Did the Pandemic Speed Up Productivity Growth?

The Covid-19 Pandemic may have sped up technological progress and thereby productivity growth. In addition to the technology for vaccine discovery and production, the Pandemic seems to be speeding up the transition to a larger share of online purchases and a larger share of in-person purchases being made with credit or debit cards instead of cash. In addition, a much larger share of business meetings and doctor visits are being done by video chat. And the shift to at-home viewing of TV shows and movies has been pushed forward.

Sarah Chaney Cambon’s April 4, 2021 Wall Street Journal article “U.S.’s Long Drought in Worker Productivity Could Be Ending” explains the importance of productivity growth, gives a bit of the history of productivity growth, and gives examples of the better ways of doing things that represent technological progress that fuels productivity growth. Unless noted otherwise, all quotations below are from that article.

The Importance and History of Productivity Growth:

On the importance of productivity growth, Sarah writes:

… productivity … is defined as output per hour worked. Stronger productivity growth is key to the economy’s long-term success. Economic growth depends on the number of workers and how much they produce. …

Higher productivity growth should also put more money into people’s pockets because wages are tied to how much workers produce.

Here is Sarah’s nutshell history of productivity growth since soon after World War II:

Productivity growth tends to move in multiyear trends, reflecting shifts in the structure of the economy. Excluding farms and government, it grew 2.8% a year from 1949 until the oil shock of 1973, then slowed to 1.4% from 1974 to 1995, sped up to 3% from 1996 to 2005 with the spread of computers and the internet, then slowed again, to 1.4% between 2006 and 2019. Last year it accelerated to 2.4% in the fourth quarter of 2020 from the same period a year earlier, although that was because the coronavirus triggered steep job losses in lower-wage sectors that tend to be less productive.

Some Paths to Productivity Improvement

On how productivity is improving, one salient fact at the macroeconomic level is that technological progress—and therefore productivity growth—are just as much a matter of adoption as it is of invention. By helping to overcome resistance to adoption, the Pandemic also points out how resistance to adoption of new technologies by consumers and by businesses can slow down technological progress. Sarah quotes Constance Hunter, chief economist at KPMG as saying:

The pandemic shocked older people into using technology and has shocked the economy in general into adopting technology.

What are some key examples of doing things in a better, often more efficient way?

More Online Purchases:

Sarah refers to Robert Gordon giving the idea that:

A shift toward e-commerce should push up productivity by eliminating workers needed in bricks-and-mortar stores

Doctor Visits by Video Chat:

Healthcare could see a burst in productivity after Covid-19 subsides. At Stanford Health Care CardioClick Clinic based in Stanford, Calif., virtual consultations surged during the pandemic. Patients could hop on a video call to discuss their diet, exercise and sleep patterns with a medical expert.

Video visits at the cardio clinic last about 22 minutes, whereas in-person visits tend to last three times as long. Video consultations are also much more likely to end on time …

Reducing the Waste of Excessive Commuting and Business Travel:

With the adoption of Zoom and Microsoft Teams, videoconferencing can replace some business conferences. As a result, workers won’t lose productive work hours traveling long distances. They will also have more energy to engage because they no longer have to deal with the hassle of daily commutes. Remote work could deliver a one-time 4.7% lift to productivity after the pandemic, though a large share of the growth will stem from shortened commutes that government productivity data won’t fully capture, according to a working paper from Stanford University’s Nicholas Bloom and co-authors.

I want to highlight Nicholas Bloom’s point that although our lives could become a lot better if we can commute less, standard government statistics don’t count commuting hours as part of the cost of production. So they miss this improvement.

The More Distant Future:

Many of these trends can be considered part of what Joel Mokyr calls “dematerialization” and Alan Greenspan talked about as GDP getting lighter in weight. Greg Ip’s December 26, 2020 Wall Street Journal article “Covid-19 Propelled Businesses Into the Future. Ready or Not” has an interesting quotation from Joel Mokyr:

Mr. Mokyr cautioned dematerialization can’t continue indefinitely: “Diminishing returns works here as well. We can mimic reality, but we are not digital creatures ourselves, and..., our evolutionary background will continue to demand physical experiences.

Although Joel Mokyr is right that human beings are not now digital creatures, we may well be digital creatures in the future, opening up many more opportunities for technological progress. The possible future of humanity becoming digital beings is an emerging theme on this blog. (See the links collected in my post “Embodiment.”)

Conclusion:

The future of technology is inherently hard to see; if we could see all the details of a technology, we would already have that technology. And people have a hard time guess which kinds of progress will be easy and which kinds of progress will be hard. We don’t have a lot of flying cars, but we do have wonders of computer technology and genetic technology.

It is probably easier to guess the rate of adoption of a technology that has already been worked out. Hence, technological progress at the macroeconomic level should be somewhat predictable during the period between invention and widespread adoption.

One area of technology that is understudied is technology based on social science. There is a chance, for example, that even leaving aside drugs, improvements in psychology could make our lives a lot better. On that, see the links at the bottom of “Elizabeth Bernstein on Getting Better Sleep.” And improvements in knowledge about diet and health might do as much as hardcore medical advances to improve human health. See “Miles Kimball on Diet and Health: A Reader's Guide.”


In Praise of the Squatty Potty

Oprah Winfrey has affected my health practices in at least two ways. First, I use a neti pot. (See “Cost Benefit Analysis Applied to Neti Pot Use.”) Second, I use a Squatty Potty. My own personal experience matches the average experience of those in the study discussed (in both text and video) in Jamie Ducharme’s January 10, 2019 Time article “Scientists Say This Popular Bathroom Accessory Really Does Help You Poop Better.” The design is also well done. It scoots under the toilet out of the way when not in use. Having a Squatty Potty for each toilet in the house has made my life better. I recommend it. That is about all there is to say.

For annotated links to other posts on diet and health, see:

Easter Skepticism

A few Easters ago, I posted “What If Jesus Was Really Resurrected?” giving the pro-resurrection case for non-supernaturalists. This Easter, I’ll give a more skeptical take.

In his April 2, 2021 essay “Recovering the Strangeness of Easter” in the Wall Street Journal, Robert Barron objects to watering down the Resurrection by treating it as a metaphor:

Especially today, it is imperative that Christians recover the sheer strangeness of the Resurrection of Jesus and stand athwart all attempts to domesticate it. There were a number of prominent theologians during the years that I was going through the seminary who watered down the Resurrection, arguing that it was a symbol for the conviction that the cause of Jesus goes on, or a metaphor for the fact that his followers, even after his horrific death, felt forgiven by their Lord.

But this is utterly incommensurate with the sheer excitement on display in the Resurrection narratives and in the preaching of the first Christians.

To understand what it means to treat the Resurrection of Jesus as literal, rather than as a metaphor, John Updike’s poem “Seven Stanzas at Easter” is eloquent:

Seven Stanzas at Easter

John Updike

“Seven Stanzas at Easter
Make no mistake: if He rose at all
it was as His body;
if the cells’ dissolution did not reverse, the molecules
reknit, the amino acids rekindle,
the Church will fall.

It was not as the flowers,
each soft Spring recurrent;
it was not as His Spirit in the mouths and fuddled
eyes of the eleven apostles;
it was as His flesh: ours.

The same hinged thumbs and toes,
the same valved heart
that—pierced—died, withered, paused, and then
regathered out of enduring Might
new strength to enclose.

Let us not mock God with metaphor,
analogy, sidestepping, transcendence;
making of the event a parable, a sign painted in the
faded credulity of earlier ages:
let us walk through the door.

The stone is rolled back, not papier-mache,
not a stone in a story,
but the vast rock of materiality that in the slow
grinding of time will eclipse for each of us
the wide light of day.

And if we will have an angel at the tomb,
make it a real angel,
weighty with Max Planck’s quanta, vivid with hair,
opaque in the dawn light, robed in real linen
spun on a definite loom.

Let us not seek to make it less monstrous,
for our own convenience, our own sense of beauty,
lest, awakened in one unthinkable hour, we are
embarrassed by the miracle,
and crushed by remonstrance.”

To those who explain the Resurrection account as myth, Robert Barron brings in C. S. Lewis’s argument that the specificity of the account of the Resurrection is not much like a myth:

The problem with these modes of explanation was well articulated by C.S. Lewis: Those who think that the New Testament is a myth just haven’t read many myths. Precisely because they have to do with timeless verities and the great natural and psychological constants, mythic narratives are situated “once upon a time,” or to bring things up to date, “a long time ago, in a galaxy far, far away.” No one wonders who was Pharaoh during Osiris’s time or during which era of Greek history Heracles performed his labors, for these tales are not historically specific.

But the Gospel writers are keen to tell us that Jesus’ birth, for instance, took place while Quirinius was governor of Syria and Augustus the Emperor of Rome—that is to say, at a definite moment of history and in reference to readily identifiable figures. The Nicene Creed, recited regularly by Catholics and Orthodox Christians as part of their Sunday worship, states that Jesus was “crucified under Pontius Pilate,” a Roman official whose image is stamped on coins that we can examine today.

My reaction to this is that the accounts of Joseph Smith, the founder of Mormonism, being directed to gold plates by an angel and then miraculously translating them are similarly specific, concrete and non-mythlike. For Mormons who believe in both the Resurrection and the Gold Plates with an account of Israelites who came to the Americas around 600 BC, that is no problem. But for those Christians who want to believe in the Resurrection but not in the Gold Plates, it demonstrates that C. S. Lewis’s argument is not fully decisive. (For more on Joseph Smith, see “Michael Coe on Joseph Smith the Shaman.”)

It matters whether claims are in principle falsifiable or not. But falsifiable claims are sometimes falsified. So having a claim be concrete and falsifiable is not enough to ensure that it is true.

Curiously, in addition to citing C. S. Lewis’s argument for the literal reality of the Resurrection that works for Mormonism as well, Robert Barron also cites the early Christian Fathers (that is, Christian writers in the first few hundred years after the crucifixion) laying out an idea that is central to Mormonism:

One of the favorite phrases in the writings of the Fathers of the Church is Deus fit homo ut homo fieret Deus, which means, God became man that man might become God. No religion or philosophy has ever proclaimed a more radical humanism than that.

As with Joseph Smith, some low-probability events occurred surrounding Jesus. But I am struck by the extent to which Christians and the world more generally benefit from aspects of Jesus’ life that didn’t require miracles. His teachings have important effects that can operate through non-miraculous means. Even belief in miracles can have whatever effects it has through non-miraculous means. A large share of the value people derive from religion comes quite apart from any miracles. Indeed, many believers that miracles are possible see relatively few laws-of-physics-defying miracles in their own lives, and yet feel that religion has made a big difference for good in their lives. Conversely, even if there were laws-of-physics-defying miracles, it is not clear that these are what would make our lives deep and rich.

Admittedly, without modern technology and wisdom, miracles would seem more important for human happiness. We desperately want healing when we are messed up physically or mentally. When miracles were the only way to hope for healing in a large share of cases, they looked crucial to the good life. But where we stand now, is it miracles we need, or is it human goodness and meaning?

It's OK for the Federal Government to Provide More Competition in the Arena of Payment Systems

There are many dangers with having the government compete in markets. The biggest is that political forces will end up leading the government to subsidize the product or service it is providing. Subsidies can be quite costly, not only because society might then overconsume the good or service, but because getting the tax revenue to pay for the subsidies creates tax distortions.

If government subsidies are the big danger, then areas where welfare can be substantially increased with a small total cost to the government are places where the benefit/cost ratio of the government competing in a market are especially good. Areas in which price is far above marginal cost are places where the social welfare benefit is high compared to the cost. in this cost assessment, most of the “cost of customer acquisition” should be disregarded. What the government does tends to be reasonably well publicized by free media, and the government can be patient with word of mouth telling about low prices. So the cost of customer acquisition is likely to be lower for the government than for private firms. It is the cost of actually providing the good or service that the government should be focused on.

In my view, electronic payments are an area in which the true marginal cost at scale is quite small, while network externalities make for oligopolies with substantial fees. So this is an area ripe for the government competing. It is probably better for the government to not get involved with guaranteeing against fraud in accepting payments. Some form of digital cash with free or nearly free transfers seems fairly simple. (A property of cash is that if you pay it, no one will compensate you if someone accepted it fraudulently, unless you are able to find and sue the fraudster.) In any case, if the government provided free or almost free electronic transfers of funds, fintech (financial technology) firms could provide add-on services.

Such government competition in payments is not a pipe dream. Brazil is doing something in this area. In the March 2021 Wall Street Journal article “Brazil’s Central Bank Uses Payment Platform to Spur Competition,” Paulo Trevisani and Jeffrey T. Lewis report:

Brazil’s central bank is revving up its yearslong effort to bust up the country’s clubby banking industry, using a pandemic-driven shift toward touchless payments to launch its own digital platform.

The payment system, dubbed Pix, was set up and is maintained by the central bank instead of private payments players, unlike similar systems in other countries. Since its launch in November, Pix is already handling a larger share of digital payments than its private-sector alternatives, advancing the regulator’s goal of spurring competition and getting more Brazilians to use financial services.

…

“Our concern is how can we make the system more competitive, more efficient?” said Roberto Campos Neto, president of the Central Bank of Brazil.

Although some of the banks who belonged to the old oligopoly are no doubt losing, many other firms are benefitting:

New entrants are expanding quickly and attracting both domestic and foreign investors, said Carlos Lobo, a partner at corporate law firm Hughes, Hubbard & Reed LLP.

“All companies in this ecosystem are seeing an absurd growth in their valuation. They are attracting foreign investors, who also like the regulation the central bank has in place.”

The benefit to welfare seems substantial. Suppose that payment systems are now taking a 2% fee. Whichever side of a transaction that is levied on, it is like a 2% tax in its distortionary effects. And it is like a 2% tax on top of other marginal tax rates in the narrower sense of taxes. An extra 2% added to the marginal tax rate would be a big deal. Ergo, a 2% payment fee is a big deal. If the government can make that go away, it is like a tax cut in its benefits for the economy.

Of course, another reason I am interested in making the electronic payment landscape more competitive is that when electronic payments (including payments with credit and debit cards) are a larger fraction of payments compared to paper currency transactions, then the modifications of paper currency policy needed to enable deep negative rates carry a lower political cost and hence are more likely to be used. And I see deep negative rates as something that could have saved us from most of the hit from the Great Recession. See:

Seeing digital cash in the context of opening up more monetary policy space points to one detail of how digital cash should be implemented: digital cash should have a nonzero interest rate. If, say, the rate was even as little as +3 basis points in a situation like today, that would at least set the precedent for a nonzero interest rate that could go negative at some point in the future. That would be better than to hardwire a zero interest rate into the payment system offerings of the government.

Central banks and other parts of governments should stop running away from negative rates and beginning explaining how wonderful they are. They help avoid recessions and thereby help savers: temporarily low rates lead to recovery and hither rates. Deep negative rates for a short time are better for savers than zero rates for years and years and years. Negative rates also help borrowers because borrowers are hurt by recessions and negative rates end recessions sooner. And they give borrowers more buying power during the recession when they need it most.

Ori Heffetz: Israel Climbs High in UN's 'World Happiness Report'

Elizabeth Bernstein on Getting Better Sleep

On Insomnia

Insomnia often has psychological roots that can be addressed with a psychological approach. In her Mrch 23, 2021 Wall Street Journal article “Can’t Sleep? Here Are Some Surprising Strategies That Actually Work,” Elizabeth Bernstein gives helpful advice of both the psychological and the more straight physiological variety. All the quotations below are from that article.

Psychologically drive sleep problems often have a strong multiplier—a vicious loop. Elizabeth writes:

When we tell ourselves we “can’t sleep” or “won’t be able to function” the next day, we’re causing ourselves a lot of anxiety, which further interferes with our sleep.

As Elizabeth notes, the opposite attitude is saying to yourself something like: “A bad night of sleep is not the end of the world.”

Elizabeth also quotes Wendy Troxel talking about both the vicious loop and some of how the vicious loop might get started. Separating the quotations with added bullets, they are:

  • People who sleep well don’t think about sleep all the time …

  • Our brains have to feel like the world is safe and secure to be able to fall asleep … Sleep is a vulnerable state.

Whether part of getting the vicious loop started or part of keeping it going, brain scans show the brains of insomniacs as being more agitated even while actually asleep:

Daniel J. Buysse … conducted PET scans of people who sleep normally and people with insomnia. In people with insomnia, parts of the brain involved with self-reflection and monitoring the environment show higher levels of activity during sleep compared with normal sleepers.

Given how worrying too much about sleep can cause sleep problems, it is useful to know the diagnostic criteria for clinical insomnia. They are much worse than occasional insomnia:

insomnia … difficulty falling or staying in sleep three or more times a week, and … lasts a month or longer, leading to daytime consequences, such as fatigue, mood changes or difficulty concentrating.

And it should be reassuring that if you ever do get serious insomnia, there are fairly effective psychological treatments:

… the American Academy of Sleep Medicine … recommended a series of treatments collectively known as cognitive behavioral therapy for insomnia, or CBT-I.

…

CBT-I focuses on breaking this loop by helping us change the thoughts and behaviors that are counterproductive. Research shows it may have lasting effects—not just fixing our sleep problems in the present but helping us form a sort of sleep resilience. A study conducted by Dr. Cheng and colleagues and published online in November in the journal Sleep found that people who received CBT-I years ago have been sleeping better and have better mental health during the pandemic than those who did not.

Several psychological approaches are easy enough to try even before you are willing to consult a sleep therapist. Philip Cheng suggests this:

Sometimes we worry because our brain is telling us to not forget something,” says Philip Cheng … If you write your worries down during the day, “when worry comes at night you can tell yourself you’ve already documented it.”

Elizabeth points to cultivating gratitude as something that can help:

… think about the things you are grateful for, or savor your favorite moments from the day. This will train your brain to associate the bed with pleasant thoughts.

And Elizabeth tells the story of an app she has (which she does not name), that uses reverse psychology. The voice on the app intones:

Resist! Resist! Resist the temptation to close your eyes, even as they feel heavier and heavier! Remember your goal here is to remain awake.

My Practice

I don’t have serious sleep problems, but I do try to have good practices in relation to sleep that might be helping me to avoid problems. Here are some things I think can be helpful, but take them all with a grain of salt:

  • Most drugs marketed as sleep aids are quite nasty and to be avoided. The exception is melatonin, which is fairly safe—at least by comparison. The next safest might be benadryl, which is in many cold remedies.

  • It is a myth that everyone needs 8 hours of sleep. By experimentation, I have figured out that I need between 7 and 7 and a quarter hours. How can you determine how much you need? If you feel alert and good except for the witching hours when it is totally normal to feel sleepy: (a) right when you wake up, (b) right before it is bedtime and (c) in the mid afternoon. If those are the only times you get sleepy, you are probably getting enough sleep. If you try to sleep for more hours each day than you need, after a while you are likely to have a wakeful period in the middle of the night.

  • The previous bullet was about a sign you are getting enough sleep—even if you sleep less than 8 hours. On the other side, a way to tell that you are sleep-deprived, getting too little sleep, is if you fall asleep instantly when you lie down or are quite relaxed.

  • Keeping the lights as low as possible for several hours before bedtime can be helpful. I find the common advice of avoiding screens much too painful to follow. But I keep the room lights off for at least 4 hours before bed and only have light from screens. Blue light interferes with sleep most. Many devices now have modes that dim the screens and reduce the blue-light content of the remaining brightness. Adjustable nightlights allow me to brush my teeth without the help of the room light.

  • In addition to light interfering with getting to sleep, it can wake you up too early. It isn’t easy to make light-blocking curtains work in my bedroom, so I wear an eye mask except in winter, when it stays dark late enough in the morning that I don’t need to. (Some people are sensitive enough to light they’ll need lot-blocking curtains or an eye mask year round.)

  • I have come around to the view that getting up at close to the same time every day is helpful for sound sleep. The experts say it is even more important to standardize your wake-up time than it is to standardize the time when you go to bed.

  • Something I don’t have to think much about because I have a short eating window each day is that it will help you to sleep soundly to stop eating many hours before you go to bed. The reason is simple: heavy-duty digestion can disrupt sleep.

  • Finally, to help calm my mind I use a meditation app at night (in my case “10% Happier”) and throughout the day use the Positive Intelligence tools I talk about in these posts:

For annotated links to other posts on diet and health, see:

Don’t Miss These Other Posts Related to Positive Mental Health and Maintaining One’s Moral Compass:

Judson Brewer, Elizabeth Bernstein and Mitchell Kaplan on Finding Inner Calm

Elizabeth Bernstein has a column on positive mental health in the Wall Street Journal named “Bonds.” The two columns shown above given hints about how to get more inner calm.

“New Strategies for Calming Your Pandemic Anxiety” is an interview with Judson Brewer, author of Unwinding Anxiety. Elizabeth asked Judson “So how can we learn to stop fueling our anxiety?” Judson said this:

There’s a three-step process. The first step is to recognize anxiety habit loops. Recognize that you’re worrying. Ask yourself: “Is this helping me solve the problem?”

Step two is to … see how unrewarding worrying is. Ask yourself: “What am I getting from this? When I worry, does it keep my family safe? Or is this making me feel worse and not better?”

Step three is … to give your brain something more rewarding to do than worrying. … You can be curious about your experience. And you can be kind. Anxiety and worry feel closed and contracted. Curiosity and kindness open you up.

Judson also made these useful and non-obvious points (bullets added to separate passages):

  • Curiosity feels better than anxiety. It helps us focus on the moment rather than worrying about the future. And it helps us gather accurate information, which is what our brain needs to be able to think and plan.

  • One of my patients has a mantra she uses when she starts to feel anxious, to remind her that she is not in danger: “Oh, this is just my brain.”

  • When we are stressed or anxious, our shoulders tense, our jaws clench and our eyes narrow. You can bring awareness to this: “Oh, my eyes are narrowed.” Then open your eyes really wide. This helps trigger curiosity, because of the association in our mind between eyes wide open and curiosity. Wide-eyed wonder is the epitome of curiosity. It’s not called narrow-eyed wonder.

  • Anxiety triggers procrastination, especially for perfectionists, because we worry our solution to the problem won’t be good enough. Procrastination feels better than being anxious or trying to come up with a solution.

  • Habit loops have three elements: a trigger, a behavior and a reward. Anxiety … becomes a habit when the feeling of anxiety triggers us to worry and that worry results in us feeling like we are in control …

In “The Therapeutic Value of Reading,” Elizabeth says this:

Books are good for the brain. And their benefits are particularly vital now. Books expand our world, providing an escape and offering novelty, surprise and excitement, which boost dopamine. They broaden our perspective and help us empathize with others. And they can improve our social life, giving us something to connect over.

Books can also distract us and help reduce our mental chatter.

She also quotes bookstore owner Mitchell Kaplan saying this:

There’s so much noise in the world right now and the very act of reading is a kind of meditation. You disconnect from the chaos around you. You reconnect with yourself when you are reading. And there’s no more noise.

These are all excellent insights. Beyond these insights, what has been working for me to find inner calm is mindfulness meditations apps such as 10% Happier and the Positive Intelligence tools I talk about in these posts:

Both mindfulness and the other tools of Positive Intelligence is that your inner critic and other chatter fueled by the survival part of your brain are constantly saying things that aren’t very helpful. It is possible to recognize this chatter for what it is and get it to quiet down by exercises such as getting into your body more by focusing on bodily sensations. Methods for awakening power such as empathy, curiosity, and a can-do attitude can also help.

Here is what I think is going on from an evolutionary perspective. The abilities to talk garrulously to both ourselves and other humans and to think at length about the past and the future are very recent in our evolutionary history. We know that because our abilities in those regards go far beyond all the extant species we know of on earth. Even aside from the issue that what is good for our genes may not alway be what makes us happy, genetic evolution hasn’t had time to work out all the kinks in what talking to ourselves and thinking about the past and future does to our psychology.

Fortunately, the ability to talk to one another—and the later invention of writing—kicked off the much speedier process of memetic evolution as useful or otherwise catchy ideas spread and evolve in a soup of minds. (On memetics, see my posts “How Did Evolution Give Us Religion?” and “Jonah Berger: Going Viral.”) A few thousand years is the blink of an eye relative to genetic evolution, but it is a long time in the arena of memetic evolution once we had writing and a large human population size. We are finally homing in on best practice for being happy. But within your lifetime, you will still have to be an early adopter in order to get the benefits for your own happiness.

Higher Capital Requirement May Be Privately Costly to Banks, But Their Financial Stability Benefits Come at a Near Zero Cost to Society

In general, I am a fan of Greg Ip. So I was disappointed to see him falling into accepting the bank lobbyists’ line that higher capital requirements are bad for the economy. In fact, higher capital requirements cut into bank profits but improve financial stability at no cost to society as a whole. The cost to bank profits is made up for by less chance of taxpayers being left holding the bag on large losses.

Banks see debt as a less expensive way to raise funds than equity, but the costs of raising funds by equity better reflects the true risks the banks are engaging in and so gives the right incentives. Raising funds by “equity” means not only issuing stock but also retaining earnings that a bank can then lend out. The advantage of pushing banks toward raising funds by raising equity is that when things go badly, equity starting from a high value can drop quite a bit without causing any trouble for the smooth operation of the bank. The value of stock goes down, but the bank doesn’t go bankrupt. Just as importantly, others dealing with the bank— “counterparties”—don’t worry that they will be stiffed if the bank goes bankrupt. Without a bankruptcy, stock prices going down cause zero problems for counterparties.

Bank debt can be too cheap for banks for three reasons. First, there is an unjustified tax advantage to debt because interest payments are more tax deductible than dividend payments are. Second, when banks go bankrupt there is always the chance that the government will bail them out. From the bank’s perspective, having a shot at bailout money depends on having enough debt to go bankrupt when things go bad instead of just having stock prices go down. The government almost never bails banks out simply because their stock price has gone down without bankruptcy. Third, some households and institutions may pay a premium for the illusion of safety even if the supposed safety isn’t real. (Institutions don’t necessarily have to be fooled to want the illusion of safety; regulations sometimes ask them to obtain the illusion of safety.)

On the third point of the demand for the illusion of safety, there is a very interesting paper by Robin Greenwood, Samuel Hanson and Jeremy Stein that was presented at Jackson Hole, “The Federal Reserve's Balance Sheet as a Financial-Stability Tool,” that basically argues that the Fed or the Treasury needs to offer plenty of very safe short-term assets so that the strong demand for such assets doesn’t cause the private market to create the illusion of very safe short-term assets. In addition to the importance of this for financial stability benefits, this also indicates that the social cost of discouraging banks from issuing these illusions is low because any advantage banks could get from issuing such assets at low interest rates points to the benefits to the government budget from the government issuing the genuinely safe short-term assets at low interest rates.

In Greg Ip’s Wall Street Journal article shown above, “Fed’s Reversal on Bank Capital Requirements Serves No Purpose,” there is a red herring. Greg talks as if bank equity is a cushion against losses asset by asset and therefore serves no purpose when a formula makes a bank get more total funds from equity when it has more assets even if the extra assets are all government promises that are quite safe. But bank equity is a cushion for all of a bank’s assets put together and few banks have 100% safe assets. If a formula makes a bank get more funds from equity to back more assets even if those assets are safe, then that equity is available to cushion losses from the risky assets the bank has along with the safe assets. It is perfectly reasonable to say that the formula should have required more equity for each unit of risky assets because that would be better targeted. But when bank lobbyists have made capital (=equity) requirements mandated directly for risky assets too low, the extra capital (=equity) forced by the formula based on total assets (including safe assets) may get capital (=equity) a little closer to where it should have been for the typical bank.

But the more powerful argument is that there is no harm done from requiring banks to have a lot of capital. Any hit to their profits is made up for by the taxpayers doing better, and the incentives of the banks become better aligned with the true risks to society. If there is any tendency toward too little aggregate demand in the economy, the right answer is monetary stimulus. (See “Why Financial Stability Concerns Are Not a Reason to Shy Away from a Robust Negative Interest Rate Policy.”) If there is any tendency toward too little risky investment even when unemployment is low, the right answer is sovereign wealth fund investing in exchange-traded funds financed by issuing Treasury bills to narrow the risk premium. (See “Alexander Trentin Interviews Miles Kimball about Macroeconomic Stabilization: Negative Rates and Sovereign Wealth Funds” along with the links it features.)

One other red herring is banks’ claims that capital requirements like the ones the Fed is restoring prevent them from lending out money. But capital requirements only say where the money comes from, not where it goes. Once a bank has gotten money from issuing stock, it can lend it out as much as it wants. Risk-weighted capital requirements do more to discourage lending (which is risky) than capital requirements based simply on total assets. Also, if banks were that worried about having funds to lend out, they shouldn’t be so eager to pay dividends to shareholders when retained earnings that keep their capital (=equity) levels strong give them more total funds to lend out. In any case, banks having too little money to loan out sounds like an aggregate demand problem. Aggregate demand is not scarce for a central bank willing to use negative interest rates as central banks should. (See “How and Why to Eliminate the Zero Lower Bound: A Reader’s Guide.”)

Related Posts:

Amanda Fronk on the Gut Microbiome

The gut microbiome is a complex subject. Amanda Fronk’s article “Inside Micropolis” in the Fall 2018 issue of BYU Magazine is a nice distillation of some of the basics. All quotations in this post are from that article, with bullets to separate different passages.

First, just to persuade you of the importance of gut bacteria, consider the effects of transplanting gut bacteria from one creature to another by transplanting poop:

  • Consider this: Five years ago, Chinese researcher Liping Zhao and his team at Shanghai Jiao Tong University caused some mice in their lab to transform from healthy to obese in a matter of weeks, putting on four times the grams as their cage mates on a similar diet. How did they do it? By transplanting bacteria from the gut of a 385-pound, morbidly obese human.

  • … Clostridium difficile is a pathogenic bacteria that causes severe diarrhea and can lead to death. It often occurs after intense courses of antibiotics, which leaves the intestines susceptible to infection. “It’s hard to get rid of. There aren’t good [traditional] treatments,” says Chaston. He calls its cure—a fecal microbiota transplant—“the hallmark of microbiome treatment.” The transplant involves giving “an unhealthy person a healthy person’s poop,” Chaston explains. “We don’t know what’s in it. We just know that they get better.” Some 90 percent of transplant recipients recover, often within mere hours of the transplant.

Here are some theories about how gut bacteria could affect health:

  • Researchers aren’t sure exactly how Enterobacter cloacae B29 or any other bacterium causes obesity, but there are theories. One is that certain bacteria are masterful at squeezing calories from food.

  • Another idea is connected to the endotoxins that some bacteria release into the bloodstream. At high levels, these endotoxins can cause septicemia and often death, but at very low levels, it could lead to chronic inflammation throughout the body. What does that have to do with obesity? “Inflammation affects insulin signaling,” says Bridgewater. “And if insulin response isn’t working right, then people can be storing fuel that they should be burning.”

  • Bacteria also appear to play a part in mental illnesses like anxiety and depression. How can your intestines have anything to do with mental illness? First off, “90 percent of the serotonin in our body is actually made in the gut,” says Bridgewater. Serotonin is one of the key neurotransmitters our body uses to keep us emotionally balanced. And second, the vagus nerve, one of the biggest in the body, runs from the brain to the gut’s 100 million neurons.

The article has some reasonable advice for improving the health of gut microbiomes: let kids eat dirt (literally), eat greens consistently, reduce stress, and be careful in using antibiotics that could kill good gut bacteria. It also has a table listing characteristics of some important types of gut bacteria that I won’t try to retail.

Besides trying to identify antibiotics that kill bad gut bacteria but leave good gut bacteria unharmed, there are bacteria-killing viruses called “phages” that might be able to target bad gut bacteria while sparing good gut bacteria.

Overall, although there is plenty of evidence that the gut microbiome matters a lot, we are only beginning to understand what the gut microbiome does and all the interventions that might improve it. One thing that will make progress slower is that there are a huge number of different types of bacteria that can live in the human gut and the portfolio of different bacteria in given individuals vary enormously. Stay tuned for many more scientific results about the human gut microbiome in the coming years.

For annotated links to other posts on diet and health, see:

The Federalist Papers #27: People Will Get Used to the Federal Government—Alexander Hamilton

In the Federalist Papers #27, Alexander Hamilton argues that the federal government is likely to be acceptable enough to the people that it will seldom need to resort to full-out military force to establish its authority. In hindsight, the US Civil War and the Utah War (see “The Federalist Papers #17: Three Levels of Federal Power”) demonstrated that the federal government did, sometimes, take up war against a part of the United States. Nevertheless, there is a lot of merit to Alexander Hamilton’s arguments. Here is the Federalist Papers #27 in outline form:

  1. Why should the attitude toward the federal government be much different than to a state government? Won’t it depend on the quality of government?

  2. The federal government is likely to be of higher quality than state government because it can draw on a larger talent pool. Also, it is easier for a truly corrupt faction to take control of a smaller unit of government than a larger unit of government.

  3. The federal government is an important guarantor that state governments will follow their own constitutions.

  4. If the federal government interacts directly with all the people, rather than just with the state governments, the people will get used to it through those interactions.

  5. The federal government will be so powerful it will seldom need to actually use force against a part of the United States; the threat of force alone will typically be enough.

  6. People will see state government and federal government as being on par. And the power of state government and federal government will often be employed jointly, further impressing upon people the legitimacy of federal power.

I find the 4th point especially interesting. In 2021, people have one image of the federal government from news reports of decision-making in Washington, and another image from the parts of the federal government they directly interact or watch fictional enactments of: the FBI, the post office, the national parks, the Social Security Administration, the local Federal court, etc. I sense a lot of respect for the majority of those parts of the federal government people directly interact with. (The Internal Revenue Service—IRS—and Immigration and Customs Enforcement—ICE—are exceptions.) One of the more entertaining evidences of the gap between the perception of Washington DC decision-making and the perception of another arm of the federal government has been the signs saying “Government, keep your hands of my Medicare!”

All of this, in practice, increases deference to Federal government authority. We do not, in fact, see the federal government as one monolith (even if we think we do). We get used to the authority of different pieces of the federal government separately.

Despite the times when the federal government has had to take up arms against a part of the US, I think Alexander Hamilton could rightly feel vindicated in the how solid the perception of—and deference to—federal authority is in the United States.

To see how Alexander Hamilton lays out his argument in detail, below is the full text of the Federalist Papers #27, with my outline interspersed as headings in bold italics (and one footnote included where it appears in the text within square brackets).

FEDERALIST NO. 27

The Same Subject Continued: The Idea of Restraining the Legislative Authority in Regard to the Common Defense Considered

From the New York Packet
Tuesday, December 25, 1787.

Author: Alexander Hamilton

To the People of the State of New York:

1. Why should the attitude toward the federal government be much different than to a state government? Won’t it depend on the quality of government?

IT HAS been urged, in different shapes, that a Constitution of the kind proposed by the convention cannot operate without the aid of a military force to execute its laws. This, however, like most other things that have been alleged on that side, rests on mere general assertion, unsupported by any precise or intelligible designation of the reasons upon which it is founded. As far as I have been able to divine the latent meaning of the objectors, it seems to originate in a presupposition that the people will be disinclined to the exercise of federal authority in any matter of an internal nature. Waiving any exception that might be taken to the inaccuracy or inexplicitness of the distinction between internal and external, let us inquire what ground there is to presuppose that disinclination in the people. Unless we presume at the same time that the powers of the general government will be worse administered than those of the State government, there seems to be no room for the presumption of ill-will, disaffection, or opposition in the people. I believe it may be laid down as a general rule that their confidence in and obedience to a government will commonly be proportioned to the goodness or badness of its administration. It must be admitted that there are exceptions to this rule; but these exceptions depend so entirely on accidental causes, that they cannot be considered as having any relation to the intrinsic merits or demerits of a constitution. These can only be judged of by general principles and maxims.

2. The federal government is likely to be of higher quality than state government because it can draw on a larger talent pool. Also, it is easier for a truly corrupt faction to take control of a smaller unit of government than a larger unit of government.

Various reasons have been suggested, in the course of these papers, to induce a probability that the general government will be better administered than the particular governments; the principal of which reasons are that the extension of the spheres of election will present a greater option, or latitude of choice, to the people; that through the medium of the State legislatures which are select bodies of men, and which are to appoint the members of the national Senate there is reason to expect that this branch will generally be composed with peculiar care and judgment; that these circumstances promise greater knowledge and more extensive information in the national councils, and that they will be less apt to be tainted by the spirit of faction, and more out of the reach of those occasional ill-humors, or temporary prejudices and propensities, which, in smaller societies, frequently contaminate the public councils, beget injustice and oppression of a part of the community, and engender schemes which, though they gratify a momentary inclination or desire, terminate in general distress, dissatisfaction, and disgust. Several additional reasons of considerable force, to fortify that probability, will occur when we come to survey, with a more critical eye, the interior structure of the edifice which we are invited to erect. It will be sufficient here to remark, that until satisfactory reasons can be assigned to justify an opinion, that the federal government is likely to be administered in such a manner as to render it odious or contemptible to the people, there can be no reasonable foundation for the supposition that the laws of the Union will meet with any greater obstruction from them, or will stand in need of any other methods to enforce their execution, than the laws of the particular members.

3. The federal government is an important guarantor that state governments will follow their own constitutions.

The hope of impunity is a strong incitement to sedition; the dread of punishment, a proportionably strong discouragement to it. Will not the government of the Union, which, if possessed of a due degree of power, can call to its aid the collective resources of the whole Confederacy, be more likely to repress the FORMER sentiment and to inspire the LATTER, than that of a single State, which can only command the resources within itself? A turbulent faction in a State may easily suppose itself able to contend with the friends to the government in that State; but it can hardly be so infatuated as to imagine itself a match for the combined efforts of the Union. If this reflection be just, there is less danger of resistance from irregular combinations of individuals to the authority of the Confederacy than to that of a single member.

4. If the federal government interacts directly with all the people, rather than just with the state governments, the people will get used to it through those interactions.

I will, in this place, hazard an observation, which will not be the less just because to some it may appear new; which is, that the more the operations of the national authority are intermingled in the ordinary exercise of government, the more the citizens are accustomed to meet with it in the common occurrences of their political life, the more it is familiarized to their sight and to their feelings, the further it enters into those objects which touch the most sensible chords and put in motion the most active springs of the human heart, the greater will be the probability that it will conciliate the respect and attachment of the community. Man is very much a creature of habit. A thing that rarely strikes his senses will generally have but little influence upon his mind. A government continually at a distance and out of sight can hardly be expected to interest the sensations of the people. The inference is, that the authority of the Union, and the affections of the citizens towards it, will be strengthened, rather than weakened, by its extension to what are called matters of internal concern; and will have less occasion to recur to force, in proportion to the familiarity and comprehensiveness of its agency. The more it circulates through those channls and currents in which the passions of mankind naturally flow, the less will it require the aid of the violent and perilous expedients of compulsion.

5. The federal government will be so powerful it will seldom need to actually use force against a part of the United States; the threat of force alone will typically be enough.

One thing, at all events, must be evident, that a government like the one proposed would bid much fairer to avoid the necessity of using force, than that species of league contend for by most of its opponents; the authority of which should only operate upon the States in their political or collective capacities. It has been shown that in such a Confederacy there can be no sanction for the laws but force; that frequent delinquencies in the members are the natural offspring of the very frame of the government; and that as often as these happen, they can only be redressed, if at all, by war and violence.

6. People will see state government and federal government as being on par. And the power of state government and federal government will often be employed jointly, further impressing upon people the legitimacy of federal power.

The plan reported by the convention, by extending the authority of the federal head to the individual citizens of the several States, will enable the government to employ the ordinary magistracy of each, in the execution of its laws. It is easy to perceive that this will tend to destroy, in the common apprehension, all distinction between the sources from which they might proceed; and will give the federal government the same advantage for securing a due obedience to its authority which is enjoyed by the government of each State, in addition to the influence on public opinion which will result from the important consideration of its having power to call to its assistance and support the resources of the whole Union. It merits particular attention in this place, that the laws of the Confederacy, as to the ENUMERATED and LEGITIMATE objects of its jurisdiction, will become the SUPREME LAW of the land; to the observance of which all officers, legislative, executive, and judicial, in each State, will be bound by the sanctity of an oath. Thus the legislatures, courts, and magistrates, of the respective members, will be incorporated into the operations of the national government AS FAR AS ITS JUST AND CONSTITUTIONAL AUTHORITY EXTENDS; and will be rendered auxiliary to the enforcement of its laws.[The sophistry which has been employed to show that this will tend to the destruction of the State governments, will, in its will, in its proper place, be fully detected.] Any man who will pursue, by his own reflections, the consequences of this situation, will perceive that there is good ground to calculate upon a regular and peaceable execution of the laws of the Union, if its powers are administered with a common share of prudence. If we will arbitrarily suppose the contrary, we may deduce any inferences we please from the supposition; for it is certainly possible, by an injudicious exercise of the authorities of the best government that ever was, or ever can be instituted, to provoke and precipitate the people into the wildest excesses. But though the adversaries of the proposed Constitution should presume that the national rulers would be insensible to the motives of public good, or to the obligations of duty, I would still ask them how the interests of ambition, or the views of encroachment, can be promoted by such a conduct?

PUBLIUS.

Links to my other posts on The Federalist Papers so far: