Try this: Econvitals

Over the weekend, Jason Furman (Chair of the Council of Economic Advisors for Barack Obama, and now at Harvard) released an interactive dashboard of US economic data, Econvitals. The site neatly summarises the key economic data for the US, and if you click on any of the headline indicators, it takes you into a page with more detailed information.

In addition to the dashboard at the top, the front page of the site summarises the economy in four questions: (1) Is inflation coming back to 2%; (2) Is the labour market weakening; (3) Is demand too strong or too weak; and (4) Why have long-term interest rates risen. Presumably, Furman (and his team) will update those questions to reflect current priorities as they change.

However, if you scroll down to the next section below that one, the highlight for me was the section, How is the Economy Doing, and How Surprising Has It Been? That compares composite indicators of economic activity and inflation relative to past performance and to forecasts. I can see a lot of use for such a tool.

According to this thread on X, Furman vibe-coded the bulk of the site earlier this year. It now has over 500,000 lines of code sitting behind it (and it shows).

Econvitals has gotten me quite excited about whether something similar could be done for New Zealand data. Of course, we don't have the depth of data or the regularity of data releases that the US does, but nevertheless it would be great to have an interactive dashboard like this that collates all of the key data in one place. I immediately reached out to my colleague Michael Ryan, and we are both keen on this. If you want to be involved, drop Michael or I an email.

In the meantime, Econvitals shows what is possible with US data. Enjoy!

[HT: Marginal Revolution and The Dangerous Economist]

Book review: The Shortest History of Economics

I've read a number of Andrew Leigh books, and generally enjoyed them (see reviews here, and here, and here). So, I was looking forward to reading his 2024 book The Shortest History of Economics. Sadly, I don't think this book was up to Leigh's usually high standards. The reason I say that is that this book seems to contain a lot of material recycled from his other 2024 book How Economics Explains the World. I only realised this after noticing a quirky example Leigh uses to introduce the idea of rival goods - giving someone apples, compared with juggling the apples. I enjoyed the quirky nature of that example in the other book, and used it in one of my classes. However, I didn't need to see it again.

Having said that, there is plenty of new material in this book that doesn't repeat from the other. Leigh takes us through a quick tour of both economic history and the history of economic thought, from humanity's migration out of Africa and the adoption of agriculture, all the way to the coronavirus pandemic. Leigh even finds space (within the 'shortest' history) to consider the future, in particular drawing attention to rising inequality, and the risks from artificial intelligence and climate change.

Given Leigh's role as a Member of Parliament in Australia, I thought this passage was interesting:

One way to think about the role of government is as a risk manager: providing social insurance against risks as diverse as earthquakes, diseases and recessions.

I wonder if, once his political career is over, Leigh will provide us with more thoughts on the role of government. I also learned some interesting facts from the book, such as these government responses to the Great Depression:

Policies were tightened further still in the 1930s. Australia imposed an immigration fee equivalent to one-quarter of the average annual Australian wage. Thailand introduced a literacy test and expensive residence permits. New Zealand closed its Department of Immigration. Migration from Europe was lower in the 1930s than it had been in the mid-1800s.

I was sceptical, but it turns out that New Zealand really did close its Department of Immigration. However, that is not the full story. Parliamentary papers note that the immigration functions were transferred to the Department of Labour (see page 29 here).

Overall, and despite my gripes, this is a good book. If you haven't read How Economics Explains the World, then this book is a good alternative. Given the overlap between the two, I wouldn't recommend reading both, unless you are keen on receiving a good dose of Andrew Leigh. And if you have to choose one, I prefer the other book rather than this one.

This week in research #149

Here's what caught my eye in research over the past week (a very quite week, it seems, but I've been busy with final assessments in the papers I teach):

• Huang et al. present HouseholdBench, a new evaluation for LLMs that tests whether they can predict behaviour, including how households adjust to changes in various policies

Also new from the Waikato working papers series:

• Suzuki et al. examine the impact of digital water-quality monitors and a farm-management app through a ten-month experiment involving shrimp farmers in Southern Vietnam, and find that the intervention reduces disease outbreaks as well as increasing revenue and profit for these smallholder farmers

The welfare impacts of a positive (consumption) externality

Back in 2023, I wrote a post about the welfare impacts of a negative consumption externality. I think I always meant to follow up that post with a companion post about the welfare impacts of a positive consumption externality, but I never did. So here goes!

To recap, an externality is the uncompensated impact of the actions of one person on the wellbeing of a third party. A positive externality makes the third party better off, while a negative externality makes the third party worse off. They are called externalities because they lie outside the original decision, i.e. some of the costs or benefits are external to the person whose action creates them.

There are fewer examples of positive externalities that come readily to mind than negative externalities, but let me use the example from my ECONS102 class: vaccinations. A person who gets vaccinated receives some benefit themselves, because they are less likely to get infected by whatever they have been vaccinated against. However, they also provide a benefit for other people (including those who are unvaccinated), because other people are less likely to catch the infection as well (because they are less likely to catch it from the vaccinated person).

Consider the market for vaccinations as shown in the diagram below. The market will operate at the quantity where supply (S) meets demand (D) - that is, the quantity traded will be QM, and the price of vaccinations will be PM.

However, the vaccine recipients create a positive externality for other people. Since this externality arises from the buyers of vaccinations, we show this externality on the demand side of the market - we refer to it as a positive consumption externality.[*] This means that the benefits that vaccine recipients receive themselves from getting vaccinated are lower than the benefits that society receives from those vaccinations - the difference is the benefit that is received by other people. We show this on the diagram by differentiating between the marginal social benefit (MSB) and the marginal private benefit (MPB). The MPB is the benefit that vaccine recipients receive for themselves. The MSB is the marginal private benefit, plus the benefit of the externality - the marginal external benefit (MEB).

Now, society prefers the quantity of vaccinations to be the quantity where marginal social benefit (MSB) is equal to marginal social cost (MSC) - I'll explain why a little later in this post. That is the quantity QS, and one way to get to the quantity QS is if the price of vaccinations decreased to PC (because then, more people would be willing to get vaccinated). Notice that in the diagram, relative to the quantity that society prefers (QS), the market produces too little (QM). There are too few vaccinations (or too few people getting vaccinated).

Why does society prefer QS (the quantity where MSB = MSC)? It's because that's the quantity that maximises economic welfare. Economic welfare is the sum of all of the net benefits arising from the market. First, the consumers receive some net benefit from participating in the market. Consumer surplus is the difference between the amount that consumers are willing to pay (shown by the demand curve), and the amount they actually pay (the price). In the diagram, at the equilibrium price and quantity, consumer surplus is the area FEPM. Second, producers receive some net benefit from participating in the market. Producer surplus is the difference between the amount the sellers receive (the price), and their costs (shown by the supply curve). In the diagram, at the equilibrium price and quantity, producer surplus is the area PMEH. Third, the third parties are positively affected by the market. The welfare benefit of the positive externality is the area in-between marginal social benefit and marginal private benefit, up to the quantity of vaccinations received (in this case, QM). That is the area AGEF, and it is added to total welfare. Total welfare is the sum of consumer surplus and producer surplus (which is the area FEH), plus the area of the positive externality (AGEF), and is equal to the area (AGEH).

Now consider the market operating at the quantity QS (with the price PC). The consumer surplus is the area FJPC. The producer surplus is tricky, because to get the market to produce QS, that would require the seller to accept a price that is below their costs (notice that the price PC is below the firms' costs shown by the supply curve). In reality, the government would probably subsidise this good to achieve the optimal outcome, but we will instead assume that the government mandates that the seller provide vaccinations at below cost, to anyone who is willing to pay the price PC (this might make some sense in a public health care system like New Zealand, but is still just a simplifying assumption rather than a description of how this would work in practice). The producer surplus is therefore the area -PCHBJ (it is all negative, because every vaccination is provided for a price that is below the sellers' costs). The area of the positive externality is the area ABJF. Total welfare at QS is equal to ABH.[**] Notice that this total welfare is larger when the quantity is QS than when the quantity is QM. If the market is left alone, there are too few vaccinations (or too few people getting vaccinated), and this decreases total welfare by the area GBE. That area GBE is the deadweight loss of the externality.

Since the market produces too little, a relevant question is how could we get the market to produce more? A Pigovian subsidy (named after 20th Century economist Arthur Pigou) is one option, since subsidies increase the quantity of a good that is traded (for more on that, see this post). Of course, determining the exact optimal quantity QS is difficult in practice. However, we can be sure that it isn't the quantity that is provided by the market.

*****

[*] In contrast, when producers produce a positive externality as a consequence of manufacturing other goods (for example), that is a positive production externality, which we would show on the supply side of the market. An example of a positive production externality is the smell of freshly baked bread emanating from a bakery (at least, it's a positive externality for those who like the smell of bread).

[**] Calculating total welfare involves adding the consumer surplus and externality (adding FJPC and ABJF gives the area ABJPC) and then subtracting the negative producer surplus of PCHBJ, which leaves the area ABH.