The Higg Index and Incentives

The Higg Index is an apparel and footwear industry self-assessment standard for assessing environmental and social sustainability throughout the supply chain. Launched in 2012, it was developed by the Sustainable Apparel Coalition, a nonprofit organization founded by a group of fashion companies, the United States government Environmental Protection Agency, and other nonprofit entities.

https://en.wikipedia.org/wiki/Higg_Index

I had no clue that such a thing existed, but it would seem that a lot of apparel stores use this index as a way to advertise the fact that the products that they’re selling have been produced in a sustainable manner.

The Higg Index is spread across three categories: product tools, facility tools and brand and retail tool.

https://apparelcoalition.org/the-higg-index/

I came across the Higg Index in a New York Times article that warns us about depending too much on an index of this sort:

An explosion in the use of inexpensive, petroleum-based materials has transformed the fashion industry, aided by the successful rebranding of synthetic materials like plastic leather (once less flatteringly referred to as “pleather”) into hip alternatives like “vegan leather,” a marketing masterstroke meant to suggest environmental virtue.
Underlying that effort has been an influential rating system assessing the environmental impact of all sorts of fabrics and materials. Named the Higg Index, the ratings system was introduced in 2011 by some of the world’s largest fashion brands and retailers, led by Walmart and Patagonia, to measure and ultimately help shrink the brands’ environmental footprints by cutting down on the water used to produce the clothes and shoes they sell, for example, or by reining in their use of harmful chemicals.
But the Higg Index also strongly favors synthetic materials made from fossil fuels over natural ones like cotton, wool or leather. Now, those ratings are coming under fire from independent experts as well as representatives from natural-fiber industries who say the Higg Index is being used to portray the increasing use of synthetics use as environmentally desirable despite questions over synthetics’ environmental toll.

https://www.nytimes.com/2022/06/12/climate/vegan-leather-synthetics-fashion-industry.html?searchResultPosition=1

I don’t know enough about the Higg Index to able to tell you about whether it ‘makes sense’ or not, but this is a good way to start to think about incentives.

When you meet an index such as this one, some simple questions are worth asking:

  • How long has this index been around?
  • Who created it?
  • Who funds it?
  • Who uses it?
  • What did it replace, and why?
  • Are there other indices that do a similar job?

Try and answer these questions for the Higg Index, for example. The NYTimes article carries a slightly sceptical tone about the Higg Index (but is, ultimately, a balanced take) – once you finish answering these questions, try giving it a read, and then reach your own conclusions about its reliability.

And as usual, the most important lesson of them all: all the other indices that you may have come across, apply the same set of questions!

On State Capacity

A student of mine and I have been sending each other papers, books and articles on state capacity, and it has been a very enjoyable exchange, with lots of interesting stuff to read and ponder upon.

What is state capacity, you ask?

Here’s a definition that I came across recently, and I think it does a very good job:

“State capacity is the ability to design and execute policy effectively”

https://www.nytimes.com/2022/05/29/opinion/biden-liberalism-infrastructure-building.html

That quote/definition is by Brink Lindsey, and he’s got a recently published paper on the topic that is worth reading.

That paper’s executive summary has another definition of state capacity, with an explanation for why it matters so much in the rest of the paragraph that follows:

State capacity refers to the government’s ability to do its job effectively: to raise taxes, maintain order, and provide public goods. A series of calamities during the 21st century—the Iraq War, Hurricane Katrina,
the financial crisis, and most recently the COVID-19 pandemic—have made it painfully clear that American state capacity is not what it once was. This deficit not only undermines effective public policy in a wide variety of important domains; with our republic now so deeply polarized, it threatens the legitimacy and continued vitality of liberal democracy as well.

https://www.niskanencenter.org/state-capacity-what-is-it-how-we-lost-it-and-how-to-get-it-back/

Matters so much, that is, in an American context, although my argument is that state capacity matters in all countries, at all points of time.

Consider China, for example:

State capacity is a difficult concept to make concrete: a government’s ability to do stuff is obviously important, but how to tell if it is high or low? As a useful overview over at the Broadstreet blog shows, the most common way to measure state capacity in general is to measure fiscal capacity: the government’s ability to extract revenue from the economy. This makes sense historically, as the growth over the last few centuries of governments’ ability to do things like wage wars and provide social benefits went hand-in-hand with the development of tax systems and debt markets.
For the 20th century onward, the authors suggest a more precise metric: “To measure the fiscal capacity of the modern state, we use the share of income tax revenue in total tax revenue, as the collection of the income tax calls for high administrative capacity to ensure compliance.” This is an interesting choice, as on this measure China is a real edge case.

https://andrewbatson.com/2022/05/19/state-capacity-and-the-income-tax/

Read the rest of the blog post to understand why China is an edge case, and reflect on how difficult it is to define and measure state capacity. But that being said, never, ever underestimate its importance.


But why, you might wonder, is state capacity so important? Why can’t we rely on markets to get the job done? Well, this is where things get really tricky. But let’s begin with a simple question, and one that you’ve been asked before on these pages:

What are you optimizing for?

That is, when you say that one should rely on markets to get the job done, you need to be clear about what the job is, and you need to be clear about your metrics for considering said job to be one that is well done.

Say you, as part of the leadership in your country, would like to have a well functioning steel industry. You would like this industry to be robust, resilient, competitive, with a large presence (at least eventually) of domestic producers – and you would like it to be profitable. How do you make that happen?

Or, if you would like to be very specific, how did a country like South Korea get its steel industry up and running?

It was not easy getting the Pohang plant financed and built. The Korean government tried three times in the 1960s to move the project ahead, presenting different, detailed plans. But equipment suppliers would not advance credit and financiers – including the World Bank – would not lend to the kind of large-scale, integrated operation that the Koreans wanted. A World Bank report published in November 1968 cited the failures of major integrated steel projects in Brazil, Mexico, Turkey and Venezuela. In the end, Park financed Pohang by using Japanese war reparations. He put his favourite student from his teaching days at the Korean Military Academy, a 43-year-old general called Park Tae Joon, in charge. The younger Park had already turned around a state mining company. Each day workers at Pohang were lined up in front of the main, corrugated-iron site office and told that Japanese reparations money was being used for the project and that it was preferable to die rather than suffer the humiliation of wasting the money.

Studwell, Joe. How Asia Works: Success and Failure In the World’s Most Dynamic Region (pp. 116-117). Grove Atlantic. Kindle Edition.

This is a book I have recommended before, and will recommend again. It just is that good a read. In the paragraphs that follow, Studwell goes on to explain the factors that made POSCO such a huge success.

  1. A focus on scale from the get-go, but married to a step-by-step approach
  2. Being open to technical advice from abroad, but never being reliant on only one source
  3. A gargantuan appetite to learn more about the industry
  4. A relentless focus on exporting the steel that was produced
  5. Subsidies for the plant – they only had to ask, and they got (subject to the fourth point above being met!)

POSCO, the South Korean steel producer, is now a globally recognized brand name, and is a behemoth on the global stage, let alone South Korea. The South Korean steel industry may not be very competitive (there are only three players), but it is robust, it is resilient, has domestic producers, and is profitable.

And as Studwell’s book makes clear, this needed the presence of the state. Left to its own devices, there would likely have been no domestic steel industry in South Korea.


Was the approach adopted by the South Korean government perfect? Nope. Did it tick all the boxes? Nope. Could a different approach by either the South Korean government itself, or by South Korean industry have done a better job?

That’s the devil of it where economics is concerned, because we will never know. We can’t go back in time, try a different approach and compare the results – all we can do is hypothesize, or compare South Korea’s experience with that of other countries, all the while keeping in mind that it will never be an apples to apples comparison.

But I will say this much and I think there is a broad consensus on this: state led industrial policy matters. What shape it should take, to what extent and for how long, and whether different countries should have different industrial policies are topics that will provide employment and educative opportunities (of an excellent kind!) for years to come.

But industrial policy? It really, really matters.


Ezra Klein’s point in his essay is about American state capacity (and naturally so, of course). This is how he ends his essay:

Democrats spend too much time and energy imagining the policies that a capable government could execute and not nearly enough time imagining how to make a government capable of executing them. It is not only markets that have failed.

https://www.nytimes.com/2022/05/29/opinion/biden-liberalism-infrastructure-building.html

My point, if you are a student of economics anywhere in the world is this: it is not only America that needs to think deeply about this topic.

Learn Economics By Looking At A Painting

It was the IPL yesterday, so why not art today?

https://commons.wikimedia.org/wiki/File:Stilleven_met_vergulde_bokaal_Rijksmuseum_SK-A-4830.jpeg

Stare at this picture, and do so for a long time. If you are reading this on your phone, please take the time to switch to a laptop or even better, a desktop computer with a large screen. And just look at it, for as long as you like.

Here’s the description of this painting from Wikimedia:
On a table laid with a green table cloth and two linen damask serviettes are displayed: pewter plates with bread and a pewter dish with oysters, a glass of red wine, a glass of olive oil or a vinegar jug, a silver salt cellar, a rummer of white wine, a gilt silver cup, a pewter jug and a Berkemeyer laying on its side.

… which is fine as things go, but the NYTimes takes things to, as they say, another level in their Close Read series. I’ve linked to another one from this series more than a year ago, which is also worth your time. But this particular one, titled “A Messy Table, A Map of the World“, is worth an hour or more of your time.

In loving detail – and rarely must this phrase have been more appropriately used, Jason Farago takes us through the many messages, implications and nuances of this painting, and so much more besides.

I’ve noted below some points that stood out for me in terms of appreciating the painting better after having read the article (please note that I know nothing about art appreciation, so feel free to help me learn more):

  1. The reflection of the window-frame on the glass is remarkably well done, particularly on the wine glass, but also on the jug towards the right. The wine glass, by the way, is called a roemer, and the reason it has a knobbed stem is so that the glass is easier to grip after you’ve had a more than a couple of drinks.
  2. I wouldn’t have noticed it no matter how long I stared at it (but then again, I’m not very good at this), but directly below the half-hidden knife, on the edge of the white napkin is the artist’s signature, and the year in which the painting was created.
  3. The wall in front of which the table stands is drab by choice, so as to focus our eyes on the table itself.
  4. The lemon is mesmerizing. The realism that Heda manages is brilliant, and if you take a look at his other paintings, you will realize that it is a recurring motif.
  5. The texture of the bread in the foreground, the difference in the texture and the luster of the silver cup (or tazza) and the matte texture of the jug (or pewter) is remarkable.

I could go on, but I’ll leave you to both read the rest of the article, and figure out other details yourself.


But (surprise, surprise) what I enjoyed the most were the economic aspects.

  1. Learn more about where Heda was located, and why that mattered in terms of the commerce behind the creation of paintings such as these. Reflect on the section from the article that helps you understand why religious motifs are not to be seen in his works. While you are it, reflect on the fact that this is an artist known for the creation of a genre called late breakfasts. Who has the time to have late breakfasts, and what might that mean for the society that Heda lived in?
  2. Peperduur is a Dutch word, still in use today, that means expensive. It literally means “as expensive as pepper”. The peppercorns in the painting, by the way, are to be found in that little cone of paper towards the left of the painting.
  3. Where did the lemons come from back then? Were they imported? If so, from where? Under what conditions, treaties and laws? With what consequences? If you find yourself wanting to read more about this, I’m happy to recommend to you one of my favorite books about globalization: Vermeer’s Hat.
  4. Which other things came from which other parts of the world? The article tells us about gold, cinnamon, porcelain and pineapples that came from an island called Manaháhtaan. Where is this place, you ask? Well, near a place called New Amsterdam. And where is that, you wonder? Listen to this song, and read the lyrics.
  5. This is a painting that celebrates wealth: the fact that you were able to afford a spice that lives on today in a word that means expensive, that were able to afford to buy, eat and not finish something as expensive as oysters, that you were able to wash down the meal with beer and wine, that you were able to use only a bit of as expensive a fruit as a lemon, and that you could have a meal such as this for a late breakfast – all of this isn’t just telling the viewer a story. It is sending the viewer a message about what the Dutch people were when the painting was created. They were rich, and they wanted you to know it.
    How they became rich, at what cost to the rest of the world, and with what consequences to themselves and the rest of the world are questions that you should ask after you stare at the painting… and then try and find out the answers.

There are many, many ways to learn economics, whether by watching the IPL or by learning about art appreciation – and a million other things in between. Being a student of economics is about so, so much more than the study of an economics textbook. That, if anything, is barely the start.

I hope you have as much fun learning about this painting as I did!

AI/ML: Some Thoughts

This is a true story, but I’ll (of course) anonymize the name of the educational institute and the student concerned:

One of the semester end examinations conducted during the pandemic at an educational institute had an error. Students asked about the error, and since the professor who had designed the paper was not available, another professor was asked what could be done. Said professor copied the text of the question and searched for it online, in the hope that the question (or a variant thereof) had been sourced online.

Alas, that didn’t work, but a related discovery was made. A student writing that same question paper had copied the question, and put it up for folks online to solve. It hadn’t been solved yet, but the fact that all of this could happen so quickly was mind-boggling.

The kicker? The student in question had not bothered to remain anonymous. Their name had been appended with the question.

Welcome to learning and examinations in the time of Coviid-19.


I have often joked in my classes in this past decade that it is only a matter of time before professors outsource the design of the question paper to freelance websites online – and students outsource the writing of the submission online. And who knows, it may end up being the same freelancer doing both of these “projects”.

All of which is a very roundabout way to get to thinking about Elicit, videos about which I had put up yesterday.

But let’s begin at the beginning: what is Elicit?

Elicit is a GPT-3 powered research assistant. Elicit helps you classify datasets, brainstorm research questions, and search through publications.

https://www.google.com/search?q=what+is+elicit.org

Which of course begs a follow-up question: what is GPT-3? And if you haven’t discovered GPT-3 yet, well, buckle up for the ride:

GPT-3 belongs to a category of deep learning known as a large language model, a complex neural net that has been trained on a titanic data set of text: in GPT-3’s case, roughly 700 gigabytes of data drawn from across the web, including Wikipedia, supplemented with a large collection of text from digitized books. GPT-3 is the most celebrated of the large language models, and the most publicly available, but Google, Meta (formerly known as Facebook) and DeepMind have all developed their own L.L.M.s in recent years. Advances in computational power — and new mathematical techniques — have enabled L.L.M.s of GPT-3’s vintage to ingest far larger data sets than their predecessors, and employ much deeper layers of artificial neurons for their training.
Chances are you have already interacted with a large language model if you’ve ever used an application — like Gmail — that includes an autocomplete feature, gently prompting you with the word ‘‘attend’’ after you type the sentence ‘‘Sadly I won’t be able to….’’ But autocomplete is only the most rudimentary expression of what software like GPT-3 is capable of. It turns out that with enough training data and sufficiently deep neural nets, large language models can display remarkable skill if you ask them not just to fill in the missing word, but also to continue on writing whole paragraphs in the style of the initial prompt.

https://www.nytimes.com/2022/04/15/magazine/ai-language.html

It’s wild, there’s no other way to put it:


So, OK, cool tech. But cool tech without the ability to apply it is less than half of the story. So what might be some applications of GPT-3?

A few months after GPT-3 went online, the OpenAI team discovered that the neural net had developed surprisingly effective skills at writing computer software, even though the training data had not deliberately included examples of code. It turned out that the web is filled with countless pages that include examples of computer programming, accompanied by descriptions of what the code is designed to do; from those elemental clues, GPT-3 effectively taught itself how to program. (OpenAI refined those embryonic coding skills with more targeted training, and now offers an interface called Codex that generates structured code in a dozen programming languages in response to natural-language instructions.)

https://www.nytimes.com/2022/04/15/magazine/ai-language.html

For example:

(Before we proceed, assuming it is not behind a paywall, please read the entire article from the NYT.)


But about a week ago or so, I first heard about Elicit.org:

Watch the video, play around with the tool once you register (it’s free) and if you are at all involved with academia, reflect on how much has changed, and how much more is likely to change in the time to come.

But there are things to worry about, of course. An excellent place to begin is with this essay by Emily M. Blender, on Medium. It’s a great essay, and deserves to be read in full. Here’s one relevant extract:

There is a talk I’ve given a couple of times now (first at the University of Edinburgh in August 2021) titled “Meaning making with artificial interlocutors and risks of language technology”. I end that talk by reminding the audience to not be too impressed, and to remember:
Just because that text seems coherent doesn’t mean the model behind it has understood anything or is trustworthy
Just because that answer was correct doesn’t mean the next one will be
When a computer seems to “speak our language”, we’re actually the ones doing all of the work

https://medium.com/@emilymenonbender/on-nyt-magazine-on-ai-resist-the-urge-to-be-impressed-3d92fd9a0edd

I haven’t seen the talk at the University of Edinburgh referred to in the extract, but it’s on my to-watch list. Here is the link, if you’re interested.

And here’s a Twitter thread by Emily M. Blender about Elicit.org specifically:


In response to this critique and other feedback, Elicit.org have come up with an explainer of sorts about how to use Elicit.org responsibly:

https://ought.org/updates/2022-04-25-responsibility

Before we proceed, I hope aficionados of statistics have noted the null hypothesis problem (which error would you rather avoid) in the last sentence of pt. 1 in that clipping above!


So all that being said, what do I think about GPT3 in general and elicit.org in particular?

I’m a sucker for trying out new things, especially from the world of tech. Innocent until proven guilty is a good maxim for approaching many things in life, and to me, so also with new tech. I’m gobsmacked to see tools like GPT3 and DallE2, and their applications to new tasks is amazing to see.

But that being said, there is a lot to think about, be wary of and guard against. I’m happy to keep an open mind and try these amazing technologies out, while keeping a close eye on what thoughtful critics have to say.

Which is exactly what I plan to do!

And for a person with a plan such as mine, what a time to be alive, no?

Why Is Reading the News Online Such a Pain?

Livemint, Hindu Business Line, Business Standard, Times of India, The New York Times, The Hindu, The Washington Post, The Economist, Bloomberg Quint and Noah Smith’s Substack.

These are, as of now, my sources of news online that I pay for.

There are other newsletters that I subscribe to and pay for (The Browser is an excellent example), and I read stuff published in other newspapers too, but I’m restricting myself to only the current news sources that I pay for. I would like to subscribe to the Financial Times and to Stratechery too, but my budget line begins to cough firmly and insistently at this point, more’s the pity.

But here’s the thing: reading news online sucks.


Some are worse than others, and I’m very much looking at you, Business Standard. Their app is a joke, and the number of times one has to sign in while reading the paper on a browser isn’t funny. Some are, relatively speaking, better. The NYT website and app are both pretty good, as is the Economist. But still, it isn’t friction free, and there really should be a way to get the user experience to be better than it is right now.

And more than better, a more urgent word is uniform. Here’s a simple use case: let’s say I want to read articles on the current lockdown in Shanghai. I have to go to each website, and either run a search, or navigate to the appropriate section. But on each website, the search button will be located in a slightly different place, with a slightly different user experience. Each website while have their own navigation system. Each website will have different ways to filter search results.

Some will allow you to copy excerpts, some won’t. Some will allow clips and force an appendage at the end (“Read More At XYZ” – I’m looking at you, ToI). But by the time I finish visiting the third website to read about the topic I wanted to – current lockdowns in Shanghai – I’m pretty much done out of sheer exasperation.


It shouldn’t be this hard!

Workarounds kind of exist. For example, I can add the RSS feeds to Feedly, or any other feed reader of your choice. If you’re not familiar with Feedly, or RSS readers in general, here is an old post about it. But the reason I say kind of is because most (if not all) newspapers will not provide the full article in the RSS feed. You have to click through to read the full thing.

Not much use, is it?

Which, to be clear, is entirely understandable. User tracking, ads, and all the rest of it, I get it. But it does mean that Feedly isn’t a great way to keep track of all these articles in one place.

What I would really like is an app/service that aggregates all news sources in full in one place, and allows me to sign in to premium news sources via that app/service.

Does such a service exist? Or are there workflows that solve this problem?

Please, do let me know!

Game Theory and Nuclear War

What a wonderfully cheerful topic with which to get back to work, eh?

But then again, we’ve to live up to our billing of being the dismal science, and what could be more fitting than trying to analyze the chances of nukes going off sometime this year?


Timothy Taylor kicks things off, by reminding us of the canoe and the rowboat:

For those of you who have not experienced the pleasure of gliding across a northwoods lake or river in a canoe, I’ll just note that a canoe has a point at both ends, which make it maneuverable but also potentially tippy. In contrast, a rowboat has a point at one end but is flat on the other end, which makes it more stable. From this standpoint, are small conflicts between great powers “better” in some sense than larger ones? Yes. But if there is too great a willingness to engage in many smaller conflicts, then the chance that one of them will escalate in the tippy canoe to a larger conflict is worrisome. Is a fight more likely to dump you into the water in a canoe or a rowboat? Once the fight starts, a canoe is tippier. But if neither party wants to end up in the water (in this case, a metaphor for a much broader war or a nuclear exchange), then they might be less likely to start a fight in a canoe than in a rowboat in the first place.

https://conversableeconomist.com/2022/03/06/fighting-in-a-canoe-thomas-schelling-redux/

Read, as always, the entire post. But one point in particular stood out in that post:

There are too many imponderables that could be affecting Vladimir Putin’s decision process to make any definite claims, but one wonders if his decision to invade Ukraine might have been affected by earlier western actions. For example, what if there had been a stronger western reaction when Soviet troops essentially levelled the city of Grozny in Chechnya about 20 years ago? What if the countries of western Europe had been more willing to keep their promises to commit 2% of GDP to military spending over the last two decades? What if Germany had not been so extraordinarily eager to become dependent on inflows of Russian-exported oil and gas? What if various assassinations that appeared to be engineered by Russia had been met with greater pushback? What if the Winter Olympics in 2014 had not been held in Sochi? What if the Russia-Ukraine conflict of 2014, which ended with Russia annexing Crimea and other areas, had received greater pushback when Joe Biden was vice-president?

https://conversableeconomist.com/2022/03/06/fighting-in-a-canoe-thomas-schelling-redux/

Timothy Taylor’s point in the excerpt above is that “saving face” isn’t so much about pride and honor in the present instance (whatever that instance may be), but rather about sending a message about our likely actions in the future. And that the west, because of their earlier actions and decisions, may well have signaled to Putin that they weren’t quite as decisive as they would have been in the past.

Which is a useful segue into reading an NYT profile of Putin:

An important moment in this development appears to have come with Mr. Obama’s last-minute decision in 2013 not to bomb Syria after Bashar al-Assad, the Syrian president, crossed an American “red line” against using chemical weapons. Mr. Obama took the case for war to a reluctant Congress instead, and under the lingering American threat and pressure from Moscow, Mr. al-Assad agreed to the destruction of the weapons.
The hesitation appears to have left an impression on Mr. Putin. “It was decisive, I think,” said Mr. Hollande, the former French president, who had readied warplanes to take part in the planned military strike. “Decisive for American credibility, and that had consequences. After that, I believe, Mr. Putin considered Mr. Obama weak.”

https://www.nytimes.com/2022/03/26/world/europe/vladimir-putin-russia.html

Basic game theory is actually – to use a strong word – useless. And the reason it is useless is because basic game theory assumes two things:

  1. Rationality on part of the actors
  2. Some prior knowledge about the payoffs associated with a game.

But as Noah Smith points out on his substack (the post, alas, is paywalled):

The first is that game theory fundamentally assumes that the players are rational. You have to be a cold calculating machine to think through all the strategies and pick the one that yields the greatest payoff. But it’s not clear that real actors are always rational. Putin might simply be nuts.
In fact, there’s a whole theory called “madman theory”, in which it makes sense to try to fool your opponent into thinking you’re crazier than you really are. If your opponent thinks you’re a madman, they are likely to give you more concessions than if you were rational, simply because they’re less sure about what would push you over the edge into a mutually destructive war. Nixon is said to have used this strategy intentionally by acting unhinged in order to scare the USSR, and Putin might be using it right now.

https://noahpinion.substack.com/p/nuclear-game-theory-and-its-limitations

Is Putin rational? Who knows? Does Putin? Authors have been trying to figure out Vladimir Putin for a very long time, says The Economist:

In “The Man Without a Face” (2012), for instance, Masha Gessen characterised Mr Putin, then set to reclaim the presidency after a pro-forma stint as prime minister, as a killer and extortionist. This version of him—a kgb thug turned mafia godfather—had been “hidden in plain sight”, but obscured by wishful thinking and that grey veneer. Death and terror were politically useful to Mr Putin, the author wrote. He made no distinction between the state’s interests and his own.

https://www.economist.com/culture/writers-have-grappled-with-vladimir-putin-for-two-decades/21808311

Does that sound rational to you? And regardless of your answer, how does it help one think of what Putin will do when it comes to deploying a nuke?

By the way, speaking of Masha Gessen, listen to or read her conversation with Tyler Cowen. Here’s a cheerful tidbit about Russia:

I think that there’s a kind of grumpy and dark culture in Russia. Russians certainly have a lot of discernment in the fine shades of misery. If you ask a Russian how they are, they will not cheerfully respond by saying they’re great. If they’re miserable, they might actually share that with you in some detail.
There’s no shame in being miserable in Russia. There’s, in fact, a lot of validation. Read a Russian novel. You’ll find it all in there. We really are connoisseurs of depression.

https://conversationswithtyler.com/episodes/masha-gessen/

But back to game theory and nukes.

The Economist tells us that using game theory to study the topic isn’t all that simple:

As a showdown between nuclear powers becomes more intense, Schelling observed, the risk that unexpected and perhaps undesired developments cause the situation to spiral out of control rises. (When nuclear forces are on high alert, for instance, false alarms become far more dangerous.) The upper hand, in such a situation, is thus maintained by the side that is more willing to tolerate this heightened risk of all-out nuclear war.
This is the essence of brinkmanship. It is not merely a matter of ratcheting up the tension in the hope of outbluffing the other side. It is also a test of resolve—where resolve is defined as a willingness to bear the risk of a catastrophe. Mr Putin’s move to increase the readiness of his nuclear forces may represent an attempt to demonstrate such resolve (over and above the message sent by the invasion itself). President Joe Biden’s refusal to escalate in kind could be seen as an acknowledgment of the conspicuous fact that an autocrat embroiled in a pointless war has less to lose than the rich democracy to which Mr Biden is accountable.

https://www.economist.com/finance-and-economics/2022/03/19/the-disturbing-new-relevance-of-theories-of-nuclear-deterrence

So is Putin, bizzare though it may sound, being rational by getting some folks to think that he is a madman? That is, if he anticipates that Biden is thinking along the lines outlined in this excerpt above, does it actually make sense for Putin to push this line of thinking in a calculated manner, increasing the chances that Biden will blink first.

Ah, but should Biden see through this and therefore discount the whole thing?

Of course you could model trickery attempts as their own strategies, with some (unknown) probability of success. But when you start introducing more and more options like this, you run into the second limitation of game theory — real-life strategic interactions are hellishly complex. This puts them beyond the modeling power of human theorists — perhaps the A.I. from War Games could handle this, but not even the most piteously overworked grad student is going to draw you a game tree that incorporates every possible feint and misdirection and signal. There are whole scholarly books that try to think about every possible nuclear move and countermove; they’re intellectually interesting, but they end up giving you a near-infinite menu of models to choose from, and thus they’re not very useful in real life.

https://noahpinion.substack.com/p/nuclear-game-theory-and-its-limitations?s=r

Here’s where we are then, after reading all those excerpts:

  1. There is (and there is no sugarcoating this) an increased chance that a nuke will be launched this year.
  2. It helps to try and think through this problem, because the phrase “skin in the game” is applicable for all humanity where this problem is concerned
  3. Game theory is a good place to start, because it seems to be the best, most appropriate tool in our toolkit
  4. Who better to tell us how to think about the game theoretic aspects of a nuclear war than Thomas Schelling? He won a Nobel Prize for it, and his book is the book to read about the topic!

… except it ain’t really about game theory!

But as subsequent writers have pointed out, Schelling’s work wasn’t really a work of game theory. Game theory, as an economist knows it, is an exercise in pure rationality — two rational actors, each knowing that the other knows they’re rational (and knowing that the other knows, and so on) think through the possible set of strategies that they and their opponent(s) might take. This process of thinking through all of the possible moves causes them to arrive at some kind of strategic equilibrium (usually some kind of Nash equilibrium, although there are other kinds that people think about). At that point, playing out the moves of the game is simply pro forma; what people will do is either predetermined, or randomized.
Schelling’s concept of deterrence, in contrast, is full of signaling, misdirection, and guesswork about the opponent’s motives and thoughts. It’s the kind of thing that could only be rationally calculated in its entirety by a supercomputer like the one in War Games. Schelling’s ideas are more like the way real people play most games — feints, blunders, deception, and looking for tells.

https://noahpinion.substack.com/p/nuclear-game-theory-and-its-limitations?s=r

But if you ask me, that is exactly why you should read Schelling about this topic! Precisely because it isn’t just about basic game theory, and because it takes into account signaling, misdirection and guesswork.

Or, if you’d like the same thought expressed in more popular, and less highfalutin’ words, this is a game in which you have to play the man and the cards. And the stakes are ridiculously, scarily high.

As my favorite blogger sometimes says, have a nice day.

All About Taxation

I write this blog for folks who are looking to learn more about economics. And if you are in this group, you can’t help but have noticed that there’s been a bit of a brouhaha over taxes, both in the United States of America and in India.

ProPublica has obtained a vast trove of Internal Revenue Service data on the tax returns of thousands of the nation’s wealthiest people, covering more than 15 years. The data provides an unprecedented look inside the financial lives of America’s titans, including Warren Buffett, Bill Gates, Rupert Murdoch and Mark Zuckerberg. It shows not just their income and taxes, but also their investments, stock trades, gambling winnings and even the results of audits.
Taken together, it demolishes the cornerstone myth of the American tax system: that everyone pays their fair share and the richest Americans pay the most. The IRS records show that the wealthiest can — perfectly legally — pay income taxes that are only a tiny fraction of the hundreds of millions, if not billions, their fortunes grow each year.

https://www.propublica.org/article/the-secret-irs-files-trove-of-never-before-seen-records-reveal-how-the-wealthiest-avoid-income-tax

What exactly is income tax? And what is its history?

Well, the first question is simple to answer (to begin with): it is a tax on your income. Ah, but that then begs the (pardon the puny pun) million dollar question: what is income?

But a question remained: What would count as income and what wouldn’t? In 1916, a woman named Myrtle Macomber received a dividend for her Standard Oil of California shares. She owed taxes, thanks to the new law. The dividend had not come in cash, however. It came in the form of an additional share for every two shares she already held. She paid the taxes and then brought a court challenge: Yes, she’d gotten a bit richer, but she hadn’t received any money. Therefore, she argued, she’d received no “income.”
Four years later, the Supreme Court agreed. In Eisner v. Macomber, the high court ruled that income derived only from proceeds. A person needed to sell an asset — stock, bond or building — and reap some money before it could be taxed.

https://www.propublica.org/article/the-secret-irs-files-trove-of-never-before-seen-records-reveal-how-the-wealthiest-avoid-income-tax

As the article I have excerpted this from goes on to say, folks were warning us even back then that this was not going to end well (it is nowhere close to ending, and it is not going well). But this talks to us about the difficulty of defining income, about which more in a bit. Here’s a brief snippet about how the idea of income taxes originated:

The universal taxes of ancient times, like the one that brought Mary and Joseph to Bethlehem just before the birth of Jesus, were invariably head taxes, with one fixed sum to be paid by everybody, rather than income taxes. Before about 1800, only two important attempts were made to establish income taxes—one in Florence during the fifteenth century, and the other in France during the eighteenth. Generally speaking, both represented efforts by grasping rulers to mulct their subjects. According to the foremost historian of the income tax, the late Edwin R. A. Seligman, the Florentine effort withered away as a result of corrupt and inefficient administration. The eighteenth-century French tax, in the words of the same authority, “soon became honeycombed with abuses” and degenerated into “a completely unequal and thoroughly arbitrary imposition upon the less well-to-do classes,” and, as such, it undoubtedly played its part in whipping up the murderous fervor that went into the French Revolution.

Brooks, John. Business Adventures: Twelve Classic Tales from the World of Wall Street (p. 93). Hodder & Stoughton. Kindle Edition.

That… is not reassuring.

The chapter on income tax from this excellent, excellent book makes for great reading. As it turns out, it was the (surprise, surprise) Civil War that finally provided the impetus for the imposition of an income tax across the length and breadth of the nation1 And the imposition was celebrated! Well, at least by some:

“I am taxed on my income! This is perfectly gorgeous! I never felt so important in my life before,” Mark Twain wrote in the Virginia City, Nevada, Territorial Enterprise after he had paid his first income-tax bill, for the year 1864—$36.82, including a penalty of $3.12 for being late. Although few other taxpayers were so enthusiastic, the law remained in force until 1872. It was, however, subjected to a succession of rate reductions and amendments, one of them being the elimination, in 1865, of its progressive rates, on the arresting ground that collecting 10 per cent on high incomes and lower rates on lower incomes constituted undue discrimination against wealth.

Brooks, John. Business Adventures: Twelve Classic Tales from the World of Wall Street (p. 96). Hodder & Stoughton. Kindle Edition.

Back, as it were, to the future. Anand Giridharadas wrote an article in the New York Times about the ProPublica report:

Mr. Buffett is almost the perfectly made billionaire for this moment in which, at last, many Americans are beginning to question not only corruptions of the system but the matter of whether billionaires should exist at all. He doesn’t do the things the worst of them do. He isn’t in it for what they’re in it for. He clearly must care about money, but he also kind of doesn’t care about money. Even in his generosity, he has avoided the imperial lording over that others cannot resist.
And this is what makes him so troubling, because through him we are tempted into believing that a system can be defended that allows a man to accumulate more than $100 billion while people are sleeping, in hock to him, in his mobile homes, shortening their lives with the beverages he’s invested in, scampering around the warehouses whose nonunion status has redounded to his money pile.
It can’t. And who keeps us from seeing that simple, stark truth more effectively, more perniciously, than the Good Billionaire?

https://www.nytimes.com/2021/06/13/opinion/warren-buffett-billionaire-taxes.html

The second card in my three card trick is a response to this essay, from V Ananta Nageswaran2:

So, notwithstanding Anand Giridhardas, we can still think about the manner in which incomes and capital gains & dividends are taxed. I see three issues, at my level.
There needs to be a discussion on unrealised capital gains and dividends. Dividends are avoided and companies buy stocks back to avoid dividend tax. What if the tax policies take away that choice?
Second, even if we accept that only realised capital gains are to be taxed, why are they taxed at much lower rates than tax on wages?
Third, even if we accept this logic (which, in addition to the above arguments, is also a reflection of who made those laws, their incomes and wealth status, etc., over time and across the world) of the primacy of capital, for the sake of argument and hence accept the conclusion that capital gains will be treated differently from regular labour income, then the question is one of defining short-term and long-term. Why should short-term be just one year? In economics, anyone’s definition of short-term is not one year but a business cycle, i.e., minimum three years. Extending the definition of ‘short-term’ to 36 months from 12 months will earn more revenues.

https://thegoldstandardsite.wordpress.com/2021/06/19/the-inequity-of-the-tax-system/

That is, the author is saying that that are indeed problems with capital being taxed the way it is, but (as he points out elsewhere in the blog) the way forward is evolution, not revolution.

Which brings me to the third card: TALISMAN.

The truth, as always, lies somewhere in the middle – and that, of course, is the point of the excerpt above too. On the spectrum of Current System Bad:::Current System Good, reasonable people can and should argue about the “sweet spot”.


And if you are a student of economics (and especially public finances), where do you go to learn more before trying to figure out where you should be on this spectrum?

  1. Please read the chapter on income taxes from the book Business Adventures
  2. Read this essay by Tim Taylor (and note that it was written before the ProPublica report came out!)
  3. Farhad Manjoo, a while ago, on abolishing billionaires (and the response to that essay)
  4. Gulzar Natarajan on this issue
  5. And for a theoretical understanding – always a good idea for an issue as complex and important as this one – Chapters 20 and 21 from Stiglitz’ Economics of the Public Sector.
  1. do read the entire chapter, though. The snippet about the experiment in Rhode Island is fascinating.[]
  2. note that I am excerpting the outline of the argument, please visit the blog to read it in full[]

Asking And Answering Important Questions

Shruti Rajagopalan asked a very important question on Twitter earlier this week:

I’m writing this post on Sunday evening, which is when Shruti asked this question (and you, of course, are reading it today) but so far, there haven’t been any encouraging responses to her query, save for this one:
That would be this report, and I don’t think it was recommending large purchase orders or calling out Prime Minister Modi’s incoherent vaccine policy. This is the entire paragraph on vaccination:

Vaccines: The Committee recommended that a vaccine should pass all phases of clinical trials before it is made public. Further, it recommended that the whole population should be vaccinated. In this regard, the Committee suggested that: (i) the cost of the vaccine should be subsidised for weaker sections of society, (ii) the cold-storage system across the country should be upgraded, and (iii) vaccines should be administered as per the World Health Organization’s strategic allocation approach or a multi-tiered risk-based approach.

https://www.prsindia.org/sites/default/files/parliament_or_policy_pdfs/Report%20summary%20COVID.pdf

Long story short, the answer to Shruti’s question is: nobody. None of us were prescient enough in 2020, and that is a failure on our part.


What Shruti is really asking for is this: who is India’s Alex Tabbarok?

Why do I say this? Because Professor Tabarrok was recommending/demanding large purchase orders…

We don’t want to find ourselves with a working vaccine but too little manufacturing capacity. From an economic point of view, it would make sense to install enough capacity so that everyone in the U.S. who wanted could be vaccinated within a month. Normally, new vaccines cannot be produced so quickly and in sufficient supply. Each step of the manufacturing process must be verified and tested, and inputs to the process may face their own supply chain bottlenecks. Just as shortages of swabs and reagents delayed the rollout of testing, shortages of glass vials, bioreactors or adjuvants (a substance that increases immune stimulation) may delay vaccines. For want of a vial, the vaccine could be lost. To stand a reasonable chance of having a substantial supply of vaccines in 2021, we need to plan for capacity and reinforce supply chains now.

https://www.nytimes.com/2020/05/04/opinion/coronavirus-vaccine.html

…on the 4th of May. That is the 4th of May 2020.

He had a post praising the idea of advance market commitments (AMC’s) out in February. Again, 2020.


And while the first excerpt up above was a plan for the USA alone, he and his collaborators expanded upon this plan, outlining what a globally coordinated plan may have looked like:

I’ve been working with Michael Kremer, Susan Athey, Chris Snyder and others to design incentives to speed vaccines and other health technologies. AcceleratingHT is our website and now features a detailed set of slides which explain the calculations behind our global plan. The global plan is similar in style to the US plan although on a larger scale. The key idea is that the global economy is losing $350 billion a month so speed pays. One way to speed a vaccine is to invest in capacity for 15-20 vaccine candidates before any candidates are approved, so that the moment a candidate is approved we can begin production (one can store doses in advance of approval). Most of the capacity will be wasted but that is a price worth paying. As Larry Summer says if you will die of starvation if you don’t get a pizza in two hours, order 5 pizzas. Human challenge trials are another way to speed the process.
A global plan is ideal since there are significant benefits to coordination. If each country invests in vaccines independently they will each choose the vaccine candidates most likely to succeed but that means all our eggs are a few baskets. There are over 100 vaccine candidates and they have different scientific and production risks so you want to choose the 15-20 which maximize the probability of success for the portfolio as a whole. To do that efficiently you need countries to agree that ‘I will invest in lots of capacity (more than I need) in candidate X if you invest in lots of capacity (more than you need) for candidate Y’, even knowing that the probability that X succeeds may be less than that of Y.

https://marginalrevolution.com/marginalrevolution/2020/05/acceleratinght.html

The website AcceleratingHT provides many more instances that reinforce my point, and as a student, reading the material there is genuinely useful.


A while ago, I wrote a post for students who want to work in the field of public policy. Alex Tabbarok’s work this past year is a great example of what that advice might look like in practice.

I do not know who India’s Alex Tabbarok is in 2021 – there may not even be one. But as a student, the correct question to ask is this:

What do I need to do to acquire the ability to be ahead of the curve when the next crisis comes around?

Here is my list in response to that question:

  1. Read, and write. Everyday, read and write. If you are a student of the humanities (and if you think about it, who isn’t?), you should be reading and writing everyday. It compounds, trust me.Don’t be afraid
  2. Learn the art of working backwards from the solution you want to get to. In this specific case, if you want the world to be vaccinated by the end of 2021 (let’s say), then begin by asking yourself what needs to be done to get there, but in reverse.
    7 billion vaccines will be needed – which are the manufacturers that are most likely to supply them – what do they need to get the job done – how can we get them what we need – what are the regulatory, financial, supply-chain-related hurdles they will face – how can these be removed – and so on…
    My point here is not the specifics of the exercise, whether in the case of vaccines today or something else tomorrow. My point is to learn and apply the art of working backwards from where you want to eventually be. I don’t know what you’re supposed to call this in consultant/management speak, but for starters, read about the game 21 flags in The Art of Strategy.
  3. Learn the art of being unafraid to ask big picture questions. Whenever you get that feeling of “Surely somebody somewhere must have thought to ask this question already?” – especially if you have been serious about pt. 1 above – ask the question. Repeatedly, furiously and publicly.
  4. Consume as much content as you can about crisis management from the past. (I’m working on this for my own self, and recommendations are welcome)
  5. Do not be afraid of putting out your potential solution out there. Your worst case scenario is that it is a wrong solution. As a society, we’re still better off rejecting wrong solutions than waiting for the perfect one. For rejecting a solution as being the wrong one forces us to learn more about the problem at hand.
  6. Most difficult of all: once you have offered a solution, remember that your job is to solve the original problem. Your job is to not defend your solution at all costs. This is hard.

So You Want to Work in Public Policy…

If you’re between the age of 18-24, and aspire to work in the field of public policy, how should you prepare for such a career? Outside of the academic requirements and the network that you will build, reading about what public policy experts have done when on the “front-lines” is a useful exercise.

In today’s blogpost, I aim to get you started on this journey by referring to a book, an interview and an article.

The book? To Move the World, JFK’s Quest for Peace.

The book is about the lead-up to the Cuban Missile Crisis, the crisis itself, its succesful resolution, and the aftermath. It is a short book, and well worth your time if you are an aspiring public policy student.


At the very start of the ExComm process, Kennedy made the basic decision—one that was never second-guessed within the group—that the Soviet weapons must go. Either the weapons would be removed peacefully by the Soviets themselves, or they would become the cause of war.

Sachs, Jeffrey. To Move The World: JFK’s Quest for Peace . Random House. Kindle Edition. (Location 529)

Decide upon a goal. In this case, the goal was to get the Soviet weapons to go. Professor Sachs lays out the consultations that led to this goal being chosen in subsequent pages. But that is step 1. Without a clear goal, the rest of the process is meaningless.

Be crystal clear about the “What are we trying to do here?” question, first and foremost.


That brings you to step 2. And once step 1 has either been decided, don’t make your arguments from now on about step 1. The time for that is now gone. Step 2 is about clear-eyed assessments about what maximizes your chances of getting step 1 done.

The ExComm held divergent views on the substantive effect of the missiles on the East-West military balance. Secretary of Defense Robert McNamara held that the missiles had zero net effect, given that the Soviets had intercontinental ballistic missiles (ICBMs) that could target the United States from Soviet territory anyway. The military brass felt otherwise, that Soviet missiles just off the U.S. coast would substantially enhance Soviet military power, especially since the Soviet strategic forces at that point depended overwhelmingly on bombers with a long and difficult flight path to the United States. All agreed, however, that the missiles must go.

Sachs, Jeffrey. To Move The World: JFK’s Quest for Peace . Random House. Kindle Edition. (Location 548)

“How should we go about getting to our goal?” is the difficult, contentious issue. This is where your expertise is called upon as a public policy expert.

This forced a thorough review of options, and it allowed some time for communication between Kennedy and Khrushchev, albeit through a laborious and confused process of letters, public pronouncements, telegrams, and messengers. It gave time for heated emotions—panic, fear, and desire to lash out at the adversary—to be kept in check so that reason could be invoked. “Slow” rational thinking was given time to dominate the “quick” emotional thinking.

Sachs, Jeffrey. To Move The World: JFK’s Quest for Peace . Random House. Kindle Edition. (Location 558)

It sounds peaceful and professional – “a thorough review of options”. But this is where you have to:

  1. Really, really know your subject, or admit that you don’t and get out of the way.
  2. Have a strong point of view on the basis of your expertise, and defend it passionately. Arguing at this stage isn’t just fine, it is expected.
  3. The really, really difficult bit: figure out where your argument is weak, and listen to folks on the other side of this issue. What are they saying that is worth including in your recommendation? What are they saying that makes you want to refine/exclude parts of your proposal? Can a happy medium emerge? Remember, The Truth Always Lies Somewhere In The Middle.

Even if you think the article is mostly fluff, I found this excerpt relevant for this blogpost:

Before making up his mind, the president demands hours of detail-laden debate from scores of policy experts, taking everyone around him on what some in the West Wing refer to as his Socratic “journey” before arriving at a conclusion.
Those trips are often difficult for his advisers, who are peppered with sometimes obscure questions. Avoiding Mr. Biden’s ire during one of his decision-making seminars means not only going beyond the vague talking points that he will reject, but also steering clear of responses laced with acronyms or too much policy minutiae, which will prompt an outburst of frustration, often laced with profanity.

https://www.nytimes.com/2021/05/14/us/politics/joe-biden-policy-decisions.html

And finally, for those of you who are hoping to get into public policy and are currently studying economics:

I would like economists to be working with engineers, to be working with public health, to be working with the medical professionals so that we’re actually working on the real systems of our time and adding our pieces to that, understanding and studying that so that we have an answer to robotics, not a pure theoretical model, which is nice and fun, but something that can be helpful.

https://conversationswithtyler.com/episodes/jeffrey-sachs/

The point isn’t to build a theoretically correct model. The point is to build a model that maximizes the chances of getting to the goal we established in step 1: What are we trying to do here?

Or put another way, if you have to choose between being theoretically correct and doing whatever it takes to achieve step 1, choose the latter. If I had to choose between the two, that is what I would do.


There’s tons of other books, papers, blogs and newsletters to read on this topic, of course. If you asked me to pick just one, make it Anticipating the Unanticipated. Spend the summer reading every single one of their posts and taking (and then publishing!) notes. Better, if you ask me, than any other way to learn.


[Thank you to all those who reached out to check if I was ok. It means a lot. There’s been a covid death in the family, and a covid scare. We’re getting back to a semblance of a routine, but it has been tough and slow going. Please, stay safe, all. And again, thank you for your wishes.]

In Memoriam: Robert Mundell

Robert Mundell passed away earlier this week. Most macroeconomics students will know of the Mundell-Fleming model, of course, while a lesser number may have heard of his work on optimum currency areas.

Here is a relatively old article about him from the New York Times:

”In the very short run, I’m a Keynesian,” he said. ”In the intermediate run, I’m a supply-sider, and in the long run I’m a monetarist.”

https://www.nytimes.com/1986/01/12/business/eccentric-economist-robert-a-mundell-supply-side-s-intellectual-guru.html

And here is a summary by The Economist on the impossible trilemma:

HILLEL THE ELDER, a first-century religious leader, was asked to summarise the Torah while standing on one leg. “That which is hateful to you, do not do to your fellow. That is the whole Torah; the rest is commentary,” he replied. Michael Klein, of Tufts University, has written that the insights of [[international macroeconomics]] (the study of trade, the balance-of-payments, exchange rates and so on) might be similarly distilled: “Governments face the policy trilemma; the rest is commentary.”

https://www.economist.com/schools-brief/2016/08/27/two-out-of-three-aint-bad)

Here is Paul Krugman, first rhapsodizing about the Optimum Currency Area1:

First up, Mundell, whose classic 1961 paper argued that a single currency was more likely to be workable if the regions sharing that currency were characterized by high mutual labor mobility. (He actually said factor mobility, but labor is almost surely the one that matters). How so?

https://krugman.blogs.nytimes.com/2012/06/24/revenge-of-the-optimum-currency-area/

.. and then rhapsodizing about Robert Mundell and his early theoretical work:

Those of us who work on international monetary theory have been wondering for a decade when Robert Mundell would get his richly deserved Nobel Memorial Prize in Economic Sciences. Mundell’s work is so central to that field, so “seminal”–an overused term that really applies here–that on many disputed issues his ideas are the basis for both sides of the debate. But a layperson might be confused about exactly what Mundell and his prize are really about.

https://slate.com/business/1999/10/o-canada.html

This is the NYT obituary:

In his 2006 interview, he said that winning the Nobel “was particularly pleasing to me as my work has been quite controversial and no doubt stepped on a lot of intellectual toes.”
He added: “Even more than that, when I say something, people listen. Maybe they shouldn’t, but they do.”

https://www.nytimes.com/2021/04/05/business/economy/robert-mundell-dead.html

And finally, the Washington Post’s obit:

Dr. Mundell gave one of the more unusual — and crowd-pleasing — acceptance speeches in the history of the Nobel Prize. He ended his remarks by singing a few bars of the hit Frank Sinatra song “My Way,” an allusion to the independent-minded approach that he brought to his life and work.

https://www.washingtonpost.com/local/obituaries/robert-mundell-dead/2021/04/06/36793d92-96d4-11eb-b28d-bfa7bb5cb2a5_story.html

RIP.

  1. This essay, along with the tables, used to be freely available on the NBER website. No longer, and I don’t know why. My apologies[]