fact, it’s not even true for most states! From 2019 to 2022, there were 29 states that saw their median family incomes rise! That’s adjusted for inflation (I’m using the C-CPI-U, which is Census’s preferred inflation measure for this data). The income data in this post all comes from the Census ACS 1-year estimates.

Here’s a map showing the states that had increases in median family income (green) and those that had decreases (in red). (This is my first time experimenting with Datawrapper maps, feedback appreciated!)

Some states had pretty robust growth, with New Mexico and Arizona leading the way with around 5 percent growth. There is substantial variation across US states, including with big declines like Wyoming at -5 percent, and Oklahoma and Illinois are -3 percent.

A few weeks ago I also wrote about the richest and poorest MSAs in the US. But what about the richest and poorest states in the US? The following map shows that data.

The immediate fact which will jump out at you is that the lowest income US states are almost all located in the South. This will probably not surprise most of us, although it probably is a bit surprising since the data is adjusted for differences in the cost of living (using the BEA RPP data). Even after making these adjustments, the South is still clearly the poorest region (and it definitely was the poorest without the adjustments).

Among the higher income states, they are distributed pretty well across the rest of the non-South. There are 16 states (plus DC) that have median family incomes over $100,000 (again, cost of living adjusted), and while many of these are in New England and the Mid-Atlantic, there area still a few in the Midwest, Great Plains, and the West. Utah and New Jersey have similar incomes, as do Virginia and Rhode Island.

The highest income states are Massachusetts and Connecticut, with over $112,000 in median family income, while the lowest are Mississippi and West Virginia, both under $78,000. Median family income in Massachusetts is 46 percent higher than Mississippi. And that’s after adjusting for differences in the cost of living.

The Fermi Paradox: Where Are All Those Aliens?

Scott BuchananLeave a comment

Last week NASA’s independent study team released its highly anticipated report on UFOs.  A couple of takeaways: First, the term “UFO” has been replaced  in fed-speak by “UAP” (unidentified anomalous phenomena). Second, no hard evidence has emerged demonstrating an extra-terrestrial origin for UAPs, but, third, there is much that remains unexplained.

Believers in aliens are undeterred. Earlier this summer, former military intelligence officer David Grusch had made sensational claims in a congressional hearing that the U.S. government is concealing the fact that they are in possession of a “non-human spacecraft.”  The NASA director himself, Bill Nelson, holds that it is likely that intelligent life exists in other corners of the universe, given the staggering number of all the stars which likely have planets with water and moderate temperatures.

A famous conversation took place in 1950 amongst a group of top scientists at Los Alamos (think: Manhattan Project) over lunch. They had been chatting about the recent UFO reports and the possibility of faster-than-light travel. Suddenly Enrico Fermi blurted out something like, “But where is everybody?”

His point was that if (as many scientists believe) there is a reasonable chance that technically-advanced life-forms can evolve on other planets, then given the number of stars (~ 300 million) in our Milky Way galaxy and the time it has existed, it should have been all colonized many times over by now. Interstellar distances are large, but 13 billion years is a long time.  Earth should have received multiple visits from aliens. Yet, there is no evidence that this has occurred, not even one old alien probe circling the Sun. This apparent discrepancy is known as the Fermi paradox.

A variety of explanations have been advanced to explain it. To keep this post short, I will just list a few of these factors, pulled from a Wikipedia article:

Extraterrestrial life is rare or non-existent

Those who think that intelligent extraterrestrial life is (nearly) impossible argue that the conditions needed for the evolution of life—or at least the evolution of biological complexity—are rare or even unique to Earth.

It is possible that even if complex life is common, intelligence (and consequently civilizations) is not.

Periodic extinction by natural events [e.g., asteroid impacts or gamma ray bursts]

 Intelligent alien species have not developed advanced technologies [ e.g., if most planets which contain water are totally covered by water, many planets may harbor intelligent aquatic creatures like our dolphins and whales, but they would be unlikely to develop starship technology].

It is the nature of intelligent life to destroy itself [Sigh]

It is the nature of intelligent life to destroy other technically-advanced species [A prudent strategy to minimize threats; the result being a reduction in the number of starship civilizations].

And there are many other explanations proposed, including the “zoo hypothesis,” i.e., alien life intentionally avoids communication with Earth to allow for natural evolution and sociocultural development, and avoiding interplanetary contamination, similar to people observing animals at a zoo.

As a chemical engineer and amateur reader of the literature on the origins of life, I’d put my money on the first factor. We have reasonable evidence for tracing the evolution of today’s complex life-forms back to the original cells, but I think the odds for spontaneous generation of those RNA/DNA-replicating cells are infinitesimally  low.  Hopeful biochemists wave their hands like windmills proposing pathways for life to arise from non-living chemicals, but I have not seen anything that seems to pass the sniff test. It is a long way from a chemical soup to a self-replicating complex system. I would be surprised to find bacteria, much less star-travelling aliens, on many other planets in the galaxy.

Maybe that’s just me. But Joy Buchanan’s recent poll of authors on this blog suggest that we are collectively a skeptical lot.

Innovation as inspiration

mdmakowskyLeave a comment

Moments of inspiration can and do lead to innovation, almost by definition. Sometimes we forget that innovation is itself inspirational. I first read about “inverse vaccines” two days ago and it hasn’t left my mind since.

“Inverse vaccine” shows potential to treat multiple sclerosis and other autoimmune diseases

These are lab results, not clinical trials. This is not a new treatment coming any time soon. The logic though, the idea, is absolutely brilliant. Traditional vaccines teach the immune something the blueprint for attacking a new enemy. These researchers realized that the liver has a method for marking molecules with N-acetylgalactosamine so that the immune system knows not to attack them. Autoimmune disorders, from common allergies to multiple schlerosis, are a product of the immune system attacking what it shouldn’t.

Why can’t we mark the cells of the body being tormented by an overzealous immune system with N-acetylgalactosamine?

It’s such a simple idea. Simple and completely brilliant. I am convinced we are living in a new golden age of vaccines. But this? This is inspired and inspiring, promising to take what is already a time of miracles and push it in an entirely new direction. There are new ideas sitting out there, waiting to be conceived. But sometimes what we need is for an act of innovation to inspire us to think in a new way. Or an old way. Or a reciprocal way.

Asking EWED if the Aliens Visited

Joy Buchanan1 Comment

All the chatter about aliens made me want to do something new: poll my excellent co-bloggers.

Overall, this group does not put the probability of alien intelligent life existing at 0%. It is not possible to prove that aliens are nowhere in a vast universe. A separate question is whether the recent unboxing event in Mexico or the sightings by US military pilots raises the probability that aliens have visited earth. This group does find that recent evidence to be very convincing.

Here are the group thoughts, separated by paragraphs but not indented as quotes:

I don’t think that I have enough information to put a probability on aliens existing. I am not compelled by recent evidence. 

I’m near 50% that they’re out there somewhere in the universe, less than 10% that they are visiting Earth, though some recent evidence (the US military videos, not the Peruvian mummies) is compelling enough to raise this slightly. The 50% is coming from the Fermi paradox, and what I find most compelling from the last few years isn’t any of these potential sightings on Earth, but rather the recent attempts to model the Fermi paradox differently.  Sandberg, Drexler and Ord (2018) argue that when you use probability distributions instead of point estimates in the Drake equation, it is actually reasonable to expect that we are alone in the universe. Robin Hanson has a different model where alien life is common in the universe, but we shouldn’t expect to see them yet.

I put the probability of aliens existing between 0.01% and 10%, but  I find none of the recent evidence compelling enough to have raised my probability. 

Put the probability of aliens existing between 0.01% and 10%. I find some recent evidence compelling enough to have raised my probability.

I doubt that aliens exist, and I find all recent evidence uncompelling.

Joy again: Part of the reason for doing a poll is that I have not dug into this. I have not watched all of the videos, or even most of the most famous videos. I did skim “The UFO craze was created by government nepotism and incompetent journalism” and the part that makes the most sense to me is that UFO stories are great for clicks (clicks are web traffic -> money).

Christine Lagarde on Instability in 2023

Joy Buchanan1 Comment

Christine Lagarde, President of the European Central Bank, gave a speech called “Policymaking in an age of shifts and breaks” at Jackson Hole in August 2023.

She mentioned multiple factors that make the near future hard to predict, from the effect of A.I. on jobs to the war in Ukraine.

In the pre-pandemic world, we typically thought of the economy as advancing along a steadily expanding path of potential output, with fluctuations mainly being driven by swings in private demand. But this may no longer be an appropriate model.

For a start, we are likely to experience more shocks emanating from the supply side itself.

A line I found interesting, because of my paper on sticky wages:

Large-scale reallocations can also lead to rising prices in growing sectors that cannot be fully offset by falling prices in shrinking ones, owing to downwardly sticky nominal wages. So the task of central banks will be to keep inflation expectations firmly anchored at our target while these relative price changes play out.

And this challenge could become more complex in the future because of two changes in price- and wage-setting behaviour that we have been seeing since the pandemic.

First, faced with major demand-supply imbalances, firms have adjusted their pricing strategies. In the recent decades of low inflation, firms that faced relative price increases often feared to raise prices and lose market share. But this changed during the pandemic as firms faced large, common shocks, which acted as an implicit coordination mechanism vis-à-vis their competitors.

Under such conditions, we saw that firms are not only more likely to adjust prices, but also to do so substantially. That is an important reason why, in some sectors, the frequency of price changes has almost doubled in the euro area in the last two years compared with the period before 2022.

Once Covid changed our lives so much, then things kept changing. Firms are raising prices because consumers got used to change.

At this Jackson Hole meeting, both J. Powell, the chair of the Federal Reserve, and Lagarde indicated that they are trying to get inflation under control and back to the 2% target. If you want to get this information via podcast, listen to “Joe Gagnon on Inflation Progress and the Path Ahead: Breaking Down Jerome Powell’s Jackson Hole Speech“

After reading her interesting speech, I had to know more about C. Lagarde. On Wikipedia, I discovered:

After her baccalauréat in 1973, she went on an American Field Service scholarship to the Holton-Arms School in Bethesda, Maryland.[18][19] During her year in the United States, Lagarde worked as an intern at the U.S. Capitol as Representative William Cohen’s congressional assistant, helping him correspond with French-speaking constituents from his northern Maine district during the Watergate hearings.

Since my post about “awards for young talent” was found and shared on Twitter, I have continued thinking about it. According to Wiki, C. Lagarde has received several prestigious awards. Her progression through the “Most Powerful Woman in the World” ranking is something.

Imagine being that close to the top back in 2015 and getting beat out by American Melinda Gates.  But today, Lagarde is winning over both Melinda French Gates and Kamala Harris. Will an economist climb to #1? Lagarde is currently sitting at #2 when I checked the Forbes website.

Dysfunctional Virtue: A Tale of No Profits

Zachary BartschLeave a comment

For-profit firms are well-oriented. The managers within firms may not make profit their only explicit priority, but it is pre-requisite to their other concerns. Without profits, firms eventually cease to exist. Non-profits are different. They might have revenues due to sales and operate much like a for-profit firm. But, they many times operate on revenue from donations and endowments. Because the success of non-profits is harder to measure, the signals of triumph and defeat do not orient the employees as clearly. The result can be that there is a lot of ruin in a non-profit. Plenty of tasks are done inefficiently, poorly, or not at all.

Mission-driven non-profits are able to attract enthusiastic, dedicated employees given the pay that they offer. But, supporting the mission of such an organization often acts as an implicit “belief test”, filtering out other would-be job applicants who self-select out of applying to open positions for which they are otherwise qualified. Indeed, part of the purpose of mission statements is to filter for the kind of employees that the organization managers or donors desire. While the employees may be enthusiastic and dedicated to the mission, that is mostly separate from whether they have the technical skills to flourish in their position and to effectively serve the organization.

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Bond King Doesn’t Like Bonds

James Bailey1 Comment

Bill Gross grew PIMCO into a trillion dollar company by trading bonds, earning the epithet “Bond King“. But in an interview with Odd Lots this week, he disclaims both bonds and his title. He wasn’t the king:

My reputation as a bond king was first of all made by Fortune. They printed a four page article with me standing on my head doing yoga, and I was supposedly the bond king, and that was good because it sold tickets. But I never really believed it. The minute you start believing it, you’re cooked.

Who is the real bond king? The Fed:

The bond kings and queens now are are at the Fed. They rule, they determine for the most part which way interest rates are going.

Who still isn’t the bond king? Any other trader, especially Jeff Gundlach:

To be a bond king or a queen, you need a kingdom, you need a kingdom. Okay, Pimco had two trillion dollars. Okay, DoubleLine’s got like fifty five billion. Come on, come on, that’s no kingdom. That’s like Latvia or Estonia whatever. Okay, and then then look at his record for the last five, six, seven years. How does sixtieth percentile smack of a bond king? It doesn’t.

Why he doesn’t believe in long-term bonds right now:

We have a deficit of close to two trillion. The outstanding treasury market is about 33 trillion… about thirty percent of the existing outstanding treasuries, so ten trillion have to be rolled over in the next twelve months, including the two trillion that’s new. So that’s that’s twelve trillion dollars. Where the treasuries that have to be financed over the next twelve months, and who’s going to buy them at these levels? Well, some people are buying them, but it just seems to be a lot of money. And when you when you add on to that, Powell is doing quantitative tightening, as you know, and that theoretically is a trillion dollars worth of added supply, I guess. And so it just seems like a very dangerous time based on supply, even if inflation does comedown.

By revealed preference I agree with Gross, in that I don’t own any long-term bonds. Their yields are way up from 2 years ago, making them somewhat tempting, but I can get higher yields on short-term bonds, some savings accounts, and some stocks. So I see no reason to go long term, especially given the factors Gross highlights. If he’s right, better long-term yields will be here in a year or two. If he turns out to be wrong, I think it would be because of a severe recession here or in another major economy, but I don’t expect that. So what is Gross buying instead of bonds? He likes the idea of real estate:

 All all my buddies at the country club are in real estate, and they’ve never paid a tax in their life…. I’ve paid a lot of taxes.

He landed on Master Limited Partnerships, common in the energy sector, as an easier way to avoid taxes, and has 40% of his wealth there. Those are yielding more like 9% and have the tax benefits, though they are risker than treasury bonds. The rest of his portfolio he implies is in stocks, describing some merger arbitrage opportunities. I am a bit tempted by bonds because they’ve done so badly recently (and so have gotten much cheaper), but like Gross I think we’re still not to the bottom.