Smorgasbord

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2021 was awarded to David Card “for his empirical contributions to labour economics” and to Joshua D. Angrist and Guido W. Imbens “for their methodological contributions to the analysis of causal relationships.” Each year, the prize committee produces a highly readable “Popular science” explanation, this year titled “Natural experiments help answer important questions,” along with more specialized and longer “Scientific background” paper, this year titled “Answering Causal Questions Using Observational Data." From the “Popular Science” explanation:

This year’s Laureates—David Card, Joshua Angrist and Guido Imbens—have shown that natural experiments can be used to answer central questions for society, such as how minimum wages and immigration affect the labour market. They have also clarified exactly which conclusions about cause and effect can be drawn using this research approach. . . . Their solution is to use natural experiments—situations arising in real life that resemble randomised experiments. These natural experiments may be due to natural random variations, institutional rules or policy changes. In pioneering work from the early 1990s, David Card analysed some central questions in labour economics—such as the effects of a minimum wage, immigration and education—using this approach. . . . Natural experiments differ from clinical trials in one important way . . . [in] a natural experiment, the researcher also has access to data from treatment and control groups but, unlike a clinical trial, the individuals may themselves have chosen whether they want to participate in the intervention being offered. . . . In an innovative study from 1994, Joshua Angrist and Guido Imbens showed what conclusions about causation can be drawn from natural experiments in which people cannot be forced to participate in the programme being studied (nor forbidden from doing so). The framework they created has radically changed how researchers approach empirical questions using data from natural experiments or randomised field experiments.

The Nobel Prize (2021)

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Daniel Rees and Phurichai Rungcharoenkitkul discuss “Bottlenecks: causes and macroeconomic implications."

Pandemic-induced supply disruptions have clearly been a major cause of bottlenecks, especially in the early stages of the global recovery. Producers who had severed relationships with suppliers early in the pandemic found it hard to re-establish them when demand picked up. Asynchronous lockdowns disrupted shipping, while sporadic virus outbreaks led to further dislocations. But there are also other causes. Unexpected natural events have intensified supply pressures. A lack of investment in the years leading up to the pandemic left some industries with little spare capacity.

Several factors have amplified the economic severity of bottlenecks. One is the shift in the composition of demand towards manufactured goods during the Covid recession and recovery. These goods are heavily reliant on inputs from other industries, leading to larger demand spillovers than from a services-led recovery. Manufactured goods (and their inputs) also tend to be relatively capital-intensive, making their short-run supply elasticity low as it takes time to expand productive capacity. . . . A second factor is . . . [that] [a]nticipation of product shortages and precautionary hoarding at different stages of supply chain have aggravated initial shortages (the “bullwhip effect”), leading to further incentives to build buffers. These behavioural changes have the potential to lead to feedback effects that exacerbate bottlenecks. . . . A third important background element is the lean structure of supply chains, which have prioritised efficiency over resilience in recent decades. These intricate networks of production and logistics were a virtue in normal times, but have become a shock propagator during the pandemic.

Bank of International Settlements (2021)

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The Hutchins Center on Fiscal & Monetary Policy at the Brookings Institution and the Initiative on Global Markets at the University of Chicago Booth School of Business created a Task Force on Financial Stability report, led by Glenn Hubbard, Donald Kohn, Laurie Goodman, Kathryn Judge, Anil Kashyap, Ralph Koijen, Blythe Masters, Sandie O’Connor, and Kara Stein. The report identifies five main areas of concern: Treasury markets, mutual funds, insurance companies, housing finance, and central clearing counterparties.

Our decision to focus on nonbank finance was reinforced in March 2020 when fear and uncertainty arising from the onset of the pandemic sparked a huge spike in demand for cash, disrupting a wide variety of credit markets, including markets for U.S. Treasury, corporate, and municipal bonds, mortgage-related securities, and commercial paper. The extraordinary growth in those markets had outgrown the capacity of the private sector to meet this outsized demand to sell securities to get cash. . . . The resulting disruptions threatened to cut off credit to households, businesses, and governments, which would have made an extremely serious economic situation much worse. Only very aggressive central bank intervention in the United States and elsewhere stabilized markets and restored credit flows.

Brookings Institution (2021)

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Gaurav Nayyar, Mary Hallward-Driemeier, and Elwyn Davies have written At Your Service? The Promise of Services-Led Development .

Evidence suggests that manufacturing-led development in the past delivered the twin gains of productivity growth and large-scale job creation for the relatively unskilled. Underlying these were economies of scale, access to international markets, innovation, and supply chain linkages with other sectors, combined with the ability to leverage relatively unskilled labor with capital. Although services are labor intensive, they often require simultaneous production and consumption that precludes accessing larger markets. Their more limited ability to use capital to improve labor productivity also limits both scale economies and incentives to innovate. Conventional wisdom is therefore pessimistic about the prospects for services-led development. This book seeks to test that conventional wisdom. . . . The data show that services can deliver productivity growth—in several cases, growth that is higher than that of industry. What matters for the longer-term potential of services-led development is whether the features of industrialization that have enabled scale, innovation, and spillovers along with job creation for unskilled labor—as in East Asia—are increasingly shared by the services sector. . . . It is not necessarily the production of `goods’ or `services’ per se that matters but how these are produced.

World Bank (2021)

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Bigstock

A committee convened by the National Academy of Sciences discusses Reducing the Impact of Dementia in America: A Decadal Survey of the Behavioral and Social Sciences.

More than 6 million people in the United States are currently living with Alzheimer’s disease, a number that will rise to nearly 14 million by 2060 if current demographic trends continue. It is estimated that approximately one-third of older Americans have Alzheimer’s or another dementia at death. . . . The primary economic costs of dementia to persons living with dementia and their families are (1) medical and long-term care costs, and (2) the value of unpaid caregiving provided by family (most commonly) and friends. Most estimates of these costs in the literature draw on such nationally representative data sources as the Health and Retirement Study, the Medicare Current Beneficiary Survey, and Medicare claims data. An estimate of annual per-person costs for 2019, which includes health care and the value of unpaid care provided to persons with Alzheimer’s disease, is approximately $81,000 ($31,000 is the value of the unpaid care). This estimate is about four times higher than the costs of the same care provided to similarly aged persons without the disease. . . . When aggregated to the U.S. population, the costs are estimated to have exceeded $500 billion in 2019 and are projected to increase to about $1.5 trillion by 2050.

National Academy of Sciences (2021)

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Naomi R. Lamoreaux and John Joseph Wallis tell the story of “Economic Crisis, General Laws, and the Mid-Nineteenth-Century Transformation of American Political Economy”.

In 1851, in the aftermath of an economic crisis that forced the state into default, Indiana rewrote its constitution to require that laws enacted by the legislature ‘be general and of uniform operation throughout the state.’ This directive may not seem remarkable from the standpoint of the twenty-first century; we take it for granted that is what legislatures do. From the perspective of the mid-nineteenth century, however, the provision was groundbreaking. The first such mandate ever enacted, Indiana’s innovation spread to almost all the other U.S. states over the next few decades . . . Before Indiana’s innovation, the main business of legislatures was to enact special or private bills on behalf of specific individuals, organizations, and localities. The year before its new constitution was ratified, for example, Indiana’s general assembly passed 550 acts. . . . About half benefited particular local governments, granting them permission to spend public funds, borrow money, levy taxes, set salaries, fees, duties, and meeting times for administrators and judges, and take a variety of other actions. Almost all the rest (nearly 40 percent) aided particular individuals or organizations. Some involved personal matters such as divorces, name changes, and the administration of decedents’ estates, but the vast majority conveyed grants of economically valuable privileges such as corporate charters to people specifically named in the bills.

Journal of the Early Republic (2021)

International Corporate Taxation

Alan Auerbach delivered the 2021 Martin S. Feldstein on "The Taxation of Business Income in the Global Economy."

Fifty years ago, the top five companies by market capitalization were IBM, General Motors, AT&T, Standard Oil of New Jersey (Esso, the predecessor of today’s ExxonMobil), and Eastman Kodak. . . . These were companies that ‘made things’ in identifiable locations, to a large extent in the United States. If we shift to today, we see another five familiar names, all giant companies: Apple, Microsoft, Amazon, Alphabet (Google’s parent), and Facebook. These companies are worldwide multinationals, relying very heavily on the use of intellectual property in the goods and services they provide . . . In the last half century, the share of intellectual property measured in US nonfinancial corporate assets more than doubled, according to the Fed’s Financial Accounts of the United States.  That’s probably a conservative estimate, because the measurement of intellectual property is a fairly narrow one here. The share of before-tax US corporate profits coming from overseas operations nearly quintupled, according to data from the Bureau of Economic Analysis. US companies have become much more multinational in character, not just selling things abroad, but making them abroad as well. And the share of cross-border equity ownership has steadily increased, to the point that foreign individuals and companies account for a significant fraction of US companies’ share ownership.

National Bureau of Economic Research (2021)

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Ruud de Mooij, Alexander Klemm, and Victoria Perry have edited a collection of 16 essays about Corporate Income Taxes Under Pressure: Why Reform is Needed and How it Could be Designed. For a sample, Narine Nersesyan explains in Chapter 3 “The Current International Tax Architecture: A Short Primer.”

The generally applied tax architecture for determining where profits are taxed is now nearly 100 years old—designed for a world in which most trade was in physical goods, trade made a less significant contribution to world GDP, and global value chains were not particularly complex. . . . The current international tax framework is based on the so-called ‘1920’s compromise’. In very basic outline, under the ‘compromise’ the primary right to tax active business income is assigned where the activity takes place—in the ‘source’ country—while the right to tax passive income, such as dividends, royalties and interest, is given up to the ‘residence’ country—where the entity or person that receives and ultimately owns the profit resides. The system has, however, evolved in ways that considerably deviate from this historic ‘compromise,’ and international tax arrangements currently rest on a fragile and contentious balance of taxing rights between residence and source countries. . . . While domestic laws of each individual country set out the rules . . . the international taxation system is—very importantly—overlain with a network of more than 3,000 bilateral double-taxation treaties. . . . The key role of the international tax architecture is to govern the allocation of taxing rights between the potential tax-claiming jurisdictions to avoid both excessive taxation of a single activity and a nontaxation of a business activity.

International Monetary Fund (2021)

Eviction Economics

The Summer 2021 issue of Evidence Matters, published by the US Department of Housing and Urban Development, is devoted to the theme of “Evictions,” with three readable articles heavily footnoted with references to published studies, written by Dana Goplerud and Craig Pollack. From the first article, “Affordable Housing, Eviction, and Health."

Based on data from 2016, the most recent year available, landlords filed an estimated 3.7 million evictions, with about 8 out of every 100 renter households receiving eviction notices. Hepburn and Rutan place the scale of evictions in context by comparing them with the 2.8 million foreclosure starts at the height of the Great Recession. As staggering as these figures are, many more renters may be forced to exit their housing without a formal filing or between the time of a filing and a judgment. . . . Nonpayment of rent is the primary reason for eviction, which itself can arise from various causes, including rising rents combined with stagnant income growth and persistent poverty, job or income loss, or a sudden economic shock such as a health emergency or a car breakdown. Other reasons include lease violations, which can be technical in nature; property damage; and disruptions, such as police calls. Landlords, for their own reasons, may force tenants to move, either informally or through a legal “no-fault” eviction. Renters often are evicted over relatively small amounts of money—in many cases, less than a full month’s rent. . . . The Milwaukee Area Renters Study found higher rates of eviction for African-American, Latinx, and lower-income renters and renters with children. Neighborhood crime and eviction rates, the number of children in a household, and ‘network disadvantage’—defined . . . as ‘the proportion of one’s strong ties to people who are unemployed, addicted to drugs, in abusive relationships, or who have experienced major, poverty-inducing events (e.g., incarceration, teenage pregnancy) to increase his or her propensity for eviction’—are factors associated with an increased likelihood of eviction.

US Department of Housing and Urban Development (2021)

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One part of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) that became law on March 27, 2020, was a national moratorium on evictions from rental housing, which was later extended by the Centers for Disease Control. The Eviction Lab at Princeton University has been tracking the results.

For example, Anne Kat Alexander and Sarah Lee published a “Preliminary Analysis: A Year of Eviction Moratoria. Jasmine Rangel, Jacob Haas, Emily Lemmerman, Joe Fish, and Peter Hepburn followed up with a “Preliminary Analysis: 11 months of the CDC Moratorium” . They show considerable variation in state and local rules as well, but summarize: “In total, we estimate that federal, state, and local policies helped to prevent at least 2.45 million eviction filings since the start of the pandemic.

The Eviction Lab (2021)

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Elijah de la Campa, Vincent J. Reina, and Christopher Herbert published “How Are Landlords Faring During the COVID-19 Pandemic? Evidence from a National Cross-Site Survey." Based on a national survey of landlords:

[T]he share of landlords collecting 90 percent or more of yearly rent fell 30 percent from 2019 to 2020. . . . Ten percent of all landlords collected less than half of their yearly rent in 2020, with smaller landlords (1–5 units) most likely to have tenants deeply behind on rental payments. . . . The share of landlords deferring maintenance and listing their properties for sale also increased in 2020 (5 to 31 percent and 3 to 13 percent, respectively).

Joint Center for Housing Studies of Harvard University (2021)

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The research group at JP Morgan Chase Institute published “How did landlords fare during COVID?”

Between the Emergency Rental Assistance Program and the American Rescue Plan Act, $46.5 billion of rental assistance has been made available by the federal government for states and localities to distribute. As of the end of September [2021], less than a quarter of the funds have been distributed. The distribution of these funds has been hampered by onerous paperwork requirements for both tenants and landlords to prove that tenants meet strict requirements to qualify for assistance, including matching information from the renter and the landlord.

JP Morgan Chase Institute (2021)

Bigstock

Interviews with Economists

Allison Schrager speaks with Luigi Zingales in “Break Up Big Tech? A conversation about the future of the industry”.

I think the problem is that we treat Big Tech as one big issue, and we say we need to break them up. Rather, what we should do depends on what we want to accomplish, and what sector in the industry we’re taking about. Let’s start with social media. I think the government should have tried to stop Facebook’s acquisition of Instagram and WhatsApp, but I am not sure that breaking them up now would make a difference in the long term. If there are big network externalities, separating Facebook from Instagram would be just a temporary measure, because eventually only one of the two will prevail. . . . We should separate the two key functions Facebook performs: sharing of information and editing of information. . . . The problem isn’t social media; it’s the business model, which is to get people addicted to platforms.

City Journal (2021)

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Douglas Clement serves as interlocutor in "Rucker Johnson interview: Powering potential," subtitled “Rucker Johnson on school finance reform, quality pre-K, and integration."

Today, about 75 percent of per pupil spending disparities are between states (rather than between districts within states). And we’ve witnessed that inequality in school spending has risen since 2000. After three decades of narrowing—the ’70s, ’80s, and ’90s—primarily due to the state school finance reforms . . . there has been a significant rise in inequality, especially sharply following the Great Recession. What I want to highlight here is the current disparities nationwide in school resources. School districts with the most students of color have about 15 percent less per pupil funding from state and local sources than predominantly White, affluent areas, despite having much greater need due to higher proportions of poverty, special needs, and English language learners. . . . [S]chools with a high level of Black and Latino students have almost two times as many first-year teachers as schools with low minority enrollment. And minority students are more likely to be taught by inexperienced teachers than experienced ones in 33 states across the country. . . . [O]nly a third of public schools with high Black and Latino enrollment offer calculus. Courses like that are gateways to majoring in STEM in college and having a STEM career.

Federal Reserve Bank of Minneapolis (2021)

Discussion Starters

The World Bank has ended its well-known "Doing Business" reports. The reasons are available in a report from the outside law firm of WilmerHale, "Investigation of Data Irregularities in Doing Business 2018 and 2020—Investigation Findings and Report to the Board of Executive Directors"

To that end, we undertook to understand: (1) how improper changes to the data for China (Doing Business 2018) and Saudi Arabia, the United Arab Emirates, and Azerbaijan (Doing Business 2020) were effected; (2) who at the Bank directed, implemented, or knew about the changes to the data. . . . and (3) what internal circumstances, whether related to policies, personnel, or culture, allowed for the changes to take place.” The Summer 2015 issue of this journal included a two-paper symposium about the Doing Business reports.

World Bank (2021)

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Steve Kaczynski and Scott Duke Kominers offer a primer in "How NFTs Create Value".

As the name ‘non-fungible token’ suggests, each NFT is a unique, one-of-a-kind digital item. They’re stored on public-facing digital ledgers called blockchains, which means it’s possible to prove who owns a given NFT at any moment in time and trace the history of prior ownership. Moreover, it’s easy to transfer NFTs from one person to another—just as a bank might move money across accounts—and it’s very hard to counterfeit them. Because NFT ownership is easy to certify and transfer, we can use them to create markets in a variety of different goods. . . . Because blockchains are programmable, it’s possible to endow NFTs with features that enable them to expand their purpose over time, or even to provide direct utility to their holders. In other words, NFTs can do things—or let their owners do things—in both digital spaces and the physical world. In this sense, NFTs can function like membership cards or tickets, providing access to events, exclusive merchandise, and special discounts—as well as serving as digital keys to online spaces where holders can engage with each other. Moreover, because the blockchain is public, it’s even possible to send additional products directly to anyone who owns a given token. All of this gives NFT holders value over and above simple ownership—and provides creators with a vector to build a highly engaged community around their brands.

Harvard Business Review (2021)