Information, behavior, and frictions (short course on economics)

“Economics is really about two stories. One is the story of the old economist and younger economist walking down the street, and the younger economist says, ‘Look, there’s a hundred-dollar bill,’ and the older one says, ‘Nonsense, if it was there somebody would have picked it up already.’ So sometimes you do find hundred-dollar bills lying on the street, but not often—generally people respond to opportunities. The other is the Yogi Berra line ‘Nobody goes to Coney Island anymore; it’s too crowded.’ That’s the idea that things tend to settle into some kind of equilibrium where what people expect is in line with what they actually encounter.”
― Paul Krugman

I love this quote. These two jokes do sort of describe economics, at least what you might call “pure” or celestial economics, where there are no real world frictions to worry about. If we add frictions to the mix we get terrestrial economics, the economics of the real world.

Krugman’s first joke gets at the way economists think about information. It’s essentially epistemology, about whether to believe something is true. The second joke is about behavior, about how we model the response of people to changes in their environment. At the end I’ll add frictions, and try to give you a sense of how economists like me think about the world.  So here’s my 4-minute course on economics.

1. Information:  Imagine a giant encyclopedia, written in Japanese.  It contains a vast amount of information about the world.  But to read it one must first learn Japanese.  By learning economics we are able to read an enormous amount of information from prices, if we assume that people are rational utility maximizers.  Thus if conventional Treasury bonds yield 7% and indexed bonds yield 3%, we can infer that optimal forecast of inflation is 4%.  If that were not true, there would be $100 bills lying on the sidewalk for investors to pick up.

Here’s another example.  Suppose there’s a neighborhood of cookie-cutter homes on the Irvine/Lake Forest boundary, here in Orange County, CA.  If we compare two similar houses on each side the border, we can infer the difference in value that people see in living in each city, capitalized into the home value (actually land value.)  Most likely, this reflects differences in the perceived value of the two school systems, with Irvine viewed as superior.  If the price gap didn’t reflect amenity differences then homebuyers would take advantage of any mis-pricing.

Here’s another example.  Assume that Mexican farm workers in California earn $11/hour on average while Central American farm workers earn $10/hour on average.  We can infer that the Mexican farm workers are probably about 10% more productive, on average, otherwise California farmers would choose to hire Central Americans, not Mexicans.  Again, no $100 bills on the sidewalk.

The economy contains billions of such pieces of information, all embedded in prices, for those who know how to “read economics”.  It’s like a giant encyclopedia.

2. Behavior:  Economists assume that rational people will keep doing X up until the point where the benefit of one more (marginal) unit of X no longer exceeds the marginal cost of X.  This is the “equilibrium”.  X could be any activity: units consumed, hours worked, dollars invested, etc.:

Urban planners often suggest that expanding highways does not reduce traffic congestion.  That’s wrong.  If you widen a highway, more people will travel on the highway.  That part is true.  But traffic congestion will be reduced; indeed it must be in order to induce more people to travel on the highway.  Why do urban planners get this wrong?  Because they noticed that traffic did not seem to improve when places like Orange County built more highways.  But that’s because both lines were shifting at the same time, as Orange County’s population was growing rapidly when it was building new roads.  It is still true that, other things equal, building more highways reduces traffic congestion.  Recently, Orange County’s population stopped growing.  Now if they were to build more highways in OC, it really would reduce traffic congestion.

Or consider how firms respond to a change in the cost of inputs.  Most students understand that firms will respond to cost increases by raising prices, but often fail to see that firms will respond to price decreases by cutting prices.  But the model is symmetrical; a shift up in the MC curve has the opposite effect of a shift downward, even for a 100% monopoly.  In both cases, cost curve shifts move the optimal output point, which requires a price change.  And we know that firms don’t want to leave $100 bills on the sidewalk.

So that’s celestial economics in a nutshell.  It describes a world where inefficiencies should be quickly eliminated, as utility maximizers do deals to improve efficiency and share the gains.  No $100 bills left on the sidewalk.

3.  Frictions:  Here in the real world, things don’t work so smoothly.  One friction is transactions costs.  In principle, inefficiencies related to externalities (pollution, etc.) and monopoly could be eliminated through negotiations.  Pollution victims could bribe factories not to pollute.  Monopolies could negotiate perfect price discrimination with consumers.  But such negotiations are often costly and hard to do, for all sorts of reasons.  Another friction is sticky wages and prices, which result in nominal shocks having real effects.  Bad real effects, such as high unemployment.  Another friction is illiquidity, which explains why the TIPS spread may not perfectly measure the public’s inflation expectations.  TIPS are less liquid, and hence less desirable.  Furthermore, information is costly.  So there may be a few $100 bills on the sidewalk because no one spent the resources to look for those $100 bills.  And there’ll be lots of coins on the sidewalk.

Left leaning economists focus more on frictions.  Right leaning economists focus more on celestial economics.  I’m somewhere in the middle, but definitely leaning to the right.




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Ezra Klein on California Housing Restrictions

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.

This is from Ezra Klein, “California Is Making Liberals Squirm,” New York Times, February 11, 2021.

I like large parts of this Klein article, which is unusual for me. One thing I’m seeing is that there seems to be an alliance among libertarians, liberals like Ezra, and a few others to reduce government restrictions on housing. Last month I finished a review of Conor Dougherty’s excellent book Golden Gates: Fighting for Housing in America. It will come out next month in the Spring edition of Regulation. Dougherty delves nicely into some of the somewhat hopeful signs for housing in America.

I don’t endorse everything Klein says in the op/ed, especially on the Central Valley’s middle-speed rail, euphemistically called high-speed rail. But there’s a lot of good stuff in the piece.

By the way, in Pacific Grove, where I live, you can walk 20 feet without seeing the sign he sees, but it’s hard to walk 200 feet without seeing such a sign.

HT2 Glenn Reynolds.



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Great Moments in California Lockdowns

The Marie Antoinette edition.

This was sent to me by a friend last month in response to California governor Gavin Newsom’s order to shut down salons and even outdoor restaurants.

I talked to my wife last night and she said that she has 3 close friends in the personal care service business (2 hairstylists and 1 esthetician). Only 1 of them kept working underground during the first shutdown in March. My wife said that all 3 are planning to defy the order since they won’t be able to make it financially this time around. Also, my wife talked to one of them this week and she said that she had called the county health office to discuss various options on how to stay afloat. This is how the conversation went:

Friend: Is there anything we could do to stay open (additional safety measures, operating outside, etc.)?
County health office: I’m sorry, no.
Friend: We are on our last legs and don’t have the funds to stay afloat any longer. In fact, we will have to close down permanently if this goes into effect. What should we do?
County health office: You’ll have to apply for food stamps.

End of conversation.


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Hypocrisy Over Lockdowns

At pickleball recently, I made the following point to a fellow player: every instance I can think of where a politician imposed or supported lockdowns yet violated the letter or spirit himself of herself is a Democrat. Art Carden talks about the hypocrites here. Notice the names: Chicago mayor Lori Lightfoot, Speaker of the House Nancy Pelosi, Washington mayor Muriel Bowser, Philadelphia mayor Jim Kenney, New York governor Andrew Cuomo, and California governor Gavin Newsom. All are Democrats. Art could have also mentioned Denver mayor Michael Hancock and U.S. Senator from California Dianne Feinstein.

My pickleball friend had a comeback. She said, “That’s because it’s Democrats imposing the lockdowns. Republican governors aren’t.”

I answered, “That’s not true. Charlie Baker of Massachusetts and Larry Hogan of Maryland have pretty extreme lockdowns and I haven’t heard or seen any evidence that they’ve been hypocritical.”

I made this point to a fellow libertarian the other day, a man who is generally nuanced. He answered, “I have no desire to defend Republicans.” Neither do I. I do want, though, to note and report evidence.

I think the hypocrisy about lockdowns is almost entirely one-sided: it’s Democrats.

This doesn’t mean that Republicans can’t be, and aren’t, hypocritical.  Ted Cruz often talks about this father escaping from Cuba and there’s no doubt that he wants people to think it was good for his father to escape from Cuba. But Cruz has been horribly hypocritical recently in trying to prevent Chinese people from escaping from Hong Kong to come here.

So the hypocrisy is on both sides.

But on lockdowns, it’s not.


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Adding Demand to Increase Excess Demand

Possible 11th Pillar of Economic Wisdom: When you’re in a hole, stop digging.

One of the most absurd things that have happened with the Pfizer COVID-19 vaccine is that politicians have been trying to increase demand for a vaccine of which, not surprisingly at a zero price, there is a shortage.

The rationale for putting Nancy Pelosi, Mitch McConnell, Mike Pence, and Karen Pence at the front of the line way ahead of almost all of the rest of us is that it will persuade people that it’s safe and those otherwise-hesitant people will be more willing to take it. They might be more willing to take it, but if that’s the rationale, the rationale makes zero sense in December. Tens of millions of us are ready to take it now. There’s no need to persuade people to take it when there isn’t enough in the short term to satisfy all willing takers.

Hmmm. Do you think there might be another reason for Pelosi, McConnell, and Pence to take it now? Let’s scratch our heads really hard and we might come up with a reason.

Here it is. They’re selfish people who are using their privileged position to get immunized. This is Newsom French Laundry all over again.

This “patriotic” behavior on their part is the opposite of admirable.


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Tyler Interviews a Liar

Tyler Cowen’s latest “Conversations with Tyler” is an interview of former CIA Director John Brennan. If you read the whole interview, you see that Tyler has done due diligence by reading background material on Brennan.

Unfortunately, Tyler doesn’t ask him a thing about Brennan’s lying to Congress about the fact that his CIA staff, at his behest, spied on Senator Feinstein and other employees of her Senate Intelligence Committee. Conor Friedersdorf lays it out in “A Brief History of the CIA’s Unpunished Spying on the Senate,” The Atlantic, December 23, 2014.

A key paragraph from Friedersdorf’s 2014 article:

CIA Director John Brennan denied the charge. “Nothing could be further from the truth,” he said. “We wouldn’t do that. That’s just beyond the scope of reason in terms of what we’d do.” It would be months before his denial was publicly proved false. “An internal investigation by the C.I.A. has found that its officers penetrated a computer network used by the Senate Intelligence Committee in preparing its damning report on the C.I.A.’s detention and interrogation program,” The New York Times reported. “The report by the agency’s inspector general also found that C.I.A. officers read the emails of the Senate investigators and sent a criminal referral to the Justice Department based on false information.”

Tyler Cowen has written a lot about what he calls “state capacity libertarianism,” which he favors. In this post, he lists 11 propositions about state capacity libertarianism. None of the 11 seems to involve holding government officials accountable for mistakes and lies. But I would think that a state capacity libertarian would see that as important.

Apparently not, at least from its main proponent.


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Response to a Friend about Fear of Death

My friend Ross Levatter sent me a thoughtful email challenging some aspects of my posts (here and here) on the risks we should fear. He gave me permission to post the whole thing. I also shared it with co-author Charley Hooper, who emailed me his thoughts. I’ll answer, and give Charley’s answer, after his letter. Here’s Ross’s letter:

I briefly skimmed your posts on what people are frightened of, where you note that many are frightened about rare events rather than more common causes of death or injury. You write “What should we fear? What threats are most likely to kill us?” Your underlying assumption is that the answer to the latter should strongly inform us in answering the former. But I don’t think that’s right.

The fact is, most adults have made peace with the fact they’re going to die at some point. Most people are not scared of dying per se. They go through the 5 stages, ending with acceptance. You don’t find massive amounts of fear in hospices.

It seems your paper’s underlying assumption is that FEAR of death by X should track LIKELIHOOD of death by X. But I don’t think that’s correct.

What ARE people frightened about?

1. UNEXPECTED deaths. Cardiovascular disease kills lots of people. Cancer kills lots of people. Shark attacks DO NOT kill lots of people. One might be frightened to anticipate dying of something that hardly kills anyone.

2. PAINFUL deaths. Here’s an Anthony Jeselnik joke: “My grandmother died last year. Initially, we all thought she died in the best way possible. What’s the best way possible? Right, in her sleep. But then we had an autopsy and we found grandma died in the worst, most gruesome way possible. During an autopsy.” In fact, numerically, dying in one’s sleep is orders of magnitude more likely than dying during an autopsy (which I doubt has actually ever happened unless you count vivisection.) But it’s hopefully understandable why the thought of the latter is more frightening than the thought of the former.

3. SUDDEN deaths. The *novel* coronavirus infection is very unlikely to kill you, especially if you’re under 70. But unlike dying of cardiovascular disease, this is not a death you’ve given any thought to up until a year ago. So it’s more frightening. A *NEW* way to die.

4. UNFAIR deaths. The odds of dying of a terrorist attack are extremely low. But to most people it seems very UNFAIR to be a perfectly healthy, active individual with decades of life ahead of him in the morning and dead in the afternoon.

I’m sure if I gave it more than casual thought I could come up with other distinctions, but I hope my point is clear. The belief that fear of death from X should track likelihood of death from X is an assumption that is not obviously true—it needs at least to be argued for—and is most likely, IMHO, false.

I basically agree with most of what he said because Ross keyed in on our words “fear” and “afraid.” I think we should have focused not on fear but on what things it makes most sense for a person to invest in preventing. Terrorism? No. Shark attacks? No. Being killed by a policeman while unarmed? No. Living a life to avoid heart attacks or delay them by 5 years? Yes. Being cautious around social groups to avoid COVID-19? Yes.

Charley put it better. He wrote:

His [Ross’s] points are correct and we did use the word “fear,” but what we were getting at isn’t fear as much as being smart about risks. If you want to live a long life, what should you think about and do?

To summarize his points, if we make peace with a manner of death, we no longer fear it. We fear those deaths that are sudden, painful, and unexpected.

We could have used “being smart about fatal risks” instead of “what fatal risks to fear.” But at some point, we start sounding like Star Trek’s Spock.

Now back to me: Consider the hospice point. If you’re in a hospice, then, if it was a good decision for you to be there, you have exhausted the alternative ways of preventing, without great discomfort, the thing or things that you’ll die of. It makes sense both not to fear the thing that will kill you and also not to invest further in preventing it. The time to act would have been much earlier when possibly a change in life style could have given you a couple more years of good life.

Ross then added a short additional point:

BTW, here’s another (I think incorrect) implication of this line of reasoning. Assume “Dying in your sleep” and “Dying from shark attack” are statistically exactly equally likely. Does it then follow that one should be equally frightened at the two prospects? I suspect most people, told they are equally likely, would still more greatly fear dying of shark attack.

I answered Ross as follows:

Yes, I would much rather die in my sleep, as my grandfather did, rather than dying in sheer terror, as his passengers did.

But seriously, folks, it is true that if you  choose between two ways of dying that have equal probabilities, the one that is more painful is the one to avoid.

You could alter our analysis by scaling the numbers, though, and in many cases that won’t matter. For instance, imagine that you would hate being killed by a shark 1,000 times as much as dying in your sleep. The odds of being killed by a shark are still so low that it doesn’t make sense to take account of that in deciding whether to swim in the ocean.




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Answer to a Reader on What We Should Fear

I received the following letter last week and the author gave me permission to quote without using his name.

Hi Dr. Henderson,

My name is X, I’m a fan of your writing, so I wanted to thank you for your work and insight that I’ve been able to enjoy…

I recently read your article “What should we fear most and what should we do about it” in the recent Regulation magazine, and while I generally agree with the policy prescriptions for the FDA I was somewhat confused about the discussion around people’s irrational reaction to different threats in life.  I’ve also heard other economists discuss irrational threat response behavior and honestly it strikes me as a bit misguided.  But I’m also not an economist or an academic so I may be missing something, and I’d be grateful to hear your thoughts on it..

One thing is that isn’t there a categorical mistake being made when comparing something like shark attacks to things like heart disease or cancer?  The latter two seem to be more or less results of aging (or long-term behaviors like excessive eating or smoking, for example).  In other words, aren’t illnesses or diseases that come with the territory of aging and dying categorically different than something like a shark attack?  I feel the same reasoning could be used to tell people not to worry about walking in a bad part of the city because your chances of dying from cancer are higher than getting shot.  It seems like a non-sequitur to me.  One way is a gruesome and sudden end to (hypothetically) a younger person’s life while the other is something that is more or less accepted by people as a very possible ending to their lives when they are older–illness and death at the end of life are accepted as part of the tragedy of the human condition.  This is not to say that I think people should be very worried about shark attacks, just that the statistical probability analysis comparing these events is missing something.

The second thing is the uncertainty of some risks as opposed to others.  I’d agree with the proposition that we shouldn’t go too far in restricting freedoms in order to prevent terrorism, but comparing it to illness or automobile accidents again seems misguided to me.  I think most people would have found it irrational to say, for example after the attack on Pearl Harbor, that people should be more worried about automobile safety and cancer than Japanese acts of war because their likelihood (at that point) of dying in an attack was much lower.  People worried about it because there was uncertainty about further attacks, a time sensitivity to stop aggression as early as possible, and the possible defeat of the US in a war.
Am I missing something here?  I appreciate your time and any thoughts you may have on this.  I look forward to reading more of your writings!

X was referring to this article by Charley Hooper and me.

Here’s my answer.

First, thanks for the compliment.

Second, let’s consider the shark versus heart disease/cancer point. They are different categories, but I don’t think there’s a category mistake. You’re right that the heart disease and cancer risk come with age whereas the shark attack is pretty much unrelated to age. They do come with the territory, but there’s a lot you can do about the territory. Just as you can avoid the almost infinitesimal risk of being killed by a shark by staying out of the ocean, you can substantially reduce a risk that’s a few orders of magnitude greater by, say, not smoking cigarettes, getting exercise, and eating in moderation. As someone who just turned 70, I don’t passively say, “Oh, that risk comes with the territory. I want to make it to 100 and I’m doing a number things will help me.” And I haven’t even mentioned medications that will help me as I age.

Regarding the point about walking in certain parts of town, if the risk is high enough, then it easily could be the case that you’re more at risk from dying in an hour from walking in that part of town than you are at risk from dying from a heart attack or cancer in an hour. The sensible way to think about risk is per unit time, whether it be an hour, a day, or a year. As I’m sure you noticed in our article, we normalized by having it be risk in a year.

You said that comparing terrorism to illness or automobile accidents seems misguided, but you didn’t say why. Why do think that?

Re Pearl Harbor you wrote:

I think most people would have found it irrational to say, for example after the attack on Pearl Harbor, that people should be more worried about automobile safety and cancer than Japanese acts of war because their likelihood (at that point) of dying in an attack was much lower.  People worried about it because there was uncertainty about further attacks, a time sensitivity to stop aggression as early as possible, and the possible defeat of the US in a war.

You make a good point. The way to compare risks there is not to see Pearl Harbor as a one-off event but to put it in context. What was the probability of further attacks? What was the chance the United States would have been defeated in war and what would have been the consequences of that?

What that basically says is that it makes sense to look at the whole thing, not just a piece. I would give you my views on the war with Japan because they are different from the views of almost everyone else I know, but that would take us too far away from the statistical issues you’ve raised.

I shared the letter with my co-author Charley Hooper, who answered as follows:

If we don’t want to die, or at least die at a young age, there are certain actions we can take. These actions have a cost and an expected benefit. That expected benefit is the probability times the benefit.

There’s a cost I incur if I avoid swimming in the ocean to reduce my risk of a shark attack. The expected benefit is minuscule because the probability is already so low that it’s difficult to lower it further. In other words, the expected benefit is negligible.

There’s a cost I incur if I exercise more, take a medication, practice meditation, or avoid eating certain foods. The expected benefit may be large because I only need to reduce the probability of dying from a heart attack or cancer a little bit to make a noticeable improvement. In other words, the expected benefit is large.

X is saying that we accept heart disease and cancer because they are a part of aging. If that’s the case, then why are so many drugs sold, so many procedures completed, and so much medical attention devoted to treating cancer and heart disease? Plus, if you could prevent a death from any source, you’ve still prevented a death. A heart attack can kill you just as certainly as can a shark.

We don’t act as if we accept heart attacks and cancer. And even if we did, we shouldn’t.

Regarding Pearl Harbor and WWII, again it comes to probabilities, actions, and outcomes. An individual might have a greater chance of dying in a car crash than dying in the war, but the risk of war is more than death: it’s having your house destroyed, your family killed, your government overthrown, your wealth destroyed, and your daughter raped. War is hell.

We shouldn’t worry about either car crashes or wars; we can worry about both and take the appropriate steps to reduce the risk of each.


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The Future of Travel

A piece in the Wall Street Journal in late July that explored the future of travel has been making the rounds on social media recently. The airline execs and regulators interviewed there agreed on a number of things, most important that business travel is going to be in real trouble even after the immediate dangers of COVID are past. A number also thought that leisure travel would come back “robustly” once travelers feel sufficiently safe.


I think that broad picture is probably right, but I wanted to add a few additional thoughts to consider. First, it’s important to disentangle the relative weight of leisure versus business travel from the question of the overall level of the total amount of travel. That is, are we looking at a future where people travel less overall but a greater proportion of that travel is for leisure, or will that overall level recover or surpass where it was pre-COVID?


No doubt, business travel is in trouble. Just as many in-person meetings within an organization generate the “this could have been an email” reaction, we’re looking at a future where in-person meetings across geographical distance will generate “could this be a Zoom?” considerations. (I ignore the question of what proportion of Zoom meetings also could have been an email!) Firms are going to have to think very carefully about the marginal benefits of in-person meetings involving travel compared to teleconferencing, especially as the software continues to improve and we learn to take advantage of that specific mode of interaction. Even if we assume away all health risks, can organizations really afford to pay travel expenses and sacrifice employee time when a Zoom meeting can accomplish most of the same things? And will employees be as willing to travel for business, with all of its headaches from the TSA to potential health risks to whatever health protocols stick around?


The WSJ piece suggests this will raise the cost of leisure travel, especially by air, as sellers lose the segment of their market that would pay high prices. That seems right, but the elasticity of demand might matter here. Leisure travelers are more price-elastic with respect to airfares, and if air travel becomes more of a hassle, the full cost of flying will quickly get prohibitive. Many folks have become used to driving longer distances the last few months, and the car might look like a better option on an increasingly large margin. Car rental places may have to re-orient their business more toward leisure travelers.


One piece of evidence of the tilt toward leisure is the recent decision by the airlines to waive change fees for essentially all travelers. This is one way to appeal to leisure travelers who previously might have been hesitant (on the margin) to fly if there was significant uncertainty. The elimination of change fees is a reduction in the total cost of the ticket in any case. But it also takes away a perk from frequent flyers, who are more often business travelers, by making it available to everyone.


Hotels will be in better shape, but here too, they will have to adapt to business that is relatively more leisure-oriented. Think about a chain like Marriott’s Courtyards, which are clearly designed for business travelers (e.g., no free breakfast). Many hotels got rid of pools, often for liability reasons. And it’s hard to find ones with adjoining rooms anymore. Chains that don’t allow pets will find it tougher going. If travel does tilt toward leisure, amenities such as free breakfasts, pools, adjoining rooms, and pet-friendliness will be part of that shift.


The WSJ piece also concludes with a call by former Transportation Secretary Ray LaHood to have clear and strict national safety and health standards for air travel. Just as hotels are going to compete to provide not only leisure-friendly amenities but also to assure customers of their health protocols, so will airlines compete to make clear how safe air travel is, even in the absence of national mandates. And this is the way it should be. Let the travel industry be free to experiment with different methods of addressing the concerns of their potential customers. If it’s correct that travel is going to be a challenging business for the near future, these firms have every incentive to figure out the right combination of safety and affordability to meet people’s desires. One-size-fits-all mandates squelch experimentation and assume we know things that only market proceess can discover.


Finally, just like the many Econlib readers who are academics, I’m not sure what this means for the future of academic conferences. Presenting papers and the other forms of more formal interaction can actually be done pretty well by Zoom, as can the preliminary rounds of job interviews that are central features of many such conferences. However, I do think there’s something really valuable about the in-person informal interaction at such conferences that cannot be replicated by Zoom. With colleges suffering in a post-COVID world, budgets will be even thinner, especially for travel. And while professional organizations might be able to negotiate really good hotel deals if total travel is down, it probably won’t be enough to entice a lot of academics to come who wouldn’t otherwise attend. Professional organizations are going to have to think very creatively about what pieces of their conferences do and do not have close enough substitutes over the web and just what their members are willing and able to pay for. Here, as everywhere, letting professional organizations experiment will be key to finding out what works best for their members.


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The Lockdowns Definitely Suppressed Economic Activity


Pryce Boeye’s Hungry Hobo sandwich shops’ sales on the Iowa side of the Mississippi River have been booming since the state reopened dining rooms in mid-May, while those he owns in still-closed Illinois languish.

The pattern is repeated across the Quad Cities, a river-straddling metro area of around 420,000 that includes Scott and Muscatine counties on the Iowa side, as well as Rock Island and Henry counties in Illinois. The contrasting state reopening policies have created two tracks in what had been a unified economy before the coronavirus pandemic.

The scene is playing out in other border communities around the country where workers and shoppers regularly cross state lines. The relatively stringent lockdown regime in Illinois compared with Iowa has created a clear shift in current spending patterns and potential longer-term consequences.

These are the opening 3 paragraphs of Doug Cameron, “States’ Divergent Virus Rules Create Tale of Two Economies,” Wall Street Journal, June 24 (June 25 print edition).

I often see economists say that the lockdowns didn’t have much effect because a huge percentage of consumers were essentially engaged in their lockdown measures without government regulation.

The evidence in this article, not just anecdotes but 3 graphs of hours worked, businesses open, and employees working, strongly suggests that the lockdowns matter. (There are 3 graphs in the print version and only one in the electronic version.)

To be sure, you have to adjust for the fact that these cities border each other; the effect is therefore exaggerated by the cross-border shopping. So a better test would be Iowa and Illinois cities separated by 50 miles or so. Nevertheless, it’s strong evidence.


I’m catching up on Wall Street Journals during my staycation.


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