Monday, May 9, 2022

Revealed Preference: Where are people moving to and from?

Here are the top 10 growth states, according to U-Haul data analyzing migration patterns from 2020: 

  1. Tennessee 
  2. Texas
  3. Florida 
  4. Ohio 
  5. Arizona 
  6. Colorado
  7. Missouri
  8. Nevada
  9. North Carolina
  10. Georgia
  1. California
  2. Illinois
  3. New Jersey
  4. Massachusetts
  5. Maryland
  6. Oregon
  7. Louisiana
  8. Connecticut
  9. New York
  10. Pennsylvania
  11. Michigan

Facebook vs. Australia: The alternatives to agreement determine the terms of agreement

 The Australian govt. passed a law requiring Facebook and Google to start paying for news content that appeared on their sites. However, the law did not specify any criteria for identifying pages that were in violation of the law.  

This uncertainty creates a tradeoff when trying to design rules to comply with the law:    

  • An "overly broad" take down means that Facebook is less likely to violate  the law,  BUT
  • It also means that Facebook is likely to take down pages that shouldn't be taken down.  

According to WSJ

The documents show that Facebook deliberately created an overly broad process for deciding what was news and taking down supposedly news pages that swept up a lot of things that weren't news. And the document showed that it knew this. This was a choice. ...
The other thing Facebook didn't have ready was a process so that anyone who thought their page had been wrongly taken down could appeal to Facebook and ask to be reinstated. The company says it was still working on the appeals process when the takedown began. The massive takedown of Facebook pages may have wreaked havoc for the public, but for Facebook, it got the company back at the negotiating table with Australian lawmakers. ...
Within days, Australian lawmakers watered down the bill and added in language that said if Google and Facebook struck enough deals with the news publishers on their own, they could avoid that dreaded government run negotiation process: the so-called final offer arbitration. 

The reporter suggests that this was all part of a cleverly thought out plan to pressure Australia to watering down the law, but the overly broad take down could also be seen as Facebook's honest effort to comply with the law.  

Keynes vs. Hayek, round II

Saturday, May 7, 2022

Enlightenment Now!

Alex Tabborock opines I hate paper straws:
There is a wing of the environmental movement that wants to punish consumerism, individualism, and America more than they want to solve environmental problems so they see an innovation agenda as a kind of cheating. Retribution is the goal of their practice.
If you find yourself drawn to the weird atavistic sensibility to get back to the land (which would dramatically increase our carbon footprint--remember density is green), or unplug and return to a simpler (read dirtier, riskier, less interesting) golden past, don't. Instead read Steven Pinker's Enlightenment Now: The Case for Reason, Science, Humanism, and Progress.
In this elegant assessment of the human condition in the third millennium, cognitive scientist and public intellectual Steven Pinker urges us to step back from the gory headlines and prophecies of doom, which play to our psychological biases. Instead, follow the data: In 75 jaw-dropping graphs, Pinker shows that life, health, prosperity, safety, peace, knowledge, and happiness are on the rise, not just in the West, but worldwide. This progress is not the result of some cosmic force. It is a gift of the Enlightenment: the conviction that reason and science can enhance human flourishing. 
...Many commentators, committed to political, religious, or romantic ideologies, fight a rearguard action against it. The result is a corrosive fatalism and a willingness to wreck the precious institutions of liberal democracy and global cooperation.

And as if to prove this point, The Atlantic shows up:

...the Enlightenment emphasis on the autonomous, rational individual can also lead to alienation and isolation, which make tribalist mythology all the more appealing.

Thursday, April 28, 2022

Can EU governments pick unicorns to close gap with US and China?

New report from the EC focusses on the number of unicorns which are thought to be a metric of innovation, the primary driver of growth.  The chart above shows that US (red) and China (pink) way ahead and growing faster than EU (blue), which updates the chart below (2013-2017).
  • To catch up, the EC suggests that "governments should play a role in the supply of venture capital, establishing funds to invest in larger deals ... that private sector VCs avoid.
  • Interestingly, much of the private VC funding in the EU comes from the US and China
  • Hubris:  Why do EU bureaucrats think they can pick winners more accurately than venture capitalists?  
  • Selection bias:  Don't they realize that investments that VC's avoid are more likely to lose money?
  • However, I do like the humility of one caveat in the EC report.  
    • "... our analysis recognises that simply increasing the supply of finance will not be effective unless there will be also an effort to increase entrepreneurial activity, both technology start-ups and growth businesses."

Tuesday, April 12, 2022

How bad is rent control?

When I get to demand and supply, I show students the unintended effects of rent control: a price ceiling below the equilibrium price results in shortages, as there are more people who want to buy at the controlled price than want to sell.  

A new paper studying rent control in St. Paul shows that the policy doesn't even live up to intended purpose of transferring income from rich landlords to poor tenants:

  • control caused property values to fall by 6-7%, for an aggregate loss of $1.6 billion. 
  •  ... the tenants who gained the most from rent control had higher incomes and were more likely to be white, while the owners who lost the most had lower incomes and were more likely to be minorities. 
  • For properties with high-income owners and low-income tenants, the transfer of wealth was close to zero. 
And the sad conclusion: 
  • the extent that rent control is intended to transfer wealth from high-income to low-income households, the realized impact of the law was the opposite of its intention.

Thursday, April 7, 2022

Buy this book ASAP: "Rationality" by Steven Pinker

Rationality: what it is, why it seems scarce, and why it matters was an eye-opener for me. As an economist who both teaches rationality and and uses it in my research and consulting, I was thrilled ("shocked" in a positive way) to discover how narrow my perspective is. Pinker approaches rationality from so many different angles (logic, psychology, statistics), and gives so many fabulous examples of how we (mis-)use it that that I found myself underlining examples to borrow (with attribution) for my econ class. 

 His articulation of statistical reasoning was so good that I made two coauthors--under deadline--rewrite our article for the Antitrust Law Journal stealing his brilliant description of the signal processing problem. No one better at communicating than Pinker. 

Of course, the NY Times gave it a lukewarm review, warning that his "jaunty demotic and occasional bar-stool sermons will not be to everyone’s taste." I suspect that they were particularly irked that one of their own (a liberal Democrat) would admit that many of their favorite policies defy reason. Of course, Pinker also eviscerates many right-wing policies, and notes that what he calls "motivated reasoning" is not reason at all.  

Sunday, April 3, 2022

Is inequality necessary for growth?

 China seems to think so:

For most of last year, Mr. Xi trumpeted a signature program known as “common prosperity” aimed at redistributing more of China’s wealth, amid concerns that elites had benefited disproportionately from the country’s economic boom. The program underpinned many of Mr. Xi’s policy drives, including a clampdown on technology companies that were seen as exploiting their market power to boost profits.
But a year later, use of the term "common prospertity" is fading because
...the policies ... spooked business owners and slowed growth when Mr. Xi needs China’s economy to stay robust. He is preparing for political meetings expected to return him for a third term in power later this year.

Friday, April 1, 2022

How is Russia supporting the ruble?

In the graph above, we see the FX price of a ruble fall and then rise. 

To explain this, think of shifts in the demand and supply of rubles in the market for foreign exchange.  
  • Supply of rubles:  Russian importers and investors sell rubles to buy foreign currencies to buy foreign imports or invest abroad.
  • Demand for rubles:  Foreign importers and investors sell foreign currencies to buy rubles to buy Russian exports or invest in Russia.  
Anything that increases demand for rubles or decreases supply of rubles will appreciate the ruble (push the price back up): 
  •  First, the Russian central bank raised interest rates on February 28th from 9.5% to 20%. 
    • To earn 20% in Russian savings accounts, investors sell foreign currency to buy rubles, an increase in demand for rubles.
  •  Second, Russia imposed a 30% fee on purchases of foreign exchange (since lowered to 12%). 
    • Such a "tax" on selling rubles to buy foreign currency reduces the supply of rubles.  
  •  Third, exporters—such as those selling oil and gas—were mandated to convert 80% of their foreign-exchange earnings to roubles.  
    • Exporters had to sell foreign exchange and buy rubles, an increase in demand for rubles.  

Thursday, March 31, 2022

Does taking econ make you rich?

$22,000/year (46 percent) higher more than they would have with their second-choice major

HT:  MarginalRevolution


Monday, March 14, 2022

Software Development performance metrics

To better align the incentives of individual software developers with the goals of a company that sells software as a service, SaaS, companies need better metrics than lines of code. 

Impact, for example, can compare a contribution that is 100 lines of new code (illustrated on the right) to one that represents only 18 lines (on the left) by taking into consideration:
  • that the change required modifying previous work 
  • that edits took place in 4 different locations 
  • that 3 different files were affected 
It would quantify the 18 lines as more 'impactful,' than the 100 lines of code.

Like most intellectual property that can be easily copied or duplicated, the algorithm is proprietary.   

Saturday, March 12, 2022

Pricing Gasoline

The price of a barrel of oil has shot up due to the Ukraine/Russia War and many felt the sting at the gas pump. This story at NBC News interviewed an owner of three gas stations in Texas who said he is losing money with the price increases.

“We’ve raised the price of fuel as little as we could [and] absorbed the price increases to cut into our profits,” he said. “On Friday, the wholesale price went up 21 cents. … Our price at the pump went up 11 cents.”

This indicates about a 52% pass-through of a change in industry marginal costs to prices, at least in the short-run. Slightly more of the burden of the cost increase falls on consumers with the rest falls on gas stations. The size of the pass -through is determined by both demand and supply elasticities. Perfectly elastic demand would generate a 100% pass-through while perfectly inelastic demand would generate no pass-through. This is somewhere in between and is consistent with recent estimates of the elasticity of demand for gasoline of -0.37.

Thursday, March 10, 2022

Incentives Matter - Ukrainian Edition

The Ukrainians are offering 5 million Russian rubles and full amnesty to soldiers if they, “put down their guns and voluntarily surrender to prison.” That's about $47,000 or two years of average Russian GDP per capita. That may be enough to sway a wavering Russian conscript. But Ivan may not trust it. Would they better trust it if it came from the US?

My colleague, Tim Wunder, says the US should back these offers on deficit reduction grounds alone.  For all 200,000 Russian troops thought to be involved, this would come to $9.4 Billion. The US House just approved $13.6 billion in aid to Ukraine so it is cheaper than funding the war. Not all have to accept the offer for the invasion to collapse. The other thing about this strategy is that we can afford it while the Russians could not afford to reciprocate. Tim suggests an extra amount thrown in if you "bring a friend." Bring a whole platoon and get even more. Heck, work it like a multi-level marketing campaign.

Yes it would be cheaper, but moral too.

Friday, March 4, 2022

Delivery economies of scale

Firms that deliver a lot of stuff have a huge advantage over smaller rivals because they can design more efficient routes. In the figures above, we plot the shortest delivery routes for randomly distributed customers on a 1x1 square. The length of two independent routes on the left is 5.68.  When the routes are combined on the right, as they would be if one firm outsourced its delivery to the other, route length goes down to 3.73, a reduction of 34%. 

Such route consolidation not only reduces cost, but it also reduces traffic and pollution.  You may recognize this as the "Traveling Salesman Problem" from your Ops class.  It is the source of big economies of scale, as the average cost per delivery goes down the more deliveries a firm makes in a given area.  

Revealed preference: young Russians are leaving

From The Economist:
Vladimir putin, so intent on bringing Ukraine under his control, is neglecting the problems facing Russians at home. A survey conducted between February 17th and 21st—that is, in the week before Mr Putin’s invasion—by the Levada Centre, an independent Russian pollster, found that 43% of Russians between the ages of 18 and 24 wanted to leave the country for good. And 44% of those who hoped to emigrate cited the “economic situation” as their motivation.
Moving to higher valued uses

Which are the best charities?

From GiveWell
  1. Medicine to prevent malaria, sub-Saharan Africa ($4500/life saved)
  2. Nets to prevent malaria, sub-Saharan Africa ($4500/life saved)
  3. Supplements to prevent vitamin A deficiency ($3000/life saved) 
  4. Cash incentives for routine childhood vaccines ($4500/life saved), Africa
  5. Treatments for parasitic worm infections (deworming)
  6. Treatments for parasitic worm infections (deworming)
  7. Treatments for parasitic worm infections (deworming)
  8. Treatments for parasitic worm infections (deworming)
  9. Cash transfers for extreme poverty, mostly Africa

Tuesday, March 1, 2022

Forecasting the Future of Russia

Need a forecast of how the Ukrainian / Russian conflict will be resolved? Ask the prediction markets! Predictit has created a security that tries to get at this. The price of this instrument can be interpreted as the probability that Putin holds onto the Russian presidency through the end of 2022, as determined by the collective wisdom of people willing to stake money on their beliefs. It started at 84% on 25 Feb but is closer to 74% as of 28 Feb.

Monday, February 28, 2022

Why are Russians withdrawing money from banks?

From today's WSJ:
In Russian cities, anxious customers started lining up on Sunday in front of A.T.M.s, hoping to withdraw the money they had deposited in banks, fearful it would run out. The panic spread on Monday.
...On Monday it plunged further, with the value of a single ruble dropping to less than 1 cent at one point. As the value of any currency drops, more people will want to get rid of it by exchanging it for one that is not losing value — and that, in turn, causes its value to drop further.
In Russia today, as the purchasing power of the ruble drops sharply, consumers who hold it are finding that they can buy less with their money. In real terms, they become poorer. Such economic instability could stoke popular unhappiness and even unrest.

Sunday, February 27, 2022

News from Ukraine

 From software developers working for US clients:  

Hello team, now I am in a save place in the mountains near the Poland. As --- mentioned I have laptop not so strong to use it for development. Tomorrow I will try to buy it in Mukachevo city and will try to return to the work. Network is poor, but I think I will have ability to work.

A few words about war: russians are very bad peoples especially from Chechnya. They stopped a car and killed a family with 2 children’s we know this family they killed all of them, children’s 3-5 years old….. Family want to move from Kiev today. I took my child, wife and my mother and we fill safe. My father and sister couldn’t move from Kiev. They are on the front line with enemy. We have a contact with them. Hope they will be alive.
Also tomorrow I will go and give my blood for our army. 

Please if you have time: share the information about Russians invaders in different channels. We need to stop them. This is terrible!!! lovely and pleasure capital of Ukraine Kiev was bombed all night. Millions of people are staying at home. It is a disaster!!!!!

Be safe and pray for Ukraine.

Best regards, -----

Saturday, February 26, 2022

The costs of equity and equality

==> Weaker incentives. transparency causes significant increases in both the equity and equality of pay, and significant and sizeable reductions in the link between pay and individually measured performance.

Friday, February 25, 2022

Why do women earn more than men in Pakistan?

 Tim Harford ("The Undercover Economist") suggests that it is due to selection bias: a country where the barriers to paid work for women are high, the few women who do have jobs at multinational companies are outstandingly good. These high‑flyers are promoted and paid more than the average man. This suggests that there are women outside the workforce who, if they did have paid jobs, would be well above average even if they weren’t superstars. If the barriers to their workforce participation could be lowered, they would raise the productivity of the companies that employed them.
Bottom line: Inefficiency implies opportunity for those with the imagination and initiative to exploit it.

Thursday, February 24, 2022

Why did Airbnb succeed?

 Interesting story from Wharton that illustrates a number of ideas from the book.

Airbnb was born in 2007, when two broke designers were trying to make rent on their San Francisco Apartment.  When a design conference came to town, and hotels were sold out or charging surge prices, they bought some air mattresses put them on their floor, and rented them to conference attendees. 

Obviously, the space on the apartment floor was more valuable to the conference attendees than it was to the two designers [Ch 2].  

At the time, there were other home-sharing sites, like VRBO and  But these were for vacation rentals.  Airbnb was uniquely urban.  Every time a conference came to town, demand for lodging would spike, and hotels would raise rates [Ch 12, "revenue management"].  Airbnb made money by sending some of this demand to apartment owners and renters.

The still-private company has grown rapidly and reached a valuation of $31B.  As a result, the hotel price spikes have gotten smaller, called "compression" in industry jargon, because Airbnb supply is drawn into the market during these increases in demand [Ch 8].  

Monday, February 21, 2022

Tuesday, February 15, 2022

RIP PJ O'Rourke

When I was a long-haired, first-year econ grad student and TA/labor organizer (AFL/CIO #3220), on strike and pissing away my education, I picked up Republican Party Reptile at the University Bookstore and never put it down.  I had no idea that other people thought the same way.  

About ten years ago, I invited PJ to speak at Vanderbilt and had the pleasure of introducing him to my students. Thank you PJ.

Tax Soda, Sell More Beer

 A new PLos One study by Lisa Powell and Julien Lader, compared beverage consumption in Seattle and Portland after Seattle, but not Portland, instituted a "sugar tax" on soda. They found a 7% increase in beer consumption in Seattle relative to Portland. They estimate the cross-price elasticity to be 0.35. The tax was meant to cut the medical costs of obesity due to excess sugar intake. The social costs to additional beer drinking may be even higher. Not only is beer calorie rich, people tend to function less well while inebriated, leading to various injuries. Below are the raw trends in beer sales.



From a managerial perspective, beer distributors who anticipated the substitution would have increased production enough to maximize profits from this shift in demand.

Friday, January 28, 2022

Supply and Demand for Space Travel

Growing up seeing the NASA Apollo missions, it was easy for me to believe that I would see rockets  flying all over the solar system. Despite the triumphs of the Shuttle, ISS, and Mars rovers, the next 40 years did not quite live up to expectations. But the last 10 did. For forty years, the costs barely budged but they have fallen one hundredfold since 2010! See this cool info-graphic on truly revolutionary changes in costs.

When costs fall that much, we move way down on the demand curve. Once costly ventures such as colonies on the Moon, manned missions to Mars, and mining asteroids start to become feasible. Is this a one time drop in costs or will they continue to fall as more is learned?  My ten year-old self is giddy again.

Thursday, January 27, 2022

Can ESG investing stop climate change without sacrificing returns?

 The WSJ gives us a clear answer:  NO.  

Although this is a gross simplification of the argument, ESG investing to save the environment means buying fossil reserves and leaving them in the ground where they lose all their market value.  

The ESG paradox: "if you don't lose money on ESG investing [relative to non-ESG investing], ESG investing doesn't work. Take your pick." 

Tuesday, January 25, 2022

Venture Capital, Innovation, and Mark Andreessen

How do VC's make money? WSJ has the answer:
“In venture capital, you think a lot about so-called adverse selection,” Mr. Andreessen says. “ ‘Why am I so lucky as to be the person you’re trying to raise money from?’ You want to get to positive selection, the best people coming to you.”
“Super-talented” people, Mr. Andreessen figures, leave academia or big companies because they realize they’re “swimming in an ocean of mediocrity.” Hence the positive selection for venture capitalists.

Here's why:

Mr. Andreessen starts with the replication crisis in scientific studies, especially in psychology—over half of studies can’t be replicated. I suggest “studies show” are the two most dangerous words in the English language.

HT:  Quinn 

Wednesday, January 19, 2022

Pipelines --> Platforms --> Protocols

Interesting article about how market institutions are changing with blockchain technology:

  • Platforms drove market efficiencies by leveraging data to reduce search costs and verification costs. This involved an inherent trade-off as market participants — particularly consumers — needed to surrender their data to the platform to benefit from these market efficiencies. 
    • This surrender of data and attendant lock-in increased the risks of privacy invasion, loss of agency through over-dependance, and unilateral censorship as centralized platforms could change their policies at will.
  • With protocols, property rights go back to the creator and identity goes back to the consumer.

Double Marginalization Distortions

Double Marginalization occurs when two firms within a supply chain "compete" for the value the chain creates. The upstream firm's margin becomes part of the marginal cost incurred downstream which then gets magnified by the downstream firm setting its margin. Prices are too high, output is too low, and further investment is less profitable. If the firms were to integrate, they would "marginalize" only once, leading to increases in consumer surplus and profits to all parties.

An analogous effect occurs  when a turnover tax becomes a value added tax (VAT). A turnover tax, or sales tax, is a margin on all firms within a supply chain while a VAT represents a single margin. Firms in a supply chain tend to merge simply to avoid multiple turnover taxes. In "How Distortive are Turnover Taxes? Evidence from Replacing Turnover Tax with VAT," Xing, Bilicka and Hou investigate what happened in China when taxation transitioned from a turnover tax to a VAT. Without the motive to avoid double marginalization, firms can now outsource more if outsourcing is more efficient. As predicted:

The reform increased sales, R&D investment, and employment for affected service firms, which is primarily driven by outsourcing from downstream manufacturing firms. We document that smaller and less innovative manufacturing firms outsource more, and reallocation increases the quality of innovation for affected service firms.

Saturday, January 15, 2022

Why are Google, Amazon, Meta and Micrsoft laying their own transatlantic cables?

From the WSJ:

The ability of these companies to vertically integrate all the way down to the level of the physical infrastructure of the internet itself reduces their cost for delivering everything from Google Search and Facebook’s social networking services to Amazon and Microsoft’s cloud services. It also widens the moat between themselves and any potential competitors.

Thursday, January 6, 2022

Why is St. Louis considering restarting a trolley that no one wants?

Maxim:  Consider all costs and benefits that vary with the consequence of a decision [if you miss some that is the hidden-cost fallacy]; but only costs and benefits that vary with the consequence of a decision [if you consider irrelevant ones that is the sunk-cost fallacy].  

  • 2018: The trolley started operational life —six years behind schedule and about $10 million over budget.  Ticket revenue was 10% of what was originally forecast and nearbt businesses hated it.
  • 2019:  St Lous shut it down, but the Federal Transit Administration (FTA) demanded the return of $37 million the government paid for the project. 
Analysis:  Reviving the streetcar would require additional operating funds, BUT not reviving it would require paying back $37 million.

Lest you commit the hidden-cost fallacy, returning the federal funds would also hurt the St. Louis ability to secure federal grants for future projects, i.e., from the President Biden's $1.2T infrastructure bill.

Prediction: St. Louis will revive the trolley that no one wants.

HT:  Michael

Sunday, January 2, 2022

The last refuge of a vacant liberal mind

 On Christmas day, the headline in the NY Times business section was As Prices Rise, Biden Turns to Antitrust Enforcers.  Larry Summers immediately [and correctly] bashed the idea:

“The emerging claim that antitrust can combat inflation reflects ‘science denial,’ ” tweeted Harvard economist Lawrence Summers, a senior official in the Obama and Clinton administrations. “There are many areas like transitory inflation where serious economists differ. Antitrust as an anti-inflation strategy is not one of them.”

In the late 1970's, I heard John Kenneth Galbraith, the economist in charge of price controls during WWII, say much the same.  He called the idea "the last refuge of a vacant liberal mind."  The turn of phrase was so elegant and shocking--at the time, I was a liberal--it has stayed with me.