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Luke Froeb



Articles by Luke Froeb

Do criminals respond to incentives?

4 days ago

At least in Minneapolis they do.I am old enough to remember the debate (late 1980’s at the Sentencing Commission) about whether punishment deters crime.  Some criminologists mocked the economic model of crime which assumes that criminals respond optimally, rationally and self-interestedly to the incentives created by expected punishment (the probability of being caught and convicted times the punishment if convicted).  The policy implication was clear:  increase the expected penalty to reduce crime, called "deterrence."It looks as if Minneapolis has run an experiment to test the deterrence hypothesis (defund the police==>lower probability of being caught==>lower expected penality==>more crime).  The experiment took less than a year to complete, and they seem to have learned something from

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A Simple App to Teach Regression

5 days ago

A Simple App to Teach RegressionVanderbilt Owen Graduate School of Management Research Paper15 Pages Posted: 10 Jan 2020 Last revised: 8 May 2021Luke M. FroebVanderbilt University – Owen Graduate School of ManagementDate Written: December 30, 2020AbstractThis paper introduces a simple, free web app for teaching regression that “inverts” the usual pedagogy. Rather than asking students to run regressions on data, it asks them to “create” data to achieve a given outcome, like a statistically significant line. By clicking on an (x, y) graph, students watch the regression line update with each mouse click, along with its confidence intervals and test statistics. The exercises presented in this paper are designed to give students an intuitive feel for the relationship between data and

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Removing intellectual property protections: what could possibly go wrong?

10 days ago

Marginal Revolution has a devastating critique of the Biden Administration support for “the waiver of IP protections on COVID-19 vaccines to help end the pandemic.”  First, IP protections are not a bottleneck, production is:  All of the vaccine manufacturers are trying to increase supply as quickly as possible. Billions of doses are being produced–more than ever before in the history of the world. Licenses are widely available.It follows that the waiver of IP protections will do little (nothing?) to help.  Second, Moderna has already said that they won’t enforce their patents during the pandemic, but no one has stepped up to produce because because producing RNA vaccines is really hard.  Third, there are tried and true ways of encouraging vaccine production, like Operation Warp Speed.

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Costs of lockdowns are more than 3 times higher than the benefits

24 days ago

Essay from a Canadian economist concludes"…the cost/benefit ratio of lockdowns in Canada, in terms of life-years
saved, is between 3.6–282. That is, it is possible that lockdown will go down as
one of the greatest peacetime policy failures in Canada’s history.1.  The benefits of lockdowns are small because:Even without lockdowns, vulnerable people take care of themselves by isolating, so the effects of lockdowns are small.Covid deaths are concentrated among the elderly, with fewer years ahead of them.  The following table shows the value of a statistical life ranges from $14 million for toddlers down to $2 million for an 85 year old.  2.  The costs of lockdowns on an economy are much larger than the fall in GDP (Canada’s Gross Domestic Product graphed below):The hidden costs of

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Revealed preference: people are leaving California in droves

April 16, 2021

I grew up in San Diego and, despite the great weather and surf (swells three to four feet at ten-second intervals), I left the state for a better job.  Now, the National Review reports on the current exodus (links below are to past posts on the website about the Not-So-Golden State).

…what caused and continues to cause the exodus out of California is not tax burden, or regulation, or cost of living, or housing prices. Rather, it is the burden, and regulation, and cost of living, and housing prices, and more.Taxes:  One making $58,000 a year in California is in a marginal tax bracket (9.3 percent) nearly double that of someone in Arizona making over $500,000 a year (4.5 percent)The top 5% of filers make 67% of tax payments, and they are starting to leave)Regulation:Why are Cows leaving

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Does venture capital still contribute to growth?

April 10, 2021

The New Yorker has a harsh critique of some Venture Capital firms, like the ones that funded WeWork:  A widely read summary by a Harvard Business School professor, Nori Gerardo Lietz … exposed WeWork’s “byzantine corporate structure, the continuing projected losses, the plethora of conflicts, the complete absence of any substantive corporate governance, and the uncommon ‘New Age’ parlance.” At the same time, she wrote, the S-1 (Disclosures to the regulators about the company’s financial health ) failed to provide many conventional financial details. …S-1 laid bare a basic truth: WeWork’s dominant position in the co-working industry wasn’t a result of operational prowess or a superior product. Instead, WeWork had beaten its rivals because it had access to a near-limitless supply of

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President Joe Biden vs. Joe Biden

April 8, 2021

NY Times has a good article on the Biden administration’s contempt for economics.  

“The next generation of the economics profession is rebelling against its predecessors by being all about inequality in the same way that my generation rebelled against its predecessors by being all about incentives, and this is a good thing,” said Larry Summers, who served as Treasury secretary under Bill Clinton and N.E.C. director under Barack Obama. 
Biden has less trust in economists, and so does everyone else. Obama’s constant frustration was that politicians didn’t understand economics. Biden’s constant frustration is that economists don’t understand politics….  The backdrop for this administration is the failures of the past generation of economic advice. Fifteen years of financial crises,

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Restrictive zoning causes segregatation in Connecticut

April 5, 2021

Restrictive zoning–90% of Conneticut allows only (expensive) single-family homes–limits supply, especially of lower priced housing like apartments, and drives up the price.  From Vox:According to one measure by researchers at the University of Pennsylvania’s Wharton School, Connecticut has the 15th-most regulated residential building environment. In doing so, it has confined poorer people to small parts of the state and likely discouraged countless more from ever moving to the state.The results are pernicious:By artificially restricting the supply of housing through onerous regulations, Connecticut has in effect driven up the cost of living for everyone and priced out lower- and middle-income Americans from living in most of its towns and cities. Simply put: fewer homes and growing

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Is the recent 10% house price increase going to stick?

March 16, 2021

Last year, house prices in my zip code increased by about 10%; and they are forecast to increase another 10% this year.  This "tightness" or "seller’s market" is indicated by the small available supply relative to demand, as indicated by the 2.1 months of inventory.  [NOTE:  months of inventory=(# houses for sale)/(selling rate per month)].  In the scatter plot below, we see that an inventory of 2.1 months (vertical axis) is normally associated with about a 1.5% monthly price increase (horizontal axis).  The increase in housing demand caused by the lockdowns, as working from home increases demand for bigger living spaces, or for owning a bigger home instead of renting a smaller apartment, is probably behind the price appreciation.  And if you can explain a price change with demand and

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Which cities have the cheapest house prices?

March 16, 2021

From chapter 9, we know that in the long run a mobile asset has to be indifferent to where it is used, otherwise it will move.  This long-run indifference principle means that in the long run, you should be indifferent about where to live and whether to own or rent.  In particular, the price-to-rent ratios should reflect this "indifference," and be  similar across cities.  However, this is is certainly not the case.  Here are the most expensive cities:CityPrice-to-RentRatioHome Price(for a $1,000 Rental)San Francisco, California50.11$601,362Oakland, California41.05$492,611Honolulu, Hawaii39.50$474,014Los Angeles, California38.59$463,135New York, New York36.83$441,987Long Beach, California36.37$436,385Seattle, Washington36.07$432,862San Jose, California33.77$405,263Washington,

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Housing Bubble-ology: is this time different?

March 16, 2021

The WSJ is apparently reading our blog: (earlier blog post)The Pandemic Ignited a Housing Boom—but It’s Different From the Last OneResidential home sales are hitting peaks last seen in 2006, just before the bubble burst, but this time mortgages are stricter, down payments are higher, and a tight supply is supporting prices

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South Lake Tahoe: when housing inventory is low, price increases

March 16, 2021

More evidence of adjustment in the housing market to changes in demand and supply.  The Pandemic has increased demand for housing, taking the available supply of houses to buy (blue line) to historic lows.  Price increases (red line) generally follow.  The seasonal spikes are due to increases in seasonal demand for vacation houses (higher in summer).  South Lake Tahoe has a large percentage of second (vacation) homes. CalculatedRisk is a good blog to follow if you are interested in real estate.

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Mask moral hazard?

March 14, 2021

According to an AP article, "Virus Tolls [are] Similar Despite Governors’ Contrasting Actions." The article suggests moral hazard is the cause:

Some people voluntarily were “being more vigilant in states where the guidelines are more relaxed,” said Thomas Tsai, an assistant professor at the Harvard T.H. Chan School of Public Health.In other words, in states where it is safer, people take more risks.

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Housing Bubble-ology: is this time different?

March 10, 2021

Famed Bubble-ologist Robert Shiller called "bubble" on the housing market in 2006 based, in part, on graphs like the one above, showing the relative prices of owning relative to renting.  We know from Chapter 9 that, in long-run equilibrium, a mobile asset has to be indifferent as to where it is used, otherwise it will move.  Here, think of the mobile asset as either people, who can rent or own, or houses and apartments that can be rented or sold.  In the graph above, the current housing price of owning is 25% higher than the equivalent price of renting, the highest it has been since 2006.  However, what is different this time is that supply is really limited.  Due to the increase in demand for housing driven by the pandemic (people spending more time at home want bigger, nicer homes),

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Why are there no public toilets in the US?

March 8, 2021

John Cochrane has another clever metaphor of what is wrong with America.

Activists decide free toilets are a human right, and successfully campaign to ban pay toilets. For a while, existing toilets are free. Within months, upkeep is ignored, attendants disappear, and the toilets become disgusting, dysfunctional and dangerous. Within a few years there are no toilets at all. Fast forward, and we have a resurgence of medieval diseases that come from people relieving themselves al fresco.

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Which governments can get out of the way of growth?

March 7, 2021

John Cochrane reminds us to keep our eyes on the prize:

In the long run, nothing else matters. GDP buys you health, advancement of the disadvantaged, social programs, international security, and climate if you are so inclined. Without GDP, you get less of all.  Economic policy should have one central goal — get productivity growing again, or (in my view) get out of the way of its growth. This is the one little hope that has not been let out of the policy Pandora’s box, focused on everything else right now.Macroeconomists classify two basic types of growth:  More inputs (labor, capital) lead to more output (GDP)Technological progress (Total Factor Productivity) increases output for the same level of input.Here is a graph of the Total Factor Productivity in the USAnd here is the change

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Is South Africa incorrigible?

February 19, 2021

incorrigibleThe ‘nice’ word for someone (or government) that never learns from their mistakes is “incorrigible” which is defined as a person (or government) that is not able to be corrected, improved or reformed.South Africa banned cigarettes and alcohol during the pandemic.  Predictably, The sales bans may also have had a more limited effect on consumption than was expected. Though the sale of legal, tax-paid tobacco came to a halt, there is evidence that many smokers purchased illicit, tax-evading alternatives on a large scale. A recent study by the University of Cape Town found that more than nine out of 10 smokers continued to purchase cigarettes despite the sales ban.The tobacco ban appears to have strengthened the illicit trade in cigarettes, possibly permanently. With no tobacco

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Pandemic increased inequality

February 16, 2021

What happened: The winter surge of COVID-19 stopped and then reversed the progress in returning to work that had been made by the lowest-income workers, the New York Fed points out in a research paper released Tuesday. (cite)

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Consequentialist critique of California Housing Policy

February 15, 2021

in the NY TimesThis is a crisis that reveals California’s conservatism — not the political conservatism that privatizes Medicare, but the temperamental conservatism that stands athwart change and yells “Stop!” In much of San Francisco, you can’t walk 20 feet without seeing a multicolored sign declaring that Black lives matter, kindness is everything and no human being is illegal. Those signs sit in yards zoned for single families, in communities that organize against efforts to add the new homes that would bring those values closer to reality. Poorer families — disproportionately nonwhite and immigrant — are pushed into long commutes, overcrowded housing and homelessness. Those inequalities have turned deadly during the pandemic.“If you’re living eight or 10 people to a home, it’s hard

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Ironically, advances in AI increase the value of human judgement

February 4, 2021

Written by three economists, Prediction Machines analyzes the potential of AI and as a fall in the cost of prediction.  The top review on Amazon reduced the book to three propositions:AI is mostly about predictionThe cost and price of prediction is falling,This will increase demand for complementary skills, like judgement and decision making.While accurate, the review does not do the book justice.  Most interesting is the taxonomy of the different kinds of uncertainty:  (known, knowns), (unknown, knowns), (known, unknowns),( unknown, unknowns).  From a review:Building on Donald Rumsfeld’s oft-repeated taxonomy of known knowns, known unknowns, and unknown unknowns, the trio of economists add another category: unknown knowns.[7] For Agrawal, Gans, and Goldfarb, known knowns represent a

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Are Stocks over-valued?

January 24, 2021

Earlier we noted that Shiller’s CAPE (cyclically adjusted P/E ratio) is the second-highest its ever been  behind only the tech bubble of 1999.  And now Goldman is telling its clients that there are other signals that the market may be over-valued, e.g., the growth of SPAC’s, and the big increase in prices of stocks with negative earnings, indicating an expectation of future growth.  Nevertheless, Goldman seems to think those expectations are right:"we expect modestly higher rates will be offset by a declining equity risk premium, leaving the S&P 500 P/E effectively unchanged and allowing strong EPS growth to drive the market towards our year-end target of 4300."CAVEAT:  If I really knew, I wouldn’t be teaching school.

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Can money buy happiness?

January 20, 2021

Contrary to what I was taught in Sunday School, self-reported happiness rises with income, but at a declining rate:each dollar (of income )starts to matter less the more a person earns. "We would expect two people earning $25,000 and $50,000, respectively, to have the same difference in well-being as two people earning $100,000 and $200,000, respectively. In other words, proportional differences in income matter the same to everyone."

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Bargaining with Macaques: the alternatives to agreement determine the terms of agreement

January 15, 2021

At the Uluwatu temple in Bali, monkeys steal high value items from tourists, and then ransom the items back for food.  Higher valued items are returned only after higher payouts.  From MarginalRevolution.com:After spending more than 273 days filming interactions between the animals and temple visitors, researchers found that the macaques would demand better rewards – such as more food – for higher-valued items [like mobile phones, wallets and prescription glasses].Bargaining between a monkey robber, tourist and a temple staff member quite often lasted several minutes. The longest wait before an item was returned was 25 minutes, including 17 minutes of negotiation. For lower-valued items, the monkeys were more likely to conclude successful bartering sessions by accepting a lesser

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Good early signal from the Biden administration: First doses first!

January 9, 2021

MarginalRevolution reports that the Biden administration will release all the available doses of COVID vaccine, essentially over ruling the bureaucrats at the FDA, to vaccinate twice as many people with a half dose!The expected benefit of a one-dose regime is millions of lives!This is a good harbinger of decision-making under the new administration,

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