Recommended reading

  1. Real estate scams mess up the market in Russia
  2. Vegan junk food may save the Earth by delivering flavor without righteousness
  3. Fraud and ruthless competition at
  4. A dentist takes on Big Sugar by exposing their own damning research
  5. China’s white-elephant dam thrice screws over Ecuadorian citizens
  6. America is allowing Greek levels of tax cheating (“only suckers pay tax”)
  7. A fascinating investigation on the world’s NOT oldest woman
  8. A debate on the role of government in innovation (I agree with her, but yes, it’s hard to get government — a monopoly — to perform)
  9. The French battle over notions of place, community
  10. This article from 8 months ago details how peer-to-peer lenders lost investors’ money by failing to monitor borrowers. Here’s my explanation as to the perverse incentives.

Course announcement: “Fundamentals of Water Utility Regulation” will take place in March in Budapest. The registration fee is €1000-plus. (I taught there a few years ago but will not be this year.)

Life at 49C

This Guardian story sounds like one of the narratives in my cli-fi books Life Plus 2 Meters, which discuss how we will (not) adapt to climate change. Truth is stranger than fiction!

Michelle Coles, owner of the Cinema Augusta, Port Augusta, South Australia, (49C on Tuesday)

“I didn’t think it was that hot yesterday, if you want an honest answer. Yesterday at the cinema was very quiet. People tend to stay home. We’re quite used to it. Every summer is hot. A couple of degrees hotter doesn’t make that much difference.”

“Honestly I’d much rather be in 48C heat in Port Augusta than in the city – you’ve got so much concrete and it’s closed in, but here it’s quite open. You just don’t stand out in the sun though, that’d be stupid.”

“Most of us have got pretty good air-conditioning. Our local sporting centre is open with the aircon running for anyone who doesn’t have any. The one thing I do, is for the elderly people I know, I go and visit them.”

“We don’t take our dogs for a walk early in the morning, we take them out at night. Even then, the concrete can still be quite hot. I walk out and actually stand in my bare feet to check.”

“I think it’s different these days to what it was 20 or 30 years ago. You notice that people walk around with water bottles. Everyone has water bottles. I think people are sensible. We’ve got a couple of homeless people who pop into the cinema, and our girls are instructed to give them a drink. We have a really amazing community spirit here – everybody looks after everybody else.”

What do central banks do?

Marcello asks:

What are the pros and cons of the fed raising the interest rates? How does it help control inflation?

I’ll begin by describing the main goals of financial regulation and central banks before turning to the relationship between inflation and interest rates and the Federal Reserve’s tasks.

In theory, financial regulation, like any regulation, is meant to improve market efficiency and reduce systemic risk. In most cases, this means promoting transparency, spreading accurate information promptly, and preventing fraud and mistakes that put the entire system at risk. In reality, these goals tend to be ignored by politicians who want big banks (“national champions”) or benefit from bribes and (retirement) jobs at banks that they allow to make excess profits by taking risks at taxpayers expense (“privatize the gains, socialize the losses”) or growing “too big to fail.” In the US, the biggest problems arise from dividing regulation among so many government agencies that it’s ineffective and the ongoing subsidies to FannieMae and FreddieMac, the private-profit, government-guaranteed mortgage buyers at the central of the Financial Crisis of 2007-12.

Central banks sometimes regulate banks (and other non-bank financial firms), but they are always in charge of managing the money supply with the goal of “keeping inflation under control,” which has been codified as “near 2 percent” for historical reasons.

The connection between inflation and interest rates is tricky, so let me say a bit more about inflation, interest rates and the money supply.

First, there are two types of inflation. “Supply-push” inflation reflects the supply of money. As a simple example, start with a money supply of 100 and 100 units of goods sold at an average price of 1.00. In this case, the price index is 100 because the average basket of goods costs 100 units of money. If money supply doubles (everyone has $2 for every $1 in their pockets), but there are still 100 units of good, then the price index doubles to 200, meaning that inflation is 100 percent. (The most familiar price index — the Consumer Price Index, or CPI — is often used to measure inflation.) Supply-push inflation is present in Venezuela because the government is printing money — and lying about it with the hope that citizens will not notice — while the supply of goods is falling (big topic for another post).

“Demand-pull” inflation results when people devote more of their spending to some goods and thus less to other goods. In most cases, this inflation is normal and benign, because it increases profits in that sector and thus attracts more supply (resources arrive from shrinking sectors), but various political-economic distortions might lead to harmful sorts of demand side inflation in, for example, higher education, medical care and housing in the US. I could write a whole book on these issues, but I’ll give you the simple example of housing markets where demand is strong (people are moving to the area or buying larger houses because they are wealthier) but building regulations restrict demand.

Interest rates can be used to raise and lower inflation by making money “more expensive.” If inflation is high, then an increase in interest rates means that it’s better to save rather than spend money because you can make more money by leaving the money in the bank or investments. This reduction in the “velocity of money” means that they are fewer people chasing the same number of goods, so prices of those goods slow or stop rising.

Interest rates are often set in markets for money based on the demand of a country’s currency vis-a-vis other countries or the money supply set by central banks. It is for these reasons that interest rates depend on exchange rates, banking reserve requirements, open market operations (buying and selling bonds) and many other factors that are hard to understand, let alone manage. It’s this complexity that lies at the heart of debates over the role of central banks. Some people think that central bankers are geniuses that manage our collective prosperity. I am with the other people who think that humans introduce more noise and prefer that a bot increase the supply of money at a known rate and leaves the market to sort out the other factors. (Bitcoin was released 10 years ago based on that exact logic. If you’ve followed its price gyrations, then you know that other factors affect its demand and thus its price!)

Also note that interest rates vary by maturity (e.g., interest rates on overnight deposits vs 30-year loans) because varying “time preferences” lead to different aggregate demand functions.

This summary should give you a (vague) idea of how regulations are supposed stabilize prices and markets, but a brief look at the macroeconomic performance of 200+ countries will tell you that politics, regulations and cross-border operations combine in unpredictable ways to produce systems that fail often, systems that fail when shocked and systems that affect others due to their size or reliability (i.e., the US, EU, China and Japan).

It’s my opinion that the greatest threat to financial and non-financial markets arise from political interference (e.g., India, Turkey, China, UK, Italy and the US in recent months). In many cases these are caused by populists who think that markets can be manipulated to suit their superstitions. They are sometimes right in the short run but always wrong in the medium (1-2 years) and long run. (I think that bitcoin and other “trustless” currencies might gain value in the near future as people lose faith in populist shenanigans.)

Finally, let me note that the US Fedeal Reserve in unusual in its dual mission of simultaneously keeping maximizing employment and preventing inflation. Although its hard to optimize on two margins, it’s even harder to pursue these goals because increases in employment eventually lead to increases in wages (as the supply of workers falls short of demand), which leads to demand-side inflation and thus the need to increase interest rates, which will cool the economy and thus dampen demand for workers.

So what are the pros and cons of increasing interest rates? A reduction in economic activity and job losses (cons) but a decrease in prices and inflation (pros).

My one-handed conclusion is that markets are hard to “manage,” and thus should be regulated in a slow, incremental and transparent way. Most economists understand this. Few politicians do.

Weekend reading

  1. A podcast on rethinking economics (something I’ve been doing for awhile)
  2. The institutions of a liberal society depend on trust, which is  under assault. [This is one of the best essays I read in 2018.] Related: The Republican party is using authoritarian methods in a power grab.
  3. Facebook isn’t just showing you ads. It’s selling your data to companies and showing that revenue as “advertising”. Here’s an example:
  4. Humans have some terrible tendencies: lie, betray and more
  5. OTOH: Here’s the paper describing the “general purpose” AI that learned (from zero) how to beat the best chess computer in 4 hours.
  6. Are we getting sick because we’re killing the helpful bacteria in our gut?
  7. Bill McKibbon on how badly we’re screwing up the planet. Sad.
  8. China is buying up media and journalists world-wide to promote “its good side” in yet another step into an illiberal world where power decides truth. 🙁
  9. A really nice history of the synthetic drugs that are messing up so many people

H/T to CD

Porn and social capital

JB asks:

As an economist, what unique perspectives do you bring or how do you weigh in on the increasingly anecdotal if not manichaean (morally bipolar) debate of porn-good / porn-bad? Is porn’s ubiquity symptomatic of a larger cultural dysfunctionality that has yet to be articulated in clarity, and is porn’s popularity a (or the) cause of this so-called “sex recession”?

If you’re interested in the role of sex in society and our sexual habits, then read the linked article above to think over the many reasons why younger people may be having less sex, fewer partners, and (perhaps) unfulfilling relationships.

Out of all the possible reasons listed in that article, I would emphasize how younger people are stressed about success, their “place” in social groups, and the paradox of (too much) choice. Back in the 90s, it wasn’t so easy to browse dozens of potential hook-ups per hour or compare your “success” to hundreds of “friends” and influencers filling social media feeds. Back then (and for all of human history), people hooked up according to their choices from a local pool of potentials. These days, you can compare yourself to the (artificial) profiles of far more people and get distracted/attracted to “horny locals” who are only a few clicks away.

Sadly, young people today are going to be less confident (and thus less attractive and less experienced at sex and relationships) if they get trapped in a downward spiral of “everyone has love… except me.” We see this problem at its worst with the InCel (involuntary celebrate) “movement” of guys who blame women for withholding sex. InCels didn’t exist 20 years ago (in any meaningful way) because it was harder to lust vicariously. With nothing to distract you at home, you went out and met other humans who were also looking for some action.

Turning to porn, I think that it is worsening this problem by creating false impressions of how people meet (“Hey pizza guy, how about anal?”); the role of romance, flirting and foreplay in sex (pizza guy is busy — drop your pants!); and conflating pay-for-view transactions with give-and-take relations.

I’ve never been a fan of porn (or prostitution), but I can see — as an economist — how there will be supply to meet demand. The drop in the price of porn has led to an increase in its variety and rate of consumption, which has probably had a negative impact on young men (usually) who spend time consuming porn rather than awkwardly learning how to flirt. (Girls tend to be more comfortable with the nuances of communication, but I’m sure those skills are underdeveloping as they too turn to social media fantasy, selfie narcicissm, and text-jibberish chatter.) Does porn contribute to cultural dysfunction? Absolutely: It offers an escape for guys trying to avoid the awkward phase of making themselves vulnerable by asking for others’ attention. It’s much easier to live in a fantasy relationship, just as it’s much easier to pretend you’re talking to someone by liking their update or texting some emoji’s.

(The alt-sex scene is different, but I think that gays and lesbians are experiencing similar issues. When it comes to trans-, queer- and gender-identity, I think that sex and relationships are going to be complicated by social norms and psychological wandering. Feel free to comment.)

So my one-handed conclusion is that porn is not the problem, nor the solution, but a symptom of young people having a harder time learning how to let go, take a chance, face rejection and get laid. We need more of this.

And a random question: First of all, is social capital a valid notion? And if so, why does it seem that social capital is not transactable via social media? Said differently, why is it impossible to actually make new friends on Facebook, get a job through LinkedIn, find a companion on OKStupid, etc? No matter what stage of trust one is at with someone else, it would seem that our social capital can only be accrued and spent in handshake transactions. And so, what can social media do for social capital at all? Simply squander it through embarrassing hyperbole or tactless attention-grabbing screeds?

This is a good question on one of my favorite topics. I’ll begin by referring you to my post (“Social media is neither social nor media“) but add a few more comments in response to your particulars.

First, social capital is indeed a real and important type of capital. People with more social capital are better insulated against shocks (insurance), better able to find work and other resources (information) and happier (collective identity). The bad news is that there is no short-cut to social capital: Money can’t buy you love. Relationships and trust need time and commitment.

Second, markets tend to displace social capital (relationships) by supplying substitutes at lower (transaction) costs. Thus, we can buy food from the store rather than bartering with the neighboring farmer. Thus, we hire babysitters for our kids and put grandma in the retirement home rather than living in extended families. In many cases, these market substitutions are better, but we also lose positive externalities (unintended benefits) when we replace relations with transactions. That’s why I worry sometimes that we’re overdoing it when it comes to outsourcing.

Third, most social media companies are promising something for nothing while manipulating you and selling your data. If you want to see what they really do, then read their financial and investor-facing documents. Facebook is NOT “connecting the world,” it’s selling advertising. LinkedIn is NOT about your career, but revenue from HR departments. OKCupid is NOT about love, but selling your personal details to marketeers. I can guarantee that any reader on this post is more likely to get friends, jobs and romance by meeting people face-to-face (at parties, bars, through friends, etc.) than putting in a few more clicks.

Fourth, social media has lowered the cost of connecting, which means that any given “demander” will be overwhelmed by supply. Influencers have so many friends that they cannot possibly say “hi” in response. Companies advertising jobs need bots to filter thousands of applicants. Attractive people on OkCupid and Tinder spend so much time saying no that they miss opportunities. Even when they do take a chance, they are nearly always tempted to drop someone with a slight flaw for a virtual perfection who pops into their feed.

(Stronger labor markets, btw, are reducing noise in this system as companies compete for workers and employed people waste less time on social media fantasies.)

My one-handed conclusion is that social media companies are making our lives worse by giving us false hopes, wasting our time, and selling our data. As above, I suggest spending more time in meat-space and less time in cyber-space.

Weekend reading

  1. Trolls, Trump and college professors (?!) are responsible for America’s loss of civil discourse.
  2. The lessons of the financial crisis have not been learned.
  3. The best (?) supermarket in the US? (I think so.)
  4. This podcast with James Kenneth Galbraith (son of the more famous Galbraith) is interesting, even if he’s a bit smug.
  5. Would women with “real” rights stop carrying babies and instead focus on community? Related (?): Communists had a sex-positive culture.
  6. We all use drugs. 
  7. Cities are getting better at using “meanwhile” spaces.
  8. “Reagan’s true legacy is a hollowing out of the middle class… that ultimately led to the financial crisis, a stupendous increase in the national debt, and a rise in inequality that gave rise to an oligarchy… and the resentment that elected Trump.” Read the paper [pdf].
  9. Housing cannot be affordable AND a good investment. Choose one.
  10. Veganism can “save the world” one soy-sausage at a time!

H/T to CD