The Economist Magazine has changed its tone since its new ownership took over.   Another example is presented here in a piece that argues that applied microeconomics is a mess.   The article makes some reasonable points as it highlights that teasing out cause and effect is difficult.  The piece throws a strange punch at Gary Becker as the author enjoys playing the role of the critic.

Sherwin Rosen said many things to me. One thing he said was "Don't be an assassin".    For the field of economics to make progress, we must focus on constructive ideas that improve our existing machinery. We are not going to throw away our machinery.

I want to make several points;

1.   Applied micro researchers have access to more data than ever and have access to more computing power and more easy to use and sophisticated econometric methods than ever before.   Improved canned software in Stata allows applied researchers to relax many of the statistical assumptions that researchers made in previous years.   Such "robust" estimates allow us to march towards learning the truth.

2.   Due to "natural experiments", discontinuities, and explicit randomizations, we now have more variation in "cause variables" (the X's) than ever before.

3.  The advent of Google and the rise of Economics in Europe and outside of Western nations means that the current set of applied micro researchers are aware in "real time" about what findings are emerging in the top 5 journals and NBER and IZA and CEPR working papers.    Now that there are so many applied micro economists working around the world, this competition fosters innovation and progress.

4.  Replication is rising as an important piece of our advance as a "science".

5.  Leading firms such as Amazon highly value quantitative training.  Undergraduates are aware of this and they are investing in the math/computer programming and economics and stats training to have the option to pursue this.  Some of these young people will opt into doing a PHD in economics and applied micro grows stronger due to this influx of talent.

6.  Thanks to scholars such as Raj Chetty, the power of using administrative data (such as IRS tax data) are now more clearly seen all over the world. I expect that more government officials who "know that they do not know" the answers for unlocking economic development will increasingly partner with the J-PAL and other economists to help them to experiment and learn.  This is Hayek as applied microeconomist at its best.

All of these points make me highly optimistic about our future.

My Concerns;

1.  Applied microeconomists are shrewd about marketing.  Before we write a paper, we know how it likely will be interpreted by the media and the bloggers.  A tenured professor who has certain political leanings can step "towards the line" by writing the paper in the way to raise the probability that his/her work triggers a media response.  We see this all the time in environmental economics.    As the line between research and activism blurs, economists must be very careful here.

2.  The war on the perfect competition model.   Many of our predictions such as the effects of a minimum wage are based on assuming perfect competition in the labor market.   Many economists such as Joe Stiglitz argue that there is pervasive market power in labor markets and output markets across our economy.  The presence of market power (that firms have price setting ability) has key implications for applied micro studies.   Such market power means that we can only make progress in applied work if there is a much closer connection between game theory and strategic play and applied estimation research (no more "taking prices as given" implicit assumptions).

3.  Some economists have "career concerns".  In our 30s, we focus on research excellence while later in life many of us begin consulting or seeking government jobs.   Do such expected career trajectories have implications for the applied micro research that scholars conduct while young?

The good news with respect to #3 is that in an age of replication and in an age where young economists can make a name for themselves if they successfully challenge an earlier study that this dynamic possibility disciplines "bad behavior" by the current generation.

4.  The Lucas Critique continues to be ignored.   Economics has no physics constants. The economy is always evolving.  The Austrians were right about this.    In an economy featuring forward looking optimizing decision makers, what do "reduced form" coefficient estimates mean?  Which structural estimates are "structural"?  Research in climate economics is plagued by this.  Past correlations between extreme heat and economic growth tell me little about the future relationship between these variables and I have argued that the past correlation plays a causal role in leading to a smaller relationship between these variables in the future.  Why? If we have learned from the past experience that extreme heat hurts our economy, and if we expect climate change to cause greater heat in the future, we will invest to attenuate the future effect of heat on economic growth.

Glen Weyl gave a great talk at USC yesterday. He presented ideas from his new co-authored book Radical Markets.  Here is one of his recent videos.    I own two copies of the book and I'm reading one of them!  The book is filled with ideas.  It presents an intellectual history of economic thinking as it openly debates the left/right views on the inequality challenge we now face.

One of his thought provoking proposal is for there to be common ownership of all assets.  Think of your house or your shoes.  Rather than owning these assets, what would take place if you could bid each year to rent these?  In this "auction for everything", assets would be allocated efficiently.   Thaler's endowment effect would vanish and a type of Coase Theorem optimism would unfold. 

Glen gave a great example of Elon Musk's hyperloop.  What might slow Musk down is the "right of way" and the holdup problem. Under the Posner and Weyl mechanism, Musk wins the auction for the right of way parcels and would be able to launch his idea.   Glen quickly sketched the efficiency and equity implications of his ideas.

The revenue collected by this "auction for everything" would then be returned to the people as a dividend (think of how Alaska does this).   This would sharply reduce inequality in our society and by allocating assets to the "right users" would stimulate economic growth.  You don't have to be Hsieh and Klenow here to seek an economic growth model to figure out how large this effect actually is.

While I need to sit down and read more of Glen's book and think more about its deep ideas, I want to make one smart point.  Everyone at the USC presentation was thinking the same thing, "Glen --- this is fascinating but how would you even begin to launch this?"  What is the pathway for how capitalism can "save itself" by marching towards socialism?

Today, as usual, random thoughts were crossing my mind.   I started to think about Paul Romer's Charter Cities concept.  Here is a video of Paul explaining his ideas. 

My point:   Imagine if Paul could launch two identical charter cities in the developing world and imagine if a second treatment "the Weyl Common Property experiment" could also be run in one of them, what would we observe?  Would different types of workers self select to migrate to the charter city? Would economic growth and inequality be higher or lower in the nation that launches the Romer experiment but not the Weyl experiment?   This is a two by two matrix.  What are your predictions for each box?

The Charter City is a physical place (a new city) in a LDC nation.  Romer has an opt in model of labor and capital flowing in to this place that has adopted Western (read "good")  institutions such as Swedish rules of the game.   If we now superimpose Glen's proposed property structure, what unfolds?  The point of the Charter City is to run an experiment.  Combining the two approaches offers a new hybrid experiment.

Since all of the assets are new, no endowment effect logic would pollute the set up. There would be no awkward transition dynamics because everything is new in the Charter City. 

One issue would arise.  Does everyone in the nation or just everyone in the Charter City receive a $ piece of the auction revenue?   I believe that Glen would say that it would be efficient to give everyone in the nation a share of the auction revenue.  Why?   Sharing the Charter City's wealth would remove the "welfare arbitrage" effect.  Only those who can truly productively work with the city's capital assets and "good rules" would move there and then rent them.

Weyl's rules over capital ownership would have at least one consequence for Romer's world.  Paul envisions that foreign direct investment will flow in.  If Goldman Sachs anticipates that once it invests in capital in the Romer/Weyl city that it will have to re-rent the capital the next period will it invest less?  Yes, of course.

Would international capital be injected into the charter city if there is no private property?   A rational investor might at first invest in a series of 1 year projects rather than engaging in sunk cost investment of building a factory that can produce for 20 years. 

So, I think it is useful to think about how the flow of L and K to the Charter City is affected by the nation's property rights regime.

My point in this blog post is that the Charter City creates a lab for experimentation and this radical property rights regime could be bundled with the new city with its new rules.   In my understanding of Romer's ideas, he was not specific about the public finance of how the rest of the LDC nation gains from the Charter City.  The Weyl/Posner proposal offers specifics for how this would unfold.

Henry George would like the end result.

Let's play this Bertrand pricing game,  I have the set the price of my e-book at $0.    Will Greg and Austan lower their books' prices to compete with me?  This book's title is:  "An Introduction to Empirical Microeconomics".   I wrote this because I think that most early economics courses are a pinch goofy in the following sense.

We spend a lot of time in class taking the perspective of the economic agent; "Given that I have cobb-douglas preferences defined over pizza and beer and given this budget constraint, what is my best choice of pizza and beer?"

A more interesting and relevant question is the inverse.  Given your budget constraint, if the researcher observes you choose X units of pizza and Y units of beer and then given a shift in the budget constraint if the same person now chooses Q units of pizza and Z units of beer, what has the researcher learned about your preferences?

This "partial identification" approach based on revealed preference logic is the only idea I explore in my book.  This takes the essence of structural applied microeconomics and teaches it to freshmen without doing any formal statistics or econometrics. This approach helps to get students ready for formal stats and econometrics classes as they see how the "inverse" problem works and why it is important.

INET has partnered with several leading academics to create a new documentary video series exploring the boundaries of economics and philosophy.  A preview is available here.  In this first segment, Harvard's Michael Sandel  and Harvard's Robert Barro and a group of talented young people discuss; Should retailers and airlines be allowed to discriminate and only hire workers with specific looks or age?  If consumers want to be served by attractive people, should for profits be allowed to supply such differentiated products? 

The discussion then turns to the social consequences and the morality of these decisions. We know that universities do not hire faculty at random.  Should retailers be allowed to hire only specific types of people (such as tall blond blue eyed attractive people)?    Is this a form of "lookism" or is this a part of a product's quality?  Larry Summers cogently discusses comparative advantage. He makes the point that Harvard hires very smart faculty and the Boston Celtics hire tall people so he isn't bugged if retailers mainly hire attractive people.

This video probes in a subtle way the benefits and costs of screening and non-random assignment.

The young people are arguing that firms such as Abercrombie shift our culture when they mainly hire traditionally looking beautiful people.   This retail strategy raises their profits but it unintentionally leads non-traditional looking people to feel like the "out group".

Over 20 years ago, Robert Barro wrote a thought provoking business week column on allowing airlines to screen flight attendants based on their attractiveness.    Robert Barro is asked whether some consumers have "bad preferences".  Barro takes preferences as given and does not support government mandates to regulate who firms can hire as they attempt to cater to this demand. 

Some of the young panelists make the subtle point that over time more women are flying and that for profit firms will shift the demographics of who they hire to meet the demands of their shifting "median consumer".   Other members of the panel are not convinced and argue that laws are needed to "move the market" in the morally right direction.

The overall documentary is excellent. I would like to see a deeper discussion here of property rights.   Do people have the property right to equal consideration for every job?  Do firms have the property right to hire who they want to further their mission?  If we believe Gary Becker's work on the economics of discrimination, then in competitive industries another firm will hire a worker who has been denied a job by the discriminator.  Competition protects the workers. 

Are one's looks a personal attribute that firms can screen on or do we forbid this?  What is the difference between brains and beauty?    Firms screen on brain power and personality, why can't they screen on beauty?

By  blending a subtle discussion of economics and philosophy, INET has opened up an important dialogue.

The NY Times has written a very good piece about the high costs of public sector defined benefit pension plans.    Given that governments face budget constraints and have trouble raising taxes, if a local government "overpays" its retirees then there will be less $ to hire new public workers to provide essential services and there will be less $ to purchase capital (think of the low quality of New York City subway cars) that is key to providing public goods such as public transit. 

I have written three papers on this topic.

1. Matthew E. Kahn, 2017. "Is Local Public Sector Rent Extraction Higher in Progressive Cities or High Amenity Cities?,"NBER Working Papers 23201, National Bureau of Economic Research, Inc.

When Mark Zuckerberg testifies this week in front of Congress, I hope that he agrees to share data to allow for a non-experimental test of whether FB helped Trump to win the election.  Here is test.

Given that the NY Times Upshot has written a very interesting piece about the geography of eviction and given that I am teaching graduate urban economics this fall at USC, permit me to make a few points about the economics of housing eviction.

First we need to make some assumptions.  Jill owns a house and Matt wants to rent her house.  Jill has an opportunity cost. She can live in her own house or rent it out to someone else. Matt has an opportunity cost. He can rent or buy another house.  If Matt and Jill agree on a one year rental contract, then this deal must make both of them better off than if they don't sign the deal.

Case #1:  Suppose that the contract states that Jill cannot evict Matt during his 1 year of entitled residence.  Economists will worry that there will be several unintended consequences.  First,  Jill will raise the rent for Matt as a type of risk premium.  She will also try (perhaps using Facebook) to screen out high risk people who may be more prone on average to default on monthly rent.

If you doubt this, recall the work by Acemoglu and Angrist on the unintended consequences of the Americans with Disabilities Act.

If Matt knows that he cannot be evicted, this creates a moral hazard effect such that he will be even less likely to pay his monthly rent. If Jill anticipates this, she will be less likely to rent her place to Matt because she anticipates that she will collect little rent from him.

Case #2:  Suppose the contract says that Matt can be evicted by Jane with 1 week's notice if he is late in paying his monthly rent.  If Matt knows this and believes this contract will be enforced,  he will self protect himself from risks such as sickness or short periods of unemployment by engaging in risk pooling with his friends and family (see Robert Townsend's work on risk pooling in India).

If Matt has no friends or family to engage in such risk pooling and Matt is unable to find work, then this would be a case of Milton Friedman's housing vouchers.  Friedman would support having housing vouchers to provide a basic level of housing for the poor.   Tax dollars would be used to provide these housing vouchers.

The NY Times is implicitly asking the property owners to provide social insurance by collecting $0 rent from those who experience a negative shock.  I am very sympathetic that those who experience a surprise shock to their health and labor market status deserve support but right now we are asking the property owners who trusted them with their private property to "nationalize" their property to protect the poor during their time of need.

This sounds like a distorting tax.

Everyone should sit down and watch Milton Friedman's video on education vouchers or read Peter Ganong's 2018 co-authored piece.

An alternative proposal would be to pay the owner of the apartment the contract price and for the individual who rented the apartment to use her own funds, borrowed funds and the state's provided voucher to jointly fund the rental unit.

The threat of eviction actually creates incentives to encourage property owners to rent out their places. If we remove this threat, where will many people live?  Will homelessness rise further?