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Smorgasbord

Leonardo Gambacorta and Vatsala Shreeti describe "The AI supply chain" (Bank of International Settlements Papers No. 154, March 2025, .

They provide "a comprehensive analysis of the market structure, economic forces and challenges along the five key input layers of the AI supply chain . . . The first layer consists of specialised hardware—most notably specialised microprocessors or chips that perform the complex computations needed for AI model training and inference. The second layer is cloud computing, which provides the infrastructure required to build, store and use AI models. Training data are the next input layer: AI models feed on vast data sets, which include everything from text to images and videos, typically sourced from both public and proprietary repositories. Foundation models, the fourth layer, are large, pre-trained models that can be adapted to many different uses. These form the base for the last layer: downstream AI applications. The market structure and the economic forces shaping the layers are different. The first two layers of the AI supply chain (hardware and cloud) are characterised by high fixed costs, economies of scale and scope, high switching costs and consumer inertia, and network effects. The substantial investment required for developing and maintaining AI infrastructure creates barriers to entry and favours larger firms with significant financial resources. In contrast, the market for training data, foundation models and downstream AI applications may currently be more contestable but could still be prone to 'winner takes all' dynamics."

Cass R. Sunstein discusses "The use of algorithms in society" (Review of Austrian Economics, December 2024, 37: 399–420, ).

"Across a wide range of settings, use of algorithms is likely to improve accuracy, because algorithms will reduce both bias and noise. Indeed, algorithms can help identify the role of human biases; they might even identify biases that have not been named before. . . . In important cases, algorithms struggle to make accurate predictions, not because they are algorithms but because they do not have enough data to answer the question at hand. Those cases often, though not always, involve complex systems. (1) Algorithms might not be able to foresee the effects of social interactions, which can depend on a large number of random or serendipitous factors, and which can lead in unanticipated and unpredictable directions. (2) Algorithms might not be able to foresee the effects of context, timing, or mood. (3) Algorithms might not be able to identify people's preferences, which might be concealed or falsified, and which might be revealed at an unexpected time. (4) Algorithms might not be able to anticipate sudden or unprecedented leaps or shocks (a technological breakthrough, a successful terrorist attack, a pandemic, a black swan). (5) Algorithms might not have 'local knowledge,' or private information, which human beings might have. Predictions about romantic attraction, about the success of cultural products, and about coming revolutions are cases in point. The limitations of algorithms are analogous to the limitations of planners, emphasized by Hayek in his famous critique of central planning."

David Schleicher and Nicholas Bagley tackle a key problem of federalism in "The State Capacity Crisis" (Niskanen Center, January 1, 2025, .

"Three areas are of particular concern to us. First, . . . [p]olarization notwithstanding, in 39 out of 50 states, both houses of legislatures and the governor come from the same party and only rarely have institutional limits like the filibuster. As a result, majority parties can usually do what they want. Gridlock is not the problem. Yet state legislatures are in an even worse spot than Congress. Voters know almost nothing about what is happening in state politics, and increasingly vote for the same party for state legislature that they do for president and Congress. This pervasive nationalization of state and local elections means that state legislative performance has little connection to electoral outcomes. Gerrymandering is also a much worse problem at the state level than at the federal level . . . as is the lack of staff capacity and resources. Second, . . . [s]tate administrative law is as strict, and often stricter, than federal administrative law, both with respect to the procedures it imposes and the intensity of judicial review. State and, in particular, local governments have extremely powerful rules requiring lots of public participation in administration. Because small groups with members that care intensely about state and local decisions are much easier to form than groups representing a diffuse public interest, unrepresentative private interests—whether that's the Chamber of Commerce or neighborhood NIMBYs—overwhelm administrative process at the expense of majoritarian preferences. Third, . . . [e]very state (save Vermont) is legally required to balance its budget, no state can print money to inflate away its deficits, and all states face both legal and market limits on their capacity to borrow. When a recession depletes tax revenue, states have few choices except to increase taxes or reduce spending—right when public services are needed most."

Sandra Baquie, Yueling Huang, Florence Jaumotte, Jaden Kim, Rafael Machado Parente, and Samuel Pienknagura from the IMF have published a Staff Discussion Note summarizing some lessons in "Industrial Policies: Handle with Care" (IMF, SDN/2025/002, March 2025).

"After falling out of favor in the 1990s, IPs [industrial policies] have been widely used, especially after 2017. Arguments in IPs' favor relate to market failures, economies of scale, and collective action problems, but factors like limited state capacity and capture by private and political actors can hamper their effectiveness. Moreover, IPs' historical track record has been mixed. IPs are associated with moderate and uneven improvements in the performance of targeted sectors, but this relationship varies with sector characteristics and instruments. IPs targeting highly distorted sectors (those with high markups and external financial dependence making firms vulnerable to credit market imperfections) are linked to improvements in value added that are four times as large in the medium term as those targeting less distorted sectors. Similarly, IPs targeting upstream sectors (those providing inputs for other sectors) are associated with broader benefits to the economy through positive spillovers along the supply chain. Targeting products that are closer to the frontier, as gauged by a high initial revealed comparative advantage, also yields faster and larger gains, while IPs targeting products in which the country is not competitive do not show definite gains over the horizon considered. Turning to instruments, export incentives are linked to more sustained competitiveness and productivity improvements (albeit after an adjustment period) compared to domestic subsidies, which are strongly associated with increases in capital accumulation. Structural reforms have, on average, much larger effects than IPs, pointing to their fundamental role. IPs are accompanied by smaller economic benefits than 'horizontal policies' focused on lowering corruption, improving governance and enhancing access to credit. Even when IPs may be desirable, horizontal policies are key. IPs are more effective in countries with better institutions, business environment, and financial market conditions, and a more educated workforce."

The World Bank has published 21st-Century Africa: Governance and Growth, a collection of eight chapters on different aspects of development in the countries of sub-Saharan Africa, edited by Chorching Goh (May 2025, ). From the "Main Message" section at the start of the report:

"Over the past 25 years, Africa has achieved notable progress . . . Mortality rates have fallen, with life expectancy rising from 50 years in 1998 to 61 years in 2022. School attendance has improved, with primary school enrollment increasing from 80 percent in 1999 to 99 percent in 2022 and secondary school enrollment increasing from 26 percent to 45 percent over the same period. The early 2000s saw strong economic growth fueled by high commodity prices. China emerged as a trade and investment partner, and the continent experienced a massive inflow of foreign capital from 17.6 percent of gross domestic product (GDP) in 1998 to 38.1 percent in 2018. Consequently, African countries have shown significant growth performances: from 2000 to 2019, 7 of the world's 10 fastest-growing economies were in Africa. Aid dependence has declined, tax revenues have increased, and the median poverty rate fell by about 10 percentage points to about 43 percent."

 However, the chapters focus on future challenges. For example, Cesar Calderon and Ayan Qu point out in Chapter 3 on "Productivity":

"When compared with the average living standards of the rest of the world, GDP per capita in Sub-Saharan Africa has declined over the past three decades. The region's lack of convergence in living standards with the rest of the world largely results from its inability to sustain growth over time. If Sub-Saharan Africa had grown (in per capita terms) at the same pace as the global economy since 1990, its level of income per capita in 2022 would have been more than 40 percent higher than its actual level. If it had grown at the same pace as emerging East Asia, the region's income per capita would have been nearly three times its 2022 level."

Simon Pittaway grabs hold of the arguments in “Yanked away: Accounting for the post-pandemic productivity divergence between Britain and America” (Resolution Foundation, April 2025, ).

"Britain isn't alone in its recent struggles: productivity in Canada, France, and Italy has also fallen below pre-pandemic levels. But the US has bucked this trend entirely. Although recent US economic data has been soft, its productivity growth since the pandemic has been in a league of its own: between 2019 and 2024, US productivity has grown by 9.1 per cent. It is the only G7 economy where productivity growth has accelerated in recent years, increasing at by 1.9 per cent a year on average, compared to 1.0 per cent in the 2010s Meanwhile, US productivity growth has been boosted by a continued boom in oil and gas extraction. . . .  US tech companies have become world-beating, but it is the way that the rest of the US economy uses this tech that drives its productivity overperformance. Tech-using rather than tech-producing services account for more of its recent productivity gains relative to Britain. Professional, scientific and technical services accounts for another sixth (17 per cent) of the post-pandemic gap in productivity growth between the US and the UK—twice as much as the tech (ICT) sector (8 per cent). What is driving this broad outperformance? Business investment is a critical part of the story . . ."

International Trade

Pol Antràs surveys the field in his "FBBVA Lecture 2024: The Uncharted Waters of International Trade" (Journal of the European Economic Association, February 2025, pp. 1–51, .

"[I]nternational trade research has undergone transformative developments over the past 25 years, fueled by breakthroughs in data, methodologies, and theory. Notably, the seminal work of Bernard and Jensen (1999) and Melitz (2003) revolutionized the field by shifting the focus from industries and products to firms as the central units of empirical and theoretical analyses of international trade flows. This firm-level perspective has significantly broadened the scope of organizational decisions examined in global firms. Researchers have highlighted that firms engage not only in exporting but also in importing (Antràs, Fort, and Tintelnot 2017), multinational activity (Helpman, Melitz, and Yeaple 2004), and the organization of global value chains (GVCs) (Antràs and Chor 2013). In the process, firms make key strategic organizational design decisions to manage cross-border connections with offshore production units efficiently (Antràs and Helpman 2004). Simultaneously, the field has witnessed a quantitative revolution, marked by the development of medium-scale models that allow for quick, back-of-the-envelope estimates of the implications of trade cost shocks on real income (Eaton and Kortum 2002; Arkolakis, Costinot, and Rodríguez-Clare 2012). Additionally, a growing body of empirical work in international trade has been 'unshackled' from the constraints of traditional trade theory, leveraging new data sources and innovative methods to provide fresh insights into the nature of global trade, in many cases exploring topics that had not yet been developed theoretically (e.g., Autor, Dorn, and Hanson 2013; Atkin, Khandelwal, and Osman 2017). The primary goal of this paper is to highlight several underexplored areas—what I call 'uncharted waters'—for young researchers trying to leave an imprint in the international trade field."

Maurice Obstfeld interrogates "The U.S. Trade Deficit: Myths and Realities" (Brookings Papers on Economic Activity, Spring 2025, with video, comments, and discussion, .

"[T]hree prominent myths locate the principal sources of U.S. deficits beyond America’s borders. The first myth is that U.S. deficits originate mostly in unfair foreign trade practices to which America has exposed itself through ill-advised trade liberalization. On this theory, tariffs provide a ready remedy. A second myth is that the world's desire to hold the dollar as its main reserve currency is a prime determinant of U.S. foreign deficits. One variant of this view, which is entirely false, is that U.S. current account deficits are necessary for foreign official holders to acquire dollars; another variant, of limited quantitative importance but more accurate, is that global dollar preference has asset price effects that make the U.S. deficit bigger. A final myth is that U.S. deficits result entirely from excessive saving by our trade partners, which forces the U.S. to borrow from them and spend the proceeds on extra imports. This paper shows that the realities are more nuanced. While foreign and domestic trade policies can affect both imports and exports separately, they are not principal drivers of their difference, the trade deficit. The U.S. can supply the world with dollars without trade deficits. Finally, the trade deficit reflects the interplay of foreign and U.S. macroeconomic factors (including China's saving rate and the U.S. government budget deficit) and often U.S. factors are dominant. Higher Federal fiscal deficits, for example, will likely raise U.S. trade deficits despite more import tariffs."

Kyle Pomerleau and Erica York offer a primer for "Understanding the Effects of Tariffs" (AEI Economic Perspectives, April 2025, .

"Tariffs do not directly affect the trade deficit, which is driven by net lending and borrowing between the US and the rest of the world. Tariffs would cause the US dollar to appreciate, which would increase untaxed imports, reduce exports, and transfer wealth from Americans to foreign holders of US assets. As an indirect tax, tariffs could prompt the Federal Reserve to increase the price level to prevent unemployment. Tariffs would reduce the after-tax return on work and investment, distort the allocation of resources in the economy, and ultimately reduce economic output in the long run. Broad-based tariffs can raise revenue for the federal government, but that revenue is partially offset by significant behavioral and economic responses. Tariffs would reduce after-tax income for households at all income levels but be slightly regressive."

Interviews

Jon Hartley serves as interlocutor in "Revisiting Empirical Macroeconomics with Robert Barro" (Hoover Institution, Capitalism and Freedom Podcast, March 25, 2025, audio and transcript available .

"So if you have a massive increase [in government spending], such as the transfer payments, even more under Biden than under the first Trump administration, a way to avoid paying for that by cutting other spending or by raising taxes is by having a inflation that’s surprising from a perspective of a pre-crisis period. And that basically wipes out a lot of real value of the government bonds that are outstanding and it amounts to a very large temporary source of revenue which can be something like 10, 15 percent of the GDP. So it’s not a minor deal. And that’s empirically about what happened in the US and also in other places. [P]eople don’t like the idea that it might not have been completely crazy to pay for the expenditure in substantial part through this surprise inflation. I get a lot of grief on that point from people who normally, who normally are on my side about things because they just want to think of the inflation as being stupid and being dramatically harmful. So I think what was harmful is the excessive fiscal expansion, particularly under Biden. It was unnecessary to have that vast increase in transfer payments, but given that you had it, we effectively paid for most of it through the surprise inflation. And maybe that part was not so crazy because the alternatives would have been also very costly."

"Paul Krugman talks trade, industrial policy, and Trump," with Chad Bown (Trade Talks Podcast, March 16, 2025, ). On the distinction between industrial policy and tariffs:

"Max Corden's 1974 book Trade Policy and Economic Welfare remains relevant. And what Corden and others said was, if there’s something that you think you need to be producing, then encourage production. The answer is industrial policy. The answer is to subsidize or otherwise promote. In general, a tariff has side effects that may not be what you want. If you were worried that too many of the world's semiconductors are being produced within striking range of China, then you want to subsidize production of high-end semiconductors in the United States. But that's not a good reason to raise the cost of semiconductors to the U.S. downstream industry. So, there’s a really pretty strong case for industrial policy here. That's the generic principle. Now actually implementing it is tricky, by the way. The thing about these agglomeration economies is that, once they're well established, they’re really hard to break. And so if you want to develop rival agglomerations to the existing agglomerations that you think are in the wrong place, it's going to be expensive and hard, which doesn’t mean you shouldn’t do it, but you should realize that it's not something you do by throwing a few dollars at the problem."

Discussion Starters

The OECD discusses "The Ocean Economy to 2050" (March 31, 2025, ). From the "Executive Summary":

"The ocean covers 71 percent of Earth’s surface, comprises 90 percent of the biosphere, provides food security for over three billion people, enables the transportation of over 80 percent of global goods, and hosts sea cables carrying 98 percent of international Internet traffic. If considered a country, the ocean economy would be the world’s fifth-largest economy in 2019. From 1995 to 2020, it contributed 3 percent to 4 percent of global gross value added (GVA) and employed up to 133 million full-time equivalents (FTEs). The global ocean economy doubled in real terms in 25 years from USD 1.3 trillion of GVA in 1995 to USD 2.6 trillion in 2020, growing at an annual average rate of 2.8 percent."

Caitlin Myers investigates "From Roe to Dobbs: 50 Years of Cause and Effect of US State Abortion Regulations" (Annual Review of Public Health, 2025, pp. 433–446, .

"For more than 50 years—beginning with abortion reforms in the 1960s and continuing through the Dobbs decision in 2022—state regulations of abortion were neither uniform nor consistent. States reformed and repealed abortion bans leading up to the Roe decision in 1973. Following Roe, they enacted both demand-side regulations of people seeking abortions and supply-side regulations of people providing abortions. The resulting laboratory of state policies affords natural experiments that have yielded evidence on the effects of abortion regulations on demographic, health, economic, and other social outcomes. I present a brief history of state policy variation from 1967 through 2016 and review the empirical scholarship studying its effects. This literature demonstrates that the liberalization of abortion access in the 1960s and 1970s allowed women greater control over their fertility, resulting in increased educational attainment and earnings. Subsequent state restrictions in the 1980s through 2010s had the opposite effect, particularly when they increased the financial and logistical costs of obtaining an abortion."

Alex Tabarrok lays out some steps toward "Pandemic preparation without romance: insights from public choice" (Public Choice, published online April 16, 2025, .

"I examine how standard political incentives—myopic voters, bureaucratic gridlock, and fear of blame—predictably produced an inadequate pandemic response. The analysis rejects romantic calls for institutional reform and instead proposes pragmatic solutions that work within existing political constraints: wastewater surveillance, prediction markets, pre-developed vaccine libraries, human challenge trials, a dedicated Pandemic Trust Fund, and temporary public–private partnerships. These mechanisms respect political realities while creating systems that can ameliorate future pandemics, potentially saving millions of lives and trillions in economic damage."