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.