1. Microfinance: October 2nd was the 10th anniversary of what I consider to be an underappreciated but critical moment in the history of the microfinance movement--David Roodman's piece on how Kiva actually worked. David had already been working on a book about microfinance that was going to be very influential--his open book blog as a whole is a remarkable contribution to the public good, one I wish many more people had decided to replicate--but the Kiva post (based on it being one of the most read blog posts in CGD history according to Justin Sandefur) brought a huge amount of attention to questions about how not only Kiva, but microfinance as a whole, actually worked. I re-read it this week and it's as good as I remember it and definitely makes me pine for the brief glorious time where the development blogosphere was a thing.
There's another important anniversary this week for global microfinance though with a less arbitrarily neat number--Muhammad Yunus's Peace Prize was 13 years ago. Today many were surprised that Greta Thunberg didn't win. The explanation seeming to be both timing and the fact that there is not a direct link between climate change and conflict. There may be a narrowing of the scope of the Peace Prize given that there is certainly no connection between microcredit and reduced conflict. In case you didn't know the winner was Abiy Ahmed, the Ethiopian Prime Minister, who has done some pretty impressive things directly related to peace, like ending the conflict between Eritrea and Ethiopia and freeing thousands of political prisoners. For what it's worth the Economics Nobel announcement is Monday so expect to see more about that in next week's faiV. Some favorites with particular applicability to the faiV include some combination of Donald Rubin, Josh Angrist, John List and Guido Imbens for kicking off "the credibility revolution" and Michael Kremer, Abhijit Bannerjee, Esther Duflo and/or John List for kicking off the experimental revolution. Of course, I'm hoping for the latter because it would likely give a pretty significant boost to my book sales.
But back to microfinance. Banerjee, Emily Breza, Townsend and Vera-Cossio have a new paper (presented at NEUDC) that uses the Townsend Thai village data and the expansion of a credit program to further bolster what should be the clear consensus on the effect of microcredit: on average not much, but very high returns for some. In this case, they find that there are very large gains for high productivity households who get access to credit (1.5 baht increase in profits for every 1 baht increase in credit) and even higher for those outside agriculture. This is broadly similar to earlier work, now in an NBER paper form, by Banerjee, Breza, Duflo and Cynthia Kinnan on Indian microfinance. Keep in mind, as we continue to see these results, that there is another side of the coin: is there a business model that can reach the high productivity borrowers more exclusively?
2. Inequality: If you think about within-country inequality, you think about taxes. Since the United States has had a huge explosion of income and wealth inequality in the last few decades, and there is a presidential election (hopefully) just over a year away there is a lot of discussion about the US tax system and how it has contributed to the growth of inequality and how it might be used to reduce it. This week there has been a lot of focus particularly on whether the US tax system is progressive or regressive, which seems intuitively like it should be a pretty straightforward question to answer. But the US tax system is so complicated, including not only collecting but distributing cash, it's a controversial question. Emmanuel Saez and Gabriel Zucman make the case that since the 1950s the US tax system has shifted dramatically toward being regressive. Here's David Leonhardt's shorter version of their argument with cool animated graphics. But not everyone agrees and those differences can't be traced just to ideology. Here's a thread from Jason Furman, former chair of the Council of Economic Advisors under Obama debating Zucman on methodology and interpretation. Here's David Splinter with a more in-depth analysis illustrating why Saez and Zucman get such different numbers than the traditional approaches to analyzing progressivity.
Meanwhile, there is an entirely different question about whether taxes can be used to effectively address inequality (Saez and Zucman's book is all about how the wealthy evade taxes). There's a new NBER paper on the response of rich taxpayers to an increase in the California tax rate. It finds that just under 1% of those subject to the higher taxes moved out of state, and those who stayed found ways to avoid the tax, so that total income from the tax was about half of what it would have been otherwise. Here's Lyman Stone's Twitter summary.
It's not clear how to think about that 50% cut in additional revenue: on the one hand, there is a big increase in tax collection, on the other hand you have to expect that over time people are going to get even better at evading the tax. Here's Lily Batchelder and David Kamin with a comprehensive review of wealth taxation in implementation with hope that wealth taxes can work.
Week of September 27, 2019
1. Jobs: I've written a good bit here on the "Great Convergence" from the perspective of financial inclusion--that the US and middle-income countries have more in common in that domain than they have ever had--but another version of the "Great Convergence" is the common focus on jobs in countries across the per-capita income spectrum.
It's useful to put the current convergence in historical perspective--the recognition that creating jobs was critical and that "national champion" industrial development was not creating them played a large role in the development of the microfinance movement. The failure of microcredit to produce much beyond self-employment alternatives to casual labor has brought job creation, and especially job creation through SMEs, back to the top of the agenda of international development. At the same time, the failure of richer economies to produce very many "quality" jobs in the 10 years since the Great Recession (and arguably since the 1970s) or for the foreseeable future has put the question of jobs at the top of the list of concerns for policymakers in those countries.
Paddy Carter, the director of research for CDC (UK, not US), and Petr Sedlacek have a new report on how DFIs and social investors should think about job creation that lays out some of the issues (e.g. boosting productivity can both create and destroy jobs) quite nicely. MIT's "Work of the Future Task Force" also has a new report, this more from the perspective of policymakers in wealthier countries, with a call to focus on job quality more than job quantity. Stephen Greenhouse has a new book on dignity at work, which of course has a lot to do with job quality. Here's a talk he gave recently at Aspen's Economic Opportunities Program.
Seema Jayachandran has a new working paper on a specific part of the jobs conversation: how social norms limit women's labor market participation and what might be done about that. For me it also opens the question about microcredit-driven self-employment being a higher "dignity" job for women in many contexts than the jobs that are available to them otherwise. More on that in a moment.
2. Household Finance: I don't have a lot of links here, just some thoughts from conversations in the last few days. But to kick things off, Felix Salmon had a nice gibe at financial literacy this week that had my confirmation bias going. But in hindsight, I actually disagree: teaching financial literacy actually doesn't seem to be that hard based on the many papers that show that running a class leads to passing a financial literacy test. The hard part is making higher financial literacy pay off in terms of changed behavior. But there I agree with Felix's basic point: higher financial literacy doesn't lead to improved decision making for the poor or the wealthy. The wealthy just have more structure and protection (both formal in terms of regulation and practices at private firms who know better than to routinely screw profitable customers, and informal in terms of slack and cushion) from bad choices. On the flip side, Joshua Goodman has a new paper in the Journal of Labor Economics that finds that more compulsory high school math leads African-American students to complete more math coursework and to higher paying jobs (there's a nice little estimate that the return to additional math courses makes up half of the gains from an additional year of school).
Part one of "more on that in a moment" is that Seema with a rockstar list of development economists (Erica Field, Rohini Pande, Natalia Rigol, Simone Schaner and Charity Troyer Moore) has another new paper on whether access to, deposits into and training on using a personal bank account affects women's labor supply and gender norms. They find that it does increase women's labor supply and shifts norms to be more accepting of women working. Here's the indispensible Lyman Stone with a somewhat skeptical take on the interpretation of the data.
Finally, in a conversation with Northern Trust this week about their financial coaching work (see a recent summary here) a really fascinating insight came up: people in the coaching programs seem to have much more success when "saving" is framed as "debt reduction" than when it's framed as "saving." These sort of things always grab my attention because Jonathan's paper Borrowing to Save was a seminal piece for my interest and thinking in financial inclusion. But it also got me thinking: what would happen if retirement savings programs were framed as debt + loss aversion? Specifically, if when you started a job, the employer said: "I'm loaning you $10K, deposited into an IRA and you owe me $x monthly, until you pay it off--and if you don't I take it back." Obviously you couldn't run an experiment like that in the US because of regulations, but is there somewhere you could? Maybe someone has already done it? Let me know if you have any thoughts.
Week of September 20, 2019
1. Evidence-Based Policy: So this may seem pretty off-topic as a way to start, but here's a story about the very slow moving revolution in soccer/football analytics, told from the perspective of attending a "bootcamp" put on by one the leading firms in the field. Why is it in the faiV? Because I think there is a lot for those of us who think about evidence-based policy to learn from watching how evidence infiltrates other domains. [Side-note: the RCT apologetics that appeal to "the way it's done in medicine" annoy me to no end, because the use of evidence in medicine is terrible.] And I think in many ways the sports world is a useful mirror to the policy world--if only because there are a lot of people who care a lot, have strong opinions but relatively little expertise. Here's a story about that specifically: what it means to be a fan, psychologically, when there is increasing distance between you and the people who are making decisions (or put another way, how does it feel to live in a technocracy?). Which also allows me to slip in Glen Weyl's recent essay, "Why I Am Not a Technocrat."
I don't worry that much about the pros and cons of a technocracy as we are so far away from living in one--many of the people in positions to make decisions are still a long way away from adopting the evidence that is available, even when their job would seem to depend on listening.
Of course there is another factor delaying evidence-based policy in many domains: the poor quality of the evidence. Here's a newly revised paper from Bradley Shapiro, Gunter Hitsch and Anna Tuchman about, of all things, advertising effectiveness(Twitter thread here). I find it interesting because this is a place where you would expect that there is lots of demand for high quality evidence. And yet, with really painstaking work, the authors are able to show that the published literature is quite biased, and therefore wrong. So wrong that the maxim should possibly be not that "half of my advertising budget is wasted, I just don't know which half", but "Three quarters of my budget is wasted...". Waiting for the revolution indeed.
Finally, since I expressed growing skepticism about nudging last week, here's a paper that finds an effect in a place I would not have expected it at all: remindingseniors with reverse mortgages to pay their property taxes.
2. SMEs: Thanks to David McKenzie, I just learned about a relatively new "book" from the World Bank on High Growth Firms: Facts, Fiction and Policy Options for Emerging Economies. It's a terrific effort to pull together a lot of research from different countries and account for how uneven the data is. Two important evidence-based takeaways: past episodes of high growth are not predictive of future ones, and not even that predictive of survival; and, the link between high growth and productivity is really weak. The only quibble I have with it is that it is framed too much for "emerging economies." Everything I see here is relevant to the US and other developed economies as well, where the thinking on SMEs can be just as wrong.
Policy prescriptions in the book include focusing on managerial skill, which I am increasingly convinced is the crux of the matter. Another is to focus on market linkages, particularly export markets. Here's a J-PAL report on helping small-scale Egyptian rugmakers connect to export markets, which boosts their profits and productivity (2017 QJE paper here). For one more aspect of SME development and policy implications, see item 5 below.
Week of September 13, 2019
1. Digital Finance: Is a tide turning on digital credit? Old hands in the microfinance world like MicroSave and CGAP have been highlighting concerns about digital credit for the last few years, but the non-specialist community hasn't seemed to notice until recently. In late August Bloomberg had a quick hit piece with an eyebrow-raising headline, "This Nobel-Prize Winning Idea is Instead Piling Debt on Millions," which is likely the way the general public will perceive this despite the protests of insiders that telecoms/fintechs making instant loans at high rates with minimal customer engagement doesn't have much in common with traditional microcredit. A more serious treatment,"Perpetual Debt in the Silicon Savannah" was published in the Boston Review the same week, though it's frustrating in its own ways, notably the lack of engagement with the global/historical context of small dollar lending or with the research from financial diaries.
In both articles there are two additional issues that I wish received more attention. First, the value of liquidity management. The authors of the Boston Review piece, Emma Park and Kevin Donovan (both historian/anthropologists), spend a good deal of time talking about the "zero-balance economy" creating a situation where consumers can be exploited without engaging on the need for services to manage liquidity when you have low and volatile incomes. Second, the kind of default rates being hinted at in these articles raise serious questions about the business models and sustainability of digital lenders. Tala, one of the larger digital credit providers in Kenya (and elsewhere) just raised another $110 million. How much of that money is covering losses? I would love to see some analysis of what sustainable default rates are for digital credit.
Shifting gears a bit, the reason that the Kenya specifically and East Africa more generally remain in the spotlight on digital finance is the ubiquity of access. But ubiquity can't be assumed and in general I would say not enough attention is being paid to what happens when ubiquity fails. Here I don't mean places where everyone knows service is unreliable, but places and times where service is unexpectedly unavailable. Here's a story about the problems that can create in the US with ZipCar customers stranded in the "wilderness" because of a lack of signal leaves them unable to unlock or start the vehicles. More seriously, though, is the concern when access is limited because of political reasons. Here's a story about the rise in government-directed internet shutdowns. Of course there is the big concern of how these shutdowns would affect people who have adopted digital finance and find themselves unable to spend. But I also wonder if Tala investors have priced in the risk to the business model of internet shutdowns.
Internet shutdowns are a blunt tool. We should also be concerned about more fine-grained tools in the hands of governments or private companies. I'm old enough to remember when one of the highlighted "benefits" of digital finance was that it created an audit trail of transactions. Here's a story about how much data about you leaks to unknown parts of the internet when you use the Amazon Prime card and the Apple Card. And finally, here's a new report on cash as a public good from IMTFI, sponsored by the International Currency Association, which I am fascinated to discover exists (though I'm even more fascinated to discover the International Banknote Designers Association, which is one of its members).
2. Our Algorithmic Overlords: There is of course a lot of overlap between concerns about digital finance and privacy and digital everything and privacy. One of the standard mantras of those gathering and selling data is that much of it is anonymized, so we shouldn't be concerned. But, of course, not so much. That's not just a concern in the US, because digital data-gathering is becoming a thing worldwide. Here's a plea to stop "stop surveillance humanitarianism." And here's a story about how a high-tech surveillance approach to improving disaster response turns out to have not been such a good idea (spoiler: garbage in/garbage out).
One of the major concerns about the use of algorithms in these situations is the garbage in/garbage out problem--combined with the gee-whiz veneer that technology provides obscuring that problem. I'm generally skeptical of that argument as a whole, because my experience is that people are far less likely to trust an algorithm than a human being (In some sense I wrote a whole book about it in a different application: the bogus fears that Toyotas were suddenly accelerating and trying to kill people). But there are other forms that algorithmic discrimination can take. Here's a story about a new US Housing and Urban Development regulation that would exempt landlords from responsibility for the discriminatory results of their screening practices as long as they don't understand the algorithm, which y'know is a given.
Finally, there is a new documentary about the 2016 US election, the Brexit referendum, Facebook/Cambridge Analytica, etc. called The Great Hack. Here's a piece about 7 things the documentary gets wrong which I find pretty convincing.
Week of August 16, 2019
1. The Great (Household Finance) Convergence: I've been teasing this for awhile and now it's finally out: my essay for Aspen's Financial Security Program laying out the convergence between the US and developing, especially middle-income, countries especially when it comes to financial inclusion. The essay also highlights areas where mutual learning and collaboration should prove particularly fruitful. While you're there check out the rest of Aspen FSP's work on financial inclusion and keep an eye out for my next essay on "Reinvigorating the Financial Inclusion Agenda" (or, y'know, just wait until it shows up in the faiV; or you could check out this piece I did for CDC (UK) on the value of investing in financial system development).
Now the work for that essay was done a while ago, but the evidence for the convergence thesis (and it's related "corrupted economy" thesis) keeps coming. The past few weeks there were several stories in this vein. For instance, the growing number of American families relying on debt to pay their bills. Sorry, I meant the growing number of Russian families relying on debt to pay their bills. Sorry, I meant the growing number of post-retirement Americans relying on debt to pay their bills and being forced into bankruptcy.
2. Moving to Convergence?/Evidence-Based Policy: Here's a different area of convergence--my interests in the Great Convergence and in evidence-based policy in general and the RCT movement in particular. Part of the argument of the Great Convergence/Corrupted Economy is that the bottom 40% of the American income distribution faces an economy characterized by limited opportunity, with poor jobs, poor education, poor healthcare and housing that closely resembles the economies of middle-income countries. Escaping from these circumstances requires something akin to winning the lottery (Oh, did you hear about Virginia's new program for automatic purchases of lottery tickets? Set it and forget it!). People do win, but it's hard to justify the mental, physical, emotional and economic investment in hard work and building human capital when you are facing a lottery economy (and frequently witness things like this which don't seem to horrify very many people beyond Paddy Carter).
Perhaps you heard about or read the new paper from Chetty et al. on an experiment to revive the Moving to Opportunity program that showed next-generation benefits(but not much in terms of short-term benefits) from moving from poor neighborhoods to wealthier neighborhoods. The results from the experiment were met with a good bit of enthusiasm--here's Nick Kristof, and here's Dylan Matthews.
But the whole thing leaves me pretty uncomfortable for four reasons. One, the whole thing really is a lottery. Jake Vigdor does a good job in this thread of laying out the issues. First, the underlying program is literally a lottery. In fact, all housing assistance in Seattle is the functional equivalent of lottery. So to benefit from the program you would have had to win the lottery of applying for housing assistance at the right time, when there were slots open, and then when the lottery to get one of these vouchers specifically for this type of move.
Second, the program isn't an anti-poverty program as they are traditionally conceived of--it's a test of a program to encourage people who win the double lottery to follow through and actually move to higher-income neighborhood. It turns out that a remarkably small number of people who get housing vouchers like this actually use them--see above on the difficulty of motivating action in a lottery economy. The program works on its own terms--it significantly increases the percentage of people who actually move. But the anti-poverty effects in the theory of change won't be felt until the children of these movers become adults--at least 10 to 15 years from now.
Which raises the third issue. To really consider this an anti-poverty success you have to believe that the things that made the high-income neighborhoods in Seattle good for generational mobility 20 years ago, remain true today, AND that the labor market faced by today's kids will be same in 10 to 15 years further into the future. Those seem to me to be large assumptions.
It's not just that they seem so, the fourth reason is that they are large assumptions. Because the underlying mechanisms that lead to next-generation income mobility haven't been identified in any meaningful way. Other work by Chetty et al has documented the clear existence of high-mobility and low-mobility neighborhoods in the US--that work is a big part of what informs my views on the Great Convergence/Corrupted Economy. But it doesn't make it clear why the good neighborhoods are good, and therefore you have to believe that those factors are invariant over time, which maybe you shouldn't.
Here's the connection to evidence-based policy, and the fourth : this work and the reactions to it seem to me to be a much clearer example of the criticisms of RCTs by folks like Lant Pritchett, Angus Deaton, Glenn Harrison and Martin Ravallion than anything I've seen in the economic development space. You've got black boxes, large unexamined assumptions, a suspension of disbelief due to the methodology, and ultimately the possibility of gains so small (e.g. once you narrow from the winners of the lottery to the people who follow through to the kids who benefit; and all of this is just in one county in the whole country) that you should say, "so what?" instead of cheering.
By the way if you're interested in a different critique of this body of work, and other takes on economic mobility in the US, check out this thread from Scott Winship.
Wrapping up on the evidence-based policy front, it turns out that policy-makers have a lot of behavioral biases.
Week of August 2, 2019
1. Financial Systems: I've referenced several times over the last year some work I've been doing for the CDC (the UK DFI, not the one in Atlanta) on investing in financial systems. The first public version of that work, a summary of a much longer paper that I'm still hoping to finish in the next few weeks, is now available. As a summary, it necessarily elides a lot but it does capture what I think are the essential points on the topic right now. The main one I want to highlight here is a somewhat esoteric one: the question in front of us in the sector is not whether or not financial systems matter for the poor, it's whether we know how to intervene in the development of those systems in ways that specifically benefit target populations we care about, in the timeframes and manner in which we can measure. It's an important distinction that I think is missing in too many current conversations about where we are on financial inclusion. Please do read it, and let me now what you think.
In related financial system development and development ideas, Paddy Carter from CDC pointed me to this paper from Paula Bustos, Gabriel Garber and Jacopo Ponticelli on how the financial system in Brazil channeled a productivity shock in agriculture into other sectors (which apparently is on its way to appearing in the QJE) which is exactly what one hopes a financial system accomplishes from a development perspective.
The longer paper for CDC and my research for it emphasizes the history of financial system development. A couple of 2018 books on the topic, specifically on John Lawand Walter Bagehot, are reviewed in the New Yorker by John Lanchester. Rebecca Spang has some thoughts on the continuing focus on the "great man" approach to the history of financial systems and how that misleads. Again, I hope that my work for CDC takes this into account by spotlighting what we know about informal financial systems and how to factor that into thinking about investing in financial system development.
Finally on this topic, two papers that I've had sitting in open tabs for quite some time but have never found a place for in the faiV. First, here's Anginer,Demirgüç-Kunt, and Mare on how institutions affect how much bank capital influences systemic risk (and here's the blog summary). The bottom line is that bank capital matters less when there are well functioning regulatory institutions, but higher capital requirements can substitute for quality institutions in reducing risk. Of course, those higher capital requirements limit the outreach and inclusion of those banks. Trade-offs forever. And here's Ben-David, Palvia and Stulz on how banks in the US react under distress finding that the banks generally reacted prudently rather than gambling in an attempt to revive their sick balance sheets. Which is a further argument for higher capital requirements in weak institutional settings, but creating an alternative system for financial inclusion that isn't bank-based.
2. The Corrupted Economy: My comments a few weeks ago on the "great convergence" and the "corrupted economy" in the US got more positive feedback than I was expecting. So we may now have a new regular section of the faiV.
Unequal access to a quality education is one of the areas where the US increasingly looks like middle income countries. Here's a minor, but infuriating, version of the corrupted system: wealthy parents giving up their children to "guardians" so those children can in turn apply for financial aid as if they don't have any resources. And here's a less blatantly evil version of a similar corruption: children who receive extra time on tests due to some psychological/medical diagnosis are disproportionately white and wealthy--because those are the parents who can afford the thousands of dollars required to pay a private psychologist to deliver such a diagnosis. And the issue is much broader than that because the article only briefly touches on the systemic impact on families and school districts, one I'm acutely aware of personally. I know the educational outcomes for my son, with a rare disease, are almost certainly going to be much better than many other kids in this country with the same disease, because we can afford to live in a school district that isn't so strapped for cash that they have to cut back on services, and I can be an intimidating presence in meetings with the district when necessary.
Here's a story about how the "adjustment" payments for farmers negatively affected by Trump's trade war are all going to the largest, wealthiest farmers. Here's a story about how minor criminal offenses are turned into profits and debtors prison. And here's a story about the actual labor market conditions faced by the lower half of the income distribution: a few days in the life of a meal-delivery bicyclist in NYC. Marvel at how DoorDash preys on income volatility to take tips away from riders. And how the riders' existence is pushed to margins with minimal and shrinking interaction with the customers, how they acknowledge that they are being used to generate data so they can be replaced by drones, and in the meantime how they are subject to the capricious whims of NYC police who can confiscate their bikes on a pretext at any time. And how the riders are grateful that this is a step above working directly for the restaurants. This is America.
And speaking of the Great Convergence, check out this trailer for a new Indian movie about a heroic effort to help kids break out of their corrupted economy. Then think about the long history of American movies with essentially the same plot:Stand and Deliver, Dangerous Minds, Lean on Me, etc. etc. And they are all essentially a distraction from the systemic issues.
Week of July 26, 2019
1. MicroDigitalFinance: The nominal intention of the faiV is to keep you aware of what's happening in various domains, especially microfinance. But there is a more systematic approach to documenting trends in the industry, e-MFPs survey of people in the industry on what they perceive to be the most important trends and developments. Here's their report from last year's survey. This year's survey is now open--so click here (French; Spanish) and go produce some data on trends in the industry.
There's some new experimental evidence on the impact of mobile money from Christina Weiser, Miriam Bruhn and co-authors, who managed to work with Airtel to randomize the expansion of mobile money agents in Northern Uganda. The findings, to my eye, are broadly similar to Jack and Suri's work in Kenya (keep that in mind, we'll be coming back to it later), though without the direct impact on income poverty.
And here's a report from Karandaaz Pakistan on the regulatory and policy bottlenecks limiting the spread of digital financial services there. The basic issue is a lack of clear policy and regulation, rather than existing policies that prevent action--which raises a question of why the lack of clear policy and regulation was a boon to digital financial services development in so many places, but a hindrance in others.
2. Digital Security: One of the areas the report on Pakistan highlights is lack of clarity on data privacy and protection, but mostly from the compliance side. One of the things I've been thinking a lot about lately is the other side of digital security and the huge burden we are rapidly putting on individuals and firms to protect themselves from bad actors.
I'll admit this is somewhat driven by personal anecdote--I've spent a good bit of time over the last few weeks helping my in-laws recover after falling for one of the "Microsoft" security alert scams. These are older folks, obviously, but both are highly educated, experienced professional people--and they found it completely plausible that Microsoft had a customer service department that was monitoring their computers and helping protect them. Which is not a crazy thing to think, unless you've spent most of your life living in an era where digital service providers have effectively declaimed all responsibility for the damage using their products could do.
But apply this more broadly to people and institutions. As digital financial services spread, we are asking essentially the entire world to become immediately savvy about what a plausible claim is in the digital world. Google and Firefox and other browser providers who have policies and authorized "stores" for browser extensions actually enforce those policies right? Ha, ha, no, of course not, why would you think that? If you get a call from travel agent to book your accommodation at the conference you have been invited to give a keynote at, that's safe right? I mean, how would some scammer know that you're the keynote speaker and the right dates, etc. No of course that's a scam too.
But individuals aside, institutions should have the expertise to protect themselves. Unless it's say, local governments who keep being compromised by ransomware. Or you know, institutions that don't deal with anything particularly crucial, like say, elections.
But the old adage is that "banks" will be the most attacked targets because that is where the money is. Here's an interview with the former CEO of Thomson Reuters and now founder of a digital security company that touches on some important points, especially for financial services providers that aren't behemoths. Here's a blog post about how you can't "hire enough people to fix your cybersecurity problems." The nominal solution is to hire data scientists, which while great for the job market prospects of future economics PhD cohorts, isn't much of an answer for most organizations. How on earth are microfinance institutions going to be able to secure their digital infrastructure?
The bottom line on all of this for me is simply this: we pushed digital financial services as a way of pushing down transaction costs but it seems increasingly likely that if we add up the costs of keeping up with technology and ensuring digital security, we actually radically increased total cost.
3. Our Algorithmic Overlords: Digital security is even more of a concern because of our algorithmic overlords--I keep picturing the movie Brazil, which a minor change to data triggers an unstoppable set of processes, ruining a man's life. It was conceived in an era where those processes were totalitarian/bureaucratic; it's all the more plausible today when those processes are automatic.
What does the age of algorithmic control mean for how governments make decisions. Here's video of a session on that topic from the Institute for Government's recent conference featuring Sendhil Mullainathan and Rachel Glennerster. Rachel makes the point that decision rules hidden by machine learning and algorithms are a big problem for good governance.
Week of July 19, 2019
1. The Great Convergence: I want to tell you about a young man in his early 20s. I'll call him M. He has a high school diploma, but it's from a school system where students don't tend to learn very much in the upper grades. M has a semi-skilled job, but it's tenuous and the hours are pretty unpredictable. Public transport in his neighborhood is poor, so he borrowed some money to get a "minimum viable vehicle" in order to get the job. His connection to the formal banking system is negligible. His biggest goal is to save up some money for a better apartment--where he lives now is as safe and reliable as his vehicle, which is to say, not very. He's been saving up for that for awhile, but he keeps his savings with his grandmother. The combination of ups and downs and needs from his extended family has kept that savings from growing much, if at all.
Based on that description, there is no way to tell if M is Manuel from Puebla, Melokuhle from Cape Town, Mohammed from Dhaka, Mentari from Jakarta or Michael from Baltimore. There has been tremendous progress in reducing poverty(and yes in financial inclusion) in most of the world over the last few decades. Meanwhile, in the US, there has been tremendous growth in inequality. More than that, the US economy and the labor market in particular has become much more like that in developing countries. The result is a great convergence: For the bottom 40% of the income distribution in the US, the economic reality they live in is more like that of Mexico, South Africa or Indonesia than the economic reality for the upper part of the income distribution.
2. The State of the US and the World: From a financial inclusion standpoint, there are fewer and fewer meaningful differences in the challenges faced by middle income countries and the US, at least if we care about that bottom 40% of the income distribution. Below is a chart I quickly made based on the latest Findex data, which helpfully breaks out the US lower 40%, comparing it to middle income countries.
Just taking it at face value, you can see that the differences on a variety of financial inclusion metrics aren't that big. Take a close look particularly at the "No source of emergency funds" metric. Yes, the US has more people with no source of emergency funds than middle income countries on average. The one metric that stands out is the use of formal credit, but that difference is almost certainly due to credit cards. As digital credit grows rapidly in the countries where mobile money systems are functional, expect that gap to close dramatically.
The financial inclusion challenge for many middle income countries is rapidly shifting from one of expanding access to formal services broadly to issues of consumer protection for the masses, ensuring that services offered are appropriate and safe, and of reaching the last mile. Sound familiar?
3. The Corrupted Economy: But there's another part of this story that is less about financial inclusion or exclusion defined narrowly, and more about how the economy functions and what that means for growth, development, opportunity, mobility and even social cohesion.
When we think about the challenges of growth and development in middle income countries the conversation is often about institutions, about access to good jobs, about quality of education, about opportunity and economic mobility for the average citizen. The general understanding is that in these countries there is one set of rules and opportunities for those who are already wealthy, those connected to power (economic and political), and everyone else. Getting a place at a university, getting a government job, getting a formal job at an international, making a powerful friend are like winning lottery tickets that can transport someone from one class to another--but they are allocated like winning lottery tickets. Getting one is a factor of luck and divine intervention. For most everyone not already part of the elite, there is little prospect of upward mobility absent a lottery ticket. Even if you follow the rules, there's little reason to believe the institutions or the powerful are going to follow the rules.
Week of July 12, 2019
1. Research, Evidence, Policy and Politicians: We talk a lot around here about evidence-based policy and often about the political economy of adopting evidence-based policies. In the last faiV I featured some of the first evidence that elected officials (in this case 2000+ Brazilian mayors) are interested in evidence and will adopt policies when they are shown evidence that they work.
Far be it from me to let such encouraging news linger too long. Here's a new study on American legislators (oddly also 2000+ of them) that finds that 89% of them were uninterested in learning more about their constituents opinions even after extensive encouragement, and of those that did access the information, the legislators didn't update their beliefs about constituent opinions. Here's the NY Times Op-Ed by the study authors.
But wait, there's more! In another newly published study using Twitter data on American congresspeople, Barera et al. find that politicians follow rather than lead interest in public issues. But also that politicians are more responsive to their supporters than to general interest. Which perhaps goes some way to explaining the seeming contradictions between these two studies: American legislators are not interested in accurate data on all of their constituents' opinions, but will follow the opinions of their most vocal supporters.
2. Research Reliability: Two studies of the same population finding at least nominally opposing things published in the same week is kind of unusual, shining a brighter light on the question of research reliability than there normally is. But there have been plenty of other recent instances of the reliability of research being called into question for lots of different reasons:
* The difference between self-reported income and administrative data: the widely known finding that Americans living in extreme poverty (below $2 a day) was based on self-reported income. Re-running that analysis with administrative data that presumably does a better job of capturing access to benefits and other sources of income and wealth finds that only .11 percent of the population actually has incomes this low, and most are childless adults. Here's a Vox write-up of the findings and issues.
* A "pop" book on marriage from an academic claimed that most married women were secretly desperately unhappy. But that's because he misunderstood the survey data, believing that the code "spouse not present" meant that the husband was not in the room when the question was answered, when it really means that the spouse has moved out. Again, Vox does some good work explicating the specifics and the context: most books aren't meaningfully peer reviewed.
* But you probably should be very skeptical of any research on happiness regardless of whether it's peer reviewed because "the necessary conditions for...identification..are unlikely to ever be satisfied."
* And you should be skeptical of many papers studying the persistence of economic phenomena over time, and spatial regressions in general because of the possibility of inflated significance that is really just noise.
* You should also perhaps be skeptical of any claims based on Big 5 personality traits outside of WEIRD countries because the results are not stable across time or interviewers.
* And there are still a lot of issues with the applications of statistical techniques across the social sciences, including, for instance, the misapplication and misinterpretation of RDD designs, or conditioning on post-treatment variables (that's a paper from last year that finds 40% of experiments published in top 6 Political Science journals show evidence of doing so), or using estimated effect sizes to do ex post power calculations.
* Or this Twitter thread about a series of papers published in top medical journals that defies description, other than you really have to read it.
It's enough to make you despair.
Week of June 21, 2019
1. Concentration Camps: The United States is operating concentration campsagain, and one soon will be at the site of one of the Japanese-American camps operated in the 1940s. The conditions are inhumane and unconscionable, both for children and for adults,and getting worse. People are dying. Babies are being denied medical care. Last week, I joked about a scream of helpless rage about financial literacy programs. This week, I'm not joking, and I don't know what else to do, except to do my best to not look away.
2. Philanthropy and Social Investment (and Microfinance): What would it look like if US philanthropy en masse decided the reappearance of concentration camps in the United States was a crisis that deserved all hands and funds on deck? I don't know, but I don't think historians would view that decision unkindly.
There is something going on in American philanthropy--for the first time since 1986, charitable giving did not track GDP, falling 1.7% last year. More specifically, giving by individuals fell 3.4% and for the first time (since the data has been tracked) made up less than 70% of total contributions. Here's the researchers' analysis of the new data. And here's Ben Soskis' Twitter thread on the important questions the decline in giving raises about giving culture and inequality. Several years ago I speculated about whether Giving Tuesday's hidden theory of change was to shore up American giving culture, and that question has new relevance.
On the social investment front, there's a new book out that I can recommend, A Research Agenda for Financial Inclusion and Microfinance. If you're wondering about the connection to social investment, Jonathan and I have the opening chapter, "The Challenge of Social Investment Through the Lens of Microfinance." Keeping on that theme, Beisland, Ndaki and Mersland have a new paper on agency costs for non-profit and for-profit microfinance firms, finding that CEO power determines whether residual losses are higher or lower in non-profit firms. Governance matters in social investment!
If you're one of those CEOs (or just any aspiring social entrepreneur), you may be interested in Alex Counts', founder of the Grameen Foundation, new book, Changing the World Without Losing Your Mind. Here's an interview with Alex about the book and the evolution of microfinance (which I'm including even though he says a couple of nice things about me).
3. Digital Finance, Part I: Libra: The news of digital finance this week was dominated by the announcement of Libra, Facebook's proposed...well, depending on what you read, either Facebook's "me too" derivative payments service masquerading as crypto, or Facebook's attempt to take over the world and replace all governments. Here's Vox's explainer.
My favorite immediate response was from Erik Hinton, which I have to quote in full: "God, grant me the confidence of Facebook, a company that has managed to lose most of the data that it's either stolen or extorted and has repeatedly been caught lying or miscounting its own analytics, deciding to create a global financial system."
As that response hints, there are a lot of questions. Here's a start at some of them and some answers about who is participating and why. Here are Tyler Cowen's questions about how exactly Libra will work as a currency without an underpinning banking and regulatory system. Here's a view that Facebook's main target in the near-term is remittances, but that it really does have ambitions to replace national currencies. One of the things I find most interesting about the whole thing is that this is a like Facebook building a giant sign to the world's governments saying: "Come seize all our data and regulate us heavily!" (and governments are indeed reading the sign!) I would guess that there will be approximately .1 seconds between the first cross-border transfer and an accusation of money laundering or terrorist financing. I was having a conversation this week about the main reason Amazon hasn't started consumer lending: it would never do something to invite regulator access to its data.
Here's a piece on the good and bad of Libra which I highlight because it's an odd mix of complete ignorance about how money works and evolved (did you know that before bitcoin there had never been money that wasn't controlled by a government?), with some actual engagement on the dangers of private digital monetary systems.
