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A quick announcement: we’ve moved the blog to Forbes. You’ll be able to find us there at blogs.forbes.com/modeledbehavior, and soon modeledbehavior.com will redirect there. All our old links will still work, and an archive of the old site will be available soon. Thanks to everyone for reading, commenting, and linking. We hope you’ll follow us over there… and if you don’t, well quite frankly that will be a little rude.

Catherine Rampell has some excellent coverage of the GOP war on the ACS that does an admirable job of not pulling punches and calling nonsense out as nonsense:

It is, more or less, the country’s primary check for determining how well the government is doing — and in fact what the government will be doing. The survey’s findings help determine how over $400 billion in government funds is distributed each year.

But last week, the Republican-led House voted to eliminate the survey altogether, on the grounds that the government should not be butting its nose into Americans’ homes.

“This is a program that intrudes on people’s lives, just like the Environmental Protection Agency or the bank regulators,” said Daniel Webster, a first-term Republican congressman from Florida who sponsored the relevant legislation….

….A number of questions on the survey have been added because Congress specifically demanded their inclusion. In 2008, for example, Congress passed a law requiring the American Community Survey to add questions about computer and Internet use. Additionally, recent survey data are featured on the Web sites of many representatives who voted to kill the program — including Mr. Webster’s own home page.

This stupidity encapsulates perfectly the extremeness that is showing its face in some elements of the GOP today. Between things like this and the debt ceiling insanity it is hard not to agree with those who claim there is an asymmetrical extremeness in politics today. It is a depressing display.

On Karl’s Up With Chris Hayes appearance, Betsey Stevenson rightly pointed out the obvious falseness of the claim that we would be better off if we defaulted on our debt during the debt ceiling crisis. Everyone seemed to agree it was a problem that there were no elites to come down on Republican politicians making this crazy argument and tell them they are, well, crazy. But as I blogged back then, sane conservative did come out strongly against defaulting. You had Douglas Holtz-Eakin, Gary Becker, Keith Hennessey, Richard Posner, and Glenn Hubbard arguing that not only would defaulting be terrible, but that it would unequivocally be terrible. This was not a failure of the elites, it was a failure of people to listen to them. I suspect we may see the same thing happen when the debt ceiling comes back again.

I don’t know enough about the science to tell whether this is a significant step forward in neural-interface systems, or just the specific potential of neural-interface systems to aid paralyzed individuals, but this report from the NYT is encouraging in any case:

Two people who are virtually paralyzed from the neck down have learned to manipulate a robotic arm with just their thoughts, using it to reach out and grab objects. One of them, a woman, was able to retrieve a bottle containing coffee and drink it from a straw — the first time she had served herself since her stroke 15 years earlier, scientists reported on Wednesday….

Scientists have predicted for years that this brain-computer connection would one day allow people with injuries to the brain and spinal cord to live more independent lives. Previously, researchers had shown that humans could learn to move a computer cursor with their thoughts, and that monkeys could manipulate a robotic arm.

The technology is not yet ready for use outside the lab, experts said, but the new study is an important step forward, providing dramatic evidence that brain-controlled prosthetics are within reach.

I think there is a non-trivial probability that future computer interface using only our minds will be popular (I don’t think whether it will be possible is much of a question anymore). I’m not sure this will replace current inputs entirely, as the telephone did to morse code, or just compliment them, as the mouse did to the keyboard. In either case I think it adoption of such technology will go hand-in-hand with the continuing integration of brans and computers. Psychologically, I think controlling computers with your mind will make computer memories feel much more like actual memories, and will blur the line between the two further.  After all, having no manual inputs means the entire process will occur internally with the appearance of moving parts in the real world: simply think what you want to know, and have what you want to know appear floating in front of your face (augmented reality). I predict this will feel very different from even just waving your hands in the air Minority Report style.

ADDED: Mark Thoma has what looks like a very interesting video on all of this from the Milken Institute. Fast forward to around the 50 minute mark for some amazing footage.

ADDED II: From MathDR in the comments, apparently Doc Oc will be real some day:

I spoke with the DARPA program manager regarding this project (this was a while ago) and I remember his statement about the impact of this research: Basically when doing experiments on monkeys with no impairment of limbs (they constrained the monkey arm with a sling to inhibit movement and force it to use the robotic arm), the question was what would happen then the sling was removed.

The monkey responded by utilizing both of its arms normally AND the robotic arm as a THIRD arm. This implies (extending to humans) that we would be able to *extend* our anatomy to multiple appendages and maybe even other toolsets (surgical tools on the end of appendages, etc.)

 

I think the problem people have imagining a world of self-driving cars is they imagine it happening overnight. Yes, if a self-driving car showed up at your house tomorrow it would be a little nerve-racking to turn over control to a computer. But the progress will be relatively incremental, and we will give up control one piece at a time. In fact, this is already underway.

As far as I can tell, the first such feature to make it onto the market was the self-parking system. These systems automate the steering of parallel parking and provide the driver with distance alerts, but the driver still controls the speed. Watching this technology demonstrated it is very easy to imagine the entire process being autonomous.

There are other examples as well, like adaptive cruise control which adjusts a cars speed to the vehicle in front of it, even bringing the car to a full stop if necessary. This technology is already on the market. Cadillac’s  “Super Cruise” seems like an extension of that which bridges the gap between autonomous driving and adaptive cruise, but is designed to only work highways. With “Super Cruise” the car stays in the lane and at the speed the driver sets, while staying at least two seconds away from the car in front. This isn’t available yet, but it seems a likely precursor to fully autonomous cars and a natural extension from adaptive cruising.

Automatic braking systems are a similar technology that is more focused on preventing accidents. The Insurance Institute for Highway Safety found that automatic braking in Volvo SUV’s prevented one out of four low-speed crashes. Other technologies like this have tremendous potential to save lives. USA Today reports:

“Along with automatic brakes, IIHS is studying the effectiveness of other advanced safety features such as warnings that alert drivers they are leaving their lanes and indicate another car is in the car’s blind spot, as well as adaptive headlights that turn as cars move around corners. NHTSA, in cooperation with automakers, is also studying automatic brakes — which go by different names, including “forward collision warning/mitigation” or “pre-sense” — and advanced safety belts designed to work with the brakes.

IIHS estimated last year that these crash-avoidance features have the potential to prevent or at least lessen the impact in 1.9 million crashes a year and help prevent one out of three fatal crashes. Systems that warn then help prevent frontal crashes by braking automatically could be the solution for most of those — 1.2 million crashes. That represents 20% of the 5.8 million police-reported crashes each year and as many as 66,000 non-fatal injury crashes and 879 fatalities a year, IIHS says.”

Auto executives are quick to ensure people that people and not robots remain in control of vehicles, but as these technologies become more widespread we will begin trusting computers more than ourselves. I suspect their cautionary rhetoric will change as people become more comfortable with computers in charge, and soon enough we’ll be able to be asleep at the wheel, and safely.

Matt Di Carlo at Shankerblog has some, as always, thoughtful and nuanced ideas on the discourse surrounding education policy. He argues that accusations of “teacher bashing” is often an unfair charge to level against education reformers, but that these reformers should also recognize that there is less space between criticizing teachers unions and criticizing teachers than they think. He writes:

So, is there any distinction between teachers and teachers’ unions? Of course there is.

People who disagree with policies traditionally supported by teachers’ unions, or support policies that unions tend to oppose, are not “anti-teacher.”… It’s certainly true that the rhetoric in education can cross the line (on both “sides”), and extreme, motive-ascribing, anti-union statements are understandably interpreted as “bashing” by the teachers that comprise those unions. Some of the discourse involving unions and policy is, however, from my (admittedly non-teacher) perspective, more or less substantive.

So, you can “love teachers and disagree with their unions,” but don’t kid yourself – in the majority of cases, disagreeing with unions’ education policy positions represents disagreeing with most teachers. In other words, opposing unions certainly doesn’t mean you’re “bashing” teachers, but it does, on average, mean you hold different views than they do.

He goes on to note that teachers are not  a monolith, and thus there will be disagreement among teachers and some will oppose union policies. But I think this point deserves more emphasis, specifically I think many rules favor incumbents and people who already are teachers over people who would otherwise be teachers, or will become teachers. This is true of a wide range of occupational licenses. For instance, maintaining rules that make it hard to become a barber make incumbent barbers better off, but hurt those who would have become a barber were it not for the rules.

So while it is true that opposing policies that helps incumbents means opposing policies they support on average, I think it is a less understood and in many cases more important point that rules which help existing workers often hurts others who want those jobs.

One way to help improve the lives of low income people is to focus on how the government can give them more. Sometimes this can be very effective, and even desirable. But a far less common way is to look at how the government can stop doing stuff that is making them worse off. Occupational licensing is a great example of this. In the 1950s, around 1 out of 20 jobs required a license. Now the number is around 1 in 3. This red tape keeps a lot of low income people out of better jobs with better income. This issue receives the discussion it deserves in an excellent new report from Angela Erickson and John Ross at the Institute for Justice. They looked at 102 occupations that are licensed in at least one state and where incomes are below the national average. As an important improvement on past research, they document the difficulty in getting licensed by looking at the five main costs of licensing: fees, education and training, exams, minimum age and minimum grade completed. This allows them to measure not only how widespread licensing is, but how much of a cost it imposes. The following are a couple of facts worth noting from the report, but you should read the whole thing

1. Those receiving licenses have lower income than the average worker ($30k vs $47k), more likely to be minority, and more likely to be a high school dropout or have just a high school education than the general population. Importantly, those crowded out of these jobs probably have even lower income and even less educated than those who actually got the licenses.

2. Forty-seven states find it unnecessary to license interior designers, and yet the four that do find it necessary to receive 2,190 days of training to become one. This is a joke, and congressmen in those four states should be ashamed of themselves for this obvious and egregious handout.

3. Defenders of licensing regularly point to safety concerns, but for a large proportion of the occupations that are licensed somewhere, there are other states where they are not licensed, and in these states we do not witness of epidemic of wildly untrained barbers accidently cutting off ears, for example.  In addition, some jobs that clearly do involve safety often require vastly less training than others where the argument is much more tenuous. For instance, cosmetologists on average require 372 days of training, while EMTs only require 33.

4. States should have commissions with the power to strike down these laws unless evidence is presented that the licenses provide a significant health and safety benefit that justifies the cost. For many occupations if one wished to be a tedious contrarian one could say “well, you see florists are a public health concern because…” and then Slate your way into a convoluted argument in defense of a license, but the beauty of this study is that it shows other states where licensing isn’t required. Angry and concerned citizens of 26 states should be saying “South Carolina doesn’t require a license to be a taxidermist, so why the fuck do I have to have one?”

5. If you appreciate this study, you should donate some money to The Institute for Justice.  They do excellent and essential work in areas that go ignored far too often. Sometimes people hold charitable donations up to a high standard by asking “is there some charity I should donate to that would increase welfare more, like giving money to starving kids?”. But this is incorrect framing. You don’t ask that question every time you go to buy something at the store, and if even if you do, you answer “no” enough to buy lots of stupid unnecessary things (don’t lie, you do).  But if you’re going to ask that question, why should you only do so for charitable donations rather than for all spending? Donations are consumption, so let them compete with your other consumption, don’t put them in an isolated and elite league of consumption that pits them against starving children in Africa. Pit them against an extra large container of popcorn at the movies. A donation to The Institute for Justice increases welfare way more than an extra large popcorn.

I think, perhaps, Raghuram Rajan has been partly misunderstood. In a much maligned essay he writes:

Since the growth before the crisis was distorted in fundamental ways, it is hard to imagine that governments could restore demand quickly—or that doing so would be enough to get the global economy back on track. The status quo ante is not a good place to return to because bloated finance, residential construction, and government sectors need to shrink, and workers need to move to more productive work.

This has been interpreted by Karl and Paul Krugman to mean that the construction sector is currently in need of shrinking. What it looks to me like is that he’s saying we can’t go back to the size of these sectors that predominated before the recession, because it was in need of shrinking then. The key to interpreting correctly is that he says the way things were is not a “good place to return to“. But the confusing part is that “bloated finance, residential construction, and government sectors need to shrink“, rather than “needed to shrink”. But what I think he means here is that when sectors are bloated, as they were before the recession, they need to shrink. We do not want “to return to” the way they were because they were bloated, and “bloated..sectors need to shrink”.

The misunderstanding this generated is unsurprising: it’s worded confusingly. And who knows, maybe I’m the one reading him wrong. In any case, there much else wrong with his piece that, most importantly the incorrect assumption that we can either do long-term reforms or worry about short-term problems. We can do both. Why not, for instance, identify solutions that attack long-term and short-term problems. What magical policy could simultanously address our short-term housing sector weakness (including an oversupply of housing, low house prices keeping homeowners underwater, and a lack of normal construction sector contribution to recovery), long-term demographic problem driven by an aging society, a medium and long-run debt-to-GDP problem, and a shortage of skilled labor? A huge increase in skilled immigration.

To be clear: this is not to say we shouldn’t have more inflation, because we should. But whenever someone like Rajan wants to point out long-run problems, we should argue against them and advocate for more inflation, but we should also say that even if he’s right, there is at least one policy that address short and long-term problems: more immigration, and now. We might never convert the do-nothing caucus to inflationists, but perhaps we can convert them to the do-something-productive congress.

There has been pushback from economists who support fringe positions on this article I wrote while guest-blogging for Megan on things that economists agree on. A lot of the pushback seems to focus on the title of the piece which says “all economists” reject these ideas. That’s a fine complaint, but in the piece itself I go out of my way to not refer to all economists. Obviously within any field you will find some people supporting just about any position. I mean you see the doctors on TV selling obviously sham diet medicine, right?  I may reply in depth to the criticisms more at some later point, but I don’t have time, so for now I just want to note one interesting thing. Here is Dean Baker who says he’s comfortable with three of the four things I say economists mostly agree on, but that I’m too easy on NAFTA and free trade. In contrast, here is Amity Shlaes who says I am spot on when it comes to free trade, but too hard on the gold standard. The general pattern is: yes, you are right to dismiss the other fringes, but not my fringe.

Which is fine, I don’t begrudge them wanting their fringe to be treated with more credence. But my point was specifically to point to a survey of economists that identified these positions as being rejected by a strong consensus of the profession. I’m not going to accurately marginalize these positions with one hand and then with the other hand tell readers to give them more consideration than the vast majority of economists do. These may be issues worth considering for economists or others with a detailed interest in the issues, but for laypeople who just want to know the truth these aren’t positions they should take very seriously.

Jodie Beggs of Economists Do It With Models posed the following via twitter:

Question- how is it that ppl are advised against variable rate mortgages but pushed into variable rate student loans?

I never turn down the chance to lecture condescendingly to a Harvard trained economist, so let me see if I can clear this up for Jodie by arguing why it might make sense for an individual to have a fixed rate mortgage but variable rate student loans.

First note the similarities that lead one to ask this question: a college education and a home are sort of assets. Well, a home is literally an asset, and an education is kind of like an asset, but they both share the features of an asset that they are a long-lived investment that pays investment returns. In addition -and central to this issue- purchases of both are typically financed by debt. A third important similarity is that these are typically the large components of household debt, and two of the most important investments households make.

Given these similarities, it is natural to assume that it would be optimal for households to choose similar interest rates. But it is the nature of the returns these investments produce that explains why an individual might choose different interest rates. For a house, the investment return produed is a flow of housing services. Think of it as a factory that produces a months worth of housing each month, which the individual owning it consumes. Education, in contrast produces higher human capital which translates (usually) into higher value of output that their labor creates. The difference is that inviduals sell their labor output, whereas they consume the flow of housing services.

This matters because if inflation -and thus nominal interest rates- go up then the cost of debt service will go up for both housing and education debt if the interest is variable. In addition, inflation should also drive up the price of the output produced by the assets and the nominal value of the assets themselves: house prices and the value of the flow of housing services -equal, in theory, to rent- will increase, and so will wages. Because households are selling their labor, their income rises with their costs of debt. But households are consuming their housing services, their debt service goes up without an offsetting increase in income. For this reason, it is more risky to use variable rate interest on housing debt than on education debt.

Let me summarize a debate that is going on:

1. Matt Zwolinski repeats the popular argument that people like Warren Buffett who want higher taxes should donate money to the government like they do to charity.  But people largely don’t do this, as a mere $3.2 million was donated to the government compared to $300 billion to charities. This tells you people don’t really want higher taxes.

2. Will Wilkinson replies that this is incorrect because it can be rational for someone to not comply with a rule that: “(1) you support, but (2) will only have its desired effect if general compliance with the rule is high, and (3) you suspect general compliance will not be high.” He compares someone who thinks we should not eat meat but their not eating meat won’t result in any less animals being killed, since his not eating alone will have zero effect on market demand.

3. Bryan Caplan responds that the real question we should be asking is:  “Why is government’s share of the voluntary donations market so damn small?”  He argues that the prisoners’ dilemma can explain why a particular charity (or the government as a charity) has a low amount of donations, but it can’t explain why it has low donations relative to other charities, which also suffer from a prisoners’ dilemma.

This is going to be another one of those posts where I argue everyone kind of has a point. Overall, I think Will is correct that people legitimately do want higher taxes. But I think Matt and Bryan have a point that the lack of donations is indicative of something.

One point I want to make is that I think Bryan is incorrect that the prisoners’ dilemma can’t explain why the charitable donations to government are so small. Consider Bryan’s hypothetical that raises money for haircuts for hippies. Imagine that absent coercion people would voluntarily give $1,000 to hippy haircuts by themselves, but if they know that everyone else would also, they would be willing to give $3,000, making it the largest charity in the country. Now suppose the government taxes everyone $2,800 and gives it to the organization. In this circumstance it can be completely rational for everyone go give zero marginal dollars to hippy haircuts, despite the fact that without the government taxing them they would have donated $1,000. Likewise one could argue that people in this country would be willing to donate hundreds of billions each year to the U.S. government if they weren’t already paying taxes, and that we are still below the efficient level of contribution.

However, I also want to quibble with Will’s example of not eating meat. It makes sense for someone to believe they’re not going to have any effect on the consumption of meat since the tiny, tiny amount of lower demand may be a fraction of a rounding error that doesn’t even show up in the yearly spreadsheets upon which they base next year’s production numbers. Likewise the extra couple thousand dollars the typical U.S. household could donate to the government would amount to pennies per government program. But meat consumption is going to be relatively normally distributed, while income is going to be more log normally distributed. Consider everyone’s favorite example in this issue, Warren Buffett. I believe he makes in the neighborhood of $60 million a year, and total U.S. household income is around $7 trillion, meaning he accounts for 0.000857% of U.S. income. A rounding error? Maybe. But consider if Buffett consumed a proportional share of meat, as in Will’s example. U.S. households consume around 30 million cows a year, which means Buffett would personally be consuming around 250 heads of cattle. Would it be legitimate for a man consuming 250 cows a year to say that it wouldn’t matter if he became a vegetarian?

But this brings me to a section point related to Will’s meat eating metaphor. Part of the reason people who think eating meat is wrong shouldn’t eat meat is to be an example to others. Charitable acts are often purposefully visible signals meant to encourage others to do the same. Isn’t this why people do charity walks? Sure, a lot of this signaling is motivated by the desire to signal higher status, but this desire to signal can incentivize good behavior.

Like Bryan, I don’t find it hard to imagine us ending up at a different equilibrium where many people do donate to the government:

Could the U.S. government attract a lot more donations with better marketing?  What if the President spent less time raising money for his campaign and more time raising money for the Treasury?  What if Congress publicly acknowledge the ten biggest donors in an annual ceremony?  I can easily believe that donations to the U.S. government would rise a hundred-fold.  But even then, Uncle Sam’s share of national charity would be a mere .1%.

Rather than politicians appealing to people to donate to the government, I could imagine high profile people like Warren Buffett urging people to donate more and generating some movement on this. But I don’t think the lack of this sort of movement proves anything about how much people value government spending, I just think it’s a potential that hasn’t been realized yet.

In response to an old post of mine, Eli Dourado has some skeptical thoughts on what you could call “brain mounted computers”. This is really a collection of technologies, but the gist of it is computers increasingly integrated with our minds. The screens float before you using augmented reality, and you control them using your thoughts, and probably before that with hand gestures in the air or some sort of projected input surface, like skinput:

Eli is skeptical though, but I think his skepticism is motivated by a common error people make when projecting what the future will look like: they think about what kind of future they would like, instead of what kind of future is probable. You can see this in the case Eli makes, which appeals quite a bit to his preferences:

…when I think about a world of increasing wealth, I don’t think of one where everyone is part computer. I basically think about vacations. What do I like to do when I’m on vacation? I like to eat good food, see and try new things, lay in the sun, be creative, have good conversations with friends, have plenty of sex, read books, and generally unwind….

…What do I not like to do when I am on vacation? Near the top of my list, at least if I am doing it right, is “be notified that I have email.” This is why I am skeptical of widespread adoption of permanent brain-computer interfaces with augmented reality capabilities. As we get wealthier, we will accept fewer interruptions in our lives. It’s also part of why I think Google’s Project Glass will be a failure….

Unfortunately for the world though, most people aren’t like Eli. I feel fairly confident in claiming that Eli is quite far from the median person in terms of preferences, and so imagining whether a future populated with Eli Dourados would adopt various technologies won’t make for accurate forecasts.

I can agree that one somewhat plausible future is one filled with a lot of leisure time, but how are we likely to spend our marginal leisure time? Eli imagines we’ll do what he likes to do on vacation, like relaxing, having conversations, and eating good foods, which he claims are “all things our distant ancestors enjoyed as well”. I think most people are more likely to spend their new marginal leisure doing similar things that they spend their marginal leisure time on now, which are connected things, like Facebook, and what you might call mindless things, like watching TV. My categories of things people do with leisure time on the margin suggest that people will desire using augmented reality and brain mounted computers in their newfound leisure time. Eli’s categories suggest they won’t. So who is correct?

Well we can get something of a look at this by seeing how people are choosing to spend their marginal leisure time now by at the extra leisure time resulting from the recession. Of course this sample of marginal leisure time will be biased away from fun things, since the people with extra time now are likely suffering an income shock, so you might imagine they would spend much of their time doing things that are more substitutes for work, like household production. But when it comes to the things Eli thinks people will want to do with more leisure -like lying around in the sun, having conversations with friends, and eating good food- none of these are necessarily more expensive than other cheap leisure options. Sure, good food with friends can be expensive, but as Tyler tells us in his new book, it needn’t be.

So what are people doing with their extra time? Watching TV and sleeping mostly. The Wall Street Journal reports:

What did people do with that extra time? Mainly they slept and watched TV. Time spent in front of the television rose by 12 minutes, to two hours, 49 minutes a day in the two years through 2009. Sleep was the next big gainer, increasing by six minutes to eight hours, 40 minutes a day.

The data also show what Americans aren’t doing with their extra time: There was virtually no change between 2007 and 2009 in the time devoted to volunteering, religious activities, exercise or education. In sum, time people might have used productively is instead being squandered, says University of Texas economist Daniel Hamermesh.

You could argue that sleep is sort of in Eli’s category, since it is certainly a primitive activity. But the extent to which sleep is going to fill up our future leisure time is pretty limited. TV on the other hand, can take up a whole day if you want it to. A more sophisticated analysis of American Time Use Survey results verifies where marginal leisure time during a recession goes:

…roughly two-thirds of the increase of leisure time associated with the decline in market work at the business cycle frequency are concentrated in television watching and sleeping. To the extent the individuals consider recessions to be a period of increased leisure, the bulk of the leisure increase shows up as an increase of time in these two categories. Given the large movements in the time allocated to these two categories, our results suggest that economists need to think hard about how individuals value the marginal time spent watching television or sleeping when computing the welfare costs of business cycles. We do not find that socializing (spending time with one’s spouse, extended family, and friends) increases significantly during recessions.

Perhaps the wealthier future word will filled with high-brow individuals like Eli who prefer primitive entertainment. I think that would be a more rewarding world in many ways, but I also think a wide swath of mindless, easy, entertainment and connectedness is here to stay, and Americans will continue choosing it for their leisure. Except in the future it will be more directly connected to our brains.

Over in the comments at Steve Waldman’s, Morgan Warstler has an interesting proposal for a replacement for the minimum wage and unemployment insurance:

Using a clone of Paypal and Ebay platforms, the US govt. should establish a Guaranteed Wage of $240 per week. Anyone who wants to work registers, receives a Debit Card,and each Friday has their GI deposited.

All recipients have their labor weeks auctioned online. Bidding begins at $40 per week ($1 per hour). Bid increases by .50 cents per hour ($20 increments).

Recipients keep 50% of the top bid, if they take it. If they opt for a lesser bid outside certain boundaries there are penalties (fraud measure).

Recipients cannot be made to work outside a radius of a couple miles.

Bidders must deposit money into system before they bid. They must accurately describe the job. Feedback will be given both ways. If you are familiar with Ebay, you understand what this accomplishes.

There are no taxes paid, there are basic workplace protection requirments. Umbrella insurance is sold on site for folks bringing labor into their home.

Expect 30M to register so approx $345B is our cost assuming 30M are auctioned at $1 (The govt. is picking up $5.50 and bidders are in for $1)

At an avg. bid of $4 per hour, avg. worker is making $8, and the govt. is spending $250B a year.

There is no more UI. There is no more minimum wage. That’s why there are 30M in program.

It is an intriguing proposal, and I see something like this as more likely if the fears of robot labor market dominance come true and many workers end up zero marginal product. But here are some problems I see with this program:

1. If weekly online ebay-like employment markets like this are efficient, then why don’t they exist yet? Is the extra $5.50 in marginal product really all that is stopping them? Here is one similar market for what are mostly errands. Perhaps we are already on a path towards the obsolescence of this complaint. Although maybe labor market regulations make this impossible to do on a significant scale.

2. Are workers required to put themselves up for auction or can they just receive the minimum guaranteed income and say “no thanks” to auctioning their labor? If it is the latter, then I think we will see many workers choose the $5.50 and do nothing. If you can receive $5.5 an hour from the government for doing nothing, or $6 for working 40 hours a week, then you’re exchanging 40 hours for an extra $20 a week. Not a very good deal.

On the other end of the low-paid spectrum, workers who are worth $10 an hour will receive $10.50 ($5.50 + 50% x $10), which means they can get $220 a week for doing nothing or $420 for working 40 hours. Some will probably choose to work, and some will choose not to. But I think many would find $220 plus some extra pay from black market labor (likely at more than a marginal $5.50 an hour) to be a pretty good deal. Those that don’t will be receiving a very small subsidy of $0.50 an hour.

Thus workers with labor worth $10 or more will have only a small subsidy from this, and those with labor worth less will find it pretty tempting to not work. Under either scenario I don’t see much work flowing through this market.

If the point is that everyone will be required to put themselves on auction and surely everyone will be bought at a minimum cost of $40, then I think this logic is incorrect. A review system will be in place, and any worker who does not wish to be hired again will find ways to make sure that doesn’t happen very quickly.

3. Do workers and laborers have the incentives to provide accurate rankings? If an employer finds a good worker and they elect to give them an accurate rating then they will have to pay more for them the next week. If they rank them poorly, perhaps accusing them of being negligent or criminal, then they should get them cheaper.  The reverse is true for a worker who finds a good employer.

4. How much does employee choice matter in this framework? The setup of employers purchasing employees at an auction ignores worker preferences over what work they do. Morgan says if job seekers “opt for a lesser bid outside certain boundaries there are penalties”, and it’s unclear to me how you do this without meaningfully ignoring job seeker preferences. This also provides a potential explanation for question #1: the predominant labor market arrangement for cheap labor is for employers to post a wage, job seekers to apply, and employers to choose among them. Aren’t there reasons we’ve evolved to this equilibrium?

Overall Morgan says with this program we can get rid of unemployment insurance and the minimum wage, but I see this more as lifetime unemployment insurance combined with a government funded minimum wage. Still, with the threat of hordes of ZMP workers looming in the future, things like this are worth thinking about and we need more ideas like Morgan’s.

H/T Pascal Gobry

I’m sorry to do this to you, but I don’t really have Deirdre McCloskey reviewing David Graeber’s “Debt: The First 5,000 Years”. But did you feel how bad you wanted to read that when you saw that headline? Surely, one of our readers has the power to make this review happen.

In the meantime, here is McCloskey on Karl Polanyi, who instead of arguing that the economist’s view of pre-money barter is false, argued that the economist’s view of markets as existing throughout history is false:

…the mistake Polanyi and his school then make is to suppose without evidence that any regulation whatever obviates a market, quantitatively. An epsilon degree of social intrusion, they say, makes for No Market. The standard is again that of Arrow-Debreu -flawless markets or nothing. The presence of regulation -informal or legal- does change relative prices across markets. But it does not by itself eliminate market forces. In China at the height of the Cultural Revolution the women of the village secretly purchased produce from farmers and fishers before the watchmen started their day. Supply and demand popped up. How much? That remains for the economic scientist to determine.

Of course this is the mistake that all schools of economics make, believing they can prove the economy like proving a theorem in geometry. Proof in Math Department’s spirit -the existence of epsilon, no matter what its measure- is of no use for science, as may be seen in physics and chemistry. For the work of science one must measure (as Polanyi implies in appealing to a quantitative rhetoric). Polanyi is trying to prove capitalism false. But in such a matter not “proof”, only magnitude matters: how close to a perfect market economy does an actual economy have to be before the long-run considerations are to this or that degree admissible? How much of a self-regulating market needs to exist before we can assume approximately the functioning of market laws? It is not a metter of on/off, exist/not.

For those with more interest, here is a longer McCloskey article on Polanyi with Santhi Hejeebu. For what it’s worth, I think McCloskey is too dismissive of what economic proofs tell us. What good does it do, for example, to show how close an economy is to a perfect market economy if we cannot establish why and in what ways a perfect market economy is desirable? I agree with McCloskey that the work of science is to measure, but we must first know against what standard we are measuring.

In any case, I hope someone out there is spurred by this to hire McCloskey to write a review of Graeber.

These are two things I’ve written about lately but wanted to draw an explicit parallel between. First is Andrew McAfee and Erik Brynjolfsson’s and Race Against the Machines, which argued that technology is progressing so quickly that it “confounds expectations and intuitions”. The part I want to address in particular is where they try and predict the jobs in which humans have the most sustainable comparative advantages. In addition to problem solving and creativity, they cite manual work:

If, as these examples indicate, both pattern recognition and complex communication are now so amenable to automation, are any human skills immune? Do people have any sustainable comparative advantage as we head ever deeper into the second half of the chessboard? In the physical domain, it seems that we do for the time being. Humanoid robots are still quite primitive, with poor fine motor skills and a habit of falling down stairs. So it doesn’t appear that gardners and restaurant busboys are in danger of being replaced by machines any time soon.

The second thing I’ve written about that I want to connect to this is DARPA’s new grand challenge. This contest is very specifically seeking to address this disadvantage that robots have compared to humans. Here are the tasks a robot will have to complete to win the challenge:

1. Drive a utility vehicle at the site.
2. Travel dismounted across rubble.
3. Remove debris blocking an entryway.
4. Open a door and enter a building.
5. Climb an industrial ladder and traverse an industrial walkway.
6. Use a power tool to break through a concrete panel.
7. Locate and close a valve near a leaking pipe.
8. Replace a component such as a cooling pump.

Sorry gardners and busboys. A robot that can do all of these can weed a garden and clear a table. Oh, and that part about robots falling down stairs? Here is a new video from DARPA showcasing a robot  that “is expected to be used as government-funded equipment (GFE) for performers in Tracks B and C of the DARPA Robotics Challenge.”

It is appropriate that the book about how machines are outperforming our expectations is having its expectations outperformed by machines.

Will Wilkinson and Bryan Caplan have been going back and forth on the value of labels. In particular, Will is arguing that political labels are a detriment to clear thinking. Overall, I think both of them have some pretty good points. I do think Will is correct that for most people political labels make you dumber. I am frequently baffled by the sight of an otherwise intelligent person making a partisan knee-jerk defense or attack on a politician when they would obviously be taking the exact opposite position if the D were switched with R. I see this happen literally almost every single day, and it is an extremely sad sight, made all the more sad by it’s obviousness. This makes me side with Will (somewhat). Yet, as would be expected, I don’t think my own labels do this to me (much), and I do think they are useful, which makes me side with Bryan (somewhat). But there is one point I think is missing from the debate: a self-conscious lack of labels is in fact a label, and can be just as constraining of one. Let me explain.

Will writes:

Politics just is coalitional conflict. A political label puts you, like it or not, on a team in a number of disputes in which there are significant real-world stakes. People therefore tend to see their ideological affiliation as constitutive of their identity in a way their opinion about the ontology of mental illness (to use one of Bryan’s examples) isn’t…  Other people are thus likely to see our politics as central to our identity, and to see our attributed identity through the prism oftheir politics. Self-labeling gives others permission to apply to us the label we apply to ourselves, and (here is something I believe!) who we are is to a large extent a complicated product of our reactions to social expectations.

But to define oneself as, for example, “of no party or clique”, as Andrew Sullivan does, creates in others a social expectation of holding beliefs that defy parties and cliques. You may not be expected to take particular and easily predictable positions on every issue as you would if you had a politically well-defined label like, say, paleolibertarian, Christian conservative, or pro labor democrat.  But you are expected to regularly take positions that are idiosyncratic.

Take Will for example. He is one of my favorite writers and I think he has a great talent for peering deeply into an issue. But nowadays I expect Will’s self-description as stridently not-a-libertarian who still steadfastly holds some libertarian positions to mean he will be boldly rejecting libertarian positions somewhat regularly, and embracing them other times. Will’s label as a label-less individual is perhaps even more central to my expectations of him than ever, since this has become an important issue to him that he wishes to persuade us on. “Look at me”, Will seems to be shouting sometimes, “I am no longer beholden to libertarianism!”. I don’t begrudge him his new found freedom, and am glad he feels unburdened of a bias, but it is a label he is wearing brightly.

I consider myself something of an idiosyncratic neoliberal libertarian who is willing to admit a lot of uncertainty. Each of those four things creates some expectations (to the extent anyone expects anything of me), but I think they give me a fairly wide berth to accept claims across many ideological spectrums. I don’t think abandoning those labels would liberate me, because I don’t feel very constrained. I think a lot of libertarians and conservative couldn’t picture themselves agreeing that the minimum wage doesn’t lead to unemployment, and indeed at one time I also could not have done it. But I took a lesson from Robin Hanson and pictured myself walking around as someone who believed this, and adjusted my self-conception until I actually could do that. Now I sometimes earnestly consider it, rather than just reconvincing myself that my belief in the opposite is rigorous. I don’t think you have to do this with all literally absurd claims, but it should be possible for slightly plausible claims.

Perhaps Will’s rejection of a label, or I should say his embracing of the label “label-less”, is the most effective way for him to minimize his biases. For me, I think I feel the most pressure or bias from my  “idiosyncratic” label, and my “neoliberal” and “libertarian” labels help counter that by aligning social expectations of my beliefs to what I approximately consider to be the truth, and so regularly believe. But “idiosyncratic” isn’t a political ideology, it’s an adjective. And try as we might we cannot label ourselves as “adjectiveless” or be “adjectiveless” people and writers.

For some perhaps the best course of action is to abandon labels with strong expectations for those with less. For others I think the best course of action is to truly be able to imagine yourself defying social expectations your labels create, and to practice doing so by thinking a lot about the areas where you are most likely wrong. Just don’t defy social expectations of your beliefs by re-labeling yourself as someone who defies social expectations of your beliefs, or you will end up biased against holding predictable beliefs. Idiosyncrasy can be a burden like that.

That is the epistemic case against abandoning labels. Now allow me to make the Straussian case.

There is a constant branding war over ideologies, which combined with the inevitability of labels and anti-labels leads me to wish to defend the label libertarian by attaching myself to it and steadfastly insisting it is compatible with reasonableness. I know many people have exaggerated and cartoonish images of what makes a libertarian, and many cannot imagine themselves as self-identifying as libertarians. Part of this is the fault of Ron Paul and other radicals. I think convincing people that their self-conceptions as reasonable people can remain intact while they also embrace the label “somewhat libertarian” or even just “sometimes agreeing with libertarians” is valuable for the cause of promoting liberty, especially smart libertarian policies.

On the other side of the spectrum, I want to sell radical libertarians on a more reasonable brand of libertarianism. This is an easier task for someone who truly sees themselves as a libertarian. It is also, I hope, valuable for the cause of promoting liberty, especially smart libertarian policies.

Let me end by noting that I expect Will, with his insightfulness and persuasiveness, to talk me out of half of this [this is my uncertainty label operating].

Jagdish Bhagwati provides an argument for more trade liberalization that should be embraced by progressives, and in doing so makes the case against Obama’s World Bank nominee:

In fact, it is the rapid acceleration of economic growth in the major emerging countries that has reduced poverty, not only directly, through jobs and higher incomes, but also by generating the revenues governments need to undertake the public-health, education, and other programs that sustain poverty reduction – and growth – in the long term….

The problem with Kim, and presumably with the Obama administration’s development experts, is that they do not understand that successful development requires big-payoff pro-reform, pro-growth policies, not just small-payoff micro-level policies….

Kim is hardly likely to understand this dynamic. A decade ago, he cheered on the tirades against “neoliberal” reforms that, in fact, were the harbingers of higher growth and lower poverty around the world. The World Bank presidency should not be an apprenticeship.

Bhagwati suggests Ngozi Okonjo-Iweala and Laura Tyson as better choices.

Over at The Atlantic, where we will be guest blogging for Megan, I have a piece about the progress of technology and why we should all be futurists now. One sign of progress is improvement of autonomous vehicles, and the DARPA Grand Challenge, which paid million dollar cash rewards, played a big part in helping that along. Now DARPA has a new challenge for humanoid robotics. Here is a summary of the challenge:

The goal of this Grand Challenge is to create a humanoid robot that can operate in an environment built for people and use tools made for people. The specific challenge is built around an industrial disaster response.

There are also details on what the humanoid robot will be required to do:

1) The robot will maneuver to a open frame utility vehicle, such as a John Deere Gator or a Polaris Ranger. The robot is to get into the driver’s seat and drive it to a specified location.

2) The robot is to get out of the vehicle, maneuver to a locked door, unlock it with a key, open the door, and go inside.

3) The robot will traverse a 100 meter, rubble strewn hallway.

4) At the end of the hallway, the robot will climb an ladder.

5) The robot will locate a pipe that is leaking a yellow-colored gas (non-toxic, non-corrosive). The robot will then identify a valve that will seal the pipe and actuate that valve, sealing the pipe.

6) The robot will locate a broken pump and replace it.

Hopefully this will spur progress on humanoid robotics like the other Grand Challenges have spurred progress in autonomous vehicles.

I think a big part of why people struggle to imagine a world where cars drive themselves is they believe too few people will want it, at least in this country. There needs to be a minimum number of customers to support both the technology and the political will to pass laws allowing something that many will instinctively feel is dangerous. So how do we get from here to there? Garrett Jones proposes one way that I think is persuasive:

A thin edge of the wedge for Google Cars: an alternative to driver’s licenses for some of the elderly. Voter demand meets tech solution.

If there is one group is this country with the money, the demand,  and the political influence to get us driverless cars it is the elderly. Another constituency will be the disabled, as illustrated in the following video of a blind man riding in a Google driverless car:

Many see driverless cars as a solution to a problem we don’t have, but in fact for many this would be an extremely liberating technological advance.

Housing markets need better information. An interesting AP article discusses both the informational problems in determining how big the shadow inventory of housing is, and how informational problems are in part causing the housing inventory:

Economists at CoreLogic, a California company that analyzes mortgage data, weigh in at the low end, charting 1.6 million homes in shadow inventory nationwide. They count homes not listed for sale, with loans that are at least 90 days overdue, in foreclosure or bank-owned.

Others say the shadow is much bigger. Laurie Goodman of Amherst Securities in New York says it covers from 8.3 million to 10.4 million homes. Goodman’s analysis includes homes with loans that are at least 60 days overdue, have been delinquent in the past and are likely to go into default again, and thousands of homes whose owners are making payments but are likely to give up because they are so far “underwater,” in homes worth less than they owe.

“The question is `how long is the shadow?’” Goodman says. “I think some people are definitely underestimating the seriousness of the problem.”

And more on the difficulty in reading price signals in this environment:

But investors and those who represent them complain banks are not realistic about the prices they’ll accept. Verna, the real estate agent specializing in distressed properties, says that slowing the flow of homes into the market creates an artificially low inventory in some neighborhoods, which can temporarily lift prices. At the same time, lenders are increasingly selling homes or the underlying loans in bulk to hedge funds.

That’s where Verna comes in, tracking down borrowers to convince them to trade deeds for cash, and turning around homes like the building on 21st Street for resale. This takes patience and a strong stomach. Abandoned homes are frequently trashed or occupied by squatters. Borrowers are difficult to track down and reluctant to talk.

Verna has tracked one homeowner from address to address to address. Each time the real estate agent thinks he’s caught up, the man has moved again.

At this rate, Verna figures it will be three to five years before lenders let all the homes go. The risk is that, by moving too slowly they could artificially raise prices in some areas, which might spur investors who bought homes as rentals to put them up for sale.

H/T Market Urbanism

Consider three leading explanations for the current weak economic conditions. First, a new paper from James Stock and Mark Watson identifies demographic shifts as an important determinant of poor current economic conditions, and a likely problem going forward:

…barring a new increase in female labor force participation or a significant increase in the growth rate of the population, these demographic factors point towards a further decline in trend growth of employment and hours in the coming decades. Applying this demographic view to recessions and recoveries suggests that the future recessions with historically typical cyclical behavior will have steeper declines and slower recoveries in output and employment.

Second, as Karl has argued, the economy is waiting for “the kick” of an increase in sales of durables like housing and autos. Third, you have low house prices in holding back the economy by weakening household balance sheets.

My question is this: do not all of these factors point towards more immigration to drive both a recovery now and a recovery from the decline in the long term economic trends? In The Great Stagnation, Tyler Cowen identified lots of immigration as one of the three main kinds of low hanging fruit that helped drive our earlier growth:

“In a figurative sense, the American economy has enjoyed lots of low-hanging fruit since at least the seventeenth century, whether it be free land, lots of immigrant labor, or powerful new technologies. Yet during the last forty years, that low-hanging fruit started disappearing, and we started pretending it was still there.”

But this low hanging fruit has not gone away. We have simply stopped grabbing it.

I find Shanker Blog’s Matt Di Carlo to be a reliable and very fair minded source for education research coverage despite coming from a somewhat different part of the ideological spectrum than I do on education reform. He has an assessment of the literature on TFA that I recommend.  Although I don’t know this area of research very well, his discussion reflects my general impression. Here is how he summarizes:

 One can quibble endlessly over the methodological details (and I’m all for that), and this area is still underdeveloped, but a fair summary of these papers is that TFA teachers are no more or less effective than comparable peers in terms of reading tests, and sometimes but not always more effective in math (the differences, whether positive or negative, tend to be small and/or only surface after 2-3 years). Overall, the evidence thus far suggests that TFA teachers perform comparably, at least in terms of test-based outcomes.

I also Matt is correct to look to the meta lessons about TFA and teachers in general, but I disagree somewhat about the meta lesson. He says:

But, to me, one of the big, underdiscussed lessons of TFA is less about the program itself than what the test-based empirical research on its corps members suggests about the larger issue of teacher recruitment. Namely, it indicates that “talent” as typically gauged in the private sector may not make much of a difference in the classroom, at least not by itself.

In contrast, I would say the lesson from TFA is that “talent” as typically gauged in the private sector makes as much of a difference as an entire four year teaching education does. If talent didn’t matter much, then you could give all teachers five weeks of training instead of four year educations and the outcomes would be comparable to what we are seeing now. Either talent doesn’t matter much or going to college for four years doesn’t matter much, in either case one is about equal to the other on average.

One thing this lesson implies to me about policy is we should think about how we can combine the most important aspects of the four teacher year education and boil it down to something more than five weeks and less than four years in order to make it easier to recruit people with TFA level talent into teaching. We should be experimenting more with alternative credentialing regimes for teachers.

ADDENDUM:  In response to BSEconomist’s comment let me clarify. The evidence shows a lot of ability is worth about as much as a full teaching education. Yet we only allow two choices: a lot of ability with very little education (TFA), or a full education. We should allow a wider variety of substitution of ability for training  instead of just all or almost none.

People have complained that Amazon factory warehouse jobs are marked by poor conditions and low pay, but this may be less of a problem in the not to distant future. Amazon has acquired robots maker Kiva systems for $775 million and they are planning on replacing warehouse workers with autonomous robots. The New York Times reports:

…Kiva Systems’ orange robots are designed to move around warehouses and stock shelves.

Or, as the company says on its Web site, using “hundreds of autonomous mobile robots,” Kiva Systems “enables extremely fast cycle times with reduced labor requirements.”

In other words, these robots will most likely replace human workers in Amazon’s warehouses.

Despite the ugly conditions that can reportedly occur at Amazon warehouses, I don’t think the workers will be better off when these jobs are replaced by robots. The article also reports on the general trend of Robots Are Stealing Our Jobs:

Robots have been in factories for decades. But increasingly we will see them out in the open. Already little ones — toys, really — sweep floors. But they are getting better at doing what we do. Soon, if Google’s efforts to create driverless cars are successful, cab drivers, cross-country truckers and even ambulance drivers could be out of a job, replaced by a computer in the driver’s seat.

In the video below you can see Kiva robots perform The Nutcracker.

Not everyone will lose from climate change, or to put it another way, not everyone would gain from climate change mitigation policies. But a smart mitigation policy, like a carbon tax, creates more benefits overall than costs. Some people will see the benefits over gains as sufficient justification for mitigation policy, but others oppose such policies unless the redistributive effects of the policies are compensated for so that the change is a pareto improvement. With climate change this would be, for example, areas of the country where cheap gas prices or carbon based energy production are disproportionately important.

Not everyone will lose from protectionism, or to put it another way, not everyone would gain from free trade. But free trade creates more benefits overall than costs. Some people will see the benefits over gains as sufficient justification for free trade, but others oppose such policies unless the redistributive effects of the policies are compensated for so that the change is a pareto improvement. With free trade this would be, for example, areas of the country where manufacturing jobs that would be displaced by trade competition is disproportionately important.

I don’t think there will be much of a correlation between these positions, yet they use similar logic. How do people decide when redistribution effects of a policy change are sufficient to overcome the desirability of benefits exceeding costs? Is there something more than political allegiance going on here?

Long time China correspondent Adam Minter has a good interview in Time Out Shanghai that anyone interested in labor standards in China should read. Here is how he answered a question about whether Foxconn’s labor standards need to be improved:

My expertise is not in high-tech manufacturing, but rather recycling facilities like scrap yards, and raw material processing facilities like aluminum smelters. I wouldn’t want to generalize either of those industries, but I can tell you that companies engaged in raw materials are far more dangerous, unhealthy, and unpleasant places to work than somewhere like Foxconn. Indeed, I can think of a range of industries that are more dangerous than Foxconn: textile dying, batttery manufacture, paper making, the list is endless.

The goal should not be raising the standards of Foxconn, but rather the much more difficult task of raising up China’s other industries to the level of a Foxconn. Responsibility for that, however, belongs to the various levels of the Chinese government, ultimately. I don’t think any amount of consciousness raising on the part of foreigners can make a bit of difference.

I don’t think Mike Daisey has had any impact on China’s labor situation, and I don’t expect his current troubles to have an impact either.

The ongoing debate about Apple’s supply chain in China has me wanting to put down a couple of quick thoughts on corporations and whether they should, to put it broadly, promote laws and standards around the world. This isn’t an attempted knockout punch to any position, and while I am often a critic of regulations, and will be here in some places, this is just as much of a rebuttal to Milton Friedman’s argument that the only social obligation of business is to maximize shareholder profits.

In many developing nations, the legal system functions poorly, and international corporations are often more capable of enforcing efficient laws throughout their supply chain than anyone else. This can be, to some extent, due to pressure from U.S and other western customers to “behave ethically”. This can be good both because it enforces efficient and desirable laws, and because getting a supply chain to be able to conform to any standards, whether they are quality, ethical, or efficiency standards, is a necessary step in moving up the manufacturing value chain. One example of this would be how Walmart is able to enforce environmental laws that are likely closer to efficient than what the local governments enforces. Pollution can do a lot of costly and unfortunate damage to health and the environment in developing areas with weak rule of law.

Another benefit of corporation enforced standards, which applies to environmental, labor, and other kinds, is that corporations are more likely to find the least cost ways to comply. A corporation with a broad goal can be more efficient than specific government mandates.

Friedman argued that shareholders, workers, managers, or CEOs can contribute to social causes with their own money outside of the corporation. But stakeholders of Walmart can get far higher social return for $1 spent within the company than outside it. And as Friedman agrees in his essay, if a manager loses money for a corporation by behaving with social responsibility, free markets will ensure that it comes out of their wages.  So if it is CEOs making the decision to sacrifice $1 of profits for $10 of social returns, then the corporation will take that $1 back through lower compensation, creating $9 of value. But if a CEO  chooses to operate outside the corporation, it may cost him $9 to get the same $10 of return, creating only $1 of net value.  Consider the example of a CEO who refuses to sign off on $1 million in pollution to save the company $100k. In contrast, if the CEO allows the spill to happen and then tries to clean it up with his own money it will probably cost closer to $1 million than $100k.

This argument requires efficient markets for executive wages, and an obligation to not hurt society to save yourself a fraction of the cost. Nothing too radical. Importantly, such spending will often be far more profit maximizing than is assumed, so the $1 of nominal cost to the company is often much less when private returns, for example marketing value, are considered.

Despite these positive aspects of corporate standards and social responsibility, when these corporations are responding to the demands of U.S. and other western customers there is a downside risk that they will enforce standards in accordance with our preferences that are less in accord with the citizens of the affected countries than if they simply profit maximized. This is a real concern with respect to labor laws. People tend to have the misconception here that our standards of living are disproportionately a result of our labor laws, and that the way our jobs became safer, healthier, and higher paid is mostly about regulation instead of mostly about economic growth. People also tend to believe that we have “exported” bad jobs to China, rather than understanding that as far as manufacturing jobs go in China, working for foreign corporations, including Apple, are above average quality. If American companies were very responsive to consumer demands, labor laws in China would very likely be far too strict.

Even when the labor laws come from the developing countries themselves than can be problematic. Here is what Tim Culpan, who has been covering Foxconn for 10 years, had to say about what he sees there:

In our reporting, as “Inside Foxconn” detailed, we found a group of workers who have complaints, but complaints not starkly different from those of workers in any other company. The biggest gripe, which surprised us somewhat, is that they don’t get enough overtime. They wanted to work more, to get more money.

Why would these young workers want to work what look to us like extreme amounts of overtime? Culpan explains:

Rather than forced labor and sweatshop conditions, workers told of homesickness and the desire to earn more money-two impulses that seemed to drive each other for workers planning to go home once they’d earned enough.

If labor laws mean that workers can’t do as much overtime as they’d like, one of the unintended consequences of this looks like it could be to force these workers to stay at the factories for a longer period of time before they earn enough to go home. Should labor laws, either domestic or imposed by foreign corporations, prevent workers from taking on as many hours as they are willing?

Maybe, I suppose. These are young workers after all, and maybe there is a clear level of hours beyond which health is clearly at risk. But you have to know an awful lot about the workers, the factories, the local culture, and a lot of things that American consumers probably don’t have a very good grasp of. Furthermore, the journalists who have spent years in China and know the most, like Adam Minter and Tom Culpan, seem to have the least criticism for Foxconn and the manufacturing in China for international corporations.  I am reminded of what Freddie DeBoer wrote about Libyan intervention:

What interventionists ask of us, constantly, is to be so informed, wise, judicious, and discriminating that we can understand the tangled morass of practical politics, in countries that are thousands of miles from our shores, with cultures that are almost entirely alien to ours, with populaces that don’t speak our same native tongue. Feel comfortable with that? I assume that I know a lot more about Egypt or Yemen or Libya than the average American– I would suggest that the average American almost certainly couldn’t find these countries on a map, tell you what languages they speak in those countries, perhaps even on which continents they are found– but the idea that I can have an informed opinion about the internal politics of these countries is absurd…

…A colossal, almost impossible arrogance underpins all interventionist logic. Beneath it all is a preening, self-satisfied belief in the interventionist’s own brilliance and understanding. So I ask you, as an individual reader– are you that wise? Are you that righteous? You understand so much? When was the last time you read a Libyan newspaper? Talked at length with a Libyan? A year ago, what did you know of Libya and its internal struggles?

Labor laws aren’t war, and Apple critics aren’t Neocons. I don’t want to take this analogy too far. But some of the criticism Freddie makes here apply to arguments about demanding companies in China comply with U.S. labor standards. You can counter that all that is being asked is that the companies comply with Chinese laws, but this is not always the case. Furthermore, the decision to not enforce a law is also a legitimate decision a nation may choose to make. And to the extent workers wish to not comply with the laws, we are asking companies to override their wishes. Just as we should have humility about our ability to know what is best for another country, we should have humility about a country’s ability to know what is best for workers and their employers.

Freddie elsewhere wonders:

Would Ira Glass ever allow his children, when grown, to work 60 hours a week? In those factories? In those conditions? Of course not.

But these aren’t Ira’s children, and he shouldn’t act as if they are. Neither Freddie, nor Ira, nor I really knows what Chinese workers want. Even within this country, let alone across the world, people have vastly different preferences with regards to how many hours they want to work, what risks they are willing to take for what compensation, and all of that. I don’t think Ira would allow his children to be crab fisherman in the United States either, but that does not mean we want these jobs to be regulated until they are safe enough and well paid enough that Ira Glass would send his children to work there, or until they are regulated out of existence, which in many cases are the same thing.

I get the sense that one reply to the Mike Daisey scandal is that “well, he may not have seen what he says he saw, but those things are happening and well documented”. But Daisey did not just take the reality conveyed in other accurate reporting and pretend that he saw it with his own eyes. No, because the stories he tells aren’t just made up, they also fail to characterize the situation correctly. You can see this importantly in how widespread and obvious he makes underage workers at Foxconn look. Here is how Daisey reported it in the monologue portion used in This American Life:

And I say to her, you seem kind of young. How old are you? And she says, I’m 13. And I say, 13? That’s young. Is it hard to get work at Foxconn when you’re– and she says oh no. And her friends all agree, they don’t really check ages. I’m telling you … in my first two hours of my first day at that gate, I met workers who were 14 years old, 13 years old, 12. Do you really think Apple doesn’t know?

This is not just a story about Daisey meeting underaged workers, but a claim about how easy it is to find them. And as you can see in the transcript from the retraction episode of TAL, Daisey’s claims are in contrast to what his translator says:

Rob Schmitz: Do you remember meeting 12 year-old, 13 year-old, and 14 year-old workers here?

Cathy Lee: No, I don’t think so. Maybe we met a girl who looked like she was 13 years old, like that one, she looks really young.

Rob Schmitz: Is that something that you would remember?

Cathy Lee: I think that if she said she was 13 or 12, then I would be surprised. I would be very surprised. And I would remember for sure. But there is no such thing.

Ira (narrarating): She’d be surprised, because she says in the ten years she’s visited factories in Shenzhen, she’s hardly ever seen underage workers.

As TAL reports, Apple has been aggressive about underage workers and they are rare:

In fact, underage workers are sometimes caught working at Apple suppliers.  Apple’s own audit says in 2010 when Daisey was in China, Apple found ten facilities where 91 underage workers were hired … but it’s widely acknowledged that Apple has been aggressive about underage workers, and they’re rare.  That’s 91 workers out of hundred of thousands.  Ira asked Mike about this on the This American Life broadcast, and he admitted it might be rare, but he stuck by his story

This is not consistent with anyone being able to walk up to Foxconn and within two hours be talking to underage workers. The story Daisey tells is one where Apple is negligent to an obvious and easily solved problem, whereas the facts TAL reports are of a company trying to stop underage workers and failing on relatively rare occasions. This kind of lie is not telling the story of the truth through a fictional narrative, but creating a fictional narrative that contradicts the bigger truth.

There are opposing narratives about the Apple, and Chinese labor and manufacturing. One sees the issue as black and white, simple, and easily solveable. Another sees it as a complex issue with no easy solutions, and that requires real tradeoffs. The former is how Mike Daisey tried to portray things, and the latter is how people like Adam Minter see it. In fact on an episode of On Point with Warren Olney, Adam Minter argues:

“….you’ve got a far more, far more complicated story than what is being presented in just the new york times and especially the This American Life Story”

In contrast, Mike Daisey appears on that same show and says “Lets stick a knife in this whole complicated thing for starters, because this isn’t actually that complicated”. That is the biggest fiction Mike Daisey was selling.

The New York Times has updated it’s Mike Daisey op-ed with the following:

Editor’s Note: Questions have been raised about the truth of a paragraph in the original version of this article that purported to talk about conditions at Apple’s factory in China. That paragraph has been removed from this version of the article.

Here is the paragraph that they excised, which I was able to find here:

I have traveled to southern China and interviewed workers employed in the production of electronics. I spoke with a man whose right hand was permanently curled into a claw from being smashed in a metal press at Foxconn, where he worked assembling Apple laptops and iPads. I showed him my iPad, and he gasped because he’d never seen one turned on. He stroked the screen and marveled at the icons sliding back and forth, the Apple attention to detail in every pixel. He told my translator, “It’s a kind of magic.

As the press release (pdf) from This American Life confirms this is one of the stories that Daisey’s translator denies ever occurred. So I think Daisey perhaps needs to expand his apology which says his only regret is allowing This American Life to excerpt from his monologue, which was theater and not journalism:

What I do is not journalism. The tools of the theater are not the same as the tools of journalism. For this reason, I regret that I allowed THIS AMERICAN LIFE to air an excerpt from my monologue. THIS AMERICAN LIFE is essentially a journalistic ­- not a theatrical ­- enterprise, and as such it operates under a different set of rules and expectations. But this is my only regret.

Writing an op-ed for the New York Times is also not theater, so I’m thinking we will not remain his “only regret” for long.

I’m hearing a lot of people say the real tragedy is that the things Daisey pretended he saw actually do happen and this whole debacle does a disservice to that truth. I side more with the wise Adam Minter, who is quoted here by Rob Schmitz, the journalist that caught Daisey in the first place:

“People like a very simple narrative,” said Adam Minter, a columnist for Bloomberg who’s spent years visiting more than 150 Chinese factories. He’s writing a book about the scrap recycling industry.

He says the reality of factory conditions in China is complicated—working at Foxconn can be grueling, but most workers will tell you they’re happy to have the job. He says Daisey’s become a media darling because he’s used an emotional performance to focus on a much simpler message:

“Foxconn bad. iPhone bad. Sign a petition. Now you’re good,” Minter says. “That’s a great simple message and it’s going to resonate with a public radio listener. It’s going to resonate with the New York Times reader. And I think that’s one of the reasons he’s had so much traction.”

And Minter says the fact that Daisey has not told the truth to people about what he saw in China won’t have much of an impact on how the public sees this issue.

Minter’s criticism of the overly simplistic story that misses the complicated reality of China’s factory conditions was true before Daisey’s lies were exposed, and they are true still.

Some commenters are pushing back on my previous post by suggesting that the GM bailout was desirable and the AIG bailout wasn’t.  I don’t have hard evidence for this, but I’m pretty sure economists in general are more supportive of the bailout of AIG than the bailout of GM. For one thing AIG is a financial company whose failure would have brought down many banks, and we have known for over 100 years that preventing banking panics is an important function of central banks. Justifying bailouts of manufacturers on the basis of economies of agglomeration does not fit within the well understood and commonly agreed upon tenants of central banking. Regardless of the end desirability of the GM bailout, it is certainly a more controversial thing for a central bank to do.

More importantly though, the issue here is that Treasury issued a notice that exempted companies which the government became an owner of in a bankruptcy preceding from the established section 382 of the tax code. Are those who criticize the AIG tax benefit but not GM really arguing that this ruling should be amended so that whether section 382 applies is subject to the discretion of the Treasury? For one thing I’m not sure that would be legal (somebody who knows more can tell me if this is the case). But even if it were it strikes me as pretty undesirable to give administrations that level of discretionary taxing power, essentially allowing the President to provide a potentially massive tax benefits to companies it bails out if it feels like it. No, I would rather not give Presidents more arbitrary bailout power, especially of the kind that tends to be hidden and unreported.

Via James Pethokoukis, comes a statement from Elizabeth Warren and three other former members of the TARP Congressional Oversight Panel with some harsh words for the special treatment given to GM:

“When the government bailed out GM, it should not have allowed the failed auto giant to duck taxes for years to come. That kind of bonus wasn’t necessary to protect the economy. It also gives GM a leg up against its competitors at a time when everyone should have to play by the same rules – especially when it comes to paying taxes”

Actually Warren didn’t quite say this. Despite the fact that AIG, GM, and Citigroup all benefitted from a special Treasury rule that allowed them to, as Warren puts it, “duck taxes”, Warren only called attention to the money given to AIG. Here is the phrasing actually used:

“When the government bailed out AIG, it should not have allowed the failed insurance giant to duck taxes for years to come. That kind of bonus wasn’t necessary to protect the economy. It also gives AIG a leg up against its competitors at a time when everyone should have to play by the same rules – especially when it comes to paying taxes.’’

The basic issue is this. When a company has a net operating loss (NOL) in one year, they can carry these losses forward into later profitable years to  lower their tax bill. Normally, when a company goes bankrupt and ownership stake is changed by more than 50%, the NOLs disappear. According to a paper by  Mark Ramseyer and Eric B. Rasmusen, GM had $45 billion in losses, with a book value of $18 billion, that the Treasury’s special exemption allowed them to keep. According to Warren the exemption has provided AIG with $17.7 an extra billion in profits. It’s unclear why you would complain about AIG receiving this tax bailout and not complain about GM doing the same.

Am I missing something here? It’s quite possible. I’m not a tax lawyer or an accountant. But from where I’m sitting, James Pethokoukis is correct that it is strange to complain about AIG and not GM. The only reason I can see why Warren would do this is that she is a politician running for Senate and she doesn’t want to alienate liberal voters and unions who support the GM bailout, including the part that lets them “duck taxes”.

It’s worth noting that, hypocrisy aside, Warren is right these secret bailouts are a bad idea. People tend to ignore these costs when considering bailouts, indeed many pundits seem completely unaware of them, which bailouts them seem cheaper then they really are. I don’t think we’ll ever be free of the problem of bailouts, and letting politicians hide billions of dollars in costs makes it more likely that the bailouts we get will be even bigger.

James Poulos has a piece at Forbes speculating on the relationship between an asset’s complexity and financial bubbles and panics. If the value of an underlying asset is not tangible, he argues, then it is”capable of denominating value that had been wildly abstracted and exaggerated from the value’s underlying assets”.  These would be things like derivatives and other complex financial instruments. He contrasts this to a mortgage whose value comes from land and an underlying structure, which are clear and tangible assets. This may be a true enough on the margin; the more complex the relationship is between a piece of paper and the underlying source of cash flow from which it derives value, it is probably more susceptible to a bubble. However, good old fashioned highly tangible assets are quite capable of experiencing massive bubbles.

Take, for example, the tangible example James provides of a house.  You can point to the various complex financial instruments which provided funding for housing markets as the area of complexity and problem in the market. But the fact housing is a tangible asset that you can walk up to, poke at, and even stroll around in, and in the end home buyers themselves had come to believe that their values were much more than they in fact turned out to be. Despite the very tangibleness of the asset, beliefs about their values were completely inflated even by those who understood them as well as they could be understood. And in any case, the causality of this most recent housing bubble aside, there have been many housing and land bubbles before this, and in times that predated complex financial instruments only a quant can understand. Complexity and lack of clear tangible assets may makes bubbles easier, but it is far from a necessary condition.

He is also appears to be floating the idea that currencies not being pegged to some underlying asset leads to bubbles as well. Here again I would point to history, by the end of the 1920s most countries had returned to the gold standard after abandoning convertibility during WWI. Then during the onset of the Great Depression, which the gold standard did not prevent, those who exited the gold standard fastest recovered the quickest. It is hard to understand given this history how one might suppose a currency pegged to a tangible asset is going to prevent financial crisis. Aside from all the reasons why a gold standard is a bad idea and won’t prevent financial panics, as James Hamilton points out, the peg is only as good as the government’s promise:

A gold standard only works when everybody believes in the overall fiscal and monetary responsibility of the major world governments and the relative price of gold is fairly stable. And yet a lack of such faith was the precise reason the world returned to gold in the late 1920′s and the reason many argue for a return to gold today. Saying you’re on a gold standard does not suddenly make you credible. But it does set you up for some ferocious problems if people still doubt whether you’ve set your house in order.

I can understand why in times like these when governments seem so inept it is tempting to think that tying ourselves to something like gold that appears sound can provide discipline, safety, and stability. But a government cannot buy credibility by promising to crucify their nation’s economy on a cross of gold.

A speed limit makes sense because driving too fast or too slow puts other drivers on the road at risk, thus the decision how fast to drive can create an externality. But how should policy makers set the right speed limit? Engineers can weigh the costs of higher speeds (more accidents) against the benefits (getting places faster), and determine the optimal level. But in reality they are set at discrete levels that don’t vary nearly as much as the optimal speed on various lengths of road would appear to vary. Furthermore the optimal speed clearly depends on the preferences of the drivers, the current weather, and other factors that shift by hour of the day.

Variable speed limits, in contrast, present a more flexible, even Hayekian, way of setting the speed limit. One example is Interestate 80 in Wyoming, where sensors detect driver speeds, which are then used in an algorithm, along with weather conditions and other factors, to set speed limits that vary. An interesting article, via Radley Balko, provides more information on this road:

Drivers’ speeds are tracked by sensors embedded in the pavement and installed on markers alongside the highway.

However, that’s just one element the Wyoming Department of Transportation uses to calculate and set variable speed limits.

Other factors include weather, road condition and recommendations from Wyoming Highway Patrol troopers and department maintenance operators

According to Wikipedia, variable speed limits date back to at least 1965, with a road between Munich and Salzberg able to have a speed limit of 60, 80, or 100 km/h. These speeds were set by individuals who monitored traffic speeds, but today computers can do this automatically. This seems like the kind of law/technology that should would be more widespread, but speeding tickets mean government revenues. And at the local level, research shows that towns that are undergoing fiscal problems are more likely to issue traffic tickets (yes, traffic tickets are countercyclical). In addition, I think people suffer from a general fear of allowing safety to be at the mercy of algorithms.

But if it is true that the variance of traffic speed matters more than the average in determining the probability of an accident, then it would seem sensible to let speed limits vary with drivers perceptions of what is optimal, making adjustments for the externality of driving too fast. After all, a speed limit to far below the “natural level” probably creates more variance.

Marion Nestle writing at The Atlantic continues to try and widen the food regulation Overton window. The target this time is portion sizes:

For a long time, I’ve wanted restaurant owners to give a price break for smaller portions. No luck. They say this would put them out of business. We need to make it easier for people to choose smaller portions, which means changes in public policy.

Does this mean subsidies for smaller portions? A government agency to regulate prices for relative portion sizes? A small plate mandate? Whatever Marion has is mind, it is a terrible idea.

Notice the familiar tactic of trying to sell this is more “choice”. Who doesn’t love more choice? It’s pro-freedom!

There appears to be no dimension of food that the government shouldn’t be regulating. This apparently includes a food’s color, the amount of salt or sugar, how it is advertised, what goes on the box, and now the portion size. Can’t we skip all this piecemeal regulation and just create a new government agency that must approve all foods before they can be sold? Let’s place Marion in charge, or at least put her in charge of the restaurant menu approval division.

This is becoming difficult to parody. Perhaps it would be easier to parody if I could sample more paternalist writings, but there are so many paternalists and their writings can often be too long. What we need is a government mandate for writers to provide a shorter version of every article they write. Studies have shown people are more willing to read one paragraph of regulatory overreach than several paragraphs of it. And after all, it will improve consumer choice.

I have argued that consumer pressure for better treatment of animals in agriculture is a good thing, but that pressuring for better treatment of workers might lead to worse outcomes. Obviously, there are a lot of consequential differences between workers and animals, but I will try to explain which differences specifically matter and why. Note that in both cases I am ignoring the welfare of consumers here.

The first and fundamental difference is that animals cannot bargain and do not have choices. Humans usually have other alternatives to a given employer, and even under a local monopsony they can move. So when you observe a workers current employment situation it likely reflects the best choice among all of their alternatives. When prevent a worker from making a particular choice, say by pressuring a corporation to stop employing those workers, then you are pushing them into their next best choices which is a good indicator that you are making them worse off.

In contrast, Animals are owned outright and have no alternatives, which means that if you push corporations from using them as they currently do, their next highest use may make them better off even if it is a less profitable arrangement overall. Since they do not share in their marginal product, this need not make them worse off .

Another fundamental difference in a similar vein is that the supply of animals is much more elastic than the supply of people who might wish to work. If a given industry were to fire it’s lowest level of workers because the jobs were seen as too dangerous, or if costs are raised due to higher job perks or safety, then those workers pushed out of that job and industry will be excess labor supply in another industry. On top of the next-worst-choice problem highlighted above, this means that workers currently employed in the next worst industry will face lower wages from higher labor supply.

In contrast, when a factory farm producing pigs is pressured into ceasing operations or increasing standards so the profit maximizing quantity decreases, the supply of pigs produced can be reduced quickly in a way that is not true of workers. Since agriculture is very competitive, it’s likely that pigs across industries are being produced near long-run average cost, so that any extra supply of pigs will only decrease prices for alternative uses of pigs in the short run, and in the medium and long run less pigs will simply be raise. This is also why the next-worse-choice problem that workers face isn’t as significant for animals: for most their next worse choice is probably never being born, which very often is an improvement.

This post was inspired by an old Tyler Cowen post that I think about often but can’t seem to find. What aspects of this issue am I missing?

David Pogue has a very nice piece about Apple, China, and Foxconn over at the NYT that I recommend reading in full. But I want to highlight one part in particular where he quotes from a letter he received from a Chinese man whose aunt got a job at a Foxconn like factory that allowed her to leave her old job of prostitution:

If Americans truly care about Asian welfare, they would know that shutting down “sweat shops” would force many of us to return to rural regions and return to truly despicable “jobs.” And I fear that forcing factories to pay higher wages would mean they hire FEWER workers, not more.

What bothers me about some of the commentary I’ve been reading on this is that  many who are bothered by Foxconn are saying things that imply they don’t in fact truly care about Asian welfare, as Pogue’s correspondent put it. But I don’t think most don’t care, rather I agree with Krugman they simply haven’t thought through the implications.

Take, for example, Andrew Leonard writing at Salon about a labor union PR man who is searching for “an ethical smartphone”:

Wood embarked on a quest to see if he could find, at the very least, a smartphone that wasn’t quite so badly compromised as all the others… He wondered whether he should cut Samsung a break because the company kept more of its manufacturing in house in South Korea — where the labor laws were better enforced than in China or Vietnam.

Now South Korea has a per capita income of around $30,000, while China’s is around $8,400 and Vietnam is even lower at $3,400. So, predictably, Wood thinks it’s more ethical for a company to locate it’s operations in the nation that is somewhere between four to ten times richer than the alternatives. I struggle to see what the moral philosophy is that finds benefitting richer workers instead of poorer ones to be more ethical. He frames the issue in terms of rewarding nations that enforce labor laws better, but it will almost always be the case that richer nations enforce labor laws better.

And no, contrary to some of the arguments I’ve been seeing, a nation does not move from poor to rich by having stronger labor laws (or for that matter through more “ethical” consumption and the decision by consumers altruistically to pay more for goods). Yes, well functioning governments and institutions are an important part of the recipe for growth, but labor laws will be skated even in very rich countries when businesses save a lot of money by doing so. Thus we see that even in the U.S. many employees break labor laws by hiring illegal immigrants, but very few attempt to sneak past regulators by instituting 1800s style safety regulations. This is because 1800s safety and work rules would cost employers a lot of money as the laws are very far from what the free market would dictate. If you want workers with high marginal productivity and concomitant ability to demand high wages to do something dangerous then you have to pay them to do it.

This is why the causality works primarily like this:

  1. Worker productivity rises
  2. Wages rise
  3. Workers are less willing to accept unsafe conditions for marginally higher wages
  4. Compensating differentials increase so dangerous working conditions become more expensive for employers
  5. The difference between free market safety levels and those specified by labor laws narrow
  6. Complying with said laws is cheaper
  7. Compliance increases

This is not to say that labor laws can’t or don’t increase safety. They certainly can on the margin, especially as rising wages and worker safety preferences makes complying with them cheaper. But most of the observed difference in working conditions between the developed world and the developing world is due to the above mechanism, and not labor laws themselves.

If you want to make Chinese workers better off in terms of safety and working conditions, you’re missing the main point if you ignore productivity. Which, by the way, is hurt when foreign investment and capital locates in richer countries instead of poor ones. People who don’t like what they see at Foxconn would do well to remember this and stop calling companies who choose to locate operations in rich countries more “ethical”.

When you ask the average person why wages are so much higher today than the were 100 years ago, or why they are so much higher in developed countries than in developing ones, marginal product of labor is woefully neglected, and unions, regulations, and society’s general beneficence are woefully exaggerated.

Some people think that the subtler truth is that unions have had more of a positive impact on wages than the average economically literate person, and economists in general, believes. Thus despite marginal product of labor being the massively unsung hero of the story with respect to what the average person thinks, they feel it necessary to emphasize the larger role they think their minor hero deserves. But when you’re offering a quote to a journalist, or writing for public consumption, you educate readers far more if you emphasize the role of marginal product.

This is why, despite being unable to answer the question “who am I to lecture David Autor?”, I have to say he is negligent in his duties in what he appears to have said to this New York Times article about rising Chinese wages:

“This is the way capitalism is supposed to work,” said David Autor, an economist at the Massachusetts Institute of Technology. “As nations develop, wages rise and life theoretically gets better for everyone.”

“But in China, for that change to be permanent, consumers have to be willing to bear the consequences. When people read about bad Chinese factories in the paper, they might have a moment of outrage. But then they go to Amazon and are as ruthless as ever about paying the lowest prices.”

Here it is consumers’ generous willingness to bear higher prices that is the hero. But is the story of economic development really one of consumers bearing higher prices which allows wages to rise? Or is it about increased marginal productivity of labor that generates higher wages for workers without necessarily leading to higher consumer prices whatsoever?

The way capitalism is supposed to work is not consumer generosity leading to higher wages, but instead more productivity doing so. After all, consumers can’t tolerate higher prices for everything they buy without buying less of some things, which means some laborer somewhere producing less.

Marginal product of labor, not consumer beneficence, is the hero of this story.

I’m fairly certain that almost everyone is tired of reading about comparisons of public sector and private sector pay, but a new paper in the Journal of Economic Perspectives is worth reading if you are at all interested in the issue. They lay things out very clearly, and bring some new evidence to bear using micro level data from an employer based survey that includes non-wage compensation. Their main result is that, compared to the private sector, state public sector workers are paid 3-10% more, and local public sector workers are paid 10-19% more.

The paper includes a useful discussion of the issues that divide many papers on this topic and which explain why different researchers often find different answers to these questions. It boils down to what should and shouldn’t be controlled for in the regression analysis. While it’s not always clear which is which, there are broadly speaking to kinds of factors:

….skill-related factors that an individual can transfer from job to job and a second set of variables that are descriptive of the job or sector and possibly indicative of noncompetitive pay differentials such as  rent-sharing.

Studies will differ in whether they consider employer size and union wage premiums as reflecting skill-related factors or non-competitive pay differentials. The authors agree with that I have argued in past blog posts, that neither should be controlled for in the regression:

We treat union status and organizational size as not reflecting worker skills. Controlling for union coverage seems inappropriate, because union wage premia probably do not refl ect ability differences, and those in the public workforce would not likely take their public sector unionization rates with them if they were to move to the private sector…  Troske (1999) tests several explanations of the employer size-wage effect and a significant unexplained premium remains. This and other evidence leaves the door open for the possibility that rent-sharing may be involved. Absent evidence that larger public sector organizational size reflects unobserved ability, we do not control for employer size.

That union status should not be included seems pretty clear, but as the authors acknowledge the firm size issue is not so certain. As a recent CBO report points out, the size premium could reflect a higher degree of specialization at larger firms. However, even if this is the case, the higher specialization may not be transferrable between jobs. In the end, I would agree with the authors of the JEP paper that the best approach is to not control for firm size.

I don’t think regression analysis like this can answer the public sector compensation premium question with certainty, but it is informative. And to the extent that it is useful, I believe these authors take the correct approach and provide the best estimates that the available data can give us. If you’re going to cite empirical analysis on the public sector compensation premium, this is the study you should cite, not other studies that make questionable assumptions or lack sufficient data.

Bryan has responded to my post on the sheepskin effect in typical Caplanian style: even if my critic is right, it just means I’m more right. In this case he says that my argument that ability bias explains some of the sheepskin effect is just evidence against the human capital model of education, because ability bias is a competing theory. I don’t have a dog in the bigger fight on what explains the overall education wage premium. It looks to me like the general consensus is behind the human capital theory, but I’m open to being convinced that signaling is an underexplored and underappreciated explanation. But I don’t think the story I’m telling about the sheepskin effect provide evidence against the human capital theory.

I would argue that Bryan is conflating two kinds of ability bias: the ability that endogenously determines the treatment of attending college, and the ability that endogenously determines the treatment of graduation conditional upon attending. It may be that randomly assigning people the treatment of attending college will lead to the exact same average estimated returns to education. This would not be inconsistent with claim that randomly assigning people to drop out of college would greatly reduce the measured sheepskin effect.

So why might ability bias be a bigger deal for graduating than for attending? Because even the dropouts themselves thought that they looked like someone who would complete college until at some point they no longer did. Attending and then dropping out of college, I would argue, most often results from some unpredicted negative shock. This becomes more true the longer someone attends college, because if you’ve spent 3.5 years in college thinking that this represented a good investment, you need a pretty big negative shock to make that no longer the case after the majority of the costs are sunk. This is going to be true as long as there is some signaling sheepskin effect.

I’m not positive this is correct, but I’m thinking of this ability bias as a downward bias on the part of the spline regression measuring the linear effect of years of education for years 12-16 rather than an upward bias on the dummy variable representing 16+ years of education.

The sheepskin effect is the impact on your wages of completing college or high-school that is in addition to the marginal value of the years of educational experience. Consider someone one test from graduating college, so they have 96% of a college degree. The extent to which finishing college increases the wage premium by more than 4% is the sheepskin effect. Bryan Caplan has interpreted this effect as being strongly supportive of the signaling effect of education, but is this so? As Bryan puts it:

“If finishing your last year of college sharply boosts your income, the reason probably isn’t that colleges withhold the financially lucrative material until your senior year.”

But what does it tell you about someone when they have invested a lot of money into college, come very close to collecting the payoff, but then failed to do so 75% through their senior year? Is the only difference between this person and someone who finishes college really just the small amount of extra education and the sheepskin effect? It seems extremely likely to me that someone who fails to collect their sheekpskin effect is going to be systematically very different from someone who has, and most of the plausible differences I can imagine will tend to decrease future wages for the dropout.

This is to say that dropping out is not just lacking the positive signal of education completion, but having the negative signal of failing to collect a large NPV payout. The human capital model of education could be completely correct and it wouldn’t be inconsistent with falling short of graduation having a negative wage impact. This perhaps explains why, as Bryan tells us, the sheepskin effect takes such an incredibly long time to wear out: it’s an indicator of something real about human capital, and not just an indicator of college completion.

ADDENDUM: I sense I’m not really being clear here. To put it simply: people who drop out at 96% have more wrong with them than just having 4% less education than graduates. If u could cause random drop outs at 96% completion you would observe a much smaller sheepskin effect. I don’t believe it would be zero, but I think it is incorrect to interpret the sheepskin effect as being equivalent to the signaling effect of education alone. Call it the signaling effect of failing, as it is distinct from the normal signaling effect of education.

What does Apple owe it’s workers? I’ve read some silly proposals since the big New York Times story on the difficult and sometimes dangerous conditions in it’s factories. For instance, the idea that Apple should give some of it’s massive cash horde to workers in China. But Apple and its shareholders don’t owe these workers anything, and they certainly haven’t taken anything from them. In fact, in operating out of self-interest they have helped bid up the wages of the workers there. It is profit seeking by corporations, and not their charity or generosity, that has and continues to greatly improved the lives of the global poor.

Since Apple is already giving so much to the workers of China as a byproduct of self-interest, why of all the charitable causes they could spend their profits on should they decide to use them on workers in China who are relatively well off compared to the rest of China? People in China are clamoring for jobs in Foxconn, why should Apple provide charity to the relatively lucky ones who have jobs already? This is to say nothing of the extremely poor in many areas of the world. This also makes the questionable presumption that it is corporations rather than shareholders who should be engaging in charity.

The most positive thing you can say of the criticism of Apple is that there are probably some margins where more safety, health, and working conditions can be achieved at a relatively low-cost, and that by being profit motivated Apple is likely to press it’s supply chain to find these least-cost improvements. If anyone is going to find welfare improving changes to make, it will be them and not regulators or other government entities.

The most negative thing you can say is that this whole incident creates the false appearance that, once again, Apple and other multi-national corporations are doing something wrong when in fact they are having an extremely positive impact. Public opinion isn’t a nuanced thing, and the general perception here does not seem to be of a tremendously good process that is doing a lot for the global poor, but could perhaps be slightly improved on the margin, but more importantly should not be significantly impeded. Instead we’re seeing guilt, shame, and outrage directed broadly at Apple, globalization, and ourselves.

Another risk is that public outrage pushes Foxconn and other manufacturers to replace workers with robots faster than they would if they simply were minimizing costs. There is nothing wrong with mechanization per se, and it is in many cases inevitable. But mechanization is a good thing because it is cost minimizing and productivity enhancing, if done on the margin for PR it lacks it lacks that benefit.

Arguments like I’m making here spur a lot of righteous indignation, and complaints that I and others who refuse to scream that something must be done are uncaring and we simply place no value on the lives of the Chinese. I’m afraid these people don’t even understand what the disagreement is about. Or as Paul Krugman once put so aptly:

Such moral outrage is common among the opponents of globalization–of the transfer of technology and capital from high-wage to low-wage countries and the resulting growth of labor-intensive Third World exports. These critics take it as a given that anyone with a good word for this process is naive or corrupt and, in either case, a de facto agent of global capital in its oppression of workers here and abroad.

But matters are not that simple, and the moral lines are not that clear. In fact, let me make a counter-accusation: The lofty moral tone of the opponents of globalization is possible only because they have chosen not to think their position through. While fat-cat capitalists might benefit from globalization, the biggest beneficiaries are, yes, Third World workers.

Trust me: I really don’t care that much about paying a little more for my Apple products, just like I doubt Paul Krugman cares about paying a little more for his sneakers. I also value the welfare of the workers of China very highly. More highly, it would seem, than those who constantly call on politicians and corporations to “bring back our jobs from overseas”, and complain about outsourcing. Those who would paint this disagreement as being between those who care about poor foreigners and those who don’t are either lying of confused.

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