Smorgasbord

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2024 has been awarded to Daron Acemoglu, Simon Johnson and James Robinson "for studies of how institutions are formed and affect prosperity." Each year, the Nobel Committee publishes a "Popular information" overview of the award and a "Scientific Background" essay that goes into greater depth (at https://www.nobelprize.org/prizes/economic-sciences/2024). Here’s one part of the explanation:

"It is instructive to put the contribution of Acemoglu and Robinson in perspective and relate it to the literature that already existed in the late 1990s. … Recall that the standard answer to why elites gave up the control of economic and political institutions was embodied in modernization theory and related explanations. According to these theories, the process of socioeconomic development would eventually bring about democratization, essentially as a by product of economic progress. As societies become richer, this wealth brings about rising education, a more plentiful middle class, and gradually milder conflict over income inequality, factors which all favor democratization. A second approach, which challenged modernization (and other structural) theories, argued that democratization is instead the by-product of patterns of strategic interaction among political elites. Personal skills, luck, or strategic mistakes are, according to this approach, part and parcel of what democratization is about. … While the second view thus holds that democracy is usually granted or undermined from above, a third approach to explaining democratization, by contrast, points to the importance of social forces in society, most importantly different class actors. The key assertion in this tradition is that democracy is imposed from below by the people through popular mobilization. According to this view, incumbent authoritarian elites would not care to enact reforms or bargain with the democratic opposition if they did not fear the masses or an imminent threat of revolution. Acemoglu and Robinson integrated these three traditions by providing structural conditions (such as economic crises), relating these to preferences over institutions and social forces (such as the threat of revolution), and by providing the conditions under which strategic elites chose to reform (such as extending the electoral franchise). This is one of the reasons why their approach has become so influential."

The World Development Report 2024, one of the flagship publications of the World Bank discusses discusses "The Middle Income Trap" (https://www.worldbank.org/en/publication/wdr2024).

"Developing economies change in structure as they increase in size, which means that changes in the pace of growth stem from factors that are new to them. Although these imperatives can vary across countries, economic expansion, on average, begins to decelerate and often reaches a plateau in income per capita growth, typically at about 11 percent of US GDP per capita. Today, this figure would be about US$8,000, or around the level at which countries are firmly considered upper-middle- income. A systematic slowdown in growth then occurs. … [T]he pace of progress in middle-income countries is slowing. Average annual income growth in these countries slipped by nearly one-third in the first two decades of this century—from 5 percent in the 2000s to 3.5 percent in the 2010s. A turnaround is not likely soon because middle-income countries are facing ever-stronger headwinds. They are contending with rising geopolitical tensions and protectionism that can slow the diffusion of knowledge to middle-income countries, difficulties in servicing debt obligations, and the additional economic and financial costs of climate change and climate action. … To achieve more sophisticated economies, middle-income countries need two successive transitions, not one. In the first, investment is complemented with infusion, so that countries (primarily lower-middle-income countries) focus on imitating and diffusing modern technologies. In the second, innovation is added to the investment and infusion mix, so that countries (primarily upper-middle-income countries) focus on building domestic capabilities to add value to global technologies, ultimately becoming innovators themselves. In general, middle-income countries need to recalibrate the mix of the three drivers of economic growth—investment, infusion, and innovation—as they move through middle-income status."

John A. List explores concerns over "Field Experiments: Here Today Gone Tomorrow?" (American Economist, 69:2, published online August 6, 2024, https://journals.sagepub.com/doi/abs/10.1177/05694345241261340). He discusses difficulties of moving from simple field experiments to scaled-up policy advice.

"In the A/B experimental test of an early childhood program summarized … the program is found to triple Kindergarten Readiness: from 17% to 51%! One might view this result as extraordinary, and immediately want to scale the program. To understand why that choice is not prudent, consider what exactly we have learned from this research. If it is a typical social science experiment, then it has likely been conducted as an efficacy test: the 'best-case' test of the program is arm B versus the control, arm A. To understand why more information is necessary, we must consider the incentives that the researchers faced. Those incentives are set up to create a petri dish that provides results that gives the intervention its 'best shot,' or likewise the largest treatment effects. In this manner, we are answering the wrong question if we are attempting to provide policy advice. We are asking: can this idea work in the petri dish under the best-case situation rather than will this idea work at scale? This is the wrong question. We must not only do the efficacy test but also relevant tests of scale within the original discovery process. The economics of many situations demand such an approach."

William Nordhaus reflects on his career in economics in "Looking Backward, Looking Forward" (Annual Review of Resource Economics, 2024, 16: 1–20, https://www.annualreviews.org/content/journals/10.1146/annurev-resource-112223-091502). On the progress that has been made in analyzing climate change issues:

"Because we know so much today, it is hard to remember how little we knew in 1970. Specialists thought the globe was cooling and that rising levels of particulates would further exacerbate cooling. The first study of the economics of climate change examined the impact of cooling, not warming. The only alternative to fossil fuels was thought to be nuclear power, which was viewed by many scientists with suspicion. All climate worries were based on modeling at that time, and only in the last two decades has the science been validated by observations. … Over the next two decades, I moved from model to model like a pilgrim trying to find the holy grail. The main goal was to fix the two major flaws in the IIASA [International Institute for Applied Systems Analysis] model: to develop a general-equilibrium framework and to develop the modules of the climate externality, especially developing monetized damage estimates. Accomplishing these two goals took nearly two decades, and what finally emerged was the DICE model (Dynamic Integrated model of Climate and the Economy). The first major study was rejected by economic journals but accepted and published in Science (Nordhaus 1992). I have always loved the name of the DICE model. It is easy to remember and visualize. DICE also conveys a shiver of risk and danger. It alludes to the Faustian bargain that we make as we continue down the path of unchecked climate change, on the Walpurgis Night of reveling in a world enflamed by fossil-fuel passions and ignoring how the devil of damages will drag us into a hellish future."

Symposia

For readers who would like more on merger issues than the symposium in this issue, the August 2024 issue of the Review of Industrial Organization contains a 12-paper symposium on "The U.S. 2023 Merger Guidelines" (many of the papers are open access at https://link.springer.com/journal/11151/volumes-and-issues/65-1). Herbert Hovenkamp contributes "The 2023 Merger Guidelines: Law, Fact, and Method." From the abstract:

"These Guidelines break some new ground that older Guidelines did not address, and make many positive contributions, which this paper spells out. They are also excessively nostalgic for a past era, however, and this may explain their propensity to treat empirical questions as issues of law: This is one way to insulate these Guidelines from further revision. The excessive reliance on one decision, Brown Shoe, is unfortunate—particularly since that decision has been so often repudiated, even by the Supreme Court itself. This paper pays particular attention to: the Guidelines' treatment of structural triggers and direct measures of competitive effects; their aggressive position on potential competition mergers; their willingness to weigh a 'trend' toward concentration as a factor; and their treatment of serial acquisitions. The Guidelines include a welcome new section on mergers involving multi-sided networks, although their view of networks is too one-sided; and the Guidelines also contain an expanded section on mergers with harmful effects on suppliers—including labor. The Guidelines' treatment of market definition is likely to lead to underenforcement because they define markets too broadly. Finally, the Guidelines could have made better use of recent retrospective studies—many of which would have provided further support for the substantive positions that the Guidelines take."

The Summer 2024 Journal of Policy Analysis and Management includes a Point/Counterpoint feature on reform of US health insurance (https://onlinelibrary.wiley.com/toc/15206688/2024/43/3). Liran Einav and Amy Finkelstein begin by offering "A blueprint for U.S. health insurance policy."

"It contains two main elements. The first is universal coverage that is automatic, free to the patient, and basic. The second is the option—for those who want and can afford it—to purchase supplemental coverage in a well-functioning marketplace. We argued that we could thus fulfill our social contract without tackling the other multi-trillion-dollar elephant in the room: the problem of high and often inefficient healthcare spending. … In addition to the question of what will be covered, there is also a question of how it will be covered. The social contract is about providing essential medical care, not providing a high-end experience. There are many non-medical aspects of care that may be desirable without being essential. The ability to see the doctor of your choice at your preferred timing and location, for example, or semi-private hospital rooms. This would be substantially limited under basic coverage. Basic coverage would likewise involve longer wait times for non-urgent care than what people with private health insurance or Medicare are currently accustomed to. … Non-medical amenities would also be limited in the basic coverage, as they are in many other countries where hospitals offer a range of hotel-like amenities. In Singapore, for example, the basic coverage provides hospital care with eight beds in a room, a shared bathroom, and no air-conditioning. Patients can pay out of pocket to upgrade partway or all the way to the VIP treatment, which gets the patient a single room, with a private attached bath, television and, of course, air-conditioning, which is no small matter in Singapore's notoriously hot and humid climate. Australia's system is similar. … We estimate that about two thirds of Americans—those who are covered by Medicare or by private health insurance through an employer—would want to supplement beyond the basic."

Jason Furman makes a case for a more incremental approach in, "Starting health reform from here."

"I worry that the basic benefits they propose would either grow to be much more than basic, coming at high expense, or would be subject to serious backlash. Rather than rely on just that one instrument to control costs, I would also include broader cost sharing, something we know works."

The authors then respond to each other.

Addresses

In the annual Martin Feldstein Lecture at the National Bureau of Economic Research, Cecilia Elena Rouse suggests "Lessons for Economists From the Pandemic," delivered (NBER Reporter, 2024, No. 3, https://www.nber.org/reporter/2024number3/lessons-economists-pandemic). Here's one of her lessons: "Better calibrated economic policymaking will require much deeper investment in data and infrastructure." Rouse argues:

"This lesson is based on the fact that federal data, computer, and human resource infrastructures were — and still are — not up to the task of delivering surgical and speedy support for the economy. Components of the CARES Act highlight this reality well. For example, the Paycheck Protection Program (PPP) provided uncollateralized and forgivable loans to small businesses (generally, those with fewer than 500 employees). These loans could officially be used only to retain workers (with several safe harbor provisions), meet payroll and health insurance costs, or make mortgage, lease, and utility payments. If these conditions were met and firms met their employment targets, the loans would be entirely forgiven after the pandemic. The Economic Injury Disaster Loan (EIDL) program provided low-interest-rate loans of up to $2 million, payable over up to 30 years. Loans also included the option to defer all payments during the first two years while businesses and nonprofits got back on their feet after the pandemic. And finally, the coverage and generosity of UI were expanded dramatically. Benefits were increased by $600 per week, and those not typically covered, such as gig workers and contractors, were made temporarily eligible. While it may have been 'good enough,' it was sloppy. … Waste and poor targeting were a problem. David Autor and his coauthors estimate that PPP loans cost between $169,000 and $258,000 per job-year saved, which is more than twice the average salary of these workers. They also estimate that more than two-thirds of the total outlays on the program accrued to business owners and shareholders rather than employees. Outright fraud was also a major issue. The Government Accountability Office (GAO) estimates that PPP fraud totaled about $64 billion out of a total of nearly $800 billion in loans …. Under EIDL, some borrowers claimed loans using falsified names or business details and often simply ran off with the cash. In the end, the GAO and the Small Business Administration estimate that EIDL fraud was even more pervasive than PPP fraud, in dollar terms — more than $136 billion. UI fraud also skyrocketed during the pandemic; the GAO estimates that fraud may have cost anywhere from $55 to $135 billion."

In his da Vinci Medal Address, Donald MacKenzie considers "Material Political Economy" in his da Vinci Medal Address (Technology and Culture, July 2024, https://muse.jhu.edu/pub/1/article/933102). He focuses in part on the material side of high-frequency trading.

"Just how fast is "ultrafast"? Each year, the European futures exchange Eurex publishes data from which we can infer the response times of the fastest HFT algorithms. Eurex's 2023 measurements suggest a state-of-the-art response time (to a packet of market data that triggers a trading system’s action) of 8 nanoseconds, or billionths of a second. In a nanosecond, the fastest physically possible signal, light in a vacuum, travels only around 30 cm, or roughly a foot. That is not simply a helpful yardstick of HFT’s speed: getting messages to travel as close as possible to the speed of light in a vacuum is an important practical concern in HFT. Fiber-optic cable, for example, is not fast enough, because the refractive index of the glass at the core of such a cable slows laser-light signals to around two-thirds of light’s speed in a vacuum. Where possible, therefore, HFT firms send trading data and orders by microwave, millimeter-wave, or laser-light signals transmitted through the atmosphere, where they travel almost as fast as in a vacuum … Since around 2010, furthermore, a conventional computer system, even if programmed in C++, is in many markets not fast enough for HFT. Trading algorithms are directly programmed into the hardware of the silicon chips known as field-programmable gate arrays (FPGAs) … There have been repeated rumors of firms moving beyond FPGAs to fully bespoke integrated circuits …"

Interviews

Orley Ashenfelter interviews Samuel Bowles "on his deep interest in the causes of inequality & his work to transform economics" ("The Work Goes On" podcast, posted October 7, 2024, https://soundcloud.com/theworkgoesonpodcast/a-conversation-with-samuel-bowles). For example, I did not know that Bowles attended school in a tent in India when he was 11 years old (his father was Ambassador to India at the time), nor that he worked for the government of Nigeria as a teacher in a remote area after graduating from college, nor that he offered economic advice to Martin Luther King, Jr. Bowles says:

"I had the good fortune of being asked by Dr. Martin Luther King if I wouldn’t give him some advice about economics and of course, I was thrilled. I knew Dr. King through anti-Vietnam War activity that he and I had engaged in at the time. And so, he said he would send me some questions and I said, 'well, I’ll definitely get back to you.' I opened the envelope and here's a set of questions. And they're all about economics … I looked at these questions and I said, 'these are damn good questions. I don't have a clue how to answer these.' I didn't know where to look. They were empirical questions, but also conceptual ones. Imagine, a new successful PhD, and this could have been the high point in my life. This is why I studied economics so I could actually get into the fray and help out and make the world a better place. But that was kind of a shocker for me, and I decided that there was something wrong that I was actually teaching the grad students in micro. And I decided then and there that I was either going to leave economics, I considered that very seriously, or I would try to change it. And that’s what I’ve been trying to do since."

 Cardiff Garcia of the Economic Innovation Group interviews Paul Krugman in "How to Slay Economic Zombies" (The New Bazaar website, October 9, 2024, https://eig.org/newbazaar/how-to-slay-economic-zombies/).

"[T]he modern forms of agglomeration are different from the ones that prevailed in the 19th century. I like to say that the models that I was writing down 30 years ago had this kind of steampunk feel. They all kind of were very much focused on manufacturing and on industrial clusters, and we all lavished attention on these great stories — like the detachable collar and cuff industry of Troy, New York, and that sort of thing. And which mostly have gone away in the United States, although not totally — they do exist to some extent even in manufacturing, but these days if you really want to find old style industrial clusters, you go to China. So if you actually look at — there's a variety of measures — but basically, in the United States, there was a lot of regional convergence, convergence in incomes, convergence in basically regions becoming more similar, from the 1920s up until about 1980. Then in 1980, they started pulling apart again, and you started to see metropolitan areas with highly educated workforces pulling in even more educated people, pulling in even more of the information economy — and stranding regions that didn't have those preconditions. …So we're back in a world where we have these extremely localized clusters. … Particularly for high skill, high pay workers, you need amenities. High tech workers are not going to move to someplace in the middle of the country, even if they have excellent internet access, because where are the good restaurants? Where are the live concerts? So in some ways the fact that we’re rich enough that people can make decisions on that basis matter. So I think we're in some ways back to the kind of unequalizing development that we had in the late 19th century."

Joe Walker interviews Larry Summers on the subject of "artificial general intelligence in “AGI and the Next Industrial Revolution" (The Joe Walker Podcast, October 22, 2024, https://josephnoelwalker.com/larry-summers-159/).

"[T]he more I study history, the more I am struck that the major inflection points in history have to do with technology. I did a calculation not long ago, and I calculated that while only 7% of the people who've ever lived are alive right now, two-thirds of the GDP that's ever been produced by human beings was produced during my lifetime. And on reasonable projections, there could be three times as much produced in the next 50 years as there has been through all of human history to this point. .. Of course, I think that this [AI] technology potentially has implications greater than any past technology, because fire doesn’t make more fire, electricity doesn’t make more electricity. But AI has the capacity to be self-improving."

Discussion Starters

The Stockholm Institute of Transition Economics (SITE) at the Stockholm School of Economics has tried to see through the smoke in its report "The Russian Economy in the Fog of War" (September 2024, https://www.hhs.se/en/about-us/news/site-publications/2024/russias-economic-imbalances/).

"In terms of economic size, however, Russia is not a "great power" with a GDP of around 2000 billion US dollars. That is about 1/10th of the combined GDP of the EU-27 (about 20 000 billion US dollars), or approximately the same size as the Nordic countries combined. The size of the US economy is about 27 000 billion US dollars or more than 13 times the Russian economy. Compared to other BRIC countries, Russia is behind Brazil (2200 billion US dollars), distanced with some margin by India (3600 billion US dollars), and only around 10 percent of the Chinese economy (17 800 billion US dollars). … [D]epending on what measure of GDP is used and the time-period that is included in the analysis, between 60 and 95 percent of Russia's GDP growth can be explained by changes in one exogeneous variable alone: the change in international oil prices. … The current state of the Russian economy according to official statistics is then covered by going through standard economic indicators such as GDP growth, inflation, monetary policy, fiscal policy, reserves, trade, the exchange rate and the financial sector. It then offers a critical analysis of this official view and questions the credibility of two key economic indicators, growth and inflation, where it is shown that inflation may be significantly higher than official numbers suggest and growth significantly lower."

Julian Morris and Ben Sperry offer "The Cost of Payments: A Review," (International Center for Law & Economics Working Paper, August 28, 2024, https://laweconcenter.org/resources/the-cost-of-payments-a-review/).

"Atlanta's Mercedes-Benz Stadium in 2018 became the first major sports venue in the United States to switch to a fully cashless payment system. At the end of the new payment model's first year of operations, the stadium reported that wait times had fallen by 20 to 30 seconds and per-capita food and beverage sales had risen by 16%, while saving more than $350,000 in operating expenses. … In short, the evidence shows that, when all costs and all parties to a transaction are considered, electronic payments (debit cards, credit cards, and mobile payments) are more cost-effective than cash for most transactions. The main reason for this is that electronic payments enable consumers to spend more than they have in their wallet, which results in "ticket lift" for merchants. Card rewards, including cashback and merchant-specific loyalty programs, further increase this ticket lift. In addition, "tap-and-pay" contactless payments can reduce the time it takes to tender payment relative to cash, especially when cash payments are eliminated altogether. This increases throughput, improving the customer experience and reducing labor costs. Finally, electronic payments enable merchants to sell online, including for in-store pickup."