Marijuana legalization increases cigarette consumption

Econ Paper:  

... marijuana and cigarettes are complements and legalizing recreational marijuana is associated with an increase in cigarette consumption by about 4-7%.

So, beware the hidden-cost fallacy:  

We advise caution in passing [marijuana legalization] laws since we estimate the nationwide health care costs associated with such an increase in tobacco consumption will be about $10 billion and may equal or exceed the touted monetary benefits of marijuana legalization in many states.

HT:  MarginalRevolution.com

China's coming population collapse

... it’s staggeringly hard to grow an economy when you lose a fifth of your working-age population in a single generation. ... Demographics will slow America’s economy, but they’re a five-alarm fire for other countries. So even assuming equal levels of productivity growth, the U.S. is head and shoulders better off than other developed nations, just given its demographics alone. 

(Article link) HT: Lamar

Does this help or hurt Ex-Felons?

The city of Oakland recently voted unanimously to bar landlords from conducting background checks before renting to tenants.

Supporters say the measure will help ensure residents released from prison are able to reintegrate back into society, hold down a job and provide for their families, instead of adding to Oakland’s homeless population. But some landlord groups worry the measure will sacrifice residents’ safety.

Sure, in the short-run ex-felons will be on a more equal footing relative to law-abiding renters. But it is hard to imagine that, on average, they are not worse tenants. That they are more likely to be late with rent, cause faster depreciation of they property, and possibly make other tenants more uncomfortable. Landlords screen out these higher cost individuals with a criminal background check. The absence of the background check does not magically remove the expected costs.

This means landlords will seek out additional screening mechanisms (or law-abiding renters will provide more signals). An easy screen would be to require an even larger security deposit, something ex-felons might have a harder time scraping together. Another might be to more fully scrutinize prospective renters' social media accounts. Landlords might glean troubles with the law but also other behaviors they want to avoid (political or religious affiliation?).

Suppose these alternative screens and signals do not work as well as criminal background checks. This means that the cost to a landlord of doing business in Oakland just went up. Over the longer run, we would expect them to withhold some maintenance until the value of the property is more closely equated with the cost.  Also, with more ex-felons in Oakland, I expect the value of home ownership will fall.

See also, Screening on criminal background and credit history

What domestic cause unites the presidential candidates?

From the Atlantic:  zoning restrictions on supply make housing unaffordable

...Booker, Castro, Klobuchar, and Warren propose a combination of financial carrots and sticks that the federal government could use to induce local governments to reform their zoning. Indeed, a larger federal role in reducing local barriers to development appears to be one area with potential for bipartisan cooperation: President Donald Trump recently created a task force to address this issue.

In NYC, why are homeless shelters full, and luxury condos vacant?

Good article in The Atlantic focusses on several factors

1. Declining demand for luxury condos:

Developers bet huge on foreign plutocrats—Russian oligarchs, Chinese moguls, Saudi royalty—looking to buy second (or seventh) homes. ... But the Chinese economy slowed, while declining oil prices dampened the demand for pieds-à-terre among Russian and Middle Eastern zillionaires. It didn’t help that the Treasury Department cracked down on attempts to launder money through fancy real estate.

2. Developers are building larger, higher-cost, housing:

First, the typical new American single-family home has become surprisingly luxurious, if not quite so swank as Manhattan’s glassy spires. Newly built houses in the U.S. are among the largest in the world, and their size-per-resident has nearly doubled in the past 50 years. And the bathrooms have multiplied. In the early ’70s, 40 percent of new single-family houses had 1.5 bathrooms or fewer; today, just 4 percent do. The mansions of the ’70s would be the typical new homes of the 2020s.

 3. Restrictions on supply (restrictive zoning) slow supply responses and make it more costly to build:

Third, and most important, the most expensive housing markets, such as San Francisco and Los Angeles, haven’t built nearly enough homes for the middle class. As urban living has become too expensive for workers, many of them have either stayed away from the richest, densest cities or moved to the south and west, where land is cheaper. This is a huge loss, not only for individual workers, but also for these metros, because denser cities offer better matches between companies and workers, and thus are richer and more productive overall. Instead of growing as they grow richer, New York City, Los Angeles, and the Bay Area are all shrinking.

The result is excess demand for cheap housing, and excess supply of expensive housing.

Young adults today are one-third less likely to own a home at this point in their lives than previous generations. Among young black Americans, homeownership has fallen to its lowest rate in more than 60 years.

So why doesn't the luxury price decline to where quantity demanded = quantity supplied?

...developers have been reluctant to slash prices too suddenly or dramatically, lest the market suddenly clear and they leave millions on the table.

No institutions are seen as both competent and ethical

WSJ survey shows mistrust of all major institutions, but particularly Government.  Business seems to be responding.  

When it comes to looming societal challenges, 92% of people said it was imperative for their employers’ CEOs to speak out on issues from the ethical use of technology to climate change, and three-fourths said they believed chief executives should be the drivers of change, rather than waiting for government intervention. 

Some CEOs have picked up on this already. Lawrence Fink, chief executive of BlackRock Inc. has been outspoken on topics like slow wage growth and jobs lost to automation. His widely read annual letter to investors, released earlier this month, said that BlackRock would take a tougher stance against corporations that aren’t providing a full accounting of their environmental risks, part of a slew of moves by the investment giant to show it is doing more to address investment challenges posed by climate change. Days later Microsoft Corp. said it would take more carbon out of the air than its operations and those of its supply chain produce by 2030.

Old people taking from the young

WSJ has an interview with Prof Ed Glaeser on how old people are using government to enrich themselves at the expense of the young:

Consider the housing market. “In the 1960s and earlier,” Mr. Glaeser says, “America basically had a property-rights regime that meant that anyone who had a plot of land could pretty much put up anything reasonable on that plot of land.” Since then, cities and towns have circumscribed the areas where homes can be built, capped numbers of units, and imposed strict requirements on developers—all of which raise prices. “So there’s this intergenerational redistribution that’s occurred by restricting housing supply.

People who bought homes while the rules were lenient, or who are wealthy enough to have bought lately, have seen their values soar. Meanwhile, “younger people just don’t have housing wealth.” By 2013, a 35- to 44-year-old person at the 75th percentile had less than half as much home equity (adjusted for inflation) as his counterpart did 30 years earlier.

Glaeser suggests that such exploitation of young people is leading to a political backlash:

Yet Mr. Glaeser cites polling that suggests most young people’s vision of socialism might be better described as “hyperredistribution.” They don’t seek state control of the means of production, but punishing taxes on the rich to fund programs like free college for all. “They say, ‘Well, there are a whole bunch of projects—a whole bunch of government spending that helps old people. I want mine. If we’re going to spend a huge amount on Medicare, why aren’t we spending a whole lot on education for me?’ ”

Is the stock market over-valued?

Shiller's CAPE (Cyclically Adjusted Price Earnings Ratio)

What to make of the China trade deal

The answer from MarginalRevolution.com

Prediction market: Who will be the Democratic Nominee?

 Each contract pays off $1 if the event occurs, e.g., Joe Biden wins the Democratic Nomination. The price of the contract can be interpreted as the probability of the event, Price=probability*$1.  For example, the Joe Biden contract is trading at $0.39 suggests a 39% that he will win the nomination. 

 These kinds of prediction markets can be used by firms to, e.g., predict future sales or profitability.

Supply Curves: MRU Video

Demand Curves: MRU Video

Ugliest sweater contest winner

Get rich slowly: the power of patience

Patience makes you rich.  I tell this to my kids, my students, and anyone else who will listen.

The theory is simple.  If you have a low discount rate, it means that the future is almost as valuable as the present.  For example, a "patient" person with a discount rate of 5% is willing to invest $100 if she can earn $105 in one year, a relatively low threshold for investing.  In contrast, an "impatient" person with a discount rate of, e.g., 30% is willing to invest only in much more lucrative investments, i.e., those earning at least 30%.

The difference between the two is that the patient person will make more investments (those with a return between 5% and 30%) which will make the patient person rich.  Patient people invest more in education, smoke less, exercise, and watch their weight.  These activities all demonstrate a concern with the future, at the expense of the present.

 Here is some new evidence:

Patience boosts wealth by much more than marriage or religion. Respondents with discount rates more than one standard deviation above the average of the sample had 29% less net wealth, a loss of around $130,000. More impatient people—similarly controlling for religion, income, race, sex, optimism and education—were more likely to smoke, drink excessively, and miss out on their flu shots and medical examinations.

The title of this blog post is stolen from colleague Bill Spitz's terrific book

DC Teacher Incentives

Michelle Rhee's tenure as Washington DC's Chancellor of Public Schools was controversial mostly because she instituted reforms designed to hold teachers accountable for classroom performance. This episode provides the backdrop for studying the role of high-powered incentives linked to multiple measures of teacher performance. The effectiveness of one of these reforms have recently been analyzed by Thomas Dee and James Wyckoff in their paper "Incentives, Selection, and Teacher Performance: Evidence from IMPACT." So how did it do? From the abstract:

...dismissal threats increased the voluntary attrition of low-performing teachers by 11 percentage points (i.e., by more than 50%) and improved the performance of teachers who remained by 0.27 of a teacher-level standard deviation. We also find evidence that financial incentives further improved the performance of high-performing teachers (effect size = 0.24).

So incentive pay mitigated both the adverse selection and the moral hazard problems by statistically significant and large amounts.