Notes on “Snap-Back and Gone-Forever Goods”

The actual title is a bit longer than that: “Snap-Back and Gone-Forever Goods: Understanding the COVID Recession’s Economic Winners and Losers“.

Tyler Cowen had shared this link on MR a couple of days ago, and I really liked this blog post for two reasons: one, a great framework that I can use in the coming semester for teaching Principles of Economics (more about the framework in a bit), and two, it speaks about higher education towards the end of the post.

Let’s get started:

  • “Due to the impending COVID pandemic, businesses, except for essential ones, simply had to shut down. People were essentially forced to stop buying things they actually wanted to buy.”
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    It almost sounds trite put this way, but us economists are so used to thinking in terms of whether it is a “demand-side” problem or a “supply-side” problem that it makes sense to remember this: this one is neither! Folks are (more than) willing to supply, and folks are (more than) willing to buy – in most cases. We’ve imposed on ourselves, as a society, restrictions that prohibit such exchanges from taking place.
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    There will be knock-on effects, some of which are already visible. And that will then take us into familiar territory (supply shock, demand shock etc). But a crisis due to a pandemic is fundamentally different!
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  • First is the distinction between purchases of what I’ll call “Snap-Back” goods and services and those that are “Gone Forever.” In the Snap-Back category are things that we couldn’t buy during the heaviest COVID lock-down period, but these purchases were simply delayed.
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    Simple frameworks are such lovely, beautiful things. I think all of us in India experienced “Snap-Back” goods – and to a lesser extent, services – with the winding down of the nationwide lockdown. The number of Amazon deliveries in my own household is proof enough for me. Of course, services such as the ones offered by The Urban Company, for example, is another story altogether – but still, the point remains. “Snap-Back” goods ought to be a thing, especially in 2020.
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  • ““Gone Forever” goods and services, in contrast, are just like the term suggests: gone forever. Like me, you may have foregone several haircuts during shelter-in-place because you didn’t want to get (or give) coronavirus to your barber.”
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    Anybody who knows me will know that haircuts isn’t the most appropriate example! But enough of splitting hairs, the point is well taken. There are certain goods and services (am I wrong in thinking that it will be mostly services) that will be “gone forever”.
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    That being said, the nomenclature chosen here is slightly unfortunate. One might get the impression that the good or service in question will not be provided at all, except that is of course not true. It is just the case that business for the barber in question was bad during the lockdown. Fingers crossed, business will return to normal once things get back to normalcy – whenever that may be. And of course, if things open up without a vaccine/cure, business will be lower than would otherwise have been the case. But it still will not be “Gone Forever”.
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  • “Economic booms and busts cause average incomes to rise and fall. As a result, businesses that sell a good or service that people purchase during good times and bad, like haircuts and toothpaste, are more insulated from recessions. Businesses that sell the Fountain Powerboat 32 Thunder Cat speedboat (see below, retail price $400,000), and other goods whose sales depend on people having a lot of money on their hands, fare poorly in a recession.”
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    Tyler Cowen himself had made the point some months ago that certain business will probably not outlast this recession, and mentioned how that may not, on balance, be all that bad a thing. I’m paraphrasing, see the exact quote here. Would the world be worse off if we produced less Fountain Powerboat 32 Thunder Cat speedboats in the years to come?
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    To be clear, I do not at all mean to suggest that Bruce Wydick will lament the potential passing of these speedboats. I am simply suggesting that some luxury goods not being produced may not be the worst thing ever (and yes, I am well aware of the macroeconomic implications).
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Sourced from: http://www.acrosstwoworlds.net/?p=1176
  • This, above, is the simple framework I was referring to at the start of today’s blog post. 2×2 matrices are far too prevalent in management schools, and not prevalent enough in economic textbooks, and this was therefore very welcome indeed. But not just because of that! It really does help clarify my thinking.
    ..
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    I need to note that Bruce Wydick has explained what income elasticity of demand is before showing this figure. I haven’t, but a simple Google search will help you learn what the income elasticity of demand is. Alternatively, click here to read about it, or watch this video.
    ..
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  • First things first: it is interesting that all of the upper left quadrant is services, and not goods. In fact, I’m hard pressed to think of a single good that would fall in this bracket. Maybe seasonal fruits that you won’t get again until the same season comes back next year (mangoes being a classic example in India, of course). Can you think of any other goods that are “gone forever”?
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  • And now onto higher education.
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    “Enrollments in higher education are typically thought of as a normal good, and estimates of income elasticity are typically slightly inelastic (slightly greater than 1.0), meaning that for each 1 percent increase (decrease) in income, enrollments increase (decrease) by about 1 percent.”
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    That’s from this link, which I got by reading the blogpost we’re taking notes for. Worth keeping in mind for what follows.
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  • “What this means is that the data show college-bound kids keep going to college even in recessions.”
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    That quote is in the context of the income elasticity of education. I have two points to raise in this context, though:
    • First, as Bruce Wydick himself explains earlier on in the blogpost, this year is an example of supply and demand being willing, but markets still not clearing. That is, this time is different. Under normal circumstances, sure – but enrollment may drop because of other factors than change in income.
    • Second, bundling! When you buy an education from a college, you’re buying the signal that you have learnt, you’re buying the learning itself and you’re buying the peer networks you develop because you attend college.
      The current pandemic means that you need depend on college for only the first of these three goods: learning itself, if it is to be online, can happen through multiple online providers, and peer networks in the physical sense is unlikely to happen at least through 2020.
    • Combine the inevitable drop in nationwide income with the fact that only one out of the three “goods” from a college being up for sale, and you reach the conclusion that enrollment will likely suffer this year.
  • The reduction will of course be different for different countries, and different once again for colleges within the same country. But at the margin, my model of the world tells me to expect either a lower number of applications, or a lower number of enrollments – or both.
  • But this article is worth a read and a bookmark for the framework alone!

Notes from the Cowen-Roberts Talk about the Corona Virus

Russ Roberts and Tyler Cowen got together to talk about the corona virus some days ago, and what follow are my notes from reading the transcript. If you want to listen to the talk, or read the transcript, here is the link.

Excerpts above, my notes pertaining to the excerpt below.

 

I think Skype coffee is a really good thing. I recommend that to everybody. People you might normally have coffee with, get a cup of coffee and sit on Skype or Zoom and chat with them, and that way it’s not so bad. It’s not great, but it’s not so bad.

Skype or Zoom, and coffee or beer. Whatever works best for you, but socializing is important, and be sure to not under-rate it.

The understanding that it may be really some period of time before you are able to resume normal movements and interactions. Any given day it may seem fine, but what mental readjustment are you making?

The reason I excerpted this is because people here in India – at least the ones I speak to – seem to assume that everything will be back to normal in a matter of days, at worst a couple of weeks. I wish that were the case, but we’re going to be in for the long haul. At the absolute least, a month – almost definitely more. That’s the kind of timeline we’re looking at.

But nonetheless, if something is doubling every five to seven days, some very bad events are not so far away. But because they’re not vivid people, including a lot of economists I know, they’re not able to make that mental leap. I think my background with thinking about economic growth is a significant reason why I think I’ve seen some of the dangers here coming.

Take a look at the chart below (this is from Gapminder):

In particular, take a look at the horizontal axis. Each tick is a doubling, as opposed to the vertical axis, where each tick is the standard 10 units. The bubbles on the right are waaaaaay further apart than are the bubbles on the left. I said that, and you understood it, but your brain refuses to acknowledge or remember it, because we are a visual species, not a mathematically oriented one. Exponentials are hard for us to grasp, and we therefore can’t understand what doubling every five days means.

There seem to be many open questions, but the risks do seem to be rising and I would include the global front, the economic front. Tensions between the United States and China are much worse than they had been. China is calling it a virus from America. Trump is calling it the Chinese virus. It’s even possible, that’s the single worst outcome of all of these events.

If you’re confused about the how and the why, here’s a tweet:

And it’s as if we’re trying to put the economy in a coma, to cite an analogy Larry Summers gave. So I think we should be trying to put the economy in a coma. I’m okay with government doing that, but I think personally we need to be doing that quicker than what the government is up to.

In this blog post that I put up a while ago, a student had asked about how long we can afford a lockdown, implicitly asking what economic costs we were willing to tolerate to defeat this. Tyler Cowen’s response above is effectively saying that there’s no limit, no matter what the cost, this needs to be defeated. Or, if you want another way to put it: economic prosperity is the means to an end, not an end in itself.

I know one of my proposals is we should have things that make it more fun for people to be at home. So some of the entertainment companies are having free streaming on cable of some of their back catalog. Maybe that’s a marginal effect — but if it saves a few lives? So whatever we can do so that people are willing or indeed maybe even in some cases eager to stay home, making childcare issues easier.

Restaurants should be shut, but not takeaways, bars should be shut, but delivery of alcohol should be legalized, internet broadband should be a critical service, Netflix et al could chip in with some shows being made freely available – and so on. Note that there is always YouTube!

That’s the actual destruction going on is the relationships, the organizational capital, the intangibles that will decay. Not over two weeks, probably not over four weeks but over four or five months or longer. Then I think that’s a matter really of great concern.

I have only glanced through the book, not read it in detail, but reading this excerpt reminded me of The Third Pillar, by Raghuram Rajan.

This is from a Prakash Loungani review of the book: “Still, Rajan argues, markets and the state have usurped communities’ power, and the balance needs to be reset. Power must devolve from global and national levels to the community. Rajan notes that as machines and robots begin to produce more of our goods and services, human work “will center once again around inter-personal relationships.” Communities could well be the workplace of tomorrow.”

Not only is Rajan almost certainly right, but the current virus allows for an opportunity to the third pillar to be stronger than before. Governments and markets by themselves will struggle, community needs to come to the fore.

So I think the reopening decisions, especially in more bureaucratic corporations, it will be very hard for everyone to sign off and agree. Yes, we’re going to go ahead. There’s going to be an open Disneyland again. We’re going to have spectators at NBA games. The risk of bad publicity, social media storms against companies whether true or not, someone might have died as a result of going to a game. Over some time horizon social norms may shift and a lot of people might just say, “Look, we’re just going to take these chances and deal with it.” But I don’t think we’re close to that. And certainly, our legal system is not close to that. And human resources departments are not close to that.

You are responsible for five people’s jobs, and you need to sign a letter authorizing them to come back to work in mid-April. If you sign that letter, and they come to work, and they get the corona virus, then is it on your head? Would you sign that letter? What if it’s five hundred? Five thousand? 1.3 billion? Again, this will almost certainly last for more than two weeks.

I think the upside is to believe that at least biomedicine will be far swifter and better funded and less regulated, in the good sense of that word, and our response capabilities, when all this is over, for the next event will be far, far greater. We may overreact in some 9/11 kind of ways like we’ve done arguably with airport procedures, but if there’s one part of the economy that will get a huge, beneficial boost, I think it is our biomedical capabilities and our public health infrastructure.

If I may offer my two cents on this, specific to India: offices will now be very, very reluctant to buy desktops for their employees. I work in a college, and can attest to how many jobs are literally tied to their desk. Not as important as bio-medicine, but a change nonetheless. Second – and I hope this is true – classes will not be the same ever again.

Given that most people are not at all harmed by coronavirus, the safety of the vaccine has to really be very high. Right?

First, do no harm!

I think the thing I’m recommending for a lot of people now is to find a sphere of activity, no matter how small or how local, that you feel you can control and you can do at home and you can contribute to. This feeling of powerlessness may set in, that will cause people to panic more or become too depressed or just make them much less productive, or spread to their families, or maybe cause them to go out and want to get drunk and become a spreader in some manner, so really to think long and hard.

Teach something to somebody. If nothing else, teach into the void: create YouTube videos on a subject that you are an expert in. That’s my personal recommendation.

The degree of optimism or pessimism, it really seems to matter for economic stimulus.

Yup.

Buy the patent rights at auction, give them a huge prize, tens of billions of dollars, if they deserve it, I’m all for this. Even if you think it has no impact this time, this is not our last pandemic. It will matter for the next time around. I think those prizes should be large and credibly promised, and I would like to see us get on this.

Getting the incentives right for designing expensive-to-produce but needed-by-everybody medicines is very, very tricky. Even if you have read the entire transcript, please go back and read this section again.

Like they’re taking tools out of the toolbox from the last crisis. Things they thought should have been done and weren’t and saying now is the time to see I was right all along. It makes me very nervous. I’m seeing high levels of epistemic non-rationality. But that said, I really am not here trying to argue for doing nothing. I don’t think we can let all the cards fall to the ground. What’s your view on that?

I think of this as a statistician. When we have guests over, I and my wife often argue about how much food we should make/order. I usually argue for making too much, and she worries about leftovers. But here’s the thing: it’s almost impossible to get it just right. It’s a very hard problem to solve! So, if you must make an error, which one? Order too much or too little?

It’s the same problem at play here. We’re never – never – going to get fiscal policy just right. Give up that dream right now. You can either err by giving too much fiscal aid, or too little. What would you rather do? My personal opinion: the same as with the food. I’d rather have too much fiscal policy than too little. This time, you see, is different.

But that being said, the specifics are going to be a headache. Does anybody have the answers? Right now, no.

I think some schools will do online education well for a subset of classes and we’ll end up in a world where 20% of what is now done face to face will be done online and that will be cheaper and better. I fully get, you cannot do a face to face discussion humanities class that way, but I think we’ll see much more online education.

Again, that’s a good – nay, wonderful! – thing.

Going around and talking about redistributing the wealth, letting in so many more immigrants, whatever you think of those points of view, I think they will have much, much less social impact and we will be more inward looking, more nationalistic, less cosmopolitan. I think you’ll see this already.

Tribalism will rise, in short. And that’s a horrible – and tragic! – thing. But he’s right: it will rise.

I think there’ll be a huge wave of promiscuous sex once there’s the first break in the virus for instance.

Nothing will ever explain the principle of diminishing marginal utility better. Ever. Especially to undergraduate students.

Don’t trust everything you read out there. The degree of misinformation is very high. The degree of uncertainty from the best and most reputable sources is very high. There’s no magic bullet on how to figure out what’s going on. I can’t quite say, “Oh, trust the authorities.” It’s not exactly how it’s gone, but there’s not any single way to really know what’s happening. That’s very frustrating. I would say do your best and keep in mind that’s a highly imperfect endeavor. There’s a lot you won’t know and some of the things you think you know are probably wrong.

Potentially the most underrated part of this conversation, and I’ll expand on this. First the obvious: treat everything you receive on WhatsApp as a joke. Discount most of what you read, particularly when received as forwards, in emails, in discussions. But, and this is where it gets hard, even stuff that you read on really reputed sites, treat with a pinch of salt. Not because the people who came up with that content want to lie to you, but because there is nobody on this planet who really and truly knows everything.

And that applies to this site too, of course. Read everything, trust nothing, and tread carefully. Macro is easy in comparison.

Once again, the link to the conversation.

 

 

 

 

 

Econ101: Policy Responses to a Pandemic

If you haven’t played it already, go ahead and give this game a try: The Fed Chairman Game. I have a lot of fun playing this game in class, especially with students who have been taught monetary policy. It usually turns out to be the case that they haven’t understood it quite as well as they think the have! (To be clear, that’s the fault of our educational system, not the students.)

But the reason I started with that is because the game always throws up a scenario that mimics a crisis, and asks you what you would do if you were the Chair of the Fed.

In this case, policymakers the world over are now staring at a very real crisis, and they need to be asking themselves: what should we do?


 

There are two broad answers, of course: monetary policy, and fiscal policy.

The Federal Reserve has cut interest rates to zero, and while it has other tools to stimulate the economy, a crisis like this requires fiscal as well as monetary responses. The legislation passed thus far has been important, but another round of fiscal policy will be required immediately to fully address this crisis.

A robust fiscal response can provide income support to households, ensure broad and continuous access to safety net programs, provide incentives for employers to avoid layoffs, provide loans to small businesses, give liquidity cushions to households and firms, and otherwise stimulate the economy.

That’s a write-up from Brookings. The specifics follow in that article, but the article makes the point that more of the lifting will need to  be done by fiscal, rather than monetary policy. And that is true for a variety of reasons,  which the article does not get into, but long story short – fiscal, more than monetary.

But, ok, fiscal policy of what kind? Should we give money to firms or to workers? Here’s Paul Krugman with his take…

And here’s Alex Tabarrok with his response:

So what’s the correct answer? Well, as we’ve learnt before, and will learn again, macro is hard! In an ideal world, all of the above, but as is manifestly clear, we are not in an ideal world. If we must choose between giving money to firms or to people, to whom should we give it? My opinion? People first, businesses second. This is, of course, a US centric discussion, what’s up with India?


 

Here’s, to begin with, a round-up from around the world – you can search within it for India’s response thus far.

Calls are getting louder for governments to support people and businesses until the new coronavirus is contained. The only questions are how much money to shovel into the economy, how to go about doing it, and whether it will be enough.

Already, officials from Paris to Washington DC are pulling out the playbook used in Asia for slowing the spread of Covid-19: they’re restricting travel and cracking down on public gatherings. While those measures have the potential to reduce deaths and infections, they will also damage business prospects for many companies and cause a synchronized worldwide disruption.

Here’s the FT from two weeks ago about the impending slow down:

Venu Srinivasan, whose company TVS is one of India’s largest makers of motorcycles and scooters, said the business had lost about 10 per cent of production in February owing to a lack of Chinese-made parts for the vehicles’ fuel injection system. He added that TVS has now managed to find a new supplier.

But Mr Srinivasan said he was bracing for India’s recovery to take longer than anticipated. “One would have expected a V-shaped recovery, but instead you have an L shaped recovery,” he said. “It’s been the long haul.”

R Jagannathan in the LiveMint suggests this:

This is how it could be designed. Any unemployed urban youth in the 20-30 age group could be promised 100 days of employment and/or skilling options paid for by the government at a fixed daily rate of ₹300 (or thereabouts, depending on city). At an outlay of ₹30,000 per person annually, the unemployed can be put to work in municipal conservancy services, healthcare support, traffic management, and other duties, with the money also being made available for any skill-acquiring activity chosen by the beneficiary (driver training for Ola-Uber, logistics operations, etc). All companies could be given an opportunity to use the provisions of the Apprentices Act to take on more trainees, with the apprenticeship period subsidized to the limit of ₹30,000 per person in 2020-21. If the pilot works, it could be rolled out as a regular annual scheme for jobs and skills. Skilling works best in an actual jobs environment.

 

He also mentions making the GST simpler, which the Business Standard agrees with:

Certainly, the rationalisation of GST will also affect government revenues. However, a simpler and more transparent system would allow greater collection and reduce evasion. The government will receive a windfall this year from lower crude oil prices. The moment to move on the structural reform agenda is now. The GST Council has done well to address the inverted duty structure in mobile phones. Further rationalisation will give confidence to the market that the government is serious about reforms. It was promised that GST would remain a work in progress, and that the GST Council would act often to improve it. So far, however, the changes have been marginal and haphazard. A more structured and rational approach, which outlines a quick path to a single rate, would pay dividends for the economy in the longer run. It would also be an effective way to manage the immediate effects of a supply shock such as is being caused by the pandemic.

Also from the Business Standard, a report on the government now considering (not happened yet) relaxing bad loan classification rules for sectors hit by the corona virus. That’s pretty soon going to be every sector!


 

Assorted Links about the topic – there’s more to read than usual, please note.

Here is Tyler Cowen on mitigating the economic impacts from the coronavirus crisis.

Here’s Bill Dupor, via MR, about the topic:

First, incentivize behavior to align with recognized public health objectives during the outbreak.

Second, avoid concentrating the individual financial burden of the outbreak or the policy response to the outbreak.

Third, implement these fiscal policies as quickly as possible, subject to some efficiency considerations.

Again, via MR, New Zealand’s macro response.

Arnold Kling is running a series on the macro response to the crisis.

Claudia Sahm proposes direct payment to individuals:

This chapter proposes a direct payment to individuals that would
automatically be paid out early in a recession and then continue annually
when the recession is severe. Research shows that stimulus payments that
were broadly disbursed on an ad hoc (or discretionary) basis in the 2001 and
2008–9 recessions raised consumer spending and helped counteract weak
demand. Making the payments automatic by tying their disbursement to
recent changes in the unemployment rate would ensure that the stimulus
reaches the economy as quickly as possible. A rapid, vigorous response to
the next recession in the form of direct payments to individuals would help
limit employment losses and the economic damage from the recession.

Here are the concrete proposals, the entire paper is worth a read:

Automatic lump-sum stimulus payments would be made to individuals
when the three-month average national unemployment rate rises by
at least 0.50 percentage points relative to its low in the previous 12
months.
• The total amount of stimulus payments in the first year is set to
0.7 percent of GDP.
• After the first year, any second (or subsequent) year payments would
depend on the path of the unemployment rate.

 

Macroeconomics IS HARD!

Economics in the times of COVID-19, there is already a book. I learnt about it from Tim Taylor’s blogpost. I have not read the book, but will soon.

The NYT, two weeks ago, on the scale of the problem facing policymakers.

 

Scott Sumner on Parasite, Paris as a 15 minute city, and then the Coronavirus!

Five articles that I enjoyed reading this week, and figured you might too:

I’d actually prefer they not allow foreign language films in the best picture category, as they’ll never be judged on a level playing field. Alternatively, have three Oscars; best high-brow film, determined by highbrow critics. best middlebrow film, determined much like the current Best Picture, and best popular film, determined by box office receipts. The same film would be allowed to compete in all three categories.

The Godfather would have won all three, but I’m not sure any other film would have (Birth of a Nation?, Lord of the Rings III?)

Rear Window would have won highbrow and popular, but it wasn’t even nominated for Best Picture. LOL. Middlebrow people are the worst.

Scott Sumner being provocative – but notice that this is kind of how Filmfare Awards work!

Paris, the 15 minute city:

Even in a dense city like Paris, which has more than 21,000 residents per square mile, the concept as laid out by the Hidalgo campaign group Paris en Commun is bold. Taken at a citywide level, it would require a sort of anti-zoning—“deconstructing the city” as Hidalgo adviser Carlos Moreno, a professor at Paris-Sorbonne University, puts it. “There are six things that make an urbanite happy” he told Liberation. “Dwelling in dignity, working in proper conditions, [being able to gain] provisions, well-being, education and leisure. To improve quality of life, you need to reduce the access radius for these functions.” That commitment to bringing all life’s essentials to each neighborhood means creating a more thoroughly integrated urban fabric, where stores mix with homes, bars mix with health centers, and schools with office buildings.

 

In any crisis, leaders have two equally important responsibilities: solve the immediate problem and keep it from happening again. The COVID-19 pandemic is an excellent case in point. The world needs to save lives now while also improving the way we respond to outbreaks in general. The first point is more pressing, but the second has crucial long-term consequences.

Bill Gates on not just how to contain the coronavirus, but how to build better capacity for the next one. Worth two excerpts:

Pandemic products are extraordinarily high-risk investments, and pharmaceutical companies will need public funding to de-risk their work and get them to jump in with both feet. In addition, governments and other donors will need to fund—as a global public good—manufacturing facilities that can generate a vaccine supply in a matter of weeks. These facilities can make vaccines for routine immunization programs in normal times and be quickly refitted for production during a pandemic. Finally, governments will need to finance the procurement and distribution of vaccines to the populations that need them.

Check the info graphic out in the article as well.

Goldman Sachs now forecasts (nowcasts) -6% q/q AR growth in Q1, down from -0.5%.

Hmmmmm.

Speaking of which

2020 @PredictIt recession prediction market probabilities are now above 40% amid #Coronavirus concerns.

Quick Notes from Tyler Cowen’s Interview of Garett Jones

We’ll see how this goes, but a very quick introduction before we get started. A friend, Aadisht Khanna, has a blog with a very ambitious aim (and name): Aadisht Logs Everything. Every now and then, I speak to him about some of these posts, and we end up having a lot of fun talking about stuff we get reminded of as a result of he writing these posts and I speaking to him about them. They’re all available here, should you want to check it out.

But why not try and take quick notes on everything I see, read and here? The idea isn’t to write long and detailed posts – that’s happening on the blog, slowly but surely.

But an ongoing repository of my notes on stuff I have read, listened to, viewed, not to mention conversations I’ve been a part of – maybe that’s a good idea too? We’ll see how it goes.

We begin with the thing I read the most recently, which is an episode from what is probably my favorite podcast: Conversations with Tyler.

The episode I read most recently was the one with Garett Jones. Here we go.

  1. The first section was essentially about getting incentives right. The idea is simple, the devil lies in the details is the big takeaway for me, and that applies to practically everything in life.
  2. New Zealand’s contract for its central banker is a form of skin in the game, and that is a gloriously unexplored idea. My own take on this is what if professors were paid a part of their salary on the basis of students who chose to attend their class, and all classes were made optional in terms of enrollment and attendance? Refer to point 1 before you rush to criticize!
  3. The Rajya Sabha elections are staggered in much the same way, of course, and as I understand it, for the same reason as staggered elections in the House of Representatives, and I agree: it is an excellent idea.
  4. About Garett Jones and Tyler Cowen’s discussion re: governance in Europe, does it imply too much centralization, and isn’t that, on balance, a bad thing? Need to read up more about this.
  5. And Scott Sumner’s question about Switzerland is along those lines only, no?
  6. I haven’t read the book in question, but I found it interesting that one of the chapters was titled “The Big Benefits of a Small Increase in Democracy”. Either extreme isn’t desirable, in other words: not too much democracy, but not too little of it either. The Truth Lies Somewhere in the Middle!
  7. This was immensely thought provoking for me, along so many dimensions:

    That’s true, but that’s partly because the rich white elites are acting as the self-appointed representatives of other individuals and groups in society.

  8. Again, thought provoking, and the basis on which the point was made is added to the must-read list:

    Once he pointed out, in sort of the climax of the book, that long-run cooperation focusing on some kind of cultural norm and infusing that throughout the system was crucial to firm success, and that failed firms will be those often that failed to coordinate on a good equilibrium, I decided that was central to seeing not just how firms work, but how societies work as a whole.

  9. If you ask me, Seth Godin and Tyler Cowen should have a conversation, and we should get to listen to it/read it. Here’s one reason, here’s the second, and what follows is my third:

    JONES: Yeah, that’s the thing — figuring out which things within capitalism — what is it about living in a free society with competitive markets where, at least in our youth and middle age, we feel a need to sell ourselves as valuable creators. There’s something about that that probably is what’s most valuable for boosting cognitive skills. It’s a sort of demand-side desire to try to use our minds in socially productive ways. And I think in communism, we can —

    COWEN: So marketing makes us smarter?

    JONES: That’s what I would say, yeah.

  10. Chad Jones, Paul Romer and diminishing returns reminded me of this book, and this TED talk.
  11. Isn’t this one more reason to admire Tyler Cowen more as well?

    Oh, that’s so hard. I’d say Buchanan because he . . . Tullock had more weird ideas. Buchanan took the time to do something that I personally am not that skilled at and not that interested in, which is building an intellectual empire, building an organization and a culture that shares those ideas. And that’s really how you get important ideas into an ecosystem, by taking the time to build an organization, to build a culture, to work with people, and Buchanan did that. That gave him a power that Tullock couldn’t quite have.

  12. And isn’t this a a macro-description of point 11, applied to a nation?

    There is this case that America, at its top 20 percentile of experience — it’s been a nation that’s been built on a hope and vision, not American exceptionalism in that it’s something you’re endowed with, but it’s an American exceptionalism in the sense that it’s something that people create. And a sense of adventure that is central to the American experience. You could think of it as a pioneer. It’s a mixture of a pioneering spirit with an element of strong social capital.So to me, of course, the Mormons then are the embodiment of this. They’ve got this strong social capital, strong enough to stand up to other people, but at the same time, willing to take huge risks and endure great persecution in order to build a new world.And that’s an extreme version of what Americans have done for quite some time. It’s this rare blend of social capital and adventurousness at its best times. And that’s not just a 0.1 percent experience; it’s more like 20 to 30 percent of the US experience. And that’s something that a lot of countries just never get.

Ec101: Choices matter!

We’ve, in our Thursday posts this year, learnt about incentives and costs. But, and this is a really, really big “but” – they become operational only when we live in a world where we’re able to choose.

Tyler Cowen and Alex Tabbarok – two people who have probably done more for educating people in economics than anybody else over the last thirty years or so – have written two of the best textbooks on economics available anywhere – one on micro and the other on macro.

In the book on microeconomics, they summarize ten different “big ideas” in economics: incentives, the invisible hand is the best kind of magic*, trade-offs matter, thinking on the margin matters, trade matters, wealth matters, institutions matter, business cycles are unavoidable, printing more money will lead to inflation and central baking is hard.

*I’ve paraphrased practically all of the big ideas, but this in particular is my phrasing, not theirs.

Two other asides before we proceed: in retrospect, it is interesting (at least to me) that at least one of their PhD’s (Tyler Cowen’s) and quite a few of their books are based literally on nothing more complicated than an exposition of these big ideas. There’s a lesson in there somewhere.

Also, they say that the biggest idea of them all is that economics is fun. I’d paraphrase that too: learning about the world is fun, and economics is a great tool to use towards that end.

Now, that allows for a neat segue to the topic du jour. At the very start of the book, even before the table of contents, they provide their definition of economics, one that I agree with wholeheartedly: economics is the study of how to get the most out of life.

Here’s the two word version: choices matter!

Unless we live in a society that is free to choose, at an individual level or otherwise, none of the other big ideas even come into play. So, to me, economics is first and foremost about being free to choose – and then about the benefits and costs of the choices that you make.

Which, I’d argue, means that learning about choices is plenty important. Ergo, this post.

  1. First things first. What is choice?
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    I chose (see what happened there?) this Quora post not because it is the “best”, but simply because it is so typical. Here’s what I think choice is: it is an admission of the fact that you can’t have everything. A particularly relevant example for me: what to eat from a buffet at a five star restaurant? With every passing year, “everything!” becomes an increasingly unrealistic answer. So choose those dishes that are likely to taste the best (maximizing happiness), or those dishes that are likely to cause the least harm (minimizing unhappiness) along some dimensions such as spiciness, oiliness or what have you.
    Or hey, do both at the same time! Choose the dish that is likely to taste the best and the dish that is likely to do the least harm. That’s half your micro paper right there – the rest is just math and diagrams. (I am kidding, of course, but only a little bit.)
    Choice is an admission of the fact that you can’t have everything, but that’s a good thing! It forces you to go with the best. Which paintings should you look at when you’re at the Louvre? “Every single one!” is unrealistic. Force yourself to choose, therefore, the very best of the lot. Constraints help you understand your own tastes better: aesthetics is, among other things, a matter of acknowledging the existence of constraints.
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  2. So having too many choices is a bad thing? It would seem so:
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    “It all began with jam. In 2000, psychologists Sheena Iyengar and Mark Lepper published a remarkable study. On one day, shoppers at an upscale food market saw a display table with 24 varieties of gourmet jam. Those who sampled the spreads received a coupon for $1 off any jam. On another day, shoppers saw a similar table, except that only six varieties of the jam were on display. The large display attracted more interest than the small one. But when the time came to purchase, people who saw the large display were one-tenth as likely to buy as people who saw the small display.”
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  3. But hang on. Of what use is an economics theory that doesn’t have a on-the-other hand angle? Tim Harford, as is so often the case, to the rescue.
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    “But a curious thing happened almost immediately. They began by trying to replicate some classic experiments – such as the jam study, and a similar one with luxury chocolates. They couldn’t find any sign of the “choice is bad” effect. Neither the original Lepper-Iyengar experiments nor the new study appears to be at fault: the results are just different and we don’t know why.”
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  4. And on a related note, have you heard of Herbert Simon and satisficing? This excerpt is from a Wikipedia article on Barry Schwartz’s book, The Paradox of Choice, but it is actually about Herbert Simon.
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    “A maximizer is like a perfectionist, someone who needs to be assured that their every purchase or decision was the best that could be made. The way a maximizer knows for certain is to consider all the alternatives they can imagine. This creates a psychologically daunting task, which can become even more daunting as the number of options increases. The alternative to maximizing is to be a satisficer. A satisficer has criteria and standards, but a satisficer is not worried about the possibility that there might be something better. Ultimately, Schwartz agrees with Simon’s conclusion, that satisficing is, in fact, the maximizing strategy.”
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  5. And the final word goes to Tyler Cowen. Or is it Herbert Simon all over again? Choices, choices.
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    “What if you asked people the following: do you wish to choose your own means of limiting your (subsequent) choices, or do you wish to let someone else, perhaps the government, do the work? I suspect the answers would overwhelmingly favor the former option, namely voluntary choice at the meta-level. And if you reexamine the experiments mentioned above, they are all about ways in which people voluntarily limit their own choices. Maybe you don’t wish to run your own cancer treatments, but you wish to choose the doctor who will.”

 

Ec101: Understanding Opportunity Costs

I mean, come on. Who doesn’t understand opportunity costs?

The cost of the next best alternative, of the opportunity foregone. We could have told you this in our sleep.

So answer me this (and please don’t cheat):

“Imagine that you have a free ticket (which you cannot resell) to see Radiohead performing. But, by staggering coincidence, you could also go to see Lady Gaga – there are tickets on sale for £40. You’d be willing to pay £50 to see Lady Gaga on any given night, and her concert is the best alternative to seeing Radiohead. Assume there are no other costs of seeing either gig. What is the opportunity cost of seeing Radiohead? (a) £0, (b), £10, (c) £40, or (d) £50.”

  1. That is from Tim Harford, and is unfortunately behind an FT paywall. But here’s the original paper.
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    “We were surprised by the diversity of opinion regarding the value to which the
    term “opportunity cost” applies. As Table 2 indicates, the most popular answer
    was $50, with 27.6% of respondents choosing this answer. The second most
    popular answer was $40, with 25.6% of respondents choosing this answer. The
    third most popular answer was $0, with 25.1% of respondents choosing this
    answer. The correct answer, $10, was the least popular, with only 21.6% of
    respondents choosing this answer. In essence, the answers given to us by well trained economists appear to be randomly distributed across possible answers.” (Emphasis added)
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    So what did you guess?
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  2. People got plenty upset about the whole thing – check the comments, especially,
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  3. “I don’t have any quarrel with Alex’s economics; as far as I can see this point is semantic. (I’ll also admit that my gross perspective on opportunity cost is somewhat anachronistic; it is one reason why mainstream economists work directly with consumer surplus.) What disturbs me is how few economists gave $50 or $40 as the right answer; the actual answers were close to randomly distributed. Most Web-based sources appear confused on the net vs. gross issue, but at least they hover across the $40 and $50 options.”
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    Economists don’t always agree, but it mostly comes to down to splitting hairs? If only it were so
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  4. “This paper analyzes the relationship between opportunity costs of waiting and bribery in rationing by waiting situations. Assuming that a uniform waiting time clears the market for any given bribe and the bureaucrat chooses a bribe to maximize profit, the market equilibrium is characterized in terms of individual valuations of the good and opportunity costs of waiting. If individual valuations take discrete values and opportunity costs of waiting are uniformly distributed, then in an equilibrium individuals with low costs of waiting choose to wait while those with high opportunity costs pay the bribe”
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    While traveling on India’s highways, have you ever seen trucks waiting by the highway for no apparent reason?
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  5. For interested students, a big fat list of examples, drawn from multiple walks of life.

Ec101: Links for 9th January, 2020

Five articles on sunk costs today.

  1. First up, a somewhat basic introductory article. Feel free to skip it if you’re sure you know what sunk costs are (pausing only to note that it is not so much the knowing that matters with sunk costs, but remembering to apply it)
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  2. “The United States has invested much in attempting to achieve its objectives. In addition to the many millions of dollars that have been spent, many thousands of lives have been lost, and an even greater number of lives have been irreparably damaged. If the United States withdraws from Vietnam without achieving its objectives, then all of these undeniably significant sacrifices would be wasted”
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    The quote itself is a quote (if you see what I mean) from this paper, which is a wonderful rumination on sunk costs. Read Taleb on the subject (and not just his tweets!)
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  3. This entire post by Alex Tabarrok is very short (and I have linked to it before, I think), but it is worth reading. Especially the last sentence: do think about it, if you are an economics student.
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  4. “Once your model of choice is at all complex, no one knows what a sunk cost means any more. So a theoretical scolding of those who honor “sunk costs” is not completely well-defined. That being said, there is still the empirical question of whether most people attach too much weight to previous plans and have a status quo bias. The experimental evidence suggests that we are more rigid than we need to be. The propensity to honor previous commitments may have efficiency properties, but we cannot discard this proclivity when we ought to.”
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    The bottom line from Tyler Cowen’s post on the topic. He was responding to Tabarrok’s post above.
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  5. “Suppose that you are trying to pursue a morally worthy goal, but cannot do so without incurring some moral costs. At the outset, you believed that achieving your goal was worth no more than a given moral cost. And suppose that, time having passed, you have wrought only harm and injustice, without advancing your cause. You can now reflect on whether to continue. Your goal is within reach. What’s more, you believe you can achieve it by incurring—from this point forward—no more cost than it warranted at the outset. If you now succeed, the total cost will exceed the upper bound marked at the beginning. But the additional cost from this point is below that upper bound. And the good you will achieve is undiminished. How do the moral costs you have already inflicted bear upon your decision now?”
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    I am reminded, very strongly indeed, of the Mahabharata. That is the abstract of this paper.

Etc: Links for 29th Nov, 2019

  1. “When the British actor Jonathan Routh published the first edition of his Good Loo Guide (“Where to Go in London”) in 1965, he singled out the device for mention every time he found one. Only five toilets, out of more than a hundred, held hand dryers – of the pedal-operated kind that, in the 1965 movie Help!, inhale the jacket sleeves of Ringo Starr and Paul McCartney. Mostly, Routh encountered towels of cloth or paper, and quite often, he had to pay to use these products. (“Do loos ever advertise their attractions?” he wondered, while extolling the virtues of the splendid restrooms of Hyde Park in the 1968 update. “Has anyone ever seen an ad saying ‘Just arrived – new free electric hand-drier at the so-and-so loos.’”) Even in the third and final edition of the guide, released in 1987, I counted more instances of electric razors, armchairs and pre-pasted disposable toothbrushes than of hand dryers.”
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    The excellent, excellent Samanth Subramanian in this lovely article about (of all things) paper towels and hand driers. Yes, really. What’s more, Samanth won the Financial/Economic story of the year award for this write-up. Read the book by clicking on his name here, also read Following Fish, and definitely read this article itself. Congratulations, Samanth!
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  2. “And which book takes the very top prize for best of the year? You can’t compare the Alter to the others, so I will opt for Eric Kaufmann’s Whiteshift and also Pekka Hämäläinen’s Lakota America, with Julia Lovell on Maoism and Alain Bertaud on cities as the runner-ups. But again a strong year all around.”
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    Tyler Cowen’s list of books he found worth his time in 2019. As he would say, self-recommending.
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  3. “So what’s a desperate founder to do? Smith impulsively flew to Las Vegas and played blackjack with the last of the company money .Amazingly, when he came back the next week, he had turned the remaining $5,000 into $27,000 – just enough for the company to stay in operation for another week.

    In the book “Changing How the World Does Business: FedEx’s Incredible Journey to Success – The Inside Story,” Roger Frock, a former senior vice president of operations at FedEx, describes the scene when he found out what Smith did. “I said, ‘You mean you took our last $5,000 – how could you do that? [Smith] shrugged his shoulders and said, ‘What difference does it make? Without the funds for the fuel companies, we couldn’t have flown anyway.'””
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    A lovely story about how Fedex came back from the dead.
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  4. “The money of the world’s mega-wealthy, though, is heading there in ever-larger volumes. In the past decade, hundreds of billions of dollars have poured out of traditional offshore jurisdictions such as Switzerland and Jersey, and into a small number of American states: Delaware, Nevada, Wyoming – and, above all, South Dakota. “To some, South Dakota is a ‘fly-over’ state,” the chief justice of the state’s supreme court said in a speech to the legislature in January. “While many people may find a way to ‘fly over’ South Dakota, somehow their dollars find a way to land here.””
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    Oh hey, Tiebout. Whassup.
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  5. “Behavioral finance is finance. That individual human beings can sometimes do silly things, for reasons to do with either nature or nurture, is not under dispute. That they may make these same mistakes in the aggregate is no longer heretical. That is the gift of those that have been “misbehaving” by attacking hallowed, efficient market doctrine. Economists now can consider potential irrationality versus a standard model of profit-maximizing utility without being disinvited to (those wild and crazy) economist parties. Economists can now suggest that cognitive biases can affect asset prices without threatening their tenure.”
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    The term may be overrated – the logic isn’t: in defense of behavioral finance.

Ec101: Links for 14th November, 2019

Four of one today, and one of the other.

 

  1. “In their new book, The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay, economists Emmanuel Saez and Gabriel Zucman challenge seemingly every fundamental element of conventional tax policy analysis. Given the attention the book has generated, it is worth stepping back and considering their sweeping critique of conventional wisdom. Spoiler: My goal here is to present these issues, not resolve them.”
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    William G. Gale on the public economics topic du jour, tax policy as per Saez and Zucman.
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  2. “I find this episode appalling, and I hope The New York Times is properly upset at having been “had.”#TheGreatForgetting”
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    Strong language from Prof. Cowen is an underrated signal by definition. He is less than happy about this article.
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  3. A Twitter thread that only econ nerds should read – but econ nerds really should read it.
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  4. And finally, another post about it from MR.
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    “”This is quite remarkable. If the sensible way of defining tax rates involves excluding transfers from the denominator (as they claim), the fact that it leads to very high rates by construction at the bottom should be because this is a sensible summary of reality. Yet, in their own words, it’s a problem. Rather than switching method, they drop the people at the very bottom which conveniently covers up the problem (but leaves a less severe version of the problem in their remaining lower income sample). Of course, they could have just used the standard definition which includes transfers in the denominator, but doing this destroys the entire headline result.”
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  5. And because we can all have more than our fair share of public economics and taxes, here’s Gulzar Natarajan wondering aloud, as he puts it, about the Indian economy.
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    “”Therefore public spending has to be tailored to maximise the boost to consumption and investment. In other words, it should seek to target instruments with the highest fiscal multipliers and target population or consumption groups with the highest marginal propensity to consume.”