Category Archives: Tyler Cowen is my Favorite Blogger

Cable Internet: What is the Problem?

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Felix Salmon writes,

Americans really love their TV. They love it so much that cable-TV penetration is still substantially higher than broadband penetration. As a result, any new broadband company will not be competing against the standalone cost of broadband from the cable operators: instead, they will be competing against the marginal extra cost of broadband from the cable company, for people who already have — and won’t give up — their cable TV.

If you’re a cable-TV subscriber, the cost of upgrading to a double-play package of cable TV and broadband is actually very low; what’s more, there’s a certain amount of convenience involved in just dealing with one company for both services.

And yet Salmon argues that the lack of competition in offering broadband Internet is a problem. I am not sure why.

It has always seemed to me that what holds back penetration of broadband Internet is that there are a lot of “want-nots” among American consumers. The penetration rate for cable TV is somewhere north of 90 percent, and as Salmon points out, the marginal cost of adding broadband is low. So if more Americans wanted broadband Internet, they could have it.

The other technology that Americans really love is cell phones. My guess is that going forward the marginal value of bandwidth is much higher in wireless than it is in cable. Worrying about cable monopolies reminds me of the days when the government pursued an antitrust case against IBM for its monopoly in mainframe computers. In hindsight, that monopoly does not appear so formidable.

Pointer from Tyler Cowen, who is on my side, but for somewhat different reasons.

Government and Failure

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Megan McArdle writes,

the way that people and groups respond when they’re told that their plan is not working out as intended. Basically, there are three responses you can have:

  • My plan was defective: I should change something.
  • The world is defective: The plan is great, but we clearly need to do even more of this.
  • The information is wrong, and my plan is actually working very well.

The first answer is rarely the one that people go to.

Pointer from Tyler Cowen.

This can be as true of people in business as it is of people in government. But in business, you face what Eamonn Butler calls in The Best Book on the Market the World of Truth. If you do not fix what is broken, you lose money and go out of business. In government, you just keep telling people that Obamacare won’t cost jobs.

Recessions and Structural Change

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Ryan Avent writes,

Examining patterns of polarisation in America, Nir Jaimovich and Henry Siu find that displacement of routine work is not a gradual process but occurs almost entirely during recessions. Since the mid-1980s, roughly 92% of job loss in middle-skill, routine jobs has taken place during or within a year of recessions (as dated by the National Bureau of Economic Research). This pattern is linked to the phenomenon of “jobless recoveries”, which followed the recessions of 1990-1, 2001, and 2007-9 but not earlier downturns.

Pointer from Tyler Cowen. My first thought is that this makes it hard to sort out cyclical and structural change.

Avent’s hypothesis is that low inflation raises real wages and induces labor-saving substitution.

I think that there might be a number of hypotheses to explain the phenomenon. For example, what we call a recession could just be a bunching up of the process of shedding ZMP workers. In theory, ZMP workers should be let go at a steady rate, but it could be that firms come to a common realization that it is time to face reality.

But read Avent’s post. It is obvious that he would regard the UK in recent years as supporting his hypothesis more than mine.

Signs of the Future

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From Technology Review.

Though genome editing with CRISPR is just a little over a year old, it is already reinventing genetic research. In particular, it gives scientists the ability to quickly and simultaneously make multiple genetic changes to a cell. Many human illnesses, including heart disease, diabetes, and assorted neurological conditions, are affected by numerous variants in both disease genes and normal genes. Teasing out this complexity with animal models has been a slow and tedious process. “For many questions in biology, we want to know how different genes interact, and for this we need to introduce mutations into multiple genes,” says Rudolf ­Jaenisch, a biologist at the Whitehead Institute in Cambridge Massachusetts. But, says ­Jaenisch, using conventional tools to create a mouse with a single mutation can take up to a year. If a scientist wants an animal with multiple mutations, the genetic changes must be made sequentially, and the timeline for one experiment can extend into years. In contrast, ­Jaenisch and his colleagues, including MIT researcher Feng Zhang (a 2013 member of our list of 35 innovators under 35), reported last spring that CRISPR had allowed them to create a strain of mice with multiple mutations in three weeks.

The IGM forum tried to ask economists to take sides in the end-of-innovation debate by asking if they agreed with

Future innovations worldwide will not be transformational enough to promote sustained per-capita economic growth rates in the U.S. and western Europe over the next century as high as those over the past 150 years.

The most popular answer was “uncertain,” and the next most popular answer was “disagree.” I would note that Tyler Cowen has consistently said that he is bullish on innovation longer term.

Motivated Reasoning

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Dan M. Kahan and colleagues write,

If high Numeracy subjects use their special cognitive advantage selectively—only when doing so generates an ideological congenial answer but not otherwise—they will end up even more polarized than their low numeracy counterparts. Such a result, while highly counterintuitive from the perspective of SCT [“science comprehension thesis”], would be consistent with the view of a smaller group of scholars who take the view that identity-protective cognition operates on both heuristic and systematic—System 1 and System 2—forms of infor-mation processing (Cohen 2003; Giner-Sorolla & Chaiken 1997; Chen, Duckworth & Chaiken 1999; Kahan 2013). It would also be consistent with, and help to explain, results from observational studies showing that the most science comprehending citizens are the most polarized on issues like climate change and nuclear power.

Read the draft paper. I got to the link from Jonathan Haidt, which in turn I got to from Tyler Cowen.

I think that there is a general moral here, but I am not sure how to phrase it. Maybe something along the lines of, “Try to find the holes in your own most strongly-held beliefs.”

Over-rated in Economics

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Tyler Cowen writes,

at any point in time, the most overrated economists are the most highly rated young empirical economists at the top schools.

He says this is because empirical results do not hold up terribly well, and because what matters in empirical work is the overall body of work done by the profession, not so much the contributions of particular individuals.

I think that economists in policy-hot fields tend to be over-rated. Macro is one example. Health care is another. When I think of Jonathan Gruber or David Cutler, what comes to mind are their policy opinions, rather than any research discoveries. They are rated highly by economists who think that Gruber and Cutler know how to fix the health care system. Given that I do not believe this to be the case, I have to view them as dangerously over-rated.

I think that the fields of economic history and financial institutions are under-rated. Doug Diamond is known for his paper with Dybvig, but he has done other stuff that I like that has not received as much attention. Consequently, I think of him as under-rated. Gregory Clark may be under-rated. In my macro memoir, I end up saying that if I had it to do over again, I would pursue economic history and financial institutions as fields, rather than macro.

Many years ago Dick Startz wrote advice to economists on the job market. He said that the quality of professors at lower-institutions tends to be higher than you probably expect. Given that observation, it would be easier to find under-rated economists at lower-tier institutions and easier to find over-rated economists at top-tier institutions.

The New Piketty Book and Social Security Privatization

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I have not read it, but Tyler is touting it. Apparently, Piketty argues that it is normal for the return on capital to exceed the growth rate of the economy.

I always thought that this was impossible. Ten years ago, I wrote,

If stock prices grow at 7 percent per year while the economy grows at 2 percent per year, then the ratio of stock prices to GDP (P/Y) fifty years from now will be more than ten times what it is today. How could that happen?

If the price-earnings ratio of the stock market (P/E) stays constant, then in order for P/Y to increase tenfold, the ratio of earnings to GDP (E/Y) has to increase tenfold. However, corporate profits are over 10 percent of national output today, so that if the ratio increases by tenfold, then corporate profits will be more than 100 percent of national output. That is impossible.

Alternatively, suppose that the ratio of corporate profits to national output stays constant. Then we need the P/E ratio to increase by tenfold in order to get a tenfold increase in P/Y. So, if the P/E ratio today is about 25, then in fifty years it will be 250. That would require investors to almost ignore risk and the time value of money in valuing stocks. No one believes that this is possible.

Perhaps Piketty has a better grasp on this than I do. But if the return on capital is going to exceed the growth rate of the economy, then this strikes me as powerful argument in favor of privatizing Social Security, so that people don’t get cheated out of these wonderful returns. Again, I have not read the book (it will be released in about 6 weeks). Does he come out in favor of privatizing Social Security? If not, then why not?

The Next Financial Crisis

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Tyler Cowen writes,

When the U.S. real estate bubble burst in the late 1980s, there was a downturn in output and employment but no financial crisis. No capital markets froze up for instance and risk premia never deviated much from normal in the first place. And if that late 1980s-like path is what someone is predicting for the Nordics, Canada, or Singapore, well maybe so. I’m not predicting it myself but I certainly can see that within the realm of the plausible.

Much is within the realm of the plausible. Too much.

If you are a creditor of a government or of a large bank, your thoughts are probably along the lines of, “All of the governments and regulators of the world are doing everything that they can to prevent me from suffering from a default. So I’ll just hang in there.”

That is one equilibrium. But it is easy to transition to another equilibrium. Suppose that, in spite of all the best efforts of the same folks who were not able to stop the financial crisis of 2008, there is a large painful default by any one of the countries on Tyler’s list. If that happens, then a likely scenario is that all of the rest will go down very quickly.

The current policy approach perhaps reduces the probability of any one nation or one bank going under. However, it increases the probability of a huge, horrible, systemic collapse. A benefit of reducing government budget deficits is that it helps to reduce the probability of this Armageddon scenario. Even if you believe that reducing government deficits is painful austerity, from my perspective the benefit exceed the costs.

Models as Traps

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Tyler Cowen writes,

Enter DSGE models. There are plenty of good arguments against them. Still, they provide a useful discipline and they pinpoint rather ruthlessly what it is they we still do not understand. We can and should devalue them in a variety of ways, and for a variety of reasons, but still we should not dismiss them.

Models are simplifications. Sometimes they seem useful. For example, the AS-AD model often seems useful for explaining economic fluctuations. The production function often seems useful for explaining the distribution of income.

The DSGE model was never adopted for its usefulness in that sense. It was adopted in order to satisfy a methodological principle. That may be why I am tempted to dismiss it.

Any model can be described as valuable if you say that it shows us what we do not understand. To me, that is a low bar.

I think that a model is a trap if factors outside of the model constantly have to be invoked, to the point where they overwhelm the factors that are in the model.

Take the neoclassical production function. Recently, it has occurred to me that this may be a trap. Economists seem to need to add all sorts of types of capital to the model: human capital, social capital, network capital, brand-name capital, etc. It is hard enough dealing with heterogeneity in physical capital–how many forklifts equal one blast furnace? But when physical capital does such a poor job of explaining differences in performance across firms, across economies, and over time, at what point do you say that the neoclassical production function is a trap?