Venture-capital backed startups almost all cluster in the same handful of industries, mostly various types of software. This leaves a variety of large and economically important sectors with almost no venture-capital backed startups. That means those industries see fewer new companies and new ideas; they must rely on either growth from existing firms, which are unlikely to embrace disruptive innovation, or on startups that bootstrap and/or finance with debt, which tend to grow slowly.
Venture capital firm Fifty Years has done a nice job cataloging exactly which industries see the most, and least, investment relative to their size. Here is their picture of the US economy by industry market size:
Now their picture of which industries get the investment (though unfortunately, they aren’t very clear about their data source for it):
They use this to create an “Opportunity Ratio”- current market size divided by current startup funding:
They call the industries with the largest Opportunity Ratios the “Top Underfunded Opportunities”:
I don’t necessarily agree; some industries face shrinking demand, prohibitive regulation, or other fundamental issues making them bad candidates for investment. Conversely, investors haven’t just focused on software randomly or through imitation; they see that it is where the growth is.
Still, herding by investors is real, and I always like the strategy of finding a new game instead of trying to win at the most competitive games, so I do think there is something to the idea of investing in an unsexy industry like paper. Growing up in Maine and watching one paper mill after another close, I always wondered how they managed to lose money in a state that is 90% trees, and whether anyone could find a way to reverse the trend. Perhaps related technology like mass timber or biochar will be the way to take advantage of cheap lumber.
Thanks again to Fifty Years for releasing the data.
Every month we get new data on the labor market in the US from the Bureau of Labor Statistics. As I pointed out last month, the labor market data from 2023 was very good!
But lately on social media, some have been to ask whether this data is credible. Specifically, several people have pointed out that the initial numbers we receive each month almost always seem to be revised downward. Since the initial reports are based on incomplete data (for the jobs data, this would be reports from employers), it is normal that there would be some revisions with more complete data.
Is it the best of times or the worst of times? This question I asked myself as I saw the following three headlines juxtaposed last week:
“US consumers are in the best shape ever” is sandwiched between two downers. The American consumer’s ongoing spending has staved off the long-predicted recession, quarter after quarter after quarter. Can we keep those plates spinning?
We noted earlier that the huge windfall of pandemic benefits (direct stimulus plus enhanced unemployment benefits) put trillions of dollars into our bank accounts, and the spending down of that surplus seems to have powered the overall economy and hence employment (and inflation). How the economy does going forward is still largely determined by that ongoing spend-down. Thus, the size of the remaining hoard is critically important.
Unfortunately, it seems to be difficult to come up with an agreed-on answer here. The San Francisco Fed maintains a web page dedicated to tracking “Pandemic-Era Excess Savings.” Here is a key chart, tracking the ups and downs of “Aggregate Personal Savings”:
This is compared to a linear projection of pre-pandemic savings, which is the dotted line. (Which dotted line you choose is crucial, see below) . The next chart plots the cumulative savings relative to that line, showing a steady spend-down, and that this excess savings is just about exhausted:
If this represents reality, then we might expect an imminent slowdown in consumer spending and in GDP growth, and presumably a lessening in inflationary pressures, which may in turn justify more rate cuts by the Fed.
The following chart shows two versions of the first plot shown above, with (on the left) a linear, increasing projection of 2018-2019 savings trends, versus a flat savings rate baseline:
Two significant differences between these plots and the San Francisco Fed plot shown above are that these plots only run through the end of 2022, and that they display per cent savings rate rather than dollar amounts. However, they demonstrate the difference that the baseline makes. Using an increasing savings rate baseline (2018-2019 trend projection), the surplus was nearly exhausted at the end of 2022. Using a flat rate average of 2016-2019 for the baseline, the surplus was barely dented.
We will see how this plays out. My guess is that at the first whiff of actual recession and job losses, the administration will gush out the maximum amount of largesse; while we may have ongoing inflation and high interest rates due to the deficit spending, we will not have a hard landing. I think.
The anecdotes in Hedrick Smith’s “The Power Game” may be 40 years out of date, but the core insight into the US system of governance remains the same: power is fluid, fleeting, and indeterminant. A shocking variety of people can, for a given moment, find themselves to be the most powerful person in the US. Sometimes it is in fact the president, but it can just as easily be a block of senators, or a particularly flush and motivated donor. It can be losing candidate in a three-way race who, simply by considering dropping out, finds a moment of irresistible political leverage. Power in our republic is a constantly changing and uncertain mantle, almost as much projection as reality. I would also argue that it is the central selling point of our system: people think twice about how to go about swinging a sword if they’re not sure who’ll be swinging it tomorrow and what end they’re actually holding on to today.
Which brings me to plagiarism.
Bill Ackman wants use AI to investigate academics for plagiarism at scale. The scale here is key, the implication that AI will allow a wide net to be cast. Plagiarism never struck me as a particularly widespread problem in high level research, but I could at least feasibly be wrong and I’m in no position to tell him how to spend his time. What is fairly clear to me, however, is that there is amongst some the perception that academics have too much power. The ambition behind, or at least the gleeful anticipation for, these hypothesized plagiarism purges is to reduce that power and influence.
But where does this perception come from and why plagiarism? Power is fluid, based as much on perception as reality. In an age when the quantity of information is never in question and the price is approaching zero, the short-side of the market will always be quality, credibility, and context. Maybe we’re entering into a golden age of power and influence for academic scribblers, and that’s a reality some would like to head off at the pass. An accusation of plagiarism could stunt a career. A mass accusation of “rampant” plagiarism could diminish the broad credibility of scholars, reducing the perceived quality of the information relayed and the context they provide for policy and social discussions.
The US has three branches of federal government, four military branches, and 50 states, all sitting on top of thousands of municipal governments. As far as spreading power goes, that’s a pretty good start. If the 3,982 degree-granting institutions in the US have to be added to the registry of power, that’s fine, but I’ll have to admit that my students don’t seem all that awed by any power I’m currently wielding. Going by the focus of the media and Ackman, maybe we only need to add institutions in Cambridge, MA to the registry of power, but that doesn’t make power any less fluid and fleeting. It’s just political whack-a-mole, which I would remind everyone is a game where you can smack one source of power down, but you can’t control where power pops up next. Maybe power shifts to Silicon Valley. Maybe a cluster of TikTok influencers whose politics makes the median MIT professor look like Barry Goldwater. Be careful what you wish for…
There is a new generative AI product called Phind. Does it make up fake citations like ChatGPT? I will report experimentation with the free-tier product from January 7, 2023.
Phind is an intelligent search engine and assistant for programmers.
Prompt: “In less than 10 sentences, explain how the ideas of Hayek are connected to bailing out failed banks, and include citations from published papers as a list. include author, year in parentheses, and journal for the citations.”
Friedrich Hayek, a prominent Austrian economist, advocated for a free market system where businesses and individuals make decisions based on individual knowledge and self-interest, rather than central planning by government or bureaucrats. His ideas suggest that interventions, such as bailing out failed banks, should be minimal and temporary, allowing the market to correct itself.
However, the financial crisis of 2008, including the failure of many banks, led to significant government intervention, including the bailout of banks. This action can be seen as a departure from Hayek’s principles, as it involves direct government intervention to stabilize the financial system.
According to a paper by Todd Zywicki (2009), the Federal Reserve’s artificial lowering of short-term interest rates and the resulting shift by consumers to adjustable rate mortgages (ARMs) triggered the housing bubble and subsequent crisis [Source 1](https://reason.org/wp-content/uploads/files/federal_reserve_monetary_policy_hayek_rule.pdf). This aligns with Hayek’s critique of central banking’s manipulation of interest rates.
Moreover, the Basel Accords, international capital adequacy and liquidity requirements for banks, were designed to encourage banks to hold securitized loans in their portfolios, thereby concentrating risk and leveraging up, thereby increasing their exposure to risk. This approach, contrary to Hayek’s preference for decentralization and competition, may have contributed to the financial crisis [Source 1](https://reason.org/wp-content/uploads/files/federal_reserve_monetary_policy_hayek_rule.pdf). In conclusion, while Hayek’s ideas of minimal government intervention and self-regulating markets provide a useful theoretical framework, practical implementation in complex and interconnected modern economies may require different strategies, including bank bailouts.
Are the citations real and correct? Phind simply is not trying to write with in-text citations and academic references. There is a mention of “Todd Zywicki (2009)” and also a weblink. The weblink is to a policy paper published by Reason. This policy paper is on the correct topic and the paper does exist. The Zywicki citations also exists, in the sense that if you go into the Reason paper it cites a real Wall Street Journal op-ed. So, if you follow the trail, you can see what document Phind learned to cite Zywicki from. It seems like it is stealing the citation more than reading the source documents. To be fair, sometimes human academics work that way, too.
What I was hoping for was in-text citations with a compiled bibliography at the end. Phind did not give me that.
I’ll try another test that I ran on ChatGPT and Bing in 2023.
The prompt is “In what paper did John Duffy propose that economists use experiments to study equilibrium selection?”
Phind does not attempt an in-text citation in the response. The link in the paragraph (link number 2) points to John Duffy’s list of papers, which is better than just making up fake citations but also does not create a literature review for me. Phind is, as with the Hayek test above, providing breadcrumbs of links through which I can discover existent papers.
Is there a paper called “The Transition from Stagnation to Growth: An Adaptive Learning Approach”? Yes. And it is by Duffy.
Phind lists weblinks to sources. Has Phind done more for me than Google, on this search? Not much, in terms of finding and synthesizing references.
According to a chart circulating this week, attendance at the AEA winter meeting exceeded 13,000 economists at the peak. I had some job interviews at Chicago in 2017, and I spoke on a panel at San Diego in 2020. Chicago was freezing cold. San Diego was lovely in January. Cold or not, probably every economist on the job market showed up in person to those conferences. There are harrowing stories of people who missed job interviews because of snow and cancelled flights.
A privilege of being in this profession is the chance to meet people from around the world. At my lunch table currently there are people from Chile and Southern China to my right and Kansas and Hong Kong to my left. #ASSA2020
A privilege of being in this profession is the chance to meet people from around the world. At my lunch table currently there are people from Chile and Southern China to my right and Kansas and Hong Kong to my left. #ASSA2020
It is (or was) a huge win for the US to be the meeting place. Now that job interviews have moved to Zoom, attendance has fallen by more than half. I assume that the attendees here in 2024 skew more America-based.
A European economist predicts attendance in 2024 will fall even lower because “the interview stage of the market has moved online, and at a random date between October and January. No point in flying to ASSA, especially if you are a candidate based in Europe hoping for a job in Europe”
Lower, the interview stage of the market has moved online, and at a random date between October and January. No point in flying to ASSA, especially if you are a candidate based in Europe hoping for a job in Europe
Instead of asking why the economics job market unraveled, maybe we should be surprised that it was ever so centralized. People really did travel from all over the world to an American city in January to interview for almost every serious job available in the economics profession.
Small points:
I’ve seen several people complain that it’s a bad time of year. For me, it’s a good time of year. Since I do a lot of teaching, it’s good to have a conference that happens before my teaching starts.
I was happy to see that childcare is available here (for a fee).
I talked to a job market candidate who was trying to weigh a tenure-track job offer from a teaching school against the possible offer of a postdoc. He would prefer the postdoc. Because of the new system, job offers come in sequence. He risks losing the teaching offer before he finds out if he will get the postdoc offer in writing. In the old days, candidates would have been more likely to know what their best option was going to be.
The online JOE job board still serves for coordination. It is still administered by the AEA for jobs globally.
James provided evidence that the AEA will start letting more people get on the program to present research. (By contrast, the Southern Economic Association meeting has actually increased in attendance since Covid. They allow accept more people to present research on the program.)
When my grad school research group went out for lunch, I was sometimes the only American at the table. I loved it. I’m grateful that those brilliant people came here to start their careers.
We’ve all heard the stereotype. Millennials eat avocado toast (so say the older generations). The uncharitable version is that they can’t afford other things like cars, houses, etcetera due to their expensive consumption habits otherwise. And avocado on toast is the standard bearer for that spendthrift consumption.
I’m here to tell you that it’s bunch of nonsense and that the older folks are just jealous. Millennials, those born between 1981 & 1996, weren’t intrinsically destined to spend their money poorly as some generational sense of entitlement. Nor did the financial crisis imbue them with the mass desire for small but still affordable treats. The reason that millennials got the reputation for eating avocado on toast is that 1) it’s true, 2) because they could afford it, and 3) older generations didn’t even have access.
Is this the year the world’s largest economics conference settles into its new normal? ASSA 2024 starts in San Antonio today.
Like most conferences, the Allied Social Science Association took a big hit during the pandemic. Unlike most other conferences, a big fraction of this hit appears to be permanent. Part of what made ASSA so popular was that it was the site of most 1st-round job interviews for economists, but the pandemic made this shift to remote interviews. The American Economic Association decided the job market was better that way, so they made the arrangement permanent.
This shrunk their conference by about half compared to pre-2020; overall I thought it was still fine last year, but that the transition creates a problem:
The big problem with attendance falling to 6k is that they’ve planned years worth of meetings with the assumption of 12k+ attendance. Getting one year further from Covid and dropping mask and vaccine mandates might help some, but the core issue is that 1st-round job interviews have gone remote and aren’t coming back. The best solution I can think of is raising the acceptance rate for papers, which in recent history has been well under 20%.
I suspect the AEA is starting to take my advice. Acceptance rates ticked up slightly in 2023 (from 7% to 9% for individual papers, and from 16% to 30% for complete sessions). They have yet to release full information on acceptance rates this year, but my own experience indicates that this summer they realized they had a problem. I got a rejection email in July that said:
We were able to accept less than one third of the more than 1,150 submissions for paper or poster sessions.
This was followed by something I’ve never seen from an economics conference before- a rejection of the rejection:
You have probably already received an email saying your paper which you submitted for the American Economic Association program at the meeting in San Antonio, TX in January 2024 was not accepted. However, the AEA has decided to select a few more papers for the poster session.
I am pleased to inform you that your paper entitled
Certificate of Need and Self-Employment
which you submitted for the American Economic Association program, has been selected to be part of the AEA’s poster session.
This sums up my relationship to the core of the profession nicely: I’m exactly on the margin of it. But this time, just barely on the right side of it, helping them fill up a newly-oversized hotel block.
The odds aren’t what they were in the mega-conference days before 2020, but I expect I’ll still see some of you in San Antonio.
To kick off 2024, I’m just going to give you a chart to think about:
Notice that in 1990, Poland had about half the average income of Portugal, as did South Korea compared to the UK. By about 2021, those gaps had been completely closed. And while the 2021 data is a bit uncertain given the pandemic, IMF estimates for 2024 suggest that both Poland and South Korea have now pulled slightly ahead of Portugal and the UK.
You can find many other examples like this. Why have some countries grown rapidly while others have slowed or stagnated? In some sense, this is an age-old question in economics, and at least as far back as Adam Smith economists have been trying to answer that question.
But it’s actually a bit different now. In Smith’s day, the big question was why some countries had started on their path of economic growth, while others hadn’t started at all. Today, nearly all countries have started economic growth, but some of the early leaders in growth seem to have slowed down. But there isn’t some global reason for this that affects all countries: Poland and South Korea will likely keep growing for a while, and eventually there will be a big gap between them and Portugal and the UK.
The answer to this question is not, of course, just One Big Thing. But for countries like Portugal and the UK (and Japan and Spain and Italy and etc. etc.), the key to their economic future is figuring out what Many Little Things these economic miracles are doing right so that they can return to a path of high economic growth. And this isn’t just a race to see who wins: all countries can be winners! But without continued growth, solving economic, political, and social problems will be a huge challenge.
Maybe 2024 is when they will start to figure it out.
This continues our occasional series on stock options for amateurs.
I find options to be a nice tool in my investing arsenal. The previous post in this series was Stock Options Tutorial 1. Options Fundamentals. That post dealt with buying options, to provide simple examples. For reasons to explained in a future post, I usually prefer to sell options. Anyway, here we will look briefly at how options are priced. It is important to get an intuitive understanding of this, in order to be comfortable actually using options in your account.
The current price of an option, if you wanted to buy or sell it, is called the premium. There are two components that go into the premium, the intrinsic value and the extrinsic (or “time”) value:
The intrinsic value is easy to figure out, once you understand it. It is simply how much you would profit if you owned the option, and decided to exercise it right now. For instance, if you owned a call with a strike price of $50, but the stock price is $55, you could exercise the call and force whoever sold you the call to sell you the stock at a price of $50/share; you could turn around and immediately sell that share for $55, pocketing $5/share. We say that the option in this case is $5 in the money, and the intrinsic value is $5.
If the stock price were $60, it would be $10 in the money; you could pocket $10/share for exercising it. If the stock price were say $90, the option would be $40 in the money, and so on.
However, if the stock price were $50 (the $50 option is “at the money”) or lower (option is “out of the money”), you would get no benefit from being able to purchase this stock for $50, and so the intrinsic value of the option would be zero.
With a put (which is an option to sell a stock at a particular price), this is all reversed. If the stock is $5 lower than the option strike price, the option is $5 in the money and has a $5 intrinsic value, since if you own it, you could say buy the stock at $45, and force the put option seller to buy it from you at $50/share:
Suppose the current price of a stock is $50. And suppose you suspect its price may be above $50, say $60 sometime in the next month, so you would like to have the option of buying it at $50 sometime in the future, and then selling it into the market at (say) $60, for a quick, guaranteed profit of $10. Sounds great, yes?
Since a $50 call is right at the money (since the stock price is also $50), the intrinsic value of a $50 call is zero. Does this mean you could go out and buy a $50 call option for nothing? No, because the seller of the option is taking a risk by providing you that option. If the stock really does go to $60, he could be out the $10. Therefore, he will demand a higher price than the intrinsic price, to make it worth his while. This extra premium over the intrinsic premium is the extrinsic premium, which varies greatly with the time till expiration of the option.
If you wanted the option of buying the stock at $50 sometime in the next week, the option seller would charge only a small amount; after all, what are the odds that the stock will rise a lot in one week? However, if you wanted to extend that option period out to one year, he will charge you a high extrinsic premium, since there is a bigger chance that the stock could soar will over $50 sometime in that long timeframe.
Another way of framing this is, if you buy a $50 call option today with an expiration date a year from now, you will pay a high extrinsic value. But as the months roll by, and it gets closer to the expiration date, this extrinsic value or time premium will shrink down ever more quickly towards zero:
Now, computing the actual amount of the extrinsic value is really gnarly. The Black-Scholes model provides a theoretical value under idealized conditions, but for us amateurs, we pretty much have to just take what the market gives us. In deciding whether to buy or sell an option, I look at what the current market pricing is for it.
It turns out that an option which is priced at the money has the highest extrinsic value. As you get further into or out of the money, the extrinsic component of the total premium for the option diminishes. Below is one final graphic which pulls all this together:
The call option strike price is $25. The blue line shows the intrinsic value (labeled as “payoff at expiration”) at each stock price – this is zero at or below $25, and increases 1:1 as the stock price climbs above $25. The red curve shows the full market price of the option, including the extrinsic (time) premium. The spacing between the red and the blue lines shows the amount of the extrinsic premium. That spacing is greatest when the stock price is equal to the $25 strike price. The shaded areas specify the intrinsic and extrinsic values at a stock price of $27.
And (not shown here) as time passed and the option got closer to expiry, the extrinsic value would shrink (decay), and the red curve would creep closer and closer to the blue curve.
