Economics

Previous Economics Roundups: #1, #2, #3

Since this section discusses various campaign proposals, I’ll reiterate:

I could not be happier with my decision not to cover the election outside of the particular areas that I already cover. I have zero intention of telling anyone who to vote for. That’s for you to decide.

All right, that’s out of the way. On with the fun. And it actually is fun, if you keep your head on straight. Or at least it’s fun for me. If you feel differently, no blame for skipping the section.

Last time the headliner was Kamala Harris and her no good, very bad tax proposals, especially her plan to tax unrealized capital gains.

This time we get to start with the no good, very bad proposals of Donald Trump.

This is the stupidest proposal so far, but also the most fun?

(Aside from when he half-endorsed a lightweight version of The Purge?!)

Trump: We will end all taxes on overtime.

The details of the announcement speech at the link are pure gold. Love it.

The economists, he said, told him he would get ‘a whole new workforce.’

Yes, that would happen, and now it’s time for Solve For the Equilibrium. What would you do, if you learned that ‘overtime pay’ meaning anything for hours above forty in a week was now tax free? How would you restructure your working hours? Your reported working hours? How many vacations you took versus how often you worked more than forty hours? The ratio of regular to overtime pay? Whether you were on salary versus hourly? What it would mean to be paid to be ‘on call,’ shall we say?

I used this question as a test of GPT-4o1. Its answer was disappointing, missing many of the more obvious exploitations, like alternating 80 hour work weeks with a full week off combined with double or more pay for overtime. Or shifting people out of salary entirely onto hourly pay.

I often work more than 40 hours a week for real, so I’d definitely be restructuring my compensation scheme. And let’s face it, the ‘for real’ part is optional.

This of course is never going to happen. If it did, it would presumably include various rules and caps to prevent the worst abuses. But even the good version would be highly distortionary, and highly anti-life. You are telling people to intentionally shift into a regime where they work more than 40 hours a week as often as possible, the opposite of what we as a society think is good. This is not what peak performance looks like, even working fully as intended.

Less fun Trump proposals are things like bringing back the SALT deduction (what, why, I am so confused on this one?) and a 10% cap on interest on credit cards. Which would effectively be a ban on giving unsecured credit cards with substantial limits to anyone at substantial risk of not paying it back or require other draconian fees and changes to compensate, and lord help us if actual interest rates ever approached 10%. Larry Summers notes that this is a dramatic price cut on the order of 70% for many customers, as opposed to other proposed price controls that are far less dramatic and thus less destructive, so it would have far more dramatic effects faster. If payday loans are included they’re de facto banned, if not then people will substitute those far worse loans for their no longer available credit cards.

(Fun fact: We do have price controls on debit cards, which turns out mostly fine because there’s no credit risk and it’s a natural monopoly, except now of course the Biden DoJ is bringing an antitrust suit against Visa.)

Then there’s ‘I’m going to bring down auto insurance costs by 50%’ where I could try to imagine how he plans to do that but what would even be the point.

Also there is his plan to ‘make auto loan interest tax deductible’ which is another fun one. Already car companies often make most of their money on financing. The catch is the standard deduction, which you have to give up in order to claim this. If the car loan is the only big item you’ve got, it won’t help you. What you need is some other large deduction, which will usually be a home loan. So this is essentially a gift to homeowners – once you’re deducting your mortgage interest, now you can also deduct your car loan interest. It makes no economic sense, but Elon Musk will love it, and it’s not that much stupider than the mortgage deduction. Of course, what we should actually do is end or phase out the mortgage deduction (as a compromise you could keep existing loans eligible but exclude new ones, since people planned on this), but I’m a realist.

Also there’s Trump’s other proposed huge giveaway and trainwreck, which is a quiet intention to ‘privatize’ Fannie Mae and Freddie Mac. I put privatize in air quotes because if you think for one second we would ever allow these two to fail then I have some MBS to sell you. Or buy from you. I’m not sure which. Quite obviously we are backing these two full on ride or die, so this would mean socialized losses with privatized gains and another great financial crisis waiting to happen.

As Arnold Kling suggests, we could and likely should instead greatly narrow the range of mortgages the government backs, and let the private sector handle the rest at market prices. When we back these mortgages, the subsidy is captured by existing homeowners and raises prices, so what are we even doing? Alas, I doubt we will seriously consider that change.

Another note on the unrealized capital gains issue is what happens to IP that pays out over time. For example, Taylor Swift suddenly owns a catalog worth billions, that could gain hundreds of millions in value when interest rates shift. Are you going to force her to pay tax on all that? How is she going to do that without selling the catalog? You want to force her to do that? Or do you want her to find a way to intentionally sabotage the value of the catalog?

We have some good news on the grocery price control front, as Harris has made clear that her plan would not involve global price controls on groceries and widespread food shortages. Instead, it will be modeled on state-level price gouging laws, so that in an emergency we can be sure that food joins the list of things that quickly becomes unavailable at any price, and no one has the incentive to stock up on or help supply badly needed goods during a crisis.

Tariffs are terrible, but not as bad as I previously thought, if there is no retaliation?

Justin Wolfers: Here’s a rule of thumb that Goldman draws from the literature:

1. Roughly 15% of a tariff is borne by exporters from the other country.

2. Another 15% results in compressed margins for American importers.

3. 70% of the burden is borne by consumers paying higher prices.

The first 15% is indeed then ‘free money’ and the second 15% is basically fine. So if you were to use the tariff to reduce other taxes, and the other country didn’t retaliate, you’d come out ahead. You get deadweight loss from reduced volume due to the 70%, but you face similar issues at least as much with almost every other tax.

A full-on trade war by the USA alone, however, would be extremely bad (HT MR).

We use an advanced model of the global economy to consider a set of scenarios consistent with the proposal to impose a minimum 60% tariff against Chinese imports and blanket minimum 10% tariff against all other US imports. The model’s structure, which includes imperfect competition in increasing-returns industries, is documented in Balistreri, Böhringer, and Rutherford (2024). The basis for the tariff rates is a proposal from former President Donald Trump (see Wolff 2024). We consider these scenarios with and without symmetric retaliation by our trade partners.

Our central finding is that a global trade war between the United States and the rest of the world at these tariff rates would cost the US economy over $910 billion at a global efficiency loss of $360 billion. Thus, on net, US trade partners gain $550 billion. Canada is the only other country that loses from a US go-it-alone trade war because of its exceptionally close trade relationship with the United States.

…

When everyone retaliates against the United States, the closest scenario here to a US-led go-it-alone global trade war, China actually gains $38.2 billion.

Noah Smith does remind us that no, imports do not reduce GDP. Accounting identities are not real life, and people (including Trump and his top economic advisor) are confusing the accounting identity for a real effect. Yes, some imports can reduce GDP, in particular imports of consumer goods that would have otherwise been bought and produced internally. But it is complicated, and many imports, especially of intermediate goods, are net positive for GDP.

In other campaign rhetoric news, I offer props to JD Vance for pointing out that car seat requirements act as a form of contraception.

The context of his comment was a hearing where people quite insanely proposed to ban lap infants on flights, which the FAA has to fight back against every few years by pointing out that flying is far safer than other transportation.

So such a ban would actively make us less safe by forcing people to drive.

If you want the right job, or a great job, that’s hard. If you want a job at all? That’s relatively easy, if you’re in reasonable health.

Jeremy: Only 4% of working age males “not in the labor force” say they have difficulty finding work. By far the largest reason for dropping out is physical disability and health problems.

A comment points out Jeremy is playing loose here: 4% is who listed this as the primary reason for being out of the labor force. A lot more did have difficulty.

Jeremy: Also, the prime-age employment rate is near all-time highs — some men aren’t in the LF, this is true, but women are employed at by far the highest rate ever. This suggests that the number of jobs isn’t the problem, but something (or things) are making men drop out (see above).

And the prime age employment rate is highest for native-born workers

Yes, a lot of those jobs are terrible. But that has always been true.

Kalshi will pay 4.05% on both cash and open positions, which will adjust with Fed rates. That’s a huge deal. The biggest barrier to long term prediction markets is the cost of capital, which is now dramatically lower.

Election prediction market update: As I write this, Polymarket continues to be the place to go for the deep markets, and they have Trump at 55% to win despite very little news. So we’ve finally broken out of the period where the market odds were strangely 50/50 for a long time, likely for psychological reasons driving traders. The change is also reflected in the popular vote market, with Trump up to 31% there, about 8% above his lows. Nate Silver’s predictions have narrowed, he has Harris at 51% to win, down from a high of 58%.

The move seems rather large given the polls and lack of other events. My interpretation is that the market is both modestly biased in favor of Trump for structural reasons (including that it’s a crypto market and Trump loves crypto) and that the market is taking a no-news-is-good-for-Trump approach.

I haven’t heard anyone think of it that way, but it makes sense to me. Consider the debate. Clearly the debate was good for Harris, including versus expectations. But also the debate was expected to be good for Harris, so before the debate the polls were underestimating Harris in that way. One could similarly say that Harris generally has more opportunity to improve and less chance of imploding or having health issues over the last two months, so her chances go down a little if Nothing Ever Happens.

As many have pointed out, there is little difference between 44% Harris at Polymarket, and 51% Harris at Silver Bulletin. Even if one of them wins decisively, it won’t mean that one of them is right and the other wrong. To conclude that you have to look at the details more carefully.

We’ve gone over this before but it bears repeating, and I like the way this got presented this time around. How bad are our marginal tax rates for those seeking to climb into the middle class, once you net out all forms of public assistance, taxes and expenses?

As bad as it gets.

Josh Job: Holy shit.

Brad Wilcox: Truly astonishing indictment of our welfare policies fr @AtlantaFed. A single mother in DC can make no gains, financially, as her earnings rise from $11,000 to $65,000 because benefits like food stamps & Medicaid phase in/out as her income rises. Terrible for work/marriage.

Andrew Jobst: Talked to someone who lost their job in the GFC (highly educated, driven, professional credentials). Wanted to start her own business. Commented about how demoralizing it was to hustle all day to earn another dollar, only for her unemployment benefit to drop by a dollar.

Benefits are not ‘as good as cash’ so the problem probably is not quite as bad as ‘100% effective marginal tax rates from $10,000 in income up to $65,000’ but it could be remarkably close, especially in places with high additional state taxes.

Can you imagine what would happen if you took a world like this, and you stopped counting tips as taxable income, as proposed by both candidates?

Effectively, you’d have a ~100% tax rate on non-tip income, but 0% on tips (and Trump would add overtime). Until you could ‘escape’ well above the $65k threshold, basically everyone would be all but obligated to fight for only jobs where they could get paid in these tax-free ways, with other jobs being essentially unpaid except to get you to the $10k threshold.

Given these facts, what is remarkable is how little distortion we see. Why isn’t there vastly more underground economic activity? Why don’t more people stop trying to earn money, or shift between trying to earn the minimum and then waiting to try until they’re ready to earn the maximum, or structuring over time?

My presumption is that this is because the in-kind benefits and conditional benefits are worth a lot less than these charts value them at. Cash is still king. So while the effective rate is still quite high, we don’t actually see 100% marginal tax rates.

If you want more income, Tyler Cowen suggests perhaps you could work more hours? A new estimate says 20% of variance in lifetime earnings is in hours worked, although that seems if anything low, especially given as Tyler points out that working more improves your productivity and human capital.

Tyler Cowen: In the researchers’ model, 90% of the variation in earnings due to hard work comes from a simple desire to work harder. Note again this is an average, so it does not necessarily describe the conditions faced by, say, Elon Musk or Mark Zuckerberg.

In my experience, vastly more than 20% of my variance in income comes from the number of hours worked and how hard I was working generally. One could draw a distinction between hours worked versus working hard during those hours. I’d guess the bigger factor is how hard I work when I’m working, but the times I’ve succeeded and gotten big payoffs, it wouldn’t have happened at all if I hadn’t consistently worked hard for a lot of hours. The time I wasn’t able to deliver that effort, at Jane Street, it was exactly that failure (and what caused that failure) that largely led to things not working out.

Working hard also applies to influencers. In this job market paper from Kazimier Smith, he finds that the primary driver of success is lots of posting. Sponsored posts grow reach the same as regular posts, which is nice work if you can get it, although this results likely depends on influencers selecting good fits and not overdoing it, and on correlation, where if you are getting sponsorships it is a sign you would otherwise be growing.

The abstract also introduced the question of focus and audience capture. Influencers and other content creators have to worry that if they don’t give the people what they want, they’ll lose out, and I’ve found that writing on certain topics, especially gaming, creates permanent loss of readers. I’d love to see the proper version of that paper too.

Since we’ve now had some major storms, it’s time for another round of reminding everyone that laws against ‘price gouging’ are a lot of why it we so quickly run out of gas and other supplies in emergency situations. Why would you stock extra in case of emergency, if you only can sell for normal prices? Why would you bring in extra during an emergency, if you can only sell for normal prices?

Because presumably, what you value most lies elsewhere.

Dr. Insensitive Jerk: Our relatives in the Florida evacuation zone just told us I-75 is a parking lot, and no gasoline is available.

Do you know why no gasoline is available? Because of price-gouging laws.

Pointing this out provokes a predictable emotional response from adult children. “He should give me gas cheaply! He should store an infinite amount of gasoline so he can fill up all the hoarders, and still have gas left for me, and he should do it for the same price as last week!”

Now when Floridians need gasoline desperately, they can’t buy it at any price, because other Floridians said, “It’s cheap, so I might as well fill the tank.”

People outside Florida with tanker trucks full of gasoline might have considered helping, but instead they said, “I won’t risk it. If I charge enough to make it worth my while, I will be arrested and vilified in the press.”

But at least the Floridians won’t have to lie awake in their flooded houses worrying that somebody made a profit from rescuing them.

Alas, the Bloomberg editorial board will keep on writing correct takes like ‘Price Controls Are a Bipartisan Delusion’ (the post actually downplays the consequences in a few cases, if anything) and we will go on doing it.

I appreciate this attempted reframing, though I doubt it will get through to many:

Maxwell Tabarrok: High prices during emergencies aren’t gouging – they’re bounties for desperately needed goods. Like a sheriff offering a big reward to catch a dangerous criminal, these prices incentivize the entire economy to rush supplies where they’re most needed.

With two major hurricanes in the last couple of weeks, “price gouging” is in the news. In addition to it’s violent name, there are good intuitive reasons to dislike price gouging.

But imagine if you were the sheriff of Ashville, NC, and it was your job to get more gasoline and bring it into town.

You might offer a bounty of $10 a gallon, dead or alive.

That’s a lot more than the usual everyday bounty, but this is an emergency.

Prices aren’t just a transfer between buyer and seller.

They’re also also a signal and incentive to the whole world economy to get more high-priced goods to the high-paying area; they’re a bounty.

The last thing you’d want if you were the sheriff is a cap on the bounty price you’re allowed to set.

High prices on essential goods during an emergency are WANTED posters, sent out across the entire world economy imploring everyone to pitch in and catch the culprit.

The difficulty that many people may have in paying these higher prices is a serious tragedy, and one that can be alleviated through prompt government response e.g by sending relief funds and shipping in supplies. But setting prices lower doesn’t mean everyone can access scarce and expensive essential goods. In an emergency, there simply aren’t enough of them to go around.

Setting low prices might mean the few gallons of gas, bottles of water, or flights that are available are allocated to people who get to them first, or who can wait in line the longest, but it’s not clear that these allocations are more egalitarian.

These allocations leave the central problem unsolved: A criminal is on the loose and a hurricane has made it difficult to get these goods to where they’re needed.

When there’s an emergency and a criminal is on the loose, we want the sheriff to set the bounty high, and catch ‘em quick. High prices during other emergencies work the same way. Let the price-system sheriff do his work!

Scott Sumner points out that customers very much prefer ridesharing services that price gouge and have flexible pricing to taxis that have fixed prices, and very much appreciate being able to get a car on demand at all times. He makes the case that liking price gouging and liking the availability of rides during high demand are two sides of the same coin. The problem is (in addition to ‘there are lots of other differences so we have only weak evidence this is the preference’), people reliably treat those two sides very differently, and this is a common pattern – they’ll love the results, but not the method that gets those results, and pointing out the contradiction often won’t help you.

Chinese VC fundraising and VC-backed company formation has fallen off a cliff, after China decided they were going to do everything they could to make that happen.

Financial Times: Venture capital executives in China painted a bleak picture of the sector to the FT, with one saying: ‘The whole industry has just died before our eyes.’

Bill Gurley: Many in Washington are preoccupied with China. If this article is accurate, the #1 thing we could do to improve US competitiveness, would be to open the door much more broadly & quickly to skilled immigration. Give these amazing entrepreneurs a home on US soil.

It’s important to note these are private VC funds and VC-backed companies only. This is not the picture of all new enterprise in China. There are plenty of new companies.

According to FT, venture capital has died because the Chinese government intentionally killed it. They made clear that you will be closely monitored, your money is not your own and cannot be transferred offshore, your company is not your own, the authorities could actively go after the most successful founders like Jack Ma, that you are to reflect ‘Chinese values’ or else. Venture capital salaries are capped.

What is left of venture is often suing companies to get their money back, so the government doesn’t accuse them of not trying to get the money back on behalf of the government. New founders are required to put their house and car on the line.

The advocates of Venture Capital and the related startup ecosystem present it as the lifeblood of economic dynamism, innovation and technological progress. If they are correct about that, then this is a fatal blow.

Often we hear talk about ‘beating China,’ along with warnings of how we will ‘lose to China’ if we do some particular thing that might interfere with venture capital or the tech sector. Yet here we have China doing something ten or a hundred or a thousand times worse than any such proposals. Yet I don’t expect less worrying about China?

One perspective listing what 2% compounding annual economic growth feels like once you get to your 40s. It is remarkably similar to my experience – I look around and realize that the stuff I use and value most is vastly better and cheaper, life in many ways vastly better, things I used to spend lots of time on now at one’s fingertips for free or almost free.

A new paper asks why inflation is costly to workers.

We argue that workers must take costly actions (“conflict”) to have nominal wages catch up with inflation, meaning there are welfare costs even if real wages do not fall as inflation rises.

We study a menu-cost style model, where workers choose whether to engage in conflict with employers to secure a wage increase.

…

We conduct a survey showing that workers are willing to sacrifice 1.75% of their wages to avoid conflict. Calibrating the model to the survey data, the aggregate costs of inflation incorporating conflict more than double the costs of inflation via falling real wages alone.

Matt Bruenig rolls his eyes and suggests that a union could take care of that conflict for the workers.

Matt Bruenig: Also worth considering the degree to which “conflict costs” constitute another of the frictions that prevent job-switching (people don’t like upsetting their boss/colleagues), which again points towards collective bargaining as important and a limitation of anti-monopsony.

I got a job once that I left after 6 weeks because I got an unexpected offer that paid about $20k more per year and boy did I have to hear what a piece of shit I was from the person who hired me in the first job. It’s as if they had never even read the textbook.

Matt Yglesias: This resonates with me as I ask myself why I re-upped my Bloomberg column contract at the same nominal salary without even attempting to negotiate for a higher fee.

Except I have seen unions, and whatever else you think of unions they do not exactly minimize such conflicts, instead frequently leading to deadweight losses including strikes. And I have no doubt that inflation substantially increases the average costs of such conflicts.

The reason a worker would pay to avoid conflict with the boss is partly it is unpleasant, partly The Fear, and partly because it can result in anything from turning the work situation miserable up through a full ‘you’re fired,’ or in the union case a strike. At minimum, it risks burning a bunch of goodwill.

Also Matt should realize that when you take a new job after six weeks and quit, you have imposed rather substantial costs on your old employer. During those six weeks, you were probably a highly unproductive employee. They spent a lot of time hiring you, training you, getting you up to speed, and then you burned all that effort and left them in another lurch.

Of course they are going to be mad, although the bigger the gap in offers the less mad they should be. We’ve decided that the employee doesn’t strictly owe the employer anything here, it’s a risk the employer has to take, but at minimum they owe them the right to be pissed off – you screwed them, whether or not it was right to do that.

Another way to look at this is that the decline in real wages is a cost, which then often means other costs get imposed, including deadweight losses like switching jobs or threatening to do so, in order to fix it, but that as is often the case those new costs are a substantial portion of the original loss.

There are also the actual real losses. This is especially acute in situations that involve wages being sticky downwards, or someone is otherwise ‘above market’ or above their negotiating leverage. For example, when I joined [company], I was given a generous monthly salary. I stayed for years, but that number was never adjusted for inflation, because it was high and I needed my negotiating points for other things – I didn’t want to burn them on a COLA or anything.

Often salary negotiations happen at times of high worker leverage, when they have another offer or are being hired or had just proven their value or what not. Having to then renegotiate that periodically is at minimum a lot of stress.

As one commenter noted, sufficiently high inflation can actually be better here. If there’s 2% inflation a year, then you’re tempted to sit back and accept it. If it’s 7%, then you have a fairly straightforward argument you need an adjustment.

Vincent Geloso points out that federal any income tax data before 1943 is essentially worthless if you are looking at distributional effects. The IRS was known not to bother auditing, inspecting or challenging tax returns of less than $5k, which was 91% of them in 1921. It is a reasonable policy to focus auditing and checking on wealthier taxpayers.

But this policy was sufficiently known and reliable that it resulted in absolutely massive tax evasion, as in 95% of people earning under $2,000 a year flat out not bothering to file. Needless to say, at that point you might as well set the tax for such people to $0 and tell them they don’t need to file.

When considering insurance costs as a signal, how does one differentiate what is risky versus what are things only people who are bad risks would choose to do?

John Horton: If you listen, insurance companies are giving you solid, data-driven advice about stuff not to do or buy—don’t own a pit bull, don’t have a trampoline, don’t under-water cave dive, don’t own a “cyber” truck…

what’s kind of nuts is that when instead of just quoting you a higher price, they explicitly just will not cover it. To me, that suggests they think adverse selection is a problem. It’s not *justthat pit-bulls are natural toddler-eaters, they think you’re a reckless idiot and a higher price just increases the average idiocy of the customers, with predictable results

Gwern: Or they don’t have enough data.

The problem is, insurance companies only need correlates. So none of that is good advice about stuff you should do – unless you are planning to starting to transition to a woman because of lower insurance rates for women on many things…?

Robert Parham: Upon inspection, it seems like a externality issue. The cybertruck is so tough that any accident with it leaves the truck unscathed while totalling the other car. The Insurance company is liable for the totalled car, hence the decision.

Insurance is indeed pretty great for things like internalizing that your cybertruck would be very bad for any other car that got into an accident with it. The problem is that when you price out trampoline insurance, a lot of this is that people who tend to buy trampolines are reckless, so you don’t know how much you should avoid owning one.

I even wonder if ‘arbitrary’ price differentials would be good. If you charge less for insurance on houses that are painted orange than those painted green, and someone still wants to insure their green house, well, do they sound like responsible people?

As the tech job market continues to struggle, I’m seeing more threads like this asking if it’s time to reevaluate career and college plans based around being a software engineer. My answer continues to be no. Learning how to code and build things is still a high expectancy path.

Work from home allows workers to be paid for the 10 hours they actually work, without having to semi-waste the other 30. What is often valuable is the ability to suddenly work 60-80 hours a week when it matters, or that one meeting or day when you’re badly needed, and it’s fine to work 10 hours (or essentially 0 hours) most other weeks, and the payment is so you’re on standby.

Detty: The most surreal aspect of the WFH vs. in-office debate is how it’s widely acknowledged that hundreds of millions of people do very little all day every day and yet the economy continues to just churn & those who don’t have the magic piece of paper work very hard for very little.

Seth Largo: Lots of corporations and institutions are so wealthy that it makes sense to pay someone a full time salary for 10 hours of work per week, because those 10 hours really do help keep the machine running, and no one’s gonna do it for 10 hours of pay.

Lindy Manager: Also managers need people available who can activate for bursts when needed who have all the context and information to create or present something of sufficient quality on short notice for a client or executive.

Seth Largo: Don Draper knew this.

ib: Yep. A lot of corporate salaries are effectively retainers.

Always Adblock: Yes. And to keep their institutional knowledge. And to keep them away from competitors.

Had this section in reserve for a post that likely will never come together on its own, so figured this was a good time for it.

Paper concludes minimum wage increases drive increased homelessness due to disemployment effects and rental price increases, and dismisses migration as a potential cause. I mean, yes, obviously, on the main result.

A better question is, what does the minimum wage do to rental costs? The minimum wage does successfully cause some work to become higher paid. Most such workers will not be homeowners. It is entirely plausible that landlords could capture a large portion of these gains via higher rents for low-quality housing, perhaps all of it. In which case, what was the point?

Restaurants in Milan used to be forced to be distant from each other, then they stopped requiring that, resulting in agglomeration that caused diverging amenities in different neighborhoods, and increased product differentiation. Tyler Cowen notes ‘I am myself repeatedly surprised how much the mere location of a restaurant can predict its quality.’

I would think of this less as returns to agglomeration and more as it being costly to force restaurants to locate in uneconomical locations, and to effectively undersupply some areas, leading to lack of competition and variety there, while oversupplying others. By creating product differentiation in location, this reduces their incentive to otherwise differentiate or seek higher quality.

More educated workers experience faster wage growth over time, and an expanding wage premium with age.

The U.S. college wage premium doubles over the life cycle, from 27 percent at age 25 to 60 percent at age 55. Using a panel survey of workers followed through age 60, I show that growth in the college wage premium is primarily explained by occupational sorting. Shortly after graduating, workers with college degrees shift into professional, nonroutine occupations with much greater returns to tenure.

Nearly 90 percent of life cycle wage growth occurs within rather than between jobs. To understand these patterns, I develop a model of human capital investment where workers differ in learning ability and jobs vary in complexity. Faster learners complete more education and sort into complex jobs with greater returns to investment. College acts as a gateway to professional occupations, which offer more opportunity for wage growth through on-the-job learning.

Tyler Cowen suggests this causes problems for the signaling model of education. I disagree, and see this result as overdetermined.

1. Path dependence. Those who go to college then enter professions and careers that allow for such wage growth, from a combination of skills development and social and reputational accumulation. Thus, whatever mix of signaling, correlation and education is causing these other paths, the paths are opened by college, and this has a predictable effect over time.

2. In particular: Gatekeeping. I don’t buy that future employers will no longer care if you went to college. Many high paying jobs will be difficult or impossible to get without a degree, and the degree helps justify paying someone more, since pay is largely about affirming social status. Gatekeeping thus keeps such people increasingly down over time as results compound, and also discourages investment. Why develop human capital that no one will pay for?

3. Correlational. If you go to college, this is a revealed preference for longer time horizons and longer term investment, including the capacity and capability to do it. It makes sense that such folks would continue to invest in human capital growth over time relative to others.

4. In particular: Signaling. Alas, those more willing to invest more time and resources in signaling likely get better compensated over time. Also college plausibly teaches you how to signal.

5. Catching up. If you take a job rather than go to college, you are going to start out with several years of practical experience, which gives you a temporary advantage that fades over time. College students first entering the workforce are famously out of touch and useless, lacking practical skills, and are coming from a sheltered academic world with unproductive norms. Over time, you get over it.

Tyler Cowen put the rooftops tag on this study from Andreas Ek (gated):

This paper estimates differences in human capital as country-of-origin specific labor productivity terms, in firm production functions, making it immune to wage discrimination concerns.  After accounting for wage and experience, estimated human capital varies by a factor of around 3 between the 90th and 10th percentile.  When I investigate which country-of-origin characteristics correlate most closely with human capital, cultural values are the only robust predictor.  This relationship persists among children of migrants.  Consistent with a plausible cultural mechanism, individuals whose origin place a high value on autonomy hold a comparative advantage in positions characterized by a low degree of routinization.

I don’t understand why we want to be shouting this from the rooftops. These types of correlations are the kind that very much do not imply causation, the whole thing is doubtless confounded to hell and back and depends on a bunch of free variables. Autonomy is one of those values that maps reasonably closely with ‘The West’ and so does the level of human capital.

The core claim is that if your culture values autonomy, then you are better suited to a less routine production activity and hold comparative advantage there. Which is a case where I am confused why we needed a study or mathematical model. How could that have been false? Less routine is not the same as more autonomous but the correlation is going to be very high. People with cultural value X hold comparative advantage in activities that embody X, paper at conference?

War Discourse and the Cross Section of Expected Stock Returns finds that the paper’s model of what war tail risks should be worth does not match the market’s past evaluation of what war tail risks should be worth, and decides it is the market that is wrong. I am highly open the market mispricing things like this, especially in response to media salience, but I’m even more open to the academics being wrong.

Paper claims that we are gaining 0.5% per year in terms of how much welfare we get from across a variety of categories from increased product specialization and variety. Households increasingly spend funds on specialized products that exactly fit their preferences, with the increased variety driving the divergence in consumption.

This is also evidence we are richer. Increased product variety requires people able to consume enough, and pay enough extra for quirky preferences, to justify greater product variety. This represents a real welfare gain. However, instead of making people feel less constrained and wealthier, it puts strain on budgets and competes with and potentially puts additional strain on raising families rather than making it cheaper to raise one.

I very much appreciate the product variety, but increasingly I think we need to consider three different measures of wealth:

1. The welfare value of the experience of the items in a typical consumption basket.

2. The combined welfare value including goods that remain unpriced.

3. The difficulty in purchasing the typical consumption basket, and what affordances that leaves for life goals especially retirement, marriage and children.

Or: The Iron Law of Wages proposes that real wages tend toward the minimum to sustain the life of the worker. So we can measure four things.

1. The minimum real wages required to sustain the life of the worker.

2. The welfare value of that minimum consumption basket.

3. The surplus available after that to the typical worker and what that buys them.

4. What else is available that is not priced.

When we either effectively mandate additional consumption, such as purchasing additional safety, health care, residence size, education or other product features, or our culture effectively demands such purchases, or the cheaper alternatives stop being available, what happens?

We do increase the welfare value of the minimum basket. We also raise the cost of that basket, which reduces everyone’s surplus.

What happens when things that people value, like community and friendship and the ability to raise children without being terrified of outside intervention, and opportunities to find a good life partner, are degraded?

Life gets worse without it showing up in the productivity statistics or in real wages.

The current crisis and confusion could be thought of as:

1. The value of the minimum consumption basket is going up a lot.

2. The cost of the minimum consumption basket is going up less than that.

3. Real wages are going up, but less than the cost of the basket, so the surplus available after purchasing the basket is also declining.

4. Key other goods and options are taken away, like those mentioned above.

5. Economists say ‘workers are better off,’ and in many ways they are.

6. People say ‘but I have little surplus and do not see how to meet my life goals and I have no hope and my life experience is getting worse.’

Paper explores the impact of the 2010 dissolution of personal income tax reciprocity between Minnesota and Wisconsin. This looks like it on average raised effective taxes on work across state lines by about 8% of remaining net income. This resulted in a decline in quantity of cross-border commuters between 3% and 5%, with the largest impact on low and young earners. My hunch is that the impact size is so low primarily because of inertia, switching costs and lack of understanding of the costs. Whereas jobs that don’t pay as well, and those of the young, are less sticky. It would be shocking if an 8% tax had this small an effect at equilibrium.

Paper estimates that the CARD Act, which limits credit card interest charges and fees, saved consumers $11.9 billion per year, lowering borrowing costs by 1.6% overall and by 5.3% for those with FICO below 660. What is odd is they also find no corresponding decrease in available credit, despite this making offering credit less profitable. There is no free lunch. A potential story is that credit cards adjusted their other costs and benefits, or the counterfactual here is not well established and there would have been growth in credit otherwise, or the good version is that the whole enterprise is so profitable and useful that the banks ate the reduced profits.

There’s also the strange graph below, which requires explaining. Patrick McKenzie points out that the part of the FICO curve where offering credit cards is unprofitable is still a good place to do business, because those in the unprofitable range are unlikely to stay there so long and their business will remain somewhat sticky as they move.

Has real median income gone up under Biden? This clart implies that it perhaps hasn’t, even if weird timing is involved, and that this explains a lot. Yes, pay has increased since 2019, and increased since 2022, but the question people often effectively ask is since the end of 2020.

‘Total compensation’ is cool but what people look at is the actual money.

Previously: Economics Roundup #1

Let’s take advantage of the normality while we have it. In all senses.

There is Trump’s proposal to replace income taxes with tariffs, but he is not alone.

So here is your periodic reminder, since this is not actually new at core: Biden’s proposed budgets include completely insane tax regimes that would cripple our economic dynamism and growth if enacted. As in for high net worth individuals, taking unrealized capital gains at 25% and realized capital gains, such as those you are forced to take to pay your unrealized capital gains tax, at 44.6% plus state taxes.

Austen Allred explains how this plausibly destroys the entire startup ecosystem.

Which I know is confusing because in other contexts he also talks about how other laws (such as SB 1047) that would in no way apply to startups would also destroy the startup ecosystem. But in this case he is right.

Austen Allred: It’s difficult to describe how insane a 25% tax on unrealized capital gains is.

Not a one-time 25% hit. It’s compounding, annually taking 25% of every dollar of potential increase before it can grow.

Not an exaggeration to say it could single-handedly crush the economy.

An example to show how insane this is: You’re a founder and you start a company. You own… let’s say 30% of it.

Everything is booming, you raise a round that values the company at at $500 million.

You now personally owe $37.5 million in taxes.

This year. In cash.

Now there are investors who want to invest in the company, but you can’t just raise $37.5 million in cash overnight.

So what happens?

Well, you simply decide not to have a company worth a few hundred million dollars.

Oh well, that’s only a handful of companies right?

Well, as an investor, the only way the entire ecosystem works is if a few companies become worth hundreds of millions.

Without that, venture capital no longer works. Investment is gone.

Y Combinator no longer works.

No more funding, mass layoffs, companies shutting down crushes the revenue of those that are still around.

Economic armageddon. We’ve seen how these spirals work, and it’s really bad for everyone.

Just because bad policy only targets rich people doesn’t mean it can’t kill the economy or make it good policy.

I do think they are attempting to deal with this via another idea he thought was crazy, the ‘nine annual payments’ for the first year’s tax and ‘five annual payments’ for the subsequent tax. So the theory would be that the first year you ‘only’ owe 3.5%. Then the second year you owe another 3.5% of the old gain and 5% of the next year’s gain. That is less horrendous, but still super horrendous, especially if the taxes do not go away if the asset values subsequently decline, risking putting you into infinite debt.

This is only the beginning. They are even worse than Warren’s proposed wealth taxes, because the acute effects and forcing function here are so bad. At the time this was far worse than the various stupid and destructive economic policies Trump was proposing, although he has recently stepped it up to the point where that is unclear.

The good news is that these policies are for now complete political non-starters. Never will a single Republican vote for this, and many Democrats know better. I would like to think the same thing in reverse, as well.

Also, this is probably unconstitutional in the actually-thrown-out-by-SCOTUS sense, not only in the violates-the-literal-constitution sense.

But yes, it is rather terrifying what would happen if they had the kind of majorities that could enact things like this. On either side.

Why didn’t the super high taxes in the 1950s kill growth? Taxes for most people were not actually that high, the super-high marginal rates like 91% kicked in at millions a year in income, and at that point loopholes allowed those people to largely dodge. Otherwise rates were not so high once you take into account social security taxes and medicare taxes. Also, who is to say the rates didn’t do a lot of damage? We don’t know the counterfactual and conditions were otherwise quite good.

The Orange Man is Bad, and his plan to attack Federal Reserve independence is bad, even for him. This is not something we want to be messing with. I do wonder how much Trump ‘consulting’ would matter. It is not like he was or would be afraid to make his feelings clear or make threats without formal consultations. This is an underrated reason to be concerned.

Also, if I was a presidential candidate running against the incumbent in a time when the Fed has to make highly unclear decisions on interest rates, I would not want to be very clearly and publicly threatening their independence.

Bloomberg story about New York State and its hyperaggressive pursuit of those who claim not to live in New York. New York it notorious for being by far the most aggressive jurisdiction about this. It is also clear that a lot of this is because New York has a lot of people, many of them in finance, who are doing their best to do the exact minimum necessary to claim they are not residents of New York. Meanwhile, they are constantly visiting, they keep a domicile in the state, and so on.

What I did not see were stories about people who definitely actually left the state, and were not coming back on the regular. Yes, the state is being obnoxious, but if your flight arrives at 12: 05am and then leaves at 11: 48pm, then that is the game you decided to play. Seems fair.

Who pays for tariffs? Cato suggests this handy chart.

This chart is very much trying to have its cake and eat it too.

It starts with a correct dilemma. Suppose a tariff is imposed.

On any given purchasing decision, consider a customer who would have otherwise bought a foreign good. They can either substitute the domestic good, pay for the foreign good or (not listed) substitute away entirely. If widgets go from $100 to $115, perhaps you buy less widgets and more thingamabobs.

If you get the customer to switch, no one pays the tariff.

If you don’t get the customer to switch, no one is protected.

The difference is that in the real world, preferences and use cases are continuous. What happens as you put in the tariff is that some of the customers switch. Some of the customers do not. The price of the foreign good is probably partially absorbed by the producer, partly by the domestic supply chain and partly by the customer. Economics of scale change production costs, expertise is learned, and so on.

To the extent the foreigners eat the cost and still sell, and there is no retaliation, that is a pure win for team tariff. We get money in the public coffers at foreign expense.

To the extent that purchases stay the same and we pay the cost domestically, that is indeed a tax paid by producers or consumers. Yes, it lowers their remaining capital, but is probably one of the least distortionary available taxes. In the terms described above, if you used the money to cut income tax rates, you’d probably be ahead.

To the extent purchases are switched, this is then framed above as ‘Home pays.’ This is a weird way of looking at this. No one is paying a tariff per se, what happened was we substituted domestic production for cheaper imports. This is good for the domestic producer of the widgets, and that has spillover effects to the rest of the economy, as does substituting this activity for other potential production. Whereas the buyer is worse off, which has spillover effects in the other direction in various ways.

The question is, do the benefits exceed the costs? That is hard to know. If you are using otherwise idle resources, gaining expertise and competitiveness and so on, then it could be good. If you are already at full employment and moving down the value chain, then this could be deeply foolish and bad.

What is weird is the claim that the exporter of different goods pays if the value of home’s currency changes. Presumably home’s currency changes in value slightly. But as they say this offsets the higher price ‘somewhat.’ In most cases, this seems like somewhat is very little in practice? So yes, exporters are worse off, but my expectation is the vast majority of the impact is still absorbed as per the rest of the chart. How important is this good to the dollar’s price?

My view of tariffs is that free trade is good. We should encourage more trade, not impose more tariffs, especially since they tend to trigger a response in kind. When Cato says that economists view tariffs as generally unwise and unhelpful, I agree. We would mostly be better off without them, even if others still imposed some on us.

However, it is not like our other tax options do not suck. Income taxes punish and reduce work. Capital gains taxes punish and reduce savings and investment and value creation. Value added taxes punish adding value, and so on. Cabron taxes and unimproved value of land taxes are great where you can get them, but the Pigou Club and Georgist Club do not have enough members at this time.

So if our other options are things like income taxes and capital gains taxes, a one-way tariff that doesn’t change anything otherwise seems to me like it should be about as bad as those. What (as I understand it) makes tariffs such bad taxes in the baseline case is that other countries respond in kind when you impose them, and those countries like you less on all levels, and international relations deteriorate, and so on.

New confirmation of the IDoBadTakes theory of inflation hatred:

Alec Stapp: Twitter figured this one out five months ago.

IDoBadTakes: The economy can be summed up by an experience I had at a recent family reunion. Everyone was complaining about how shit the economy was and how expensive everything was

I pointed out that for the first time ever, every adult present had a good paying job they liked.

Three people present had just been bragging about doubling their salaries. 2 people had just gotten back from their first ever Europe trips. The raises and the jobs were things they felt they had earned. The prices going up were the government’s.

Arin Dube: Great new work by @S_Stantcheva on why people hate inflation, following up on Shiller (’97).

Big reason: people tend to ascribe wage gains to own efforts, and price inflation to policy. Esp true for those changing jobs (key source of recent wage gains).

In our work, we find a big part of the reduction in wage inequality was from very sharp change in bottom wages–driven by people moving out of bad jobs into better ones (aided by a tight labor market). This type of wage gain was particularly unlikely to allay inflation concerns.

Stefanie Stantcheva: Inflation is most definitely not seen as just a “yardstick,” but as causing tangible adverse effects. The predominant reason for aversion is clear: People believe that their wages are not keeping up with inflation and that that their living standards are declining.

The perception that wages don’t keep up with prices is amplified by the belief that wage raises during inflationary periods are not adjustments for inflation but instead due to job performance & progression. This belief is strongest among those who switch jobs during this period.

Why do wages lag behind prices? People believe employers have substantial discretion rather than being subject to market forces. The belief is that when employers don’t raise wages, it’s because they choose to do so to keep their profits high.

…

Large partisan split in who people blame for inflation. On the left, it is mostly businesses and “greed”, on the right it is “Joe Biden,” the administration and the government.

Do wages lag behind prices? The argument there would be that only after prices go up can you then ask for a raise based on inflation. But that assumes that we have commodity-driven inflation, rather than wage-driven inflation. Alternatively, one could argue that wage-driven inflation would be concentrated in the places where workers have the leverage, so even then most workers would be responding to changes elsewhere, and lag behind. And also wages are sticky downwards and costly to adjust, so it makes sense that they would in some sense lag behind if there was a one-time inflation shock or shift in expectations. But also it seems odd to talk about ‘lag’ at all if inflation is steady.

There was talk that we should be using an older inflation calculation. Scott Sumner points out that if you use the old inflation calculation, that puts greater weight on financing costs, it suggests +28.6% CPI between 11/21 and 11/23 with NGDP +13.4% and consumption +12.9%,which implies a major depression that we can all see did not happen, for example car sales are up not down, and a ~20% decline in effective compensation, which also obviously did not happen despite higher financing costs.

As Scott says, the question is what is the most useful measure. There is no one definitive inflation number, you are measuring many different things. Financing costs going up means that, for certain important purposes, costs really are way up recently, whereas the baseline cost of living for most people is not. I do think people are reacting to all of this in a not-so-crazy fashion.

Still, he notes that inflation does look too high, and we should worry it is reaccelerating. And it is clearly central to why people think the economy is bad.

Scott Sumner: Americans view the economy as poor partly because of the inflation and partly because they hate Biden. Americans view their personal finances as good because their incomes have generally risen faster than the cost of living since the pre-Covid period. (Comparisons with early 2021 are meaningless, as the data was heavily distorted by Covid.)

PS. Biden’s economic policies are really bad, but for reasons that have nothing to do with the current state of the economy.

PPS. Trump has a 6-part plan to bring down inflation:

1. Favors NIMBY policies to prevent housing construction in the suburbs.

2. Expel all the illegal workers that pick our food and provide other key services.

3. Put heavy tariffs on imported food and other goods.

4. Have Medicare do less negotiation of drug prices.

5. Run super massive budget deficits.

6. Easy money.

What? You don’t think that will work?

People disliking the economy predicts presidential approval and re-election. I had not properly considered that causation runs in both directions. I knew about the partisan split, but for Biden the Democrats don’t like him either. The campaign likely changes that, so we should expect net economic sentiment to rise if things don’t get way worse.

Atlanta Fed finds that real wages remain down about 3%, now rising slightly.

The speculation is that this is largely due to compensation in the form of increased working from home. Working from home is now a luxury that you get in exchange for lower effective pay. It is definitely worth a 3% pay cut if you value it, but not everyone gets the benefit. If we estimate an additional 6% of workers are now fully remote and 20% have new hybrid arrangements, that implies a double digit pay cut for those workers to make this work out.

That is less obviously worthwhile and suggests a mystery remains to reconcile this with the seemingly tight labor market.

Another illustration of why people’s overall satisfaction with their situation does not tell you if times are good or people are happy with the times.

People answer largely by comparing their situation to expectations. So you can get some very strange distributions.

Connor O’Brien: In contrast to what you may hear about the gig-ification of work in America, via The American Worker Project:

-The average worker is working fewer hours

-Rates of 2+ jobs are down

-Typical job tenure is up

-People are changing jobs less frequently

As always, one must ask over what time frame.

The scare tactics on debt often focus on the word ‘unsustainable.’

Spectator Index: Bloomberg ran a million simulations to assess the ‘fragility’ of the US debt outlook, and in 88% of the simulations results showed the ‘debt-to-GDP ratio is on an unsustainable path’.

If you look, ‘unsustainable’ is defined to be ‘the debt-to-GDP ratio goes up.’ Yes, in some sense that is ‘unsustainable.’ It could still be sustained for quite a long time, even if real interest rates exceed real growth.

I am also confident that those simulations did not include plausible probability distributions for the impact of AI.

What does seem clearly true is that if America fails to experience substantial economic growth going forward and things are otherwise ‘normal,’ our levels of government spending under current public choice are indeed not sustainable, and if unadjusted would cause a crisis within our lifetimes. I do not think it is that likely that we will get this kind of normal scenario.

Yes, we could plausibly spend enough more than we could to get into avoidable trouble. Mostly this seems like

A new paper on immigration by Caiumi and Peri and its impact on native wages certain to change ones of minds.

Abstract: Using these estimates, we calculate that immigration, thanks to native-immigrant complementarity and college skill content of immigrants, had a positive and significant effect between +1.7% to +2.6% on wages of less educated native workers, over the period 2000-2019 and no significant wage effect on college educated natives. We also calculate a positive employment rate effect for most native workers. Even simulations for the most recent 2019-2022 period suggest small positive effects on wages of non-college natives and no significant crowding out effects on employment.

I believe the result, if you discount all the other various things that happen as the result of immigration.

Another immigration result was a National Academy of Sciences scenario analysis looking at impact over 75 years, concluding the fiscal impact of immigration is overall positive but that it was negative for those without an education beyond high school. Now two new results, Colas and Sachs and Michael Clemens, note that the indirect effects including labor supply composition and increased capital usage are sufficient that the net fiscal impact is still positive for almost all immigrants. Tyler Cowen covers it here in Bloomberg.

I file both results under the standard ‘yes obviously but it is good to demonstrate this.’

With the caveat that they get this result by considering certain select secondary impacts of immigration, while not modeling others, such as shifts in political dynamics or the housing market.

No, I do not expect any of this to change people’s opinions on immigration’s impact on their wages or the deficit, or their political or policy preferences.

FDIC Chair Sheila Bair calls Sam Bankman-Fried ‘financially illiterate.’

Sheila Bair: #SBF was financial illiterate. He thought effective altruism meant he could rip people off, that it was OK to use new investor money to pay the old… Another reason why we need early financial education – to help kids understand money ethics, hopefully preventing future SBF’s.

Seth Burn: I am not sure “financial illiterate” is an apt description of a former Jane Street trader. SBF clearly understood that his actions were verboten. That’s why he lied about them. Someone who was financially illiterate would have made different statements.

That is… not what financial illiterate means. The fact that the FDIC chair thinks that ‘financial literacy’ is the issue at hand worries me. This is exactly a lot of why SBF considered ‘adults in the room’ to be useless to him. SBF was a thief and a fraud and he got caught, that does not mean he was confused about what he was doing. I mean, yes, there were the parts where he was too scatterbrained and overloaded and indifferent to care what was going on or give decisions more than a minute’s thought, but that wasn’t because he lacked an education.

Financial literacy can start early. Talk to your kids about common sense.

William Eden: I was chatting with an economist today who said even children have correct intuitions about certain concepts

Me: “what would happen if you gave a million dollars to everyone?”

11yo: “prices would rise?”

8yo: “chaos”

🤣

Everyone gets full credit.

I like this trick:

Jenny Chase: Some bad things about Switzerland: low tax rates and high salaries act as a brain drain on surrounding countries (hi). This is how a poor country has become a very rich one in less than a hundred years.

Rob Henderson: I like to imagine the Bizarro universe of opposites when I see tweets like this. “Some good things about Switzerland: high tax rates and low salaries motivate skilled citizens to flee (hi). This is how a rich country has become a very poor one in less than a hundred years.”

FTX customers to recover ‘all funds lost in collapse’ in terms of the at-the-time dollar values of their portfolios. They still took a big hit in several ways, but this is a better result than anyone expected for a while.

Noah Smith discusses the fall in status for economists, especially macroeconomists, and various complaints people have against economists. Mostly I think this is part of the general (and in many places well-earned and long coming, but also coming from a general unwillingness to accept ugly realities and take the best you can get) fall of respect for expertise and credentials?

Patrick McKenzie explains that there are many tax deductions or dodges that you can in practice take for small amounts, such as not paying on the cash back or frequent flyer miles on business credit cards and trips. In practice the IRS will not care in most cases. But if you scale things high enough, if you optimize for the deduction hard enough, then it is worth the IRS’s time to have a problem with this. A lot of tax law seems to be, essentially, ‘write down whatever you want within reason but do not push it.’

Seriously, charge more. Plagiarism checker sold for eight figures. It has a free plan and a $10/month plan. Buyer adds a $30/month plan and a $100/month plan. Revenue doubles.

Stripe announces it will accept stablecoin payments this summer.

Plasma donations are way more impactful than I would have expected. For the doners, that is, not those who need plasma.

Tyler Cowen (from a St. Louis Fed study via Ken Lewis):

• The typical plasma donor was younger than 35, did not hold a bachelor’s degree, earned a lower income and had a lower credit score than most Americans. Donors sold plasma primarily to earn income to cover day-to-day expenses or emergencies.

• When a plasma center opened in a community, there were fewer inquiries to installment or payday lenders. Inquires fell most among young (age 35 or younger) would-be borrowers.

• Four years after a plasma center opened, young people in the area were 13.1% and 15.7% less likely to apply for a payday and installment loan, respectively.

• Similarly, the probability of having a payday loan declined by 18% among young would-be borrowers in the community.

• That’s an effect on payday loan borrowing roughly equivalent to a $1 increase in the state minimum hourly wage.

That’s a huge decline in turning to very expensive alternative emergency funding mechanisms. Read that last line again.

Plasma donation actually pays pretty decently. You can do it twice a week for $30-$50 a pop. No, it is not ideal if the poor are falling back on that to avoid payday loans, but it seems way better than actually falling back on payday loans. Which in turn is often better than actively running out of money, although I think this is less obvious than economists typically assume it is because behaviors adjust to the optionality.

NPR reports supermarkets including Walmart are getting ready to offer fully dynamic pricing, adjusting ice cream and water upwards when it is hot, products close to expiration down, all in real time. I am here to warn those supermarkets: Don’t. If you raise prices on ice cream when it gets hot, your customers will absolutely revolt and crucify you, and this will dominate efficiency gains and revenue extraction. Even more than that, people need price consistency. Sales are fun opportunities, by all means do those and rotate and customize them more, but that is where it stops. If I have to confirm the price of everything each time I visit, I’m going to find another store.

Real ‘and your plan is to blackmail him’ energy on this one.

Joshua Wright: Ok now I went and actually read the Sen Warren grocery legislation press release. And I found this!?

“the bill requires public companies to transparently disclose and explain changes in their cost of goods sold, gross margins, and pricing strategies in their quarterly SEC filings.”

Really?

So let me get this straight — we’re going to get a bunch of competing firms in the food industry. Let’s call them rivals.

Sen Warren: Yup. Giant corporations. Evil. Bad.

And then we will have them publish how they are going to price in the future so all their rivals can see it?

Sen Warren: Yup. Transparency. Truthiness. Good.

And what do we expect to happen from forcing publication of future prices so that rivals can anticipate and coordinate strategic decisions?

Senator Warren: Prices will go …. Down.

You’ve got to be kidding me.

Brought to you by the geniuses that want to expand Robinson-Patman enforcement and chill discounts.

The Antitrust Paradox returns.

That is to say nothing of the practical considerations of having to ‘disclose and explain’ changes in cost of goods sold, gross margins and pricing strategies on a quarterly basis.

Never reason from a price change, attempt number quite a lot from Scott Sumner. Somehow, the exact timing and wording of this one sunk in for me, substantially more than previous efforts already had. This in particular:

Perhaps the following analogy would be useful: How do rising oil prices affect consumption, other things equal? That’s not even a question. Other things equal, oil prices never change. If oil prices rise due to reduced supply, then consumption falls. If oil prices rise because of increased demand, then consumption rises. But other things equal? What does that even mean?

My brain wanted to roll its eyes and say ‘yes, yes, Scott, we all get it, but still, what if the price did change anyway?’

And then I went through several cycles of ‘no, wait, that actually does not make any sense, the price will not change unless you change something else to make it change.’

You can do that via government fiat or monopoly decision if you want, but that too has a story that tells you what will then happen.

Would it have been wise to short DJT, Donald Trump Media?

I do not know. Certainly we all thought about it. But of course that is a hint. There was no rule saying the price had to come down quickly, or that it could not first go up quite a lot. And the borrow cost was something like 400% annualized.

Joe Weisenthal (April 15): Trump’s media company has now plunged 66% since its peak in late March. (Now need to go back and find all the savvy people on fintwit who said it was insane to short a stock like this).

Lake Cornelia Research Management: Hedge Fund Situations: The “Art” of Shorting

I like @TheStalwart but this is a sophomoric take. Was the $DJT overvalued? Of course. The issue with shorting is that you can only make 100%, but can lose an infinite amount. Further, at every price that you short, you can still make 100%; the only thing you give up by being “late” is the available dollar PNL to make. What we were getting at with our poll (results below), is that there is point where the risk / reward is the best…and it likely wasn’t over $50 – despite the poll results. Scaling into a short is the name of the game. The best shorts talk about “pressing” once the stock breaks trend.

The cost of borrow initially was over 400% for $DJT. That is a brutal vig to overcome. That is one of the other problems…you have to be right on timing too, because there is a ticking fee. Paul Enright, the former Viking PM now at Jain, walk through this on a podcast 2-3 years ago regarding $PTON on the short side. He noted all the people that carried the short for 3-6 months into the October “break” that bled theta vs. the guys that timed it right. Both made about 50% in total but the later group had a near infinite IRR. To be totally clear for the non-math people…shorting a $50 stock that goes to $30 has a worse return than shorting a $20 stock that goes to $10…and with a stock like $DJT, your conviction on the “meme bubble breaking” should be far higher at $20 than it was at $50.

In situations like this, and $GME $AMC etc you can have your cake and eat it too…you can wait for the meme guys to die and make more money after it is clear they are gone.

…

Look at options right now. You can buy the January $25 puts for $15…so you lose money if its over $10, and don’t even make 100% if it goes to zero…while risking a ton of capital. Would you do a risk/reversal and short the call to fund the put? Most brokers require that if you want to get size, so you would then have to sell a ~$50 call to get delta neutral.

Joe Weisenthal: Yeah this is totally fair. My tweet was sophomoric. It does seem like, regardless of a company’s valuation, or trajectory, or bubble-like characteristics, you probably hate yourself to some extent if you’re playing the short side.

I mean, I assumed when I saw it that Joe was joking.

I agree that the easiest play in situations like this is to wait until the party is clearly over, then get in on the way down. But even that is not so clear or safe. There is reason one cannot start another party.

One could say that the price of a DJT is not the real market. The real market is the price to short the stock, including all the risks that entails. That price is high, and plausibly efficient.

You still can beat the market, somewhat, by avoiding being on the wrong side of this trade. You do not want to be long DJT while its borrow costs are over 400% (unless you are at minimum collecting that borrow, and also have very good other reasons, by default this is a no just no).

In general, since it is expensive to short things, it it not even such a violation of EMH to say there are things you should know not to be long. When I buy individual stocks, I may not be that confident I can pick stocks to buy, but I am confident I can pick some of the stocks not to buy.

Tourism is like anything else. If you have too much of it, as Tyler Cowen reminds us, you should raise the price rather than lower the quality or restricting supply.

The weird thing about experiential goods like tourism is that people often get super mad about fees that go to the provider of the experience, while being happy to fork over ten or a hundred times as much so they can travel to the experience, and they can rearrange their lives to allow them the time away, and even to scalpers and travel agents.

This is backwards. You should be thrilled to support and reward those providing the actual value, not call them ‘greedy’ or accuse them of gouging. They are the ones producing the amazing value. Much better the value go to them than the scalpers and hotels and airlines.

Thus Japan has this exactly right. Raise the tourist price of the bullet train. Not only is this charging money, it is charging money in a relatively socially acceptable place.

Should we break up a big alcohol monopoly that is abusing its power, charging small retailers more than large ones? Tyler Cowen says no, because monopolies raise prices and reduce quantity, and for alcohol that is good. Like Tyler Cowen, I do not drink at all and think alcohol is best avoided by essentially everyone, and ideally taxes here would be higher but people wouldn’t go for it.

I still think we should either repeal or enforce the law.

Sam Bowman offers an interesting other argument, which is that the current system is highly conducive to a long tail of high quality product variety. In that context, if the lousy alcohol is more expensive, then that’s good for the niches.

The generalized Efficient Market Hypothesis, I hereby dub it the Efficient Company Hypothesis, is super duper false.

Patrick McKenzie: When I say some large companies just hate money, I am thinking of many, many experiences which are obviously not baked if you have seen them even once through a user’s eyes. This company does >$20B a year.

If you get a bill at that obscure provider Gmail it looks like:

Now I might not be as sharp as I used to be in conversation optimization, but I have a hypothesis or two for how one could increase CTR and payment rate for that email.

“Patrick you are neglecting the possibility that this was carefully chosen after thoroughly multi-arm banditing several candidates, where all the informative emails simply lost to the old intriguing mystery subject.”

Not ignoring it but p(that) is like 0.02% before I think much.

For starters almost nobody, not even the firms blessed with largest userbases and gigantic teams of stats PhDs with no brief other than to do testing, actually tests invoicing emails. Org/structural/tech reasons defeat attempts. Other places are more valuable to use bandwidth on.

Similarly, did you know Nvidia pays a $0.01/share dividend so funds that can only invest in companies paying dividends can hold shares? Yet other companies choose not to do this.

Marc Andreessen: Narrative violation! ‘Rapid relative wage growth at the bottom of the distribution counteraged nearly 40% of the four-decade increase in aggregate inequality.’

I felt a great disturbance in the force, as if millions of socialists cried out in terror.

Matthew Yglesias: Andreesen found @arindube’s paper about how the Biden economy is good, and decided that the point is it owns the libs.

Is that what this says? It is telling to conflate reduced inequality with good. This seems to show that median wages and 90th percentile wages are at roughly pre-pandemic levels, versus a small but real rise from 2015-2020. 10th percentile wages rose throughout, similarly under Biden versus the previous period, it looks like it returned to the trend line almost exactly.

Whereas what Andreesen is saying is that those complaining about how our horrible inequality is constantly getting worse are clearly wrong, with a huge ~18% jump over this period in relative wages.

That is distinct from the question of whether the Biden economy is good. Yglesias frames this as ‘things were very good in 2019 and are also very good now, except higher interest rates’ but higher interest rates impose big real costs. Is a 6% growth in real median wages over 5 years as measured (which as I have noted elsewhere I think overstates things in practice even without interest rates) a ‘very good’ economy? I mean, it’s fine, it is improvement over time, but it isn’t great.

Axios reports work weeks now down to starting on average on 4pm on Friday, versus 5pm as early as Q1 2021, in their survey data.

The central story here seems more about a radical decline in hours across the board? People are calling it a day earlier, at least in this population, and presumably working less, and that happened rather quickly. They speculate it is due to remote work less often bleeding into evenings.

Via Tyler Cowen via Kevin Lewis, companies that use explicit invocations of trust in their 10-K are less trustworthy. File under papers with results we all assumed but it is good that people took the time to put it in a formal journal so we can say Studies Show.

The way I learned this one was my father’s wise saying, ‘Never trust anybody who says ‘trust me.’’

We examine the relation between earnings information content and the use of trust words, such as “character,” “ethics,” and “honest,” in the MD&A section of 10-K. We find that earnings announcements of firms using trust words have lower information content than earnings announcements of firms that do not use trust words. We also find that the value relevance of earnings is lower for firms using trust words than those not using trust words. Further, firms using trust words are more likely to receive a comment letter from the SEC, pay higher audit fees, and have lower corporate social responsibility scores.

Overall, our results suggest that firms that use trust words in the 10-K are associated with negative outcomes, and trust words are an inverse measure of trust.

China is continuing down the path of an increasingly centrally planned economy. A CEO from the China Development Forum (CDF) reports via CNBC’s Michelle Caruso-Cabrera that confidence is very low and business continues to be terrible. Wealthy Chinese are selling their conspicuous trappings of wealth and trying to move money out of the country given how dangerous it is to be rich in China, and that Xi intends to double down on his economic strategy of favoring and focusing on state-owned enterprises. There also was not mention of China’s dire demographic time bomb.

Xi does not understand (unless he does and simply does not care?) that this never works and it will not work for him. Xi says the governing system of China is not going to change, but indeed it has changed, retreating from its previous compromises. And given this attitude, it is likely to change more in the same direction. It will not go well.

He also made various statements on US-China relations and Taiwan, including emphasizing avoiding the Thucydides trap and nuclear war at all costs. He is mad about Taiwan and our policy on semiconductors, but why shouldn’t he be?

Similarly, here is Graham Allison, who also points out Xi’s clear understanding of the need to play out this rivalry peacefully, and that there is room for prosperity for all.

Jamie Dimon reminds us that obviously we should re-enter the prior negotiated Trans-Pacific Partnership. If you think we have to ‘beat China’ and do not at least want to be in the TPP, I have no words.

Find a need and fill it.

Matthew Zeitlin: Your kid opens an HVAC business, my kid goes to business school and rolls up HVAC businesses.

I call the section ‘Money Stuff’ but as a column name that is rather taken. There has been lots to write about on this front that didn’t fall neatly into other categories. It clearly benefited a lot from being better organized into subsections, and the monthly roundups could benefit from being shorter, so this will probably become a regular thing.

Quite the opposite, actually. Jobs situation remains excellent.

Whatever else you think of the economy, layoffs are still at very low levels, the last three years are the lowest levels on record, do note that the bottom of this chart is 15,000 rather than zero even without adjusting for population size.

Ford says it is reexamining where to make cars after the UAW strikes. The union responded by saying, essentially, ‘fyou, pay me’:

“Maybe Ford doesn’t need to move factories to find the cheapest labor on Earth,” he said. “Maybe it needs to recommit to American workers and find a CEO who’s interested in the future of this country’s auto industry,” Fain said.

Which is, of course, what both of them would always say no matter what. I do presume that now that the UAW has raised the price and expected future price of dealing with them, Ford is now placing a higher priority in getting new factories and jobs outside the reach of the UAW.

Something rather remarkable happened here in 2020.

High-propensity applications means businesses likely to hire employees with payroll. The number was holding steady for a decade at 100k such applications per month, then it jumped and is now stable at closer to 150k, with other applications a similar percentage above previous trend. This really is a big game.

So, this happened:

Tom Gara: NY Mag’s personal finance columnist was convinced by a cold caller claiming to be a CIA agent in Langley that she needed to empty her bank account, put the money in a shoebox and give it to a guy coming to meet her on the street.

Falling for this scam was unbelievably stupid. I do not understand how they pulled this off and she fell for it. However writing the details of this up is a public service, as is admitting that this happened to you, so we thank her for that.

Critical Bureaucracy Theory: A lot of people dunking on this, but she’s doing society a service by describing it in detail, at her own expense.

Knowing about index funds and being able to compound performance doesn’t necessarily make you immune to pressure tactics.

Andrew Rettek: I would not hand $50,000 to a stranger.

I mean yes, that is true, it is possible to be good at figuring out index funds while still falling for scams. Indeed, a key reason to invest in index funds is that you do not have good judgment, the whole idea is that index funds do not use judgment. I still do think that there is a common factor that I want present wherever I seek advice.

Arnold Kling links to Moses Strenstein, with the claim that GDP growth is ‘driven primarily by old folks buying healthcare stuff (variously, on the taxpayer’s dime.)

As always, one can check the data. Even if you think GDP is not a good measure, the healthcare share of GDP should check out.

Health care spending continues to rise as a share of GDP, but it is clearly not growing so fast that we lack other RGDP gains.

It does seem valid to say that marginal healthcare spending is Hansonian, as in spending more does not lead to better health or less death, so any such increases in spending should be considered wasted, and not count as people being better off.

(As usual, standard caveat that of course much of healthcare is highly valuable, as was driven home to me this past two weeks. I am fine now.)

Similarly, Moses claims service inflation is still too high, but we should expect service inflation to exceed general inflation, and indeed want that to drive up real wages. And he complains that consumer spending is down:

Is higher consumer spending the goal, a cause, or both? I get confused about that. If people think the economy is bad so they cut their spending, that can make things bad, but if they do that and the economy remains good then that seems great and should lead to more savings and investment? Whereas the savings rate is quite low? So what is going on, if both savings and consumer spending are down, but GDP is up? That part does seem suspicious on first glance. It can be explained, and some of the explanations pass muster, but it is not going to feel like a good economy even then.

Yet another round of ‘life can’t be bad look at all your Nice Things.’

Overeducated Gibbon: All these doomposts about how people are worse off materially than they used to be, but then I look at the size of houses people buy, the niceness of cars they drive, the massive increase in air travel, the boom in restaurant spending etc.

Marc Andreessen: 💯

I continue to think that we can simultaneously live in what in many ways is great material abundance, and also be materially worse off. Yes, the basket of goods we currently buy was impossible to access in the past and would have been immensely costly. Yes, we have much better material possessions in many, even most, ways.

None of that matters if mandatory largely signaling and positional goods, especially education, health care and housing, are eating everyone’s budgets alive, to the point where many people feel they cannot afford children, and few feel they can afford four or more children. No cell phone or fast car is going to make up for that.

Our houses and apartments are bigger, but a lot of that is that they are required to be bigger, from a mix of regulations and cultural expectations. Being forced to buy more housing than you need, that you cannot afford, is not doing you any favors.

Vibecession Even if Inaccurate

As Scott Sumner points out, we are also clearly outperforming all our rivals. He ascribes this misconception to bad luck. I agree it is bad luck, but in terms of the initial conditions handed to Biden.

Scott Sumner also makes the case that yes, the economy is actually good, the numbers are real, it is that the public is being dumb at evaluating conditions, it is bad at that, you can tell because all they actually know are local conditions and they agree local conditions are fine.

I do think people are making the mistake of not comparing conditions to the right counterfactuals, not considering the initial conditions of the pandemic and previous administration’s choices, and not having reasonable expectations going forward. Compared to what could have been reasonably expected, compared to how others are doing, we are doing well.

Given those conditions, Biden needed to manage expectations, to explain the consequences of our Covid economic policies. Instead, he did not explain any of that, and then spent more.

Also people do not remember what the past was like, and imagine people used to be much richer than they were, with better consumption of goods then they had, and less stupid annoyances and time sinks than there were.

Most basically they forget how much more money people now make.

As some commenters point out, to the extent people are moving up in the general, that does not move up people overall in relative terms. So if your sense of ‘middle class’ membership, and what it means for middle class people to do well, is mostly relative, then this chart is a problem for those not in that new upper third.

Scott Sumner asks a related question more generally. Should a price index measure constant utility or constant quantity, or what?

Imagine an economy where the aggregate quantity of the only good increases at 5% per year, while the price of that good rises by 10%/year. You can think of that economy as having a 15% nominal growth rate. (I’ll ignore compounding for simplicity; technically it’s 15.5%). How much extra income would a person need each year in order to maintain a constant utility? I’m not sure, but I’m pretty confident the answer is not 10%, and it’s also not 15%.

1. A person that got a 15% raise would be able to buy 5% more real goods. So presumably their utility would be higher than before.

2. A person that got a 10% raise would be able to buy the same amount of goods, while that person’s acquaintances would be 5% ahead in real terms. So presumably that person would feel worse off in terms of utility.

This suggests that a measure of inflation that holds utility constant would be somewhere between 10% and 15%.

One index has to create one number. Then that number is equated to multiple different things.

It gets even more complicated if the quality of those goods also rises 10%/year, for varying versions of quality.

Let’s assume that instead of holding utility constant, we hold quantity constant. Then it becomes easy to calculate inflation—which would be exactly 10% in this case. Unfortunately, our textbooks seem to conflate “constant quantity” and “constant utility” in a way that ignores the social aspect of consumption.

My thought experiment involves an economy where quantity grows over time. But the same problem occurs with quality improvements. Here again, a “hedonic” adjustment that attempts to account for quality changes will typically come up with a lower estimate of inflation than an index that holds utility constant. Thus the BLS says that the price of TVs has fallen by more than 99% since 1959 (due to quality improvements), but average people don’t think that way.

They want to know how much more it costs to buy the sort of TV their neighbors have, not how much more it costs to buy the sort of TV their grandparents had.

You want to know all of these things.

You definitely want to know what it costs to get the things people typically get, so you can feel like you are keeping up, maintaining social status and dignity, buying what you are entitled to. The Iron Law of Wages covers what families expect to need, not the theoretical bare minimums.

It is also valuable to have the option to buy a really terrible today but fine 40 years ago television for $5 (remember, down 99%!) instead of a good one for $500 or great one for $2000, or to spend $0 and use your phone or tablet you have anyway as a TV potentially better than what you used to have growing up.

A lot of the problem today is that the metaphorical cheap TV, or the option to go without one, is not available.

Consider what it would cost to get the 40-years-ago quality car, or school, or healthcare, or housing, or childcare, or even food. It is easy to forget how universally worse was the quality of most goods and services back then, of course with notably rare exceptions.

In many ways it would suck to have to, today, consume that 1984 basket, even if you got to also pick some cheap stuff from the 2024 basket like a discount cell phone and all the free internet services. But the option to go with that basket to save money, to be confident you could keep your head above water? That would be great. And also there are some places where you would happily take the discount, whereas society is forcing you to buy cars with various features, childcare from college students on ground floors and hyper expensive health insurance that has not been shown to improve health, and so on.

This is related to my thoughts on the Cost of Thriving Index, and the fact that what matters is not the CPI per se but the expected purchases you have to make and costs imposed on you, and that your practical lived experience is not going to reflect the ‘value’ of the goods purchased all that tightly.

Also related is the increasing complexity of life, and the fact that the ‘intelligence waterline’ required to navigate things reasonably keeps rising. We largely self-segregate by intelligence and it is very easy to be completely out of touch with the lived experience of the majority, and especially of a substantial minority. See this Damon Sasi thread, and the original thread from Nathan Culley.

The vibecession is extreme?

Kimberly Strassel: Among the elite, 74% say their finances are getting better, compared with 20% of the rest of voters. (The share is 88% among elites who are Ivy League graduates.) The elite give President Biden an 84% approval rating, compared with 40% from non-elites.

I have a hard time believing that only 20% of ‘non-elite’ voters are seeing their finances improve. Here elite is defined as more than 150k in income, living in a high-density area and with a postgraduate degree, which should be a single-digit percentage of the population. Most people’s finances should be improving most of the time, since you get older and likely avoid extreme bad outcomes.

Also, the post claims these ‘elites’ have 77% support for “strict rationing of gas, meat, and electricity.” To contain climate change, you see. Support for rationing of electricity is certifiably nuts, as nuts as the ‘only four flights in a lifetime’ proposal.

When people say they believe the economy sucks for people like them, I continue to believe them. If your response is a bunch of economic statistics saying otherwise, you are asking the wrong questions.

John Arnold: 3.7% unemployment rate

3.2% annualized GDP growth

1.8% real wage growth 2023

3.1% annualized CPI

27% S&P 500 return past year

Larry Summers echoes that a lot of why people feel the economy is bad is that they hate high interest rates, because the cost of money is one of people’s main expenses. Housing is a huge cost in particular, and mortgage costs have shot through the roof mostly without coming down.

And of course people do not think about or care about the forward rate of change of the price level, they care a lot about current prices versus past prices and versus their pocketbooks, and they notice some prices more than others. So when grocery prices are up 25% in four years, that is a big deal. Everything still feels outrageously expensive, and ‘the last year has been fine’ is not yet bringing much comfort.

Nor does ‘food and clothing are actually outrageously cheap, historically speaking, you should be focused on the newly expensive things like health care and housing and education’ although that is very true.

Bloomberg: By volume, steak sales over the last 12 months were down 20% from the same period four years earlier, according to consumer research firm NIQ.

That is a very clear sign of feeling poorer, whether or not one is actually poorer. This is not about overall meat consumption or veganism, since Americans consumed 57.6 pounds of beef in 2023, down only 1% from 58.1 in 2019.

Robin Hanson points out that the best participants in prediction markets reliably outperform others, and that a market with only them would be far more accurate if they were still willing to participate and others could be kept out. Given arbitrage opportunities, this seems extremely difficult. If you could do it, though, it would totally work. The EMH is false, centrally because the market is a compromise between inertia and dumb money on one side, and smart money with its cognitive and capital and opportunity costs on the other.

So what can you do? The answer is simple. You let everyone participate, but you track who does what, and you figure out what the fair price is given everyone’s trades and track records. I have some experience with this. If you knew what everyone in market was doing, you would often say that the market price and the ‘fair’ price were distinct. There is no reason you could not also do this with prediction markets, or with the stock market.

If you know who is on both sides of every trade, and you pay attention, you can be a profitable trader indeed.

Markets are weak-form efficient if and only if P=NP, claims paper. Which we already knew, given that we knew that the efficient market hypothesis is false and also that P almost certainly does not equal NP. Now we have a claim that those two are logically linked.

Mira extends the market concept.

Mira: You should be able to buy anything with a limit order.

“I don’t feel like paying $250 for an anime figurine, but I left an order up for $50”

If they saw 10,000 orders at a lower price rung sitting there eventually they would take it. Otherwise, the demand gradient at $250 is ~0

“ebay but we virtualized all transactions so you can speculate on everything without worrying about shipping(unless you want to).

You can buy call options on your waifu’s figurine to hedge against the risk the manufacturer goes out of business and the price increases.”

The b2b version of this is “financializing the supply chain so that car companies don’t need to keep their own stockpile of parts and estimate demand to hedge against disruptions. they can buy options on necessary parts and some hedge fund will take the risk of war or sanctions”.

Kickstarter is arguably a variant of this.

As usual the answer is transaction costs, and general inability to make this sufficiently smooth and easy. Still, I do think there are many things to be done in such a space. I even have ideas about how one can use AI to do this better – you can privately indicate what you want in plain English, and then there is a background universal matching system of sorts.

The Argentinian province of La Rioja is attempting to print its own currency.

Quintela said that Bocades would be exchangeable for pesos at the provincially-owned bank. However, given the province’s scarce supply of pesos, the plan relies on “people starting to trust in the bonds’ value” so that they don’t exchange them immediately.

They want it to be one way. I am pretty sure it is the other way.

I say three cheers for most forms of surge pricing. Alas, most others disagree.

Tyler Durden (as in Zero Hedge): Wendy’s To Test ‘Surge Pricing’ Using ‘High-Tech Menu Boards’ That Change In Real Time.

“Guess people better change their lunch hours from 2pm to 4pm. With all of the concern of rising prices, the last thing you want to have to consider is how much will it cost you for a burger and fries depending on the time of day,” Ted Jenkin, CEO of Atlanta-based wealth management firm oXYGen Financial, told The Post.

Joel Grus:

Yep. There are three kinds of restaurants, those who are much cheaper at lunch, those that are closed for lunch, and those that are neither. If there was a place that gave a discount at 2pm or 3pm? I can (often) happily wait. But the places that are packed for lunch usually are, if not always as cheap as Wendy’s, also not so expensive.

In this case, the question is whether the cognitive cost and stress associated with changing prices is worth the efficiency of moving consumption to less utilized hours. My presumption is that fully dynamic pricing is several bridges too far on this, even without the public reaction, so it is good that Wendy’s backed down. There simply is not enough benefit here.

A constant discount for quiet hours (with raised menu prices otherwise), however, does seem like a good idea?

Biden Administration issues rule capping credit card late fees at $8, and according to CBS is forming a new ‘strike force’ to crack down on ‘illegal and unfair’ pricing on things like groceries, prescription drugs, health care, housing and financial services. It will never not be weird to me that people pay these fees so often, as in 45 million holders saving an average of $220 annually? Autopay exists, including to give minimum payments of similar size to the fee, life does not need to be this hard. Presumably cutting these particular fees will mean increased interest rates and less access to credit. And yes, it should scare you that the government has a ‘strike force’ aiming to target ‘unfair’ grocery prices.

Many (perhaps most) of the modern world’s trends that impact all those prices are out of government control, and that masks the quality of decisions about the parts where we can choose better or worse outcomes.

Burgess Everett: 70-25, Senate votes to disapprove rule allowing imports of fresh beef from Paraguay into the United States. That’s a veto-proof majority

Biden admin “strongly opposes” the move, which was led by Tester and Rounds

Matthew Yglesias: Everyone is mad about food prices and also hates things that would make food cheaper.

Also, yes. Everyone hates all the things that would actually make food cheaper.

Once again we confirm the finding that when you mandate transparent pay policies, as 71% of the OECD countries do, here’s what happens:

Robin Hanson: “71% of OECD countries have … [policies] revealing pay between coworkers doing similar work within a firm. … narrowed coworker wage gaps [but]… led to counterproductive peer comparisons & caused employers to bargain more aggressively, lowering average wages.”

The abstract attempts to somewhat bury the lede, that average wages are down, emphasizing all the other good effects that still combine to lower average pay to ask the title question, ‘Is Pay Transparency Good?’

Abstract: While these policies have narrowed coworker wage gaps, they have also led to counterproductive peer comparisons and caused employers to bargain more aggressively, lowering average wages. Other pay transparency policies, without directly targeting discrimination, have benefited workers by addressing broader information frictions in the labor market. Vertical pay transparency policies reveal to workers pay differences across different levels of seniority. Empirical evidence suggests these policies can lead to more accurate and more optimistic beliefs about earnings potential, increasing employee motivation and productivity. Cross-firm pay transparency policies reveal wage differences across employers. These policies have encouraged workers to seek jobs at higher paying firms, negotiate higher pay, and sharpened wage competition between employers. We discuss the evidence on effects of pay transparency, and open questions.

It is not good.

Pay transparency is even worse than that. It means that your pay must be socially determined as a function of your status and title. The equality of pay means that firms cannot pay extra to superior employees without also giving them the required social status or lifting everyone else’s pay. This not only makes them bargain harder and lowers wages, it means inefficient allocations of labor, such as when pay transparency made me unable to retain a highly valuable software engineer because the other software engineers in the company saw his pay, a small fraction of the value he produced, and threatened to revolt.

It also means that everyone around you knows exactly how much you make, which is kind of an obnoxious privacy issue, one might say. Never ask a man his salary.

Megan McArdle uses economics to argue that air travel pricing is a zero sum game. The airlines do not make real money, they will never make real money. People demand cheap airfare. The way you give it to them is to unbundle the seat with everything else, and engage in price discrimination, so if you dare say ‘families get to sit together for free’ then that generosity must be paid for elsewhere.

In which case, okay, fine, pay for it elsewhere, because that is clearly an efficient allocation and families need subsidies that won’t induce bad behavior, and not doing this increases stress on families.

Should we overall be happy that we use this price discrimination scheme, where you can fly remarkably cheaply if you accept a worse experience?

Yes, I think the optionality and ability to price discriminate outweigh the deadweight losses. I say this as someone who, although I obviously don’t have to, readily accepts the cheapest options, and accepts a slightly smaller seat in the back boarding last without a carry-on bag and so on, because I learned while being a Magic: The Gathering professional how to make that work.

The flip side is that Choices are Bad. I do not want to spend an hour stressing about exactly which features to buy for a flight, where each is priced to frequently make that decision close. I do not want to play an Out to Get You game of ‘upgrades’ against the airline, or feel like I am being threatened with potential disasters if I don’t pay up.

The ultimate version of this: Overbooked flights were always awesome, if not as awesome as having no one next to you. How great is it to suddenly be offered hundreds of dollars to postpone your flight by a few hours? When I was a Magic player I would very often take the deal, especially flying back.

The hourly rate on it was amazing even when you sold out cheap, and you could spend the time reading a book or listening to music. I love this as an example of something that some will say ‘exploits’ poor people when it does nothing of the kind, and call to be banned driving up ticket prices.

Oh, and also it seems this refers to something that happened with Uber and Lyft.

Jordan Valinsky (CNN): Lyft and Uber will stop offering services in Minneapolis on May 1 after the city council overrode the mayor’s veto of a minimum wage for rideshare drivers.

The city council on Thursday voted 10-3 in favor of the override, allowing rideshare drivers to be paid the local minimum wage of $15.57 an hour.

Lyft said in a statement the bill was “deeply flawed” and that the ordinance makes its “operations unsustainable.”

“We support a minimum earning standard for drivers, but it should be done in an honest way that keeps the service affordable for riders,” said a Lyft spokesperson.

Uber said in a statement obtained by CNN that it’s “disappointed the council chose to ignore the data and kick Uber out of the Twin Cities, putting 10,000 people out of work and leaving many stranded.”

Presumably there is then a doom loop, where demand drops so wait times increase, and because of minimum wage for down time you can’t get enough drivers standing by, so there is no viable service. Which is a shame. I am not saying I would be happy if rideshare prices doubled, but if there are no easy hailable cabs, the chances I would pay double for a given ride is substantial, especially for shorter ones.

Presumably, of course, Uber and Lyft also want to make a point and send a message to any other cities that might try this. They will survive without Minneapolis. They also would have looked terrible if they had actually doubled prices in the city, whereas they look a lot better withdrawing, the same way everyone hates surge pricing.

Paying minimum wage of $15/hour does not seem so prohibitive as to cause the doom loop. This, however, is something different.

Austen Allred: Important to note Minneapolis didn’t enforce a $15/hr minimum wage. It enforced a minimum of $1.40 per mile and $0.51 per minute (WAY higher than $15/hr), forced the companies to pay 80% of the cost of any canceled ride, and a lot more.

Robot Spider: Wait, so a 30 mile ride taking 30 minutes in medium traffic would require the driver being paid $57.30? For a half hour of work? That’s more than a software engineer.

Hktsre: wait that’s like ~$60/hour.

Joshua Hartley: The scams that 80% rule would have led to… Uber had tons of NYC scammers whenever they first were paying drivers for cancelled rides.

Then you would need to somehow pay Lyft or Uber more on top of that.

Not a reliable source, but I saw a claim that in August 2023 driver pay was $1 base fare, plus $0.20 per minute, plus $0.90 per mile.

So yes. If that is close to accurate, this jump could plausibly cause a doom loop.

It is not completely unheard of, if this discounts time between rides. For comparison: New York City yellow taxis charge $4-$6 up front, $3.50 cents per mile above 12 miles per hour, or 70 cents per minute in slow traffic (so effectively minimum 12 miles per hour in terms of payment). That is solidly more than Minneapolis is requiring.

Adam Platt breaks down what happened as he sees it in its broader context. Uber arrived in 2012, to a city without hailable cabs. Uber rapidly displaced existing very poor heavily regulated taxi service via pricing below cost and ignoring the regulations. Now the drivers are using their pull to get a 40%-50% raise by government mandate, at a level not guaranteed to anyone else, because they have political pull. Sounds right.

If the city does not back down, I do not expect Uber and Lyft to do so. We would then be about to do a natural experiment in so many ways. How much would this cause rents to drop, and how much would good locations rise in relative value?

Detroit is implementing a tax on the unimproved value of land. Tyler Cowen asks how optimistic we should be for this experiment, and brainstorms potential downsides.

One is that Detroit might use this to net raise property taxes by undoing the cut on buildings while keeping the tax on land. This is always possible but I don’t think it is likely, the two taxes are too clearly similar and correlated.

A second is that landowners might try to lower their tax burden by developing low-quality housing, whereas land speculators might otherwise be able to hold out on such low-value uses until they can do something more valuable. If the landowner is profit maximizing, we have made it more profitable to build now but even more additionally profitable to build whatever is net most valuable. Whatever a landowner who is not liquidity constrained chooses to do should be efficient? With the concern that people with negative cash flow often don’t long term maximize. But why would someone like that not simply sell the land to someone else? And in general, I find it hard to think that if this does the job of inducing more construction and more cleanup and such, that this could be net bad.

Beyond that, the big danger is indeed that this might simply not do much.

Tyler Cowen warns that new research shows that California state taxes have reached a tipping point where they are driving many high earners out of the state, erasing half or more of revenue gains, and the state is in crisis. None of that seems like news. I certainly have considered whether to leave New York for the same reason, and almost did so at one point. I ultimately decided to stay put, but I am paying a hell of a lot of money to be here.

Scott Sumner disagrees with me in the nicest possible way.

Scott Sumner: I agree with 95% of the views in this Zvi Mowshowitz post, but not this one:

Andrew Biggs makes the case for eliminating the tax preference for retirement accounts. This mostly benefits the rich, does not obviously increase net savings values, causes lots of hoops to be jumped through, and we can use the money to shore up social security instead, or I would add to cut income tax rates. This would be obviously great on the pure economics, assuming it did not retroactively confiscate existing savings and only applied going forward. But as Matthew Yglesias says, political nonstarter, so much so that not even I support doing it.

For the umpteenth time, retirement accounts (401k, Roth, etc.) do not provide any tax preference for saving. They remove a tax penalty for saving, and make the system neutral between current and future consumption.

Scott and Sumner I are thinking on different margins.

Scott’s point is that currently the tax system penalizes savings and rewards consuming now over consuming later, because it taxes income where it should tax consumption. I agree with him, and would support such a move.

However, once we have made that decision to mostly tax income rather than consumption, making an exception in particular for retirement accounts seems like a clear mistake to me given everything we now know, if we assume the revenue deficit is made up for by higher income taxes elsewhere.

Patrick McKenzie offers an additional explanation for occupational licensing, which is that it requires you to put a $X00k piece of paper, that also cost a bunch of time and energy, at risk as the price of admission to the chance of doing various crimes.

It is hard to throw someone in jail, it is hard to fine people serious money. It is much easier to take away their piece of paper. So you can keep such people on a much tighter leash.

Patrick McKenzie: One thing the IRS did was starting to assign tax preparers numbers. The biggest single consequence of this is it allows you to cluster tax fraud, which the IRS institutionally perceived as being acts of individual taxpayers, by their preparer.

…

Seen in this light, licensing regimes hear the critics of licensing regimes that suggest they are exclusionary, cost a lot of money, and teach nothing of value, and say “… And?”

They usually don’t say this out loud.

Robin Hanson: We have other much more cost-effective ways to punish offenders than this.

There are obviously much better ways to punish offenders, but in practice are we capable of doing them? Otherwise they do not help.

We have a wise legal principle that punishment legal requires high barriers in terms in terms of both burden of proof and the nature of wrongdoing.

However, in order to make many systems incentive-compatible, it needs to be possible to punish people for much lesser offenses, with a much lighter process that has a much lower burden of proof. If your homeowners association had to go to criminal court every time you failed to mow your lawn, you are not going to be forced to mow your lawn.

This suggests a simple compromise.

Let those who would enter the profession have a choice. They can choose to go through the training and licensing process as it exists today.

Or they can choose to post an actual bond for $X00k, perhaps via insurance. If something goes wrong, you have now agreed to forfeit some or all of that bond via a much lighter process with a much lower punishment threshold than the courts.

To be clear, regardless of the alternatives, this is all a deeply stupid reason to throw up huge barriers to people doing useful things. There are indeed many obvious superior solutions. But you do have to deal with the problem that this is helping to solve. This might beat doing nothing, given the brokenness of our default systems.

Claim that workers are much more productive outside the office, to the tune of £15,000 per worker per year for every extra day (I assume of the week). That is an absurd amount of extra productivity. This seems difficult to reconcile with the additional finding that return-to-office orders had almost no effect on profitability or market value.

The current best theory seems to be that on a given day productivity is often better at home, but that you learn skills, build a team and coordinate better at the office, so the costs of remote largely only show up over time.

Patrick McKenzie promotes Mercury as much better than other banks for wire transfers, with routine payments landing in under a minute.

Patrick McKenzie’s Bits about Money, Financial Systems Take a Holiday, all sorts of annoying persnickety and fascinating (to me anyway) details. Incidentally, such issues will keep the AIs away until suddenly they don’t.

Also his periodic reminder that the things said by customer service representatives at banks correlate remarkably little to what would happen if you wrote the bank a letter from a Dangerous Professional (or got Claude to write it for you), especially when what the CSR says is not in your favor.

The rules for checks are illegible and complex, because illegible and complex rules refined over decades perform better, and as a legal system checks get to keep those rules.

Claims about FTX and Alameda and Tether, that they were engaged in highly systematic money laundering and it is only now starting to come to light and we have only seen the tip of the iceberg. It certainly is hard to reconcile the facts presented with these companies not being a blatant criminal conspiracy in distinct ways from the stealing of customer funds.

Nate Silver: Average monthly price of top 10 paid Substack newsletters, selected categories:

Culture: $6.50

US Politics: $6.60

Sports: $8.10

Business: $22.90

Tech: $28.50

Finance: $45.00

Yes, we’re spending our Saturday afternoon doing a little Market Research™. Silver Bulletin is weirdly like 20% sports-ish, 60% politics-ish and 20% biz/tech-adjacent so it’s kind of a weird one. Big year ahead so I hope you’ll consider reading.

This would suggest I am underpricing at $10, since my comparables are all over $20, usually for a lot less content. But of course those Substacks mostly paywall their content, whereas I paywall absolutely nothing. So the value proposition is in that sense not so great. The $0 deal is, from one’s own perspective, even better. Still, what a deal.

Vitalik Buterin offers thought on ‘the end of my childhood,’ which is more of a wide-ranging survey of what he has learned and how he has changed, with childhood’s end being the taking of responsibility for being ‘one of the others’ who works to make things better.

Offered without comment, except that of the places I’ve worked with others (as opposed to communities, although it is still close) I find the same:

Jim Savage: A friend who worked for startups, nonprofits and the top rungs of government now works for a hedge fund. Calls it the most truth-seeking place she’s ever worked. Interesting how humans thrive when performance is a scalar.

In defense of the Ferengi and the need for markets in Star Trek’s Federation. Akiva Malamet points out that the Federation has turned so far away from markets that it is horribly inefficient at resource allocation and unable to do business where there is not abundance. Earth may be a paradise in Star Trek in many senses, but labor and what is effectively capital are allocated horribly, and the incentives do not work at all. I would add that Starfleet is horribly inefficient as well. Humanity fights existential wars on a regular basis, and no one thought to have a dedicated warship until the Defiant, instead we thought with the same ships we use for trade and exploration? We send gigantic ships to explore strange new worlds when we could send a scout ship, or an unmanned probe (even if you buy random just-so limits on AI)?

Meanwhile yes, things mostly don’t seem great for Ferengi or on Ferenginar, and the author admits there is far too much greed for greed’s sake (and of course the writers give Ferengi many negative attributes not related to being capitalists), but they can get things done. Most of the things shown as wrong with Ferengi society are not actually economically efficient. That they have not long since been eliminated tells you a lot about how that society actually works.

Scott Sumner on China’s weak economy. It does make sense that if youth unemployment is 20% and there are plenty of workers in the countryside, then the impending demographic collapse is not yet an issue, except perhaps for real estate prices. It will bind eventually, but not yet.