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Likely prompted by a new CBO study that argues federal workers are overpaid relative to private sector workers, Karl presents two questions I believe meant to imply that the government cannot overpay for workers. I would answer Karl’s questions with a question of my own: if the government offered a salary of a million dollars a year for a 30 hour a week mail carrier job, what would it get it return? Even though tens of thousands of workers from around the globe with a wide variety of skills would probably apply for the position, you wouldn’t get a million dollars a year in marginal product. Yes, at some margins if you offer more than you will get higher quality applicants. But the position must allow the possibility the marginal product large enough to compensate you, the employer, for the wages.

There are a couple of things that need to happen to get your extra wages worth, and that fact that this is low-skilled government work suggests this isn’t the case.

First, you need the extra dollars offered to lead to more skilled workers in fact being hired, rather than just more skilled workers queuing up for the position and first-come-first serve or some patronage determining who gets hired.

In addition, you need the extra skills to lead to extra value. If the majority of the overpaying was happening at the high end of the distribution where skills are more heterogeneous and extra skill has the potential to create a lot of extra value, I could buy Karl’s story that extra wages was buying valuable extra skills. This could be the case if the “overpaying” was happening for financial industry regulators. But the CBO report shows that the overpayment amount is inversely correlated with the level of education, with the most overpayment coming for workers with less than a bachelors degree., e.g. those that are least likely to have heterogeneous skills that extra wages can buy, and jobs with the flexibility to have those skills pay off. If the only thing a worker is allowed to do is trim the bushes at the Pentagon, or put stamps ons envelopes, there’s not a lot of job flexibility for extra skills to pay off, even if you hire a PhD. This is to say nothing of the incentives of government workers to actually create value once they’re hired into a job that might be both very secure and poorly monitored.

In short, it is certainly possible to overpay workers. If Karl doubts this is true, then he should try hiring someone to mow his lawn for $100,000 a year. Since he can’t overpay him he’ll expect to get at least that much back in lawn-mowing services.

Over at The Economic Policy Institute Blog, Josh Bivens thinks something is missing in the big New York Times story on why Apple makes stuff in China instead of America:

Yes, I’m gettingboring on this topic, but, exchange rates are by far the single most important determinant of U.S. trade performance, so if the question is “why isn’t X made in the US anymore,” it’s very likely that the answer remains “the dollar is overvalued.”

The main point of the New York Times story was that differences in hourly wages are not the primary driver of Apple’s production in China, but rather the available scale, flexibility, supply chain, and the quantity of appropriate labor available. Given that they are specifically countering the notion that wage differences are the issue, it seems quite besides the point to reply that the determinants of wage differences are being ignored.

Something we learn from the article is that you should think of Apple’s decision in terms of the labor supply curve for the type of labor they want. It is highly concentrated, medium skilled workers that can scale up extremely quickly. This means they don’t just have to consider the point where they expect their labor demand curve to cross the labor supply curve, but also how quickly the supply curve slopes upward just to the right of equilibrium, since their costs will be determined by average wages along a section of the supply curve.  That is to say the shape of the short run labor supply curve matters a lot.

One advantage in China seems to be that it is much cheaper to move quickly along the supply curve. Huge supplies of flexible labor like that don’t exist in the U.S. without offering enough pay to lure them from all over the country. In fact laws here prevent the sort of flexibility you can get in China. This means that when you scale up labor quickly in the U.S., increasing the number of workers must take up relatively more of the slack than increasing worker hours hours. Their labor supply curve is much flatter where they need it to be, and exchange rates aren’t going to flatten the labor supply curve in America.

The longer this recession goes on the more people are going to forget that in the long run job creation doesn’t matter. Because output is below potential and employment is below the natural rate, we do care about job creation in the short run. The slower the recovery is, and it’s looking slow right now, then the more job creation matters in the medium run as well. But in the long run full employment reins, and you can only create a job by killing a job.

Consider two scenarios. Capitalist A took over a company that fires half its workforce without decreasing output. Capitalist A is a dreaded jobs destroyer, and is pilloried for this (to be fair, some capitalist politicians bring this on themselves by bragging about how many jobs they’ve created). Now consider Capitalist B who took over a company that doubled its workforce and its output. He is a Real Jobs Creator, hailed as a champion of American Interests (and he wants a higher tax rate than his secretary).

But if output has doubled at Capitalist B’s factory, then surely he has taken market share from his competitors, which means his competitors have most likely had to lay workers off, perhaps half of them. The fact is that direct jobs creation that we see can often be completely offset by job destruction that we don’t, and in the long run it pretty much has to be.

While do want to celebrate job creation in the short run, in the long run productivity and innovation are how we improve well-being in this country. So when some capitalist-turned-politician comes out bragging about his career of job creation the reaction of the economist should not be to get in an argument with him about whether or not he was in fact a job creator. By all means, point out that his claims are unjustified at best. Score the political point that the politician has opened himself up to. But the job of the economist is not to accept false terms of debate because doing so is the best way to make the politician look bad. An economist should point out that in the long run job creation doesn’t matter, it’s productivity and innovation that matters, and declare that if the politician wants us to judge his contribution as a capitalist he should tell us about the productivity and innovation he delivered.

The Cato Journal’s new issue is all about immigration, and it includes an article from Gordon Hanson, who is one of the leading economists on this. Hanson repeats a claim that is common, and I think worth debating: that the fiscal externality of low-skilled immigrants should be internalized by their employers. Here is how he puts it:

Another source of unequal burden sharing is that U.S. employers enjoy benefits from immigration, in terms of higher productivity for their operations, while taxpayers pay for the education and health services that immigrant households receive. Taxpayers thus subsidize employers in agriculture, construction, meatpacking, restaurants and hotels, and other sectors that have high levels of employment of low-skilled immigrant labor. A reasonable solution to the current predicament is to eliminate such subsidies by making employers internalize the fiscal cost of immigrant workers. One way of achieving internalization is to subject employers to an immigrant labor payroll tax that would fund the benefits that their immigrant employees, and their family members, receive. Such a tax would make employers bear the fiscal consequences of immigration, releasing taxpayers from the burden and perhaps easing political opposition to immigration.

The notion here is that the employment of low-skilled immigrants is generating an externality, and that the employer who make up one side of these exchanges are not internalizing the cost of this externality. This leads them to hire them more low-skilled immigrants than they would if they had to pay the full cost. This treats low-skilled immigrants as being comparable to pollution generated by the employers, and proposes a Pigouvian tax to internalize the costs. But is this logic correct?

For one thing, I am surprised when I read liberals accepting that welfare and subsidies to low-income people are externalities to the Americans who pay for them. Is there some economic reason why these externalities should be internalized when foreigners generate them and not when natives do so?

Typically, transfers to the poor are justified on the economic grounds that people care about other people, and so improving the welfare of the poor is a public good to some extent. This isn’t just a liberal argument, here’s Greg Mankiw embracing it. In this case the fiscal burden of the low-skilled is not an externality, because everyone else receives positive utility from seeing them less poor.  Some might argue that by this logic what separates subsidies to immigrant from subsidies to natives is that Americans in general don’t care about the welfare of immigrants enough to justify the subsidies, so they are in fact externalities. This, to me, suggests that it is the policy that is generating the externality, and not the employers. If we wish to correct this is it not better to change the law so we stop giving subsidies to immigrants?

Another problem with thinking of employers as generating the externality is the fact that non-working immigrants surely generate a greater net fiscal burden than working immigrants. A tax on low-skilled immigrant working hours will result in less low-skilled immigrant working hours. In some cases this will result in immigrants returning home which will reduce the fiscal burden. But in other cases it will just result in immigrants working less hours, with perhaps less family members per household working, which will increase the net fiscal burden. Given this it seems to make more sense to tax immigrants themselves rather than those who hire them.

Gordon Hanson is just trying to find ways to make immigration more acceptable to Americans so that there can be more of it, so I don’t begrudge him for proposing an unpalatable solution. After all, most pragmatic solutions to convincing Americans to tolerate more immigration seem to have some unpalatable aspect to them. But I think accepting that the fiscal burden of low-skilled immigration represents a real externality generated by employers is both untrue and an unproductive framing of the problem.

Karl has requested that, along with a few other people, I answer this question:

What are the significant differences that you think we could actually see come to pass from a Romney Presidency versus an Obama Presidency?

Here are Tyler CowenKevin Drum, and Matt Yglesias. They all say a lot of believable things. I’m probably my least useful in this type of speculation, but here goes anyway. In a lot of points below I’m going to take the cowards way out and make a bunch of arguments I’m not necessarily going to stand behind, but that could plausibly be argued for.

One thing I’m pretty confident in is that if we’ve arrived at Obama vs Romney, and I think we have, then we’ve already dodged the biggest bullets (you know who I mean). So I think Karl is right to ask this question, as the answer is neither as dramatic or obvious as it could be if some of the other GOP contenders had gotten lucky.

If we’ve passed through the better part of the recession by the time the election is over, one could imagine attention will turn to tax reform. I can see either supporting something like Simpson Bowles, but Romney relying somewhat more on changes in the social security formula and removing exemptions, where Obama would lean somewhat more on increases in top marginal tax rates and some new taxes. I don’t think that the differences here would be huge overall, especially given the range of what could be done, but small differences can be pretty consequential in terms of welfare when you are talking about a multi-trillion dollar economy, so I don’t want to overly minimize these differences.

But whoever wins, I am looking forward to the end of Obama’s first term. I’ve come to believe that Obama’s biggest mistake might have been winning the election as resoundingly as he did. Republican’s came out of the election with a president who had mobilized the youth and won over a lot of independents.  He was going to gain more from their mutual success if they worked together, and he was going to lose more from their mutual failure if they didn’t work together. Rationally then, many Republicans’ top priority in the past four years has been to make Obama a one term president. One could argue that if Obama wins, especially if it is a tight race, this dynamic will change once the possibility of one-terming is gone. Or he’ll lose and I just don’t see Democrats having the same resistance to working with Romney.

If Romney wins I suspect he won’t have to give very much to the base for the very same reason that Obama’s first term has been such a struggle: what Republicans want most is for Obama to be a one-term president. In achieving this Romney will already have delivered a large chunk of what the base wants. This could conceivably grant him some sway. He’s probably a moderate technocratic conservative, so maybe that’s how he’ll govern, but who knows.

I’m hopeful that once the recovery gets fully underway political cooperation will be easier regardless of who is president. I don’t think most voters actually understand the recession, and without a clear real answer they grapple naturally for whatever answer is most satisfying, and partisan explanations are most satisfying, which naturally leads to polarization. Of course if Tyler is right and we are in the middle of a Great Stagnation, then I don’t think we’ll be out of the political stagnation anytime soon. Let us home Smithianism carries the day.

One possible problem with Romney is that he can’t win under circumstances which he could govern under effectively. The conventional wisdom is that the economy will be determinative in the election.  To oversimplify the issue: if the economy is weak, Romney will win. If it’s strong, Obama will win. But while I think Romney will have the political freedom to deal effectively with a recovering economy with long-term structural problems,what tools will he have to deal with an ongoing balance sheet recession? Does he have a plan to stimulate the housing market?  To increase inflation? He’ll have won on some pretty strong anti-immigration rhetoric, so a large amount of immigration as stimulus seems unlikely. What will he be able to do? If I’m right he will have some sway, but I don’t think much of it in the direction he would need it here.

One of the ways I think about elections is to ask “what will the victory do to voters?” One could argue that one of the benefits of Obama winning in ’08 was the salutary disillusionment of liberals on the power of a strong president relative to what they’d be thinking at this point had McCain won.   A democrat win risks undoing the hard earned disillusionment. (“Rocking the vote” is a tragedy. The central limit theorem does not apply to voting, in fact something like the opposite is true. More voters means more people paying attention means more populist governance.) On the other hand, a republican win in 2012 followed by a recovery could solidify the unhealthy myth that this is Obama’s recession if Romney happens to ride in at just the right time in the recovery. This part about how people will react to either win is hard to predict but important.

Karl has been blogging about Apple’s large cash holdings for some time now. His point is that management is taking advantage of shareholders by holding too much cash instead of paying dividends. My initial reaction when he first blogged this was “no way”. Then after the second or third post on it I had been converted to a “maybe”. Karl isn’t alone in arguing that cash holdings are too high, and Apple isn’t alone in guilt; there is a good bit of literature arguing corporations hold too much cash and trying to explain why. While the agency problem may not explain excess cash holdings overall, I do think it is at least one possible explanation, and that it may apply for some firms, especially Apple.

One uncontroversial fact is that cash holdings have been going up over time for firms. There are several explanations for why, and Karl’s agency problem is just one. For instance, one theory is that taxes provide firms with incentives to hold cash, and another is that there are frictions in access to capital markets so firms should hold more cash when shocks become more likely.  A 2006 NBER working paper from Bates, Kahle, and Stulz provides a good overview and some interesting empirical insights. Here is how they summarize the literature on Karl’s agency problem theory of cash holdings:

As argued by Jensen (1986), entrenched managers would rather hold on to cash when the firm has poor investment opportunities than increase payouts to shareholders. Dittmar, Mahrt-Smith, and Servaes (2003) find cross-country evidence suggesting that firms hold more cash in countries with greater agency problems. Dittmar and  Mahrt-Smith (2006) and Pinkowitz, Stulz, and Williamson (2006) show that cash is worth less when agency problems between insiders and outside shareholders are greater. Dittmar  and Mahrt-Smith (2006) and Harford, Mansi, and Maxwell (2006) provide evidence  suggesting that entrenched management actually spends excess cash quickly.

The paper provides some empirical tests of the agency problem explanation and do not find the evidence in support of it:

Agency theory predicts that cash holdings will increase for firms with high free cash flow. Our evidence on the changes in cash holdings for subsamples of firms is largely inconsistent with the agency explanation. In particular, we find that cash holdings increase more in firms that are financially constrained, as proxied by negative net income, than for other firms. Further, larger, more established firms are more likely to have agency problems of free cash flow that could lead to an increase in cash  holdings. However, the increase in cash holdings is much more significant for smaller and recently listed  firms.

I don’t know the literature well enough to say whether or not these results are consistent with most of the research in this area, but they should at least make us somewhat skeptical of the agency explanation. However, while agency problems might not explain the increase in cash holdings overall, Karl could still very well be correct in the case of Apple.

An important and related issue here is that as firms have held more cash they have also decreased net debt, which has implications for the question of whether the corporate income tax is causing firms to have too much leverage. Mihir Desai, for example, has argued:

While excessive leverage is sometimes associated with the tax code because of a presumed debt bias for corporations, concerns over the role of tax policy in fostering the financial crisis appear unfounded…. For the non-financial corporate sector where the presumed debt bias is thought to exist, the startling fact is how unlevered that sector was prior to the crisis.  In particular, the rise of cash balances and the decline of net debt is the  dominant corporate finance trend of the last decade.

He provides the following graph showing that leverage for non-financial corporations is not high by historical standards:

Reading the literature on leverage and the corporate income tax I have moved recently from thinking this is obviously a big problem to thinking that perhaps this isn’t as big of a problem as we commonly think, or perhaps it is not a problem at all. Points to Karl and Tyler Cowen who have both been arguing this.

For his part, Desai argues that there are three main explanations for the excess cash holdings issue:

 1. Weak product market demand

2. Regulatory and macroeconomic uncertainty

3. A coordination problem leading managers to be frozen into not spending

Desai proposes a tax that could fix the coordination problem if in fact that is the cause. Karl’s explanation of an agency problem implies some possible solutions relating to changing shareholder rights, and a tax might help here too. But the relationship between excess cash and low corporate leverage raises the question of whether it is in fact a problem at all. Desai argues:

“…the remarkable underleverage of the  non-financial sector prior to the financial crisis was a saving grace in ensuring that the financial crisis was not nearly as severe as it could have been.”

The overleveraging of banks is a persistent problem that regulators seem unwilling or unable to fix, and this creates serious macroeconomic risks. Perhaps we should just be glad for the corporate sector’s opposing bias against leverage and not worry about taxing it away. Excess cash may be a problem at the firm level, but it could be a boon at the macro level.

This also raises the question of whether we should be reconsidering the wall between commerce and finance. If non-financial firms have a bias against leverage, than allowing them to take banking business from financial firms is one way to eat away at leverage in the financial system. Letting Walmart get into retail banking would be one obvious way to do this.

On the other hand, perhaps allowing non-financial firms into the banking business will just remove their bias against leverage and infect that currently safer sector with the leverage problem. It’s an issue worth discussing more.

Will Wilkinson has a must-read post on libertarianism, why he’s more of a liberal than a libertarian, and how he’d rather argue more with liberals than libertarians. He also condemns Ron Paul about as well as anyone could in a paragraph of his usual rhetorical genius:

Somebody’s going to ask “Isn’t Ron Paul making a difference?” So I’m going to say, “Yes.” None of this is to say that right-fusionism of the Ron Paul variety isn’t now having an influence, or that none of it is good. I’m glad to see Paul spreading a few profoundly important ideas about foreign policy. But that doesn’t mean Paul’s decades of bilking paranoid bigots with bullshit prophesies of hyperinflationary race war was really a stroke of strategic genius after all. Or maybe it means it was. But that doesn’t make it right. I don’t think Paul would be where he is today without all those years of vile fear-mongering. And I don’t think anyone ought to get away with climbing up that evil ladder, kicking it away, then pretending he was born a thousand feet off the ground in the pure mountain air right there next to heaven. He knew what he was doing, chose to do it, and none of it can be justified by a little TV-time for salutary anti-imperialist and free-market ideas. I’d rather not be affiliated with a “movement” that includes him in even a conflicted way.

I am not quite persuaded by Will’s rejection of the term libertarian to describe himself. Or rather I am not persuaded by his rejection of the term to describe ourselves, since I share a lot of the beliefs he says differentiate him from libertarians. Will appeals to the prevailing public understanding of “libertarianism”, but I think that this is more about the relative importance of a high level of economic freedom to both freedom overall and general welfare than about which rights and liberties are “off the table”.

Maybe I am biased because I don’t want to surrender libertarianism to those I see as the radicals among us. But then again maybe Will is biased because it’s easier to persuade liberals when you call yourself a liberal.

I’m drawing here from the sample of economics blogging that we’ve re-blogged about at Modeled Behavior. What I’m learning about myself is I really like rebuttals, possibly to an epistemically unhealthy degree. I guess I should probably be bothered by this a little and worry that it gets in the way of truth seeking. In any case, these are my nominations, and I encourage readers to nominate their favorite posts of 2011 in the commenters.

First is a rebuttal of Steven Landsburg from Will Wilkinson that I wrote about here.  It’s a victory for common sense over the familiar style of attempted uber-rationality that is too often abused by economists. Will’s original post is here:

“Economists like Mr Landsburg specialise in the study of instrumental rationality. To act rationally in this sense is to take the means most conducive to one’s ends. Sadly, means-ends rationality and epistemic rationality are often at odds. Fallacious arguments can be the best means to noble ends. If we were to concede, for the sake of argument, that Mr Wahls did fallaciously attempt to rebut a statistical argument with an anecdote, it may remain that he acted not “in the service of intellectual misdirection”, but instead acted with exemplary rationality and morality by speaking eloquently in the service of justice. The kind of humanising anecdote Mr Wahls offered does in fact tend to elicit sympathy and weaken ill-founded prejudice. Maybe the relatively tolerant attitude of people with gay friends and family flows from some kind of statistical slip-up, but that’s how we are. A rational rhetorician takes his audience’s inclinations, rational or not, into account.”

The next is Reihan Salam offering up some persuasive counterpoints against two popular examples of government spending that we tend to take as uncontroversially beneficial: the space program and the U.S. highway system. Reihan wrote:

A shockingly large number of people, including Obama, seem to believe that had the federal government not stepped up to the plate in the postwar era and invested vast sums in highways and putting a man on the moon, the United States would have wound up an economic backwater. But perhaps not building a huge network of highways would have kept American families in more compact, walkable neighborhoods. Instead of sprawling suburbs and SUVs, we’d have more high-rises and bike lanes. The Interstate Highways helped supersize America’s government, by centralizing authority in D.C., and our waistlines, by encouraging us to drive and to fatten up on fast food. It’s not obvious to me that we’re better off as a nation plagued by high taxes and heart disease.

As for Sputnik, it led to a huge increase in federal funding for scientific research and K-12 education. Had we allowed the Russians to beat us to the moon, American families and firms might have kept more of their own money. Our state universities might have devoted themselves to churning out job-ready graduates instead of chasing federal grants. While the Soviets built enormous cities on the moon and Mars, financed by forced labor, we’d have devoted ourselves to becoming a richer, freer, more creative country. I love Neil Armstrong as much as the next guy, but I’d take that trade in a heartbeat.

Next is yet another one from Reihan where he challenges another popular claim: that the U.S. should look to China to learn to how grow fast. What I liked about Reihan’s previous argument was the boldness and novel way he challenged an intuitive and widely held claim. Here the claim is much more obviously false, and I see Reihan’s argument as the most concise and definitive rebuttal, and the last one that ever needs to be written. My post on this is here, and his original is here:

To really learn from the Chinese, and to enjoy such staggering growth rates, we should go about things differently: let’s have a Maoist insurrection followed by a civil war that lasts for several years. Then let’s destroy most of the wealth in the country, and drive out millions of our most enterprising and educated citizens by launching systematic terror campaigns during which millions of others will die in violence or of starvation. Next, let’s have a modest economic opening in coastal regions: impoverished citizens will be allowed to launch small-scale township and village enterprises and components will be assembled in a handful of cities by our stunted descendants. Then let’s severely curb those township and village enterprises because they represent a potential political threat and invite large foreign multinationals and state-owned enterprises [let’s not forget those!] to work our population to the bone at artificially suppressed wage rates, threatening those who complain with serious reprisals up to and including death. Let us also initiate a population control policy designed to improve our dependency ratio for a few decades. As large numbers of workers shift from low-value agricultural work to manufacturing, we will experience … rapid growth! Mind you, getting from here to there will involve destroying an enormous swathe of our present-day GDP.

The last one is Ezra Klein’s epic smackdown of Agricultural Secretary Tom Vilsack, who sought the interview after Ezra wrote a piece critical of rural subsidies.  The fact that Vilsack wanted to do the interview and clearly thought he was going to tell Ezra a thing or two adds to the impressiveness of Ezra’s smackdown. Here is my original post on it, but you should read the whole thing:

Tom Vilsack: …Rural America is a unique and interesting place that I don’t think a lot of folks fully appreciate and understand. They don’t understand that that while it represents 16 percent of America’s population, 44 percent of the military comes from rural America. It’s the source of our food, fiber and feed, and 88 percent of our renewable water resources. One of every 12 jobs in the American economy is connected in some way to what happens in rural America. It’s one of the few parts of our economy that still has a trade surplus. And sometimes people don’t realize that 90 percent of the persistent poverty counties are located in rural America.

EK: Let me stop you there for a moment. Are 90 percent of the people in persistent poverty in rural America? Or just 90 percent of the counties?

TV: Well, I’m sure that more people live in cities who are below the poverty level. In terms of abject poverty and significant poverty, there’s a lot of it in rural America…

Is this the worst paragraph about economics, at least from a major newspaper, in 2011?

North Dakota currently has the nation’s only state-run bank. Supporters point out that the state is the only one to have had a budget surplus since the economic crisis began, and has an unemployment rate below 4%.

I don’t consider the idea of public sector bank or something like it to be completely absurd, but for this reporter to allow even the hint of a connection between a public sector bank and North Dakota’s economic success is just terrible, irresponsible journalism. Perhaps North Dakota’s recent oil boom that has included a tripling of output over the past few years has something to do with the budget surplus and low unemployment rate? Or maybe it was the state bank that has existed since 1919. I guess it could be either.

One question I want to ask about public sector banks is this: would the financial positions of fiscally troubled states be better or worse if they had public sector banks over the last 15 years? What would the financial position of the State Bank of Illinois be?  I know where my bet is.

In a previous post I quoted a financial advisor who called Ron Paul’s portfolio “a half-step away from a cellar-full of canned goods and nine-millimeter rounds”, and I argued this reflected his crazy beliefs about the probability of economic collapse. It might be worth noting then, as commenter Ragout points out, that two of the other GOP candidates probably literally have a cellar-full of canned goods in preparation for a disaster scenario:

So Ron Paul, by investing in gold stocks, is preparing for a hyperinflation apocalypse where the stock market still functions. Note that the Mormon church calls upon its members to store 2 years of dried food, if they can afford it. So it’s likely that Mitt Romney is preparing for a real apocalypse, where there isn’t enough food to feed America.

Of course Jon Huntsman is the other Mormon in the race, which makes two candidates that are potentially literally preppers. This is from the official website of the LDS church:

“Our Heavenly Father created this beautiful earth, with all its abundance, for our benefit and use. His purpose is to provide for our needs as we walk in faith and obedience. He has lovingly commanded us to ‘prepare every needful thing’ (see D&C 109:8) so that, should adversity come, we may care for ourselves and our neighbors and support bishops as they care for others.

“We encourage members worldwide to prepare for adversity in life by having a basic supply of food and water and some money in savings.

“We ask that you be wise as you store food and water and build your savings. Do not go to extremes; it is not prudent, for example, to go into debt to establish your food storage all at once. With careful planning, you can, over time, establish a home storage supply and a financial reserve.”

They advise the creation of a 3 month supply of food, but also suggest if possible storing for longer-term:

For longer-term needs, and where permitted, gradually build a supply of food that will last a long time and that you can use to stay alive, such as wheat, white rice, and beans.

If Romney and Huntsman are actually prepping, what does it tell them about them? Should this be considered a “crazy belief” of theirs as Paul’s prepping is for him? I don’t think so. Their preparations don’t tell us much about how probable they actually think a disaster is, but rather reflect them adhering to a tradition.

You might argue that preparing for disaster because you believe God wants you to is in fact a crazy belief. But religious belief comes bundled with group membership, and many acts are just adherence to tradition, not wanting to rock the boat, or signaling required to maintain group membership rather than true expressions of literal belief. And at the very least religious beliefs are so widespread that I don’t think they all have the same correlation with other crazy beliefs as, say, believing an society destroying economic collapse is coming soon.  I think some religious groups and people manage to hold what I’ll politely call highly unlikely beliefs in one part of their brains, and a pretty non-crazy overall set beliefs in the other part.

In any case, I do find it amusing that there are a grand total of three candidates who are preparing in some form for an extreme disaster.

There’s a lot of justifiable shock today at a Wall Street Journal report on what Ron Paul’s portfolio consists of:

Most members of Congress, like many Americans, hold some real estate, a few bonds or bond mutual funds, some individual stocks and a bundle of stock funds….But Ron Paul’s portfolio isn’t merely different. It’s shockingly different.

Yes, about 21% of Rep. Paul’s holdings are in real estate and roughly 14% in cash. But he owns no bonds or bond funds and has only 0.1% in stock funds. Furthermore, the stock funds that Rep. Paul does own are all “short,” or make bets against, U.S. stocks. One is a “double inverse” fund that, on a daily basis, goes up twice as much as its stock benchmark goes down.

The remainder of Rep. Paul’s portfolio – fully 64% of his assets – is entirely in gold and silver mining stocks.

This tells us a few interesting things about Ron Paul. First, it is more evidence of his distrust of experts or of experts with beliefs within the mainstream. You would be hard pressed to find a non-crank economist or financial advisor who would suggest such a portfolio. Is there any economic issue about which Paul does not have extreme beliefs?

The investment advisor the WSJ talked to had this to say:

Mr. Bernstein says he has never seen such an extreme bet on economic catastrophe. ”This portfolio is a half-step away from a cellar-full of canned goods and nine-millimeter rounds,” he says.

What would it tell us about Ron Paul if he literally had a cellar-full of canned goods and nine-millimeter rounds? And what does it tell us about the average person who chooses the so-called “prepper” lifestyle?

In effect you are spending a lot of time and money insuring against one highly unlikely outcome. Either these people have extreme preferences or extreme probability beliefs. Extreme preferences would mean they would hate being unprepared in a post-apocalyptic U.S. way, way, way more than the rest of us would.  Given how much almost any of us would hate it, it’s hard to imagine how their expected disutility in this outcome could be large enough to justify the tens of thousands of times more they spend on insuring than the rest of us do (“But I’m insuring against this zero” you object, but admit it: when you spend that extra $10 on the fancy maglite flashlight, visions of a post-apocaplyse and a thought of “just in case…” zipped through your mind. Don’t worry, I won’t tell your wife* you’re a prepping just a little bit). So I think this rules out extreme preferences as the primary determinant, which leaves you with extreme beliefs.

What do extreme beliefs about the odds of complete economic disaster tell you? One thing it suggests to me is bad economic theories. This is the point Krugman his rightly been making about those who have predicted we’d be facing hyperinflation by now. We didn’t need this datapoint to tell us Ron Paul has extreme and crankish ideas about economics, but it certainly reinforces the idea that he is not faking it.

In some part I think beliefs like this also reflect wishful thinking. There is a lot of moralizing that accompanies bad economic theories. As if our failure to adhere to the crank theories makes us in a way deserve economic collapse. The ability to yell “you should have listened to me!” and “I told you so!” from a well prepared bunker as society collapses is every crank’s fantasy. I’m not going to psychoanalyze too deeply, but I do think there is something sociopathic about a desire to be right that is so strong it makes people, even subconsciously, kind of want a global disaster to happen. To the preppers and doomsayers in the room: you can object all day you don’t want it to happen, but I have spoken to many of you in real life, and I have seen the wishful glimmer in many of your eyes**.

So what does this belief tell us about Ron Paul in particular? Well we can say something additional about his beliefs based on the fact that he is running for president. As Will Wilkinson pointed on on twitter, his insurance against disaster tells us either Paul thinks he has no shot at being president, or that even if he becomes president he can do nothing to prevent economic doom. So which is it? This is actually an important question and one that reporters should be asking him.

Another thing I think you can arguably take from this relates to the re-emerging scandal of Paul’s racist newsletters. Racism, especially of the kind espoused by whoever wrote Paul’s newsletter, can be thought of as another crazy belief. It is my contention that crazy beliefs tend to be correlated. For any given crazy claim, people who hold another crazy belief are more likely to accept it, and those who hold dozens of crazy beliefs are way more likely to accept it. Because of this phenomenon, of I think it is more likely that Ron Paul actually believes the crazy things published in his newsletters than it is that Barack Obama believes the crazy things Reverend Wright said. Ron Paul is on the record as holding many crazy beliefs, whereas Barack Obama is not (that creating green jobs is something for policy to target may be wrong, but it’s not crazy).

Overall though, I think Conor Friedersdorf is correct when he argues that it is unlikely Ron Paul truly believes these crazy racist things given everything else we hear out of him. But I do think the odds that he does are higher than they would be if he didn’t hold all the other crazy beliefs, and they are higher than the odds Obama believes the crazy things Wright said.

I don’t think this is a partisan argument, and I think even Ron Paul supporters should agree with me. This is because you can believe something is true and still agree it is crazy relative to expert consensus, and you can also agree crazy beliefs, defined as such, are highly correlated.


*Yes, I am implying here that the tendency to insure even the tiniest bit against doomsday scenarios is a primarily male tendency.
**Then again, who am I to judge? Some part of me wants a zombie invasion to happen.

I want to reply to this Paul Krugman post on mercury regulations, but let me start with some important caveats. First, I have no idea if the new regulations are desirable, but if he’s correct that “it will save tens of thousands of lives every year and prevent birth defects, learning disabilities, and respiratory diseases” then I have a hard time imagining the costs exceeding these benefits. Also, Krugman is correct that there have been big successful environmental regulations in the past where the benefits clearly and largely exceed the costs. So to be clear: this post isn’t really about the mercury regulations at hand. What I really want to discuss is his more abstract and general point about when the best time to make these sorts of large regulatory changes is.

Krugman argues:

…if we’re going to have to scrap some power plants and replace them, it’s hard to think of a better time to do it than now, when the workers and resources needed to do the replacing would largely have been unemployed otherwise.

There’s certainly a valid point here. Spending like this, or any spending, in non-recessionary times has a crowding out cost, in that the resources being used to make new power plants would have gone to some other use and must be diverted. Labor and capital that had some other use must be bid away from those uses.

In a recession this is not necessarily true, as lots of capital and labor lays unused. Thus you are bringing unused inputs into use rather than diverting inputs from another use. Or at least you might, if you use the right inputs.

And here is one problem with big regulatory changes in a recession that Krugman ignores: the workers who are displaced from dirty factories may not be the same ones hired to build the new, cleaner factories. Are the skills necessary to build a new power plant the same as those necessary to run it? For that matter will clean power output replace dirty power output one-for-one, or will higher costs shift the supply curve leftward and increase prices? Both of these are possible reasons why workers at the dirty plant could become unemployed as a result of this policy.

And for these disemployed workers the costs are much higher if the regulatory change happens in a recession than if it happens out of a recession. I have voiced this concern about simplifying taxes right now: if you’re going to undertake large structural change that will require capital and labor to shift to different firms, and especially if it is to different industries, then those adjustment costs will be higher for the unemployed if the changes happen during a recession.

I am a big fan of creative destruction, and that’s kind of what we’re talking about when we talk about better policies causing industrial shifts. And even given the added costs of doing this in a recession, there are many policies where the benefits of doing it now outweigh the costs. This mercury regulation may very well be one of them. So too might tax simplification. Also the benefits of lower opportunity costs might outweigh the higher adjustment costs for workers.  But we shouldn’t pretend that making big changes like this is better along every dimension during a recession than during times of healthy economic growth.

The most common sin of economists is to take a point which is true in part and mistake it for one which is true in full. We so enjoy being contrarian and refuting sacrosanct beliefs with the clean and frictionless logic of economics that it doesn’t quite satisfy to point out that these beliefs are simply less true than people think, but must insist that they are fully false. Case in point is this Steven Landsburg post, which Robin Hanson praises, in which he argues that misers are just as admirable as philanthropists:

In this whole world, there is nobody more generous than the miser—the man who could deplete the world’s resources but chooses not to. The only difference between miserliness and philanthropy is that the philanthropist serves a favored few while the miser spreads his largess far and wide.

If you build a house and refuse to buy a house, the rest of the world is one house richer. If you earn a dollar and refuse to spend a dollar, the rest of the world is one dollar richer—because you produced a dollar’s worth of goods and didn’t consume them.

Who exactly gets those goods? That depends on how you save. Put a dollar in the bank and you’ll bid down the interest rate by just enough so someone somewhere can afford an extra dollar’s worth of vacation or home improvement. Put a dollar in your mattress and (by effectively reducing the money supply) you’ll drive down prices by just enough so someone somewhere can have an extra dollar’s worth of coffee with his dinner….

Landsburg’s point would be completely valid and convincing had he simply argued that the miser is more like a philanthropist than is commonly believed, but to fully satisfy the economist itch he must argue that the miser not morally distinct from the philanthropist. What’s missing from Landsburg’s analysis is the common sense fact that the world is full of areas where the social gains from a dollar spent are much larger than a dollar. Whether it is giving the global poor mosquito nets, education, vaccines, other medical care, or just cash, it is clear that it is easy to spend the money in ways that generate huge social gains. Likewise it is not hard to identify areas of basic research with large spillovers that are underinvested in. Of course Landsburg knows there are many ways to spend money and generate much higher social returns than burning money or putting it in the bank, which is why his article in Slate advising people how best to donate to charity didn’t simply advise them to burn it.

In reply to Landburg, Karl argues:

This is because the miser is withholding his assessment of the most utility maximizing uses of his money and that assessment is a valuable thing. Even if the miser knows very little he knows something and as always ignorance is not abdication.

I agree, but I would go a step further than this: the miser is not simply withholding his assessment, but he is signaling that he does not care that the money could generate massive welfare gains, and so he does not care about massive welfare gains. This is because it is simply not credible for a miser to argue that he cannot identify areas where there are large social benefits, or use the money to hire people to identify areas with large social benefits, therefore the only option that remains is sociopathic indifference.

In reply to Karl, Robin argues that he’d “still guess that the miser does more good than the average rich-nation philanthropist”. Surely there are many philanthropists who are terrible at philanthropy. Someone who spends millions creating a public museum filled with Damien Hirst sculptures is generating lower social returns than if he were to miserly put the money in a bank or burn it. But this simply reinforces my original point: Landsburg could’ve made a truer and more persuasive argument had he simply gone with a more modest version of it. That is, he should have said misers are better than some philanthropists. The problem is that most people are already pretty capable of identifying low value philanthropy and begrudging it as a waste of money. If you explained to them that putting the money in the bank or burning it is similar to giving it away to society at large, they would agree that some this is better than some philanthropy. But the contrarian victory there would not be enough to satisfy an economist, and so the argument is oversold.

If you were convinced by Tyler Cowen that we are facing a Great Stagnation, but like me you found his recommendations incomplete and on the short side, then Alex Tabarrok’s Launching the Innovation Revolution is a logical follow-up read. A lot of books get discussed in the blogosphere, and even if you’re the kind of person who reads the reviews on blogs rather than the books themselves, I highly recommend it. It’s short and extremely readable. I finished it in 1.5 sittings. And as Tyler says, Alex is a good tracker of truth, so you don’t have to spend a lot of time and energy figuring out why he’s wrong about something that doesn’t sound right.

There are three main areas of reform he recommends to help our economy grow faster in the long-run: education, patents, and immigration. I can’t disagree with the three categories, in fact immigration and intellectual property were the two categories for gains I suggested were missing from Tyler’s book in my review.

The area that I think begs the most questions is the one on education. Alex argues that there is a strong relationship between a the education levels of a country’s citizens and productivity. “[I]ncreasing the quantity and especially the quality of education”, he argues, ” has potentially enormous payoffs”. I don’t find this very controversial, but how much is there left to gain here for the U.S.? Now I would agree with Alex that are trillions to be gained here, but I am skeptical of the particular low-hanging fruit he identifies:

Average education levels have not stagnated because of fewer PhDs (although as we shall see that is also a problem) but because fewer people are graduating from high school.

He draws a line from high dropout rates and low international standardized test scores to the fact that countries with a better educated workforce innovate more and grow faster. But while I agree it is extremely important to improve the educational outcomes of high school dropouts and those who are currently the worst off, I don’t think raising the productivity of these workers will strongly affect our innovation. This is also why I’m skeptical of basing expectations of the impact of improving outcomes for U.S. high school dropouts on estimates from studies of the effect on average educational outcomes on productivity. My guess is that increasing educational outcomes for the the top two quintiles has a strong impact on overall productivity, while increasing outcomes for the bottom does not have nearly the impact.

In his immigration section Alex nicely lays out the mechanism by which high skilled workers generate spillovers via idea creation. In his innovation section he talks about how inventions build on each other, so an invention today can generate positive returns going far into the future. Given these mechanisms it’s not hard to imagine how increasing education for the top quintiles can increase rates of economic growth. And while it isn’t hard to imagine significant level impacts from increasing education for the lower quintile due to positive spillovers like less crime and higher low-skilled worker productivity, what are the comparable mechanisms for increasing rates of economic growth?

I am not a hardened skeptic here, I am open to persuasion. And like I said I think increasing educational outcomes for high school dropouts is one of the most important things we should be doing. But I do not see a convincing growth argument tied to the rest the themes book.

Another more minor question I’d raise is with respect to teacher quality. Alex argues correctly that we currently pay teachers for experience and advanced degrees even though they are not strongly related to teacher quality, meaning they do not raise value-added test scores. But Alex also argues that teacher quality has decreased over time as measured by high school rank, college selectivity, and SAT scores, and that we should care about this. But is there strong evidence that all of these measures of ability are any more tied to teacher effectiveness than the credentialing and experience Alex criticizes? Matt Di Carlo at the Shanker Institute argues that “it’s very tough to predict teaching effectiveness based on teachers’ measurable pre-service characteristics”, and “when there are associations, they tend to be inconsistent and small”. I think there is an argument to be made that these are at least somewhat useful measures of teacher quality while credentialing is largely not useful, but I don’t think Alex makes the case in his short education section.

But enough on disagreement. I particularly agreed with and enjoyed his section on immigration, and I think reforms there have the most potential to increase economic growth rates. This is especially true because reforming immigration is so easy: just let them in. In contrast, selecting the right innovation policy is more complex:

“No single institution solves all problems. Patents, innovation prizes, patent buyouts and advance market commitments all have their place. The key is to match problems to institutions.”

This is a much more challenging problem than simply liberalizing high-skilled labor markets. Immigration policy that is of an order of magnitude better than what we have in place now is comparatively simple problem when examined next to patent reform.

Overall, you should read Alex’s book. You should have been reading it now instead of reading this review. I hope it is influential.

The Obama administration’s attempts to regulate for profit colleges are reportedly being “watered down” under pressure of lobbyists and the industry:

Last year, the Obama administration vowed to stop for-profit colleges from luring students with false promises. In an opening volley that shook the $30 billion industry, officials proposed new restrictions to cut off the huge flow of federal aid to unfit programs.

But after a ferocious response that administration officials called one of the most intense they had seen, the Education Departmentproduced a much-weakened final plan that almost certainly will have far less impact as it goes into effect next year.

Maybe “much-weakened final plan” is in fact  watering down good regulations as a kow-tow to political pressure as a former Education Department official who helped shape the original plan claims. Or maybe the administration “listened to what they viewed as reasonable arguments and decided to narrow the scope of the original plan” as Cass Sunstein claims. Maybe it’s a little of both. As far as I can tell from the article, this is the meat of the changes:

The final standards leave a maximum of 5 percent of schools facing financial sanctions at the start; the original plan would have meant penalties against an estimated 16 percent.

The rules also pushed back the penalties to 2015 from 2012, while requiring schools to disclose more data about loans, defaults and job placement.

My gut instinct is that this constitutes watering down, but I’d put very little weight on that. What seems clear to me is that the original form of the new regulations as envisioned by the administration contained a much more egregious and much larger “watering down” in the application of the regulation to for-profit schools only, rather than both for-profit and non-profit. On what basis can one justify this exemption?

One can argue that the for-profit sector vastly underperforms the non-profit sector, and thus is the one in need of stricter standards. But it seems hard to argue that 1) standards have been designed to affect only underperforming colleges 2) non-profit schools aren’t underperforming, and 3) subjecting non-profit schools to the standards would affect them. If subjecting them to the regulations will harm them, then they are underperforming. If they aren’t underperforming, then subjecting them to regulations won’t harm them.

I think mood affiliation makes some people instinctively see for-profit schools as bad and deserving of attacks, and non-profits are good and deserving of praise. Diane Ravitch is the exemplar here. The popularity of this bias explains why the egregious exemption of non-profits from this law can exist. This is why people see the extremely low graduation rates of some for-profit schools and declare with outrage that they are failing and in need of major reform, and yet look at the sky high dropout rates at our nations worst public schools and scoff that teachers can only do so much and that poverty is the real problem. (I will let someone else write a post drawing parallels between this law and NCLB and highlighting inconsistent criticisms therein, but suspect it is a rich topic for exploration.)

To a lesser but still real extent, I think mood affiliation bias probably makes it easier for some on the other side to acknowledge the extent to which socioeconomic status should be considered in school performance measures when the class of schools we are talking about are largely unregulated for-profit corporations and not union dominated public sector institutions.

This is not to say that one must have equivalent scorn or praise for the worst for-profit colleges and the worst public schools, but that the extremeness, starkness, and gut level of these reactions is problematic.

Mood affiliation is everywhere in education, and it will continue to hold back real reforms.

Karl defends Andy Stern on China by making a claim about economic growth that on the one hand I think is partly true, but I think he overstates the case. His argument is that it is possible for economies to grow too fast in some sense, because economic growth is not the same thing as welfare. You can take too much from current generations in the name of stimulating economic growth.  Karl has made this point in the past more explicitly, pointing to China’s 40% savings rate outside the bounds of plausible optimal savings rate. This much I agree with, or at least I agree that it is possible and worth considering (I don’t know what the bounds of optimal savings are for China, or if they’re actually outside it). The problem is to use this to defend the notion that China can go too fast forever and use their current strategy to one day surpass us in per capita GDP.

The essence of the problem is still is that while China may be growing too fast because of too much savings, they also still owe a lot of their fast to catch up growth. There are still many things that go into determining a growth rate, and many of these things will weigh China down in the long-run no matter how high they keep savings rates.

In fact, one of the things that will work against them is reducing the incentives of their workers by using policies “designed to induce a large degree of suffering on its people today in return for a more prosperous tomorrow”. Any country trying to do this for a long period of time is going to have all sorts of problems. Look around at all the richest countries in the world, do you see any of them that have anywhere near the level of active management of the economy that China does without oil wealth that is massive relative to the rest of the economy?

Given China’s current level of per capita GDP ($4.3k in PPP terms), sustained large growth rates are not surprising or unprecedented. If China were as rich as we were, it would be unprecedented. China would have invented a brand new model of large developed nation that can grow extremely fast forever. There is a reason such a model does not exist: being a rich country requires democracy, freedom, innovation, entrepreneurship, and citizens who are willing to work. The ability to impose extreme levels redistribution to future generations like Karl is talking about cannot exist alongside all of these other things.

China will reach a limit to healthy growth using their current economic model. When they do, if they wish to keep growing they will look around and realize that their only choice is to become more like the rich world. If China wants to be rich they must learn from us, and Andy Stern is wrong to suggest the opposite is true. Reihan put this best:

To really learn from the Chinese, and to enjoy such staggering growth rates, we should go about things differently: let’s have a Maoist insurrection followed by a civil war that lasts for several years. Then let’s destroy most of the wealth in the country, and drive out millions of our most enterprising and educated citizens by launching systematic terror campaigns during which millions of others will die in violence or of starvation. Next, let’s have a modest economic opening in coastal regions: impoverished citizens will be allowed to launch small-scale township and village enterprises and components will be assembled in a handful of cities by our stunted descendants. Then let’s severely curb those township and village enterprises because they represent a potential political threat and invite large foreign multinationals and state-owned enterprises [let’s not forget those!] to work our population to the bone at artificially suppressed wage rates, threatening those who complain with serious reprisals up to and including death. Let us also initiate a population control policy designed to improve our dependency ratio for a few decades. As large numbers of workers shift from low-value agricultural work to manufacturing, we will experience … rapid growth! Mind you, getting from here to there will involve destroying an enormous swathe of our present-day GDP.

None of this detracts from Karl’s point about the possibility of growing too fast in a way that does maximize welfare. It’s an important point about today’s China that is worth understanding. But neither does Karl’s point disprove everything economists know about what it takes to be a wealthy nation.

A great story at the Wall Street Journal highlights a hopeful trend where people post tasks online and others complete them for payment. Think of it as craigslist for errands. I view this as a positive move towards a world where previously lost gains from trade are finally taken advantage of.  I don’t know if it’s just me or if all economists see the world this way, but I walk around constantly surprised and saddened by missed opportunities at gains from trade. As important as the techonological innovation here, I see this as social progress in the direction of making micro-markets socially acceptable.

For instance, at a concert I’ll see someone sit in front of me with a beer, and I really want a beer but don’t want to walk to and wait in line, and I’m pretty sure his beer is worth more to me than it is to him. But a lot of people would see it as rude to tap him on his shoulder and offer to buy the beer from him. Or a guy in a movie theater is laughing loud and obnoxiously, and I feel like I’d be willing to pay him more to leave than it’s worth for him to stay. But I know that exchange wouldn’t go well.

A lot of possible exchanges in fact would be seen as lazy, offensive, repugnant, and generally low-status to offer to strangers or friends. For instance paying someone to cut in line or take their reservation at a restaurant, or paying a friend to do a simple chore for you like take out the trash or clean your bathroom.

I also sometimes comfort myself knowing I would be outbid in micro-markets.  If I’m two minutes late for a train and I find myself thinking “surely the welfare gain to me of them waiting two minutes is bigger than the loss to all the other passengers for being two minutes late!”. But then I consider an auction where I had to buy off every riders’ extra two minutes, and I know I would not win that auction, which I find comforting in a way. When micro-markets like the one I imagine here are real and widespread people will have a less hard time deluding themselves like I initially do. The angry guy in line behind you in line who is mumbling about how late he is running will have less grounds to be angry if he can offer you to buy your place in line but it is not worth it to him.

“Argh! I’m so late, I should be ahead of this guy in line in front of me!”

“My place in line is worth $8 to me.”

“Oh, well being ahead is only worth $7, so I guess I shouldn’t be ahead of you”

I don’t know what it is about some exchanges that make them low-status or repugnant, but I think micro-markets will erode the stigma until everything is up for sale that should be (some people would be willing to pay a lot of money for particular markets not to exist at all, and these markets are more efficiently left non-existent, but what if the market to determine this is also more efficiently left non-existent?). It will be an economist’s world, and I’m sure some people won’t celebrate it but the world will be a better place.

Paul Krugman has elevated his “job creators don’t matter” blog post to an op-ed with some changes that I think strengthen his argument and also implicitly acknowledge the correctness of the criticisms I made.

First, he substantially narrows the focus of his point from the top 1% to the top .1%:

If anything, however, the 99 percent slogan aims too low. A large fraction of the top 1 percent’s gains have actually gone to an even smaller group, the top 0.1 percent — the richest one-thousandth of the population.

Having narrowed his focus, he makes the “job creators don’t matter argument from his blog post:

Well, aside from shouts of “class warfare!” whenever such questions are raised, the usual answer is that the super-elite are “job creators” — that is, that they make a special contribution to the economy. So what you need to know is that this is bad economics. In fact, it would be bad economics even if America had the idealized, perfect market economy of conservative fantasies.

After all, in an idealized market economy each worker would be paid exactly what he or she contributes to the economy by choosing to work, no more and no less. And this would be equally true for workers making $30,000 a year and executives making $30 million a year. There would be no reason to consider the contributions of the $30 million folks as deserving of special treatment.

Then acknowledges and agrees with the argument I made that marginal product is likely to be higher than compensation for many top earners:

Still, don’t some of the very rich get that way by producing innovations that are worth far more to the world than the income they receive? Sure, but if you look at who really makes up the 0.1 percent, it’s hard to avoid the conclusion that, by and large, the members of the super-elite are overpaid, not underpaid, for what they do.

But, having narrowed his focus to the top .1% rather than the top 1%, he argues that the contributions here are largely CEOs and financiers who do not create more value than they are paid.

So it fair to read what Krugman has and hasn’t written as an acknowledgement that the bottom 90% of the top 1% (i.e. those above 99% but below 99.9%) are indeed job creators, many of whom create more value than they are paid, and that therefore we should worry about taxing them at 70%? It seems so to me.

To turn things around, is my above non-criticism of Krugman’s narrower and substantially more modest argument an implicit acknowledgement that he is correct? I think people in the segments of finance and CEOs that Krugman focuses on are less likely to be creating value high paid individuals overall. But what percent of the financiers are venture capitalists? What percent of the CEOs are like those running Google, Apple, and Netflix? The value created by some of these people is massive, and I think the burden of proof that they are on average getting paid more than the value they create is pretty high. I have not seen anyone convincingly overcome that burden of proof. You’re certainly not going to find it in the Diamond and Saez paper Krugman cites, despite the fact that it is of first order importance to the question they’re seeking to answer.

Paul Krugman has some words for job creators and other high skilled people: we don’t need you.

…textbook economics says that in a competitive economy, the contribution any individual (or for that matter any factor of production) makes to the economy at the margin is what that individual earns — period. What a worker contributes to GDP with an additional hour of work is that worker’s hourly wage, whether that hourly wage is $6 or $60,000 an hour. This in turn means that the effect on everyone else’s income if a worker chooses to work one hour less is precisely zero. If a hedge fund manager gets $60,000 an hour, and he works one hour less, he reduces GDP by $60,000 — but he also reduces his pay by $60,000, so the net effect on other peoples’ incomes is zip.

First let me just say that the extent to which what people earn is equal to their marginal product is greatly unappreciated, so before I disagree with Krugman I just want to pause and point out that this is truer than most people think. But it’s not true everywhere and always. Note that Krugman does not go so far to say that marginal product *does* in fact equal income, but that “textbook economics says that in a competitive economy…”, and that job creator praise is not “something that comes out of the free-market economic principles these people claim to believe in”, and that “Even if you believe that the top 1% or better yet the top 0.1% are actually earning the money they make…”.

He doesn’t actually say “people earn what they make”, nor does he say how good of an approximation to reality marginal product theory is. But in his economics textbook with Robin Wells, they are a bit more explicit, and do call the marginal product theory a pretty good approximation:

The main conclusion you should raw from this discussion is that marginal productivity theory is not a perfect description of how factor incomes are determined, but that it works pretty well. The deviations are important. But, by and large, in a modern economy with well-functioning labor markets, factors of production are paid the equilibrium value of the marginal product -the value of the marginal product of the last unit employed in the market as a whole.

This is a really important point, and I don’t disagree. But I think that many high skilled, high paid workers, and job creators in the U.S. can be an important deviation from this general rule. Many of these people work at moving the productivity frontier forward, and thus increasing the marginal productivity of other workers. After all, one of the important things that entrepreneurs do is find ways to increase the productivity of other workers so they can underprice their competitors. The process of creative destruction is not manna from heaven. I won’t pretend to know have all the answers about what drives this process, but entrepreneurs, job creators, and high skilled people are an important part of it.

Consider, for instance, that if we suddenly kicked out the top 10% of high IQ people (or 10% most productive people, or 10% most creative people, or whatever) in the U.S.. It strikes me as fairly likely that the total output of the remaining 90% would go down. Krugman seems to argue that this would not be the case. But even if you disagree with me in the short run, in the long-run the productivity increasing innovations these people would have made won’t show up, and the rest of us would have lower productivity as a result.

Now, instead of kicking out the top 10% of workers, just make them work less as a result of high income taxes.  See my concern?

Lowered incentives of job creators and other innovators should be considered as one of the likely downsides to higher taxes.

Note that if you don’t think this is true, then what business do we have subsidizing higher education? If workers capture the entirety of their higher productivity, then I don’t see who gains by giving young people money to go to college rather than just cash.

The group tasked with finding a plan to cut the debt by $1.5 trillion or more has failed to come to an agreement. If you’ll recall, two of the the ratings agencies, Moody’s and Fitch, recently reaffirmed the AAA status of U.S. debt, while S&P downgraded them one notch to AA+. Will the Super Committee’s failure lead to more downgrades? Well nobody is downgrading immediately, but this certainly doesn’t help the odds of preserving AAA status.

S&P has already announced that they will not downgrade as a result of the Super Committee failure, which is not a surprise. In their original downgrade statement S&P cited the debt panel failure part oftheir down-side scenario that they would regard as “consistent with a possible further downgrade to a ‘AA’ long-term rating”. However, that down-side scenario also included other bad things occurring, like higher nominal interest rates for U.S. Treasuries, which have not surfaced.

However, it’s hard not to see the failure of this committee as reaffirming one of S&P’s chief concerns, which is essentially that politicians can’t come to agreement. As they said in their downgrade statement:

Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt  burden in a manner consistent with a ‘AAA’ rating and with ‘AAA’ rated  sovereign peers (see Sovereign Government Rating Methodology and Assumptions,”  June 30, 2011, especially Paragraphs 36-41). In our view, the difficulty in framing a consensus on fiscal policy weakens the government’s ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging…

If you’re concern is that the government is unable to work together and come up with the right solutions to long-term debt problems, it’s my position that the super committee failure should make you more worried. But it’s not necessarily the case that S&P sees it that way. And I see nothing in their August downgrade statement that commits them to further downgrades now that the super committee has failed. If some or all of the automatic cuts end up being nullified, then S&P’s previous statements certainly indicate the risk of a downgrade will go up. How much remains to be seen.

How about Fitch? I’ve read some commenters saying that the failure to come to agreement is actually good news, but Fitch does not see it this way. In their previous statement affirming AAA status they committed themselves more explicitly than S&P:

An upward revision to Fitch’s medium to long-term projections for public debt either as a result of weaker than expected economic recovery or the failure of the Joint Select Committee to reach agreement on at least USD 1.2trn of deficit-reduction measures would likely result in negative rating action….

Agreement and passage into law of a credible set of deficit-reduction measures of at least USD1.2trn by end-2011 would be consistent with Fitch’s own fiscal projections and demonstrate that a sufficiently broad-based political consensus can be forged on how to reduce the budget deficit and provide a platform for the additional measures that will be required over the medium to long term. In the event that the Joint Select Committee is unable to reach an agreement that can secure support from Congress and the Administration, Fitch would be less confident that credible and timely deficit-reduction strategy necessary to underpin the US ‘AAA’ sovereign rating and Stable Outlook will be forthcoming despite the USD1.2trn of automatic cuts that would follow.

So even if the automatic cuts go through as planned, Fitch has previously committed to being “less confident” in the maintenance of the AAA rating. While one can read S&P’s downgrade statement as being concerned about the kind of inability to agree that the Super Committee failure represents, Fitch has come right out and said that they would regard it negatively. Their statement that the failure of the committee would “likely result in negative rating action” is certainly suggests to me that a downgrade will be forthcoming.

All I’m seeing from Moody’s right now is a statement that this news is “informative but not decisive” in it’s decision whether or not to downgrade. This seems to approximately sum up the position of the other two agencies as well, although Fitch’s previous statements look to me to be the most hawkish in terms of how they will view this. I’m in agreement with the ratings agencies, I don’t think this failure is good news.

Via David Wessel, I see that the University of Chicago has a new website with a panel of elite economists answering weekly questions. Tyler is skeptical, but I am already finding it interesting. Here, for instance, is one of the first questions posed:

Federal mandates that government purchases should be “buy American” unless there are exceptional circumstances, such as in the American Recovery and Reinvestment Act of 2009, have a significant positive impact on U.S. manufacturing employment.

The results are overwhelmingly against the statement. Of the 41 respondents, only 4 agree. One of them is Daron Acemoglu who, cites the work of David Autor:

4 years ago I would have disagreed. Recent evidence (Autor Dorn Hanson) suggests yes.Caveat: costs from higher prices & other inefficiencies -see background information here

Yet a few positions down in the experts panel, Autor himself disagrees, and seems to disagree that his study is useful analysis here:

Hard to believe this does much at all. But I’m speaking based on my prior. I’ve not seen any rigorous analysis.

I would like to see more from this website. A great follow-up to this would be a conversation between Autor and Acemoglu about the extent to which Aturos’ work is applicable to the question.

In response to Karl’s post, commenter Th points us to a 1996 article from Krugman where he pens a 100 year retrospective from the point of view of someone 100 years in the future. There are so many interesting things in there, but I just wanted to point out some of the more interesting predictions.

First, Paul predicted the trend towards suburbanization would reverse, which in fact is starting to happen:

During the second half of the 20th century, the densely populated, high-rise city seemed to be in unstoppable decline. Modern telecommunications eliminated much of the need for physical proximity in routine office work, leading more and more companies to shift back-office operations to suburban office parks. It seemed as if cities would vanish and be replaced with a low-rise sprawl punctuated by an occasional cluster of 10-story office towers.

But this proved transitory. For one thing, high gasoline prices and large fees for environmental licenses made a one-person, one-car commuting pattern impractical. Today, the roads belong mostly to hordes of share-a-ride minivans efficiently routed by computers. Moreover, the jobs that had temporarily flourished in the suburbs — mainly office work — were eliminated in vast numbers beginning in the mid-90’s. Some white-collar jobs migrated to low-wage countries; others were taken over by computers. The jobs that could not be shipped abroad or be handled by machines were those that required a human touch — face-to-face interaction between people working directly with physical materials. In short, they were jobs done best in dense urban areas, places served by what is still the most effective mass-transit system yet devised: the elevator.

Here Paul predicts the rise of many small subcultures, and many small celebrities:

Luckily, the same technology that has made it possible to capitalize directly on knowledge has also created many more opportunities for celebrity. The 500-channel world is a place of many subcultures, each with its own heroes. Still, the celebrity economy has been hard on people — especially for those with a scholarly bent. A century ago, it was actually possible to make a living as a more or less pure scholar. Now if you want to devote yourself to scholarship, there are only three choices. Like Charles Darwin, you can be born rich. Like Alfred Wallace, the less-fortunate co-discoverer of evolution, you can make your living doing something else and pursue research as a hobby. Or, like many 19th-century scientists, you can try to cash in on a scholarly reputation by going on the lecture circuit.

The whole thing is really interesting. I wonder the probabilities Krugman would place on these outcomes, and if he has changed his mind at all. He certainly paints a picture of a world where inequality is not such a big problem. Sure there are still the super rich, who made their fortunes off of land and natural resources. But celebrities are both more common and serve a smaller audience, PhDs make as much money as people with a year or less of vocational training, white collar jobs are the ones most commonly replaced by machines. How long does he expect it will be until inequality starts to reverse due to these trends? Or was it just a bit of fun speculation about a possible future world?


Over at Frum Forum, Howard Foster argues that we should strongly reduce immigration in order to create jobs for native workers. I’m going to put aside the issue of the welfare of immigrants, which to judge from Mr. Foster writing appears to deserve approximately zero consideration, and focus strictly on the question as he frames it: would reducing immigration stimulate native employment? The answer here is a pretty clear no.

For one thing, there the fact that low growth in the number of households has already declined, and with negative consequences. Less household growth means less new houses are needed, and this, in part, explains why the housing sector is failing to contribute to the recovery. This is a problem because housing investment usually is an important component of post-recession economic growth.  Current economic activity is based in part on expectations, and the expectation that households would increase more slowly than expected, for instance because we were cracking down on immigration, would make businesses less likely to invest if they expected immigrants to be their customers. In the aggregate, less immigrants mean less households, which means less houses built, which means a slower recover. It’s really foolish to wish to exacerbate the problem of low household growth as Mr. Foster does.

No matter how much Mr. Foster may wish it to be true, there are significant adjustment costs to transitioning to a lower population level, and even a lower population growth rate. I would hope it would be obvious even to him that if we kicked out all 14 million immigrants that came to the United States between 2000 and 2010 that the effect would not be a boost in employment, but a lot of vacant homes, businesses, and schools, and widespread economic problems. After all, if Mr. Foster is right and less competition from other workers is the best thing for people, then why isn’t Detroit an oasis of full employment? After all, the mass exodus of competitors surely leaves more jobs for those left behind?

One thing that always puzzles me about arguments like Mr. Foster’s is why they don’t they apply the same logic to capital and goods markets that they apply to labor markets? If one can boost employment of domestic labor by legally mandating a decrease in imported labor, than surely one can boost production of domestic goods by legally mandating a decrease in imported foreign goods.

Imagine a Mexican immigrant lives in Texas and takes the job of a native Texan in the most literal sense: the American burger flipper is fired from a burger stand and the Mexican is hired to replace him. Now imagine instead that the Mexican man never comes to America but instead works for a burger stand across the border in Juarez Mexico. The burgers he makes are shipped to the U.S., putting the Texas burger flipper’s employer out of business. From the perspective of the employment of the Texan, these two situations are identical.

Why wouldn’t Mr. Foster have us ban the import of the burger if he would have us ban the immigration of the burger flipper? To the extent that these situations are different, the immigration of the Mexican burger flipper is clearly preferable.  Since there were likely some other natives employed at the Texas burger stand, native employment is hurt less by immigration of burger flippers than the importation of burgers. Better to keep the stand open and in the United States with some immigrants displacing natives than to have the whole operation move to Mexico.

The foolishness of the argument that we can spur the economy by banning imports should be pretty obvious. If you find yourself tempted to accept the idea that banning immigrants would help native employment, consider the parallels between restricting the flow of labor and the flow of goods and capital.

If you haven’t already, I definitely recommend playing around with the Wall Street Journal’s interactive table that shows various people with various major’s are doing in the Great Recession. They have some interesting information, including major field, unemployment rate, median earnings, and major popularity. If you’re like me, after you play with it for awhile you’ll start to wonder about how the various measures are related. In particular, how is the popularity of a major related to the unemployment rate for people with major. One might think that majors with low unemployment rate would be popular, and those with high rates would be unpopular.

The first scatter plot below shows there is not much of a relationship between popularity and unemployment:

A local polynomial graph provides further evidence that the two are not related:

A few caveats are in order. This is not unemployment for recent graduates, and does not appear to be popularity based on recent graduates, but rather the average of both across the population. Given this, one could imagine how a major’s popularity might reflect an oversupply of people in that field, which could cause a high unemployment rate. Another problem is that this analysis does not control for graduate degrees.

Among the 100 most popular majors there doesn’t appear to be a relationship, but it does look like the least popular majors enjoy have somewhat higher earnings. Is this the boredom wage premium?

In order to see if school’s are directing kids into the right majors, you would ideally want to look at current popularity and unemployment of recent graduates. Although one could make the case that you do want to look at average unemployment and earnings over the population, since that might better reflect average expected lifetime outcomes. All in all it’s interesting to look at the data, and they certainly suggest that popularity of a major is not driven by labor market outcomes, but I’d want to see more analysis before I concluded anything with a high degree of confidence.

There are some unfortunately unsurprising economics lessons to be seen in what is starting to result from interchange regulations. First, is that there when the government sets prices there are often unintended consequences:

…McDonald’s and other U.S. retailers that rely on a high volume of small dollar transactions could see an increase in their debit card processing costs, because prior debit costs for smaller purchases had lower fees….

…Richard Peck, 7-Eleven’s senior director for corporate finance, said the company’s gas stations and convenience stores will likely see a mixed impact from the capped fees… But for smaller, everyday purchases, executives said those costs will likely lead to price increases for consumers.

Oops, I don’t think that was supposed to happen. Another lesson is that regulation is often a slippery slope. Walmart seems to think that is the case anyway:

Michael Cook, treasurer for Wal-Mart, said the discounter viewed the debit fee overhaul as a precursor to overhauling credit card processing fees.

This is a much belated reply* to a claim Matt Yglesias made a little while ago about buying a home to live in and as an investment.  Matt wrote:

If you own a first house in the DC area, and plan to eventually sell it and replace it with a larger house in the DC area, then overall trends in DC area real estate prices are irrelevant to you. Your investment will “pay off” if prices go up, but you’ll end up needing to spend more on your second house anyway. It all washes out. If you’re speculating in real estate you don’t intent to live in, things look different. But in terms of a place you inhabit, the relevant consideration is how its price evolves relative to the market average and your odds of doing better than average are 50 percent at all times.

The problem here is failure to consider the proper counterfactual opportunity cost. Say you’re the hypothetical current DC resident Matt is discussing, and in the future you plan on owning a house bigger house than you can currently afford. Matt says if prices go up then the future house you’re going to buy is more expensive so it’s a wash. But if prices go up and you don’t buy a house now than you still have to face those higher prices, but you won’t have the profits from your more valuable older home to offset the costs.

In fact, this is true even if you plan on renting in the future. This is because if prices go up you will incur higher housing costs regardless of whether or not you bought a house early on. If you’re going to live in DC in the future, then buying a house now is a hedge against rising house prices. When prices go up that investment can pay off, and the profit certainly doesn’t need to be a wash.

*Why am I replying to a short, old post on something of a minor point? Because Matt is writing a book about urban economics, and if correct a misunderstanding in the book before it gets published then Matt will have to credit me in his book. And then I’ll be in a book.

Karl raises some interesting questions about the morality of bringing someone into existence. These are tough questions, but one group makes it a little easier to narrow the overton window by earnestly putting forth some clearly terrible answers. The group is “Population Matters” and they have some truly egregious views (pdf). For instance consider this argument:

It is also a fact that if two people with two living children have a third child, they will ratchet up the population of the planet, and thus: ratchet up damage to the environment; bring nearer the day of serious ecological failure; and ratchet down everyone else’s share of dwindling natural resources to cope with this. So individual decisions to create a whole extra lifetime of impacts affect everyone else (including their own children) – far more than any other environmentally damaging decision they make. We need to be aware of the ethical implications of having large families; and sex education in schools should include it.

You’ll notice the complete and puzzling lack of productivity in this formulation of scarcity. In this model of the world there is only resources, and they are directly consumed. Imagine, for instance, if your two people with two living children have a third child whose inventions increase the efficiency of solar power by 1%, or increases grain yields, or leads to a new low cost recycling technique. This person coming into existence has clearly increased the amount of output than can be created with the resources on earth. The way Population Matters has formulated the problem of scarcity only makes sense if… well, if you’re determined for some reason to try and argue that more population is a really bad thing.

Another massive problem with their ideas is they’re confused about what coercion means. They state repeatedly they are only for non-coercive policies:

“…the government should state a national goal of stabilising and then reducing UK numbers to a sustainable level, by non-coercive means…”

But when the chair of the group was interviewed here at Grist, he doesn’t shy away from the extremely coercive policy of drastically restricting poor people’s freedom to move to developed countries:

“Half our population growth [in the U.K.] is due to migration, so [we advocate] balanced migration to stabilize that — no more in than out. “

So they don’t want to coerce anyone except when it comes to their decision about where to live. And they’re not for coercive policies except the one that prevent more wealth creation than perhaps any other.

The interview ends with this puzzling appeal to doing things “the nice way”:

“On a finite planet, we know for a fact that indefinite growth in anything physical is physically impossible. So physical consumption of resources per person and the number of consumers will quite definitely stop at some point. It will either be sooner, the nice way, through fewer births, or later, the nasty way, through more deaths. But there is no third alternative.”

One wonders if they are completely blind to the reality that preventing people in poor countries from immigrating to better lives in developed nations is probably not seen as “the nice way” from their perspective. Or are they just that stunningly indifferent to their well-being?

A new Gallup poll of small-business owners provides evidence about what they’re worried about. Gallup themselves title an article on the survey results “Gov’t Regulations at Top of Small-Business Owners’ Problem List”. They present the following table, which is topped by “complying with government regulations”.

One thing that jumped out at me is that complying with government regulations is the most important problem for 22% of respondents, compared to 18% in the most recent  NFIB survey. One explanation for this difference could be simple margin of error: it is, after all, only 4 percentage point. However, Gallup respondents perceive regulation to be an a even bigger problem if you include “new healthcare policy” and/or “poor leadership/government/president”.

Another explanation for the difference could be the wording of the question. Gallup asks:

“What is the most important problem facing small business owners like youtoday?”

whereas NFIB asks:

“What is the single most important problem facing your business today?”

The subtle wording difference here could be consequential. It is quite easy to imagine a small business owner allowing his ideological bias to affect his beliefs about the problems facing businesses like his, but having more realistic understanding of the problems facing himself. It is likely that the latter mistake would be more costly than the former anyway.

Another difference is that in the Gallup survey, “lack of consumer demand” was cited by 12% compared to 28% who cited “poor sales” in the NFIB. However, Gallup also has “consumer confidence” as the most important issue for 15%, which you could combine to 27% for “consumers” as the biggest problem, which is close.

When it comes to what businesses would need to see in order for small businesses to thrive, the evidence again favors demand explanations over regulatory ones. Only 12% felt that “fewer government regulations” would be sufficient, and 6% cited better tax laws. Growth in sales was 15%, consumer confidence was 5%, and an improved economy was 8%. How many of these can you pin on aggregate demand?

Overall, signs continue to indicate aggregate demand is a more important problem problem than regulations. Hat tip to Catherine Rampell.

A recent back and forth between Paul Krugman and Russ Roberts on Keynesian economics reminded me of something I discussed briefly on twitter some time ago and wanted elevate it blog post level. Here’s what Russ said:

Krugman is a Keynesian because he wants bigger government. I’m an anti-Keynesian because I want smaller government. Both of us can find evidence for our worldviews.

Now there are many places where I think “better government” is more important than less government, and sometimes better even means more, but I’m broadly supportive of the notion that government should be smaller. And yet I find myself in much more agreement with Keynesian economists than those like Russ Roberts about what we should do about the recession.

But I think Russ’ point tends to be very true, and is exemplified by what, I think, Ezra Klein called “Now-More-Than-Everism”. This is when someone argues that the solution for any given problem is simply that their favored policies are needed Now More Than Ever. We find ourselves in an extended recession-like economy, obviously Now More Than Ever we need to gut the EPA, or Now More Than Ever we need green energy subsidies.

In the anti-spirit of this mindset I want to focus on Now-Less-Than-Everism. I’ll let Krugman go first:

“Here’s an example: is economic inequality the source of our macroeconomic malaise? Many people think so — and I’ve written a lot about the evils of soaring inequality. But I have not gone that route. I’m not ruling out a connection between inequality and the mess we’re in, but for now I don’t see a clear mechanism, and I often annoy liberal audiences by saying that it’s probably possible to have a full-employment economy largely producing luxury goods for the richest 1 percent. More equality would be good, but not, as far as I can tell, because it would restore full employment.”

Now my turn. I think education reform is a really important issue, and I think charter schools and some parts of the reform movement are extremely important. But we’re not going to get to full employment through education reform. And what we really don’t need right now is mass layoffs of teachers. Or postal workers. Structural adjustments are easier to make when we are at full employment, if these things need to come the future is better than now.

The home mortgage interest deduction is a terrible policy. And I don’t see any good reason why Fannie or Freddie should exist. But we need to get out of these bad policies now less than ever. The housing market continues to be a drag on the economy, and it’s worth putting off reforms until a time when so many homeowners aren’t underwater and are in a better position to absorb negative equity shocks. This isn’t to say we couldn’t begin instituting a long phase out to the deduction, but long term, smart, cautious reforms are needed here, not pulling the rug out. In full employment I’d support pulling the rug out.

Deregulation is important, and necessary, and too much regulation is a problem. But it’s not the problem the economy is facing right now. Attempts to focus on regulation are a distraction, and we’re not going to deregulate our way to full employment. We need to focus on deregulation now less than ever.

I am a creative destruction proponent and regulatory burden is a big long-term concern of mine. I wish that was what was causing our current malaise, I really do. Everyone likes to have their beliefs confirmed, and Now More Than Everism feels good. But it isn’t the problem.

So now it’s your turn. Help prove Russ Roberts’ cynicism wrong, and tell us what favorite policies of yours we need Now Less Than Ever. These can be things that either would be downright harmful now, or that we simply shouldn’t be focusing on and aren’t as important as actual recession cures.

Let’s be realistic, probably nothing. But I could be proven wrong by a new film he stars in that has the potential, at least, to raise some interesting ethical questions. Here is the summary from Wikipedia:

In a retro-future when the aging gene has been switched off, people stop aging at 25 years old. However, stamped on their arm is a clock of how long they will live. To avoid overpopulation, time has become the currency and the way people pay for luxuries and necessities. The rich can live forever, while the rest try to negotiate for their immortality.

And here is the trailer:

A frequent argument made in favor of organ markets is that donating a kidney does not lower life expectancy. But is the morality of kidney markets contingent on this fact, and how certain are we of this? I’ve written about this issue before.

The question is, do you object to markets in life years? If so, then it would seem that the argument that kidney donations do not decrease the life expectancy of the donor isn’t just an argument in favor allowing it, but a necessary condition for it.

This raises the importance of this question significantly. Has there ever been a randomized study done on kidney donation?  Clearly there is a selection bias here in that unhealthy people are unlikely to donate. If it turns out that kidney donations do decrease life expectancy, will supporters of these markets (like myself) change their minds? Or does the morality really hinge on whether there is a net increase in lifespan?

Another question about markets in life years is that it is just an explicit version of trade that is already occurring. Miners, commercial fisherman, and others in dangerous occupations already trade expected life expectancy for money.  Does the narrowing of the variance around that expectation increase the immorality of the transaction? Or is there some certainty threshold you cross where it becomes immoral? Surely it isn’t 100% certainty, right?

Anyway, these are the amateur philosophical thoughts of an economist tossing these ideas around. I’m sure more philosophically sophisticated people than I can explain clearly and persuasively the right, wrong, and unsettled of this issue.

Due to it’s decentralized nature, it’s hard to get a grasp on what the specific goals and complaints of Occupy Wall Street are. But it seems pretty clear at least one complaint of theirs is that “big banks are too big”. But if you think this is true, and you wanted to end it, then why would you occupy Wall Street of all places? What do they expect Wall Street to do about this? Voluntarily shrink? Even if they managed to convince current bank management to do this because… um… the drum circle had a persuasive beat, those managers would be kicked out by shareholders, and rightfully so. And what do they expect Washington to do about this? Break up the big banks? This is probably what they have in mind, but it’s a pipe dream.

Not that there’s anything wrong in protesting in favor of pipe dreams, but if occupying Wall Street and occupying Washington won’t actually help shrink big banks, then what will? Occupy your neighbors, friends, families, and anyone you know who uses the big banks. Tell them to take their deposits out and put them in a local credit union or small bank. Tell them to take loans from these places. Big banks are big for a reason: they have a lot of assets and make a lot of money. They need your deposits, they need to charge you fees. If Americans don’t want Big Banks to be big, then stop using them. There is a very simple way for everyone to vote with their pocketbooks and put their money where their mouths are. So instead of yelling at banks to stop taking deposits and fees, yell at the people around you to stop giving them.

From a new paper:

Do online consumer reviews affect restaurant demand? I investigate this question using a novel dataset combining reviews from the website and restaurant data from the Washington State Department of Revenue. Because Yelp prominently displays a restaurant’s rounded average rating, I can identify the causal impact of Yelp ratings on demand with a regression discontinuity framework that exploits Yelp‟s rounding thresholds. I present three findings about the impact of consumer reviews on the restaurant industry: (1) a one-star increase in Yelp rating leads to a 5-9 percent increase in revenue, (2) this effect is driven by independent restaurants; ratings do not affect restaurants with chain affiliation, and (3) chain restaurants have declined in market share as Yelp penetration has increased. This suggests that online consumer reviews substitute for more traditional forms of reputation…

This is the age of the consumer. One thought this prompts is that when better information allows choices that are more aligned with preferences, it will not show up directly in the consumer price index as an decrease in real prices, even though the standard of living attainable at a given income has gone up.

Say restaurant at restaurant A you can buy a util for $1, but at restaurant B you can buy 1.5 utils for $1. If you were unaware of restaurant B or believed the price of utility to be higher there, then becoming aware of it due to reviews decreases the real price of utils for you, and so is a decrease in your cost of living.

I won’t put forth any guestimates about how much this is worth, but it applies to at least food, arts and entertainment, housing, and automobiles.

I wrote recently that my mind was changed by the evidence on how much underwater homes were causing a decrease in mobility which in turn was causing higher unemployment. I believe it does not explain much of the current unemployment we are seeing. A new paper defends the connection between lower equity and lower mobility. The paper, by Ferreira, Gyourko, and Tracy is an update on an earlier paper of theirs that includes 2009 American Housing Survey data and improves some coding and econometric issues highlighted by another recent paper by Schulhofer-Wohl that was critical of their work.

One criticism that FGT makes of Schulhofer-Wohl is that some observations which they code as moves are in fact temporary moves, and not permanent moves.  It is strikes me as debatable as to which type of move is more relevant for labor markets, and the effects of both are worth knowing.

Another issue is that knowing who has moved today from AHS data is easier to know once future data arrives, and so you can be conservative and code censor observations where move status is unclear, waiting for future data to clarify the issue. Or you can can generate a more inclusive measure of moving and risk including false positives. As FGT state, these coding decisions are consequential for the results:

…it still is useful to understand that the potential fragility of our results (and, possibly, those who came before us) arises from the fact that it is difficult to properly measure mobility in a number of cases.

In the end, it seems likely that underwater homes are decreasing housing mobility defined as permanent moves. I also agree with FGT that the true extent of this won’t become clear until future data arrives.

However, this falls short of providing evidence that housing equity is affecting labor markets. Looking at other information from AHS data, FGT note that:

Most moves are for quality-of-life, personal/family and financial reasons, and do not appear to be primarily job-related. This is especially the case for local moves. In contrast, longer distance moves, particularly those that cross a state border tend to be job-related. One potential implication of these data is that financial frictions to household mobility are more likely to reduce local moves such as trade-up purchases that need not have any significant spillover effects for labor markets.

This, they point is, is consistent with other studies on the issue. I agree with the reasoning here, and so I think it remains safe to conclude that the evidence suggests housing equity led mobility declines are not a significant cause of unemployment.

Jon Huntsman made the important and underappreciated argument that immigration could help lift housing markets:

“Why is it that Vancouver is the fastest growing real estate market in the world today? They allow immigrants in legally and it lifts all boats. We need to focus as much on legal immigration.”

Suzy Khimm at the Washington Post attempts to throw some cold water on Huntsman’s argument, but I think she gets it wrong. Or more accurately, economist Paul Dales, whom she quotes, gets it wrong. He argues that immigration wouldn’t be significant enough to sop up the excess demand in housing and thus wouldn’t make much of a difference:

…in the short term, the impact may be comparatively negligible. More immigrants overall could have a “marginally positive” effect on the U.S. market by buying vacant homes, but “any impact would be almost unnoticeable” on a national scale given the magnitude of the excess supply, says Paul Dales, a Toronto-based economist for Capital Economics, a research firm. Dales estimates that the overhang is at least one million, and potentially as high as three to four million homes. So even a sudden influx of immigrant homebuyers wouldn’t be enough to make a dent in the market, realistically speaking

There are a couple big missing pieces here. First off, what level of immigration is Dales talking about? If an extra 100,000 a year more isn’t enough, then we can let in an extra 3 million. From his own numbers, this would likely sop up the excess supply, so surely a sudden influx of a large enough amount would make a significant dent in the market.

Second, he’s ignoring the role of expectations. If we commit to some higher level of immigration each year over the next decade, than that changes the expectations for developers about the level of demand they will face, and should help spur development immediately.

I’m glad to see this issue getting discussed, and really glad to see a high profile Republican proposing it, but so far I’ve yet to see an economic argument against it that can’t be solved by increasing the proposed number of immigrants. The argument that such a policy is politically unfeasible is surely in part a function of the fact that journalists and economists aren’t constantly reminding people that, political feasibility aside, more immigration represents one of the best available policies to attack this recession.

In the discussion on teacher employment that Tyler and Karl have been contributing to, Tyler makes a point I want to quickly address:

Note this is a sector where there is a growing realization that quite a few of the workers should, for non-cyclical reasons, be fired anyway.

This is a reason why it would have been possible to fire a significant number and do so consistent with a desirable structural adjustment, thus making the decline not a bad thing per se. Districts could have tried to identify and fire the least productive teachers consistent with Hanushek’s recommendation that we do so.  However, due to LIFO and other restrictive policies I would venture that is by and large not what is happening, and the teachers laid off are simply the most recent hires, or those in areas where you don’t  necessarily want layoffs back but schools have an ability to do so, such as music and art. I don’t have any data on this, but it is what I’ve observed, and I wouldn’t guess this is a controversial point.

Because of this I don’t see any reason why Tyler’s point should be given much of any weight in considering whether we should hire more teachers or not. I’m open to persuasion if someone has actual data on this indicating I am incorrect.

Here are a two, at least, that turned out to be pretty correct and not widely recognized in 2005:

2. I would think that the U.S. economy is overinvested in non-export durables, most of all residential housing.

3. I would think that we have piled on far too much debt, in both the private and public sectors.

The rest can be found here.

I have some very quick thoughts in reply to Erik Kain’s post at Forbes comparing unions and corporations. His point, in brief, is:

Corporations are legal entities, sanctioned by the state. Why should we be any less sanguine about unions than about corporations? Corporations pool capital and resources, unions pool labor. What’s the difference?

One important difference is that corporations are subject to anti-trust regulation. However, I think libertarians who are otherwise critical of anti-trust activity should be wary of invoking this too strongly. If the market is the best mechanism for ensuring firms do not behave anti-competitively, then why won’t that work for unions?

Another important difference is that, as Coase argued, there are costs to using a price mechanism to coordinate economic activity, and corporations exist as an alternative institution for when such transaction costs are high. One can conceivably frame the voice function of unions in this way as well, however I think that’s better characterized as public goods problem where the group collectively benefits and individuals have insufficient incentives to express worker preferences.

The other “face” of unions, other than the voice face, is the monopoly face. One the one hand economists generally recognize that this is a problem with unions, not a benefit. On the other hand, many non-economists who favor unions use this as an explicit justification unions. If you see anti-competitive behavior as an unintended downside of unions, then one can draw parallels to corporations. If, however, you see anti-competitive behavior as a reason that unions exist, then the comparison falls apart.

The most important difference between the two is that unions suffer from a much more problematic fundamental legal framework. Labor economists are much more likely to argue that the fundamental laws defining unions need reform than IO economists are to complain similarly about corporations.

So what are the complaints? Economists generally agree that worker voice is an important and useful function of unions, and yet unions are vastly diminished in the economy. The problem is that the laws regulating unions, in part due to the way they encourage antagonistic relations with management, have led to what is likely an undersupply of the fundamental purpose of unions: worker voice. As an institution they are failing to provide their primary benefit. On the other hand, the monopoly face of unions is also problematic and some economists argue incompatible with a dynamic economy, but labor laws discourage alternative forms of worker voice that are less prone to these anticompetitive effects.

This isn’t to say corporations are perfect, or that no unions provide net economic benefits. But to put things in overly reductive terms, many economists who are pro-union and many who are anti-union agree that the fundamental laws defining and regulating unions need reform. The same can not be said of corporations.

There is much more to be said about this issue and I don’t consider the above comprehensive overview, but rather a few aspects.

Writing in Bloomberg View, Ed Glaeser argues, among other things, that the GSEs should wait to sell the stock of housing they own slowly:

Exploring options makes sense, because selling homes too quickly means low prices, especially if you are trying to move thousands of foreclosed homes at once. Yet the government needs to be quite careful here as well, because renting homes that were meant to be owned is never easy.

The case for slow sales was made in a classic paper by David Genesove and Chris Mayer, which found that Boston condominium sellers with high loan-to-equity levels sold their units more slowly and got substantially higher prices. Steve Levitt and Chad Syverson found that real estate agents, who presumably know more about housing markets than ordinary sellers, typically take 9.5 days longer to sell their homes and receive 3.7 percent higher prices, holding everything else constant.

By contrast, my colleague John Campbell, along with his co- authors Stefano Giglio and Parag Pathak, estimate a general forced-sale discount of 18 percent and a foreclosure discount of 28 percent.

In a frictionless, efficient market for a commodity good the government could not expect to make money by holding on to the houses and renting them since the net present value of the returns to renting for a year and then selling would be equal to the price they could get for the houses today. Glaeser cites Genesove and Mayer as providing justification for why this might not be the case. However, it is my recollection of this paper that the way that a home seller increases the sale price by waiting is through housing being in a matching market. In this kind of market, the seller gets a higher price by waiting for a better matched buyer. The problem here is that in a matching market you presumably find a better buyer by having the house on the market for longer, not simply by waiting until a later date to sell it. If I recall correctly, this is what Genesove and Mayer argue. In this case, Glaeser’s argument for renting and waiting to sell -at least as justified by the matching market- does not hold.

One could still argue that the optimal sale time of a stock of houses is slow based on the literature on forced sales, which Glaeser also cites. So this is not to say the rental idea is not a good one relative to quickly dumping all the houses onto the market, just that one should caution against interpreting the literature for time-on-the-market as applying to units which are being rented, and thus are not in fact on the market.

David Wessel at the Wall Street Journal reports that President Obama will nominate Alan Krueger to be the new head of the CEA. It’s interesting to note that, among his other areas of research, Krueger done important work on occupational licensing. Here is a paper he co-authored with Morris Kleiner showing that 35% of jobs are licensed or certified by the government. There they report:

Our estimates of the relationship of occupational licensing and wages is consistent with the hypothesized role by members of an occupation to raise wages by using the powers of government to drive up requirements and capture work for the regulated workers for larger geographic areas. These estimates suggest a strong role for the monopoly face of licensing in the labor market. Indeed, the wage premium associated with licensing is strikingly similar to that found in studies of the effect of unions on wages.

And here is an earlier paper, also with Kleiner, on the same. If one is concerned about lowering the long-term unemployment rate, improving the functioning of labor markets, and making it easier for workers to enter into more skilled service jobs, occupational licensing is a good place to look.

Wessel also notes that Carl Shapiro is also being nominated to the CEA. Importantly, Shapiro has done work on patents and antitrust. Here is a summary of a relevant paper:

Economists and policy makers have long recognized that innovators must be able to appropriate a reasonable portion of the social benefits of their innovations if innovation is to be suitably rewarded and encouraged. However, this paper identifies a number of specific fact patterns under which the current U.S. patent system allows patent holders to capture private rewards that exceed their social contributions. Such excessive patentee rewards are socially costly, since they raise the deadweight loss associated with the patent system and discourage innovation by others. Economic efficiency is promoted if rewards to patent holders are aligned with and do not exceed their social contributions. This paper analyzes two major reforms to the patent system designed to spur innovation by better aligning the rewards and contributions of patent holders: establishing an independent invention defense in patent infringement cases, and strengthening the procedures by which patents are re-examined after they are issued. Three additional reforms relating to patent litigation are also studied: limiting the use of injunctions, clarifying the way in which “reasonable royalties” are calculated, and narrowing the definition of “willful infringement.”

Gizmodo reports on Rob Spence (shown above), who had his prosthetic eye replaced with a video camera. He echoes a prediction I have long been making:

People say no one would ever cut off their arm and replace it. If the technology gets there, which it looks like it will, people will think about it. They might be what you’d call an early adopter -a really early adopter- but people are going to have the option of having superior limbs, superior eyes at some point. So I think a lot of people will do it.

Someday, the ethical and legal controversies over whether bionically enhanced individuals can compete in existing sports leagues may actually make paying attention to sports interesting. We’re going to see interesting John Henry type contests in the future, except instead of competing against a steam hammer, he will be competing against a man with a steam hammer bionic arm.

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