Vaccines and liability

I learned something from the New York Times lead editorial on Sunday. Why are we not shipping mega quantities of vaccines to countries like India? 

... as the vaccines came to market, some vaccine makers insisted on sweeping liability protections that further imperiled access for poorer countries. The United States, for example, is prohibited from selling or donating its unused doses, as Vanity Fair has reported, because the strong liability protections that drugmakers enjoy here don’t extend to other countries...

Pfizer has reportedly not only sought liability protection against all civil claims — even those that could result from the company’s own negligence — but has asked governments to put up sovereign assets, including their bank reserves, embassy buildings and military bases, as collateral against lawsuits. 

Well, you can sort of see the problem. You're a drug company. You sell a billion units of a brand new drug -- still on emergency use authorization in the US -- to, say, India. 10 people get a rare blood clot that may or may not be due to your vaccine. Local courts sue you for a gazillion dollars. Who wouldn't want liability protection? 

As the Europeans allowed trillions of GDP and quite a few lives to vanish while they haggled over a few billion in cost of vaccines, perhaps the onus on countries should be, to say, we want your vaccine, we understand it's brand new and there may be risks, we'll take them?  

The NYT is, predictably, full of bad ideas. 

Summers at FT

Martin Wolf's FT interview with Larry Summers is a great read. It would be a great read for its articulate numeracy if Larry were a Republican, stepping down from the Trump CEA or Treasury. That he is on the the other team makes it ever more poignant. 

If you look at the economy at the beginning of this year, prevailing forecasts were that Covid would reduce wages and salaries to American households by $20bn-$30bn a month, with that figure declining over the year. So, that would be a $250bn-$300bn hole in wages and salaries over the course of the year.

So, I look at this hole and then I see $900bn of stimulus in the December package, $1.9tn of stimulus in the recently passed package and $2tn in the savings overhang, which is also likely to be spent. I see the Fed with its foot on the accelerator as hard as any Fed has ever done....

So, I look at that dwindling hole. Then I look at expenditures that aren’t hard to add into the multiple trillions, and I see substantial risk that the amount of water being poured in vastly exceeds the size of the bathtub.

Wait Larry, aren't you Mr. Secular Stagnation, Hysterisis, borrow and spend? 

More inequality

Paul Graham adds interesting thoughts on inequality, looking at the Forbes 100. Maybe we don't have enough inequality, and maybe the rise in inequality (especially of wealth) since the 1970s represents too little inequality then, not too much now. Contra the usual in politics, a change is not always a problem, but sometimes for the better. How? Read on. 

Contra the mantra of inherited wealth, the super-rich in America today largely earned their way there from middle class, by starting new companies. They did not inherit wealth. The rich did not get richer. They were superseded by the (fabulously) nouveau-riche. 

In 1982 the most common source of wealth was inheritance. Of the 100 richest people, 60 inherited from an ancestor. There were 10 du Pont heirs alone. By 2020 the number of heirs had been cut in half, accounting for only 27 of the biggest 100 fortunes.

Why would the percentage of heirs decrease? Not because inheritance taxes increased. In fact, they decreased significantly during this period. The reason the percentage of heirs has decreased is not that fewer people are inheriting great fortunes, but that more people are making them.

How are people making these new fortunes? Roughly 3/4 by starting companies and 1/4 by investing. Of the 73 new fortunes in 2020, 56 derive from founders' or early employees' equity (52 founders, 2 early employees, and 2 wives of founders), and 17 from managing investment funds.

...

 the main source of new fortunes now is starting companies, and when you look at the data, you see big changes there too. ....

Inequality mirage?

David Splinter and Gerald Auten gave last week's Hoover Economic Policy Working Group seminar, summarizing their past and some work in progress on the distribution of income.  Link in case the above embed does not work. A recent paper. Splinter's web page. 

Splinter and Auten are very even handed, just-the-facts, economists. I'll pass on their facts. Grumpy interpretations are my own. 

It is a fact generally accepted that income inequality has grown a lot recently, and this is a "problem" to be "solved." So what if the great inequality crisis simply isn't true? Let's leave aside whether income is a good measure (it isn't), let's just look at the fact, has income inequality substantially increased? 

No. Here is the headline result. In their careful redoing of the numbers, the top 1% share of income has barely budged since the 1970s. (And, by the way, if you think the mid 1970s economy was the great happy prosperity we should try to reestablish, you're too young to remember the 1970s.)

Now we get in to a deep under the hood exercise about costing up income, and where did Piketty and Saez go wrong. The video has some of that. The papers have more, and a long list of back and forth, including comparisons with many other studies. I'll name just a few.

Omitted income.   Piketty Saez leave out many kinds of income. Auten Splinter attribute all national income to somebody.  Before 1986 many wealthy people were incorporated.  Leaving out corporate income biases the early shares down. Auten Splinter fix that. Pre-tax and transfer income! Who cares about pre-tax income! Auten Splinter calculate income after taxes at the top -- lower -- and including transfers at the bottom -- higher. Demographics. Marriage rates have fallen, so Auten Splinter calculate income by individuals. Benefits! They include benefits like employer-provided health insurance.

One can quibble, but one can quibble. At least this cornerstone "fact" of political debate is a lot less sure than it looks. 

If the rich aren't getting richer, the poor aren't getting poorer:

Nuclear power and growth

Jason Crawford's "Roots of Progress" blog on what happened to nuclear power is an important read for many reasons, among them economic growth, climate, and regulation. It's a review of Why Nuclear Power Has Been a Flop by Jack Devanney which goes on my must-read list. 

Perhaps the important economic question of our time is this: Is growth over? Are we running out of ideas? Or is our decades-long growth slowdown the result of an increasingly sclerotic, over-regulated, crony-capitalist rent-seeking political system? Nuclear power offers an interesting case study. 

Through the 1950s and ‘60s, costs were declining rapidly. A law of economics says that costs in an industry tend to follow a power law as a function of production volume: that is, every time production doubles, costs fall by a constant percent (typically 10 to 25%). This function is called the experience curve or the learning curve. Nuclear followed the learning curve up until about 1970, when it inverted and costs started rising:

Plotted over time, with a linear y-axis, [note mulitplicative scale in the last graph] the effect is even more dramatic. Devanney calls it the “plume,” as US nuclear constructions costs skyrocketed upwards

 

Read carefully. US construction costs exploded in the 1970s. South Korean construction costs did not. The blue points do not continue because the US simply stopped building nuclear power plants, not because we solved the cost disease. 

This chart also shows that South Korea and India were still building cheaply into the 2000s. Elsewhere in the text, Devanney mentions that Korea, as late as 2013, was able to build for about $2.50/W.

The standard story about nuclear costs is that radiation is dangerous, and therefore safety is expensive. The book argues that this is wrong: nuclear can be made safe and cheap. It should be 3 c/kWh—cheaper than coal.

The post goes on about the safety issue, which you should read but I won't summarize. 

The point for us: Here is a clear case of an end of growth. We know the cause. We did not run out of ideas. Regulation killed this industry. 

 the NRC approval process now takes several years and costs literally hundreds of millions of dollars.

Why? Among other causes, Crawford lists beautiful parables of incentives gone wrong (Second economic lesson for today.)  

Inflation expectations

This post follow's last week's post on inflation levels prompted by the big March increases in CPI and PPI, and the CEA tweetstorm response. (Also a longer post on the chance of inflation.)

WIN button from the Ford Administration

Is inflation coming?   The CEA goes on to 

Over the longer-term, a key determinant of lasting price pressures is inflation expectations. 

And takes comfort that survey expectations don't see a large increase in inflation. But when did survey expectations ever predict inflation?  In fact most research on surveys, especially in finance,  is used to claim people are dumb and terrible at predicting the stock market and other variables. 

The CEA goes on to 

An increase in inflation expectations from an abnormally low level is a welcome development.  But inflation expectations must be carefully monitored to distinguish between the hotter but sustainable scenario versus true overheating. 

But  if after "carefully monitoring," when it becomes impossible to make excuses, it looks like inflation is breaking out, what do you do then? 

Inflation levels

 March inflation is up. The CEA delivered a historic tweetstorm. It starts with 

temporary factors: base effects, supply chain disruptions, and pent-up demand, especially for services

I'm glad for once to have nailed a forecast: That Fed and Administration's first response to inflation would be to invoke "temporary" factors, just as in the 1970s.  We'll see how that pans out. 

The CEA goes on to "base effects,"

In the near-term, we and other analysts expect to see “base-effects” in annual inflation measures. Such effects occur when the base, or initial month, of a growth rate is unusually low or high..

This unusually large price decrease early in the pandemic made April 2020 a low base. 

Since this is about the past, we can say something more definite. Yes, if you start from a low base, you can see a lot of growth. To get around the arbitrariness, let's look at price levels. Here is the recent CPI (blue) and CPI less food and energy (red). These are the levels of the CPI -- conceptually how many dollars it takes today ($271) to buy what $100 bought in 1983.  

The last few months uptick is clearly visible. You can find your own "base month" by drawing a line. Yes, a line from last April to today shows an unusually higher slope, because last April was unusually low. 

But to the extent that we're just seeing "reflation," a return of prices to normal after a steep covid-induced recession, the graph suggests that was over last summer. "Reflation" was over by September. Draw your own trends -- that's why I left some history in. 

Conversations: covid and (separately) nonprofits

 I did a few fun video conversations last week. 

This is a conversation with Ryan Bourne, Megan McArdle, and Alex Tabarrok on economics and the year of covid. Direct link if the above embed doesn't work. 

The conversation  is occasioned by the publication of Ryan's excellent book Economics in One Virus.  I am often asked for recommendations of general readable economics books. (i.e. no equations.) This is a gem. 

Then I had a nice conversation with Mike Hartmann at The Giving Review, link here with transcript, (slightly edited, please refer to that if you want to quote me. The above is just a screenshot, you have to go to the link). 

We explored my view that the US should eliminate the whole non-profit business, most of all the tax deductibility of contributions to non-profits, but also (less importantly) the non-profit corporate form. While many non-profits do a lot of good (my employer!) the system has become obscenely perverted, mostly as a tax-supported vehicle for political action, but also a tax dodge available only to the super duper wealthy, and a means of protection from the market for corporate control for flabby institutions. I trust that genuine useful charities will still attract donations -- maybe more -- from the substitution effect than they lose without tax deductions. 

I've long been meaning to gather facts and figures to see if this salty opinion makes as much sense as I think it does, and I'm glad to learn about Philanthropy Daily, a resource that will be helpful.

Oh yes also a great GoodFellows with Bjorn Lomborg on climate. I love talking to Bjorn. He has an extensive command of the facts and science, and he's still an optimist that facts and science will actually make a dent in this debate. As global warming moved to climate change to climate crisis to climate justice to climate risks (financial) I'm less optimistic, but hope must be let out of Pandora's box.  Also 

with Bari Weiss on media, censorship, free speech and assorted issues. Direct links, podcast  versions, and more all here. 

Ip on Bidenomics

Greg Ip has a great column in the WSJ on Bidenomics.  It's not long, it's so well written that it's hard to condense the good parts, and you should really read it all. 

There is an intellectual framework to Bidenomics, and with that a scarily more durable move on economic policy. 

There used to be 

"certain rules about how the world worked: governments should avoid deficits, liberalize trade and trust in markets. Taxes and social programs shouldn’t discourage work."

By contrast President Biden's (really his team's) "embrace of bigger government" is founded on different economic ideas. To wit, abridged: 

Growth

Old view: Scarcity is the default condition of economies: the demand for goods, services, labor and capital is limitless, their supply is limited. ...faster growth requires raising potential by increasing incentives to work and invest. Macroeconomic tools—monetary and fiscal policy—are only occasionally needed to deal with recessions and inflation.

New view: Slack is the default condition of economies. Growth is held back not by supply but chronic lack of demand, calling for continuously stimulative fiscal and monetary policy. J.W. Mason.. said, that “‘depression economics’ applies basically all of the time.”

I guess I'm an old fogie. 

A letter to Yellen

Secretary of the Treasury, and ex Federal Reserve Chair Janet Yellen recently hosted an important meeting of the Financial Stability Oversight Council.  This is the highest level body overseeing financial regulation in the US. It matters. 

Her remarks start smoothly but critically, as one expects of a habitually well-prepared pro. A lot went wrong last year, from the treasury markets to another mutual fund bailout, and so forth. Bravo, it is time to get past celebrating how another bailout blowout saved the world and see if we can avoid another one. 

And then, 

We must also look ahead, at emerging risks. [To the financial system, the FSOC's purview.] Climate change is obviously the big one.

It is an existential threat to our environment, and it poses a tremendous risk to our country’s financial stability. We know that storms will hit us with more frequency, and more intensity. We know warming temperatures might disrupt food and water supplies, leading to unrest around the world. Our financial system must be prepared for the market and credit risks of these climate-related events. But it must also be prepared for the best-possible case scenario: that we begin a rapid transition to a net-zero carbon economy, which also creates potential challenges for financial institutions and markets. On all these fronts, the Council has an important role to play, helping to coordinate regulators’ collective efforts to improve the measurement and management of climate-related risks in the financial system.

Dear.. May I still call you Janet? I have known you for 40 years, since you were kind to a young brash graduate student. In all that time you have always worked for sensible well-reasoned, quantitatively evaluated policy. I don't always agree, but you always have clear, careful and conservative (in the move-carefully sense, not the political sense) thinking behind your recommendations. 

What the heck is going on? Surely you know this is nonsense? 

San Francisco bans affordable housing

"San Francisco bans affordable housing," is the spot-on conclusion of a lovely post by Vadim Graboys (link to twitter). 

The post is titled "54% of San Francisco homes are in buildings that would be illegal to build today" with an interactive graph of those homes. 

Or, put another way, "To comply with today's [zoning] laws, 130,748 homes would have to be destroyed, evicting around 310,000 people."

The latter statistic is fun, but actually severely understates the damage of San Francisco's (and Palo Alto's!) zoning laws. The only reason current homes are illegal is that they were built under slightly less restrictive zoning laws. So that measures how much zoning laws have gotten stricter over time. It does not measure the much larger number of homes and apartments that were never built.

Inflation options?

 

From Torsten Slok at Apollo. Torsten explains

Current pricing for caps and floors shows that the market sees a 30% probability that inflation will be above 3% for the next five years, and a 5% probability that inflation will be below 1%, see chart below. A similar worry about high inflation can be seen in 5-year breakevens, currently trading at 2.5%, the highest level since 2008.

A perpetual inflation worrier, I habitually confront the fact that bond prices don't signal inflation. I am forced to point out that they never do -- interest rates did not forecast the inflations of the 1970s, nor the disinflation of the 1980s. And I say inflation is unforecastable, a risk like a California Earthquake. 

But for once there does seem some inflation risk in asset prices.  

These are option prices. The main forecast remains subdued inflation. But these option prices are pointing to a larger chance that inflation does break out. More risk, not so much a sure thing. Also, it's not really screaming -- after all, we're about at the prices of July 2018.

In Torsten's view, despite these prices, 

Five years of CPI inflation above 2.5% or 3% is in my view extremely unlikely. 

Defining inequality so it can't be fixed

In one of their series of excellent WSJ essays, Phil Gramm and John Early notice that conventional income inequality numbers report the distribution of income before taxes and transfers. After taxes and transfers, income inequality is flat or decreasing, depending on your starting point. 

Source: Phil Gramm and John Early in the Wall Street Journal

If your game is to argue for more taxes and transfers to fix income inequality, that is a dandy subterfuge as no amount of taxing and transferring can ever improve the measured problem! 

Testimony on financial regulation and climate change

Update: An expanded and improved version of this post is at city journal, or here (pdf on my webpage) 

I had the honor of testifying at the Senate Committee on Banking, Housing and Urban Affairs, on Protecting the Financial System from Risks Associated with Climate Change Full video at the link, I start at 48:30 with slightly abridged version of these remarks. 

Testimony of John H. Cochrane to US Senate Committee on Banking, Housing, and Urban Affairs 

Chairman Brown, Ranking Member Toomey and Members of the Committee: Thank you for the opportunity to testify today. 

I am John Cochrane. I am an economist, specializing in finance and monetary policy. My comments do not reflect the views of my employer or any institution with which I am affiliated. 

Climate change is an important challenge. But climate change poses no measurable risk to the financial system. This emperor has no  clothes. “Risk” means unforeseen events. We know exactly where the climate is going over the horizon that financial regulation can contemplate. Weather is risky, but even the biggest floods, hurricanes, and heat waves have essentially no impact on our financial system. 

Moreover, the financial system is only at risk when banks as a whole lose so much, and so suddenly, that they blow through their loan-loss reserves and capital, and a run on their short-term debt erupts. That climate may cause a sudden, unexpected and enormous economic effect, in the next decade, which could endanger the financial system, is an even more fantastic fantasy. 

Back to the 60s.

Marginal revolution links to a great read on contemporary macroeconomics from J.W. Mason. It's mostly wrong, I think, but very thoughtfully puts together the wrong ideas behind contemporary policy macroeconomics.  

Briefly, debt doesn't matter and there are no effective supply constraints. Borrow, spend without limit is the key to prosperity. 

The fact that the Biden administration not only managed to push through an increase in public spending of close to 10 percent of GDP, but did so without any promises of longer-term deficit reduction, suggests a fundamental shift.

The fact that people like Lawrence Summers have been ignored in favor of progressives like Heather Boushey and Jared Bernstein, and deficit hawks like the Committee for a Responsible Federal Budget have been left screeching irrelevantly from the sidelines, isn’t just gratifying as spectacle. It suggests a big move in the center of gravity of economic policy debates.

It really does seem that on the big macroeconomic questions, our side is winning. 

I have noticed the same thing. Few Republicans mention the idea that today's spending has to be paid by tomorrow's taxes, and consequently today's stimulus must be repaid by tomorrow's prosperity. His "side" won.  Until the well runs dry. (I also resist the assertion that economics must have political "sides," rather than an objective truth.)

But my interest in this particular post is to think about what it says about how thinking about economic policy is shifting, and how those shifts might be projected back onto economic theory.

The post is brilliant for systematizing the emerging view of economics in the Biden Administration, in much of the Fed, and its academic  allies. 

The conventional view

Mason is captures refreshingly well the other "side," conventional macroeconomic wisdom that emerged after the debacle of the 1970s: 

Hoover Economic Policy seminar online

The Hoover Economic Policy working group seminars are now online for anyone who is interested. Follow the link and click "news and events." These happen on Wednesdays at noon, and are put up soon after. Interesting speakers, interesting discussion. Here's what's available so far:

Michael Bordo and Mickey Levy Wednesday, March 10, 2021 “Do Enlarged Fiscal Deficits Cause Inflation: The Historical Record.”

Chad Jones Wednesday, March 3, 2021 “The End of Economic Growth? Unintended Consequences of a Declining Population.” 

Eleni Kounalakis And Lee Ohanian “The Exodus of Firms from California: Facts, Reasons, Solutions.” 

A Special Event in Honor of Secretary George Shultz Wednesday, February 17, 2021

Paper, silver, deficits and inflation -- Chinese history version

A history of paper money and inflation in China, from Edward Chancellor's Wall Street Journal review of Jin Xu's Empire of Silver.  In these sparse paragraphs is most of monetary (and fiscal!) theory, along with a history I was not aware of.

Paper money, Ms. Xu tells us, dates back to the Tang dynasty in the ninth century, when the authorities allowed merchants to exchange bronze coins for promissory notes, known as “flying cash.” Two centuries later, in the time of the Song dynasty, merchants in Sichuan were using private exchange notes in place of the cumbersome iron coinage. The Song emperor issued his own paper money against deposits of coin. The jiaozi, as these notes were called, proved so popular that they traded at a premium to cash.

The convenience of paper money proved its undoing, however. The first temptation was for the Song authorities to make the jiaozi inconvertible, severing the connection with metal reserves. The next step was to increase the issue of paper money, both to feed the people and, more pressingly, to fund the fight against the Mongol invaders. The inevitable outcome was inflation, followed by the collapse of the currency.

Woke wars good and bad news

R.A. Fisher, famous statistician, is canceled by Cambridge University, along with a pretty nice stained glass window

Bari Weiss has a tremendous essay by  on the state of affairs in elite secondary schools, but including the first inklings of secret resistance. Coverage below. 

The New York Times allows Brett Stephens to be critical of California's Ethnic Studies Follies. A short excerpt below. Others have slammed the curriculum more effectively, but the source makes this notable. 

A group of courageous University of Chicago students sets up "The Chicago Thinker" a well-produced news website devoted to "defend conservative and libertarian perspectives in a community that is increasingly intolerant of such voices." 

The Academic Freedom Alliance is launched, not just to talk and expose censorship but also to offer concrete and even legal help to those targeted. Spend some time browsing the website. We need not just voices, but institutions of civil society to defend free speech and thought, and this is a great initiative. It adds to the Foundation for Individual Rights in Education (FIRE) and the Heterodox Academy

*****

Bari Weiss  (I have reordered many paragraphs by my topics) What's it like at fancy schools these days? 

A Harvard-Westlake English teacher welcomes students back after summer with: “I am a queer white womxn of European descent. I use [ she | her ] pronouns but also feel comfortable using [ they | them ] pronouns.” She attached a “self-care letter” quoting Audre Lorde: “Caring for myself is not self-indulgence, it is self-preservation, and that is an act of political warfare.”

“We don’t call them Newton’s laws anymore,” an upperclassman at the school informs me. “We call them the three fundamental laws of physics. They say we need to ‘decenter whiteness,’ and we need to acknowledge that there’s more than just Newton in physics.”

A conversation with Tyler Cowen

Conversation with Tyler podcast interview. Perhaps predictably, the most challenging interview / podcast I've ever done. Video here  and embed below 

Update:

My comments on efficient markets and active management provoked a lot of email. 

I mentioned Jonathan Berk, and should have mentioned his coauthors Rick Green and Jules Van Binsbergen, on how active management can persist even though investors don't make any money on it. The basic idea is really clever:  A manager has 5% alpha skill on $10 milllion, i.e. he can earn $500k, but the skill does not scale. So he earns 5%, charges 1% fee, investors get 4%.  Investors see his great performance and rush in.  Now he has $50 million assets under management. He still earns $500k. He charges 1% fee, and investors get zero alpha. It’s equilibrium – if investors leave,  alpha to investors goes up again, and they return. Investors are earning the same zero alpha they get on the index so why not. And that’s about what we see. Fees persist in equilibrium, fees are equal to alpha on average, alpha post fees are about zero, flows follow performance. The seminal paper is "Mutual Fund Flows and Performance in Rational Markets" Jonathan B. Berk, Richard C. Green  Journal of Political Economy 2004  112 1269-1295 and a series following, here . It's not a perfect theory, but the glass is nearer full than empty, and it's a lovely supply and demand starting place to understand an industry that persists for decades. 

More generally, the average fund earns no alpha, almost guaranteed by free entry. The trouble is distinguishing the good ones from the bad ones, on ex-ante characteristics. The filters used by academics are pretty weak -- past returns, ratings, education of principals etc. On the other hand, now we just move it all up to the meta-game. Picking managers is no different than picking stocks. Skill on skill, alpha on alpha, fees on fees...

Inflation outlook at NRO. 1970s all over again?

Essay on monetary policy in National Review Online. 

Short version: The Fed's monetary policy has returned to the intellectual framework of the late 1960s. At best "expectations" now float around as an independent force, manipulable by speeches, but not tied to patterns of action by the Fed as analysis since the 1980s would require. 

If you follow the conventional reading of how monetary policy works, that observation leads to a natural prediction:  we're on the verge of reliving 1970s inflation. (Fiscal policy, entitlements, regulation and cities seem to be headed also to 1970s policy on steroids.) 

True, the Fed says "we have the tools" to stop inflation should it break out. But that tool is to rerun 1980. Does the Fed have the will? Will the Fed really induce a 2 year agonizing recession to bring down inflation, followed by 15 years of historically unprecedented high interest rates? Or will the Fed do what it did three times before that -- half-hearted interest rate rises that brought milder recessions, and a quick backtrack? Having even a nuclear weapon is useless if people stop believing you will use it. 

I don't follow that conventional reading, so I'm not confidently predicting inflation. I worry more about fiscal affairs directly than about the Fed, which leads to a fear of a larger but less predictable inflation, that the Fed will have little power to stop. But mine is definitely a minority view.   

Does the Fed’s Monetary Policy Threaten Inflation? (Contains Spoilers)

The central bank is headed back to the Seventies — a rerun that no one should want.

Does the Fed’s monetary policy threaten inflation? By conventional measures, yes. But those conventional measures have failed in the past. I believe that the short-run danger is less than it appears, but the long-run danger is larger.

If one reads Fed statements through conventional glasses, monetary policy seems to have been reset to the 1960s, and we know how that worked out.