City income differentials widen

Thomas B. Edsall writes,

According to Romem, between 2005 and 2016, those moving into the San Francisco area had median household incomes averaging $12,639 a year more than the households of the families moving out, $70,015 to $57,376.

Conversely, in the struggling Syracuse metropolitan area (Clinton 53.9 percent, Trump 40.1 percent), families moving in between 2005 and 2016 had median household incomes of $35,219 — $7,229 less than the median income of the families moving out of the region, $42,448.

It’s a long essay, worth reading in its entirety. Edsall’s focus is on the evolution of the political coalition that makes up the Democratic Party. But I find the economic phenomenon interesting. The data support the Handle Hypothesis that urbanization has become a winners-take-most game. The article by Issi Romem that Edsall refers to is also worth reading. Romem writes,

Why do the expensive coastal metros exhibit positive income sorting? These metros are expensive because they have restricted their supply of new housing even as they continue to generate strong demand for it.

Kevin Erdmann and many others have been saying this for quite some time.

Related: Pew reports,

In 2001, 13 percentage points separated the shares of white and African-American renter households that were burdened: 26 and 39 percent, respectively. . .By 2015, the share of African-American-led renter households that were burdened had risen to 46 percent

Rent-burdened is defined as spending more than 30 percent of a household’s income on rent. Pointer from Tyler Cowen.

I think that the political threat to the Democratic Party is minimal. Group identity seems to overcome anything. The Democrats can be anti-Israel and still get most of the Jewish vote. Their policies make housing less affordable and drive African-Americans out of Washington, D.C. or San Francisco, but they still get most of the black vote.

Posted in disaggregating the economy, Four Forces Watch, Housing and housing finance, Politics, Tyler Cowen is my Favorite Blogger | 12 Comments

Jason Collins on self-discipline

He writes,

My iPhone is used for four main purposes: as a phone; as a train timetable; as a listening device (podcasts, audiobooks and music); and for my meditation apps (more on meditation below). It also has a few utilities such as Uber that I rarely use. I don’t use my phone for social media, as a diary, or for email. Most of the day it stays in my pocket or on my desk. All notifications, except calls and text messages, are turned off. I rarely have any reason to look at it.

The whole post is interesting.

I think that it pays to evaluate your daily habits and try to reinforce the ones that you want to keep and eliminate the ones that you want to drop. I saw a reference recently to a “stoplight” system where you give yourself a list of 10-15 desired habits and, when you keep them, give a green check and when you break them, give yourself a red check. My current list is:

1. Do serious writing first thing in the morning (that is when I am sharpest).

2. Do foot stretches twice a day (to protect against the dancer’s habit of plantar fasciitis)

3. Review one dance using YouTube.

4. Read 20 pages in a book (in practice, I tend to binge-read or read nothing)

5. Straighten up an area

6. Organize web site (I am failing at this habit)

7. Aerobic exercise at least 2 hours

8. Touch base with any friend

9. Eat an apple

10. Eat broccoli

Posted in Jason Collins is Indispensable | 1 Comment

Estimating consumers’ surplus from information goods

Erik Brynjolfsson, Avi Gannamaneni, and Felix Eggers have a paper on the topic. From the abstract:

We explore the potential of massive online choice experiments to measure consumers’ willingness to accept compensation for losing access to various digital goods and thereby estimate the consumer surplus generated from these goods. We test the robustness of the approach and benchmark it against established methods, including incentive compatible choice experiments that require participants to give up Facebook for a certain period in exchange for compensation. The proposed choice experiments show convergent validity and are massively scalable. Our results indicate that digital goods have created large gains in well-being that are missed by conventional measures of GDP and productivity.

Pointer from Tyler Cowen.

Based on their powerpoint, I gather that the method is something like this.

1. Ask a user of, say, Facebook how much they would need to be paid to give it up for a month.

2. If they say they would give it up for $25, tell them to do it.

3. If after a month they have not used it, give them $25.

The methods that they use are really interesting, but I have doubts about the approach. I think dollars are too abstract. I would like to see a lot of “give up X or give up Y” choices offered. The authors do some of this and apparently it confirms their findings.

The values that the authors get are really high. If the median Facebook user gets over $40 a month in value from it, then Facebook is leaving a fortune on the table by not having a subscription service. Yes, they have to be careful that charging a subscription price could drive some customers away, lowering the value of the service to other customers, but the “freemium” model could be used to address that. That is, let anyone join for free, but give more privileges to subscribers.

Finally, note that if I pay less for Google Maps and other digital services than I would be willing to pay, I also pay more for my smart phone, home Internet connection, and wireless service provider than I would if all I were getting were just plain phone service. In other words, some of the “consumer’s surplus” from digital goods goes to Verizon and Apple as revenue, not to consumers.

Posted in business economics, Information Goods, statistical methods, Tyler Cowen is my Favorite Blogger | 9 Comments

Give up privacy, get free content: grand bargain?

James Pethokoukis writes,

Overall, there still seems to be great satisfaction with “the internet’s grand bargain: the exchange of free or subsidized content for personalized advertising,” as Larry Downes, project director at the Georgetown Center for Business and Public Policy, writes in Harvard Business Review. And what would the internet look like if this bargain collapses due to new government data privacy regulation?

Some companies might have to find a new business model. More likely, the incumbents would be able to afford the legal overhead to comply with regulations, and new competitors would not.

If you had told me in 1994 that the Internet’s “grand bargain” would be about getting personalized advertising, I would not have been nearly so romantically taken with it. At that time, the grand bargain I was hoping for was to be able to achieve success based on taking initiative and using some technical skills instead of relying on the ability to dazzle a crowd or elbow rivals out of the way playing office politics in big organizations.

The technical architecture of the Internet put intelligence at the edges, not in the center. The social architecture would work similarly.

But that vision for the social architecture seems to me to be far from reality. Since about 2000, the intelligence at the edges has gone down, as Internet usage spread to the masses. And the intelligence at the center went up, thanks to advances in artificial intelligence and the ability to manipulate large datasets.

Posted in business economics | 6 Comments

Responses to some comments

Some people insist that there is still a working class. For example,

Capitalists are those who obtain a majority of their incomes from capital (interest, dividends, capital gains, profits).

Workers are those who can reasonably expect to get a majority of their income in their lifetimes from wages, salaries, piece-work, or contract labor (1099 workers).

I am not convinced. This amounts to saying that class is determined by IRS regulations and arbitrary accounting conventions. It has very little relationship to how an economist would think about the source of income. For example, think of a doctor. To an economist, the designation of the doctor as “capitalist” or “worker” depends primarily on whether you count the doctor’s investment in medical school as an acquisition of (human) capital. Instead, if we follow the commenter’s approach, it depends on whether the doctor’s medical practice pays compensation in the form of salary or profits.

Moreover, it has very little relationship to how sociologists think of class. The “working class” will include workers with high autonomy as well as low autonomy. It will include workers with high social status and low social status. It becomes worthless as a way of predicting anything else about the person’s outlook, tastes, or norms of behavior.

On mental transaction costs, someone wrote,

There are plenty of counterpoints to this mental transaction costs model. Places where the number of choices and costs have proliferated. Fast food, and restaurants, for example. Most places offer a far larger selection with different prices than they used to. Upsize your fries or not, etc.?

I should have defined mental transaction costs more precisely. They are the costs that you incur when price is introduced as a consideration that otherwise could have been avoided. It is not a proliferation of choices, per se. Speaking of fast food restaurants, why don’t they charge for ketchup, or napkins? Why do they have three drink sizes, instead of charging by the ounce? I assume that mental transaction costs are a factor.

Posted in Uncategorized | 14 Comments

The Internet is not what it was

My latest essay is on the decline of the Internet.

In 1993, I did not picture people having their online experience being “fed” to them by large corporations using mysterious algorithms. Instead, I envisioned individuals in control, creating and exploring on their own.

My theories of its decline include a snobbish view that the masses made it worse. Feel free to give me pushback after you read the whole thing.

Posted in Internet governance and political theory, technology and the future | 13 Comments

Metrics meet the Null Hypothesis

From a podcast with Russ Roberts and Jerry Muller:

what’s so striking when you read through a lot of this literature on pay-for-performance and standardized measurement combined with pay-for-performance is: How often the scholarly literature shows, in a variety of fields, that it doesn’t work. And yet, politicians, policy-makers, they don’t seem to get the message.

People who are determined to try central planning aren’t interested in theories or evidence that indicate that central planning does not solve the problem.

It occurs to me that among the many problems with metrics in health care or education is that often the best way to look good is to be very selective about your customer base. Schools with children of affluent, two-parent households will tend to look “good.” Doctors who see mostly-healthy, conscientious patients will look “good.” etc.

The whole interview is interesting. Also, people seemed to like my essay on Jerry’s book.

Posted in Economics of Education | 12 Comments

Demonizing those who disagree

C Thi Nguyen writes,

An ‘echo chamber’ is a social structure from which other relevant voices have been actively discredited. Where an epistemic bubble merely omits contrary views, an echo chamber brings its members to actively distrust outsiders. In their book Echo Chamber: Rush Limbaugh and the Conservative Media Establishment (2010), Kathleen Hall Jamieson and Frank Cappella offer a groundbreaking analysis of the phenomenon. For them, an echo chamber is something like a cult. A cult isolates its members by actively alienating them from any outside sources. Those outside are actively labelled as malignant and untrustworthy. A cult member’s trust is narrowed, aimed with laser-like focus on certain insider voices.

It is one thing to say, “Joe said X, and X is wrong.” It is another thing to declare “You cannot trust anything Joe says.” The latter approach seems to dominate our political discussions, unfortunately.

The author suggests that you can only extract someone from cult thinking if you have first gained their trust. Not so simple. Anyway, I think that my three-axes model is in the spirit of trying to get people to detach from their echo chambers.

Posted in Three-Axes Model | 17 Comments

Were mortgage securities badly mis-rated?

Juan Ospina and Harald Uhlig write,

AAA securities did ok: on average, their total cumulated losses up to 2013 are 2.3 percent. . .Losses for other rating segments were substantially higher, e.g. reaching above 50 percent for non-investment grade bonds. . .

Cumulative losses of 2.2% of principal on AAA-rated securities surely is a large amount, given that rating. Such losses after six years may be expected for, say, BBB securities, and not for AAA securities. AAA securities are meant to be safe securities, and losses should be extremely unlikely. From that vantage point, an average 2.2% loss rate is certainly anything but “ok”. We have chosen this label not so much in comparison to what one ought to expect from a AAA-rated security, but rather in comparison to the conventional narrative regarding the financial crisis, which would lead one to believe that these losses had been far larger. Ultimately, of course, different judgements can be rendered from different vantage points: our main goal here is to simply summarize the facts.

Authors’ emphasis. They also say,

these facts provide challenge the conventional narrative, that improper ratings of RMBS were a major factor in the financial crisis of 2008.

I object to this conclusion. The capital requirements for the securities depended on the ratings. Because of the AAA ratings, the capital requirement was less than what the loss percentage turned out to be.

As I see it, the facts in the paper support the conventional narrative. If the securities had been correctly rated, then there would have been no financial crisis. If the securities had been properly assigned BBB ratings, or any ratings below AA, banks could not have bought the securities without having at least five times the amount of capital that was required for AAA.

The charitable interpretation is that the authors do not appreciate the significance of capital regulations. The uncharitable interpretation is that they are trolls.

Posted in Financial Crisis of 2008, financial markets, Housing and housing finance | 20 Comments

The solar exponential

In his regular email, Peter Diamandis writes,

Currently, the amount of solar installed each year increases by 35 to 40 percent.

…One megawatt of solar power is estimated to require 8 acres of land. U.S. solar capacity is on the order of 3,000 megawatts (only 0.65 percent of U.S. power produced)

Total electricity demand in the U.S. has been flat in recent years. So let’s play with a 40 percent rate of increase starting from a low base of 0.65 percent of U.S. power production. At that rate, it will take about 7-1/2 years for solar to account for 10 percent of U.S. power production. But then in another 7-1/2 years, it would be 100 percent.

Of course, the solar exponential might not be that high. Still, it is an interesting illustration of the potential of compound growth.

Posted in energy and the environment | 16 Comments