How AI Might Affect Demand

Artificial intelligence is often portrayed as a technology that will lower costs by replacing skilled workers, but ophthalmology provides an interesting counterexample. AI can now perform one relatively routine task, screening patients with diabetes for diabetic retinopathy, without requiring an ophthalmologist to examine every patient. In the ACCESS randomized trial, offering an autonomous AI eye exam during a diabetes visit increased screening completion from just 22% with conventional referral to 100%. Among patients receiving an abnormal AI result, 64% subsequently visited an eye-care provider. AI therefore substitutes for some ophthalmologist labor while dramatically increasing the number of patients who make it through the first stage of the eye-care supply chain. (Nature)

AI has lowered the cost of one link in the screening → referral → treatment supply chain. That cost reduction need not appear as lower overall expenses. Instead, it can appear as improved quality that increases demand: screening becomes easier, more patients are screened, and ophthalmologists can concentrate on patients who actually need their expertise. A 2026 Johns Hopkins study of 3,745 adults with diabetes provides evidence of this downstream effect, finding that AI screening in primary-care offices increased presentation to specialist eye care among an at-risk population. A recent meta-analysis of AI diabetic-retinopathy screening likewise concludes that it is generally cost-effective, particularly when it expands screening to underserved populations. (Nature)

The interesting result is that a cost-reducing technology can increase rather than decrease demand for expensive downstream services. Cheaper screening means more screening; more screening discovers more disease; and more detected disease generates referrals and treatment. Total spending on eye care could therefore rise even as the cost of producing a given level of eye health falls. The productivity gain results more in demand augmented by higher quality (shifting demand out) rather than lower price (moving along the demand curve). This may be a useful lesson for thinking about AI throughout the economy. When innovation improves one stage of a supply chain, its benefits need not appear primarily as lower prices or fewer workers. They may instead appear as better matching, greater use of complementary services, and higher-quality final output, in this case, healthier eyes.

Selling Mattresses on Memorial Day

A nagging thought kept creeping into my more somber thoughts this Memorial Day. Why did retailers turn a day of remembrance into an opportunity to sell large consumer goods?

Wikipedia provide a nice history of the holiday but a short piece by McNutt & Partners explains some retailing aspects. For generations after the Civil War, it was called "Decoration Day" during which acknowledgement for the sacrifices of the dead were paired with commemorations meant to instill pride for country. It was renamed "Memorial Day" after WWII but a more significant change occurred in 1971 when it was moved from May 30 to create a three-day weekend. This made possible quick vacations and more time to consider large irregular purchases. 

In economic terms, it concentrated demand for mattresses, and similar big-ticket items, into a single weekend (and then two weeks around the date). This is efficient if there are economies of scale so that retail costs fall with sales volume. This may also permit some price discrimination as those who are more demand elastic seek out these deals and schmucks like me pay higher prices the rest of the year.

Is Tax Treament of Cannabis Punative?

I am posting about marijuana in honor of 4/20 day.

Marijuana has been decriminalized across many states but is still a as a federal controlled substance as an illegal Schedule I drug. As such, cannabis related firms are subject to section 280E of the tax code. As the Cannabis Business Times (CBT) reports:

... state-licensed cannabis operators are not permitted to make common or ordinary deductions on their federal tax returns. These deductions may include labor, legal fees, marketing, security or banking. With fewer deductions, cannabis operators, particularly those in retail, have an effective tax rate that at times can approach 70% or more.

This tax treatment was originally intended to be punitive and serve as a disincentive to conduct illicit drug-related business. CBT recommends rescheduling cannabis to Schedule III, so that firms would no longer be subject to 280E taxation. Reducing a 70% higher tax wedge would likely reduce prices and increase the quantity demanded. While decriminalized, federal tax treatment depresses demand.  

Substitutability Determines Elasticity

The WSJ recently reported on how the Iran war is disrupting energy markets, particularly in Asia and specifically for Liquefied Natural Gas (LNG).

Qatar suspended production even before Iran struck its giant Ras Laffan export facility, causing damage that will take years to repair and delaying its expansion plans. The lost supply is ripping through the global economy.

One ripple has been a doubling in prices in Japan and Korea.

These high prices have led many Asian customers to substitute toward alternatives, including clean renewables but also dirty coal. What was not a viable substitute at $11/BTU has become viable at $22/BTU. Inelastic LNG demand has become more elastic as a result, suggesting that prices may have plateaued at $22/BTU.

The effect of California's $20 minimum wage

From MarginalRevolution:

...prices [of Food Away From Home or FAFH] rose, quantity demanded fell, and that’s what killed the jobs—not robots replacing workers.

In terms of welfare, the bulk of employed workers get an 8% wage increase, a small minority get disemployed. The big transfer was from consumers to workers. California has roughly 39 million residents, all of whom face 3.3–3.6% higher FAFH prices. The transfer is likely regressive — lower-income households spend a larger budget share on fast food specifically. So the policy effectively taxes low-income consumers generally to raise wages for a subset of low-income workers, while eliminating jobs for another subset. Your mileage may vary but I don’t see this as a big win for workers. ...

European Tech is growing

Economist:

Jolted by the deterioration of Europe’s relationship with America, policymakers are redoubling efforts to strengthen its technology ecosystem. At the same time, America and China have made decisions that make Europe relatively more attractive to tech workers and investors. The continent’s established tech companies, though few in number, are now nurturing a new generation of startups. ...

Europe is also getting over its reluctance to let techies make lots of money. ...Now European tech companies are giving out more options...

Mr Trump’s demand that Europe (including Ukraine) do more to defend itself is also spurring high-tech arms-making in a region that had little of it. ...

China, too, is helping inadvertently. Its model of state-directed innovation has crowded out private investment and shrunk VC spending, pushing some towards Europe.

The Rise of Prediction Markets

The idea of prediction markets may have begun as a small research tool in Iowa in the 1980s with trading volumes measured in the thousands of dollars. After a few decades, monthly dollar volume for private prediction markets had reached millions of dollars. Recently, prediction markets have hit the big time. The WSJ reports that Polymarket and Kalshi now do about $3-4 billion of volume in a month. To be sure, this is still three orders of magnitude smaller than the volume of the NYSE or NASDAQ of $2-3 trillion. But this impressive growth indicates broad acceptance. 

The idea is simple. If a contract will pay $1 if an event occurs and I think the event will occur with probability P, my expected value of owning the contract is $1 x P or $P. If it is currently trading for less (more) than $P, I can expect to make money buying (selling) the contract. With enough  potential traders, the price being quoted is "the market's" best estimate of the probability of the event. Traders' profit motives drive the price to the "the market's" expectation.

Non-traders, perhaps ignorant of how new information will affect the probability, need only look at how much the price has changed to infer what more knowledgeable individuals think of the information. Prediction markets harness "the wisdom of the crowd." The growth of these markets is an indicator of how valuable this information can be.

Natural Gas Markets When Under Stress

The January 2026 cold snap, "Winter Storm Fern,"was unprecedented in both its severity but also in its size. It that blanketed two-thirds of the US causing considerable stress on the market for natural gas. While the media often focuses on surging heating demand during these events, the historic price spike was equally driven by a leftward shift in the supply. Due to plummeting temperatures, the industry faced record-setting "freeze-offs" where water in the gas stream freezes and physically blocks wellheads. Even though demand increased, gas production fell from a pre-storm average of 108 Bcf/d to a of 95.8 Bcf/d. This 12% contraction in total output meant supply shifted leftward by more than demand shifted rightward. Just as the market required more fuel, less was being produced. Both shifts created a deficit that could not be reconciled through normal operational adjustments.

Market equilibrium would have to be achieved by moving up along a near vertical demand curve to an extreme price point to clear. While the American Gas Association (AGA) noted that demand hit an all-time 7-day high, the scarcity was compounded by the fact that roughly 18.1 Bcf/d of expected production simply vanished from the grid. The result was that the spot price surged in some locations by over 1,000%, with the national average more than doubling to over $7/MMBtu over the typical of around  $3/MMBtu. A total system collapse was prevented by the rapid withdrawal of 360 a record Bcf from storage. The price was not merely a reflection of high usage, but also included a scarcity premium.

Supply and Demand for Data Centers

A recent Visual Capitalist Info-graphic displays a fair amount of agglomeration of data centers. Not only does Virginia (!) lead, but many other states (IL, OH, TX, OR) have more data centers than their population or level of economic activity would suggest. The general pattern aligns with Fan and Greenstein's analysis that proximity to customers is important, even if it raises costs due to higher land prices in urban areas. Additionally, data centers' demand for electricity will tend to lead them to states with lower energy prices. The ability to achieve economies of scale also appear to be important, which also would be more expensive in urban areas. Different suppliers locating near to each other suggests that the advantages scale fall on the industry, not just the larger firm. This could be due to a more robust labor market for data center talent.

A tale of two cities and rent control

WSJ: What the Twin Cities Tell Us About Fixing the Housing Crisis

The Natural Experiment:

• In 2022, St. Paul enacted one of the strictest rent-control regimes in the country. The ordinance capped annual rent increases at 3% for most apartments, even empty ones. It didn’t adjust for inflation. ... 
• Across the Mississippi River, Minneapolis steered clear of rent control. Instead, city officials strictly focused on creating new housing.

Results:

• [In St Paul]:  Real-estate investment activity nearly froze. Developers halted new projects as lenders pulled back....Property values declined as investment cooled. 
• In Minneapolis:  ...developers kept building. Housing permits surged nearly fourfold in early 2022 from the year before. Downtown hubs blossomed as new apartments hit the market and attracted young professionals.

BOTTOM LINE:  In the short run, a rent ceiling create excess demand for, or shortage of available apartments.  In the long-run, it reduces supply, thereby exacerbating the shortage.   

Argentine Rental Market Natural Experiment

One of Argentine President Milei's radical reforms was to "take a chainsaw" to rent control laws. Argentina had had some of the most restrictive rent control regimes ever. All of that was abandoned almost over night. Many media outlets noted with glee that rents fell dramatically. Even most economists were surprised by how much supply had been withheld from the market.

Now a more systematic analysis by Elfert and Thomsen that compares trends just before and after the repealing laws confirms the initial impressions. Supply of rental units skyrocketed.

 When the supply curve shifts out, we move down the demand curve resulting in prices falling. 

Could this be a lesson for New York's new mayor?

Tax Avoidance in Norway

The Laffer Curve, made famous by supply-side economic policy in the 1980s, is alive and well. It shows that higher taxes can reduce tax receipts if enough people stop engaging in the activity that is being taxed. In this case, that activity is owning wealth in Norway. Like all tax implementations, it's complicated, but it seems that various increases in tax rates on the wealth of the super rich has led to their exodus.

The recent wealth tax increase in Norway was expected to bring in an additional $146M in yearly tax revenue.

Instead, individuals worth $54B left the country, leading to a lost $594M in yearly wealth tax revenue. 

 Switzerland looks to gain from this wealth flight.

 

Condos vs. Houses: months of supply

WSJ:   In Chapter 8, we teach that prices are set when the number of buyers (demand) equals the number of sellers (supply).  When there are too many sellers (buyers), prices fall (rise).  However, it may take a while for prices to "clear" the market.  

For condos and single family homes, one measure of whether there are more buyers or sellers is the "months of supply," calculated as the number of units on the market divided by the selling rate.  For example, if there are 1 million units on the market, selling at 20,000/month, it would take 5 months to sell the current inventory.  

in the second graph, you see the annual price change:  prices of condos began falling when supply hit 4 months.  

Nobel Prize: How to Grow

From MarginalRevolution:

Economic growth is not just about new ideas but about how well an economy can reallocate production to the firms using the new ideas

...growth requires that some firms fail and that labor be displaced so resources can flow to new, more productive uses. ... Business dynamism has declined in Europe relative to the United States, a worrying fact given that business dynamism has also declined in the United States. Nevertheless, the US has a more flexible labor market and appears more open to both the birth of new firms (venture capital) and the deaths of older firms.

...Yet, in both the United States and around the the world the differences between high productivity and low productivity firms appears to be growing, ... which means that the good ideas are not spreading as quickly as they once did.

Previous posts on Dynamism

HT:  Mike

CA min wage goes up ==> CA employment declines

The classic book, Economics in One Lesson reduces all of economics to a similar lesson:

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

The lesson of Chapter 3 is similar:

• Consider all costs and benefits that vary with the consequences of a decision:
• If you miss some, that is the "hidden cost fallacy"
• If you take account of irrelevant ones, that is the "sunk-cost fallacy"

 This hidden-cost fallacy comes from California, via Instapundit.com:

California raised the minimum wage statewide for “fast food restaurant employees” to $20 per hour last April following the passage of a ballot proposition in September the year before.

Analysis of unadjusted data from the Quarterly Census of Employment and Wages, the NBER found “that employment in California’s fast food sector declined by 2.7 percent relative to employment in the fast food sector elsewhere in the United States from September 2023 through September 2024 … Our median estimate translates into a loss of 18,000 jobs in California’s fast food sector relative to the counterfactual.”

The fast food sector has also cut workers’ hour and increased automation to avoid paying rising employment costs.

Any econ student could have predicted this using a shift in the supply curve, but someone at UC Berkeley predicted the opposite:

A new study published by UC Berkeley’s Institute for Research and Labor Employment confirmed that California’s $20 minimum wage for fast-food workers has led to significant benefits for workers, without the devastating consequences that critics predicted.  

Fortunately for us, we have an adversarial system, so that mistakes by one side are usually brought to light by the other.  

FOOTNOTE: a middling economists' take on weighing the benefits of our adversarial system. (link)