Smorgasbord

The Federal Reserve has published a "Review of the Federal Reserve's Supervision and Regulation of Silicon Valley Bank" (April 2023, https://www.federalreserve.gov/publications/review-of-the-federal-reserves-supervision-and-regulation-of-silicon-valley-bank.htm), focused on events leading up to the closure of the Silicon Valley Bank Financial Group on March 9, 2023.

"Uninsured depositors interpreted SVBFG's announcements on March 8 as a signal that [the firm] was in financial distress and began withdrawing deposits on March 9, when SVB experienced a total deposit outflow of over $40 billion. This run on deposits at SVB appears to have been fueled by social media and SVB's concentrated network of venture capital investors and technology firms that withdrew their deposits in a coordinated manner with unprecedented speed. On the evening of March 9 and into the morning of March 10, SVB communicated to supervisors that the firm expected an additional over $100 billion in outflows during the day on March 10. SVB did not have enough cash or collateral to meet the extraordinary and rapid outflows. . . . This deposit outflow was remarkable in terms of scale and scope and represented roughly 85 percent of the bank's deposit base. By comparison, estimates suggest that the failure of Wachovia in 2008 included about $10 billion in outflows over 8 days, while the failure of Washington Mutual in 2008 included $19 billion over 16 days. . . . The full board of directors did not receive adequate information from management about risks at Silicon Valley Bank and did not hold management accountable for effectively managing the firm's risks. The bank failed its own internal liquidity stress tests and did not have workable plans to access liquidity in times of stress. Silicon Valley Bank managed interest rate risks with a focus on short-run profits and protection from potential rate decreases, and removed interest rate hedges, rather than managing long-run risks and the risk of rising rates."

Stephen J. Ceci, Shulamit Kahn, and Wendy M. Williams have written "Exploring Gender Bias in Six Key Domains of Academic Science: An Adversarial Collaboration" (Psychological Science in the Public Interest, online April 26, 2023, https://journals.sagepub.com/doi/full/10.1177/15291006231163179).

"This article represents more than 4.5 years of effort by its three authors. By the time readers finish it, some may assume that the authors were in agreement about the nature and prevalence of gender bias from the start. However, this is definitely not the case. Rather, we are collegial adversaries who, during the 4.5 years that we worked on this article, continually challenged each other, modified or deleted text that we disagreed with, and often pushed the article in different directions. Although the three of us have exchanged hundreds of emails and participated in many Zoom sessions, Kahn has never met Ceci and Williams in person. . . . We synthesized the vast, contradictory scholarly literature on gender bias in academic science from 2000 to 2020. . . . We evaluated the empirical evidence for gender bias in six key contexts in the tenure-track academy: (a) tenure-track hiring, (b) grant funding, (c) teaching ratings, (d) journal acceptances, (e) salaries, and (f) recommendation letters. We also explored the gender gap in a seventh area, journal productivity, because it can moderate bias in other contexts. We focused on these specific domains, in which sexism has most often been alleged to be pervasive, because they represent important types of evaluation, and the extensive research corpus within these domains provides sufficient quantitative data for comprehensive analysis. Contrary to the omnipresent claims of sexism in these domains appearing in top journals and the media, our findings show that tenure-track women are at parity with tenure-track men in three domains (grant funding, journal acceptances, and recommendation letters) and are advantaged over men in a fourth domain (hiring). For teaching ratings and salaries, we found evidence of bias against women; although gender gaps in salary were much smaller than often claimed, they were nevertheless concerning."

Shahid Yusuf describes Korea's development experience in "Could Innovation and Productivity Drive Growth in African Countries? Lessons from Korea" (Center for Global Development, Working Paper 635, March 2023, https://www.cgdev.org/publication/could-innovation-and-productivity-drive-growth-african-countries-lessons-korea).

"Korea's swift ascent up the income ladder has at least three (overlapping) explanations. The unwavering commitment of the political leadership and the business elite, starting with President Park Chung Hee in the mid 1960s and sustained by his successors, to a relatively inclusive, export-led industrial strategy entailing systematic diversification into more complex manufactures, is arguably the most frequently retailed. The strategy itself was choreographed and implemented by Korea's economic bureaucracy headed by the Economic Planning Board (EPB) in consultation with the leading business groups. . . . The more 'neoclassical' explanation for why Korea pulled ahead of comparators in Asia and Africa sidesteps industrial policy and instead emphasizes the crafting of an enabling environment incentivizing and steering private investment into promising industries. This was complemented by public investment in energy and transport infrastructure and measures that deepened the skills of the workforce. This line of reasoning privileges market forces with the state playing an important supporting role, gives due attention to the initiative of private business conglomerates (chaebol) that spared no effort in penetrating foreign markets, and to (East Asian) neighborhood effects that conferred reputational advantages and attracted the attention of foreign buyers and investors. However, neither industrial policy nor market forces would have delivered the results Korea did achieve absent the great strides Korea made in absorbing and mastering technology from abroad and mustering home grown ST&I [science, technology, and innovation] capabilities. This third explanation intersects with and underpins the other reasons put forward. Unlike many other developing nations, Korea perceived and grasped technological opportunities and put them to good use. The state took the lead in creating the foundations of what was to become Korea's innovation system."

Steven A. Altman and Caroline R. Bastian have produced the DHL Global Connectedness Index 2022, subtitled "An in-depth report on globalization" (https://www.dhl.com/global-en/delivered/globalization/global-connectedness-index.html). Here are some of the key takeaways:

"International flows have proven remarkably resilient through recent crises, strongly rebutting the notion that globalization has gone into reverse. . . . There is evidence of decoupling between the United States and China across most types of international flows. This decoupling has not—or at least not yet—led to a broader fragmentation of international activity between rival blocs. . . . Trade flows stretched out over longer distances during the ­Covid-19 pandemic . . . Roughly half of all international flows already happen inside major world regions, and it is still an open question whether regionalization will increase significantly in the coming years. . . . The volume of world trade in goods reached 10% above its pre-pandemic level in mid-2022, and trade in services also surpassed pre-pandemic levels last year. . . . Foreign direct investment flows, which reflect companies buying, building, or reinvesting in international operations, rebounded to above pre-pandemic levels in 2021, before starting to weaken in the second quarter of 2022. . . . The number of people traveling to foreign countries roughly doubled in 2022, but was still down 37% from 2019."

Fabian Villalobos, Jonathan L. Brosmer, Richard Silberglitt, Justin M. Lee, and Aimee E. Curtright make their case in "Time for Resilient Critical Material Supply Chain Policies" (Rand Corporation 2022, https://www.rand.org/pubs/research_reports/RRA2102-1.html).

"China is the largest producer and processor of rare earth oxides (REOs) worldwide and a key producer of lithium-ion battery (LIB) materials and components. China's market share of REO extraction has decreased, but it still has large influence over the downstream supply chain–processing and magnet manufacturing. Chinese market share of the LIB supply chain mirrors REO supply bottlenecks. If it desired, China could effectively cut off 40 to 50 percent of global REO supply, affecting US manufacturers and suppliers of DoD [Department of Defense] systems and platforms. Although a deliberate disruption is unlikely, resilience against supply disruption and building domestic competitiveness are important."

Antitrust

Timothy J. Muris, who was head of the Federal Trade Commission from ­2001 to 2004, discusses "Neo-Brandeisian Antitrust: Repeating History’s Mistakes" (AEI Economics Working Paper 2023-02, January 2023, https://www.aei.org/research-products/working-paper/neo-brandeisian-antitrust-repeating-historys-mistakes/).

"In July 2021, with his top White House competition adviser and the new chair of the Federal Trade Commission (FTC) at his side as he introduced a competition executive order, President Joe Biden decried the 'experiment failed' in economics-driven antitrust over the past 40 years. The president promised to return to antitrust 'traditions' that existed before the 'failed' 40 years. The Biden appointees . . . call themselves neo-Brandeisians . . . Louis Brandeis’s famous 1914 Harper's Weekly article, 'A Curse of Bigness,' inspired the title . . . To the neo-Brandeisians, big is again bad. Bad, not because it harms consumers—we will see that . . . harm to consumers is not the appropriate test for judging business conduct—but bad in some overarching political sense and for its own sake. . . . The chapters that follow this introduction study in detail two examples of past antitrust policy that the Biden antitrust leaders praise: vigorous enforcement of the Robinson-Patman Act and ­1960s-style merger enforcement. . . . This, then, is the world of populist merger enforcement, the world that the ­neo-Brandeisians praise. It is a world in which the consumer-welfare standard does not exist. Consumers are so irrelevant that merging companies dare not claim they will decrease their prices because increasing their market share will harm their competitors. It is a world in which the government (almost) always wins, even if the courts must create markets that exist only on the pages of their opinions. It is a world in which the courts use progress to condemn mergers. Under such antitrust laws, the forces that create new businesses—replacing older ones with usually larger, more efficient competitors that lower costs and improve quality for their customers—are viewed with hostility, although they often benefit the less well-off the most."

In 2018, AT&T merged with TimeWarner after a legal challenge from the US Department of Justice. After testifying in support of the Department of Justice and opposing the merger, Carl Shapiro discusses "Vertical Mergers and Input Foreclosure Lessons from the AT&T/Time Warner Case" (Review of Industrial Organization 2021, pp. ­303–341, https://link.springer.com/article/10.1007/s11151-021-09826-x). He writes:

He writes: "I testified in court as the DOJ's economic expert in that case. I explain here how to quantify the increase in rivals' costs and the elimination of double marginalization that are caused by a vertical merger and how to evaluate their net effect on downstream customers. I also explain how this economic analysis fits into the three-step burden-shifting approach that the courts apply to mergers under Section 7 of the Clayton Act. Based on my experience in the AT&T/Time Warner case, I identify a number of shortcomings of the 2020 Vertical Merger Guidelines."

After testifying in support of AT&T and in favor of the merger, Dennis W. Carlton, Georgi V. Giozov, Mark A. Israel, Allan L. Shampine provide "A Retrospective Analysis of the AT&T/Time Warner Merger" (Journal of Law and Economics, November 2022, pp. ­S461–S497, https://www.journals.uchicago.edu/doi/10.1086/721268).

"We describe and evaluate in detail the economic model used by the government’s expert and then focus our empirical work on the accuracy of the predictions made by that model. We also discuss evidence related to the Comcast/NBC Universal merger, which involved the same theory of harm and was allowed to proceed with a remedy similar to the contractual commitment that AT&T/Time Warner unilaterally adopted. We conclude that the evidence from the time of trial showed the theory of harm to be weak and the specific empirical predictions made by the government’s expert to be wrong. Postmerger evidence confirms that conclusion, as does new evidence from the earlier Comcast/NBC Universal merger."

Brian Albrecht, Dirk Auer, Eric Fruits, and Geoffrey A. Manne evaluate "Doomsday Mergers: A Retrospective Study of False Alarms" (International Center for Law and Economics, March 22, 2023, https://laweconcenter.org/resources/doomsday-mergers-a-retrospective-study-of-false-alarms/).

"[T]his paper analyzes whether previous doomsday merger scenarios have materialized, or whether the critics' claims missed the mark. Our retrospective analysis shows that many of the alarmist predictions of the past were completely untethered from prevailing market realities, as well as far removed from the outcomes that emerged after the mergers." The six past mergers they discuss are Amazon-Whole Foods, ABI-SABMiller, Bayer-Monsanto, Google-Fitbit, Facebook-Instagram, and Ticketmaster-Live Nation.

Interviews

Yasheng Huang discusses "the development of the Chinese state" with Tyler Cowen ("Conversations with Tyler," March 8, 2023, https://conversationswithtyler.com/episodes/yasheng-huang/).

On "a big misconception about China’s economy," Huang says: "[O]ne of them is that they look at the Chinese R&D spending, and they look at, for example, some of the impressive technological progress the country has made, and then they drew the conclusion that the Chinese economy is driven by productivity and innovations. In fact, studies show that the total productivity contributions to the GDP have been declining in the last decade and even more. As China has begun to invest more in R&D, the economic contributions coming from technology, coming from productivity have been actually declining. In the economic sense, it’s not a productivity-driven economy. It is an overwhelmingly investment-driven economy. I think that's one of the biggest misunderstandings of Chinese economy. It entails implications about the future prospects of the country, whether or not you can sustain this level of economic growth purely on the basis of massive investments." On China's leadership: "This is a remarkable statistic: Since 1976, there have been six leaders of the CCP [Chinese Communist Party]. Of these six leaders, five of them were managed either by Mao or by Deng Xiaoping. Essentially, the vast majority of the successions were handled by these two giants who had oversized charisma, oversized prestige, and unshakeable political capital. Now we have one leader who doesn’t really have that. He relies mostly on formal power, and that's why he has accumulated so many titles, whereas he's making similar succession errors as the previous two leaders. . . . Xi Jinping does not match, even in a remote sense, the charisma and the prestige of Mao Zedong and Deng Xiaoping. There's no match there."

David A. Price interviews Annamaria Lusardi "on financial literacy, seniors versus scammers, and learning from the mistakes of NFL players" (Econ Focus: Federal Reserve Bank of Richmond, First Quarter 2023, pp. 24–28, https://www.richmondfed.org/publications/research/econ_focus/2023/q1_interview).

Lusardi and Olivia Mitchell have designed a 28-question test to measure financial literacy, which has become a widely used research tool. Lusardi notes:

"Together with a team at the World Bank, I eventually designed questions . . . that were applied to a sample of more than 140 countries. I would say there are several interesting findings. One is that even though the U.S. is the country with the most advanced financial markets, it actually doesn't score very high in terms of financial literacy. And this has been true in other surveys, as well. The second thing is that overall financial literacy is not high in other countries, either. Overall, the level of financial literacy globally is really low; only one-third of people around the world are financially literate. . . . [W]hat we did recently—and it took us a good many years to do this project— is a meta-analysis of financial education programs. . . . What we found, looking at the evidence in as many as 33 countries, is that financial education works and works well—meaning it does translate into higher knowledge and also better behavior in savings and managing credit and in other areas, including insurance and money transfers. And we also found that it is cost effective. This is due to the fact that many educational programs do not cost very much."

Daniel Kahneman tells Joseph Walker an origin story of "reference class forecasting" in in an interview on the Jolly Swagman podcast ("#143: Dyads, And Other Mysteries—Daniel Kahneman," April 14, 2023, https://josephnoelwalker.com/143-daniel-kahneman/).

"Well, first let's define our terms, what the reference class is. I don’t know a better way of doing this than telling the origin story of that idea in my experience, which is that, 50 years ago approximately, I was engaged in writing a textbook with a bunch of people at Hebrew University, a textbook for high school teaching of judgement and decision making. We were doing quite well, we thought we were making good progress. It occurred to me one day to ask the group how long it would take us to finish our job. There's a correct way of asking those questions. You have to be very specific and define exactly what you mean. In this case I said, 'Hand in a completed textbook to the Ministry of Education—when will that happen?' And we all did this. Another thing I did correctly, I asked everybody to do that independently, write their answer on a slip of paper, and we all did. And we were all between a year and a half and two and a half years. But one of us was an expert on curriculum. And I asked him, 'You know about other groups that are doing what we are doing. How did they fare? Can you imagine them at the state that we are at? How long did it take them to submit their book?' And he thought for a while, and in my story he blushed, but he stammered and he said, 'You know, in the first place they didn't all have a book at the end. About 40%, I would say, never finished. And those that finished . . .' He said, 'I can't think of any that finished in less than eight years—seven, eight years. Not many persisted more than ten.' Now, it’s very clear when you have that story, that you have the same individual with two completely different views of the problem. And one is thinking about the problem as you normally do—thinking only of your problem. And the other is thinking of the problem as an instance of a class of similar problems. In the context of planning, this is called reference class planning."

Discussion Starters

Victor Matheson provides an overview of developments in "Sports Gambling" (Milken Institute Review, Second Quarter 2023, pp. 12–21, https://www.milkenreview.org/articles/sports-gambling).

"The past 60 years have witnessed a massive transformation of the gambling landscape in the United States. In the early 1960s, the only legal casinos in the country operated in Nevada, no states ran lotteries, and essentially all sports bets were either made informally among friends or through illegal bookies. These days, 45 state governments sell $100 billion in lottery tickets each year, with multistate lotto games like Powerball and Mega Millions occasionally offering jackpots exceeding $1 billion. Nearly 1,000 casinos and card rooms operate across 41 states, generating over $50 billion in net gaming revenue. And nowhere has the gambling industry changed more rapidly than in sports betting, where nationwide expansion has led to an increase in legal wagering from just under $5 billion in 2017 to nearly $100 billion in 2022."

Michelle Clark Neely, "Is the Era of Overdraft Fees Over?" (Regional Economist, Federal Reserve Bank of St. Louis, March 8, 2023, https://www.stlouisfed.org/publications/regional-economist/2023/mar/is-era-overdraft-fees-over).

"A relatively small proportion of bank customers account for the lion's share of overdraft fees. According to the Consumer Financial Protection Bureau (CFPB), people who frequently overdraft their accounts represented just 9% of bank customers but generated almost 80% of overdraft and nonsufficient funds (NSF) fees in 2017. Consulting firm Oliver Wyman estimates that customers who heavily use overdraft services generate, on average, more than $700 in profit for the bank per year on a basic bank account; customers who don't use overdraft services produce an average of $57 in profit for the bank per year. . . . [C]onsumer backlash, scrutiny from Congress and regulators, and increased competition from nonbank providers have prompted banks—especially large ones—to change or eliminate their overdraft programs. A growing number of banks are offering lower-cost alternatives to overdraft services that can cover the account deficit and help customers fulfill other goals, such as building credit."

Finance & Development has published some recent essays on industrial policy, including Ruchir Agarwal on "Industrial Policy and the Growth Strategy Trilemma" (March 21, 2023, https://www.imf.org/en/Publications/fandd/issues/Series/Analytical-Series/industrial-policy-and-the-growth-strategy-trilemma-ruchir-agarwal) and Douglas Irwin on "The Return of Industrial Policy" (June 2023, https://www.imf.org/en/Publications/fandd/issues/2023/06/the-return-of-industrial-policy-douglas-irwin).

From Agarwal's essay: "Former US Treasury Secretary Lawrence Summers recently said he liked his industrial policy advisers the same way he liked generals. 'The best generals are the ones who hate war the most but are willing to fight when needed. What I worry is that people who do industrial policy love doing industrial policy.' . . . Just like salt in cooking, a pinch of industrial policy can be helpful, but too much can overpower, and prolonged excess can harm."