Tag Archives: economics

Richard Thaler

Richard Thaler has been awarded the Nobel Prize in economics for his work on behavioral psychology.

Limited rationality: Thaler developed the theory of mental accounting,explaining how people simplify financial decision-making by creating separate accounts in their minds, focusing on the narrow impact of each individual decision rather than its overall effect. He also showed how aversion to losses can explain why people value the same item more highly when they own it than when they don’t, a phenomenon called the endowment effect. Thaler was one of the founders of the field of behavioural finance, which studies how cognitive limitations influence financial markets.

Social preferences: Thaler’s theoretical and experimental research on fairness has been influential. He showed how consumers’ fairness concerns may stop firms from raising prices in periods of high demand, but not in times of rising costs. Thaler and his colleagues devised the dictator game, an experimental tool that has been used in numerous studies to measure attitudes to fairness in different groups of people around the world.

Lack of self-control: Thaler has also shed new light on the old observation that New Year’s resolutions can be hard to keep. He showed how to analyse self-control problems using a planner-doer model, which is similar to the frameworks psychologists and neuroscientists now use to describe the internal tension between long-term planning and short-term doing. Succumbing to shortterm temptation is an important reason why our plans to save for old age, or make healthier lifestyle choices, often fail. In his applied work, Thaler demonstrated how nudging – a term he coined – may help people exercise better self-control when saving for a pension, as well in other contexts.

Will robots take my job?

If you want to know if robots will take your job, you can go to willrobotstakemyjob.com. It turns out my job (“environmental engineer” is the closest match) is particularly hard to automate at just a 1.8% chance robots will take my job, so I’ve got that going for me. I typed in ten other other career choices to see what I would get, then ranked them from most to least at risk.

  • auto mechanic: 59%
  • electrician: 15%
  • electrical engineer: 10%
  • mathematician: 4.7%
  • biochemist/biophysicist: 2.7%
  • materials scientist: 2.1%
  • chemical engineer: 1.7%
  • computer scientist: 1.5%
  • mechanical engineer: 1.1%
  • nurse: 0.9%

I won’t bother typing in the obvious ones like taxi driver (89%) or court reporter (50%). Okay, I did and that last one surprised me a little. The ten I picked weren’t random, they were ones I thought would be safe, and it turns out I was right except for auto mechanic. I’m a little surprised at that. Vehicles are merging with computers and getting more complex all the time, which means they are going to require more troubleshooting, updating, and will become obsolete faster than the past. I would also think a car mechanic could cross-train as a robot mechanic pretty easily. So the mechanics of the future will have to be equal parts grease monkey and tech support. Maybe they won’t be called mechanics, but the complicated systems we are creating are going to break in unpredictable ways and skilled troubleshooters are going to be in demand.

Anyway, the bottom line is that most types of engineering, and research positions related to genetics and/or materials, are pretty safe. Nursing is a field where supply just never seems to catch up to demand, and medical technology (and spending) just keep marching forward as the population ages and lives longer. You can still make a living as an electrician or a plumber.

I also learned something about the Standard Occupational Classification system used by the U.S. Department of Labor.

The 2010 Standard Occupational Classification (SOC) system is used by Federal statistical agencies to classify workers into occupational categories for the purpose of collecting, calculating, or disseminating data. All workers are classified into one of 840 detailed occupations according to their occupational definition. To facilitate classification, detailed occupations are combined to form 461 broad occupations, 97 minor groups, and 23 major groups. Detailed occupations in the SOC with similar job duties, and in some cases skills, education, and/or training, are grouped together.

 

what’s new with satellites

What’s new with satellites is there are a lot more being launched lately and they are a lot smaller, according to Bloomberg.

https://www.bloomberg.com/news/features/2017-06-29/the-tiny-satellites-ushering-in-the-new-space-revolution

At 9:28 a.m. on Feb. 15, these animals watched anxiously as an Indian rocket lifted off, roaring through the hot, sticky air. Its payload consisted of 104 satellites, dwarfing the previous world record of 37 set by Russia in 2014. The largest of them weighed 1,500 pounds and was designed to map India’s infrastructure and monitor urban and rural development. Nestled alongside were around a dozen smaller satellites from universities, startups, and research groups. What made the launch a record were the 88 shoebox-size “Dove” satellites built by Planet Labs Inc., a startup in San Francisco.

For the past few years, Planet has been sending batches of its Doves into orbit, each carrying a high-powered telescope and camera programmed to photograph a different swath of Earth. The 88 launched from Sriharikota would join 61 others to become the largest fleet ever put in orbit. Images beamed back by the 61 have been used far and wide: Hedge funds scour Walmart parking lots to measure traffic flows during back-to-school seasons. Farmers assess crop health and estimate optimal harvest times. Activists track Amazonian deforestation and Syrian refugee camps. Spies monitor military buildups and trafficking operations. With all 149 satellites in place, Planet will be able to photograph every inch of Earth’s surface every day—something even the U.S. government can’t do.

This satellite constellation is one of many signs that the relationship between humans and space is changing in ways unseen since Russia and the U.S. began sending rockets into orbit six decades ago. Thanks to modern software, artificial intelligence, advances in electronics and materials, and a generation of aggressive, unconventional entrepreneurs, we are awash in space startups. These companies envision an era in which rockets take off daily, filling the skies with satellites that sense Earth’s every action—in effect building a computational shell around our planet. The people constructing this bustling new economic highway promise it will improve life down below, but the future they describe is packed with wonder and controversy in equal measure—and although few have noticed, it’s coming to pass right now.

Overall, this seems good to me. A lot of the problems we have managing our economy are caused by lags between when things happen, when information is available, and when we are able to take action to respond. Real time information gets rid of the lag between when things happen and when we can know about them. This should help us understand what is going on with the natural environment better too, and maybe we can take some action based on that. Finally, I view any move toward less secrecy as a net positive in an era when governments, corporations, and even individuals are going to have ever more dangerous and ever more accessible technology at their disposal.

The biggest drawback might be that we will grow ever more dependent on this type of technology to the point we forget how to live without it, and then when it has inevitable glitches, that is going to cause new problems even as we are solving some older ones.

HSBC on peak oil

The idea of peak oil is definitely not dead, according to HSBC. While low demand and high supply have pushed down prices over the past several years, the market is headed back for an equilibrium, demand is growing, output from traditional fields is declining while investment in new discoveries and new technologies has dropped sharply in recent years. A crunch could be coming.

  1. The oil market may be oversupplied at present, but we see it returning to balance in 2017
  2. By that stage, effective spare capacity could shrink to just 1% of global supply/demand of 96mbd, leaving the market far more susceptible to disruptions than has been the case in recent years
  3. Oil demand is still growing by ~1mbd every year, and no central scenarios that we recently assessed see oil demand peaking before 2040
  4. 81% of world liquids production is already in decline (excluding future redevelopments)
  5. In our view a sensible range for average decline rate on post-peak production is 5-7%, equivalent to around 3-4.5mbd of lost production every year
  6. By 2040, this means the world could need to replace over 4 times the current crude oil output of Saudi Arabia (>40mbd), just to keep output flat
  7. Small oilfields typically decline twice as fast as large fields, and the global supply mix relies increasingly on small fields: the typical new oilfield size has fallen from 500-1,000mb 40 years ago to only 75mb this decade
  8. New discoveries are limited: last year the exploration success rate hit a record low of 5%, and the average discovery size was 24mbbls
  9. US tight oil has been a growth area and we expect to see a strong recovery, but at 4.6mbd currently it represents only 5% of global supply
  10. Step-change improvements in production and drilling efficiency in response to the downturn have masked underlying decline rates at many companies, but the degree to which they can continue to do so is becoming much more limited

what’s going on with mad cow?

Mad cow disease is scary because there is such a long time between when someone is infected and when they begin to show symptoms, the kind of disease that could spread through large portions of a population before anyone realizes it is there. I am not saying it has, I don’t know. This article in Alternet doesn’t really address the current status, but it goes through some interesting history of the first outbreak in the U.S.

On December 23, 2003, the USDA announced that a Holstein cow, imported from Canada and slaughtered in Moses Lake, Washington, tested positive for mad cow disease. Ann Veneman, USDA secretary at the time and other USDA officials, said the cow was discovered because she was a “downer”––unable to walk—which was how the system screened for mad cows. In other words, the system “worked.” The problem was three workers said the cow had walked just fine suggesting that the entire federal mad cow testing program was worthless. Congressional hearings ensued.

As it turned out, congressional troubles were the least of cattle producers’ problems. Within hours of the mad cow announcement, China, Mexico, Russia, Brazil, South Africa, Hong Kong, Japan, Singapore, Taiwan, Malaysia, South Korea and ninety other countries banned US beef and 98 percent of the $3 billion overseas beef market vanished. (The only reason the EU didn’t ban US beef was it was already banned for its hormones oestradiol-17, trenbolone acetate, zeranol and melengestrol which EU officials said increased breast and prostate cancer risks.)

After the first mad cow, things got worse. Two more mad cows were found in the US in 2004 and they weren’t from Canada. One was born in Texas and the other Alabama. Worse, a USDA export verification report admitted that 29 downers at two unidentified slaughterhouses went into the human food supply and twenty were not tested for mad cow disease.

Most of the countries mentioned lifted their ban shortly afterward, but China apparently is just lifting it now, according to NPR:

Cooked chicken from birds grown and raised in China soon will be headed to America — in a trade deal that’s really about beef…

The Chinese appetite for beef is huge and growing, but American beef producers have been locked out of that market since a case of mad cow disease cropped up in the U.S. in 2003. In response, many countries, including South Korea, Japan, Mexico and China, banned imports of U.S. beef…

Many people long had seen China’s refusal to lift its ban on U.S. beef imports as a negotiating tactic, a tit for tat aimed at allowing Chinese chicken imports into the United States. The negotiations that led to the new trade deal have been going back and forth for more than a decade, stalled at one point by worries in Congress over China’s food-safety practices.

This might be good for the U.S. beef industry in the short term, but an exploding demand for beef can’t really be good for the world in the longer term. Maybe this is not the kind of industry of the future that the U.S. should be focusing on. I’ll admit I’m a hypocrite – I love a good cheeseburger, but I try to treat it as an occasional treat rather than a staple food.

The Retail Meltdown of 2017

The Atlantic has an article about “the retail meltdown of 2017”.

There have been nine retail bankruptcies in 2017—as many as all of 2016. J.C. Penney, RadioShack, Macy’s, and Sears have each announced more than 100 store closures. Sports Authority has liquidated, and Payless has filed for bankruptcy. Last week, several apparel companies’ stocks hit new multi-year lows, including Lululemon, Urban Outfitters, and American Eagle, and Ralph Lauren announced that it is closing its flagship Polo store on Fifth Avenue, one of several brands to abandon that iconic thoroughfare…

So, what the heck is going on? The reality is that overall retail spending continues to grow steadily, if a little meagerly. But several trends—including the rise of e-commerce, the over-supply of malls, and the surprising effects of a restaurant renaissance—have conspired to change the face of American shopping.

A lot of people like the car-dependent suburbs because they are perceived to be quiet, safe, and have good public education. But do people actually like sitting in traffic or have they seen that as a necessary price to pay. I like how the Place Shakers blog talks about this:

So what was the motivation [for the rise of auto-dependent retail]? I’d suggest it was (and still is, really) a desire for the easiest possible access to the stuff we want at the time — a desire so strong, it seems to me, that we began structuring our entire built environment around its fulfillment…

That’s why we built bigger arterials which fed bigger chain stores with more of the items we wanted to get our hands on. And why we built malls, where the variety of available goods seemed to increase exponentially. And it’s also why we established hefty parking minimums. Because you’re not effectively delivering on the promise of easy access to goods if you can pave the way to a warehouse full of stuff but leave no space to park within a few feet of the door. And parking within a few feet of the door is a fundamental part of the need being fulfilled.

But what happens when times and technologies change, and new ways of addressing our needs emerge? Suddenly we’re afforded new opportunities to prioritize how we spend our time and money.

In other words, we can get the stuff we want without spending so much time sitting in our cars, and we have figured out that there are other, better ways to be spending that time. I think something very similar is playing out with the trend of a lot of people working from home, at least on Fridays. By saving that commuting time to and from the office, your free up hours of your day for sleep, family, leisure, or extra productivity.

value added tax

Here is a Fresh Air interview with T.R. Reid explaining how great the VAT is.

This is the most important innovation in taxation in the last 60 years. This is a tax that’s like a sales tax on steroids. It’s a tax – our sales tax is called a retail sales tax. The tax is only collected when the retailer sells you the book. But on a value-added tax, a tax is collected when the paper mill sells the paper to the publisher and when a publisher buys ink from an ink company and then the publisher sells it to a wholesaler and a wholesaler sells it to a distributor, distributor to the bookstore and the bookstore to you.

That tax is collected at every level, and every time you pay the tax to the other guy, you report it to the government to get a credit for the tax you paid which means every penny of tax that’s paid is reported to the government. So the VAT turns out to be a very easy tax for government to collect and a very hard tax for taxpayers to avoid. And so if you put in a value-added tax, they’re very steady collections, and it’s hard to cheat on.

And you could use that money to reduce the rate of the corporate or the personal income tax. So 176 countries have adopted this innovation. It’s a great idea. The only countries that don’t have it are a bunch of countries so poor they have no taxes and the United States of America. So I say in my book in taxation, Americans are still banging out letters on a typewriter and dropping them in a mailbox, and everybody else is texting and using Instagram.

So let’s do it. There are actually some signs the Trump administration might consider it. But instead of eliminating income tax, they may be thinking of going after the Social Security payroll tax.

March 2017 in Review

Most frightening stories:

  • La Paz, Bolivia, is in a serious crisis caused by loss of its glacier-fed water supply. At the same time we are losing glaciers and snowpack in important food-growing regions, the global groundwater situation is also looking bleak. And for those of us trying to do our little part for water conservation, investing in a residential graywater system can take around 15 years to break even at current costs and water rates.
  • Trump admires Andrew Jackson, who I consider a genocidal lunatic and the worst President in U.S. history.
  • Fluoridated drinking water could eventually be looked back on as a really stupid idea that damaged several generations of developing brains, like leaded gasoline. Or not…I’m not sure who to believe on the issue but caution is clearly warranted.

Most hopeful stories:

  • A new political survey says there is a chance that a majority of Americans are not bat-shit crazy. Which suggests they might not be too serious about Steve Bannon, who believes in some bat-shit crazy stuff. There are a number of apps and guides out there to help sane people pester our elected representatives when they fail to represent our interests.
  • South Korean women are projected to be the first to break the barrier of an average life expectancy of 90, with a 50% probability of this happening by 2030.
  • Advanced power strips can reduce the so-called “vampire loads” of our modern electronic devices that are never really off.

Most interesting stories, that were not particularly frightening or hopeful, or perhaps were a mixture of both:

  • This long NASA article first gets you excited about the possibility of life on eight new planets it has just discovered, and then throws cold water (actually, make that lethal X-rays) all over your excitement.
  • Bill Gates has proposed a “robot tax”. The basic idea is that if and when automation starts to increase productivity, you could tax the increase in profits and use the money to help any workers displaced by the automation. In related somewhat boring economic news, there are a variety of theories as to why a raise in the minimum wage does not appear to cause unemployment as classical economic theory would predict.
  • CRISPR could be used to create new crops out of the wild ancestors of our current crops.

choosing a college major

For some reason, I was thinking today on what advice I would give a high school senior on picking a college major. Now, I believe in education for its own sake, and I believe there is a difference between education and training, but I would still have to advise someone who asked to consider a major with significant economic value. I think I would recommend a fairly traditional science or engineering degree to most people, because this leaves open many options for specialization in graduate school.

I think computer science will continue to be a hot field for the foreseeable future, and genetics is probably the emerging hot field right now. You really couldn’t go wrong picking one of these two majors.

If you want to go the computer science route, the obvious major is, well computer science. There are also computer engineering programs out there, and either electrical or mechanical engineering would be a good undergraduate foundation while leaving options open for a number of different careers. Good old mathematics is also an option.

If you want to go the genetics route, biology is the obvious major. Chemistry or chemical engineering would also lead to your knowing your way around a laboratory, while leaving all sorts of possible career options open in the chemical, energy, and pharmaceutical industries. Some schools have programs in biological, biomedical, and agricultural engineering that might have relevant training.

If these majors just aren’t your thing, other remaining traditional professions like law, medicine/nursing, architecture, and accounting should still be reasonable career paths. Teaching and child care are honorable professions but don’t get paid what they are worth to society, at least in the United States. You have to be a little careful with accounting, because you hear so much about basic bookkeeping functions being automated. But people who really understand the tax code and helping companies comply with financial laws should always be in demand. I might put my own profession of civil and environmental engineering in this category – it is not a path to fantastic wealth, but it is not likely to go away. Chemical engineering probably gives a person more flexibility to work in either the public or private sector, but it was just not my thing. I have no regrets about the path I have chosen and would recommend it to anyone if the field really interests you.

Now, if you really have your heart set on a liberal arts or fine arts degree, I think that is great. I might advise someone to do some training in a skill on the side or over the summers. You can still make a living as a plumber, electrician, or mechanic, for example. You can also learn to work with specialized software such as geographic information systems.

minimum wage and unemployment

In this Atlantic article, James Kwak summarizes several theories on why a higher minimum wage doesn’t seem to increase unemployment in the real world as the simple supply-and-demand theory would predict.

The idea that a higher minimum wage might not increase unemployment runs directly counter to the lessons of Economics 101. According to the textbook, if labor becomes more expensive, companies buy less of it. But there are several reasons why the real world does not behave so predictably. Although the standard model predicts that employers will replace workers with machines if wages increase, additional labor-saving technologies are not available to every company at a reasonable cost. Small employers in particular have limited flexibility; at their scale, they may not be able to maintain their operations with fewer workers. (Imagine a local copy shop: No matter how fast the copy machine is, there still needs to be one person to deal with customers.) Therefore, some companies can’t lay off employees if the minimum wage is increased. At the other extreme, very large employers may have enough market power that the usual supply-and-demand model doesn’t apply to them. They can reduce the wage level by hiring fewer workers (only those willing to work for low pay), just as a monopolist can boost prices by cutting production (think of an oil cartel, for example). A minimum wage forces them to pay more, which eliminates the incentive to minimize their workforce.In the above examples, a higher minimum wage will raise labor costs. But many companies can recoup cost increases in the form of higher prices; because most of their customers are not poor, the net effect is to transfer money from higher-income to lower-income families. In addition, companies that pay more often benefit from higher employee productivity, offsetting the growth in labor costs. Justin Wolfers and Jan Zilinsky identified several reasons why higher wages boost productivity: They motivate people to work harder, they attract higher-skilled workers, and they reduce employee turnover, lowering hiring and training costs, among other things. If fewer people quit their jobs, that also reduces the number of people who are out of work at any one time because they’re looking for something better. A higher minimum wage motivates more people to enter the labor force, raising both employment and output. Finally, higher pay increases workers’ buying power. Because poor people spend a relatively large proportion of their income, a higher minimum wage can boost overall economic activity and stimulate economic growth, creating more jobs. All of these factors vastly complicate the two-dimensional diagram taught in Economics 101 and help explain why a higher minimum wage does not necessarily throw people out of work. The supply-and-demand diagram is a good conceptual starting point for thinking about the minimum wage. But on its own, it has limited predictive value in the much more complex real world.

Even if a higher minimum wage does cause some people to lose their jobs, that cost has to be balanced against the benefit of greater earnings for other low-income workers. A study by the Congressional Budget Office (CBO) estimated that a $10.10 minimum would reduce employment by 500,000 jobs but would increase incomes for most poor families, moving 900,000 people above the poverty line. Similarly, a recent paper by the economist Arindrajit Dube finds that a 10 percent raise in the minimum wage should reduce the number of families living in poverty by around 2 percent to 3 percent. The economists polled in the 2013 Chicago Booth study thought that increasing the minimum wage would be a good idea because its potential impact on employment would be outweighed by the benefits to people who were still able to find jobs. Raising the minimum wage would also reduce inequality by narrowing the pay gap between low-income and higher-income workers.