Trouble in Congo?

This week’s Economist has an excellent article on the situation in the Democratic Republic of Congo, where tensions seem to be rising again and the threat of large scale violence is increasing.

I suspect most Americans are unfamiliar with the wars in Congo, or have just the vague notion that such wars existed. Probably most know of the Rwandan genocide, but don’t know that it was the kicking off point for a series of conflicts often dubbed ‘Africa’s World War’.

The best book I have read on the topic is Dancing in the Glory of Monsters, and what I really appreciated about it beyond lucid prose was that the author took pains to look at the structural factors that led to such horrors. It’s far too easy to put blame on the character of individuals (‘those people are just uncivilized/animals/etc’) and miss the much larger forces at play.

For one, the actual state capacity of the Congolese state is very limited and basically exists only in the west around the capital Kinshasa. In the east, the closest thing to a state are a series of warlords that operate more or less with the blessing of President Kabila; he couldn’t do much to stop them even if he wanted to.

In fact what makes the book great is that it is in many ways a case study of what types of social structures can lead to genocide and sustained warfare; the lessons he draws are not specific to Africa. Check it out!


Some Thoughts on Altered Carbon

That is the new sci-fi series from Netflix, based on a book of the same name. I’m not particularly interested in picking apart the plot, but some of what I say is probably spoiler-territory, so I’ll put it below the fold.

Continue reading “Some Thoughts on Altered Carbon”

US Corporate Profits as Share of GDP

Recently a number of economists have become concerned with an increase in the market power of firms, or conversely, a lack of competition in markets. This is particularly evident in the record levels of corporate profits seen over the past several years. Recall that under perfect competition firms receive no profit, which is not to say they don’t make any money, only that they make no money above and beyond what it takes to run the business and pay salaries. Given that these profits are in fact occurring, it suggests some degree of monopoly power, and monopoly power means deadweight loss. But just how large is this deadweight loss?

In the field of industrial organization, a rule of thumb is that the deadweight loss in a market is roughly half of the monopolist profit (at the profit maximizing P and Q). So a quick and dirty way to gauge this is to look at corporate profits as a share of GDP, and divide by two. Using data from FRED, the latest numbers suggest that the size of deadweight loss in the US economy is around 6%. Is this a large number?

I think it helps to put this in historical context, so below is the time series of US corporate profits as share of GDP; simply mentally divide by 2 to get the rough deadweight loss.

fredgraph (1)

If this in fact a reliable method, there appear to be three regimes: from the post war era to about 1980, the average DWL is around 5%; from 1980 to 2000 around 3-4%; and post 2000 a significant run up to 6%, with a big dip from the Great Recession.

Follow up question: how does this compare to other economies?

What’s going on with cryptocurrencies?

As the price of Bitcoin and other digital currencies have skyrocketed over the past year, many have wondered just what is going on? Why is demand for cryptocurrencies so high? Indeed, the return to investment in many cryptocurrencies is high enough that the chipmaker AMD has seen its stock price almost double over the past year because coin ‘miners’ are buying chips en masse to create massive complexes of servers doing nothing but ‘mining’ coins! (Story here.)

Economist John Cochrane argues that what is driving the price of these currencies is a combo of their ‘convenience yield’ and ‘speculative’ yield. Why would anybody hold a currency that is far above its ‘real’ value? Well, Bitcoin is good for holding for short terms when performing transactions you don’t want monitored. But with a limited supply of Bitcoins (or Etherium, or whatever), the price gets driven up via basic supply and demand. Add to that the desire to make a quick buck in the face of ever rising prices, and the behavior of these prices makes sense; it doesn’t require any sort of strange irrational herding of investors. (As Walter E. Williams is fond of saying, any theory that relies on human stupidity isn’t a very good theory at all.)


The Republican Tax Plan

There’s been quite a bit of hyperbole, at least in the areas of the Internet I typically find myself in, regarding the Republican tax plan, that end up conflating a two separate issues: the substance, and the process.

Process complaints are totally legitimate and if this is the way bills are crafted and passed going forward, we will be in real trouble as a country. As many have noted, it’s almost as if the GOP took all of their complaints about the ACA process and used them as a guidebook for how to pass a bill. The rush to pass something was driven totally by political concerns. What’s most perplexing to me is why they didn’t take some off the shelf tax plan from a conservative think tank and pass that, instead of hastily assembling a barely coherent, at times handwritten, plan. Part of the reason the ACA was able to pass after only a year of process was that much of it was already written; that’s what think tanks are for.

In terms of substance of the bill: we don’t yet know how exactly it will all shake out, so it’s a bit premature to say. My sense from reading economists I generally trust is that the bill isn’t great, but it’s not going to destroy the economy either. Here too two issues are conflated: the deficit the bill runs, and what the bill does with that deficit.

Many on the left were highlighting the deficit as the major problem with the plan, which just seems like motivated reasoning to me. Right now we are still in a very low interest rate environment, so debt service is low. Deficits in and of themselves are not bad; they simply reflect a shifting of consumption across time; borrow to spend today, and pay back tomorrow. If the economy is growing at a rate higher than the interest rate, you can run deficits with little fear; that’s about where we’re at now.

The real problem lay in how the deficits are used: Josh Barro has a rundown of the plan, and Tyler Cowen lays out his broader thoughts here, and I want to expand on a couple things in that piece. Tyler writes that the GOP and Trumpist agendas are related in that they are focused on investment – the GOP domestically, and Trumpists internationally. The idea goes that America needs a big boost to investment to stimulate growth. It certainly could be true in some situations that growth would result from greater capital investment, but is that the situation we’re in?

So I used FRED to put together a few graphs of foreign direct investment in the US. Here’s just the inflow per year in millions of dollars; you can see a seeming jump to a higher level of investment since about 2015. (Also note the mid 90s inflows thanks to the tech boom.)

fredgraph (2)

The pattern is seen more clearly seen here, in the percent change from a year ago of the total stock of FDI in the US. Each data point is per quarter.pctchange

And the log of the total stock of FDI:loglevel

So overall, we can see that FDI has actually been quite large already in the last couple years, especially compared to the post- tech boom era. This boom began in about 2015 (and so has nothing to do with Trumpist policy), and may have even ended as the last couple quarters of data suggest.

So while there could be something to the argument that we need to boost FDI, it’s obvious that it has already been at elevated levels compared to the historic norm; this is to say nothing of the actual efficacy of a 20% corporate tax in drawing in new investment (and hence more American economic growth). You’d have to imagine that there is a fairly large pool of global capital that is currently not being invested in the largest economy in the world because of the too high tax rate (despite an effective rate closer to global average). I’m rather skeptical of that.

Additionally, Trumpist efforts to reduce the trade deficit will have an opposite effect on foreign investment. After all, when a country runs a trade deficit, that means other countries are instead of purchasing US goods and services either 1) holding our currency or 2) using it to buy American financial products, which is investment! So actually, these two agendas may be running at cross purposes.

More on Housing Regulation

Tyler Cowen links to a piece in Dissent that criticizes the growing movement of anti-NIMBYism. The piece is specifically critical of Hsieh and Moretti’s research, which I previously wrote about here. While it generally attempts to be serious, my alarm bells go off anytime someone deploys the phrase ‘neoliberal agenda’.

The Dissent author’s chief argument here, beyond some nitpicking that’s not really that important, is this: markets do not provide enough affordable housing because it doesn’t get the rate of return that other investments do, therefore government must subsidize the creation of low rent housing.

Of course, this argument could be true under certain conditions…such as an excessive regulatory burden on land use development! If only a few new housing units can be added, of course developers will build to get the highest return, which will be more expensive housing. But even then, the new, expensive housing of today is tomorrow’s older cheaper housing; and when new units are built, yesterday’s housing becomes a little less desirable and a little cheaper, all else constant.

But of course, that’s not what this author, or others on the left critical of the anti-NIMBY movement, have in mind. Really it’s a baffling argument; imagine applying this logic to other areas of the economy:

Markets do not provide enough affordable coffee because it doesn’t get the return that artisinal coffee does, therefore the government must subsidize the creation of cheap coffee.

Markets do not provide enough affordable jackets because capital can get a higher return investing in Uggs, therefore the government must require jacketmakers to sell some jackets at a loss making price.

Or a another example: I remember reading someone argue awhile back, during one of the news cycles about the increases in pharma drug prices, that this was prime evidence of the failure of the market. Look, the argument went, this crucial lifesaving drug produced by a private firm, that actually only costs a few cents to manufacture, has had its price increased by hundreds of dollars! The free market is killing us!

But it’s not! The pharmaceutical market is under heavy government regulation that makes it very difficult for new firms to enter. If the pharmaceutical market were truly open and competitive, it would be trivial for a new firm to step in and start manufacturing that drug at its ‘true’ cost. That’s simply not possible under current FDA regulations; that isn’t to say such regulations are ‘bad’ (there’s an argument for quality control, for example) but to imagine they don’t have any costs or side effects is flawed reasoning.

The housing market is rife with such regulations, and to imagine that this has no effect on the nature of the housing supply is just crazy. Even something as seemingly banal as minimum room size has a distortionary effect: surely there are some people who would, at some price, prefer a 60 square foot room to sleeping on the street; but they will be forever priced out of the market because regulation forbids building a habitable room that small.

Maybe what this gets at, and this is something on the left that often bothers me, is this idea that there is a minimum standard of whatever that everybody is entitled to. For instance, everybody should have, at least, a room of a certain size with private bath and kitchen. Everybody deserves a phone with at least 8 GB of RAM, because it’s just a better experience! But of course, some people don’t want all of that, and would rather have had something else with the resources that were wasted. If it’s part of the neoliberal agenda to better align people’s wants with what is available to them, then sign me up. I would rather have more people living in ‘poor quality’ housing in a city with better job opportunities than living in higher quality housing in a place with less desirable jobs.


Quantum Ethics

Just came across this brilliant post via a comment thread at SlateStarCodex: The Copenhagen Interpretation of Ethics.

The gist:

The Copenhagen Interpretation of Ethics says that when you observe or interact with a problem in any way, you can be blamed for it. At the very least, you are to blame for not doing more. Even if you don’t make the problem worse, even if you make it slightly better, the ethical burden of the problem falls on you as soon as you observe it. In particular, if you interact with a problem and benefit from it, you are a complete monster. I don’t subscribe to this school of thought, but it seems pretty popular.

This is dead on right, and once you know to look for it, you see it everywhere.