Monthly Archives: April 2014

Krugman Reviews Piketty

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He sticks to economics, which makes the review quite readable. He drops this sentence into the end of a minor paragraph:

the fact is that the most conspicuous example of soaring inequality in today’s world—the rise of the very rich one percent in the Anglo-Saxon world, especially the United States—doesn’t have all that much to do with capital accumulation, at least so far. It has more to do with remarkably high compensation and incomes.

In fact, that is one of the more damning criticisms of Piketty that one is likely to read. Krugman stops short of calling the book an intellectual swindle, but it appears to be one (I have yet to read it).

Suppose we know two things: First, wealth at the high end of the wealth distribution has increased a lot. Second, the share of wages and salaries in GDP has decreased. Do these two things tell us that capital is gaining at the expense of labor?

The swindle here is to treat “capital” and “labor” as homogeneous, separate categories. You are either a worker or a coupon-clipper. In fact, most people are labor-capitalists. They invest in human capital. They decide how much to save and how much risk to take with their savings. And there is a lot of heterogeneity among these labor-capitalists.

Bill Gates, Jeff Bezos, and Mark Zuckerberg are not coupon-clippers. Their wealth comes from a combination of skill and risk-taking.

Looking at the 21st-century economy through the filter of the Marxist categories of “capital” and “labor” is not particularly insightful. This is not a good era for either a plain coupon-clipper or an ordinary worker to accumulate great wealth. For that purpose, it is better to be a successful entrepreneur or a high-skilled worker.

I think that Krugman correctly views Piketty’s scenario dominated by inherited wealth as offering a speculative analysis of the future. It does not well describe the present.

For example, suppose you look at the Forbes 500 or somesuch, meaning a list of the wealthiest Americans. Compare the list in 2010 to the list in the supposedly egalitarian era of 1950-1970. I will wager that the 2010 list has a smaller fraction of inherited fortunes as opposed to fortunes that were amassed by the wealthy themselves.

Moreover, looking at the low interest rate on risk-free assets today, I would say that the near-term future is one in which the inheritors shall be meek. The next generation of great entrepreneurs should easily surpass the heirs of current fortunes.

UPDATE: Steve Sailer has links to some papers on the Forbes 400. In particular, one paper by Kaplan and Rauh, says

We find that the Forbes 400 in recent years did not grow up as advantaged as in decades past. Those in the Forbes 400 today are less likely to have inherited their wealth or to have grown up wealthy.

A Case Against Charter Schools

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Several readers have pushed back on my support for charter schools. I admit that it is difficult to reconcile with my belief in the null hypothesis, which is that no educational intervention makes a real difference. I guess I would say that my support for charters is tentative and based more on sympathy for entrepreneurs than on hope to find an education “cure.”

Here is a post from a few months ago from the blog Education Realist.

As any Cato wonk knows, charters are killing private schools. Increasing charters increases public school spending. More charters will increase the number of kids under government oversight, give even more control to the states and ultimately the federal government. So why are choice people pro-charters? Charter schools purport to give choices but actually just drive up public education costs for the express benefit of a lucky few underrepresented minorities or suburban whites and Asians too cheap to send their kids to private school. As long as I’m ordering the world, choice folks, can’t you go back to pushing tax deductions for private schools? Then let Bill Gates pay tuition scholarships for URMs rather than fund meaningless and usually unsuccessful initiatives in his public school sandbox.

Thanks to a commenter for a generic pointer to the Education Realist blog.

I mostly disagree with the quoted paragraph.

1. I think of charter schools as having primarily a down-market appeal. Maybe I am falling for some public-relations stuff, but I don’t see them as competing with elite private schools. I don’t think they currently compete with elite public schools, for that matter.

2. The fact that charter schools are public schools poses problems for both the left and the right. For the right, they represent schools that are funded and regulated by government, even though they are not operated by government. To me, this is not such a big issue, since even with vouchers, or for that matter with tax deductions, government is going to claim a rationale for regulating schools.

For the left, I think that the problems are more acute. Membership in teachers’ unions drops. I think that the balance of power shifts away from government school boards and toward parents.

One scenario for charters is that they could suffer from what I called a “stifling embrace” by the government. That is, left-wing politicians could endorse charters heartily, with a strong dose of regulation to make sure that charters “serve the community,” meaning that they are forced to adopt all of the worst practices of public schools.

On the other hand, there is also a scenario in which charters achieve a sort of escape velocity, and the education system becomes more decentralized and diverse. That is the scenario I tried to paint in my earlier post.

Meanwhile, it does not seem that more purist libertarian education reforms are getting anywhere.

Setting National Priorities, Revised Version

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Again, the inspiration is an old Brookings Institution series, called Setting National Priorities. The idea is to create a web document, with a lot of cross-references, that works top-down from a few high-level objectives down to specific administrative/regulatory and legislative changes. Schematically, it might be:

  1. Ultimate Objective I
    1. Intermediate Objective IA
      1. Administrative/regulatory initiatives
        1. Administrative/regulatory initiative ARIA1
        2. Administrative/regulatory initiative ARIA2
      2. Legislative initatives
        1. Legislative initiative LIA1
        2. Legislative initiative LIA2
    2. Intermediate Objective IB
    3. …
  2. Ultimate Objective II
    1. Intermediate Objective IIA
    2. …

At each level in the outline, there would be a single member of the Administration who is the “owner” responsible for execution. That is, there must be an organization chart corresponding to the outline. I will have more to say about the organization chart in future posts.

Here is a more specific example of a high-level objective and the lower breakdown.

  1. Increase the employment/population ratio by three percentage points. This objective will be owned by the chief of domestic government operations.
    1. Reduce for businesses the cost of compensation by 20 percent for workers earning less than $30,000 per year. This objective will be owned by the project manager for reducing the cost of compensation.
      1. Regulatory Changes
        1. Rewrite regulation X to say ____. This initiative will be owned by the head of the agency responsible for regulation X.
      2. Legislative Changes
        1. Pass legislation modifying employer-paid payroll tax rules to _____. This initiative will be owned by the project manager for the payroll tax legislative package.
    2. Reform safety-net programs and tax code in order to limit the total of implicit and explicit marginal tax rates for workers earning less than $80,000 per year to no more than 35 percent.
      1. Regulatory changes
        1. Rewrite eligibility rule Y to say ____. This initiative will be owned by the head of the agency responsible for eligibility rule Y.
      2. Legislative changes
        1. Enact legislation to change safety-net program Z to ____. This initiative will be owned by the project manager for the safety-net reform program legislative package.
        2. Enact legislation modifying employee-paid payroll tax rules to ____. This initiative will be owned by the project manager for the payroll tax legislative package.
    3. Replace anti-competitive occupational licensing rules with sensible consumer protection in health care and other services…[regulatory and legislative changes]

This is still very sketchy, but I hope it gives readers a better idea of the sort of thing I have in mind.

The Real Inequality Problem

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John Cochrane writes,

The worry is that we are more and more bifurcating into a market with a small number of “permanent,” high benefit, high hours worked, career jobs, and a larger group of “temporary” employees, limited in hours and incidentally limited in career and human capital development.

That sounds a lot like the academic job market. The tenured professors on one side of the inequality gap, and the adjuncts on the other.

But never fear. Progressive policies are here to solve exacerbate the problem. Casey Mulligan writes,

Under the Affordable Care Act, between six and eleven million workers would increase their disposable income by cutting their weekly work hours. About half of them would primarily do so by making themselves eligible for the ACA’s federal assistance with health insurance premiums and out-of-pocket health costs, despite the fact that subsidized workers are not able to pay health premiums with pre-tax dollars. The remainder would do so primarily by relieving their employers from penalties, or the threat of penalties, pursuant to the ACA’s employer mandate. Women, especially those who are not married, are more likely than men to have their short-term financial reward to full-time work eliminated by the ACA. Additional workers, beyond the six to eleven million, could increase their disposable income by using reduced hours to climb one of the “cliffs” that are part of the ACA’s mapping from household income to federal assistance.

Science and Cultural Wars

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Ezra Klein profiles Dan Kahan.

Consider the human papillomavirus vaccine, he says. That’s become a major cultural battle in recent years with many parents insisting that the government has no right to mandate a vaccine that makes it easier for teenagers to have sex. Kahan compares the HPV debacle to the relatively smooth rollout of the hepatitis B vaccine.

Actually, the HPV vaccine is not a guarantee against becoming stricken by HPV. It does not protect against all of the viruses in the family. Although I believe that there is still a case for this partial vaccination, I think that the advocates make it sound much better than it is. They make it seem as if getting vaccinated frees you to have relations without fear of getting the virus, and that is just plain not true.

Jonah Goldberg has a saying that “The left is the aggressor in the culture war.” I think that statement has some merit, looking Hobby Lobby or Brendan Eich or this example.

Tyler Cowen liked the article. I confess to being a bit disappointed. If you are going to write an article about “how politics makes us stupid,” then the article should be about how politics makes us stupid. Instead, this article is about how politics makes them stupid. It focuses solely on examples where the science is allegedly on the side of the left, and the right is culturally obtuse.

As an aside, the article says that climate-change deniers misuse scientific arguments. I think that this, too, is more of a two-way street.

Simon Wren-Lewis on the Phillips Curve

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He writes,

So we choose a microfoundation because it gives us the aggregate answer suggested by the data, and not because of evidence that this microfoundation is appropriate. We then insist that everything in that model has to be consistent with this microfoundation, and that our model has been built from only thinking about what individual agents do. Have we just replaced ad hoc with post hoc?

Read the whole thing for context. Pointer from Mark Thoma. My comments:

1. My joke is that the Phillips Curve went from being an empirical finding in search of theory to a theory in search of empirical support.

2. Empirically, the only thing of which we can really be sure is that the best predictor of inflation is the lagged dependent variable (this is hardly the only macroeconomic variable to which this applies). After that, the magnitude (and even the sign) of the relationship between wage growth and employment varies quite a bit depending on how you do your specification searching.

3. Once again, let my plug my macro memoir.

Thoughts on Charter Schools

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My latest essay, which is a bit unusual for me in that it promotes a national government policy.

It would provide grants to states to support the administrative apparatus needed to ensure that charter school operators are given both a fair opportunity to offer educational alternatives and timely audits to ensure that they meet their responsibilities to students and parents. The grants should be sufficient to cover much more than the cost of this administrative apparatus. That way, recalcitrant states will have a strong incentive to adopt best practices for approving and evaluating charter schools.

I am not entirely sure that this is a good idea. But living in charter-hostile Maryland, I think it would take something like this to get charters going here.

Karl Zinsmeister writes,

Twenty-five years ago, charter schools hadn’t even been dreamed up. Today they are mushrooming across the country. There are 6,500 charter schools operating in 42 states, with more than 600 new ones opening every year. Within a blink there will be 3 million American children attending these freshly invented institutions (and 5 million students in them by the end of this decade).

1. As I see it, the main advantage that charter schools have over public schools is fact that bad teachers will tend to be fired and bad charters schools will tend to be closed.

2. Charter schools may follow a Clayton Christensen “disruptive innovation” path. That is, at first they will cater to low-income consumers. However, as they prove themselves in that niche, they may rapidly move up-market. Right now, many affluent parents are very attached to their public schools. However, that is an equilibrium that could tip. If parents come to view charter-school children as having an advantage in, say, college preparation, they will exit the regular public school system with great haste.

3. Another reason that charters may take off quickly in states and school districts that allow them to compete is that good young teachers are likely to prefer working at charter schools. If this happens over the next five to ten years, parents will notice that it is getting difficult to find good public school teachers and easier to find good teachers at charters.

4. If there is a rapid move toward charter schools, I think that this exacerbates the problem of unfunded pensions for retired teachers. If public school enrollment levels off or declines, I believe that the share of the budget devoted to paying for pensions is bound to increase.

5. I suspect that, relative to public schools, on average charters undertake less left-wing indoctrination of students. This is possibly the main reason for conservatives and libertarians to get excited about charter schools.

6. The political opponents of charters have to prevent them from getting started. Where I live, the opponents have succeeded. But once charters become entrenched, getting rid of them is quite difficult. See NYC.

Ignorance, Exit, and Voice

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In this essay, I suggest that even if voters were knowledgeable about issues, our democratic process would still not be as desirable as having the exit option. This is in the context of talking about a recent book by Ilya Somin. In my view, an even more frustrating problem than voter ignorance is the enchantment that many people have with democratically elected leaders.

As I see it, reasonable government, including the protection of liberty, requires those in office to follow norms of behavior that are bound by Constitutional constraints and principles of limited government. The problem with democratic enchantment is that it sanctions whatever majority-elected political leaders can get away with.

And….?

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Nick Timiraos writes,

Mortgage rates could rise by as much as 1.5 percentage points for homeowners with weaker credit or smaller down payments under various legislative proposals to overhaul Fannie and Freddie Mac, according to a study prepared for an industry group.

The study purports to estimate what is seen. How about what is unseen? That is, suppose we reduce the distortions in capital markets that funnel money into high-risk mortgages. That means that the interest rate on high-risk mortgages goes up. And…? Some other interest rate goes down. It might even be the interest rate paid by firms undertaking productive investment.

But Inequality is the Defining Problem of Our Time

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Lawrence Kotlikoff writes,

The US fiscal gap now stands at an estimated $205 trillion, or 10.3 percent of all future US GDP. Closing this gap is imperative, and requires a fiscal adjustment of an immediate and permanent 37 percent reduction in spending (apart from servicing official debt), an immediate and permanent 57 percent increase in all federal taxes, or some combination of the two. The necessary size of this adjustment increases the longer it is put off.