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It used to be that daily mental activity was seen as a free lunch in terms of helping to delay dementia. This certainly has an intuitive appeal: exercising your brain will keep it healthy. It also sort of seems fair, in a way, that those who use their brains the most are less likely to lose the capacity to, well, use their brains, just as those who have a more physical lifestyle maintain their physical strength longer in life. However, new research suggests that things may not be so simple, nor so rosy for the thinking man:
According to Wilson, mentally stimulating activities may somehow enhance the brain’s ability to function relatively normally despite the buildup of lesions in the brain associated with dementia. However, once they are diagnosed with dementia, people who have a more mentally active lifestyle are likely to have more brain changes related to dementia compared to those without a lot of mental activity. As a result, those with more mentally active lifestyles may experience a faster rate of decline once dementia begins.
Before you replace Marginal Revolution with TMZ on your RSS feed and commit yourself to a life of not thinking, keep in mind that mental exercises do still appear to delay dementia, it’s just that once onset occurs it comes quicker.
Some time ago there was a blogospheric debate about whether a house should be considered an investment. I contended that almost necessarily it has a large investment component, and should be thought of as such. In addition, for many people -although I don’t know how many- housing can be a good investment. Felix Salmon and Ryan Avent disagreed, with Ryan arguing housing was an investment, but rarely a good one, and Felix arguing that it was not an investment at all. Today, esteemed economist Karl E. Case of Case/Shiller fame weighs in on the housing as an investment debate:
But for people with a more realistic version of the American dream, buying a house now can make a lot of sense. Think of it as an investment. The return or yield on that investment comes in two forms. First, it provides what is called “net imputed rent from owner-occupied housing.” You live in the house and so it provides you with a real flow of valuable services. This part of the yield is counted as part of national income by the Commerce Department. It is the equivalent of about a 6 percent return on your investment after maintenance and repair, and it is constant over time in real terms. Consider it this way: when Enron went belly up, shareholders ended up with nothing, but when the housing market drops, homeowners still have a house. And this benefit is tax-free…
…This financial crisis has made us all too aware that we live in a Catch-22 world: the performance of the housing market drives the economy, and the performance of the economy drives the housing market. But housing has perhaps never been a better bargain, and sooner or later buyers will regain faith, inventories will shrink to reasonable levels, prices will rise and we’ll even start building again. The American dream is not dead — it’s just taking a well-deserved rest.
Karl wants you to think of housing as an investment, and he wants you to invest. I’ll agree with him on the first point, and remain agnostic on the second.
He also makes an important point about how housing lacks any true fundamentals like financial investments do:
Real estate sales are unlike other financial transactions. You can place a rough inherent value on a stock or bond by looking at fundamentals: a company’s profits, price-to-earnings ratios, quality of its products and management, and so forth. But a house is worth what someone is willing to pay for it. That’s a very personal, emotional decision….
This lack of solid fundamentals is an important problem with identifying housing bubbles. It is entirely possible for there to be an exogenous increase in the preference for home ownership that will drive up the prices of housing, as well as the price to rent ratio. Capitalization rates, which determine how an individual translates a flow of housing services into a house price, differ among individuals. Demographics can shift in ways that will affect cap rates, for instance average income or age can increase, but so too can the raw preference for home ownership. So house prices went up 15% while rental rates remained constant; what just happened? Is this irrational speculation, or did preferences for home ownership increase?
UPDATE: Felix does some real reporting and gets Case on the phone. I am apparently interpreting his use of “investment” too literally.
A few days ago Bryan Caplan wondered why economists question whether bringing someone into existence makes them better off, and I had some objections. Bryan has offered up a useful response, in which I think he has inadvertently answered his own question.
He responds to two of my challenges, in which I broadly claimed that if he were right, it would be a moral imperative which would trump all others to bring as many people into existence as possible, which seemed to violate common sense morality. He agrees that this is a bullet to bite for strict utilitarians, but adherents to other moral positions can rationalize not having to behave with an observation that begins “People who actually exist count a lot more than people who could exist but don’t.” This, however, answers the question he asked in the first place, which was:
If someone gives another person the gift of life, however, I’ve noticed that many economists suddenly become agnostic. $100? Definitely an improvement. Being alive? Meh.
It’s hard to see the logic. Why would a minor gift of cash be a clear-cut gain, but a massive gift of human capital be a question mark?
Understanding that the cash gift makes someone better off requires nothing more than strict utilitarianism, the mode of analysis economists are trained in. The gift of life however requires something more than strict utilitarianism, and requires some other moral position to justify it. Furthermore, it’s hard to think of a reasonable moral position according to which giving someone $100 does not make them better, whereas it is not so hard to imagine reasonable moral positions according to which the gift of life does not make someone better off. One is clear-cut and requires the usual tools of economic analysis, the other is not and requires appealing to other moral positions.
Elsewhere, and speaking of bullet biting utilitarians, Robin Hanson outlines an economic analysis of which creatures should exist and which shouldn’t. But I think Robin has some big unspoken assumptions in his analysis. The general problem is we don’t know the preferences of the non-existent. Here is how Robin broadly describes how the analysis of which creatures should exist should be done:
Economically, creature X should exist if it wants to exist and it can pay for itself. That is, in a supply and demand world, if our only choice is whether X should exist, then an X that wants to exist should actually exist if its lifespan cost of resources used (including paying for any net externalities) is no more than the value it gives by working for others.
The problem is that we don’t know the preferences of the non-existent, and so we don’t know Robin’s first requirement: whether creature X wants to exist. Not only that, but according to Robin’s efficiency criteria you have to know whether they prefer an existence conditional on that existence includes paying their costs, and not just existing as a freeloader. You could argue that we could poll the existing and see if they would have preferred to never exist, but we don’t know whether the preferences of the non-existent have any relationship at all to the existing. In addition, for many creatures we have no way to do even this post-existence polling. How do you understand a dogs preferences for existing versus never existing? And remember, showing a preference for continuing to exist over ceasing to existing is not the same as preferring to existing over never existing.
The problem with both of their analysis is the preferences for existing versus never existing are facts simply knowable through economic analysis, and must be brought from somewhere else. That is why, contra Bryan, I don’t think the value of the gift of life is not clear-cut to economists as the value of a $100 gift, and contra Robin, I don’t think knowing which creatures should exist is amenable to cost-benefit analysis.
I should add that, probabilistically, by simultaneously disagreeing with Robin Hanson and Bryan Caplan, I recognize I am likely wrong. So if I were to bet on these propositions, I would bet against them.
Via Denis Dutton, Camille Paglia offers a criticism of todays college education and appeal to a more job centered approach focused on trades:
Jobs, and the preparation of students for them, should be front and center in the thinking of educators. The idea that college is a contemplative realm of humanistic inquiry, removed from vulgar material needs, is nonsense. The humanities have been gutted by four decades of pretentious postmodernist theory and insular identity politics. They bear little relationship to the liberal arts of broad perspective and profound erudition that I was lucky enough to experience in college in the 1960s.
I have to say I am drawn into argument by her criticism of the humanities and their ills, e.g. “pretentious postmodernist theory and insular identity politics”, and any suggestion that begins with gutting this from the higher education system will catch my ear. However, I don’t know how much of a solution she has offered.
She wants us to “revalorize the trades”, and make sure that “every four-year college or university should forge a reciprocal relationship with regional trade schools”. I agree these are good things, but ultimately the problem lies with the incentives and constraints these institutions face, not with mission statements or relationships.
Until we know exactly why it is that universities aren’t already operating with an “obligation to think in practical terms about the destinies of their charges” we won’t know how to make them be better. Surely parents and students desires and freedom of choice should incentivize them to be effective already. I don’t think imploring them to be different nor a school’s acceptance of a new mission to do so will suffice. I believe the problem is deeper than administrators and professors knowing how to be a good university.
Calculated Risk tells us the key to fixing the housing market:
The key to the housing market is to absorb the excess inventory. That means more households and fewer new housing units. Luckily housing starts are very low right now, but unfortunately there is very little job growth (and therefore little new household formation).
But job growth is not the only way to get new household formation, as I’ve argued again and again, we have immigration at our disposal. Of course, there are the usual complaints about jobs. But the weakness of this argument can be seen in a new paper Felix Salmon directs us to:
Statistical analysis of state-level data shows that immigrants expand the economy’s productive capacity by stimulating investment and promoting specialization. This produces efficiency gains and boosts income per worker. At the same time, evidence is scant that immigrants diminish the employment opportunities of U.S.-born workers.
It is well understood that the removing capital tariffs and protectionism would increase overall efficiency and incomes. Since immigration restrictions are labor market protectionism we shouldn’t be surprised to see that is has similar positive effects.
Unfortunately, journalists and pundits don’t seem to oppose labor protectionism nearly as much as they oppose capital protectionism. We would see an outcry among op-eds and pundits if we were seeing a worldwide rise in capital protectionism, because they recognize that beggar-thy-neighbor policies make everyone worse off. But no similar reaction has come from the rise in global labor protectionism. Here is how a recent report from the Migration Policy Institute describes the situation:
Confronted with the most severe economic crisis in decades and rising unemployment, governments in locations across the globe embraced a range of policies to suppress the inflow of migrants, encourage their departure, and protect labor markets for native-born workers.
From Malaysia and Thailand to Kazakhstan, Taiwan, Australia, South Korea, and Russia, many governments have sought to restrict access to their labor markets by halting, or at least decreasing, the numbers of work permits for foreigners. Others, such as the United Kingdom, tightened admission requirements. And while the policy focus of many of these countries was on reducing the entry of low-skilled workers, the United States placed restrictions on some companies seeking to bring in the highly skilled.
In addition to the results from Felix above, the wider literature on the issue tells us the quantifiable impact on wages is likely to be minimal compared to the impact on house prices. For instance, research from economist Albert Saiz found
“…a very robust impact on rents and housing prices that is an order of magnitude bigger than the estimates from the wage literature. Immigration inflows equal to 1% of a city’s population were associated with increases in average or median housing rents and prices of about 1%.”
Emphasis his. In previous research, Saiz used a classic example of exogenous immigration from the literature and found effects of a similar magnitude. Looking at the Mariel boatlift, a sudden inflow of immigrants from Cuba which increased the population of Miami by 4%, Saiz found that rents in Miami increased 8%. Overall, there appears to be a robust relationship between immigration and housing prices.
Calculated Risk tells us that “Usually housing is a key engine of recovery, especially for jobs. But this time housing is going to follow the economy.” But this is not because of economics, but politics. Instead of waiting around for the labor market to lead housing recovery, let’s use the tools we have to help housing recovery lead.
A big story today is a report out by the Economic Policy Institute that criticizes value-added scores for teacher performance evaluations. Kevin Carey at The Quick and the Ed puts this challenge to the authors of the paper regarding how much weight should be placed on these measures in teacher evaluations:
The Economic Policy Institute’s new brief, which details the many concerns with and limitations to current value-added measures, says that 50% is “unwise.” However, despite EPI’s litany of concerns with value-added, the authors, who include Diane Ravitch, Helen Ladd, and Linda Darling-Hammond, conclude that: “Used with caution, value-added modeling can add useful information to comprehensive analyses of student progress and can help support stronger inferences about the influences of teachers, schools, and programs on student growth.”
But if 50% is unwise, what is EPI’s number? The paper doesn’t specify and calls for experimentation among districts. Experimentation is good. But I’d also like to see EPI’s authors and other value-added critics put their best number on the table. I doubt they will, though, because for many, that number is very close to 0%. And defending that number would be much more difficult than pointing out the flaws in value-added.
Kevin also discusses the shortcomings of value-added in a broader perspective:
Value-added measures of teacher effectiveness are not all that great…. But, and this is an enormous caveat, everything else we currently use is worse. A teacher’s years of experience, their education credentials, their certification status, the prestige of their college or their college GPA, even in-class observations. None of these measures does as good of a job at predicting a student’s academic growth as a teacher’s value-added score. Yet, we continue to use these poor proxies for quality at the same we have such passionate fights about measures of actual performance.
Carey’s two points together highlight an important question: if the weakness of the connection between value-added scores and teacher effectiveness means we should place a low weight, say 10%, on those scores for teacher compensation, than what does that tell us about the weight that should be placed on seniority and credentials? The answer has to be much less than 10%, since the evidence suggests those are far worse measures. Test scores representing 10%, and everything else that is currently used to decide pay representing less than that would be a significant improvement over the status quo. That would just mean a pay scale that is about 80% flat.
You know what, maybe you should just be reading The Quick and the Ed instead of me.
I don’t have some all encompassing narrative of the housing bubble to weave you, or an airtight case that government policies caused the bubble, didn’t cause the bubble, etc. I just want to comment on a few points in the debate.
The argument is frequently made that Fannie and Freddie were minor securitizers by the time the bubble came to a full boil in 2006, therefore they didn’t “cause” the bubble. But the fact that private companies were able to push them out of the market doesn’t tell us anything about the initiation of the bubble. The fact is that as early as August 2002 Dean Baker, who many credit as having “called the bubble”, was saying that prices were becoming divorced from fundamentals. As you can see from Karl’s chart, this is still during a time period when GSEs constituted the vast majority of MBS issuance and were quickly ramping up:
So was Dean Baker identifying a bubble in late 2002 that wasn’t there, or were Fannie and Freddie the majority MBS issuers when the bubble started?
A lot of focus goes into who issued the subprime loans which are now defaulting and much less discussion occurs about what caused the initial divorce of house prices from fundamentals. I think Jim Hamilton’s explanation of the run-up in oil prices that led to the beginning of this recession has some applicability to what happened in the housing market. In short, prices skyrocketed because market participants (and academics) no longer knew the value of a key parameter. When demand did not subside even as oil prices went above historical levels, market participants began to wonder “what exactly is the price elasticity of oil at this level?”. As Hamilton put it:
Just as academics may debate what is the correct value for the price elasticity of crude oil demand, market participants can’t be certain, either. Many observers have wondered what could have been the nature of the news that sent the price of oil from $92/barrel in December 2007 to its all-time high of $145 in July 2008. Clearly it’s impossible to attribute much of this move to a major surprise that economic growth in 2008:H1 was faster than expected or that the oil production gains were more modest than anticipated. The big uncertainty, I would argue, was the value of ε. The big news of 2008:H1 was the surprising observation that even $100 oil was not going to be sufficient to prevent global quantity demanded from increasing above 85.5 mb/d.
Once the ratio of house prices to rents and other fundamentals became indisputably divorced from historical levels, market participants had to wonder what are the new underlying parameters were. Dean Baker said from the start that the historical levels were correct, and nothing has changed. Economists overall were agnostic. But from 2002 until 2007, those who bet optimistically were rewarded and those who bet pessimistically were punished or ignored as prices increased quickly.
If Fannie and Freddie drove the initial divorce of prices from their historical relationship with fundamentals, than they are an important causal factor. Yes, markets that myopically rewarded the most optimistic assessments of the new parameter values were a necessary condition for us to arrive at the hugely frothy markets of 2006, but so too was some first mover to push prices above historical levels.
Perhaps some of that divorce from fundamentals was real, in the sense that the equilibrium price to rent ratio grew as a result of a change in capitalization rates driven by income growth. If this is the case, then those who want to claim that the bubble was “called”, especially by Dean Baker, or that bubbles are identifiable, have a harder story to tell about when you know that a bubble has formed. What level of divorce from historical values is acceptable as real and at what level do you call it a bubble?
Bryan Caplan asks why economists are agnostic about whether receiving “the gift of life”, meaning being born, makes someone better off, when they are so certain that receiving a gift of $100 dollars clearly does. I think the reason we can be confident about one and agnostic about the other is that we have a good conceptions of the two separate states being compared in the $100 scenario, and don’t in the other. In the gift of money scenario one state is with $100 extra dollars, the other is a state without. It is easy both conceptually and, if we wanted, empirically, to consider well-being in these two states and determine in which the individual is better off. We have good information about what it means to be in both states.
In the other scenario, one state is controversial and we don’t have good information about what it means to be in it. What is the expected level of utility of being in the state of never being born? Immeasurable or inconceivable might be just as good of an answer. It strikes me as a philosophical question that, at the very least, economists aren’t trained to think about.
Perhaps Bryan understands that the philosophical answer here is actually clear-cut, and the problem is a lack of sophistication among economists (and myself). I’m not convinced this is the case, but I am willing to consider it. My main objection is that it holds radical moral implications that seem to violate common sense morality. For instance, if you take seriously the notion that the utility of not being born is less than the utility of being born, it seems to me that the moral imperative is for everyone who is capable to be reproducing at the maximum rate possible, because the marginal utility is likely massive. Surely the positive marginal utility of a life of poverty with 20 siblings relative to the utility of not being born is greater than the negative marginal utility of the 20 siblings and parents being burdened with one more family member. So when do you stop? Are Jim Bob and Michelle Duggar the most moral people on the planet?
If you argue that individuals should act selfishly, which somehow I think Bryan would, then there is a huge market failure whereby the unborn are unable to contract with their potential parents to pay for life. This argues for taxation of everyone (the set of people who are born) in order to subsidize reproduction. Yes, we indirectly do some of this already, but this should trump all other charitable and redistributive concerns.
So maybe Bryan is right and the utility of not being born is lower than the utility of being born, but if he is I think we are living in an incredibly immoral world with the largest market failure that has ever existed.
Every three months someone on the internet rediscovers the old color photographs back from before it seems like there were color photographs. This is one of my favorites of those. So apropos of nothing, I give you this:
There is no reason to fear deflation in the price of movie tickets. According to the National Association of Theater Owners, prices have increased $0.40 in 2010, which is an over 5% increase.
This is not entirely price inflation, as part of it reflects a growing number of 3D movies, which charge higher prices. So prices are going up, but you get to see Shrek in 3D, so it all evens out right?
Apparently the industry is beginning to believe they are pushing prices up to the point where consumers are becoming more price sensitive. The article linked above has this account:
Notable was an AMC statement in late May, which called the $20 list price for an IMAX-3D “Shrek Forever After” presentation in Manhattan “incorrect.” Just two months earlier, the chain had raised its premium 3D admissions cost from $16.50 to $19.50.
I know, I know, you’d gladly pay $50 for Shrek in 3D, but not apparently not all consumers feel the same way.
In discussing ways to stimulate the housing market, Felix Salmon wonders why we aren’t seeing more landlords buy up cheap homes to rent:
The backstory here is basically the big secular shift that Richard Florida talks about a lot, especially in his latest book. In order to have more renters we’ll need more landlords, and they don’t seem to be buying, record-low mortgage rates notwithstanding. What’s going to entice them into the market?
One way to encourage more landlords in some areas would be to remove rent controls. Allowing landlords to raise prices increases the value of the investment to them, and thus increases their willingness to pay. In most places in the country this has gone by the wayside, but according to the most recent American Housing Survey there are still 529,000 housing units subject to rent control. That’s nothing to sneeze at.
Are there any other regulatory burdens preventing people from becoming landlords? The legal documents required are pretty lengthy, but I can’t picture that being a serious impediment. Any suggestions?
It has apparently become a complaint that the Obama administration has not been arresting and deporting enough illegal immigrants. According to Suzy Khimm, subbing in for Ezra Klein, while workplace raids have gone up 50% since the Bush administration, arrests and deportations have gone down 80%. This apparently has at least one former Bush official saying that Obama’s policy is “de facto amnesty” and they are “turning a blind eye to entire categories of aliens”. But no matter what Obama is doing, you would expect arrests and deportations to be going down right now, since immigrants are already deporting themselves, so to speak.
Contrary to the popular perception that illegal immigrants come here to lay in the shade and grow fat off of our generous welfare state that is freely available to illegal immigrants, they actually come here to work. Labor markets are thus a key determinant of immigration, and when labor markets get tight illegal immigrants leave. This inexplicably colored chart from the Office of Immigrant Statistics tells the story:
Between 2000 and 2008 the illegal immigrant population grew by 3.1 million, from 8.5 to 11.6. From 2008 to 2009, the latest year for which I could find numbers, the population decreased by 800,000, from 11.6 million to 10.8 million. These numbers are as-of January 2009, and I’m betting that downward trend has continued over the last 19 months since this measurement was done.
While the decrease may not be huge percentage-wise, especially compared to the 80% decrease in arrests and deportations, it is an indicator that the illegal population is currently experiencing a large amount of unemployment or underemployment. This decrease in illegal immigrant employment would also partly explain why arrests and deportations are going down: since the raids target workplaces, it’s harder to find them if more of them aren’t working.
It’s a lot easier to arrest and deport illegal immigrants when they are flowing into the country by the hundreds of thousands than when the population is decreasing by the hundreds of thousands. So maybe critics can lay off Obama on this and stop demanding that he actively destroy jobs in the middle of a recession.
Over at Econlog, Bill Dickens is trying to convince Bryan Caplan that signaling does not explain the majority of the value of higher education. Two of his reasons why education is productive is that is has a value as a consumption good, and as consumption capital:
2. Education is a consumption good. This should be self explanatory. At the margin school may be work, but infra-marginally at least some (if not most) people actually enjoy the reading, the lectures, the homework, etc.
3. Education is not just investment in work capital, its also an investment in consumption capital and social capital. I feel much more at home in the world due to the fact I understand certain cultural references… The shared culture produced by the education experience expands our common language with a lot of meaning, and that produces huge network externalities. Knowing history does help me do my job, but it is much more important that it allows me to make analogies that will be understood by acquaintances.
As an explanation for why people value college, this has some appeal. As an explanation for why college has a social value, I think it’s a pretty weak defense. Grant for a moment that it is entirely factually correct, is there any reason why this should be subsidized?
For the first thing this is a terribly regressive subsidy, primarily benefitting people with above average ability and wealth. Second, if the goal is to increase “social capital” for consumption purposes this is probably the least efficient way to do it. The money would be better spent subsidizing high-minded TV shows that make audiences more literate and cultures, or providing grants for creating and broadcasting informative documentaries or books that are catered towards people who normally wouldn’t watch them or read them. You would almost certainly generate more consumption capital and welfare by providing free subscriptions to the New Yorker ($40) for 175 households than a year in college ($7,020) for one person, and it would cost the exact same.
I’m not defending the signaling theory, Bill Dickens’ theory, or any other theory of education as a matter of fact. But proponents of more education investment should not look to Dickens’ criticisms of the signaling theory education, because even if he is right education is still way oversubsidized.
A recent Edmunds report shows that used car prices are up on average 10.3%, and for some models over 30%, over the last year. This has been attributed by Radley Balko, Edmunds, and others partly to the governments cash-for-clunkers program. I was and am not a fan of cash-for-clunkers, but I don’t think we know how much of this is due to clunkers and how much is due to falling incomes. In fairness, neither Balko nor Edmunds try to lay the blame entirely on clunkers, and Edmunds even discusses the difficulty of isolating the effects, but it is worth explaining the economics of why else prices may have gone up.
It might seem like common sense that that when people’s incomes go down they decrease their demand for stuff, so prices of stuff should also go down. Thus, we would expect in a recession prices for used cars to fall. But that is not always the case. There are three types of goods: inferior goods, normal goods, and luxury goods. When income goes up by, say, 10%, demand for inferior goods falls, normal goods goes up but by less than 10%, and luxury goods goes up by more than 10%. It is quite believable that used cars are an inferior good, so that the decrease in incomes has led to an increase in the demand for used cars, which could explain some unknown portion of the price increase we have seen. Without some empirical evidence it is premature to point at the 10% to 30% increases and blame it on cash-for-clunkers. This would make for a good paper topic for some enterprising student….. Or if someone wants to know bad enough to pay for it, I’d be glad to crunch the numbers.
Will Wilkinson defends himself and his brand of libertarianism from Dan Foster, and all I can say is read the whole thing. Here is one quote to pique your interest:
Foster’s worry about my sort of libertarianism isn’t really that it’s a “rationalist” ivory tower abstraction remote from the lived experience of the allegedly natively libertarianish American tradition. It’s that the application of any rational scrutiny (libertarian or not) to the efforts of conservative elites to construct bullshit American-heritage narratives tends to get in the way of elite conservative political aspirations.
It reads like Will’s being walking around for years waiting for someone to make just this attack on him; the kind of thing he wrote in 10 minutes because he’s written in his head 100 times already.
A nail salon has made national headlines recently by charging an overweight customer an extra $5 because they were over the official weight limit of the pedicure chair, which can cost $2,400 to fix. This has been called price discrimination, and has been compared to the practice of dry cleaners to charge more to clean women’s clothes than men’s clothes even though the cost to the cleaner is the same. But in order for something to be price discrimination, the price differential has to be greater than is justified by different costs. In fact, if it costs more to serve an overweight person than a not overweight person, then charging them the same is price discrimination.
The FindLaw blog Free Enterprise does not appear convinced by the different underlying costs justification in this case, because:
…it is difficult to see how a $5 surcharge, unless charged hundreds of times each day, would help defer the over $2,000 dollar cost of fixing a broken chair. In the long run, the negative publicity the salon is receiving may end up costing much more.
But the negative publicity costs are probably why the charges aren’t higher for overweight customers. This constraint on the store’s price setting means underlying cost differences may be much larger than $5. The marginally higher prices for overweight customers will recover more of the underlying costs and are therefore less price discriminatory than when everyone is charged the same.
So is this type of differential pricing a “good” thing? I won’t weigh in on the morality of the issue, but at a first pass it does seem more efficient. However, if other customers value going to a salon that charges everyone the same regardless of weight, than they may find another salon to go to. This is the long-term PR cost to the firm. In this case, as in many other real life cases, otherwise efficient differential pricing based on personal characteristics may not be efficient when you consider that customers have preferences over these pricing issues aside from any direct monetary benefits or costs to them. This is why market outcomes can be “fair” without regulation despite the fact that narrowly defined self-interest may predict “unfair” outcomes. People value what they see as fair business practices, and they are willing to pay for it.
In a defense of stimulus skeptics, Jim Manzi offers this appeal to a non-consensus among economists on the issue:
…in a genuinely scientific field which has accepted a predictive rule as valid to the point that there is a true consensus—such that the only reason for refusal to accept it is crankery or, in Chait’s terms, “politics”—you don’t usually see: several full professors at the top two departments in the subject, when speaking directly in their area of research expertise, challenge it; 10 percent of all practitioners in the field refuse to accept it; and the two leading global general circulation publications in field running op-eds questioning it.
Specifically, he cites the fact that the University of Chicago’s Barro, Fama, and Mulligan are stimulus skeptics, and according a survey from Mankiw, so are 10% of all economists. But I don’t think 10% of economists and a handful of high-profile experts disagreeing is sufficient to say there is not a strong consensus.
For economics 90% agreement is a pretty high level of agreement, and I would be surprised to find a consensus much stronger on that on most issues. From a survey of economists by Whaples we can see that ”only” 87.5% of economists agree that the U.S. should remove all remaining tariffs and trade barriers, 90.1% believe that employers should not be restricted from outsourcing jobs, 85% agree that subsidies to agriculture should be removed, and the same percent say it about sports subsidies as well. From another survey of economists, 87.5% agree that the U.S. trade deficit is not primarily due to other nations’ nontariff trade barriers, 83.5% agree or agree with provisos that tax policy can affect the long-run rate of capital formation, 93% agree that pollution taxes or tradeable permits are more efficient than emissions standards, 92.9% agree or agree with provisos that flexible exchange rates are effective, and 92.6% agree that tariffs or import quotes reduce the general welfare of society.
Despite the disagreement by 7% to 17% of economists on these issues I would argue that are all accurately characterized as representing as a strong consensus. Whaples calls the agreement in those examples a “consensus” and “an overwhelming majority”, and Fuller and Geide-Stevenson, the authors of the other paper, explicitly refer to those examples as representing a “strong consensus”.
Yet I’m certain that on each of these issues you could find experts at the top 10 economics departments that agree with the minority position. Stiglitz alone will probably disagree with more than half of them, and you won’t have to look hard to find a half a dozen other Ivy League dissenters.
My point is not to disagree with Manzi that a strong consensus means it is okay to call anyone who disagrees with the consensus a “crank” or “politically motivated”, but just to point out that the bar he’s set for a “true consensus” pretty much means that there’s is no “true consensus” on important issues in economics. Then again, he may very well agree with that point.
It must be, because what else explains this ridiculous optimism?
In an annual survey conducted by the economists Robert J. Shiller and Karl E. Case, hundreds of new owners in four communities — Alameda County near San Francisco, Boston, Orange County south of Los Angeles, and Milwaukee — once again said they believed prices would rise about 10 percent a year for the next decade.
With minor swings in sentiment, the latest results reflect what new buyers always seem to feel. At the boom’s peak in 2005, they said prices would go up. When the market was sliding in 2008, they still said prices would go up.
No, believe it or not this paper wasn’t written by Bryan Caplan or Robin Hanson. From the abstract:
In this paper, we analyze the extent to which market forces create an incentive for cloning human beings. We show that a market for cloning arises if a large enough fraction of the clone’s income can be appropriated by its model. Only people with the highest ability are cloned, while people at the bottom of the distribution of income specialize in surrogacy. In the short run, cloning reduces inequality. In the long run, it creates a perfectly egalitarian society where all workers have a top ability if fertility is uncorrelated with ability and if the distribution of ability among sexually produced children is the same as among their parents. In such a society, cloning has disappeared….
Unlike the normal, unpredictable, process of genetic heredity, cloners will be able to guarantee that their clones will be high-ability by cloning high-ability individuals. This paper looks at whether people will create clones for profit. Assuming that slavery will be continue to be illegal, the question is how could someone appropriate wealth from a clone they created? The authors offer three ways:
Negative bequest – this is when you borrow money in someone else’s name, e.g. adopt the baby clone and rack up debt in it’s name. Apparently, this is legal in Japan.
Informational retention – here you withhold information from the clone about where they came from, and who their “model” was unless they pay for it. A problem with this is that the clone has to wait until he’s older to pay for this (since child clones don’t have money, obviously) in which case you may have ruined a lot of potential, as they could have been investing in particular talents throughout childhood. For instance, the clone who learns on his 18th birthday that his model was Mozart, but he’s neglected to learn piano.
Gene ownership – if genetic codes are patentable in the future, then you could sell a clone his genome which contains information that could help them stay healthy or improve their labor market earnings.
Education – top tier schools could form a consortium to clone high-talented individuals to increase the demand for their products, and since top tier schools are not easily replicable this will drive up prices and increase rents.
The first one seems worst to me, since clones have no choice but to pay rents. Given the desirability of having these high-ability clones as citizens, I assume that some countries would pass laws to serve as sanctuaries from this type of debt.
I am curious as to what Bryan Caplan, who has previously argued for his right to clone, would say about whether these things methods of clone wealth appropriation should be legal?
The creator of TheUglyBugBall.co.uk said the British dating site is the world’s first to cater exclusively to people who “weren’t blessed with great looks.”
Howard James of London said the dating site for the “aesthetically challenged” excludes “anyone who is overtly pretty or attractive,” The Sun reported, The Sun reported Friday.
I wonder though, would they really kick off an attractive person who preferred to date ugly people? It seems like larger, mainstream dating sites should be able to incorporate niches like these within their networks but still allow for people who want to date more of a variety.
An op-ed in the New York Times illustrates why those concerned about energy use and “sustainability” should not be concerned about farms and being locavores, but about households energy usage
Overall, transportation accounts for about 14 percent of the total energy consumed by the American food system.
Other favorite targets of sustainability advocates include the fertilizers and chemicals used in modern farming. But their share of the food system’s energy use is even lower, about 8 percent.
The real energy hog, it turns out, is not industrial agriculture at all, but you and me. Home preparation and storage account for 32 percent of all energy use in our food system, the largest component by far.
Driving to a nearby Walmart to buy factory foods may be more environmentally sound if it saves you a car trip because you’re going there anyway, or if it’s closer than wherever it is you buy local food. I don’t know if anyone has quantified the extent to which big boxes have helped the environment by allowing one-stop shopping, but it seems it would be significant.
And it sounds like foodies should be focusing on which ways to prepare food conserve the most energy. Is microwaving your food the most environmentally friendly thing you can do? Clearly, locavores and greens are focusing on the wrong part of the food production chain to wring energy savings out of. The urban farmer/locavore/foodie aesthetic is a high status one though; the Walmart shopper/microwaver is not.
The piece closes with this paragraph which I will second and should be repeated to urban farmers everywhere:
The best way to make the most of these truly precious resources of land, favorable climates and human labor is to grow lettuce, oranges, wheat, peppers, bananas, whatever, in the places where they grow best and with the most efficient technologies — and then pay the relatively tiny energy cost to get them to market, as we do with every other commodity in the economy. Sometimes that means growing vegetables in your backyard. Sometimes that means buying vegetables grown in California or Costa Rica.
The L.A. Times investigation into standardized test scores is amazing, and you should definitely be reading everything they have. The Times deserves lots of praise, especially for it’s humane but honest treatment of the teachers, for whom this must be a stressful and, for many, shameful ordeal. Consider this teacher:
Even at Third Street Elementary in Hancock Park, one of the most well-regarded schools in the district, Karen Caruso stands out for her dedication and professional accomplishments.
A teacher since 1984, she was one of the first in the district to be certified by the National Board for Professional Teaching Standards. In her spare time, she attends professional development workshops and teaches future teachers at UCLA….
Third Street Principal Suzie Oh described Caruso as one of her most effective teachers.
But seven years of student test scores suggest otherwise.
In the Times analysis, Caruso, who teaches third grade, ranked among the bottom 10% of elementary school teachers in boosting students’ test scores.
This is clearly not a lazily tenured teacher, but someone who was trying in earnest and working hard at being good at their job. She was not being protected by the union and the school district’s decision to hide these scores, she was being done harm and is one of the victims here. Good teachers want this information to make them better teachers, which you can see in her response to the news of her poor scores:
Still, Caruso said the numbers were important and, like several other teachers interviewed, wondered why she hadn’t been shown such data before by anyone in the district.
“For better or worse,” she said, “testing and teacher effectiveness are going to be linked.… If my student test scores show I’m an ineffective teacher, I’d like to know what contributes to it. What do I need to do to bring my average up?”
When you read these stories about teachers across the hall from one another, with the same population of students from the same socioeconomic background, yet performing so vastly different from each other I find it hard not to reflect on a dying notion in educational reform: that the problem is that teachers need is more resources and smaller classrooms. In the not-so-distant future it will unanimously be understood that this was a completely wrongheaded idea, and we will wonder how it could ever have been believed. It will be like price controls in the 70s, or the idea that the Soviet Union would outperform the U.S. The not-so-distant future will wonder how anyone ever thought education could be reformed when performance and pay were so disconnected, and when nobody -not even the teachers themselves- knew who was succeeding and who was failing.
Smaller classrooms and more resources without better information and incentives would be like trying to save a sinking ship by filling up the gas tank.
Reading David Post and Matt Yglesias on copyright and artists has me thinking about the popular justification for copyright laws in contrast to the economic justification.
The economic justification is that free markets will not provide enough profit for artists to undertake some projects for which the social benefits of doing so outweigh the costs. Optimal copyrights will compensate artists just enough so that they are willing to create the works, anything above that is inefficient rents* (you hear that Metallica!).
The popular justification seems to be more about maintaining some “fair” balance between consumer surplus and producer surplus. The measure usually being that people who create things that generate a lot of social benefit (e.g. they write hits) deserve to get proportionally rich. Even after the artists are dead people feel that the benefits should flow to his children, wife, estate, etc. in proportion to the social benefits. This, I suspect, is simply the status quo bias. In this country artists who create very popular art have tended to get very rich from it, ergo we have come to see this as the “fair” outcome.
People seem much less concerned that the payment to roadworkers be in proportion to the benefit that society gets from that roads they created, and that the payments continue to flow long past when the work is done. The same is true of the designers of those roads.
Why should we be disproportionately concerned about artists ability to capture economic rents? Why should we be concerned about the ratio of producer to consumer surplus in the arts and not for other workers? Wouldn’t we be better off in a world full of middle class artists but more art?
This, to me, seems like yet another area for liberaltarian agreement.
*For more on this, see Alex Tabarrok’s “Patent Theory versus Patent Law”.
Is it surprising that conservatives don’t complain more about occupational licensing? On the one hand it’s not, because economists themselves don’t seem to think it’s much of a big deal. In their 2009 paper, Morris Kleiner and Alan Kreuger point out that since 2000 no articles had been written in what are considered some of the top economic journals: AER, JPE, QJE, Econometrica. In the leading labor economics journals, Industrial and Labor Relations Review and the Journal of Labor Economics, only one article on the issue had been written. In contrast, there were 16 articles on labor unions in just those labor journals. In a survey of five labor economics textbooks Stephenson and Wendt found that occupational licensing took up a combined total of 10 pages, whereas there were 7 chapters on unions. Clearly the profession is neglecting the issue, so why shouldn’t conservatives?
On the other hand, we have the following graph which shows unionization versus occupational licensing using data from Morris Kleiner*:
Over the last 70 years, occupational licensing come to dominate unionization as a labor market restriction, with growth in the former accelerating in recent years. The most recent estimates are that 30% of the labor force is required to have occupational licensing by a government agency, compare to around 13% that are unionized. Estimates of the impact of licensing on wages are about 10% to 15%, which is comparable to the typical estimates of the union wage premium.
So occupational licensing has the same affect on wages and is more pervasive than unionization; this tells me that conservatives should care a lot about. So why don’t they? One reason may be that they believe licensing increases quality. As I wrote yesterday, in my post on why liberals should care about occupational licensing, the evidence suggests this is not the case. But I don’t think this fact is generally appreciated.
One explanation is that, in contrast to unionism, licensing typically requires workers to jump through some impressive, expensive, and time consuming hoops, which certainly makes it seem like it should increase service quality. Also, one can certainly imagine that for many occupations there is some theoretically optimal non-zero level of licensing, but that public choice problems –highlighted here by Matt Yglesias– make that impossible.
Many conservatives may not grasp the public choice problem, and instead have too much trust in the institutions that set licensing standards. But these are mandatory government institutions, which conservatives should be skeptical of and instead favor free market, optional ones. At the very least they should favor mandatory testing, registration, and certification which allows people to work in an occupation even if they fail, but without the “Government Certified” stamp of approval.
Dean Baker’s hypothesis is that conservatives, journalists, and other professionals not complaining about occupational licensing is about class; specifically, the professional class. He argues that “free traders” only want free trade in low-skilled labor, and not high-skilled labor like doctors and other professionals. This is why they don’t complain when trade agreements come with restrictions on professional labor markets, like those on foreign doctors, but they do complain when they come with restrictions on low-skilled labor.
Even more puzzling, he argues, is that people are more concerned about restrictions on low-skilled trade between countries than on high-skilled trade between states:
The “free-trade” crew want to have a single set of standards for all forms of merchandise traded all over the world, but it has apparently escaped their attention that a lawyer from New York can’t practice across the river in New Jersey.
I don’t necessarily believe Dean’s diagnosis that free-traders really want is “cheap nannies”, and that their motivations are selfish. For one thing he frequently charges journalists with this, but are governmental barriers even among the top 10 things stopping a significant number of immigrants from putting journalists out of jobs? I do think that there is some sort of professionalism bias occurring, but it’s a bias towards believing that high-skilled labor market restrictions are for everyone’s benefit, not just their own.
In any case, whatever their motivations I think conservatives should care more about occupational licensing because it prevents free trade between the states, increases protectionism in professional services, and is a labor market restriction that is as expensive as and more pervasive than unions.
My final comment in this two-part post on occupational licensing is that I would like to see the ideologically diverse individuals and institutions who oppose occupational licensing to work together on this issue. This could be co-sponsoring papers, panels, or entire research programs. Dean Baker at the liberal CEPR, many at the libertarian Reason Foundation, and Matt Yglesias at the liberal Center for American Progress are on the same side and have written passionately about this issue. So why not a CEPR, CAP, Reason joint research program on occupational licensing? Just give me a call when you start handing out research grants.
Did you know that you can’t tell the future in Maryland? I’m not saying that you are physically (or psychically) unable to peer into the future and divine important information for residents of the Chesapeake Bay State, but that you are legally forbidden from doing so unless you have obtained a license to do so. Most licensing is not as frivolous as the fortune-teller example, yet as Karl recently argued, many commentators who are otherwise concerned with bad government policy tend to ignore it. This appears to be a problem with both the left and the right, so I want to offer arguments for both liberals and conservatives that occupational licensing is worse than they thought. Today I will attempt the harder case of persuading liberals, tomorrow conservatives.
I think the liberal tendency tend to ignore or even outright support occupational licensing comes from two motivating beliefs: they envision it as a way to generate upward mobility and create middle class jobs, and they believe it to be effective way to prevent people -especially poor people- from being ripped off, injured, or otherwise done harm.
The appeal of licensing as a way to create better jobs is obvious. Making it harder to do a job certainly restricts supply, and so as you would expect the evidence has shown licensing increases wages. The evidence shows that, while the impact varies by occupation, the average increase in wages from licensing is 10% to 15%. So if licensing helps barbers get a 15% increase in his wages, then that can appear to be a desirable wage subsidy.
The first problem with this is that every occupational license that affects wages does so by limiting supply. This means that for every increase in hairstylist wages from licensing, there are would-be hairstylists thwarted and pushed into a lower paying job. In his book “Licensing Occupations: Ensuring Quality or Restricting Competition?”, Morris Kleiner uses state-by-state variations in licensing to show that employment growth for a given occupation is 20% higher in states where they aren’t licensed.
Furthermore, given that 73% of licensed workers have a college degree, and 44% have more than a bachelors, these higher wages will frequently come from the pockets of even lower-income individuals. Studies on the impact on prices of licensing generally find effects ranging from 4% to 35%, so the amount is significant. Increasing the wages of inner city barbers may be a good thing ceteris paribus, but in reality this happens at the expense of other inner city residents.
Another problem is that occupational licensing is often a tool with which one occupation fends off competition from another, usually lower wage, occupation. For instance, many states have regulations preventing dental hygienists from practicing without the supervision of a dentist. Dentists have an average of six years more schooling than a hygienists, who on average have 2.6 years of post high-school education. In addition, dentists make on average $100 an hour, and are 80% male, whereas hygiensts are 97% female and make around $37 an hour. Kleiner and Park find that these regulations transfer $1.5 billion dollars a year from hygiensts to dentists. This is a highly regressive transfer to a male dominated, higher educated, higher paid job from a female dominated, lower educated, lower paid job. In a very similar vein with likely similar impacts, many states restrict the ability of nurses to practice without the supervision of doctors. In fact these regulations are currently growing as regulators rush to restrict the number nurses working in retail health clinics in a variety of ways to prevent them from competing with doctors.
Considering all of the above ways in which licensing tends to benefit relatively higher wage individuals who on average have a college degree or more, it strongly suggests the impact of licensing is regressive.
The second motivation of liberals in supporting occupational licensing is that they see it as an important regulatory tool with which to protect consumers. I think part of the problem is that liberals tend to envision the debate in terms of the most extreme examples. The number one response I get from liberals when I criticize occupational licensing whatsoever is to say “what, and you think anyone off the street should be allowed to do brain surgery? Typical libertarian extremism”. But this is framing the issue wrong in two ways.
First, it is wrong to assume that in the absence of licensing occupations, these jobs would be practiced by Joe Schmoe off the street. College professors, for instance, generally do not face licensing requirements, and yet we don’t suffer from a scourge of colleges hiring high school dropouts to teach physics.
Second, the options are not just occupational licensing or absolute laissez faire. It’s best to think of licensing as existing on a spectrum of occupational restrictions that range from very heavy, like the government defining who, what, and how very specifically, to exceedingly light, like optional registration. Liberals can support moving down this ladder without believing we need to get off it entirely.
For instance, instead of occupational licenses, governments could mandate testing, and offer certification for those who pass and have some set of qualifications. They could also allow private groups can offer alternative, competing certifications. Consider how much we have benefitted from the alternative certification process of Teach for America. In addition, there are variety of ways to have less restrictive occupational licensing, which the differences between states shows. After all, the empirical literature on this topic can exist because states vary greatly in the extent of licensing. Indiana has around 11% of it’s workforce licensed, while California has 30%. If all states moved towards regulatings more like Indiana it would be an improvement without requiring any sort of radical libertarian experiment.
Another problem with occupational licensing as a regulatory tool is that there is a lot of evidence that it does nothing to increase quality. One strain of research shows that malpractice insurance premiums aren’t lower in states with occupational licensing, which you would expect if licensing was increasing service quality. Other evidence comes from research into the effectiveness of nurses in providing primary care services, which has shown they do no worse than doctors. Still other research shows that licensing and certification for teachers does not increase outcomes. While the set of occupations which are licensed is broad, and the evidence for many jobs limited, the balance of the literature on licensing suggests it does not increases quality. Part of this is probably because, as discussed above, in areas where there is no licensing other mechanisms arise or be mandated to ensure quality can be monitored.
Not only does it licensing increase quality of services performed, but for many individuals it may price them out of the legal market and into black markets or performing the services themselves. This means people doing their own plumbing or, like Matt Yglesias, giving themselves haircuts, because licensing pushes prices higher than consumers are willing to pay. Potentially worse, low-income individuals may simply forego these services, causing more damage in the long-run… well, not for haircuts.
A great example this comes from underground dentists who operate in dirty basements using unclean equipment. Here is a description of what this looks like in New Jersey:
They set up their shingles in dingy basements, garages and spare rooms in apartment buildings across New Jersey.
The equipment includes seating ripped out of cars, rusty tools to probe inside mouths and soda bottles to dispose of spittle…
In Union City last summer, Luis Eduardo Gallo-Enriquez walked into a small office one floor below the waiting room of a licensed dentist, looking sweaty in muddied jeans, according to one of his patients. Gallo-Enriquez, a 45-year-old Ecuadorean native, was more than an hour late for an appointment but proceeded to charge the 25-year-old Secaucus woman $600 to apply her braces — using rusty tools and no X-rays or dental impressions — and put her on a monthly payment plan.
When she contacted him about a problem she was having with a chafing wire, he told her he had set off on a Caribbean vacation and advised her to trim the wire herself with a nail clipper, assuring her, “I tell this to people all the time,” she recounted.
Operations like this would be drummed out of business by other low-cost models if licensing were weakened. Think dentists in Walmart. Forcing transactions into the black market also prevents the other quality improving institutions, like credentialing, malpractice, and independent review organizations, from functioning. Word of mouth doesn’t even work as well when a service is illegal.
One last cost of licensing that will bother liberals is that by being issued at state, county, and even city levels, it decreases geographic mobility. A barber licensed in one county may have to jump through all sorts of hoops to practice in another, which will increase their cost of moving.
Overall I think that occupational licensing is something that liberals should care about, and that reducing it would particularly benefit low-income individuals. If more liberals were involved in criticizing licensing then the conversation would not so often end up with libertarians arguing for more extreme reforms like the removal of all legal requirements for doctors, and instead would focus on more pragmatic solutions like figuring out how we can all be more like states like Indiana, and how to encourage alternative credentialing institutions that allow more flexibility.
The post-housing-bubble narrative has been that the unsustainability of prices was obvious ex ante, and so we should be able to call them in the future. This to me seems to be a bit of hindsight bias, but it is always difficult to make a case that claims which turn out to be ex post false were nevertheless ex ante reasonable. Kristopher Gerardi, Christopher Foote, and Paul Willen have a new paper out that I’ve been waiting for someone to write. They go through pre-collapse claims of the housing pessimists, optimists, and agnostics, and evaluate not just who was write and wrong but which beliefs where obviously right and which were debatable. This is a fun and accessible paper starring a well-known cast of characters, with prominent roles for Paul Krugman, Dean Baker, and Robert Shiller, and a quick cameo by The Economist, Calculated Risk, and John Cassidy. I strongly recommend it.
Rereading the cases of the optimists and the agnostics should be a reminder to those who claim to have identified the bubble, and also argue for the identifiability of future bubbles, with a high degree of confidence. The burden of proof on those making those claims is to argue convincingly against, for instance, Himmelberg, Mayer, and Sinai who argue that you can’t just look at price to rent ratios, but must consider changes in the user-cost of housing.
Even more prominent than the housing optimists are the housing agnostics. Rosen and Haines argued that the academic consensus on the issue was that the relationship between prices and fundamentals was sound, and that overpriced markets, if they existed at all, were limited. The authors find that the beliefs of agnostics can be summarized in this quotation from Davis, Lenhart, and Martin:
If the rent-price ratio were to rise from its level at the end of 2006 up to about its historical average value of 5 percent by mid-2012, house prices might fall by 3 percent per year, depending on rent growth over the period.
There is a tendency to call anyone who bought a home during the late stages of the bubble “irrational”, because prices were obviously unsustainable. But as the authors point out, the consensus of economists gave no indication that this was the case, and so behaving as if it wasn’t was quite reasonable for non-experts. Of course, pointing out that current prices were justified by fundamentals does not rationalize a 120% LTV negative amortization mortgage.
To those who simply point to lower lending standards as sufficient proof for a bubble, the authors offer this:
Did lax lending standards shift out the demand curve for new homes and raise house prices, or did higher house prices reduce the chance of future loan losses, thereby encouraging lenders to relax their standards? Economists will debate this issue for some time. For our part, we simply point out that an in-depth study of lending standards would have been of little help to an economist trying to learn whether the early-to-mid 2000s increase in house prices was sustainable. If one economist argued that lax standards were fueling an unsustainable surge in house prices, another could have responded that reducing credit constraints generally brings asset prices closer to fundamental values, not farther away.
I believe the case for humility about the obviousness and knowability of bubbles is underappreciated. Many, I’m sure, will simply point to the pre-bubble agnostic consensus of economists as more evidence that economists are rational expectations obsessed, over-mathematized fools who don’t know what they’re doing. I think they would benefit from a close reading of this paper.
Here you can find the paper whose abstract contains this sentence:
“To overcome endogeneity, we draw on a quasi-natural experiment in German history and exploit the exogenous spatial distribution of baroque opera houses built as a part of rulers’ competition for prestigious cultural amenities.”
The title is “The Phantom of the Opera: Cultural Amenities, Human Capital, and Regional Economic Growth”.
It is a common and poor framing of the question to ask whether uncertainty is causing our current economic woes. Just as the path of GDP is more volatile and difficult to forecast than in stable growth years, the path of individual firm sales is similarly more volatile and uncertain. More uncertainty will make households and businesses save more and invest and spend less. There is nothing controversial here. The debate is about the cause of uncertainty, and here I see a troubling correlation between what people think the current villain is and what their non-recession bugaboos are. The narratives struggling to tie the current economic woes to long-run stagnating wages, an undereducated workforce, and anything Democrats do strike me as a tenuous stretch and reflect our tendency to need a compelling narrative when easy explanations do not present themselves.
I think a good test for yourself is to ask “what problems do you think are important today that you didn’t think were important in 2004, and what policies would you favor now that you would have opposed then?”. My answer is that low house prices are a problem today where I would previously said low prices are just transfers from sellers to buyers, and I would favor policies that prop them up when I would previously have opposed them. What are yours?
In response to Tyler Cowen’s semi-praise for job saving programs, Arnold Kling has this wisdom for us:
On the larger point, keep in mind that in an ordinary non-recession month 4 million jobs are destroyed and about 4.2 million jobs are created. Suppose that in a bad month of a recession, 4.0 million jobs are created and 4.5 million jobs are destroyed. Which of those 4.5 million jobs ought to be saved, because they might come back in a stronger economy? No one in Washington knows.
Economists often caution that in a global recession everyone can’t growth at the expense of their trading partners, either via currency devaluation, protectionism, or other policies designed to stimulate domestic demand at the expense of imports. If countries try such “beggar thy neighbor policies”, it will just make everyone worse off, since everyone is weak and everyone will defend their growth with similar measures. But what if everyone wasn’t weak. What if there was some healthy neighbor country whose growth we could siphon and feed off like a vampire. If there was such a neighbor, perhaps we should beggar them…
On an unrelated note, lets talk about Canada. Here a graph showing the healthy state of their housing market.
Nothing too volatile going on there over the last decade. Slow, steady, dependable, unexciting growth: that’s Canada. They’ve almost completely rebounded from the minor fall in prices.
Here’s a couple more facts on Canada’s performance relative to the rest of the G-7 from this report :
- Canada’s GDP declined the least during the recession
- Canada is the only country to have almost entirely recovered their full output decline
- Canada’s job losses, which only occurred for 3 quarters, have been fully recouped
- Canada is the only one to have year-on-year GDP growth from March 2010
- The IMF and the OECD expect Canada to grow the fastest over the next two years
Here’s what their GDP growth looks like:
Looking pretty healthy there. They grew 6.1% in Q1 2010, their fastest rate in a decade. Surely that’s more economic growth than any one country needs all for themselves.
Not only are they growing faster, by some measures they’ve got more economic freedom than us now. All I’m saying is that’s a real nice economy they’ve got there; I wonder if, maybe, we could just borrow a little bit of it. We can do this the easy way or the hard way. The easy way would be Canada upping their U.S. imports and tamping down their exports.
The hard way? Well I’m not sure what that would be. But Canada has definitely been home to a some terrorists, heck you might even call them a “haven for terrorist activities”. I hear Paul Bremer’s not too busy these days, and CPA could just as easily stand for Canadian Provisional Authority.
Liberal bloggers have cited the work of John Schmitt at CEPR and Bender and Heywood as showing that, despite conservative complaints, state and local public sector workers are actually underpaid compared to private sector workers. I have disputed those results elsewhere, but I’ll let that fight go for today. What I want to look at is whether federal employees are paid more than private sector workers.
Using the same data from those studies that Krugman and Cohn cite favorably (CPS ORG), and the filters and variables from Bender and Heywood*, I’ve taken a look a public sector pay for federal employees. As a first pass I found that federal workers are paid 18.2% more than private sector workers. This includes controls for age, gender, marital status, education, state residence, race, and union coverage. Using a more conservative regression that includes occupational controls and hours worked it comes to 17.8%.
So there’s probably some systematic differences between federal workers and private sector workers that we’d want to account for. One important difference is that a lot of federal employees live in Washington D.C., which I assume has a higher than average standard of living than average. To control for this I re-run the regressions dropping out all workers who live in D.C., and then I tried it again dropping everyone in Virginia as well. Still around 17%.
Maybe federal employees are more concentrated in cities, again with higher cost of living. To control for this I dropped all workers living in a Combined Metropolitan Statistical Area. Federal employee pay premium goes up to 24.2%. Dropping D.C., V.A., and MSAs gives you around the same.
Just for kicks, if you run it without controlling for union coverage, as I’ve argued you should, the wage premium is 31.8% if you use the geographic restrictions above, and 24.3% if you don’t. In contrast to state and local public sector wage premiums, which I found were concentrated primarily in low education workers with wage discounts for more educated workers, excluding these regressions to workers with college and post college only still has a wage premium of 16.2%.
A note for skeptics: If there’s other controls you would like to see included I’m happy to throw them in and re-run the regressions. There’s no need to call me a hack because I didn’t control for bananas per capita or something, just convince me in the comments that I should and we’ll see what happens. It may be that controlling for some factor I haven’t considered will make these results go away. I’ll grant that it’s certainly possible.
But until then… No matter how I cut it, using the same data and methodology that Paul Krugman and others have stood behind as proving local and state public sector workers were underpaid by around 5% shows that federal workers are overpaid by over 15%.
*I would have loved to do the analysis using Schmitt’s filters and variable definitions as well, but he hasn’t yet responded to my emails
Ryan Avent and Jim Manzi have recently been debating whether a carbon tax will stimulate innovation, with comments from Matt Zeitlin and Megan McArdle. There is an inherent difficulty in empirically testing the effects of increasing the cost of polluting on innovation in that you want to measure the shadow price of pollution, which includes not only direct prices like the cost of gasoline, but indirect costs like non-price regulations.
One strand of the literature examines the effect of energy prices on energy efficiency in a variety of products. A good summary can be found in this paper by Jaffe, Newell, and Stavins (JNS) for the Handbook of Environmental Economics. They cite a study which found that energy efficiency in air conditioners and gas water heaters would be 50% to 25% lower by 1993 had energy prices stayed where they were in 1973. This paper finds similar results using a dataset of product characteristics of almost every tractor (yes, tractor) sold in the U.S. from 1920 to 1996. Of course these results could just represent the continuing adoption of existing technology rather than innovation of new ones.
JNS also cite the work of Popper, that shines some light on the innovation vs substitution issue. He found that patents in energy related fields increase in response to higher energy prices. Importantly, he also found that two thirds of the change in energy use in response to higher prices was a result of substitution among existing products (movement along the production frontier), and the remaining third was a result of induced innovation (movement of the production frontier). Due to the measurement error inherent in using patents as a proxy for innovation, JNS suggest this could be interpreted as lower bound for the innovation contribution. This supports Avents argument.
An important unsettled question is the extent to which these innovations will be marginal versus revolutionary. I have yet to see empirical evidence on this, and it is hard to imagine how you would in fact conduct such a study.
Mark Price has some thoughtful comments in response to my previous post on public sector unions, and I recommend those interested in the issue read them. I’m going to respond to some of his points here.
He first points again to several studies suggesting that public sector pay is not too high. As I’ve tried to show though, adding in other controls brings the public sector discount to approximately zero. Also, given that benefits and unobservable job perks are higher for public sector unionized employees the lack of a significant public sector discount suggests they may be overpaid. At the very least the studies don’t tell us that the public sector isn’t overpaid.
I’d also like to point out another way to look at the data, which is to exclude controls for union coverage. The EPI paper Mark cites does this, arguing that:
Union status was omitted from this study on earnings comparisons, since it has been a focal point of the compensation controversy. This means that, in essence, we are statistically comparing unionized public-sector workers with all private-sector workers—both union and nonunion—rather than with their union counterparts. Unionized private-sector workers have both better pay and higher benefits, of course, so our standard of comparison is very conservative.
There is certainly some sense to that. Consider this thought experiment: imagine if the majority of the 61% of public workers that weren’t unionized joined a union tomorrow, and their wages went up by the 15-20% union wage premium. Would we really want to ignore this increase in examining the pay of these workers? I would argue no.
I’ve rerun the regressions without union variable, with separate regressions for each education level to control for heterogeneity. The results, shown in the table below, indicate that there is in fact a public sector premium for lower education workers and a public sector discount for more educated workers. One explanation may be that non-wage benefits are higher for more educated workers. It could also be that the more educated accrue non-monetary benefits for public sector work, such as the prestige or valuable experience. Think financial sector regulators who go on to work at Goldman.
In any case, I don’t think the data contradict my point, and while I’m not going to hang my hat on these results, they do appear to support my argument for some segment of public sector workers.
Another point Mark argues is that the existence of a public sector union wage premium, just like there is a private sector union wage premium, is not evidence that public sector unions have too much power. So if I understand him, his criteria is that public sector unions must be able to set wages higher than private sector unions in order to have “too much power”. But as Richard Freeman says in 20 year anniversary symposium on his book “What Do Unions Do?” that Mark cites, public sector unions are so different from private sector unions that they did not cover public sector unionization in the book because they require a different analytical framework. These differences mean that simply understanding that the power and effects of private sector unions are often overstated doesn’t really shed a lot of light onto the issue of public sector unions, regardless if the relative union wage premia.
Let me give an example of one important difference. If a private sector union has too much power they may cause disemployment for that firm and industry, and at worst put the firm out of business. In contrast, a public sector union with too much power will affect the ability of the government to effectively provide public goods. The latter case has the potential to be much more harmful that the former. Education, roads, public transportation, regulation, and public health are more important than most consumer goods. I’ve spoken with many liberal economists who support private sector unions but oppose public ones for just this reason.
Mark also suggests that time series evidence is required, and that the wage premium should be increasing. I disagree with this. A falling premium is entirely consistent with a union that still has too much power, but power that is dwindling over time. Also, too much power does not necessarily mean a faster rate of wage growth, but could simply mean a higher level of growth. I think both of those statements are likely true about many public sector unions and their wages.
One issue where I want to agree with Mark is his claim that my main point was “sloppy”. That’s definitely true; I did not bother making the statement precisely. I didn’t bother because I believed (and believe), that I am making a common sense, uncontroversial claim that’s mostly about politics: public sector unions have the power to influence government. Freedman makes the power of public sector unions clear in his chapter from the symposium:
A realistic analysis of public sector unions has to factor in their role in shifting demand for public services through lobbying legislatures or city government and through campaigns to convince citizens that they need more public services, as well as their role in shifting the allocation of budgets toward workers.
Take the NEA with it’s 3.2 million members and $350 million dollar annual budget; they’re seventh largest contributor to political campaigns over the last 20 years. Yes, I believe they have power, and I believe they block beneficial reforms, including teacher pay reforms. Maybe Mark disagrees that the political power of the NEA and public sector unions like them is a bad thing, but that is a separate issue from whether they have a whole lot of power. If our disagreement is really about whether they use their formidable power for good, than that’s something we can agree to disagree on (for now), but attacking my point by arguing about wage premiums is a roundabout way to argue that. “They have lots of power and it’s good” is different than “they don’t have lots of power”.
What impact did the Federal Reserves $1.25 trillion LSAP (large-scale asset purchase) intervention in the mortgage backed securities market have? A new Boston Fed paper investigates:
Our analysis yields three main findings. First, the announcement of the LSAP program led to significant reductions in interest rates for borrowers almost immediately…
Second, the Fed’s initial announcement led to an immediate and large increase in borrower activity in the primary loan market. The records show an increase of approximately 300 percent in the number of borrowers shopping for refinance mortgages… this increase in shopping activity translated into a 150-250 percent increase in the number of applications and subsequent originations….
Third, the initial LSAP announcement generated a significant shift in the characteristics of borrowers. In particular, refinancing activity became highly skewed toward borrowers with high credit scores.
The authors offer a variety of possible explanations for that third finding, but the huge variance of impact by borrower credit quality is shocking:
Comparing the day before the initial LSAP announcement on November 25 to the day after, we see a bit more than a doubling in the number of refinance applications that led to origination for borrowers with FICO scores below 700. For borrowers with FICO scores between 700 and 720, that number more than tripled, for those between 720 and 740, it quadrupled, for those between 740 and 760, activity quintupled, and for those above 760, activity went up more than seven-fold.
Last week I wrote about falling wages in public sector unions, and suggested that due to the power of public sector unions those wages will just return to trend after the recession is over. I therefore suggested it would be better if public sector unions lost power rather than wages, since you could permanently take power but not above market wages. Via twitter labor economist Mark Price (@price_laborecon) disagreed with my claim that public sector unions have “too much” power. If they did, he argued, it would show up in compensation data, and the evidence suggests it doesn’t. He linked to three reports (here, here, and here) that show that public sector wages are no higher than, and often lower than private sector wages.
I’ve seen the paper by Bender and Heywood, and the one from CEPR before, and the third one is a paper on public sector premiums from the Economics Policy Institute. The Bender and Heywood paper uses household survey data on income and worker characteristics from the yearly Outgoing Rotation Group in the Current Population Survey (CPS) to estimate whether there is a public sector wage premium after controlling for worker characteristics. I’m going to focus on this paper because it is the strongest and most relevant: the CEPR paper is missing important controls, and the EPI one only applies to New Jersey.
In short, the study finds that controlling for age, education, race, gender, whether they are married, state of residence, and union status, both local and state public sector employees are paid less than private sector employees. The first thing to note is that union status is controlled for, which means that public sector workers are paid less if you ignore the wage premium they get from being in a union. My claim was that public sector unions possessed too much power, so removing a wage premium attributable to union status gives you an answer that is beside the point. My claim isn’t that all public sector workers have too much power, or that public sector unions have too much power relative to private sector unions.
This study in fact supports my argument if you use Dr.Price’s metric. The regression coefficients on page 8 of the report show that the union wage premium is between 15% to 16%, while the public sector wage discount is around 11%, meaning unionized public sector employees are paid 4% to 5% wage premium. Thus the power is showing up in compensation, which is what Dr.Price suggested should be the metric for “too much power”.
There are other interesting issues here as well. I obtained the datasets from here and with the help of Dr. Bender, one of the study’s authors, I was able to recreate the results. One important point is that if you include occupation controls, and include average hours worked and hours worked squared (which you should) the union premium increases and the public sector discount drops, so that the total differential (union + public sector) grows to 18.1% for local and 15.2% for state.
Another important point is that some public sector jobs will obviously pay less than private sector jobs for reasons unrelated to unions or wage setting power. This is particularly true for more high skilled occupations. Public defenders, for instance, are going to get paid less than the average private sector lawyer. I don’t know whether this is due to lower abilities and skills or simply a willingness to accept lower pay because they want to perform a civic duty, but either way it’s pretty unrelated to the issue of public sector union power.
The heterogeneity of these results across different skill levels becomes clearer when we look only at workers with less than a college education (including those who had some college but not complete it). The union wage premium here increases to 22% for both local and state, and the (now statistically insignificant) public sector discounts are 1.2% and 1.3%. Thus lower educated workers earn around 20% more when working for a public sector union than they would if they were non-unionized public or private sector workers.
A final point I’d like to make is that a wage premium is not equal to public sector union power. A powerful union may use all of it’s bargaining power to negotiate for absolute job security, which could then select for a different set of workers with lower unobservable skills. In this case you would observe wages equal to or even below private sector wages despite a clearly powerful union. Some would argue this is exactly what teachers unions do.
[UPDATE: Regression results above slightly corrected]
With regulations set to come into affect limiting overdraft fees, the banking industry is already in the process of ending free checking. Here are some numbers that explain why:
The typical checking account costs a bank $250 to $300 a year to maintain… If the account isn’t generating at least that much in revenue, it’s a loser.
Overdrawn ATM and debit card transactions made up half of the $37 billion consumers paid last year in overdraft fees. The other half came from bounced checks and recurring electronic payments, which the new law doesn’t affect.
PNC, the bank with the greatest presence in the Cleveland market, said it expects to lose nearly $300 million a year in overdraft revenue. No. 2 KeyBank expects to lose $40 million a year.
The article also speculates that banks will respond via the following:
• Increasing fees for services such as getting a cashier’s check or money order.
• Adding fees for things that are now free, such as banking at a branch or getting a statement by mail.
• Creating electronic checking accounts, with no checks or paper to process.
• Dropping no-strings free checking accounts.
From a new NBER working paper:
…Real, constant quality land values have increased by nearly 800% since the first quarter of 2003, with half that rise occurring over the past two years. State-owned enterprises controlled by the central government have played an important role in this increase, as our analysis shows they paid 27% more than other bidders for an otherwise equivalent land parcel.
Has the entire globe been overbuilt? I can foresee a future where a global housing bubble (maybe not this one) leaves governments realizing that the only way to sop up excess housing demand that is killing economic growth is to encourage procreation and immigration. Beggar-thy-neighbor immigration policies will be the new trade wars, and blogs and social scientists will debate about how best to incentivize having children. Statist governments (and, again, bloggers and social scientists) will try to figure out whether outlawing abortion will increase or decrease the population, which in a world of rich countries with more than open borders will have to go hand-in-hand with emigration restrictions.
So this is the choice you have in the fall: the party of Gingrich and Palin at war with the Cordoba house, or the party with this economic platform:
President Obama and congressional Democrats — out of options for another quick shot of stimulus spending to revive the sluggish economy — are shifting toward a longer-term strategy that promises to tackle persistently high unemployment by engineering a renaissance in American manufacturing.
That approach … is still evolving and so far focuses primarily on raising taxes on multinational corporations that Democrats accuse of shipping jobs overseas.
The strategy also repackages policies long pursued by the White House — such as investing in clean energy, roads, bridges and broadband service — with more than two dozen legislative proposals aimed at developing a plan for promoting domestic manufacturing.
Sometimes I wish the 1950s had never happened. Democrats are like a burned out 1980s rock star trying forever to recapture the glory days of his youth using the same formula that brought him fame in the first place: acid washed jeans, tall spiky white hair, and writing the same hair metal songs. “Hey, it worked once, why not try it again and again and again forever until I die alone in a trailer in an IHOP parking lot, on a dive-bar tour in between a sad show and a sadder one?”
That’s Democrats and the 1950s.
I’d never heard this story before; it is perfect:
On January 26, 2006, [Joaquin] Phoenix was in a car accident in Hollywood on a winding canyon road that flipped over his car. The crash reportedly was caused by brake failure. Shaken and confused, Phoenix heard a tapping on his window and a voice say, “Just relax.” Unable to see the man, Phoenix replied, “I’m fine. I am relaxed.” The man replied, “No, you’re not.” At this point, Phoenix saw that the man was famed, eccentric German film director Werner Herzog. After helping Phoenix out of the wreckage, Herzog phoned in an ambulance and vanished.
Whoever wrote this Wikipedia entry has done an excellent job because Werner Herzog does not just “walk away from the scene of the accident”, he “vanishes”.
Sometimes I think if Jamie Galbraith were as heterodox in the conservative direction as he is in the liberal direction he would be mercilessly skewered in the econ-blogosphere. What is the conservative equivalent of “deficits never matter”? It’s probably somewhere between “cutting taxes always raises revenues” and “FDR caused the Great Depression”.
That, again, was my initial reaction when I read his proposal (via Mark Thoma) that we shouldn’t be cutting medicare and social security, but expanding them. Then, much to my surprise, somewhere about halfway down the page I found myself somewhat convinced, or at the very least intrigued and open to persuasion, by part of it.
He argues that we should lower the social security age to 62 for three years. This would allow older workers to leave the workforce, and would open up job vacancies for younger workers. You can see some appeal to this. If you have to subsidize the unemployment of some workers, it should be the older ones who no longer need to accumulate skills.
Right now one thing we are witnessing is older people hanging onto their jobs longer, and so younger people can’t begin climbing up the ladder. Younger people are thus suffering from decreased work experience and bouts of unemployment or very low-skilled work. This is at best delaying the accumulation of human capital and so lowering the present value of their lifetime earnings, but also likely causing them to forego investing in, or even destroy, human capital. Giving old people the cushion to leave their jobs like they otherwise might have can help prevent some of this. If you think hysterisis is a serious threat, this plan looks even better.
An alternative plan is to directly subsidize human capital accumulation of young people by paying for more education or training. But this involves the government making many decisions and creating many (more) marginal distortions in human capital investments of young people. In contrast, lowering social security age creates much less of these distortions.
There’s a cleanness and a simplicity to lowering the social security age that I find very compelling. Maybe Jamie Galbraith isn’t crazy, and this is a reminder of the value of having heterodox thinkers like him around to come up with ideas like this that conventional economists wouldn’t dream up. Or maybe I’m just crazy too, and this is a terrible idea. Somebody talk me out of this.
