The Great K-L Substitution

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Loukas Karabarbounis and Brent Neiman have a paper on the decline in labor’s share of income.

We start by documenting the pervasive decline in labor shares around the world at the country, U.S. state, and industry levels. Next, we document a decline in the relative price of investment goods, which we later show to be the key factor explaining the global trend in the labor share.

Recall that Timothy Taylor blogged on this topic (although not on this paper in particular). The story is that computers and computer-driven machines are getting cheaper, leading businesses to substitute capital for labor, causing labor’s share of income to fall.

To me, this, along with factor price equalization, is the most intuitively plausible account for trends in the distribution of income over the past twenty years.

On K-L substitution, TechReview has a new article on Brynjolffson and McAfee, although scanning it I did not see anything new (I liked their e-book and their debate with Tyler Cowen.)

College and Career Skills

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the highly dubious notion that college and career skills are the same. On its face, the idea is absurd. After all, do chefs, policemen, welders, hotel managers, professional baseball players and health technicians all require college skills for their careers? Do college students all require learning occupational skills in a wide array of careers?

No, that is not Bryan Caplan. It is Robert Lerman. Read the whole thing.

We Need 250 States

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Have you heard about the folks who want to create North Colorado? The reader who sent me the link suggested that it was time to plug my essay We Need 250 states. There, I wrote,

In 1790, the largest state in the union, Virginia, had a population of under 700,000. Today, Montgomery County has a population of over 900,000. Our nine-member County Council answers to about the same number of registered voters as the entire House of Representatives of the United States at the time of the founding of the Republic.

We cannot have an accountable democracy with such large political units. We need to break the political entities in the United States down to a manageable size.

I have just started reading America 3.0, by James Bennett and Michael Lotus. One of the early chapters offers a utopian scenario for America in 2040 in which there are 71 states. In that scenario, people have sorted themselves in part by political preferences. That would not work for someone like me, who lives in a blue state but who does not want to move. I think we need the option of virtual citizenry. Imagine I paid user fees in Maryland for specific services here, but for most tax and policy purposes I lived in a virtual state with other libertarian-minded folks.

Notes from a Civilization-Barbarism Symposium

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I heard a number of former Bradley Prize winners speak at a symposium Wednesday morning. That evening, there was an awards reception, at which this year’s winners were announced. Yuval Levin said,

Conservatives tend to begin from gratitude for what is good and what works in our society and then strive to build on it, while liberals tend to begin from outrage at what is bad and broken and seek to uproot it.

You need both, because some of what is good about our world is irreplaceable and has to be guarded, while some of what is bad is unacceptable and has to be changed. We should never forget that the people who oppose our various endeavors and argue for another way are well intentioned too, even when they’re wrong, and that they’re not always wrong.

…That’s not to say that conservatives are never outraged, of course. We’ve had a lot of reason to be outraged lately. But it tends to be when we think the legacy and promise we cherish are threatened, rather than when some burning ambition is frustrated.

Overall, I think that he spoke to the civilization-barbarism axis, as one would expect. He also tended toward Thomas Sowell’s “conflict of visions” analysis of the difference between liberals and conservatives.

The Bradley folks are conservatives, not libertarians. In the hallway conversations at the morning symposium, I heard lots of support for government snooping. (Speaking of the snooping program, David Brooks certainly took the conservative line, didn’t he? I think others have pointed out that Brooks is more concerned about the lack of checks and balances against Edward Snowden than about the lack of checks and balances against the intelligence agencies.)

One of the panels at the Bradley symposium addressed the topic of threats to freedom (other than economic policy, which was the subject of a separate panel). A couple of panelists cited Charles Murray’s “coming apart” thesis. Heather MacDonald thought that perhaps too much individual freedom was leading the lower classes into behaviors that lead to dependency. Later, after Robby George voiced similar concerns in response to a luncheon speech by Charles Krauthammer, Krauthammer replied that the Constitution was not designed to require virtuous citizens. On the contrary, it is meant to be robust to human failings. While I appreciate both sides, I think that in the end I come down on the side that a culture of virtue matters more than the Constitution. I think where I would differ from Murray/MacDonald/George is on where the cultural problem lies. I think it lies not with the lower classes but instead with certain parts of the elite. Another panelist, Brad Smith, spoke of the need for conservatives to regain control over the K-12 curriculum. I think that is closer to being on track, and if that is the case, then lamenting the breakdown of the traditional family is barking up the wrong tree.

MacDonald also cited the atmosphere of censorship in academia. Topics on which there is not freedom of speech include gender differences and IQ. But note that, again, this is a problem among the elite.

Krauthammer offered an optimistic take on the electoral prospects of conservatives. Among his reasons:

1. Polls show more conservatives than liberals.

2. The 2012 election was idiosyncratic. Romney lost on the issue of “who cares more about people like you?” in which Obama swamped Romney in exit polls by 60 percentage points. (Krauthammer did not give figures, but one can imagine something like 75 Obama, 15 Romney, 15 undecided)

3. The current scandals hurt Democrats, because they are the party of government.

4. The key issue of our times is the crisis of the welfare state, an issue on which conservatives are better positioned than liberals.

The immigration issue came up in the earlier panel on the economy. Victor Davis Hanson carried the ball for the restrictionist civilization-vs.-barbarism team. Gary Becker proposed using tariffs rather than quotas (although he did not use that terminology). I used that term in my essay ten years ago, and in fact you should read that essay to see how little the issue has changed during the interim.

Hamilton, Hooper, Greenlaw, Mishkin

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I thought I linked to their paper before, but I cannot find the post.*

we calculate the level of the primary government surplus that would be necessary to keep debt from continually growing as a percentage of GDP. We argue that if this required surplus is sufficiently far from a country’s historical experience and politically plausible levels, the government will begin to pay a premium to international lenders as compensation for default or inflation risk.

This sounds a lot like my Guessing the Trigger Point paper, in which I say that a key variable is the “pain threshold,” which is my term for “politically plausible levels” of the required fiscal adjustment.

I heard Jim present a different paper, on estimating the off-balance-sheet liabilities of the U.S. government, at a recent Cato event. I questioned the usefulness of an exercise that tries to come up with a single number, when so many of these liabilities are contingent (the government has written a lot of put options). Douglas Holtz-Eakin shot back that policy makers cannot handle multiple possibilities. They need one number.

Fine, then. If policy makers cannot handle something that is essential to financial management in any public corporation in America, tell me why we want them to manage trillions of dollars?

*Ah, here is where I linked before.

Robert Fogel

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Tyler Cowen notes his passing. One of his difficult books, The Escape from Hunger and Premature Death, had an enormous influence on my thinking. In fact, it was just one table, showing the long-term income elasticities of large categories of goods and services, that I have referred to many times. Indeed, The New Commanding Heights, the essay that Nick Schulz and I wrote, is hardly more than an extended riff on that table.

The Future of American Health Care Policy

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Tyler Cowen prefers,

The Singapore system, involving single payer for catastrophic expenses and health savings accounts for smaller expenditures. To varying degrees you can combine this with forced savings for the HSAs and price controls on service provision, both of which you will find in Singapore. Where “catastrophic” starts can vary as well. This is my first choice, although if you wish to dismiss it as “utopian” for the United States you have a point.

My view is that we are headed toward a two-tier system regardless of the political configuration. We will have a government system under which doctors are unhappy with how they are paid and how they are regulated, and in which consumers are denied some treatments that they otherwise would want. We will have a private system in which doctors and patients have more choice, but patients bear much more of the cost directly. People who rely almost entirely on the government system will tend to have lower wealth than people who use the private system.

I do not think that Americans are egalitarian enough or tolerant enough of a price-control regime to be willing to destroy the private tier. On the other hand, I do not think that they have enough confidence in markets to do without a large government tier.

I do not think that Americans would vote for the Singapore system. Maybe Singaporeans would not vote for it, either, but that country runs differently. Consider three choices:

1. Uninsured

2. Comprehensive insurance

3. Catastrophic insurance

Economists strongly prefer (3). But I think that most people around the world would prefer (1) or (2) to (3).

That does not mean that I want to give up on reforms that make catastrophic insurance competitive. On the contrary, I am willing to make the case for it any time I get the opportunity. Obamacare is designed to make it harder, not easier, for people to choose catastrophic insurance. That means either that Obama’s economic advisers failed, or perhaps didn’t try, to make a case that I believe they should have been making. As a result, I am pessimistic about the prospects for Obamacare. My book still needs to be read.

Comments on NSA Snooping

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1. Anyone who desires or expects government agencies to relinquish the use of information-gathering should read David Brin’s The Transparent Society. Indeed, that book is a must-read for anyone who cares enough about the issue to pay attention to recent news reports.

2. I also claim that a must-read is my own article, The Constitution of Surveillance, written nine years ago.

3. I hope people are putting the NSA program in context with the Boston Marathon bombing. Here you go to all this effort to use Big Data to find terrorists, and when you are handed hard, actionable intelligence from the Russians you muff it.

4. I bet you will not find politicians putting the NSA program in context with Chinese cyber-spying, and explaining why ours is good and their is bad. I don’t think politicians are capable of doing the hair-splitting, so I think what they are left with is “What we do is good because we are good, and what they do is bad because they are bad.”

5. The issue is an uncomfortable one for libertarians, because I think that most people believe that the government is snooping in their interest. The majority may even be right about that. I myself have less of a problem with the snooping per se than with the secrecy of the programs. In my view, it is the secrecy, along with an absence of strong institutional checks, that is bound to lead to abuse. Also, see point (3).

6. The issue is an uncomfortable one for progressives, because their impulse is to treat the Obama Administration differently than they would have treated the Bush-Cheney Administration.

7. The issue is an uncomfortable one for conservatives, because it turns them into strange bedfellows. The civilization-barbarism axis clearly argues in favor of government snooping to defend citizens against barbarians, so conservatives feel inclined to betray libertarians and instead offer aid and comfort to President Obama.

8. How does snooping technology relate to the idea of competing private security agencies? Isn’t snooping technology going to be a vital tool for security agencies? What if a rogue private security agency conducts snooping in a way that customers of other agencies see as abusive? What if there are such significant economies of scale in snooping that it is a natural monopoly? David Friedman probably has thought about this.

Maybe the key point is (5). Government officials will argue that what they do must remain secret. They cherish secrecy. They claim that it is for our own good that we do not know what they do. I would say that such claims are often made and rarely true.

Obviously, a lot of other people have written about this. I recommend David Strom’s post (he is the St. Louis technology consultant, not the North Carolina libertarian) for its useful links.