A Composite Update to Some Old Posts, Regarding Developments in AI Over the Last 18 Months

AI has been bubbling along for many years, but the real bloom was in November 2022, when ChatGPT 3.5 was rolled out. It was on a different level.

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I have gone back and pulled forward a couple of old posts on this, and here offer some updates.

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This first one is from June 11, 2010, and is entitled "Technology that Augments Labor with More Labor (Instead of Capital)". 

At that time, it seemed like nanotechnologies and cloning were going to be relevant sooner than AI.

How much more productive would you be if a digital version of yourself could do the grocery shopping? How about if it could get your car inspected? What if it could go to a lecture you’re not sure is worthwhile, evaluate it as you would, and report back on it?

Ummm ... you can already do that last one. Just get a Zoom lecture, feed it into Otter, feed its output into a personalized AI using ChatGPT 4, and done. I've done it. Fourteen years ago that was science fiction.

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The second one is just a post about a poignant comic from July 25, 2011 entitled "Calling Robin Hanson". 

Digression: I hate what the internet has become since the advent of social media. We had a good 15 year run of being able to find everything, and with social media it's gotten harder to find anything. In particular, that "permanent link" from 15 years ago is gone (which is actually really stupid, because if the comic has moved to a new place, anyone thoughtful can code a redirect in seconds ... but ... no one did). Anyway, you can still find it here.

I'm pretty sure the artist drew this about the ennui of getting older. But my alternative take was what if your smartphone could do this. Again, that seemed like science fiction in 2011, but this is actually possible in 2024. Heck, this was possible several years ago. Now we can make deep fake videos that are way beyond the little asterisks in the comic.

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The third one is from March 25, 2015, and is entitled "This Post Is Not a Joke". Here's a few updates.

Mongolia is no longer posting amazing growth rates. Ethiopia is. No ... wait ... that's so 2022 ... Guyana is boasting the highest growth rates now. But Mongolia does have a big capital city now, that's gotten pretty spiffy, even touristy, even if it is thousands of miles from ... anywhere. 

BTW: We used to get some Mongolian students in our MBA program, and they felt that Cedar City was just like Mongolia, climate-wise.

In 2015, I mentioned drones because I'd recently seen a live demonstration of a (remotely piloted) drone that could and did push the elevator buttons and get off at its chosen floor. I am quite sure they can probably do that without human control these days, but I have not seen it.

My mathematical point and graph from that post still hold true. There's no way to prove it, but I think some people have already shifted from the orange path to the blue one.

Some people still play Borderlands, and the last entry in its universe was made about the time ChatGPT 3.25 came out. You can't buy it new, but I'm sure you can find the original ClapTrap robot for sale on eBay.

Do note the paragraph about what I might do with more Stata knowledge than you. The thing is ... I don't need that anymore ... ChatGPT writes my Stata programs for me these days. And I had it write a PowerShell script last month to sort all the digital images on my hard drives. I am now wondering if I rated some of my digital images and trained it ... whether it could reasonably rate all my images of my kids and dogs as if I had done it??

Also, SoundHound is still around and still great. People say Shazam is better, and that may be so, but I find it to be more intrusive too. I started to think my son could really pull off being a professional pianist when after SoundHounding him for many years and getting nothing ... he started to be good enough that it would think he was one of the professional releases in its database.

And finally, the last paragraph was the part of the motivation for the optional section in Chapter III of the Handbook that I covered briefly in response to ME's question in the Discussions. AI may make our productivity higher but our measure of that productivity lower if it converts things that used to be expensive and rare into the cheap and commonplace. Of course, you already know that's true of your phone ... provided that you can maintain some focus while using it ;-)

 

A Tale of Two Earthquakes

Taiwan had a bad earthquake during this year's ECON 3020 class.

Turkey had a bad earthquake during last year's ECON 3020 class. 

The outcomes were not the same. And richness, as measured by nominal or PPP GDP per capita probably goes a long way towards explaining the differences.

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Full reveal: I badly missed on my subjective forecast of casualties from last year's quake in Turkey. I anticipated the country doing a lot better than it did, largely because it is richer than many suppose. I was wrong. In retrospect, it was a pretty big earthquake in a fairly poor area of Turkey. So I now see it as more similar to the smaller Iranian earthquake in 2003.

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The literature that economic growth is highly negatively correlated with deaths from natural disasters (mostly earthquakes) is fairly well-established (see here, here, here, and here). The second of those also points out that income inequality, which is fairly high in Turkey, is positively correlated with earthquake deaths. 

So, I do have a history of pointing out in ECON 3020 that high death tolls, say in Haiti in 2010 (here and here), are reprehensible but not surprising.

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Here's the details on these two recent quakes.

Taiwan had a 7.4 quake a few weeks ago, Turkey had a 7.8 a year ago. 

The last death toll I could find for Taiwan was 16. Turkey's death toll was 53,000. 

Do note that the Richter scale is logarithmic, so the shaking in Turkey was more than a little bit worse. Even so, Turkey also lost three times more than Japan did to 2011's 9.1 earthquake AND tsunami.

Nominal GDP per capita in Taiwan is 3-4 times higher than that of Turkey; using PPP it's still 75-100% higher.

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P.S. A contributing factor to Turkey's death toll may also be a lower standard of services provided to the large Kurdish minority near the epicenter.

A Macroeconomic Hotspot to be Worried About: China and Taiwan

I meant to write this much earlier in the semester ... but ... I've been a little busy this semester.

Anyway, it's been a long time since the world has seen a war as big as the one between Russia and Ukraine. In Europe, it's the biggest in 75 years.

In America, we tend to view the Iraq and Afghanistan wars (and the Gulf War too) as pretty big. But not really ... the wars were the easy parts of those, and largely foregone conclusions ... it was the long occupations that were problematic. The same thing with the Russian invasion and occupation of Afghanistan; or even the full-blown war between the UK and Argentina. No, we probably need to go back two generations to the 1970's to the Vietnam War for magnitude, and the fourth Arab-Israeli War for hotness, to get something that matches the last two years in Ukraine.

Even so, while the macroeconomic consequences for the U.S. have not been huge this time around, they are definitely an omnipresent concern. Witness the political ramblings over Ukraine aid that have taken place over the last few months.

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Given all this, it is useful to put in perspective than a conflict between China and Taiwan would be a much bigger deal. The scuttlebutt this week, on both the left and right, is that Iran's hugely unsuccessful attack on Israel has got the Chinese rethinking their contingency plans regarding Taiwan.

First off, just using Chapter VI in the Handbook, China is macroeconomically 6 to 10 times as big as Russia. Taiwan's economy is 3 to 4 times the size of Ukraine. So this is a much bigger deal for the whole world.

In addition, the Taiwan Strait is over a hundred miles wide. It's not exactly open ocean, but it's definitely deep enough for sinking capital ships with major loss of life (it's been 40 years, but the world was pretty shocked when the Argentinians found out the hard way that the British were fighting for keeps in the open ocean).

Secondly, both countries are richer than Russia and Ukraine. Taiwan has legitimately been considered by outsiders to be a fully-developed economy for a generation. But the conditions are reversed. Russians are about 3 times as rich as the Ukrainians. The Chinese have about 1/3 of the real GDP per capital of the Taiwanese. 

The last time the world witnessed an economically poorer, but numerically superior country attacking a developed countries forces head on was ... probably China's surprise attack on the U.S. forces mopping up  North Korea in 1950. It's worse than that: an economically poorer but numerically superior force arguably hasn't attacked the homeland of a richer country since the initial Arab Moslem invasions of the Persian and Byzantine empires in the 7th century.

Third, the situation for China is probably extra tempting. China has a much larger population, putting its whole economy as about 20 times larger than that of Taiwan. Russia is more like 10 to 1 over Ukraine.

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That last point is especially concerning given the 50 year international campaign of othering Taiwan.

Economically, this is right there in the PPP tables in Chapter VI of the Handbook. The World Bank doesn't provide economic data about Taiwan because it does not recognize Taiwan as existing as an independent country. 

The UN does a little better by publishing some data about Taiwan, but it has excluded Taiwan from the UN itself since 1971. Yeah, it's a little laughable that it calls itself the United Nations when it excludes one of the largest economies in the world.

The backstory here is that China was coming apart at the seams for the first third of the 20th century. Eventually, a government that came to be known as Nationalist to us in the west asserted control over much of the country. Even so, there was an ongoing and significant communist rebellion (that's not really the right word for it, but there may not be a good one). They put aside their differences while fighting the Japanese, but turned on each other again in 1945 in full civil war. By 1949, the Nationalists had fled to the island of Taiwan (taking most of the ships with them).

China has successfully sold the argument that Taiwan is thus just a rebellious province, and therefore there is only one China. That position was laughed at through the 50s and 60s, but gained ascendancy in the 1970s, mostly by portraying itself as a non-aligned, Third World, country (see Chapter VI in the Handbook again). One can easily imagine that justifying a "Round 2" with the descendants of the Nationalists.

Taiwan begs to differ. The island's indigenous minority peoples aren't Chinese at all; they're closely related to Filipinos and Indonesians. The history of the Chinese in Taiwan only goes back several hundred years, and the interest of Chinese emperors in the island was tenuous at best. Then the Japanese were awarded Taiwan after a war with China, and it became part of Japan for 50 years. At the time that the Nationalists went there it was still considered to be part of occupied Japan. And in the 1952 treaty that settled World War II in Asia, the Japanese gave up title to the island, but it was not awarded back to China. It wasn't given to the Nationalists either, which probably doesn't help the situation. Really, the only way to read that is they were working under the adage that possession is 9/10 of the law.

In sum, Russia has a much better claim to some or all of Ukraine than China does to Taiwan. Russia has at least included Ukraine for 2-3 centuries, and its only been 33 years since their (at the time) amicable split.

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It is probably not wise to underestimate the stupidity of the current regime in China. They have squandered a lot of hard won international goodwill over the last ten years. Could that include invading Taiwan someday? I didn't used to think so. Now I'm not so sure.

It's also useful to keep in mind that while the world was distracted with CoVid and lockdowns that China unilaterally abrogated its treaty obligations to honor Hong Kong's distinct a pro-western developmental path. So it's definitely on the move.

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OK. Enough about how economics influences politics. Sometimes the economics works in mysterious ways. 

In particular, I would be incomplete without noting that a lot of the financing that's allowed southern China to thrive comes from ... Taiwanese investors. But like many foreign investors, they've been backing away the last 10-15 years as well.

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Full reveal. It's been hard to assess this since the lockdowns, but historically China's Great Firewall has blocked this blog for expressing what I regard as realistic data and viewpoints. This was problematic for Chinese students attempting to complete my course remotely in 2020 and 2021.

Applying the Handbook: Sweden and Finland, Turkey, NATO and the OECD (and Kurds, Sunnis, and Indo-European Languages)

There's a lot to unpack in this one. But it's a great application of the implications of the measurements in Chapter VI of the Handbook, and the observations of growth told throughout.

For most of its history, Sweden and Finland weren't in NATO.

Then Russia invaded another non-NATO country in Ukraine, and both countries reconsidered. Gee ... ya' think?

Except Turkey was in NATO, and didn't want Sweden and Finland in the club. And NATO is a military alliance: you don't get in without unanimous approval of your new allies.

After about a year, Finland got in. After about another year, Sweden got in (just last month).

How does that all work??

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First, Turkey is super-underrated by Americans as a macroeconomic power. It is not as big as the "big 4" western European countries, but it is solidly in the second tier with Russia and Spain (see the top deciles for GDP in Chapter VI). So it has weight it can throw around. It's also economically bigger than Sweden, and quite a bit bigger than Finland.

Second, given the war in Ukraine, Sweden and Finland wanted in to NATO. So what would they give up in the bargain?

Third, Turkey blocked them for a several of months, bargained for and got some concessions. Hmmm ... and Turkey's economy is bigger than both Sweden and Finland (maybe there's something to this macro stuff), and that accounts for a lot of their influence.

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NATO is the military alliance, and the OECD is the overlapping economic group of developed and developing capitalist countries. 

Sweden and Finland were not members of NATO. Turkey was. Sweden, Finland, and Turkey are all OECD members too. It stands to reason that the Turks view themselves as fuller members of the club of important countries, in a way that American might not recognize.

Also, Turkey is a really important NATO member. Consistently active since the start, and militarily large. Also, given western European prejudices about language, religion, and skin color ... NATO is Turkey's connection into the club of big, important, countries. So, if Turkey objects to Sweden and Finland joining, NATO will listen because Turkey has been trying very hard to get western Europeans to pay attention to them and this is their wedge issue to make that happen.

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Why is Turkey in NATO?

This actually goes back 4500 years.  The first horse-oriented people to ride out of the Eurasian steppes and conquer everyone in their path was ... us. (For reference down below, the Indo-European language group is called that because some went west to Europe and others went south to what is now India, Pakistan, Afghanistan, Iran, Iraq, and Turkey). Then came the Huns, Avars, and Magyars, who over about 500 years eventually became Hungary. Third came the Turks, who stayed in what is now called Turkey, and after them, the Mongols who rode back home.

Over the next several hundred years, the Turks fight off Crusaders, and eventually conquer the Byzantine Empire. Through the 16th and 17th century, they vied for being the strongest empire in Europe.

But it was a loose, decentralized, empire: the Ottoman Empire was ruled by Turks, but it was much more than them and not tightly held. As an example, the Barbary pirates against whom  America fought its first war after the revolution (you know, as in the Marines song "... To the shores of Tripoli") were, in fact, nominally subjects of the Ottomans.

Three things happened as the Ottomans faded from their peak. First, some of the European states started more seriously centralizing power over their nations to form some of the nation-states we still have today. Second, it seems to have been a coincidence, but economic growth started up in the same region as those new western nation-states. As they got economically bigger, they started to extend their political and military influence. And third, a more eastern nation-state in Russia started picking off parts around the edges of the Ottoman Empire.

Both the perception and reality we still have that Russia and Turkey are poorer and somewhat backwards is not so much because they did anything badly. Rather it's that western Europe and America opened a gap by growing first. Turkey didn't get poor. Turkey was normal. Instead, other parts of the world got abnormally rich first. Russia and Turkey did too, but because they weren't as close geographically to the origin of economic growth, they started later. They are poorer today because we got the jump on them then.

But the Russian Empire did centralize into a nation-state and the Ottoman Empire did not. Because it could focus its resources, for 2 centuries it took lands away from the Ottomans.

Now, along come the Prussians who wrest dominance of the Germans from the Austrians in the 1860s, and form another empire. It's insufficiently appreciated in the U.S. the extent to which the new German state always regarded Russia as the big threat. Everyone else, including France and England, was an afterthought. So who do the Germans go looking for as an ally in Europe? Russia's enemy: the Ottoman Empire. And recognizing that economic growth was already happening there too, they put a lot of extra economic support into that region in the years leading up to World War I. 

Not surprisingly, the Ottoman Empire fights on the side of the German Empire in World War I. And Americans tend to forget (or never knew) that they hold their own on several fronts, including one against Russia ... because they were a bigger player than we care to know.

After World War I, three fading empires are broken up. Austria-Hungary becomes a bunch of little countries along ethnic lines. Russia loses some territory, and turns inward as the Soviet Union. And the Turks lose a lot of loosely held territory, throw out their sultans, and establish a nation-state that's centered on a civilian controlled military as the most effective institution. But, while it's a very stripped down empire, it's still ruling some other nations. More on that later.

To some extent, the Nazis line up the same team for World War II: Bulgaria, Hungary, and Austria fight with them both times (and the Czechs were more solid than they care to admit). They tried pretty hard to get Turkey involved too (if you're curious, a little historical reading shows those Nazis in the Indiana Jones movies were not just randomly placed in the Middle East ... they really were there opportunistically in the 30s). To its credit, the new Turkey was not interested.

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So Turkey is trying to be new and different place after World War I, and after World War II they want everyone to remember that they really were different the second time around and had stayed neutral.

And, in the wake of World War II, the western countries return to worrying about the Soviet Union. And Turkey chimes in to point out that they've had problems with the Russians for centuries.

So when NATO forms, Turkey is admitted almost immediately. And historically, Turkey has been the 3rd biggest contributor to NATO. Why? Partly because they want to be supportive to help change western perceptions of them, but also because they're macroeconomically bigger than Americans tend to recognize: in the 92nd or 93rd percentile according to Chapter VI in the Handbook ... comparable to Mexico. And they have an effective institution in their civilian-controlled military which can be directed to serve larger aims.

And all through this period, Turkey's economy is growing, and Turks are becoming richer. In the 57th or 70th percentile according to the Handbook: comparable to the Russians, Mexicans, or Chinese.

The bottom line for macroeconomists is that a country like Mexico is aspirational for many other countries. Well, Turkey is also aspirational for many other countries, and Americans should understand that better. More on that later.

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So why was Sweden not in NATO?

It is believed this was mostly threat based. Sweden was officially neutral in both World Wars, but was pretty cozy with Nazi Germany. So after World War II, the Soviets used their size to lean on Sweden and tell the littler country to keep its nose clean going forward.

Again, the country with the bigger GDP ... 3 to 7 times as big according to Chapter VI ... gets its way. And the Soviet Union was even bigger than its remnant in Russia.

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And why was Finland not in NATO? This is more complex.

The Finns had been dominated by the Russians since the early 18th century. Then what is now Finland was part of the Russian Empire. But the Finns freed themselves during the Russian Revolution. 

At the beginning of World War II, Hitler and Stalin were allies. One of the things the Soviets got out of that was a promise that the Nazis wouldn't object if the Soviets attacked Finland. Which they did a few months later. 

Fairly obviously then, when the Nazis turned on the Soviets in 1941, the Finns went along for the ride for a few years.

But, as the tide turned, Finland switched sides in return for promises from the ascendant Soviets that they would not invade.

So after the war the Soviet pitch was more along the lines of you're our ally now, so don't even think about joining NATO. Probably the only reason they didn't join the Warsaw Pact was that the Soviets never stationed troops there.

Again, the country with the bigger GDP gets its way. Russia has 5 to 15 times the GDP of Finland, and is right next door.

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None of this addresses why Turkey would not want to have Sweden and Finland as allies in the 2020s.

There's two parts to this.

One, Turkey is economically bigger than either Sweden or Finland, so it's very likely that the Turks would be helping to defend the Swedes and Finns, rather than the other way around. Again, consulting Chapter VI, Turkey is a third bigger than Sweden, and 2-3 times the size of Finland. Turkey also has that big and effective and dispatchable military.

Secondly, Sweden and Finland have a history of supporting militant minorities in Turkey. 

That's probably not that smart.  

And, I don't know that there's any evidence of this, but it makes sense to speculate that Russian intelligence encouraged their smaller non-enemies in the north to support divisiveness in their bigger enemy to the south. 

Again, the story is of an economically bigger country (the Soviets and then the Russians), that leans on smaller countries (Sweden and Finland), to make trouble for the medium-sized country (Turkey).

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In the middle of this are the Kurds. Who are the they, and how did they get involved in this situation?

Again, there are several threads from Chapter VI in the Handbook at work here.

In the 19th century, there's greater interest in nationalism, and the idea that countries should coincide with nations with their own state.

But there's also the reasonable 19th century observation that most of the country-nation-states that are growing in economic power ... were also pretty big to begin with. So there's a bias against small countries because it was thought they would not be viable. The idea that a Switzerland or The Netherlands could become economically powerful didn't happen until after World War II. This is the polar opposite from the view from the 1960s onward that we ought to give every nation a chance to grow and be rich no matter how small. And honestly, the jury is still out on whether that happens in anything other than the special cases of banking and tax havens (see the discussions in Chapter VI on richness vs. bigness).

Anyway, that bias is there after World War I. So when they completely break up the empire of Austria-Hungary, mostly break up the Ottoman Empire, and lop some chunks off what was the Russian Empire, the plan is to make sure the new countries succeed by making them big enough.

But what if the nations aren't big enough to reach whatever size threshold was envisioned for a country? Well, that's how we got Czechoslovakia! Which amicably broke into 2 countries about 30 years ago, because the Czechs and the Slovaks don't view each other as the same. That one worked pretty well. But it's also how we got Yugoslavia, which broke apart with genocidal events at about the same time. 

And it's also how we got Iraq! Which was never a country until the U.K. (again, a bigger economy) decided to clip economically desirable parts (full of oil) off of the economically smaller and poorer Turkey between the wars. But, the region had smaller nations, so it cobbled 3 bigger ones, and a some smaller ones, into one country. One of those bigger groups was the Kurds, some of whom were also in Persia (before it renamed itself Iran), and a bunch of whom were left in the new-ish Turkey.

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Update: I forgot to mention that there were several treaties involved in the carving up of the Ottoman Empire. An initial one signed while the Ottomans still held power did give the Kurds their own country mostly inside current Turkish borders. But before it was put into effect, the Ottomans were overthrown, and the new Turkish government negotiated new treaties, the most important of which did not give the Kurds their own country.

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So what makes the Kurds view themselves as a nation? 

Ethnically and culturally Kurds are related to the Iranians, and they speak a language that is distantly related to English, but fairly closely related to Persian (the prime language of Iran). Recall that these languages are hugely distinct from Turkish. 

However, Islam has two big divisions: Sunni (about 80%) and Shia. And they regard each other as apostate (analogous to Catholics and Protestants in Europe in the 16th century). The Iranians are Shia, but the Kurds are Sunni. 

So Iran has a majority of Shia Iranians, and a minority of Sunni Kurds. Iraq has Sunni Kurds mixed with some Shiites, and Arab Sunnis. And Turkey is Sunni, but the Turks speak a vastly different language from the Kurds, and have dominated them for centuries. 

So the Kurds think of themselves as a distinct nation without a country or state.

And that tends to foment violence and revolutionary tendencies. 

Into which the Swedes and Finns blundered by accepting Kurdish refugees for decades ... probably because they were an oppressed nation. Which is very big-hearted. But also, it's a recipe for trouble because, as is typical, there's exiled revolutionaries and militants mixed in.

There's also a problem that we've seen globally over the last 50 years. It used to be that oppressed minorities didn't travel very far. Everyone was poor, and maintaining links to home if you emigrated was not cheap. Think about how a few centuries ago very few Europeans could afford to move to America. And how even as that became more common, and people were drawn from increasingly remote parts, it was too expensive for most to stay in touch with the home country. That's not really the case over the last few decades: more people can afford to move around the globe, and maintain better ties with their homelands. So as everyone gets richer, because everyone eventually hits that kink in Chapter II of the Handbook, we see a lot of local militant/terrorist/revolutionary activity extending tentacles like an octopus from a head that's safely at a distance.

Thus, Turkey has a long-standing beef with Sweden and Finland that they harbor and maybe even nurture terrorists able to reach and target Turks in Turkey.

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We are probably never going to know what the Finns and Swedes conceded to the Turks to get into NATO. But it took the Finns a year to agree to it, and it took the Swedes two ... so it is probably not a minor thing. 

It should also be fairly clear that there was probably a huge pressure on Turkey from the more western countries in NATO.

Also, keep in mind that Turkey is aspirational for lots of developing countries around the globe. They probably don't think they can be like Sweden or Finland, but they can be like Turkey some day. So it's a good bet that a lot of states around the world had their diplomats tell the Swedes and Finns to back off a bit.

 One thing is for sure: it is probably very bad for the Kurds who are still in Turkey.

Supply Chain Issues and the Baltimore Ship/Bridge Disaster

A problem with a disaster, like the ship hitting the bridge in Baltimore, is that it upsets supply chains.

Supply chains are the links from sources of resources, through manufacturers, warehouses, and retailers, through to final consumers. These are like trees with many branches: literally thousands of branches for most of the products you buy.

A disruption at any point in that supply chain can have effects both downstream (all the way to consumers) and upstream (all the way to resource extractors). 

Recall that during the early part of CoVid/lockdowns that the store shelves were empty? Recall that about 18 months after that (in late 2021) we had additional problems with getting stuff on shelves. Those are the visible effects of supply chain disruptions.

The closing of the port of Baltimore won't create huge disruptions, since it's not a really major port. But it will create some.

Interestingly, the biggest disruption is probably going to be to cars imported from Europe for sale in the northeast. Almost all of those come through Baltimore. Why is that? Because what's called a roll-on-roll-off ship carries about 5,000 cars (for perspective, the SUU campus has about 4,000 parking spots, but they're never all full at the same time). They all arrive at the same time, and the port that they all go to is the one that already has big parking lots built, for the cars to be unloaded into. Then they all get trucked out, to create room for the next ship's cargo. There's really just one of those on the east coast: Baltimore.

The other thing that will be affected is coal mines in Pennsylvania, Maryland, and West Virginia. Students tend not to know this, but most coal burned in the U.S. is hard, and relatively clean, and comes from strip mines in Wyoming. The softer, dirtier coal, from tunnel mines that we all have in our imagination isn't used much anymore. It's mostly found in the Appalachian mountains, and exported to places like India. And most of it goes through ... Baltimore.

What the Baltimore Ship/Bridge Disaster Will Do to the Budget Deficit

On Monday we discussed how the announced deficit is not as accurate as it sounds. This is because the government doesn't actually know how much it will spend or receive in advance. For example, natural disasters can make the deficit worse because extra money is spent in disaster relief.

Then on Tuesday a cargo ship hit and collapsed a bridge, effectively blocking the harbor of Baltimore.

At this time it isn't clear who own the bridge, or to what extent it was insured. But, the state of Maryland almost immediately announced they don't have the money to rebuild it. This is not surprising: most big transportation infrastructure projects are funded by the federal government, with the work managed at the sate level. So, it should not be surprising that within a day the federal Department of Transportation announced they would be getting the bridge rebuilt as quickly as possible.

I am not sure how much a bridge that's both long, and high, over water, will cost. My guess is $5B. If I'm right, while this will increase the deficit, it won't increase it by much: the deficit is roughly $1.7T/year or $1,700B/year. That works out to be less than 1%.

The people in the federal government are not as dumb as most people think. There is money set aside for this sort of thing. But, just like households that save for a rainy day, that amount will help, but may not cover the whole cost. That money has already been allocated by Congress, so it's considered "spent" already, and would not add to the deficit. Anything extra on top of that would add to the deficit.

Problems with Canals

Excellent piece in the Wall Street Journal entitled "Two Canals, Two Big Problems —One Global Shipping Mess".

Of course, we've covered the problems with the Houthis and the Suez Canal.

 

This map was included in the article, and shows routes on which ship traffic has increased from 12/23 to 12/24. Note that the route through the Red Sea is barely shaded, while the routes around Africa are bright red. 

I believe the red routes from our Gulf coast to southern Europe are largely our exports of liquefied natural gas (replacing shipments that are no longer being made from Russia).

Also note the traffic around the southern tip of South America. Even in the 21st century, this is a stormy route that ships try to avoid. But if they can't get through the Panama Canal, that's the only way to go.

The problem with the Panama Canal is drought: there isn't enough water sometimes to move the ships.The article contains an animated infographic explaining the problem.

Has the State Failed in Haiti?

Haiti is the poorest country in the Americas. It has not had much of a viable state for the last 2 generations.

But, it really seems to have come apart over the last month, with armed gangs apparently taking over the country.

The Prime Minister is currently in Puerto Rico. It's unclear if any part of the state is actually functioning. The Dominican Republic, which has done quite well economically over the last 30 years, refused to let the Haitian Prime Minister land there and drive across the border.

The U.S. has evacuated nationals, and added troops to the embassy.

Here's the Google search page for Haitian news.

In the language of Chapter VI in the Handbook, the country still exists, the nation of Haitians still exists, but the state is barely holding on.

Macroeconomically ... expect a humanitarian crisis in Haiti over the next several months.

Update 1: the Prime Minister of Haiti did promise to resign the day after I posted this. He has yet to return to Haiti or even to the island of Hispaniola (that Haiti shares with the Dominican Republic). And he set conditions on his resignation having to do with the transfer of the Haitian state to its next leader.

Update 2: Haiti has not even had what one could call a coup (where the leader of a state is forcefully replaced with a new leader). Instead, gangs are just running rampant. The apparently strongest gang leader goes by the name "Barbecue". I am not confident of the willingness of someone who goes by Barbecue to observe the polite and formal transfer of power proposed by a former Prime Minister with little or no power base in the country.

Bab-al-Mandeb Sinking / Possible Environmental Disaster

So the Houthis have been firing missiles and drones at cargo ships for a few months now. But cargo ships are big, and the Houthis are a bare-bones outfit with limited weapons.

But, they did repeatedly hit, and sink a British owned freighter (under a flag from Belize, with a mostly Asian crew) last week. This is the first cargo ship sunk as an act of war since the 1980s. 

Allegedly traffic through the strait was down before this, but I haven't seen a measure of this. No doubt it will decline further.

***

No sinking is a good thing for the ocean. But this one may be particularly nasty.

First off, the Red Sea is not a particularly healthy body of water to begin with: long, narrow, closed at one end, with limited circulation through the other end ... and, at least historically, lots of traffic.

Secondly, the ship that sank was carrying fertilizer. Twenty-one thousand tons of it. Yeah, work out the math ... about a million of those bags they sell at stores.

Third, in the U.S. we have a problem with waterways with agricultural runoff. Basically, fertilizer washes off the ground into waterways ... and causes excessive plant growth in the waterways rather than in the fields. If you've seen a lake filled with algae, you know what I mean. Keep in mind that this problem is just from runoff. What's going to happen to the Red Sea when a million bags of fertilizer are dumped into it?

(Not Required) I Was Not Making It Up When I Mentioned This In Class

From the Financial Times this past week "'Enshittification' Is Coming for Absolutely Everything".

And here is a story on the choice from the American Dialect Association: 

Here is how platforms die: first, they are good to their users; then they abuse their users to make things better for their business customers; finally, they abuse those business customers to claw back all the value for themselves. Then, they die. I call this enshittification.

The source was an article in Wired about Tik Tok by Cory Doctorow, who was a founder and still is a co-owner of the tech site Boing-Boing.

Here is the press release from the ADA listing the vote totals of other nominations for word of the year for 2023 (including rizz).

Not a Macroeconomic Worry Spot: Ukraine

Ukraine is another place for which there are reasonable political and military worries. 

But at this point, it is not seen as likely to create macroeconomic issues. It certainly was when the war started. 

If you're curious, you can go to the archives on the right hand side, and open up the link for February 2022. The posts about Russia and Ukraine occupy the top third of the month, and most of the posts for the following month too. I think it's fair to say that, back then, politicians were quite sure that the macroeconomic connections Russia had made with the rest of the world over the last 30 years were so important that Russia would back down. Apparently not.

Two years on, what we're left with is an ugly, money pit of a war, with no end in sight.

***

This is probably a good time to introduce you to two college level words.

Revanchism is the name given to a country's policy of attempting to recover lost territory. Russia has demonstrated a revanchist policy towards parts of Ukraine for the last 10 years or so, and has succeeded in conquering parts of their neighbor. Revanchism is about getting back what used to be yours.

A related ideas is irredentism. This is the belief (rather than the more active policy) that parts of your country or nation are outside your current borders, and should be united with it. The first round of Russia biting off parts of Ukraine back in 2014 was about acting on irredentist views that the Crimean peninsula should be part of Russia. Russia has also pushed this idea about a region called Donbas over which some of the current war is being fought (although the claim to Donbas is shakier).

Not surprisingly, revanchist and irredentist positions can have macroeconomic consequences. Venezuela bringing up what everyone thought was a settled claim on part of neighboring Guyana is an example.

***

One of the things that puzzles me about (national) states and their leaders is their interest in acquiring territory.†

Of course, there's a lot of historical precedent for this. And if you took me for principles, I mentioned that what is animating policies is often nothing more than "we've always done it this way".

But, what I wonder (and this definitely is pushed along by the fact that we've developed ways to measure the value of regions over the last century) is whether or not it's worthwhile to pursue territorial ambitions. For example, consider the U.S. It isn't that hard to envision some states as being a net drag on the rest of the country. Say ... Mississippi. Other states of roughly the same GSP are more likely to be net contributors to the rest of the country. Say ... Utah.

I think it's pretty clear that if somehow Mississippi was conquered by a foreign power, the U.S. would adopt a revanchist position to get it back. But I think it's a reasonable question to ask whether or not that would be worth it.

Now come full circle back to Russia and Ukraine. Are the parts of Ukraine that Russia wants to take back ... worth it? Further, are they still worth it after they've been wrecked by war?

Of course, if the answer is "no", then why start the war? But it seems like humans have a bias towards thinking the answer must be "yes", and then they find out the hard way that it is not. There is some game theory on this with something called all-pay auctions, where theoretically no one should overbid, while in practice just about everyone does.‡

 

† Do note that you need to recognize in posts like this whether I'm writing about "states": a name for the potentially infinitely-lived government of a country; or "states": a name for the the subdivisions of some countries. In this post I write about both. Sorry about that.

‡ Not every semester, but frequently, I touch on all-pay auctions in my micro principles classes when talking about high fixed costs, natural and/or platform monopolies, and network externalities.

Not a Macroeconomic Worry Spot: Gaza

Sure, I think that the war in Gaza is a political worry spot this year. But it is not one that I expect will lead to macroeconomic issues.

In short, what I post here isn't about current events, but rather current events filtered through a macroeconomics lens.

***

One macroeconomic sideshow is that some would take the quasi-Marxian position that because Israel is rich, and its neighbors are not, Israel must have somehow exploited them.

First off, as we've seen in lecture last week, and will continue to see this week, diminishing marginal productivity tells us a lot about how macroeconomies should behave. Exploitation arguments hark back to Marx, who wrote most of his stuff before diminishing marginal productivity was widely recognized. It is one of several principles associated with the "marginal revolution" in economics (from 1870 to 1890) that superseded Marx (at least amongst economists) because they offered better answers to outstanding problems. In this week's lectures we'll take that further and show how some technologies can help us explain situations like this.

Secondly, it's important to have some historical perspective. Israel was economically comparable with its neighbors 75 years ago. Since then, it has pulled away. Even if the exploitation argument is correct, it leaves a lot of loose ends in the region: 1) how did Israel pull away both from countries it is alleged to have exploited, and also those it could not have exploited, and 2) if Israel has been exploitive the whole time, how come it has only pulled away over roughly the second half of that period?

Two More WEF Critics

MV came to class this week, and wanted to know if I'd heard about Javier Milei's incendiary speech at the WEF.

In response, I asked if he'd seen what the president of the Heritage Foundation had said at the WEF.

***

Milei is the recently elected President of Argentina. Argentina is every macroeconomists best example of how government's pursuit of bad policies for long periods of time can immiserize a country. Milei ran under a platform for a radical change in direction that Americans might call libertarian. He's worked as an academic macroeconomist, and has a decent research record. In public events he's known for being ... Trump-like.

The Heritage Foundation is one of the big, conservative, think tanks in Washington D.C. I would describe it as more economically-oriented than most D.C. think tanks. It's current president is Kevin Roberts, a historian. I don't know much about him: he's been very low profile.

***

Here's a Newsweek piece entitled "Two Conservatives Challenge the Davos Divas", which quotes from both speeches.

***

FWIW: Print magazines are fading away, but for decades, Time and Newsweek were the big two current event magazines. Many households got one or both. Historically, they've both been centrist, with Time leaning towards the Republic Party as it was before Reagan (much less Trump), and Newsweek leaning toward the conventional Democratic Party view that has faded a bit over the last 10 years. Newsweek has always covered conservatives and their views a bit, but I've rarely seen anything as glowing as this piece. I guess they also liked the hammering of the WEF that everyone seems to be doing this year.

Revisiting a Worry Spot from 2022: Canada

At the start of every semester, I try to forecast the worry spots. This is a fool's errand: the most problematic places are the ones we didn't forecast, right?

In Spring 2022, just as I was wrapping up those posts that January, Canada blew up in our faces. 

On the surface, this was about long distance truckers getting tired of CoVid restrictions. More specifically, it was about those that crossed the border with the U.S. being viewed as potentially dangerous virus transmitters by both countries. Ostensibly, that was probably true, but they were just truckers trying to do their job. The truckers staged a strike, organized public protests, camped out, and blocked border crossings.

Anyway, there were big macroeconomic consequences because they blocked the border crossings, and the U.S. and Canada trade more with each other than any other pair of countries on the planet. 

So this was a big deal (see here, here, here, here, here, here, here, here, here, and here). The government of Canada did not react sensibly (from an economic perspective) as shown here and here. 

Amongst other things, Canada's Trudeau administration (a politically left administration that claims they support things like the right to strike and protest publicly) quickly passed a law under which they:

• Made arrests
• Conscripted private tow truck owners and forced them to use their trucks to do the government's bidding
  
• Towed vehicles (trucks and third party vehicles that supported the strike and blockades)
• Revoked business licenses of some trucking firms completely
• Suspended license plates on passenger vehicles involved in strikes, protests, and blockades
  
• Revoked licenses for other trucking firms to pass through Ontario.
• Doxxed over 90,000 people who contributed money through crowdsourcing to support the strike
• Seized bank accounts of those arrested
  
• Severed the ability of hundreds of people to access their funds or use their credit/debit cards for a period of days or weeks
  
• Took children into custody and separated them from their parents (if they were protesting).
• Confiscated pet dogs of protesters.
• More or less shut down the entire Canadian financial system for about 12 hours (and seems to have narrowly averted a nascent bank run the next day).

In addition, the Trudeau administration made clear that they felt much of the money was coming from donations from "Trumpers" in the U.S. In fact, a "reporter" in SLC used the doxxing list to contact contributors from Utah.

In short ... all the stuff that free countries are not supposed to do.

***

So why do I bring this up in 2024? There's an aphorism that the wheels of justice turn slowly but inexorably.

Canada isn't organized the same way as the U.S. Specifically, there is no equivalent of our Supreme Court.

Anyway, a case was brought and heard, by a national level judge who specializes in international terrorism cases, and the ruling came out this week:

At the outset of these proceedings ...I was leaning to the view that the decision ... was reasonable. I considered the events that occurred in Ottawa and other locations in January and February 2022 went beyond legitimate protest and reflected an unacceptable breakdown of public order. I had and continue to have considerable sympathy for those in government who were confronted with this situation. Had I been at their tables at that time, I may have agreed that it was necessary ...

But:

I have concluded that the [policies enacted in 2022 did] ... not bear the hallmarks of reasonableness — justification, transparency and intelligibility — and was not justified in relation to the relevant factual and legal constraints that were required to be taken into consideration.

Wow. 

The ruling runs to about 200 pages of details and boilerplate, but the decision is as short and simple as that last quoted paragraph: the whole of the government response was illegal. 

***

Of course, sometimes it's easier to say you're sorry than to ask permission. But we'd probably like government to not behave this way.

2024 Worry Spot 2: Guyana

In October, Venezuela announced that more than half of Guyana belonged to it, had always belonged to it, and that they intended to take it back.

Dubious claims, to say the least.

But, recently, a lot of oil was discovered in Guyana. Hmmm.

Finding oil, for the last 150 years, has been like having a gold rush in the years before that: all the crazies come out.

Lastly, political maps have meaning. When you live in one country (like, us living in the U.S.) you tend to accept the maps that are published in your country. You may not realize that other countries have their own maps (because you don't see them in sources commonly available in your country). But they can tell you a lot about whether one state regards another country as legitimate, existent, or whole (see Chapter VI Section A in the Handbook if you do not understand the distinction between a state and a country). Venezuela has published new maps that say half of Guyana is theirs. In realpolitik, there's an aphorism: when bad actors say they're going to do bad things, believe them.† ‡

***

Historically, that long coast of South America that faces north-northeast was one of the most inhospitable parts of the continent: poor harbors, lousy soil, jungle, a big nasty plateau region reminiscent of southern Utah (featured in the movie Up), and sometimes even drier desert-y areas.. The Spanish colonists worked their way slowly east from Colombia. The Portuguese worked their way slowly north from Portugal. 

In the end, the Dutch, and French landed in the middle first and set up small outposts (in areas claimed by Spain) that grew into colonies. The British got involved officially because English settlers arrived on their own, and eventually the British peeled off the western part of the Dutch lands to form their own colony. Today, these are Guyana, Suriname, and French Guiana (going east from the border with Venezuela). Guyana and Suriname have been independent for decades.

French Guiana is an interesting digression. It's not considered a colony, but rather it's part of France: more like, say, Hawaii than Puerto Rico for the U.S. I usually have to briefly touch on it later in the semester because it's actually shown as part of France in the colored maps in your Handbook. It also makes the news more than you'd think: the EU's spaceport is there. It was also the location of the infamous French prison for people both convicted and also exiled for their crimes: Devil's Island (there was a big movie in the 70's about this named Papillon).

***

There is a longstanding border dispute in the region. It was first raised by Spain around 1800, and that claim was adopted by Venezuela in the 1820's after its successful fight for independence.

This was regarded as largely settled by diplomatic efforts in 1899. 

No one ever worried much about this much, since the disputed region was largely inhospitable, and mostly inhabited by indigenous peoples (who may not like or care about Venezuela or Guyana), and gold seekers (who are usually unsavory to begin with).

But it may have mattered to the Venezuelan state more than was recognized. They felt bullied by the British Empire, and had some evidence that they were cheated.

Anyway, Guyana gained independence in the 1960s based along the 1899 borders. And leftist governments in the region relaxed their positions: preferring us against the big and rich countries rather than neighbor vs. neighbor. Then oil was discovered. And now that's changed.

***

That's just background: when oil is involved, it's more about macroeconomics than politics.

It's a common macroeconomic myth that natural resources are what makes rich countries what they are. Not so. So this fits right in with the class discussion started by AL on Friday.

Physically larger countries tend to have more natural resources (and they look important when taking a naive look at a political map): think Russia, Canada, China, the U.S., Australia, Brazil, Congo, even Saudi Arabia.

But the world is full of smaller countries that are rich and often don't have much in the way of natural resources: most of Europe, Japan, Israel, Singapore, and so on. 

The numbers for the U.S. surprise most people. You can get value added by industry: 1% for agriculture, forestry, fishing, and hunting combined, 2% for mining, 2% for utilities that burn natural resources, and not much else.

So what gives?

I think there's three reasons: one is personality, a second is about property rights, and the third is about ignorance about how businesses work. Oil triggers all three.

First, maybe I'm cynical, but I think you can go a long way by attributing decisions of government officials (particularly unelected ones) to control issues. Superhero movies often feature villains who say something along the lines of "once I control all of X I will rule the world". I think a lot of government officials think that way about resources, particularly oil, and maybe going forward: lithium.

Second, in the U.S. we're used to having good property rights, but most countries don't. And even if places with good property rights, the ownership of what's under the ground if often with the government (a legal principal called "split estate" that may be familiar to those who know something about water rights in Utah). That ownership only gets asserted when valuable resources are discovered.

Third, the naive view outside of business schools, and functional corporate offices, is that revenue and profit are basically the same thing. But the reality is that about 90% of revenue usually goes to cover costs. And here's the real macroeconomic kicker: those costs usually get paid out to the people nearer to you, and one firm's cost is some household's income. The real macroeconomics beauty of a natural resource is that it helps support a whole bunch of employees, vendors, and so on.

On that third point, I think a lot of leaders around the world thinking that their country will turn into Saudi Arabia if only they discover oil. But the handful of Arab countries that have oil are different: lots of oil and not too many people. The rule tends to be the opposite: not much oil spread over a lot of people. So perhaps a fourth element of magical thinking should also be invoked.

...

So. Venezuela. Thirty years ago this was the richest country in Latin America. Oh ... and there were no Venezuelan restaurants in the U.S. I'd never even met a Venezuelan until I was in my forties: no one was trying to emigrate out of that country.

Oil wealth helped: Venezuela has lots of oil, and a middling population only about that of Texas, so the success recipe worked fairly well for them.

The rest is well-known. Chavez takes over, the economy of Venezuela takes a steep nose dive, his hand-picked successor Maduro takes over, and doubles down on that plan. Oh and there's some kleptocracy and nods towards socialism along the way.

There's been a ton written over the years about bad policies undertaken by Chavez and Maduro, and how their socialist leanings ruined everything. But the business economics explanation satisfies Occam's razor: they wanted more profit from their oil industry, so they cut costs on maintenance, and their revenue went down too, until all three were close to zero.

And now oil has been discovered in a disputed part of Guyana. The old claims are pulled out, because the only way the Chavez/Maduro government has ever generated excess funding for government is by looting an oil industry. It worked once ...

One of the few things that's clear is that Guyana is unlucky to be next to Venezuela at this point in history.

† Another worry spot that I intend to cover is China, Taiwan, and the South China Sea. China has been making good on enforcing its territorial claims to just about the entire South China Sea. These are mostly based on a single map, first published in China, by the government of China at that time (1947). Other interested countries weren't consulted about this.

‡ The pro-Hamas chant that has been in the news the last few months is based on maps produced in the West Bank and Gaza by Fatah and Hamas for the local audience (including schoolchildren). These maps are deemed offensive because show an absence of the country of Israel, make no mention of the nation of Israelis, or the state of Israel.

Same Perspective On the WEF, Opposite Side of the Political Spectrum (cross-posted from ECON 2020)

I guess it's fashionable this year to dis Davos.

Yesterday's post quoted from a fairly conservative source (the opinion page of the Wall Street Journal). But here's another piece entitled "Why the Davos Smart Set Sounds Dumb" on the solidly Democratic site Politico.

It is not that the observations and arguments are notably dumb, though it is rare to hear something arrestingly smart. The signature of most conversations about current events is how emphatically commonplace they are. ... Outsiders, however, should liberate themselves from the illusion that these insiders really know the score.

...

There’s no reason to pick on Davos. It is just an especially concentrated setting ...

...

The youthful tendency is to believe these people have access to hidden pathways of information and world-shaping insight.

...

One can look at the phenomenon ...  from different angles. The first ... many conversations about the news revolve around inherently imponderable subjects ...

...

The second way to think about it is that insights ...  have been radically democratized over recent generations. ... weakened by cable news and demolished by social media.

...

The final point is that even the most highly credentialed people can be vexed by modern life — even in their own areas of expertise.

That may be the real lesson of Davos: Everyone is winging it, experts and schlubs alike, muddling through with at best fragmentary understandings of a fast-moving world and its inscrutable future.

Again, I emphasize that the problem is not that experts don't know what they're doing: the world is a hard place to figure out. 

Rather, it's our belief that they do know what they're doing, and their cheerleading for themselves that encourages our belief.

The message here is that if macroeconomics ends up piquing your interest, read more textbooks, and listen less to people in positions of power (who may have taken less classes on this than you have).

World Economic Forum Meeting This Week

 

The World Economic Forum is in the news this week. They are meeting in a resort town in Switzerland named Davos.

This event gets way more attention in the news than it deserves.

The event attracts leaders of country's governments and their attendants, leaders and attendants of NGO's, and celebrities.†

Perhaps I'm cynical, but I think part of the reason this event gets so much attention in the media is that most journalists are ... brown-nosers, bootlickers, sycophants, flunkies, fawners, or whatever term you like best. Importantly, acting this way definitely helps them get stories, so it's not like it's always a negative personality quirk. 

Anyway, the attendees at the World Economic Forum (which is rarely abbreviated to WEF, go figure) have some power or influence. But collectively, the group itself has nothing except a claim on a high moral position.

Here's the problem: the World Economic Forum is moribund and doesn't know it. For a scathing viewpoint on this, see "The Humiliation of Davos Man" by Walter Russell Mead.

On both the far left and the far right, conspiracy theorists see the WEF and its allies as an all-powerful network successfully imposing a nefarious agenda on the rest of the world. This reading gets Davos exactly wrong.

The real scandal of Davos isn’t that it’s taking over the world. It’s that it’s failing. The Davos agenda—a global security order, an integrated world economy and progress toward objectives including decarbonization, gender equality and the abolition of dire poverty—is controversial in some quarters and on some points but is neither secret nor particularly nefarious. But far from imposing this agenda on a captive world, the Davos elites are wringing their hands as the dream slowly dies.

...

This isn’t, at its core, a crisis of trust. It is a crisis of competence. Why would voters expect an “expert class” that was so wrong for so long ...

“The emperor has no clothes!” is the cry of populists everywhere. To render this message ineffective, Davos Man doesn’t need image consultants and disinformation specialists. He needs to get dressed.

Harsh. True though.

† It's a good time in your college career to learn what an NGO is. It stands for Non Governmental Organization. There are thousands of these. Some examples might be the Red Cross, the United Nations, the International Monetary Fund, the Sierra Club, PETA, and so on.

Other Trade Chokepoints to Mentally File Away

Chokepoints are where all the ships go are on the same route in a narrow region. Here's an infographic and post about chokepoints from Statista:

I like the measurement in terms of percentage of global trade.

The Panama Canal is so low because it's narrow.

Also, it's low because there's a part of U.S. code commonly called "The Jones Act". It may have been good-hearted a century ago, but it's a nuisance now. It makes it illegal for any ship to transport goods from a U.S. port to another U.S. port unless the ship has a U.S. flag and a predominantly American crew. The thing is, there aren't many American ships, we don't build a lot of ships anymore, and being part of the crew of cargo ship is just not something most American high schoolers are interested in as a career. The bottom line is that we send stuff around the country on trains, trucks, and planes that could easily go on ships.

FWIW: the article the infographic references is not from my area, but I found it to pretty accessible reading if this sort of thing interests you. It's also not behind a paywall, which is always cool.

2024 Macroeconomic Worry Spot 1: Bab-el-Mandeb

ECON 3020 is only offered in the Spring. 

Each year, I try to offer some guidance to students on what country/region might be in the news, and how it might affect macroeconomic outcomes.

Betcha' never heard of Bab-el-Mandeb. Perk up: it's been in the news for several weeks, and the story is not getting smaller.

***

Americans are biased in a lot of ways. That's a given.

One of the things we're biased about is the Panama Canal. It's a big deal ... to us ... and pretty much no one else. It's not really big enough any more, its expandability is limited, and it doesn't really link up the important spots believe it or not.

The really big and important canal in the world is the Suez Canal, running through Egypt, to join the Mediterranean Sea to the Red Sea (and then the Indian Ocean and the Pacific Ocean).

Almost three years ago, a cargo ship about twice the length of the Titanic, through a combination of factors that may not have even involved human error, got stuck in the canal.

Most of the world freaked out. 

But not the U.S. (or the Americas more generally) because our ship traffic mostly doesn't go through the Suez. Everyone else's does.

Here's the three posts I did on this incident for the Spring 2021 class.

The estimated cost of the blockage of trade was ... $9,000,000,000 per day (for the whole globe).

So, you see ... macroeconomic consequences.

***

Except Americans did notice this, they just didn't make the association.

If you followed the link in yesterday's post, you could have produced a graph like this one:

Macroeconomists (and a lot of other scientists) think of data that arrives over time in terms of impulses and propagation. Impulses are the causes. Propagation is how they're amplified, stretched, and distorted into what we experience. 

It's hard for people without exposure to this stuff to fathom how what they're experiencing can be connected to events they've forgotten about. But it happens. Especially with global trade, because the time frame is months or years, not days and weeks.

There are two important points to that graph.

• I think it's fair to say that CoVid and the initial lockdowns are probably the biggest impulse in our lifetimes. And while that did get propagated out to about 8 months, global supply chains processed it and got back to normal.
• But there was something bigger that happened from October 2020 to February 2023. I'm sure CoVid was part of that, but I think we can probably agree that its impulse can't have been as big then as it was in March of 2020. And the world is being hit by fresh impulses all the time, so that big hump is a propagation of a bunch of stuff, all overlapping, and jumbled together. But one of those impulses is definitely the blockage of the Suez Canal — about a third of the way into that big hump.
  

Bottom line, if it bugged you that you couldn't find stuff on the shelves two years ago, part of the reason was a ship on a windy day the previous spring. Global supply chain disruptions take a long time to work their way out of the system.

***

So what does this have to do with Bab-el-Mandeb? The Red Sea is long and thin, with a canal at one end, and a strait at the other called Bab-el-Mandeb.

And it's in the news because it's indirectly related to the conflict in Gaza, which in turn is related to Iran having been an international troublemaker for the last 2 generations. Iran supports a whole lot of bad actors in the Middle East, including Hamas in Gaza. And an ethno-religious group in Yemen largely drawn from a tribe called the Houthis. The Houthis hold land that overlooks the Bab-el-Mandeb. And they have missiles and drones. From Iran. And, while they have almost no connection to or affinity with Hamas, for some reason they are itching to join the conflict. Go figure. They're doing this by firing missiles and drones at unarmed cargo ships heading to the Suez Canal.

(None of this is to diminish the political and military problems this presents to the U.S. whose naval ships are now the main target. But this is just a macro class).

What's important for macro is all those ships are now going around Africa, which takes time and costs money, both of which are negative impulses the global economy will feel. 

This fantastic image from Wired shows what ocean-going trade is supposed to look like:

Yellow shows the most important trade routes. And there's pretty much one big yellow one: hooking around most of Europe, through the Suez and Bab-el-Mandeb, straight across the Indian Ocean and then heading to China and Japan.

Also note that the scale is multiplicative: yellow is 5 to 10 times as heavily trafficked as orange, and 25 to 500 times as heavily traveled as red.

Think of it this way: the Houthis are trying to discourage traffic on the world's biggest watery interstate. And ships are already going around Africa:

Maps like this are easy to come by. I got this from marinetraffic.com. You can even watch it live. Green is cargo ships, red are tankers, orange is fishing, dark blue is cruise ships, and so on.

Normally, there's very little traffic going around round the southern tip of Africa, and most of that goes to South America. Not this winter and spring.

***

A lot of students don't like economics and/or finance because they lack certainty about the statements they make. It's one reason some students prefer accounting. Fair enough.

But a big reason that economics and/or finance are like this is that they're forward looking. It's a lot easier to explain what did happen than what will happen, right?

So, file this one away in your brain. I could be wrong, but if several months down the road we start seeing bare shelves, and stock-outs at Amazon, tell your friends you knew this might happen.

Also, it's a campaign year, and Democrats will be pushing the infrastructure legislation they passed a few years ago. Whether or not you were in favor of that, global trade routes are infrastructure too, and needing to protect them was not part of that plan. Perhaps it should have been.

Big Convention

Economists, like other professionals, have a lot of conventions/conferences/meetings.

Some of you might eventually go to one of these.

The big one is the ASSA (Allied Social Science Association) meetings, held during the first week of January. Mostly this is just the AEA (American Economics Association).

This year's meeting was in San Antonio.

At these meetings, people present their new research papers, network, catch up with friends that went in different directions from graduate school ... and a lot of them dine out, play golf, and do touristy stuff. I even got married at one (well, right after a WEAI conference ended)! Until a few years ago, almost all first interviews for new professors (who start work in August) were done at these meetings too: all the hiring schools, and all the applicants, were in one place for a few days. For example: I was the SUU person who first interviewed Dave Berri, around a table in a hotel ballroom in New Orleans.

***

Every year the Wall Street Journal sends a reporter to the meetings, who files a story about some zeitgeist they absorbed there. This year's article is entitled "Nation’s Top Economists Are Short-Term Happy, Long-Term Glum".

It's not too big on deep economic content, just a few quotes from a few big names.

One thing macroeconomists are perplexed about is where'd all the inflation go? This was a huge deal 2 years ago, a fading crisis a year ago, and now just a quaint worry for some. The truth is, macroeconomists really don't know. 

What our models tell us is that bringing down inflation is hard. Mostly this is because it's self-perpetuating: if you expect prices to go up, you're more inclined to buy now, which pushes up prices, confirming your expectations. 

What our practical experience tells us is that policymakers aren't very good at pulling that off. A lot of inflation ends up being persistent for many years, even decades. While in other cases, inflation is brought down by a recession — unintentionally created by policymakers "hitting the brakes too hard" — a so called hard landing.

Even worse, no one had great confidence in the policymakers this time around: monetary policy is increasingly run by amateurs and political hacks, while with fiscal policy, both Democrats and Republicans have been making choices to push up inflation for several years now.

I'm as guilty of this as anyone: my prediction was inflation for 15-20 years, punctuated by not-quite-hard-enough-landings.

***

The article also touches on inflation maybe heating up again. That's essentially my point from the previous paragraph.

***

The article also offers a nugget that you should take to heart: for all our complaints about the post-CoVid recovery in the U.S., we're doing better than most other developed countries. I find the explanation offered very plausible ... although you may not have heard it in our heated political environment. Truth be told, we actually do a lot less to help out firms in the U.S. than most other developed countries do, and a lot more to help individuals and families especially that other countries don't do.

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The article also touches on the importance of productivity growth. We'll be talking a lot about that in class this semester. Unfortunately, we know a lot more about how to measure it, and how important it is, than how to make it happen.

***

Lastly, there's a chart of a cool new data index (keep the word index in mind, because we'll spend some time in about a month thinking about how to put those together).

We know there were problems with supply chains over the last few years: first with the initial wave of CoVid and the lockdowns, but then again almost 2 years months after that. The thing is, no one ever measured it because it wasn't a problem before.

So some economists from the Federal Reserve Bank of New York constructed a measurement by weighting existing data series. The result, GSCPI (Global Supply Chain Pressure Index), shows that we're in a good place now, that there were 2 distinct bad patches over the last 4 years, and that they were a lot worse than what we'd experienced before that.

(Not Required) Antitrust Regulation, Monopoly, and the Four Big U.S. Professional Sports Leagues

Not required for ECON 3020: only posted here for the curious.

Towards the end of 2010 in the Fall, 2 students started a discussion about antitrust regulation and sports. I told them to hold on, and I'd write them something longer over break. I pasted that below.

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First off, departments tend to specialize in one sort of research or another. One person hires someone they know who does something similar, and so on, until you have a critical mass of people.

At SUU, we have a group that does sports economics. So we have a class, a textbook, and then classes where sports data are used a lot. So if you're interested ... you might have just found your major.

Dave Berri is the big name guy in this group. He recommended that if you want more information, take his class or buy his book. Josh Price does some upper level data classes where he encourages students to use sports data to learn new techniques. One of our newer guys Roderick He is interested in sports economics, but I'm not sure exactly what he likes to do. Our late chair, Kim Craft, came from a horse breeding family, and was interested in horse racing economics. Mark Evers, whose only here for one more semester, is interested in baseball (although I don't know if he's done any research, or just reads up on it). And (I'm the oldest now and) I kinda' started it all because I did some football and baseball stuff in the 80s, 90s, and 00s ... and was in charge of the hiring committee and saw Dave Berri's name in the stack and thought "we gotta' get this guy" and we did.

***

Also keep in mind that I'm biased: being from Buffalo, I know a lot of Buffalo sports history. And that's tied up with antitrust in MLB (in two ways), and the NFL (in two ways). I also lived in New Orleans for most of the 90s, so I know that history pretty well too.

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So, organized league baseball goes back to Reconstruction.  And there were other major leagues. One, the AL, was a successful upstart. Another, the Federal League, failed. For a century there have been relatively fixed major and minor leagues (MLB is the abbreviation for Major League Baseball, composed of two leagues). If you've ever wondered why there are some smaller northeastern cities that have MLB teams but can't sustain teams in all the other sports (Cincinnati, Pittsburgh), and why other cities that can sustain teams in other sports but don't have an MLB team (Buffalo, Columbus, Indianapolis), this is part of the reason - they were in leagues that failed. Another little known reason for the cities that had clubs back then was their locations along the two big passenger railroads: the Pennsylvania and New York Central ... which both ran as far as Chicago and St. Louis. And the cities at the ends of the line usually had more than one team to make the road trips worthwhile.

Anyway, the Federal League sued the NL citing abuse of monopoly power under the Sherman Antitrust Act. The Supreme Court ruled against them. They argued that baseball was not subject to a federal/national law because the travel across state lines was incidental to the game (a not-so-good minor team could play all its games in its state, and be subject only to state laws, but then a team that was better/major to play out of its state shouldn't be judged differently). Also, back then, the 10th amendment was taken more seriously; basically it wasn't viewed as the federal government's business. That was in 1922. In the 1950's, the courts refused to undo this ruling, noting that it's a legislative job to do that, and no one had done anything, so it must still be fine. In the 1970s, the 1922 decision was partially reversed, giving rise to the free agent market we still have. Although, the basic position that MLB is a monopoly, and has legal protection to keep its monopoly, until Congress legislates otherwise, still holds. 

One implication of all this is that since MLB is a monopoly, and the clubs are just "components", they can decide amongst themselves how to operate. A lot of the big-market/small- market issues in contemporary MLB comes from the sale of  television rights to home games, which are worth more in a bigger market. It's also why there's been much less movement of successful franchises, because the league/owners can block them. It's also why some awfully good bids for expansion cities have been blocked (e.g., Buffalo), since MLB gives existing owners a veto of cities that might compete for fans. The existing owners also love that the monopoly status means they can get top dollar for expansion slots from prospective owners (e.g., Miami). And, many would argue that it's led to a decline in the product as MLB has become more owner-run than commissioner-run over the last 30 years.

The NFL has not been so lucky. Keep in mind that the NFL was not a popular league before the 1958 title game, which was broadcast on TV nationwide (videotape didn't exist then, so only bits and pieces of that can be found on YouTube). College football was a much bigger operation back then. And even Canadian football, which was the first to be broadcast widely on TV, was a serious competitor. 

Here the upstart league was the AAFC in the late 1940s. They had richer owners, and were using all the pilots and planes from World War II to have a league that involved more of the country. The NFL's approach was to blacklist everyone involved, and then they cut sweetheart deals with just the owners. The 49ers, and what are now the Ravens got into the league that way.

Out of that came Radovich's suit, brought under the Clayton Act. Radovich had been blacklisted. He won the suit, and a between-the-lines reading of the Supreme Court decision is that baseball's monopoly exemption was kinda' dumb and they shouldn't do it for another league.

But that opened the doors to a competing league, the AFL, which from day one was a pretty serious organization with a lot of deep-pocketed and patient owners. 

The new NFL commissioner, Pete Rozelle, did something amazing though. Lower courts, following the Radovitch precedent, had ruled that the NFL could not negotiate a joint TV contract. Rather than appealing to higher courts, Rozelle got the owners to agree, and then pushed through Congress the Sports Broadcasting Act of 1961 which said a league did have a limited monopoly right to bargain as a group for a group TV contract (in the same way that workers can form a union to collectively bargain without being considered in violation of the Sherman or Clayton acts). And they got one in 1961 and ever since the NFL has had games on national TV on Sunday. It's also the reason that NFL and college games aren't generally shown at the same time.

Part of the problem with the AAFC had been the ridiculous domination by the Cleveland Browns (now the Ravens). The AFL was lucky to avoid that, with mini-dynasties in Houston, then San Diego, then Buffalo, then a Chiefs/Raiders/Jets era. Part of the reason they created the Super Bowl was the sense amongst sportswriters that the 1964-65 Bills might have been able to beat the NFL champions during those years. The Bills faded a bit and lost the next championship at home to the Chiefs, who went to the first Super Bowl and got clobbered (the entirety of that game was reconstructed from various sources a few years ago, and the Chiefs hung pretty well with the Packers until the 3rd quarter). But, of course, the AFL won 2 of the first 4 Super Bowls and then dominated the 70s, proving they'd developed a competitive product. So, another win for the upstarts' owners.

Legally though, what brought the AFL and NFL together was another lawsuit. Dallas was not that big a city then (Boston and Buffalo were the bigger, new football markets, the new league brought). Lamar Hunt, the key founder of the league, put his team in Dallas. The NFL responded by awarding an expansion franchise to the Cowboys. Hunt saw the proverbial writing on the wall and moved the team to Kansas City. And sued. Instead of going to court, the leagues quietly negotiated a merger. 

The other thing with the AFL was that the owners were rich enough to stick it out, and there were no shenanigans with teams going bankrupt, or players not getting paid.

In other sports, the NBA and NHL never have had any antitrust exemptions. So alternative leagues were a real problem for them. From the mid 1960s the ABA competed fairly successfully against the NBA, mostly based on a more interesting game (the Will Ferrell movie is mostly fictional). And, at least initially, the WHL in the 1970's competed successfully against the NHL, but rising energy costs created big problems for the business of indoor ice rinks (lots of smaller Canadian markets didn't help). Without the antitrust exemption, decent organizations from both leagues were folded into the older leagues, so those were wins for the business model of starting a new league and lasting long enough to be brought in. And lots of players from both leagues became stars, and even Hall-of-Famers in the NBA and NHL (e.g. Dr J. and Wayne Grtezky).

In the 1970s another upstart football league formed, the WFL. It signed some players from NFL teams, but kind of jumped the gun a bit financially. It had no national TV coverage. The people behind it were involved in the ABA and the WHL and the formula just didn't work this time (it's tougher in football because there's a lot fewer games to sell tickets to, so TV ad revenue is a bigger deal). In retrospect, the owners in the league were suspect. And there was a lot of lying about paid attendance. The league collapsed on its own. No lawsuits or antitrust issues needed. The two most solvent franchises, Memphis and Birmingham, wanted to be bought into the NFL, but it wasn't really in the works. Although the Memphis team did sue the NFL and lost ... a lot of its people ended up with the Giants. I was little when this all took place, but I do remember that the WFL was rarely on TV. The quality of the product was not great either: very few decent players (e.g., Danny White who quarterbacked the Cowboys, and Alfred Jenkins who was a starting wide receiver for some pretty good Falcons teams), and no hall-of-famers transitioned from the WFL to the NFL. Quite a few coaches got a leg up from the WFL (e.g., Jack Pardee, Lindy Infante, Marty Schottenheimer, Jim Fassel).

The USFL of the 1980s was a different story (do not mistake it with the current version, which paid for the rights to names and uniforms). The idea for it had been percolating for almost 20 years. The guy who dreamed it up, David Dixon, was a longtime respected pro sports entrepreneur: he was early in the AFL, instrumental in getting the Saints as an expansion team, dreamed up the Superdome (which is still a first rate venue that's busy year round), helped professionalize tennis, and developed the idea of the USFL. Initially, they were very different. Deep pocketed owners, willing to take it slow ... following the AFL story. National TV contract from day one. Teams had regional rights to players to prevent bidding wars. Signed lots of good players, and not just at ball-handling positions. Played in the spring so they could get a dedicated fan base. Located in some solid, smaller, markets: Memphis, Birmingham, Tampa (the Buccaneers were still pretty much a horrible expansion team at that point, and the ownership group had been involved with Memphis in the WFL), Oakland (which had lost the Raiders), Phoenix (which didn't have the Cardinals yet).

I may be a little biased. I was a football fanatic back then, and had some personal reasons to watch the USFL. So I pretty much watched every game that was broadcast. They get a bad rap these days: a lot of those teams were playing solid football from day one, and there were some that made some innovations that the NFL was unwilling to make (like only the QB in the backfield, and smaller receivers). And people have forgotten how many people came over to the NFL after the USFL collapsed, and were successful: Hall-of-Famers like Reggie White, Steve Young, Jim Kelly, Sam Mills, Gary Zimmerman, Marv Levy (a coach), and Bill Polian (a GM).

But, the owners were arguably too free spending. Without an antitrust exemption, a league is more like a cartel than a monopoly. And cartels break down because the owners make decisions that drive their operations towards zero profits (e.g., the USFL champions the first year were also the biggest money loser because they overspent on players). So the character of the league started to change, and so did its decision-making. Extra expansion slots were offered to raise cash. New owners fibbed about their net worth. Teams couldn't get decent stadiums, often because baseball teams didn't want to share space in the spring.

Then, bizarrely, they voted to switch to an autumn schedule for the 4th season. The motivation for this was an argument that a merger could never take place if the leagues played at different times of the year. And they sued the NFL. A bunch of teams folded right away, because they didn't feel they could compete with NFL teams already in their markets (like Denver, and Chicago - the Bears were the most popular team nationwide at that time). Also, without a spring season in 1986, the players had 14-15 months off to think about it, and about 2/3 of those that ultimately made the NFL bailed before the case went to court (including immediate starters around the league like Bobby Hebert, Craig James, Kevin Mack, and Anthony Carter)

The thing is, the NFL mostly let the USFL do its thing. They pursued a much more hands-off strategy this time around. 

By then it was clear that the strategy of the group of dominant USFL owners, led by ... wait for it ... Donald  Trump (one of the overspenders) was to win punitive damages in court, or settle for a merger to solidify the value of their team. 

The case went to court, and the jury decided that 1) yeah, the NFL was a monopoly that had tried to harm the USFL, but 2) they hadn't really done much damage (the USFL had been offered 2 network contracts for spring of 1986 and declined them both), and the prime culprit was poor decision-making by the dominant owners group (who didn't have a TV contract for fall 1986). They awarded the USFL owners damages of $3. Yes, you read that correctly. The league folded a few days later. 

This was during NFL training camps for the 1986 season, and the NFL teams snapped up the best remaining USFL players right away. The Redskins took the most, and then won 2 Super Bowls in the next 5 years. The Bills got a bunch too, and of course made it to 4 straight Super Bowls with a couple of starters from the USFL. The Cowboys got Hershel Walker, who put in a few good/great seasons, and then got traded for a bunch of draft picks that formed the core of the team that won 3 Super Bowls in 4 years (Emmett Smith and 4 defensive starters).

A check for $3.76 (including interest) was eventually sent to the former USFL owners in 1990.

Since then, there have been zero leagues that have tried to compete directly with any of the 4 big sports leagues. The reason appears to be that the formula used by the NFL against the USFL worked, and that juries could see through the bad decisions that oligopolists often make. 

So, probably more than you expected to get. Feel free to reply back with any questions.