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I understand that being unemployed and having to move back in with relatives can cause a lot of stress, and I really do have a lot of sympathy for anyone going through this, and especially for those who don’t have the safety net of family and friends to fall back on. But this recent article in the New York Times, while clearly designed to highlight the stresses of moving back in with your parents, really illustrated the stresses of moving back in with your parents when you’re all assholes. I know that’s harsh, but let me provide some evidence.

The story opens with a litany of impatience, short-tempers, and passive aggresiveness:

A nudge from Kathy Maggi for her 26-year-old daughter, Holly, to clean her room sparks a blow-up; an offhand comment by Jim Maggi about the way bills come in “month after month” to his daughter’s fiancé, James Wilson, causes days of smoldering; a bite of a chocolate bar from Grandma to 21-month-old Madison leads to frustrated chatter behind closed doors about “Nana” and “Pawpaw” spoiling her.

Then there is the fiance’s frankness in speaking with the reporter. Now you may be interested in honestly sharing your tale of woe with the nation, but keep in mind you’re going to still be living with them tomorrow when the paper arrives, and will probably be sitting across from them at the breakfast table when they read this:

“I liked her family when we weren’t here,” said Mr. Wilson, who has struggled to mesh his more reserved personality with the garrulousness of Ms. Maggi’s family. “Now that we’re here, I don’t like them. I feel bad about it. I don’t think it’s their problem, or something that can be helped. It is what it is.”

Saying it’s not something they can help doesn’t really sugar coat “I don’t like you”.

And there’s this:

Over time, Kathy Maggi’s regular chirping about how to deal with Madison and her sometimes-differing approach — she prefers, for example, not to let her granddaughter cry, even though Mr. Wilson and Holly Maggi sometimes think she needs to — has rankled Mr. Wilson. “I don’t think she feels Madison is safe when she’s with me,” he said.

I’m not a parent, but maybe what’s going on here is that the grandparents just don’t feel like listening to the little girl cry all the time? If I had a houseguest whose child was frequently crying, I think I’d also probably start hinting that maybe they should encourage her to give it a rest too. Also the last sentence makes Mr.Wilson an asshole if he’s wrong, and the grandmother an asshole if he’s right.

And here, halfway through the second page, is the kicker:

….the couple spend most of their time in their bedroom, with Madison dashing in and out. Most of their possessions, including a 75-gallon fish tank with two giant South American cichlids and a South American catfish, occupy a second bedroom.

What?!  You brought your catfish with you? I would gladly extend my home to a relative on hard times, but not to their god damned catfish and 75-gallon fish tank. Sell that thing and use the money to pay some bills so the grandfather doesn’t have to keep passive aggressively mentioning how the bills keep coming “month after month”.

Following Alex, I thought I’d quickly put up Modeled Behavior’s top blog posts for 2010 by pageviews. Here are the top 5:

1) America’s Obesity Epidemic: Bringing Sideshow Freaks Into The Discussion (also in Marginal Revolution’s top posts)

2) Rome is Burning

3) Income Inequality: A Deeper Look

4) Ezra Klein is Dismayed that Some People Think The Bush Tax Cuts Raised Revenue

5) The World’s Most Powerful Economist


Posting will be extremely light from me for some time. With Karl also blogging lightly things will be quiet around Modeled Behavior, as 2/3 of us will be in temporary semi-retirement…. it’s just temporary though, and also only semi.

I’ve long suspected that immigration amnesty would be a boon to housing markets. The idea is that illegal immigrants could be deported and so will be less willing to make the fixed investment of homeownership, and illegal status holds down wages which should also decrease the demand for housing.  However I haven’t seen any persuasive studies on this issue. Today I discovered a new paper by Catalina Amuedo-Dorantes and Kusum Mundra that provides some evidence:

A significant homeownership gap still remains between natives and immigrants in most countries.  Because of the many advantages of homeownership for immigrants and for the communities where immigrants reside, a variety of countries have tried to implement policies that facilitate immigrant homeownership.  Many of these policies hinge on immigrants’ legal status.  Yet, owing to data limitations, we still know very little about its impact on immigrant homeownership.  We address this gap in the literature and find that legalization raises immigrant homeownership by 20 percentage-points even after accounting for a wide range of individual and family characteristics known to impact housing ownership.  This finding underscores the importance of legal status in immigrant assimilation –housing being an important indicator of immigrant adaptation, and the need for further explorations of the impact of amnesties on the housing markets of immigrant-receiving economies.

Note that this does not address the question of whether legalization increases the demand for housing or just the type of housing. For instance, legalization may simply lead illegal renters to buy houses that are identical to the ones they were renting, which aside from potential externalities to homeownership shouldn’t affect prices. This seems unlikely to me, and I’d wager that legalization also increases the demand for housing, and therefore house prices.

I’ve argued frequently that letting in more immigrants is the last best tool we have to help increase house prices, but perhaps legalizing the immigrants we already have would help as well.

UPDATE: MorallyBankrupt provides some excellent thoughts in the comments:

I used to live in Boston. While living there, a few of my friends lived in inexpensive rental apartments where line cooks–often Brazillian–also lived. They used to pack-in pretty tight in those apartments to minimize expenses and maximize remittances. A common theme was that the men would often move out to their own place if and when their wives / girlfriends came into the country or if they formed a family locally.

I think that amnesty coupled with the ability to extend legal resident status to immediate family (spouses, children) would be a great option. Not only would the units of houses demanded per newly-legal resident probably increase, but the number of residents demanding housing would increase as well. Additional positive effects would be to move (at least some) of the consumption from those remittances into the US.

Finally, establishing residence would allow access to legal, documented earnings which would increase tax-receipts and access to credit, enabling purchases of not only housing, but also durables.

Tom Levenson at Balloon Juice has a lengthy reply to my article on the value of good teachers that accuses me of neither understanding nor reading the paper at hand, and drawing incorrect conclusions from it. He’s wrong.

It’s ironic that Tom is accusing me of not reading a paper based on a blog post of mine that he has clearly not read, but has instead relied on the two paragraphs of it quoted by Conor Friedersdorf at The Daily Dish. Tom says I wouldn’t be as surprised by the results of the study if I were familiar with the literature:

That jolt would be a little less if you read—hell not the primary literature—but, say, just blog posts written by the New York Times’ best economics writer, David Leonhardt, who in the distant obscurity of … oh, this summer, reported on another study that looked at the impact of a good kindergarten teacher on future earnings and other social outcomes.

Anyone who is stunned by the specific result or the broader claim that educational outcomes have an impact on economic success simply hasn’t been paying attention…

Like Tom, I think it helps to put research in the context of existing literature, which is why I included this in my original post:

You can find similar results in the work of Raj Chetty, which suggests that good kindergarten teachers are worth $320,000.

If you follow that link you’ll see it takes you to that same David Leonhardt article, and had Tom actually read my post he would have seen this.

Unlike Tom, and despite having already read David Leonhardt, I do find Hanushek’s results “shocking”.  For one thing, Hanushek runs through a large range of plausible values for the parameters determining the value of better teachers and even with very large knowledge depreciation rates he still finds a value of $150,000 for a teacher in the 75th percentile with a class size of 20.

In addition, the net present value of over $100 trillion that would result from replacing the bottom replacing the worst 5-8% of teachers with average teachers would be, as Hanushek calls it, an “astounding” improvement in welfare. This is especially important given that, as Tom points out, we don’t yet have a good idea how to design performance pay in a way that ensures higher teacher quality. Hanushek argues that this difficulty raises the importance of the replace-the-worst-teachers policy:

The foregoing analysis has also implicitly suggested an alternative approach to simple performance pay that could be more cost effective.  If there is an accurate screen on teacher effectiveness, many of the properties of a performance pay scheme can be achieved by eliminating low performing teachers and paying the remaining teachers higher but relatively flat salaries.

So I’m sorry if Tom is not impressed or surprised by these results. Given the considerable media attention this paper has received, including bloggers at the New York Times, the Huffington Post, Education Next, the National Review, the Atlantic Wire, and the Daily Dish, I’m going to have to say that a lot of people disagree with Tom.

As an aside to all of this, I want to add that I don’t think those who prefer a system that consists mostly of public schools should be happy about the difficulty of finding good ways to structure performance pay and use value-added measures to identify effective teachers. The harder it is for social scientists to identify clear ways to improve the education system through bottom down reforms the more likely it becomes that more market based, bottom up reforms are both necessary and popularly demanded. I think this will mean things like vouchers, charters, and more creative reforms like this proposal Reihan Salam highlights from Rick Hess and Olivia Meeks:

Wisconsin would do well to start exploring a new model at the high school level. It ought to continue insisting that schools provide the 11 core credits, amounting to about 55% of the high school curriculum, but then rewrite the funding formula so that the per pupil allocation currently delivered to school districts is broken into two pieces: 55% to fund “core” mandated instruction and 45% deposited in a virtual Educational Spending Account (ESA) created for each child. Parents would have a choice. They could direct those ESA dollars to their child’s school and simply enroll their child in the usual manner, or they could use them to procure instruction from other state-approved providers.

If we could drastically improve the public school system simply through better pay structure and value-added measures then I think the public school system as it stands would require much less change than it’ll get if those relatively simple changes fail. I don’t think those who prefer a system that consists mostly of public schools will be happy with what we get when simpler reforms fail, because I believe the end result will be a more privatized system than would otherwise be necessary if we could centrally plan our way to a great education system.

For the record, I recognize that this is a very speculative claim, and there is a lot of room for reasonable disagreement here.

Mark Thoma has a good piece up on at the Fiscal Times about why the particular causes of this recession have led to a slow recovery:

Recessions can occur for a variety of reasons. For example, oil price shocks, stock market crashes, housing bubbles, monetary shocks, and productivity shocks can all lead to economic downturns….

..One way to distinguish recessions is through differences in their effects on balance sheets, in particular those of households and banks. For households, the collapse of a housing bubble, which also tends to cause a stock market crash, results in a decline in home equity as well as the loss of retirement and education savings. When combined with the loss of jobs due to the recession, and the fact the debts do not decline with the fall in asset values, the effect on balance sheets can be devastating – much larger than, say, the balance sheet impact of an oil price shock. Households have no choice but to set aside part of their income to both rebuild the asset side of the balance sheet and to pay down their debts.

Monetary policy can help us recover in a recession like this by increasing nominal asset and income values relative to average debt, some portion of which is nominally fixed. But cleaning up household balance sheets while unemployment remains high is difficult.

I don’t see any good way to do this, but as Mark points out banks have repaired their balance sheets, and if there was a good way for some of that wealth to be transferred to households with poor balance sheets I think it would help the recovery. The only thing that comes close to that is mortgage cramdowns, which I am not optimistic could be done without lots of unintended consequences. My secret hope was that the foreclosure fraud debacle would provide a way to transfer wealth from banks to underwater homeowners that would be consistent with a fair interpretation of existing laws, and wouldn’t represent an ad hoc transfer of wealth that would undermine banks future willingness to lend.

Ryan Avent at the Economist explains much more clearly than I the wrongness of the claim that low population growth will make us better off:

The point concerning government spending is simply bizarre. Projected growth in federal spending is largely due to rising spending on entitlements, especially Medicare and Medicaid. Slower population growth isn’t going to limit this spending growth; it will just increase the dependency ratio and the expected per capita burden of taxation….

…Indeed, all of the above is precisely what has been observed in Japan, where population growth slowed, halted, and eventually reversed. Per capita incomes have risen only very slowly, government debt is enormous, households are heavy savers, and deflation is endemic.

Also in the comments Andy Harless tries to provide an explanation for what Johnson may be thinking:

(1) fewer immigrants mean less competition for jobs in the short run (assuming immigrants don’t create enough domestic demand to support their employment), and (2) fewer children mean less drain on governments. Of course fewer children do also mean less demand and therefore fewer jobs, but this is obviously endogenous: children are just a manifestation of the multiplier effect, an expense that people choose based on their income. OTOH immigration is also endogenous, so all the first argument is really saying is that it’s a good thing people aren’t dumb enough to keep coming to the US when there are no jobs.

I think this is quite possibly what Johnson is thinking, and I like Andy I think there are some big problems with it. I won’t rehash the arguments here, but there are a lot of other reasons why more immigration would make us better off.

Commenter Adam and Matt Yglesias (via twitter) also point out that an economy based mainly on some scarce natural resource or agriculture could have diminishing returns to labor even in the long-run as capital adjusts, which would explain higher real wages as population grows. However as Matt, Adam, and I agree, this a very bad model of the U.S. economy.

Karl addresses the monetary impacts in the comments:

More worker would imply an increasing demand for money. If you are thinking of the money stock as fixed this will tend to be deflationary and worsen our condition.

However, we have a rate target so increasing money demand should be met by increasing lending. More population should supply more credit unconstrained borrowers who can profitably take out loans at the prevailing interest rate.

Overall I am less puzzled by what Johnson could be thinking, but don’t see a plausible case for why he could be right.

Writing about Tyler’s argument got me thinking some more about Will’s argument on price indices. That is, that true inequality hasn’t risen as much as we think because of price decline in the goods that poor people buy.

My reaction was that this isn’t appropriate because poor people are only buying those things because they are poor. If real incomes had in fact risen they would be buying different things. However, now I think my argument was wrong. Here is my example.

Suppose there are two Pete and Sam. Pete has an income of $10 a month which he uses to buy one potato. Sam has an income of $100 a month which he uses to buy one steak.

Then suddenly there is a big techno-social global revolution. The end result of which is that potatoes cost $5, steaks still cost $100, Pete still makes $10 but now Sam makes $200.

Pete can now buy two potatoes and Sam can buy two steaks.

If we ignored the fact that that the two had different consumption patterns we would say that inequality had doubled. Sam is now making twice the income as Pete. However, when we look at real consumption Pete is eating two potatoes and Sam is eating two steaks.

We can’t say that income inequality hasn’t risen because we don’t know that an additional potato adds as much relative happiness as an additional steak.

With this limited set of goods its even possible that inequality has fallen. An addition potato could be relatively better than an additional steak. With a more complete set of goods this becomes unlikely because Sam probably could arrange a basket that contained an additional potato and more steak if he wanted. The fact that he chooses not to suggests that an additional steak is better than an additional potato.

However, we can say that inequality hasn’t risen as much as we would think had we not accounted for the change in relative prices between what Pete buys and what Sam buys.

It does matter that goods Pete buys are cheaper. Even with a more complete set of goods it wouldn’t be right to chalk up all the difference to hedonic effects. That is, it wouldn’t be right to say that the price difference between steaks and potatoes must mean that now steaks are 20 times as good a source of food as potatoes when before the economic shift steaks were only 10 times as good.

By that same token we shouldn’t simply say that the difference in the price of food at Wal-Mart and Whole Foods only represents the fact that shopping at Whole Foods is much better than shopping at Wal-Mart. Lower income folks really do have more. We don’t know how much more but some more.

Can someone explain to me a model of an economy where this makes sense?

For the economy, a slower increase in the population raises concerns about American competitiveness. But it could actually be a good thing. A number of economists, including the Federal Reserve Chairman Ben Bernanke are worried about the lack of inflation and income growth in the United States. Fewer workers could drive up salaries. What’s more, fewer new Americans might help slow government spending. That may curtail the rising US federal debt, which many think will soon cause interest rates to jump and hold down US GDP growth. “At a time of fewer government resources, fewer new people might not be such a bad thing,” says New Hampshire’s Johnson.

This seems very wrong to me. For one thing we have an aging population who we are going to need to support, and the less working age population we have to support them the more of a burden they become. Like a pyramid scheme you can’t permanently improve this situation with faster and faster population growth, but you certainly can make the situation worse by decreasing the number of working people per retired person. In addition, lots of government spending, like defense spending, is non-rivalrous public goods so that a higher the population means a lower the per-capita cost. I’m very curious to hear how Kenneth Johnson, the “population expert” from which this claim comes, sees per-capita government spending decreasing. Or perhaps he is talking only about total spending, but why should that be a concern?

Likewise I find his claim that lower population growth will drive up salaries to be confusing. After all one man’s salary is another man’s price, which decreases his real wage. Perhaps he thinks there are basically two types of people: skilled and unskilled. And that what’s really happening is population growth is decreasing in the unskilled which will make them more scarce relative to the skilled, and thus able to command a higher wage. I don’t find this very believable, either empirically or as a model for our economy.

Can someone explain to me a model where decreasing population growth raises real wages and decreases per capita government spending? I do not mean to be dismissive of Professor Johnson or his claims, but I am at a loss here.

It’s no wonder that truth is stranger than fiction. Fiction has to make sense.

– Mark Twain

Several days ago I read Tyler Cowen’s piece in The American Interest. It deals nominally with inequality but is mostly about financial profits. I have been mulling it over ever since. Today, I read this by Krugman in response to the current obsession over European debt levels.

A lot of this is self-serving, of course. But there’s also a strong element of trying to shoehorn whatever happens into an ideological frame; it must have been about fiscal irresponsibility, because isn’t everything?

In the wake of Cowen’s piece Will Wilkinson wrote this

I’ve long had the sense that folks in finance are getting spectacularly rich by somehow gaming the system, but the nature of the system is too inscrutable for me to formulate a sufficiently informed hypothesis on my own. But it’s not so inscrutable to Mr Cowen. He offers what sounds to me a quite plausible story about the way the financial-regulatory-political system has been, and continues to be exploited and destabilized.

Both Krugman and Wilkinson are keying off of the same phenomenon. The world is extremely complicated and doesn’t make sense – at least not in the way we want it to. We don’t want to understand the world simply by following some complex routine of intellectual gymnastics. We want it to makes sense intuitively. We want it to bound up in a single completely digestible ball. The world, sadly, does not always comply.

So we build miniature models of the world in our minds – fictions that do make sense. When we run into a part of the world that doesn’t co-operate we either shoehorn our observations into that miniature model or tear through, blogs, articles and books until we find someone who can.

The statement “it makes sense” is, however, a statement about how pleased we are with our efforts to shoehorn observations into our miniature model. It is not a statement about our understanding of the world.

To check our understanding of the world we have to ask not “does it make sense”, but “how would I know if I was wrong?”

I’ve been asking myself that about Cowen’s piece, which sits well with me on an intuitive level. There are a couple of things that I see.

Cowen’s thesis seems to be summed up in this paragraph

The first factor driving high returns is sometimes called by practitioners “going short on volatility.” Sometimes it is called “negative skewness.” In plain English, this means that some investors opt for a strategy of betting against big, unexpected moves in market prices. Most of the time investors will do well by this strategy, since big, unexpected moves are outliers by definition. Traders will earn above-average returns in good times. In bad times they won’t suffer fully when catastrophic returns come in, as sooner or later is bound to happen, because the downside of these bets is partly socialized onto the Treasury, the Federal Reserve and, of course, the taxpayers and the unemployed.

He goes on to explain how the strategy of going short on volatility works. What’s not so clear is how the losses get socialized.

One simple explanation would be that the government bails out the banks. Then the taxpayers support the government. Thus the excess financial returns are simply a transfer from taxpayers to bankers. However, this requires that the government loose money on its bailout and from the looks of it the government stands to gain money. Its clear how the bankers won, but its not clear how the taxpayer lost.

If it is the case that the banker’s won but the taxpayer was held harmless then this a Pareto optimal move. This is the kind of win-don’t lose scenarios that economists search for. Indeed, it could be transformed into a win-win simply by taxing the salaries of hedge fund managers a bit more.

A more complex version of socializing the losses might come through the actions of the Federal Reserve. Cowen says

Furthermore, the Federal Reserve System has recapitalized major U.S. banks by paying interest on bank reserves and by keeping an unusually high interest rate spread, which allows banks to borrow short from Treasury at near-zero rates and invest in other higher-yielding assets and earn back lots of money rather quickly. In essence, we’re allowing banks to earn their way back by arbitraging interest rate spreads against the U.S. government. This is rarely called a bailout and it doesn’t count as a normal budget item, but it is a bailout nonetheless. This type of implicit bailout brings high social costs by slowing down economic recovery (the interest rate spreads require tight monetary policy) and by redistributing income from the Treasury to the major banks.

Yet, this doesn’t seem to accord with Fed policy. Paying interest on reserves has long been advocated, originally by Milton Friedman, who felt failure to do so constituted a tax on banks. However, in the last decade or so paying interest on reserves has been advocated as a way to allow the Central Bank to engage in Qualitative Easing, the goal of which is to lower the interest rate spread.

Paying interest on reserves allows the Fed to print money, use that money to effectively make loans and then have that printed money sit on the balance sheets of the banks. That’s how the monetary base was able to skyrocket without sending tons of cash flooding into the system.

The loans the Fed made were not primarily to banks but to homeowners in the form of buying new Fannie and Freddie debt and to other central banks in the form of currency swaps.

One may or may not view this as wise policy but it was done to lower interest rate spreads not to widen them and to date it has increased Fed profits.

It also may be the case that the Fed is too tight – I tend to think so – but its not exactly clear what this has to do with bailing out banks.

Lastly, we could say that there is an inherent interplay between financial stability and macroeconomic stability. By increasing taking on too much risk in the capital markets the bankers imposed to much macroeconomic risk. In this telling its not that the bankers took anything from us directly.

Instead it is that there is an inherent tradeoff between volatility and return. The higher the volatility, the higher the return. Only the banks arranged it so that they got all the higher return and the macroeconomy – the rest of us – got all of the volatility.

If this is the story then you are accepting that no Fed policy, not NGDP targeting, not price level targeting, not a higher inflation target, would have prevented the collapse. The collapse was inherent in the bankers risk.

The jury is, of course, still out on whether anything could have been done in to stop this recession and whether the real problem was in fact all nominal.

Without that link I don’t see how we square the circle on bankers taking excess profits at the expense of the general public.

A new paper by Nathan Berg and Gerd Gigerenzer asks this question:

For a research program that counts improved empirical realism among its primary goals, it is surprising that behavioral economics appears indistinguishable from neoclassical economics in its reliance on “as-if” arguments. “As-if” arguments are frequently put forward in behavioral economics to justify “psychological” models that add new parameters to fit decision outcome data rather than specifying more realistic or empirically supported psychological processes that genuinely explain these data. Another striking similarity is that both behavioral and neoclassical research programs refer to a common set of axiomatic norms without subjecting them to empirical investigation. Notably missing is investigation of whether people who deviate from axiomatic rationality face economically significant losses. Despite producing prolific documentation of deviations from neoclassical norms, behavioral economics has produced almost no evidence that deviations are correlated with lower earnings, lower happiness, impaired health, inaccurate beliefs, or shorter lives.

My guess is that this critique will bring the behavioralists and neoclassical economists together in joint attack. The authors propose a new approach they call ecological economics, and summarize what the field should do improve like this:

“To make behavioral economics, or psychology and economics, a more rigorously empirical science will require less effort spent extending as-if utility theory to account for biases and deviations, and substantially more careful observation of successful decision makers in their respective domains.”

So, my readers and have been sending me links and information on Austrian Business Cycle theory. Thank you for that.

One question, as I continue through what I have received. The textbook presentation of ABC refers to a lengthening of the production triangle and additional stages of production.

Is this meant to be taken literally? That is, can I go out into the world with a spyglass and ruler recording additional stages of production and then find that these stages will proliferate as interest rates fall?

Or, is this a metaphor for R&D generally?

Adam points to a new study estimating a 400K social value of a good teacher. This is in line with other recent estimates. I want to make a couple of notes on how to think about that.

1) Social value isn’t a feel good concept. Hanuschek limits himself to future earnings of the students. The other big drivers are always crime reduction and public assistance reduction. So we are saying better teachers lead to higher wages, lower crime and less welfare. This is a far cry from trying to put numbers on soft factors like civic engagement.

2) As big as these numbers are they actually accord with the way people behave. In areas where private school dominates, parents obsess over getting Johnny into the right private school. There are obviously some peer factors at work here but at its heart a school is primarily a collection of teachers and classrooms. Unless we think the classrooms are really, really good, then the parents are implicitly obsessing over getting the right teachers.

Some of the most gripping scenes in a recent controversial movie shows parents in tears and praying over whether or not their child will win the lottery for entry into a particular school.  Rarely do you see people crying and praying that they will get into say, a T.G.I.Fridays. There are some fine dining establishments in New York and elsewhere that might be a different matter.

Yet, we notice that when people are on their knees hoping that God will intervene to get them into a place, that typically translates into a high market value of said place.

So we get big numbers, but people also act like their ought to be big numbers.

3) Not only are university professors paid more than K12 teachers but the pay per instructional hour differs wildly because professors spend so little of their time instructing. We can have a whole debate about why that it is but at the end of the day the market is telling us that the value per hour of professorial instruction is extremely high.

Yet, our science tells gives us strong reason to believe that K12 instruction should be more valuable. In general the older one gets the less impact good education seems to have. Giving someone a great college professor should be less impactful then giving them a great Kindergarten teacher.

Now, it could simply be that the technical nature of university instruction means that great professors are in short supply, while there are plenty of great Kindergarten teachers. Thus, the short supply drives the wages of professors higher. That implies, however, that there is enormous consumer surplus just raining out every single Kindergarten classroom.

That’s not how parent behave. They behave as if some Kindergartens are much better than others. With very low prices on Kindergarten instruction, that looks like market failure.

4) I want to leave as light a touch as I can here but let me simply say that when market forces control neither the quantity nor the price in a market, the observed prices can diverge wildly from the optimum even when those setting the price and quantity have the best of intentions.

That is, if finding the best teachers is worth upwards of half-a-million a year then something is seriously going wrong in the structure of education. However, with no market check its entirely possible for things to go really, really wrong.

Now since there is no restriction on the production of private K12 education we would expect it to eventually come to dominate. The key thing to remember, however, is that there are credit constraints. The children are the ones who are going to be making the extra money, not the parents. The children can’t borrow because kids can’t enter into binding contracts. The parents can’t borrow because they themselves won’t actually have any higher earning capacity with which to repay the loan.

You could try to arrange something where the parents borrowed and then sought to guilt the children into paying the loan back but there is serious moral hazard here since its fully and totally in the parents interest to simply default and let their kid walk away with a great education and no debt.

Thus you have a major problem where no one in the private market can make a creditable commitment to repay the schools for the future value they produce.

5) Where we do see something like strategic behavior emerging is in the housing market. By buying into an expensive school district parents are able to credibly amortize the value of education by linking it to the physical house. Though no one can repossess your kids education they can take back your educational golden ticket: a house in the right district.

Thus we would expect to see skyrocketing prices as people compete for this valuable resource through side channels. Indeed, it does look like that happens.

Jonathan Chait has been having a back and forth with Will Wilkinson over the extent and insurmountability of regulatory capture. In his last reply, Chait summed up his position like this:

If [Will] has access to some study showing that regulation usually, as a rule rather than the exception, become s a weapon of the powers it was intended to regulate and winds up serving the opposite of its intended purpose, then I’m willing to listen. But if his only argument is “look at all of Tim Carney’s articles,” then no, I’m not persuaded, and and not many people outside the economic libertarian world are going to be, either.

Given the varieties and scope of regulation this would be a difficult question to answer with a particular study, or even with a handful of studies. Another problem is defining the challenge as showing that regulations end up “serving the opposite of its intended purpose”.  Shouldn’t it be enough to show that regulations don’t serve their intended purpose at all but instead simply raise prices?

To focus on one class of regulations in particular, consider occupational licensing. In his book“Licensing Occupations: Ensuring Quality or Restricting Competition?”, Morris Kleiner surveys the literature on occupational licensing and finds a lot of evidence that it does nothing to improve quality. From teachers to interior designers to medical professionals. Now here, at the mention of medical professionals, is where alarm bells start going off in everybody’s heads except libertarians. I’m not arguing that any regulation of medical professionals represents inefficient capture in-and-of-itself, but that on the margin the restrictions put into place on medical professionals represent attempts to control competition rather than quality.

For instance, there are studies showing that the wide state-by-state variations in these regulations do not affect outcomes. In medicine there are studies showing that malpractice insurance premiums aren’t lower in states with occupational licensing, which you would expect if licensing was increasing service quality. There is evidence that nurses provide providing primary care services as effectively as doctors. There are the studies showing that licensing and certification for teachers do not improve outcomes. This is unsurprising given that in most cases how one qualifies for a license is strongly influenced by or even directly set by some group representing the interests of the industry.

In some cases it can even worsen outcomes by driving people priced out of the market into the black market, where quality is very low due to informational problems caused by regulation pushing these markets into the shadows. It’s difficult to develop a good or bad reputation when having any reputation whatsoever risks attracting law enforcement.

So I don’t know if this quite represents an answer to Chait’s challenge. But the balance of the evidence shows that on the margin occupational licensing does not improve quality. How important is that margin? Well there is a huge variety in the level of occupational licensing in states. Indiana has around 11% of it’s workforce licensed, while California has 30%. If all states moved towards regulatings more like Indiana, based on the evidence it seems unlikely that quality would be impacted despite cutting the number of licensed occupations down to nearly a third of the current level for some states.

There’s obviously a lot of regulation other than occupational licensing, so this doesn’t rebut Chait’s wider point. But it is a very important and widespread class of regulation. At the very least I would hope Chait would agree that regulatory capture is decidedly more than an exception to the rule when it comes to occupational licensing.

Finally, I’d also like to answer the challenge that libertarians aren’t interested in making these laws work better, and are only in abolishing them. Yes, because regulatory capture here has proven fairly intractiable, so just getting rid of many occupational licenses will be a huge improvement. But I am also interested in improving occupational regulations.

One thing that states can do is write these laws with sunset provisions that force legislators to reexamine them at some point. This was a suggestion by the Cato Institute in a paper I can’t find. Another thing that states can do is have mandatory registration for certain occupations, which is what Pennsylvania does for contractors. This help solves informational problems by ensuring that contractors can’t lie about who they are and then rip you off, and allows sites like Angie’s List to work better by ensuring that someone can’t dodge bad reviews by using fake names. States should also look at other states and see what works for them, given the wide variety of licensing there is a lot of improvement states can make by following their neighbors. The last suggestion is to give Matt Yglesias millions of dollars to start a think tank dedicated to identifying and calling attention to bad occupational licenses, and identifying good examples of occupational regulation.

Bob Murphy comments on my debate with Jim Manzi. He concludes

[Smith’s] self-described “defense of economics” (by which he means mainstream macroeconomics) doesn’t recognize that the empirical record is entirely consistent with those models being horrible.

Let me put it in other words: The Austrian critique of artificially low interest rates is that they fuel an unsustainable boom, sowing the seeds for an eventual crash. Yes, after a particular collapse, it’s possible for the central bank to do it all again. This might appear to give a “soft landing,” and indeed people might laud the Maestro for his deft manipulation of the federal-funds rate.

But tinkering with electronic bank reserves doesn’t expand the actual supply of capital goods. Eventually, the inflationary chickens will come home to roost. The ultimate bankruptcy of monetary pump priming — of flooding the credit markets with money printed out of thin air — occurs when short-term interest rates hit zero, and can go no further.

So I should start by saying that I don’t know enough about the modern Austrian critique to offer a full rebuttal of the entire school of thought. I hope Bob continues the dialog and that through it we can both learn more.

I can address the points that Bob brings up.

First, is that Fed policy has at times been less than ideal. You won’t get arguments from me on this one. Though, I think its for different reasons. Currently, of course I think that the problem is that monetary policy has been too tight.

However, saying that the money supply could have been managed better is different than saying that our understanding of how monetary policy works is wrong. For one thing our understanding has evolved considerably over the last half century. For another, the all central banks seem nervous about taking the steps proscribed by theory.

Second, Bob seems to be implying that that monetary policy can’t influence the stock of capital goods but he does recognize that monetary policy can induce a “boom.” The problem with this assertion is that capital investment rises during booms.

Here are GDP, Investment in Nonresidential Structures and Investment in Equipment and Software, all plotted on the same scale.

FRED Graph

As you can see Investment in capital is actually more volatile than the overall economy and moves with it. Here GDP is scaled on the right so that co-movement is more clear.

FRED Graph

If we believe that monetary policy can cause booms then we believe that monetary policy can cause changes in investment.

Now my sense of Austrian business cycle theory was that it acknowledged this but argued that we would cause malinvestment. That is, we would cause investment in things which should not have been invested in. Eventually people will realize this and the economy will crash.

My issue with this is that if the Fed is causing too much investment this implies that people should have been consuming more, either in the form of more consumption goods or more leisure. The problem with the consumption goods story is that consumption moves along with investment and overall GDP.

Here is consumption added to the same graph

FRED Graph

On one level this is obvious since consumption and investment are the main components of GDP. However, it could be the case that they are moving opposite yet the affect of investment swaps the moves in consumption. This doesn’t seem to be what happens. People consume less and invest less.

You could say that people should be engaging in more leisure instead of this consumption and investment. It is true that Aggregate Hours worked moves counter to all of these trends.

However, the loss in hours worked is related strongly to unemployment and people seem to dislike being unemployed. Few people comment that the problem with the boom is that I was working more than I should have and then I suddenly realized I should be taking time off.

Some economists have suggested this but it doesn’t resonate with what people actually experience.

So, we are left with the question: what malady is the Fed creating when it lowers the interest rate too much. It isn’t swapping investment for consumption and people seem to prefer working to not working.

My answer would be that if the Fed lowers too much it will generate inflation. That is the increase in what people try to buy will outstrip the increase in the amount people work. This will lead to people trying to purchase more goods and services than exist. When quantity demanded is greater than quantity supplied price will tend to rise to restore equilibrium. When this happens to all goods at roughly the same time we get inflation. [1]

Indeed, we see that inflation rises during booms and falls during recessions.

Here is inflation added to all of other trends

FRED Graph

The graph is getting crowded but I think its important to make the point that all of these things: GDP growth, Investment Growth, Consumption Growth, Price Growth all move together.

This is the basis for my claim – the standard claim – that the goal of monetary policy is to balance increases in inflation against increases in real growth. Indeed, on a deeper level we want to balance inflation against increases in unemployment.

Ultimately whether or not people want real growth in output or not is a personal choice. We could take all increases in productivity as leisure if we wanted. What’s bad is when people are looking for a job but cannot find one.

Now there are further questions about why there is unemployment in the first place. This is, of course not obvious from a basic supply and demand analysis. It is this question that mainstream macroeconomics tries to answer.

I sense that taking the conversation further is going to require discussion of the issue of asset bubbles. However, I’ll let Bob reply before going into that.


1 Economists like to think in real terms but I am speaking explicitly in nominal ones. There is a money price that people pay and it is this money price that can rise in all markets at the same time and it is nominal demand that can exceed nominal supply. However, this does still have to work its way through the goods markets. For the price of some good to rise the nominal demand for it must rise. We cannot have immaculate inflation. That is, contrary to what is sometimes asserted, the printing of money in-and-of-itself cannot cause inflation. Someone must use that money to attempt to buy something. The quantity demanded in that market must then exceed the quantity supplied. Only then can prices rise.

Slate is the internet’s most notorious house of contrarianism. It’s their formula, and most of the time it’s pretty obvious -at least it was, I haven’t been a regular Slate reader for some time, being turned off by said obvious contrarianism and the frequent wrongness it required. But they may have just lured me back with what might be the most contrarian sentence in the most contrarian article in the history of the internet:

Noncannibalistic people may be the weird ones, cross-culturally speaking.

The article is titled “Bite Me: An Evolutionary Case for Cannibalism”, and quite frankly I love it… the article that is, not cannibalism. Perhaps dropping their bucket into the contrarian well and coming up dry is pushing Slate to extremism. If so, then I think I’m going to reconsider making them part of my daily reading, because that, at least, would be interesting.

h/t @petersuderman

From a new NBER working paper by Eric Hanushek comes this shocking abstract:

A teacher one standard deviation above the mean effectiveness annually generates marginal gains of over $400,000 in present value of student future earnings with a class size of 20 and proportionately higher with larger class sizes. Alternatively, replacing the bottom 5-8 percent of teachers with average teachers could move the U.S. near the top of international math and science rankings with a present value of $100 trillion.

There are really two important claims here. I think progressives tend to be very pleased with claims like the first one, which is that teachers have a very high value. You can find similar results in the work of Raj Chetty, which suggests that good kindergarten teachers are worth $320,000. If this is true then the marginal benefit of teaching skill -or quality, if you want to think of it that way- is far below the marginal cost, and therefore we should increase wages to draw more talented teachers.

However, the second claim is just as important and is suggested by, although not a necessary condition of, the first: if good teachers are very valuable, then bad teachers are very costly. This means we should be willing to pay more for good teachers, but it also increases the benefit of getting rid of bad teachers and ensuring we have a system that can do that.  After all, every dollar spent on a bad teacher has the high opportunity cost of good teachers.

Findings like this tell us that we should place even less relative value on teacher well-being for it’s own sake (which is separate from teacher well-being to the extent that it improves outcomes) when considering reforms. I think this is something that some progressives aren’t as happy to hear, especially with regard to using the teaching profession as a middle class jobs program.

Overall though these results reinforce one fact that progressives and conservatives should agree on: this is a really important issue.

So writes Steve Chapman at Reason. Obama, he argues, is a moderate at heart, despite conservatives and progressives who thought he would be very liberal. Chapman cites the deficit commission, the smaller first round stimulus, the bailing out of the banks, the lack of a public option, the continuation of Bush policies in Iraq, and escalation in Afghanistan. To be fair, not all liberals were fooled. Paul Krugman has been saying all along that liberals were going to be disappointed in Obama and that he wouldn’t be progressive enough. I believed Paul was right, but in contrast I took comfort in his predictions.

I believe the center right should be most pleased with Obama. I can’t imagine how a democrat having been elected in the wake of 8 years of Bush could have done much better than he did to moderate populist liberal demands. Obama has even managed to govern in a way that has aroused small government yearnings at minimal pain and in a very short time since conservatives were supposed to be out in the wilderness.

As Chapman says:

“Liberals and conservatives have one thing in common: They have both persisted in believing that Obama, in his heart of hearts, is a man of the left. But by his fruits, they—eventually—shall know him.”

After reading through the Modeled Behavior Twitter stream and playing around with Google’s new Ngram database (and the Google Body Browser), I had an epiphany, which I immediately tweeted:

Here’s an interesting comparison, but I defy you to counter it: Google (Labs) is the modern-day Bell Labs…

For anyone who would like to read an interesting, if not rather rosy view of Bell Labs in the heyday of its operations, check out the book The Rape of Ma Bell, by Constantine Raymond Kraus and Alfred W. Duerig.

Bell Labs was the research and development arm of the AT&T conglomerate. It subsequently became Lucent Technologies, and then was integrated into the Alcatel-Lucent conglomerate. Here is an excerpt from Wikipedia:

At its peak, Bell Laboratories was the premier facility of its type, developing a wide range of revolutionary technologies, including radio astronomy, the transistor, the laser, information theory, the UNIX operating system, the C programming language and the C++ programming language. Seven Nobel Prizes have been awarded for work completed at Bell Laboratories.

The theme of a productive arm of an organization funding wild research has even transcended the physical universe into popular narratives of late. In Avatar, Giovannia Ribisi’s character, in a tussle with Sigourney Weaver’s character, reveals that it is their revenue stream that keeps her research functioning. Similarly, in GI Joe, Christopher Eccleston’s character informs Joseph Gordon-Levitt’s character that once they conquer the world, he can perform all the research he wishes.* Not to mention, the famous conspiracy theories surrounding Nikola Tesla involve the same sort of relationship.

Web 2.0 companies are particularly interested in this sort of symbiotic relationship between profit-generating arms, and public goods research. Was AT&T a glimpse into the future? Will we see more of this?

*Forgive me for not remembering the characters’ names!




Here is David Brooks’ advice about how the President can bargain with both parties to make progress towards fixing some of our long-term problems:

Most important, the president will probably have to take advantage of the following paradox: bigger is easier. If he just tinkers around the edges with modest proposals, then everybody will be on familiar ground. But if he can expand the current debate, then, suddenly, everybody is on new ground.

The general approach should be to offer the left something it really craves. Then offer the right something it really craves. Then, once you get them watering at the mouth, tell them they’re going to have to bend on the things they don’t care about in order to get the things they do.

Now I don’t agree with the things Brooks’ calls for giving the Democrats, but I can think of one thing Obama should give the Republicans and the Democrats should happily give up: get rid of the minimum wage. Wait, wait, don’t roll your eyes and close this window! Stay with me!

Economists from both sides of this debate agree that the minimum wage is less important than most people think and politicians act. Futhermore, there is widespread agreement it is a highly imperfect way to make poor people better off.  The Earned Income Tax Credit is better targeted at low-income families instead of middle class teenagers, and it doesn’t have the downsides of potentially causing disemployment. So Democrats should be glad to trade this policy in for a smarter, more effective, and more efficient one, and in doing so cash in on Republican’s emotional attachment to this issue.

Yes, it would be a huge symbolic loss for Democrats. But like Brooks said, getting reform done is going to require giving and taking, so a good strategy for both sides to maximize actual real benefits is to give when the policy is symbolic, and take when the policy is most efficient and beneficial.

Google has released a new tool called Ngram that allows you to search their dataset of how often words and short phrases have been used in books from 1500 to 2008. The dataset contains 500 billion words in English, French, Spanish, German, Chinese and Russian. This is just one more example of the astounding welfare created by Google, generating yet another public good. I’d venture that Google creates more public goods than most countries in the world. For more on the dataset here is a good story in the Times, but for now I’m going to show the results from the searches every econ nerd will do when the first start playing with this thing.

First up is “economics”, which you can see is for the most part a 20th century word. Surprisingly,  usage of “economics” has been declining since around 1995 down to levels not seen since before the 1960s.

Zooming in to the 1925-2008 window in the graph below shows the decline clearly beginning in 1995. I’m not going to draw any cause and effect here, but I just want to mention that Paul Krugman started writing for Slate in 1996, which appears to have killed all interest in writing about economics.

In all seriousness though, the recent decline could represent the move of economics related writing out of books and to the web.

“Keynesianism” has performed even worse than “economics”, although there has been a slight uptick starting at around the time of the financial crisis. Interest in Keynesianism is about where it was in the late 1970s.

At least it’s doing better than “monetarism” though, which had a smooth ride up to a peak in the 80s and has been straight down since there. There’s no sign of a revival of interest in monetarism.

Rounding out the big 3 in economics paradigms is “neoclassical economics” shown below.

Ummm… No comment.

Well that was fast! A few weeks ago I was wondering where we would land next down the slippery slope of paternalism after San Francisco moved to ban toys from Happy meals with more than 600 calories and 35% of the calories from fat. I’ll confess that I did not predict that the next step would be the State of California banning all happy meal toys, widening the ban in both geography and scope. Via Megan McArdle, here is the scoop:

With perfect Grinch timing, a consumer group has sued McDonald’s demanding that it take the toys out of its Happy Meals.

The Center for Science in the Public Interest, an advocacy group, claims it violates California law for the hamburger chain to make its meals too appealing to kids, thus launching them on a lifelong course to overeating and other health horrors. It’s representing an allegedly typical mother of two from Sacramento named Monet Parham. What’s Parham’s (so to speak) beef? “Because of McDonald’s marketing, [her daughter] Maya has frequently pestered Parham into purchasing Happy Meals, thereby spending money on a product she would not otherwise have purchased.”

….she’s suing because when she said no, her kids became disagreeable and “pouted” – for which she wants class action status.

As the New York Daily News reports, the “allegedly typical mother of two” who is bringing the suit, Monet Parham, is actually not a typical mother of two:

…she is in fact the same person as Monet Parham-Lee, who is a “regional program manager” on the state of California payroll for child nutrition matters.

Specifically, she works on a federally funded program that campaigns to exhort people to eat their vegetables and that sort of thing.

My question is this: is someone who admits she is unable stop herself from buying McDonalds for her children really the kind of person we want as regional program manager for child nutritional matters? Isn’t this a little like putting an admitted drunk driver in charge of a states anti-drunk driving program? Or a gambling addict in charge of gaming laws?

It sounds like the lawsuit is in early stages right now, here’s to hoping the good people of California come to there senses and trim down the insane consumer laws they must have that make this lawsuit even thinkable.

I – and I believe many of my fellow economics professors – seek not to get our introductory students to learn specific facts or techniques but to begin to “think like an economist.”

I want them to abandon wishful thinking, good vs. evil analogies, just-so-stories and general ad hocery, in favor of treating human behavior as if it stemmed from some (perhaps unknown or even unknowable) set of systematic principles. In particular we are big on the notion that people respond to incentives.

Students it turns out are people. While “thinking like an economist” is often a bitter pill, this semester it went down much easier – and I think I see why. No less than half of the final papers were written on either immigration in general or the DREAM act in particular. A typical paragraph

Immigrants not only join the circular flow of the economy as labor, but also as consumers. They spend money on goods and services which results in firms having more revenue. Higher revenues tend to increase firm production to meet the higher demand of consumers. This increased production most likely would result in more jobs as firms expand to meet the needs of consumers. On a very basic level, this explains why immigration would only serve to expand the economy.

Unlike our discussions of taxes, rent control and the minimum wage “thinking like an economist” gives them in edge in an argument they already want to make: that the US should be more welcoming to immigrants.

While it is encouraging to see the tools taken up so easily, it is a warning that we cannot be sure students or the public generally has abandoned ad hocery when the systematic explanation does in fact suit their immediate needs.

Reihan Salam has a criticism of education policy expert Diane Ravitch that I will nominate for Blog Post of the Quarter, at least. Reihan charges Ravitch of making crude simplifications and showing overall poor analysis. This is something I’ve written about before, and quite frankly I’ve been waiting for someone with more subject knowledge than me to write exactly what Reihan has written. While there are many points Ravitch makes and Reihan dissects, the central disagreement is this: Ravitch says that the real problem with education is poverty, Reihan says that while poverty is a real problem and it has an impact on educational outcomes, there are a lot of other things we can improve in our education system that will make real differences.

To take but one example, here is Reihan countering the claim that if public schools had the same classroom sizes as they do in the Harlem Children Zone they would do as well or better:

…on the class size point, note that Shanghai, the PISA outlier this year, finds that the average class size in Shanghai is 35. That is, students in Shanghai are achieving the best educational results in the world with a teacher-student ratio of 1:35, not the 1:7.5 that Ravitch cites as the source of the success of HCZ. One has to assume that the push for smaller class sizes has helped dilute the teacher talent pool in the United States. This doesn’t mean that larger class sizes are necessarily the right answer. But it does at least suggest that Ravitch’s analytical framework is decidedly imperfect.

That Ravitch’s “analytical framework is decidedly imperfect” is, I think, the key takeaway from Reihan’s piece.

I’d like to counter one common point that Reihan quotes Ravitch making:

Instead we’re creating a revolving door where we say if you’re no good, you’re out and let’s bring in Teach For America. They’ll send in 8,000 kids to stay for two years and then they’re gone. This is no way to build a profession.

A 2008 study by Morgaen Donaldson on Teach for America has some useful numbers on this subject. Contra Ravitch, 61% of TFA recruits are teachers for longer than the required 2 years, and 24% stay teachers for at least 6 years. While this may seem low, remember that 40-50% of all teachers leave the profession within the first 5-6 years. In addition, 15% of teachers in low income schools leave those schools annually.

These number show that, as Ravitch well agrees, the status quo for attrition in public schools is not so great. So to point to tenure choices of TFA teachers as unbecoming of the profession, when those teachers are actually less than twice as likely to leave the profession in the first 6 years relative to all public school teachers, is an exaggeration.

There is a lot more in Reihan’s piece and you should really read the whole thing if you care about education reform. I’d like to see a back and forth between Reihan and Dana Goldstein on Ravitch and her analysis of the education system.

A while ago, I made a post which argued for reverse causality in the search for the source of the US’ widening income inequality. In that post, I made this point:

What is it that European countries do? Massive income redistribution. That may seem superficial, but it’s the answer that I’m most happy with. It has long been known to network theorists that competitive networks (with a return to scale to node connection) are characterized by power law distributions. This is a natural phenomenon; it happens in the blogosphere, the financial markets, in sports, and it happens in economies as a whole. Left to its own devices, it is inevitable that such networks will evolve an shockingly large disparity between the best-performing actors, and the mean actor.

Lane Kenworthy, who writes a lot about inequality issues, has a recent post on his blog (and a subsequent link to a longer article in a U of Arizona journal) which seems to corroborate the story I told above:

What about in an absolute sense? Would the incomes of low-end households have grown more rapidly in the absence of the top-heavy rise in inequality? If we look across the rich nations, it turns out that there is no relationship between changes in income inequality and changes in the absolute incomes of low-end households. The reason is that income growth for poor households has come almost entirely via increases in net government transfers, and the degree to which governments have increased transfers seems to have been unaffected by changes in income inequality.

I was probably subconsciously channeling my inner Kenworthy when I wrote the previous post, as I read his blog sporadically. If I had it my way, the discussion would break along three lines:

  1. Wealth Inequality.
  2. Income Inequality.
  3. Consumption Inequality

And on three lines, we would be able to analyze poverty. What would be the value in this? We would more easily be able to define public policy on narrower grounds. For example, wealth distribution is always going to be sharply unequal. People with higher incomes relative to consumption will always be able to amass more wealth than lower income groups (wealth meaning savings + assets, wealth is something I think many people conflate with income). However, what is the best policy for addressing this aspect of the problem? Simple income transfers won’t work alone, we need to incentivize intergenerational savings among the poor. In that light, Social Security is not the most optimal program, as it discourages savings.

I tend to not really focus on income inequality, but it does feed into the more important aspect (in my view); consumption inequality. Are poor peoples’ consumption patterns keeping up with what we as a society would consider some measure of a “quality” standard of living? Are they able to afford necessities like electricity, HVAC, food, and medical care? If not, this is where we get to fiddle with income in my most preferred way (and the way which allowed other countries’ poor to keep up with growth): simple transfers. Look for efficiency on the supply side, but on the demand side, just augment income. This could be in the form of a universal deduction for income under a certain level, or cash or voucher transfers. It is relatively cheap and easy to structure these transfers in a way that incentivizes future-time orientation…indeed, that is what the Mexican organization Opportunidad does.

I realize that democracy is much messier than this, but it is something to work toward. The welfare state need not be cumbersome…indeed, the US is unique in the world in the inefficient ways it implements a patchwork system. Canadian Philosopher and pop-economics writer Joseph Heath has said that the US government gets away with it because we don’t redistribute a whole heckuva lot of income…but as that enterprise grows, we’ll inevitably have to address our abhorrent inefficiency issues.

Addendum: Lane Kenworthy has also done some good work on the question of measuring poverty and material wellbeing, so check that out as well. Seems the real barrier to constructing a time series from this data is that it doesn’t go back far enough to create a reliable measure of wellbeing over time.

Via The Daily Dish, I see Austin Frakt has some interesting thoughts about how unemployment insurance may be decreasing migration:

I wonder to what extent UI benefits discourage migration. North Dakota could use some workers. Nevada has too few jobs. Yet we’re paying people in Nevada whether they have a job or not. I doubt many would move to North Dakota anyway. Paying them not to makes it less likely. But how much less likely?

This reminds me of something I proposed awhile ago, which is to let the unemployed front-load their unemployment insurance if they use it to move. Here is what I wrote:

So what policies could we pass to make the unemployed better off and incentive them in a way that speeds up the structural unemployment adjustment process?

One idea is relocation vouchers. If you offer relocation vouchers to unemployed workers who move a minimum distance from their current residence, then you could incentivize labor to move where it is needed away from where it is no longer needed.

The demand for this type of voucher can be seen in the piece from Catherine Rampell on structural unemployemt that Avent was commenting on…

This is someone who could clearly be made better of by a moving voucher. In contrast, unemployment payments for her would do nothing to incentivize or even allow her to move, which would mean she remains in the labor market for which her skills are not needed at a salary she will accept.

One way to pay for this program would be to allow workers to front load their unemployment. Take a full three months worth of unemployment at once instead of spreading it out as long as the person can verify that they are relocating a minimum number of miles away from their current residence.

Obviously there are some problems with this. How do you ensure that movers weren’t going to move anyway? How to you monitor whether they are actually moving or if they are just going on vacation? Still, I think it’s worth consideration, as more labor mobility would do the economy good right now.

In today’s Philadelphia Inquirer I have an op-ed about how immigration could be used to increase house prices. I’ll put the whole thing below the fold, but it’s also worth noting another recent study that supports the results of the study I cite in my piece. Importantly, this study provides evidence that immigration raises house prices even in housing markets with low price inflation and rent control, and even when the immigration amounts are modest. The impact they find, which is for Switzerland, is that a 1% increase in immigration causes a 2.7% increases in home prices. To my knowledge it is still the case that every study on this issue, which is admittedly few, has found that immigration has a positive impact on house prices.

Here is what I wrote in the Inquirer, with more below the fold:

Amid reports of continuing declines in home prices, it’s safe to say that government policies designed to prop up those prices have failed. More than 14 percent of home mortgages are delinquent or in foreclosure, and 23 percent of homeowners owe more on their homes than they’re worth. At this point, it may seem as if we have to let prices fall until they find a bottom.

But we haven’t yet tried one of the easiest and least costly options for helping the housing market: more immigration.

Read the rest of this entry »

James Fallows is dismayed with Peter Orzag’s career choices

Peter Orszag, until recently the director of the Office of Management and Budget under Barack Obama, to join Citibank in a senior position. Exactly how much it will pay is not clear, but informed guesses are several million dollars per year. Citibank, of course, was one of the institutions most notably dependent on federal help to survive in these past two years.

Objectively this is both damaging and shocking.
   – Damaging, in that it epitomizes and personalizes a criticism both left and right have had of the Obama Administration’s "bailout" policy: that it’s been too protective of the financial system’s high-flying leaders, and too reluctant to hold any person or institution accountable.  . .

  – Shocking, in the structural rather than personal corruption that it illustrates. . . The idea that someone would help plan, advocate, and carry out an economic policy that played such a crucial role in the survival of a financial institution — and then, less than two years after his Administration took office, would take a job that (a) exemplifies the growing disparities the Administration says it’s trying to correct and (b) unavoidably will call on knowledge and contacts Orszag developed while in recent public service — this says something bad about what is taken for granted in American public life.

What it says most about is public sector pay. One thing that I find disheartening about the debate over public sector pay is how much it seems to mirror the notion of a “Just Price” for public workers. Is this how we think in economics?

Or do we believe that when prices are out of whack then black markets emerge, corruption of various forms ensues and people engage in strategic behavior?

One thing the low pay of senior public officials allows for is a pump-and-jump. Even in the most noble of circumstances smart folks will notice that they can get to the front of the line pretty fast in the low competition public sector, build an impressive resume and then jump ship to the private sector to make a load of cash.

Less noble would involve actively selling the benefits of one’s position to the highest bidder. What would stop people from doing this? The fear that they would be fired and thus loose out on a lucrative salary. However, with no lucrative salary there is little incentive not to do this.

I do hope that economically oriented folks aren’t suggesting that we use moral suasion to control government corruption. People respond to incentives. If you don’t want them to sell you out then you have to pay them more.

Robert Samuelson wrote a recent piece arguing that part of our current economic woes are due to a new widespread risk aversion, which prompted Matt Yglesias to write that the risk aversion is not new. He argues that the large investment in housing in the post dot-com bubble world was a in fact a result of people becoming risk averse and seeking the relatively safe investment vehicle of housing. There may be some truth to this, but I think an equally compelling story is that people were seeking returns rather than avoiding risk.

After 2004 or so it’s hard to picture someone putting their money into housing in Florida, California, Nevada, or Arizona out of an increased aversion to risk rather than seeking increased returns. Of course, a more complete description is to say that both perceived risks and returns motivated homeowners, but what changed the most was the expected returns went up a lot while expected risk did not, so I think this is best characterized as chasing returns rather than avoiding risk.

On the other hand, there were surely many potential homebuyers who were planning on buying housing in the later in the future but bought during the bubble to avoid the risk of being priced out of the market. For these homebuyers, Matt would be correct to call them motivated by risk aversion, but even here they are motivated by changes in risk/return to housing rather than a change in the risk/return of equities.

As has been pointed out many times on this blog and elsewhere, you’re born short on housing and so fully modeling the rent/buy decision and the subsequent level of housing consumption are both tricky. Nevertheless, I would say the best simple explanation for what changed in homebuyer behavior over the past decade was perceived increase in the expected returns to housing investment, rather than an increase in risk aversion.

I hope the long-run takeaway from the housing bubble is that individuals learn that you can’t simultaneously seek outsized returns and avoid risk at the same time, which if both Matt and I are partially correct is exactly what was happening. I have a friend who is a financial advisor who says that when he’s seeking new clients, some will be hesitant about whether they need his services because, as they brag, they got 15%+ returns on their portfolio last year. This is one thing to hear from someone who is young, but he tells me it often comes from people at or past retirement age.

If you are someone who is getting ready to retire, and you see 17% returns on your portfolio you should be terrified, not proud, because the investments which you will shortly be living off of are clearly exposed to large amount of risk. There is no magic that brings large returns without risks. Where you see one, there will almost certainly be the other. So if you don’t like huge risks, be wary when you see huge returns.

There are so many things wrong with this Steve Horowitz post its hard to know where to begin. However, I must note that Matt Yglesias does an excellent job responding to the claim that we should focus on increasing production not consumption.

People talk about demand during downturns because in a downturn you have an unusually large number of unemployed people. That’s people producing nothing who the year before were producing something. If there were more demand, they’d produce something.

Now if you look around the world, you can find lots of examples of countries with lower unemployment rates than the United States that are nonetheless poorer than the United States. How does that happen? That happens because when you’re not in a downturn, the only way for a country to improve its living standards is to actually get better at producing stuff. When almost everyone who wants a job has one, the only way to get richer is for people to start being more productive. Productive capacity matters—a lot. But when lots of people who want jobs aren’t doing hobs, you’ve got a different problem. A failure to mobilize the productive people you already have.

There is a certain “click” when a concept becomes more than a set of principles or equations but is imbedded into your fundamental understanding of reality. You can see that business cycle macro has “clicked” in what Yglesias writes.

I still want to address another claim that Horowitz makes

The great irony is that leftists frequently argue that capitalism equals “consumerism.”  They think defenders of free markets believe that more consumption promotes economic growth; thus we are charged with providing the ideological cover that justifies the consumerism they see as deadening lives and wasting resources.  What the leftist critics miss is that economists never saw consumption as the driving force of economic growth and prosperity until the Keynesian criticisms of free markets became ascendant.

So first off obviously the desire to consume is the beating heart of all economies. Remember

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.

What is that “own interest” exactly? It is their interest in consuming, in using resources to satisfy their wants and needs. These need not be personal wants and needs. If I buy a doll for my niece or books for poor girl who can’t afford then I am consuming. I am using the resources of the universe to satisfy something that I want and what I want is to help these kids.

That having been said there is a difference between consumption and investment. Investment – which is perfectly good Keynesian demand by the way – is using the resources of the universe to create tools that will allow me to make even more stuff in the future.

However, I don’t just do this for the hell of it. I hope that one day this investment will lead to a world of even greater consumption. Consumption is still the ultimate goal.

Nor does consumption equate with “consumerism”. Though we don’t add up GDP figures this way, taking time off to spend with your kids is consumption. It uses up resources. In this case the resource is time. Its time that you are not spending making other stuff, including investment stuff.

Just like other consumption, investment can also allow us to have more of it in the future. I might not see my kids for two weeks while I build a machine that automatically grades papers for me. I forewent consumption, spending time with my kids, for investment, building a machine. However, once the machine is built I can spend even more time with my kids as the machine does my work for me. That’s the essence of economic growth.

Leisure, as economist call things like spending time with your kids, will even solve the problem of inadequate demand. Suppose that because of a super massive tax cut Joe decides to switch to working part time. His tax cut allows him to purchase the same things he did before, but now he is  spending more time with his kids.

Because of the tax cut he increased his consumption but he took all the extra consumption in the form of time with his family.

What happens in the economy?

The demand for labor stays the same, but the supply of labor falls – because Joe is only working part time. Thus the excess supply of labor, that is unemployment, falls.

So to wrap up

  • The desire to provide the things we want for our loved ones and community -  the desire to consume -  is the entire point of the economic exercise and the ultimate source of all of our motivations.
  • Consumption doesn’t mean consumerism. Walks in the park are perfectly good consumption. As is flying kites with your grandkids.
  • Deficit financed consumption in all its forms lowers unemployment. And, unemployment is the problem of recession.

If you had a computer chip implanted in your brain that allowed you to perform complex mathematical computations just by looking at numbers and equations, like an onboard calculator, would you consider that genuine cognitive activity? How about if the computer chip was instead in your pocket? Answering “yes” to the former question is much more intuitive than a “yes” to the latter, but why should that be?

This are questions that occur in the fields of “embodied cognition” and “the extended mind”, and the topic of a recent article in the New York Times. The author of the article, Andy Clark, argues that we should view the theoretical brain-mounted computer chip as “bio-external elements in an extended cognitive process: one that now criss-crosses the conventional boundaries of skin and skull”. Importantly, he argues that iPhones and blackberries function in a similar way that a brain mounted chip would, and so they should be thought of likewise.

I’ve made similar arguments before, and I think that in the not-so-distant future we won’t need thinkers like Andy Clark to prompt us to consider these questions, as technology will place them front and center. Even if you find it absolutely clear that none of todays technologies should be considered cognition, or part of your brain, mind, or self, it will be much less clear as future technologies become more seamlessly integrated with our thought process.

For instance, consider the inevitable scenario I’ve laid out before: micro-computers, visual retinal displays, augmented reality, and neural input devices combined so that you’ve essentially got a brain-mounted computer on virtual floating screens in front of you that you control with your thoughts.   Whether or not using these future devices should be considered cognition and part of our minds will be much trickier than it is with today’s iPhones, especially considering that from everyone else’s perspective “organic thought”, as you might call it, will often be indistinguishable from “computer thought”. “Did he just remember my birthday when I asked if he knew it, or did he look it up?”

Niklas’ has some thoughtful comments about taxation and how he struggles to communicate the desire for less but better government, and it has me thinking about, in a very broad sense, what I want, and why what I want creates an internal struggle. This is a fairly rambling, possibly incoherent, jumble of thoughts, as a struggle is wont to be.

Like Niklas, I too want “smaller” government that is more efficient, but there are areas where on the margin I want “more” government if it is efficient. Smaller and more are in quotation here because unlike efficiency, these are tricky and sometimes inconsistent notions. A minimum wage requires no actual change government taxation or revenues, in contrast to the earned income tax credit. Yet in reality it functions are a tax on one group of businesses for a subsidy to one group of workers. In which case is the government “smaller”? But I digress….

My point is that I’d like in some cases more government, like a carbon tax, but I’m also not okay with that being used as a revenue prop for the status quo of way-too-inefficient policies that we do have. I’d like the  government to spend money efficiently subsidizing and incentivizing effective early childhood education, but can’t bring myself to let government take more money and become a larger player in education until they stop doing the things they already do so poorly.

I think in the whole I would be comfortable with a fairly large amount government spending that was efficient and effective. In part I’d be ok with this because in the long-run, my small fantasy is that a successful government should make itself less necessary. If we got early childhood education up through high school working really really well, I think government would be able to roll itself back significantly in a lot ways, from prisons to welfare.  With efficient and robust safety nets and a dynamic and healthy economy we could arrive at a place where who are poor are very likely to have chosen such a state, and so we don’t have to have the impossible, expensive, and sisyphean task of preventing all poverty.

Some, perhaps much, of this, I understand, is wishful thinking. I think one measure of how liberaltarian versus libertarian you are is the extent to which you think my vision of good government is a possibility. I shift along this spectrum. Another difference, of course, is whether this vision, possible or not, is even desirable. Here, I am more firmly in the liberaltarian camp.

The libertarian part of this liberaltarian vision is the fact that a required first step to good governance is having a government that can stop doing things it very clearly should not be doing. Even good governments make mistakes, and if they can’t back out of them that provides a serious problem to the sort of effective government vision I’ve laid out. I am very skeptical of our governments ability to do this. Likewise, there are far too many people who want the government to be things that I think are incompatible with effective governance, like a middle class jobs program, and a guarantor of universal safety in everything we do.

So despite the progressive vision of government I’ve said I would be happy with, I remain in the short-run more interested in seeing government be, in the main, “smaller” rather than “larger”, whatever that means. You might confusingly sum up my position as wanting a small government now, so that we can have a large government going forward that makes a large government in the future unnecessary.

Clearly, I am with Niklas in having a hard time expressing exactly what it is that I want here.

I find it very hard to discuss taxes. I actually don’t like it, when I have to do it in person, or on a blog…it rankles me into a defensive mode immediately. Let met explain.

I’m a right-wing, mostly libertarian. I’m for efficient taxation to satisfy social goals…and that is the problem. Social goals are always changing. Unlike railing against stupid market inefficiencies like barbers licenses and land use, this involves a revenue calculation, and not one that is straightforward.

Back when I was a “wet behind the ears” libertarian person, I took the efficacy of “starve the beast” seriously. But that was before I learned how the >world works. It is entirely obvious that starve the beast can only work in the most excruciating circumstances…and I don’t want humans to have to deal with pain, I just don’t want them to have to deal with stupid government.

So I find it hard to talk about taxation. I think that the former should be lower (rates) while we should reform public services to offer a consistent level of quality, and efficacy — and get rid of many that are prized. And I have ideas about how that can happen, but unfortunately, I’m constrained by language mechanics, and network effects..

So how do you call for less burdensome taxation and more efficient public services, or even less in the absolute? I don’t know. I suppose if I was a think tank researcher, I’d have it all figured out (hint?). But as a blogger, I find it really hard to convey.

Canadian readers may catch themselves in a fit of exasperation to learn that I don’t spend a lot of time understanding the Canadian tax code. I know the basics, and I know that it generates revenue much more efficiently than the American tax code (although you do have an odd propensity to take money, give it back, and then take it again — a la the child care tax dividend). In any case, the following description strikes me as novel…but also ridiculous at the same time. From Frances Wooley, of Worthwhile Canadian Initiative:

Under the current system, Canada’s corporate income tax acts as a withholding tax. When a corporation makes a profit, it pays corporate income tax. But the government doesn’t keep that money forever and ever – it just withholds it for a time.

When a corporation pays out its profits to shareholders in the form of dividends, shareholders get a dividend tax credit – which credits the individual with the taxes the corporation paid on her behalf.

If it wasn’t for the fact of deadweight loss, this would be an incredibly ingenious tax scheme. Basically, a loan to the government, which they pay on a margin call. It does incentivize investment though, so provides Canada with a higher capital stock than otherwise. However, deadweight loss is a reality, and this reeks of the type of idiocy that the conservatives made out of the lunacy of the liberals’ child care tax dividend.*

Here’s another absurdity:

Professor Kent also proposes taxing capital gains equally with salary and interest income – so a $100 capital gain would be taxed at the same rate as $100 in interest income.


*The gist of the story is that there existed, at the behest of liberals, a universal child care dividend (regardless of income). A check that you received every month, simply for having children — regardless of your income (or if you have children, as I understand it). The idea is that you would use it to pay for daycare, and then you could have a higher marginal income as a family. However, in the infinite wisdom that conservatives have shown in recent history, they decided that it was unfair that “rich people” got the dividend as well. Their grand plan was that they would tax, give the dividend out to everyone, and then tax the money back from households over a certain income threshold. As far as I know, that is the way it works today (don’t quote me!). I hope everyone understands how that represents the behavior of a drunk person.

I cannot think of an explanation for this trend:

The number of Americans hospitalized for dog bites almost doubled over a 15-year-period, increasing to 9,500 in 2008 from 5,100 in 1993, a new government study reports.

The increase vastly exceeded population growth, and pet ownership increased only slightly during the same period, said the report’s author, Anne Elixhauser, a senior research scientist with the Agency for Healthcare Research and Quality.

Is this a healthcare utilization trend? Is the rise of “how to” dog training TV shows to blame (I’m looking at you Cesar Milan!)? Is it a trend in the kind of dogs that people are owning, i.e. a shift to more aggressive breeds? What is going on here?

Matthew Yglesias posted a blog with a similar title, without the exclamation which I express for this idea. Here’s Matt, channeling his inner William Easterly:

Alternatively, one under-discussed possibility is for a guy who has a lot of money and a desire to help poor people to just identify some poor people and give them some money. It sounds banal when you say it, but one of the main obstacles to people being less poor is that they don’t have enough money. If you give them money, they’ll have more of it. Will this be optimal in all cases? Of course not. But in the vast majority of cases, you’ll do some good. It’s tempting to believe that you’re on the [v]erge of some major conceptual breakthrough in the field of philanthropy. But give some consideration to the possibility that you’re not. Perhaps if you have a special talent for anything, it’s a talent for making money. It’s not very hard to identify some people who might need money more than you do. Maybe you should just give them some, and then go back to making money.

Indeed, I think that Matt discounts the effectiveness of making simple transfers of cold hard cash (or digital numbers) from one section of society to another. Here’s me:

This tendency [to fiddle with wages] is called the “just price fallacy“, and it is very popular in politics…and unfortunately, seems to be human nature to decry prices we don’t deem to be “just”. Going all the way back to Diocletian, we can find examples of people verily condemning “price gouging” or “profiteering”. Of course, as we know from economic theory (and experience) setting price floors causes unemployment, and setting price ceilings causes shortages.

In (nearly?) all cases, simply giving poor people money is much better anti-poverty measure. Ironically, Milton Friedman, widely regarded as a “conservative economist” was one of the strongest backers of the negative income tax — a policy deemed “too liberal”! Why the tepid response to things like the Earned Income Tax Credit from the non-economist left (we know the right do it to simply score political points with constituents)? Well, it seems that it stems from what I like to call the “Barbara Ehrenreich theory of value[1]“. For those of you who do not know who Ehrenreich is, she pretty much built the industry of authors working undercover doing low-paying jobs, with the intent on writing a normative essay about the experience. Of course, the common conclusions are that we should treat these people nicer (which is fairly uncontroversial), and we should pay them more based on the humility that they face. By giving money directly to the poor, it seems that we are “justifying” employers that profit from “slave labor”. Of course, this is wrong and wrong-headed, but the view persists.

I’m guessing that I have a much weaker paternal instinct than Matthew, such that once it was identified the socially optimal level of transfer, then I say just simply give people money — which is the cheapest thing to do from a deadweight loss perspective. I am guessing that Matthew would much prefer a system of voucher payments, in order to exert more control over how poor people spend money. At least this is a tacit acknowledgement that hyperbolic discounting is a major problem for poor people. This is one of the big criticisms that I have for “solutions” politicians dream up. As I outlined in this article:

There is a very high correlation between poverty and hyperbolic discounting. Because this is true, many of the left simply deny that the fact that it exists, or worse — even if they acquiesce to the fact that poor people tend to heavily discount the future, they claim that we need better education, more information, etc., to battle the problem. The traditional hard-line right wing (not Hayek, yes Rothbard) is Mathus’ and Franklin’s prescription; let them suffer.

Why these strategies are wrong is that they both exaggerate the problem. Education is the perfect example of something that people who heavily discount the future will not tolerate. The whole problem with extreme hyperbolic discounting is that it makes people unwilling to tolerate short-term deprivation in order to receive exponential long-term benefits. The right’s preferred solution does the exact same thing. Making alcoholics ineligible for liver transplants, or not paying for cigarette smokers’ chemotherapy so that they have to suffer financially isn’t going to deter anyone, because the punishment is so far off that it is effectively discounted to zero. There is no use in kicking people after they’re down, in the same way that it is unconstructive to repeatedly tell people how badly they are screwing up.

I’m not personally all that interested in how poorly people spend their money. However, it is relatively straightforward to design incentive systems that take hyperbolic discounting into account.

Interestingly this is an area where I sort of disagree with Arnold Kling, who bills himself as a ‘civil societarian’. He believes that voluntary donation to public services will provide a superior outcome in gaining high-quality public services. I’m skeptical of this, as there are search costs, and information asymmetries inherent in judging the quality and efficacy of the vast amount of public services. I think it would simply lead to the most visible services getting all the money, with the less visible services suffering…independent of the value they create for society. For example, it is a monumentally large task to maintain records of property rights. It’s easier now, but historically it has been so difficult that possession became “9/10ths of the law”, simply because records were so poorly kept. This service creates an immense amount of value for society, but it is nearly invisible. It would probably get shafted in a voluntary donation drive in competition with Food Stamps, Medicaid, and Welfare. I think that government has important economies of scale in distribution that would be hard to match with private institutions. The problem is dealing with the inefficiencies of our institutional arrangements.

It is definitely in everybody’s interest that everybody becomes as rich as possible. To that end, we should provide poor people with the means and (possibly) the incentives to make choices that increase their wealth over time (and most importantly, increase intergenerational wealth). To that end, simply giving poor people money that is phased out slowly over the course of an income quintile is much more efficient than the hodge-podge of a safety net we currently have.

Addendum: Before I had a chance to peruse Kevin Drum’s blog, I see he commented on the same thing, taking roughly the opposite view. Although I’m confused by this statement: “The generosity of the American taxpayer is not exactly legendary, after all.” Is that taken to mean that people don’t voluntarily pay more to the government, or that Americans aren’t charitable in general?

One of my primary responsibilities is advising the North Carolina General Assembly and other state officials on Economic and Fiscal Issues. Given

Fiscal experts set NC budget gap at $3.7 billion


There’s now a better estimate of how wide the gap between expected revenues and expenses could be in North Carolina state government in 2011.

Fiscal experts at the Legislature announced this week the preliminary gap for the year starting July 1 is $3.7 billion. That’s $500 million more than the minimum budget gap discussed after the current year’s $19 billion budget was approved last summer.

Most of the gap is caused by the loss of federal stimulus dollars and temporary taxes set to expire. The increase can be attributed to high-priority spending items the General Assembly usually agrees to such as increasing school enrollment, state pension funds and the employee health insurance plan.

The gap could change if the economy improves or worsens.

Blogging will be erratic for the foreseeable future. As far as I know Adam and Niklas should still be posting.

Modeled Behavior has enjoyed a lot of growth over the last year or so and I have had the opportunity to be a part of some great conversations. I am extremely appreciative for that. I hope those conversations can pick up where they left off when I rotate back to the world.

I have two questions about inequality: 1) how much of the measured inequality changes in recent decades has been due to shifts to the top .1% from elsewhere in the top 10%? 2) what is the propensity to donate to charity as wealth increases?

This is apropos yesterdays story about Mark Zuckerburg, Carl Icahn, and others joining Bill Gates and Warren Buffet in their pledge to give half of their wealth to charities. Stories like this make me wonder whether higher inequality is, or is going to, lead to more charity, which by containing transfers and spending on poor families actually mitigates the measured inequality.

By also utilizing economies of scale and overcoming coordination problems, it seems possible at least that inequality like this could make poor families better off. This could be the case even if the initial inequality was a redistribution from the bottom 99.9% to the top 0.1%, rather than from the top 10% to the top 0.1%.

There may be data that prove this completely false, but it’s food for thought anyway.

There is a lot of debate over the sources of growing inequality. The common answer from economists is that we are moving to a tech-generated winner take all economy.

Some economists, perhaps most famously, though by no means solely, Paul Krugman, have endorsed the idea that changing social norms about what executives can be payed are key. In this telling unions and their ability to enforce such norms may be an important player.

However, only mildly in jest I’d like to offer another explanation – the proliferation of norepinephrine based stimulants. My sense is that in the old days caffeine, nicotine and cocaine were the only widely used stimulants.

  • Caffeine has a wide variety of effects but the one most likely linked to increased productivity is a downstream dopamine effect.
  • Nicotine likewise is multifaceted but its stimulant effects seem to act primarily through a dopamine pathway.
  • Cocaine is unquestionably a dopamine reuptake inhibitor and a powerful one at that. If its potential for abuse wasn’t so high it would be the “super-drug”

However, what’s newer on the scene are norepinephrine based drugs. The street forms are speed, meth and the various derivatives. However, the slew of popular energy drinks also work this pathway, as does ephedra, as does ephedrine, as does pseudoephedrine (sudafed) – though not nearly as effectively.

Perhaps, most importantly Adderall and other ADD drugs work this pathway.

Unlike the dopamine drugs which target the reward system, the norepinephrine based drugs target the “fight or flight” response more directly. They AMP you up for lack of a better term and markedly increase focus.

The increase in work level from an norepinephrine hyped person is obvious. However, I might expect that the increase in productivity is many times greater. There seems to be increasing returns from having a single individual work on a single project over short periods of time. The communication delays between people and the memory loss when stretching projects is likely to be significant.

Causal empiricism tells me that the difference in the work effort produced by a “lazy” employee and a “motivated” employee is at absolute best a factor of 2 or 3. However, the increase in work product from a motivated employee could realistically be a factor of 20 or more.

This means there are enormous returns to being motivated and motivation can to some extent be simulated by norepinephrine based drugs.

Moreover, casual data collection also tells me that the use of such drugs in one form or another is massively widespread among high earners.

Am I arguing that Adderall is the ultimate cause of the increase in inequality – of course not.  However, I am interested in what extent it is a factor.

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