Jan 31 - Hug An Economist Day

A much undeserved constituency finally gets some love. ;-)

Hug An Economist Day

The U.S. celebrates Hug An Economist Day on January 31 each year. Now, it’s obvious this day was meant to show your affection for economists, but we like to think it also encourages us to learn more about economics and how it affects us. Unfortunately, we don’t know much more about this day, like who initiated these celebrations or when they began. For now, this might be an unofficial holiday, but we urge you to celebrate officially and with gusto! If you’re interested in becoming an economist and pursing a degree in business, check out these business scholarships.

Hug An Economist Day Activities

1. Hug an economist

   We only recommend this with economists you really know (and are close to). If you are lucky enough to count an economist among your loved ones, go on and give them a huge hug to show your appreciation for all they do.

2. Celebrate the profession and the field

   Host an economics-themed party. Design little dollar-shaped cupcakes, dress up as famous economists, and even play economics-themed games. Monopoly, anyone?

3. Learn about economics

   Economics is used in conjunction with several other fields, including business, marketing, education, and even the environment. There are plenty of resources that make learning new economic theories and concepts fun — check out videos, presentations, and even Pinterest for ways to learn and remember new information about this field.

 

Economics of Lawsuits

The Planet Money folks did an episode on the Telephone Consumer Protection Act (TCPA) to combat spam callers. It allows spamees to sue for $500 per unwanted call. This has made it worth while for some people to actually sue and some have received sizable settlements. Defendants claim that it over deters because some people have made suing under the TCPA a business. Toward the end of the show the hosts have a pretty good sum up that describes the incentives for both parties.

HOROWITZ-GHAZI: The TCPA has turned telemarketing enforcement into a kind of market. Like, instead of having a central government agency deciding this is how much law enforcement we're going to have, the amount of enforcement goes up or down depending on the incentives. How easy is it to hunt down a company making illegal calls? How much does it cost to bring them to justice? Can you find efficiencies of scale by bringing lawsuits on behalf of millions of people all at once?

GUO: And, of course, as with any enforcement regime, the lawbreakers are also weighing their costs and benefits. Telemarketing is a multibillion-dollar business. How much can a telemarketer make on each call? How much financial risk is worth taking on to sell some vacation packages over the phone?

Incentives matter.

Does inequality make us rich?

The theory is right out of Chapters 1 and 2: incentive alignment means that those who create more wealth earn more.  

Evidence comes from the Great Depression (link):

Roughly four-fifths of the “golden age” of equality (between 1950 and 1980) owed to the Great Depression, not tax policy. This finding is hard to celebrate because it means that greater equality was achieved while everyone was getting poorer.

Evidence also comes from the decline in life-span inequality: as lifespans grow, inequality between residents of a country declines.  

Incentive alignment in Benefits Corporations

Begun in Maryland in 2012, thirty states now have Public Benefits Corporations (B-corp's) (wikipedia, seeking alpha, quora) 

• For-profit companies that can be publicly traded, but which follow other goals, like ESG. 
• B-corp managers get legal protection from shareholder suits based on low profitability, as they can claim they are pursuing ESG goals.

Chapter one identifies their fatal flaw: not only is ESG hard to measure, but it also conflicts with the pursuit of profit.  This is similar to the problems created by balanced scorecards.

Without good performance metrics,  it is hard for shareholders to tell if B-corp managers are doing a good job, so managers will pursue their own goals at shareholder expense.

Related:  ESG blog posts

US Fertility rates are below replacement (2.1)

 From MarginalRevolution:

Smoothing the Incentives of Patent Examiners

How do you address employees gaming a production quota system? In 2011, the US PTO went from patent examiners having a bi-weekly quota system to adding bonuses tied to eliminating pending examinations on a daily basis. In "Deadlines Versus Continuous Incentives: Evidence from the Patent Office," Frakes and Wasserman examine how patent examiners responded to the new incentives to "clear the inbox." Instead of completing of assignments just before deadlines, there was  a near complete smoothing of task completion ...

leading to large reductions in average examination pendency while resulting in no corresponding reductions in the accuracy of examinations.

This is analogous to "Budget Games: Paying People to Lie" in chapter 22 in which workers have incentives to just meet budget goals. The solution, as the US PTO experience demonstrates, is to find ways to make incentives more linear and less lumpy.

Should we tax the rich more than we already do?

WSJ says "no" for two reasons: 

First, our income taxes are already the most progressive in the OECD, and by increasing the income tax rate, we also increase the incentive to avoid paying it, so it would not raise tax revenue by very much.  

America’s top tax rates often exceed international norms. Our top income-tax bracket of 43.7%—including typical state taxes—exceeds that of the standard OECD nation (40.4%). Our top capital-gains tax rate is 10 points above the OECD average, and our corporate tax rate exceeds not only the OECD mean but that of every Scandinavian nation. America’s effective corporate tax rate is also above average, as are its estate and inheritance taxes.

Second, as we know from Chapter 2, taxes destroy wealth by discouraging wealth-creating transactions, so if we tax income, we get less of it.  This also reduces the amount of money that an income tax would raise. 

 So, what should we do? 

 First, get our spending in line with our income. In the graph below, we see that are spending 8% more than we are making.

Failing that, we can raise more money with a low rate, broad-based consumption tax, like a VAT.  

Politically, we could probably "sell" a consumption tax if we also promised to reduce income tax. But this would be opposed by the left because consumption taxes are not as progressive as income taxes.  Likewise, those on the right would be skeptical because consumption taxes are so good at raising money that they have been used by EU countries to expand the scope of government.  As the late PJ O'Rourke wrote, "Giving money and power to government is like giving whiskey and car keys to teenage boys."  

Apartments vs. Single Family

Housing is good for illustrating the market forces of chapter 8 because everyone has housing and, due to construction lags and the durability of housing (30 years), market adjusts slowly to equilibrium.

In the graph above from Calculated Risk, we see single family housing starts increasing (RED), but apartments (BLUE) decreasing.  The market is adjusting to the high prices for single family by building new supply; and to the expected low future prices for apartments due to the big supply of apartments under construction due to come to market this year and next by reducing new supply.

SINGLE FAMILY HOMES (RED LINE): "...The weakness in 2022 and early 2023 was in single family starts. However, single family starts have now picked up, helped by limited existing home inventory."

APARTMENTS (BLUE LINE): "...we should see ongoing weakness in [apts] based on less household formation, falling asking rents, rising vacancies, and tighter lending. ... A near record number of multi-family housing units are currently under construction due to construction delays. This suggests a large number of multi-family housing units will be delivered in 2024."

Are Things Really that Bad?

Binsbergen, Bryzgalova, Mukhopadhyay, and Sharma develop an index of economic sentiment for the US (and individual states) from accumulated news reports. They use a historical collection of 170 years of digitized newspapers, which includes the text of 200 million newspaper pages from 13,000 local newspapers, collecting instances of a bunch of keywords like "profitable", "success", "opportunity" versus "failure", "insolvent", or "unsuccessful". It turns out it predicts economic activity quite well.

 

 

 

 

 

 

However, the authors also note that sentiment trends downward significantly over the past four, and especially two, decades. My colleagues doubted me when I had claimed that the news presented an increasingly bleak picture. It is nice to know I am not crazy. I suspect this reporting of poor sentiment influences public perceptions.Most laymen I come across think that each decade has a worse economy.

This despite all of the evidence to the contrary. Almost all trends in well-being over this period are positive. This period saw increases in income, innovation, leisure time, life expectancy, food choices, a cleaner environment, literacy, entertainment, tourism - you name it. Moreover, there is every reason to believe these trends will continue. I am confident that my grandchildren's lives will be amazing compared to mine. But that is because my profession puts more stock in the data than the news reports. I hope my grandchildren will do the same.

A Victory Parade is in Order!

Sixty years ago, LBJ declared "War on Poverty." The results are in and poverty in the US has mostly been vanquished. New research in the prestigious Journal of Political Economy points out that the official poverty rate is hugely biased upward. The authors compare this to a measures of the "Absolute Full-Income Poverty" level that includes various cash transfer programs, adjusts for inflation, and adjusts for changes in consumption bundles. All tolled, the poverty rate fell from 19.5% in 1963 to 1.6% in 2019. Yippee!

 

Alas, we may not want to celebrate quite yet. First, those in that bottom 1.6% are truly destitute. I cannot imagine the difficulties these people face.

Second, since inflation adjusted GDP per capita tripled of this period, the rest of us have become quite a bit more wealthy.

 

 

 

 

 

 

 

 

 

The burden to the rest of us of subsidizing the poor does not bite as much. Perhaps public policy should be directed at the lowest X% of the population rather just those below $X per year. We can quibble of the appropriate Xs.

Airbnb Constrains Hotel Market Power

Schaefer and Tran have a new paper that estimates price competition between Airbnb offerings and hotels in Paris, France in 2017 using granular data on tens of thousands of rooms. They find that, while these offerings are differentiated, the do put downward pressure on each others' pricing power. 

Using the estimated models, we assess how Airbnb affects hotel profits and consumer welfare and how much Airbnb hosts value the platform. Our simulations imply that Airbnb increases average consumer surplus and decreases hotel profits substantially. 

Specifically, consumer surplus from Airbnb in Paris increases by 32 euro per night per room for a total of 4.3 million euro (about 0.3% of all hotel revenue). Moreover, about a quarter of this is due to lower hotel prices.

Digital platforms have obliterated some traditional marketing channels, e.g., video rental and music stores, but usually some of the traditional channels survive albeit in diminished form, e.g., book stores and taxis. It appears that even if short term rentals do not replace hotels, they still provide some discipline to the market.

Potential Workers Use ESG as an Employer Screen

A new multiple author study looks at how workers sort into, or out of "good" firms, that is, firms with environmental, social, and governance (ESG) practices. From their abstract:

We conduct a field experiment in partnership with the largest job plat-form in Brazil to study how environmental, social, and governance (ESG) practices of firms affect talent allocation. We find both an average job-seeker’s preference for ESG and a large degree of heterogeneity across socioeconomic groups, with the strongest preference displayed by highly educated, white, and politically liberal individuals. We combine our experimental estimates with administrative matched employer-employee microdata and estimate an equilibrium model of the labor market. Counterfactual analyses suggest ESG practices increase total economic output and worker welfare, while increasing the wage gap between skilled and unskilled workers.

Limiting your investment portfolio to only ESG projects should lower returns. However, this could easily be overcome if better workers have a preference for ESG employers.