Milton Friedman on public housing

Note the consequentialist ethic, when he fields a question from a young man in the audience.

Will Commercial Real Estate prices fall?

The Economist calls it "a hellish-perfect-dumpster-fire-storm."

The situation poses a problem for two big, intertwined American industries. The first is property, where owners are grappling with the idea that the office buildings they own—uncomfortably empty and unlikely to fill up again—might only be worth half what they paid for them. The second is their financiers. When Brookfield, an asset manager, recently decided it would be better off handing over the keys of two vast office towers in Los Angeles, rather than refinancing the $784m of loans it owed on them, it handed the keys over to Citigroup and Morgan Stanley, two big banks.

Banks will end up responsible for lots of offices, which they will likely have to sell at deep discounts. This will bring back memories of the global financial crisis of 2007-09. But there are reasons to think history is not about to repeat itself. First, commercial property is worth just half as much as residential real estate, which is where problems began last time around. Second, lax lending saw banks grant mortgages worth as much as 100% of a home’s value before the financial crisis. Commercial-property lenders offer a borrower a maximum 75% mortgage, meaning prices will have to fall much further for banks to face losses. ...

Look out the windows of The Economist’s office in Washington and on any given weekday a handful of builders are busy converting the old Vanguard building, an office that once housed the Peace Corps, into a block of shiny new apartments

Bank regulators didn't see the hidden cost of bonds

WSJ on how banks evade regulation: 

If a bank buys a bond paying 3% interest for $100, and then the interest rate on similar bonds goes up to 6%, the value of the bond is cut in half because no investor is going to buy a bond earning 3% if they could buy an equivalent bond earning 6%.  But rather than take losses on their bonds which would have triggered regulatory action,

...banks simply "declared that they intended to hold on to large portions of their money-losing bonds until they matured rather than selling them, and they then changed the bonds’ accounting labels accordingly. ... excluding the unrealized losses from their balance sheets allowed them to report robust levels of capital when in reality their assets were worth much less.

If we are going to insure deposits, we need regulators to do their jobs. They can start by reading Chapter 3 (the opportunity cost of holding a bond is what they could have earned by selling it) and Chapter 5 (the value of an asset is its discounted cash flow). This is not rocket science.

ChatGPT vs. Google Bard on a real-world example of benefit cost analysis

ChatGPT 

One example of a benefit-cost analysis from a US firm is the analysis conducted by Ford Motor Company to determine whether to recall certain vehicles with potentially dangerous defects. Ford used benefit-cost analysis to compare the costs of the potential recall with the benefits of preventing injuries, fatalities, and potential lawsuits. The costs of the recall included the cost of replacing or repairing the defective parts, as well as the cost of notifying customers and administering the recall. The benefits of the recall included the value of the lives saved, the reduction in injuries, and the potential reduction in legal liabilities. Through the use of benefit-cost analysis, Ford was able to determine that the benefits of the recall outweighed the costs, and therefore made the decision to issue the recall. This decision not only helped protect customers and prevent potentially costly legal battles, but also helped protect Ford's reputation and brand image in the long term. 

Bard

 Netflix uses benefit-cost analysis to make decisions about which new shows and movies to produce. The company considers the costs of production, including the cost of actors, writers, and directors, as well as the cost of marketing and distribution. Netflix also considers the benefits of each project, such as the potential for critical acclaim, the potential for awards, and the potential for commercial success. 

Amazon uses benefit-cost analysis to make decisions about which new products to offer. The company considers the costs of development, including the cost of research and design, as well as the cost of manufacturing and distribution. Amazon also considers the benefits of each product, such as the potential for sales, the potential for reviews, and the potential for customer loyalty. 

Apple uses benefit-cost analysis to make decisions about which new technologies to develop. The company considers the costs of research and development, as well as the cost of manufacturing and distribution. Apple also considers the benefits of each technology, such as the potential for innovation, the potential for commercial success, and the potential for customer satisfaction. 

 Benefit-cost analysis is a valuable tool for making decisions that are in the best interests of a company. By considering the costs and benefits of each project, companies can make sure that they are investing their resources in the most profitable way possible.

ChatGPT vs. Google's bard on an example of incentive misalignment, why it occurred, and how to fix it.

 

Please give me an real-world example of incentive misalignment, why it occurred, how to fix it how much it would cost to do so.

========CHATGPT=================

Here's a real-world example of incentive misalignment: Example: In 2016, Wells Fargo, one of the largest banks in the US, was involved in a major scandal where thousands of its employees opened millions of fake accounts in order to meet internal sales targets and earn bonuses. The bank's incentive structure was such that employees were rewarded for meeting aggressive cross-selling targets, which led to unethical behavior by employees who were under pressure to meet these targets. Why it occurred: Wells Fargo's incentive structure rewarded sales targets instead of customer needs. The bank's management had set unrealistic sales targets for its employees, and as a result, employees felt immense pressure to meet those targets, even if that meant resorting to fraudulent and unethical behavior. How to fix it: The bank's leadership had to take immediate corrective action by eliminating the cross-selling targets, revising comp plans, and creating a culture focused on customer satisfaction and ethical behavior. The bank also hired an independent law firm to conduct a thorough investigation into the scandal, apologized publicly, and paid billions of dollars in fines to various regulatory authorities. How much one would save by doing so: The scandal cost Wells Fargo billions of dollars in lost market value, legal fees, and fines. The bank had to pay over $3 billion in fines and penalties, fire thousands of employees, and face years of regulatory scrutiny. If the bank had focused on customer satisfaction and ethical behavior from the start, it could have saved itself from this financial and reputational hit.

========GOOGLE BARD============

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Sure. One example of incentive misalignment is the case of the Wells Fargo bank scandal. In this case, employees were incentivized to sell as many products as possible to customers, even if those products were not in the customers' best interests. This led to employees opening fraudulent accounts and engaging in other unethical practices.

The incentive misalignment occurred because the bank's compensation system was based on the number of products sold, rather than on the quality of those products. This created a situation where employees were motivated to sell products even if they were not in the customers' best interests.

The bank has since taken steps to fix the incentive misalignment. For example, it has changed its compensation system so that employees are no longer incentivized to sell products at all costs. It has also implemented new training programs to teach employees about the importance of ethical behavior.

The cost of fixing the incentive misalignment is difficult to estimate. However, it is likely that the bank has spent millions of dollars on these changes.

Incentive misalignment can occur in many different situations. It can occur in businesses, schools, government agencies, and even in families. When incentives are misaligned, it can lead to problems such as:

• Employees who are more focused on their own self-interest than on the best interests of the company or organization they work for.
• Students who are more focused on getting good grades than on learning the material.
• Government employees who are more focused on pleasing their superiors than on serving the public.
• Family members who are more focused on getting what they want than on helping each other.

There are a number of ways to fix incentive misalignment. Some common solutions include:

• Changing the incentives so that they are more aligned with the desired behavior.
• Providing training to help people understand the importance of ethical behavior.
• Creating a culture of transparency and accountability.
• Developing a system of checks and balances.

Should we prevent teens from working?

The message of chapter 1, that voluntary transactions create wealth, has longer term benefits when the transactions involve labor.   As Reason points out:

"When economist Raj Chetty studied dozens of local factors that correlated with upward mobility, teenage labor force participation proved more powerful than almost any other factor, even high school drop-out rates or violent crime rates," Timothy P. Carney pointed out last week in a Washington Examiner column.

Chetty, a Harvard University economist, is better known for emphasizing the value of social capital—in particular, friendships across class lines—for boosting economic mobility. But his research indicates a strong correlation between teenage participation in the labor force and upward mobility. It's a connection that's been made multiple times in the past.

Although teenage labor force participation fell from 59.3% in 1978 to 32.5% in 2014, this year it climbed to 37.5%, partly as a result of less restrictive laws.

How does ChatGPT characterize me?

Luke Froeb is an accomplished and highly experienced economist who has made significant contributions to the field of antitrust economics. He has held many important positions throughout his career, including Chief Economist at the Antitrust Division of the U.S. Department of Justice and Director of the Bureau of Economics at the Federal Trade Commission. Froeb is known for his extensive scholarship and research on competition policy, antitrust economics, and industrial organization. He has published numerous articles in top academic journals and has co-authored several highly regarded textbooks on the subject. Additionally, he has served as an expert witness in many high-profile antitrust cases. Froeb is also a respected educator, having taught at a number of universities, including Vanderbilt University where he currently serves as the William C. Oehmig Chair in Free Enterprise and Entrepreneurship. Through his teaching, research, and service, Luke Froeb has become a leading figure in the field of antitrust economics and has played a significant role in shaping antitrust policy in the United States.

Interestingly, it made up this part "co-authored several highly regarded textbooks on the subject."  That is a feature, not a bug, which is a byproduct of the "noise" it adds to its answer.  Without it, the writing seems seems sterile.  

Why are state income taxes going down?

Competition between states for high earners has intensified (link):

...two structural changes have enhanced state tax competition. First, the 2017 Tax Cuts and Jobs Act capped the federal deduction for state and local taxes paid at $10,000, thus increasing the “felt cost” of state taxation, particularly for higher earners. A high-paid Silicon Valley engineer who could previously deduct $70,000 in California income taxes on his federal tax return can now only deduct $10,000. In short, the burden of his state-government tax policy went up, incentivizing him to find a better-managed state.

Second, the pandemic untethered a multitude of high-paid workers from a geographic location, creating the opportunity for taxpayers to move, and giving states an incentive to compete for their relocations. A 2022 McKinsey report found that 35 percent of workers were eligible for full-time remote work, including 46 percent of workers earning over $150,000. The Silicon Valley engineer who lost federal deductibility for his California income taxes in 2018 became eligible for remote work in 2021. His move to Austin, Texas, eliminated his entire state income-tax liability. 

HT:  Instapundit.com 

ChatGPT vs. Google Bad on how LLMs are going to change Economics education

General AI is poised to revolutionize many aspects of our lives, and education is no exception. In particular, the teaching of economics is likely to be transformed by the use of AI, with new opportunities for both students and professors. 

1. One of the key ways in which AI will change economics education is in the automation of routine tasks. This includes grading, which can now be done much more quickly and accurately using AI algorithms. This will free up time for professors to focus on other tasks, such as developing new course materials and providing more individualized feedback to students. 
2. Another area where AI is likely to have a significant impact is in the personalization of learning. With AI-powered adaptive learning systems, students can receive individualized instruction tailored to their specific needs and learning styles. These systems can adjust the difficulty and pace of instruction based on the student’s progress and provide targeted feedback to help them improve their understanding of key concepts. 
3. Moreover, AI can provide students with access to vast amounts of data and information that would be otherwise difficult to process. This includes live economic data and simulations of economic models that can help students understand complex economic theories and their real-world applications. 
4. One of the most exciting aspects of AI in education is the potential for new modes of learning, such as gamification and virtual reality. Gamification can make economics concepts more engaging and interactive, while virtual reality can provide students with immersive experiences that allow them to explore economic phenomena in a more dynamic way. 
5. Finally, AI can facilitate new forms of collaboration and peer-to-peer learning. With AI-powered chatbots and social learning platforms, students can connect with each other to discuss economics concepts and receive feedback on their work. They can also collaborate on projects and assignments, sharing their knowledge and expertise to solve complex economic problems. 

In conclusion, the possibilities for AI in economics education are vast and exciting. While there are undoubtedly challenges to be overcome in implementing AI in the classroom, the potential benefits far outweigh the risks. With AI, the study of economics will become more personalized, engaging and dynamic, providing students with the skills and knowledge they need to succeed in the 21st century economy.

===GOOGLE BARD======

Large language models (LLMs) are going to change the teaching of economics in a number of ways.

First, LLMs can be used to create personalized learning experiences for students. For example, an LLM could be used to create a customized study plan for a student based on their individual strengths and weaknesses. This would allow students to learn at their own pace and focus on the areas where they need the most help.

Second, LLMs can be used to provide students with real-world examples of economic concepts. For example, an LLM could be used to show students how the principles of supply and demand can be applied to the current housing market. This would help students to understand economic concepts in a more concrete way.

Third, LLMs can be used to automate tasks that are currently done by teachers. For example, an LLM could be used to grade homework assignments or create practice tests. This would free up teachers to spend more time on tasks that require human judgment, such as providing feedback to students or developing new lesson plans.

Fourth, LLMs can be used to create new forms of economic education. For example, an LLM could be used to create a virtual economy that students could explore. This would allow students to learn about economic concepts in a more hands-on way.

Overall, LLMs have the potential to revolutionize the teaching of economics. By providing personalized learning experiences, real-world examples, and automating tasks, LLMs can help students to learn economics more effectively and efficiently.

Mis-aligned incentives in healthcare?

 Fortune Magazine thinks it has absorbed the lessons of chapter 1, i.e., "Make sure employees have enough information to make good decisions, and the incentive to do so."

The article points to this as evidence of incentive misalignment between payers (insurance companies) and patients:

...hepatitis C can be cured 95% of the time with pills in as little as eight weeks. Yet fewer than one in three insured people diagnosed with hepatitis C receive the cure within a year of their diagnosis, according to an August report from the Centers for Disease Control.

If we can believe the CDC stats, the article implies that payers would rather stall, i.e., avoid paying $30,000 for the cure because, patients could switch suppliers.  Lets do some benefit-cost analysis to check out the plausibility of this story.  If the payer does not pay for the cure, it faces the risk of having to pay for treating the symptoms of the disease.  

From the insurer's point of view:

• Buying the pills costs $30,000, cures the patient, and there are no further costs.
• Not buying the pills risks having to treat the patient for hepatitis C which can cost 10 times as much as the pills, e.g., a liver transplant costs $500,000

To model this trade-off, let p be the probability that a patient stays with the insurer.  We assume that premiums are small relative to the costs of treatment, and we ignore them.  

If the article is correct, then a $30,000 cure today is more costly than the expected costs of treating the symptoms of hepatitis C tomorrow.

•  30,000 > p*$300,000

Unless the probability of the patient staying with the insurance company is less than 10%, it is more profitable to pay for the cure.  

BOTTOM LINE:  I don't see the misalignment. 

HT:  Justin