Monthly Archives: December 2015

Dean Baker on the One Percent

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He writes,

This paper argues that the bulk of this upward redistribution comes from the growth of rents in the
economy in four major areas: patent and copyright protection, the financial sector, the pay of CEOs and other top executives, and protectionist measures that have boosted the pay of doctors and other highly educated professionals.

Pointer from Mark Thoma. Baker backs up this opinion with evidence. he then concludes

The implication of this argument is that progressives need not think of themselves as using government against the market. Rather they should seek to find ways to use market mechanisms to bring down the incomes of the wealthy in the same way that wealthy have sought to structure markets to lower the income of everyone else.

If progressives want to look at ways that financial policy, patent policy, and occupational licensing create artificial rents rather than create “public goods,” that works for me.

Intelligence, Leftism, and Academia

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Noah Carl tries to sort out the relationships. (pointer from Tyler Cowen.)

I first bring together data on the political beliefs of three separate populations: academics, the general population, and a high-IQ population. I then calculate the proportion of each population that identifies with various political positions (e.g., thinking of oneself as a liberal, supporting the Democratic Party). The extent of overrepresentation for any particular position is simply the percentage-point difference between academics and the general population (i.e., the total length of the right-hand bar in Fig. 1). And the fraction of this overrepresentation that can be explained by intelligence is simply the percentage-point difference between the high-IQ population and the general population divided by the percentage-point difference between academics and the general population

The results:

Overall, intelligence may account for: most of the disparity between academics and the general population on the issues of abortion, homosexuality and traditional gender roles; none of the disparity on the issue of income inequality (but see Section 3.2); less than half the disparity on liberal versus conservative ideology; and much less than half the disparity on Democrat versus Republican identity.

The conclusion:

Possible explanations for the remaining overrepresentation comprise: self-selection on personality, interests, cognitive style or preferences; social homophily and political typing; self-selection on strength and stature; individual conformity; status inconsistency; and discrimination.

I have to believe that a lot of the over-representation comes from discrimination. If you ask left-wing academics, they will tell you that essentially all of the over-representation comes from intelligence. This tells you that they associate conservative beliefs with stupidity and are therefore almost certain to under-rate the intelligence of anyone who fails to chime in with the appropriate left-wing dogma when relevant topics come up in casual conversation.

But read the paper for yourself. I think it is an important one.

Vegetables, Meat, and Resource Use

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This story says,

according to new research from Carnegie Mellon University, following the USDA recommendations to consume more fruits, vegetables, dairy and seafood is more harmful to the environment because those foods have relatively high resource uses and greenhouse gas (GHG) emissions per calorie.

I put zero trust in this sort of study. I think that market prices give you a much better indicator of resource cost. I think that environmental scientists have not business telling us that they know better.

Social Security is Still Going Broke

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Timothy Taylor writes,

the gap between benefits and receipts doesn’t change much after about 2035. This tells you that the Social Security problem is essentially a one-time problem, occurring as a result of the retirement of the boomer generation. If we can enact a series of reforms that moves up the receipts line and moves down the benefits line, then after about 2035 the system can be fairly stable for decades into the future.

I have a different view. Longevity has been going up pretty steadily at a rate of 2.5 years per decade. In recent decades, much of that increase has occurred at the high end (reductions in infant mortality used to be a big factor, but that has reached an asymptote). The age of government dependency (aka the Social Security retirement age) has not been increased as much. If those trends continue, then the ratio of government-dependency years to working years goes up inexorably. A system in which workers pay for retirees faces very troubling arithmetic.

Having said that, Taylor does a nice job of summarizing a CBO report on options for improving Social Security finances. I think he is more charitable than I would be toward the left’s approach, which strikes me as more of a “deny that there is a problem” strategy.

Significance Comparisons and Measurement Error

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Leilan Shu and Sara Dada report,

We first use a simple linear regression model of average test score and average household income to first establish a positively correlated relationship. This relationship is further analyzed by differentiating for other community-based factors (race, household type, and educational attainment level) in three multiple variable regression models. For comparison and to evaluate any consistencies these variables may have, the regressions were run on data from both 2007 and 2014. In both cases, the final multiple regressions found that average household income was not statistically significant in impacting the average test scores of the counties studied, while household type and educational attainment level were statistically significant.

Pointer from Tyler Cowen. If this were credible, it would seem to suggest that “schooling inequality” is really ability inequality.

BUT…Whenever somebody says that “X1 does better than X2 at predicting Y,” watch out for the impact of measurement error. A variable that is measured with less error will drive out a variable that is measured with more error.

In this case, suppose that the variable that matters is “parents’ resources.” Income could measure that variable. Educational attainment could predict that variable. Income has many sources of measurement error–if nothing else, one year’s income could be high or low due to volatility. Educational attainment has fewer sources of measurement error. So even if parents’ resources is the true cause of children’s test scores, you could wind up with a zero coefficient on income, particularly if you include another regressor with lower measurement error.

And this is one of many reasons to prefer experimental data to regressions.

Handle on Health Policy

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In a comment, he writes,

As bad as it may presently be, the whole domain between the current equilibrium and a more genuinely market-like equilibrium is a vast no-man’s-land of even more dysfunctional instability. This type of circumstance is usually a big factor when bad systems are surprisingly stable.

Again, anyone that proposes a reform that relies on nudging the system towards the market-equilibrium from where we are now by taking one little step is being very naive. One has to accept the possibility that we might have to pair pro-market moves with non-Libertarian coercive regulatory actions, at least in the short-term.

These are provocative statements, with which I am inclined to agree. For a long time, I have been saying that he basic problem we face is that in the United States we undertake many medical procedures that have high costs and low benefits. There are two directions that we can turn in order to change this. The “left turn” is toward government rationing. The “right run” is toward the price mechanism, with market forces turned loose and health insurance providing only catastrophic coverage, so that consumers must confront the true marginal cost of what I call “gray area medicine,” where the benefits are low and uncertain.

Obamacare is a weak left turn, that neither solves the basic problem (high-cost, low-benefit medical procedures) nor satisfies the goals of those on the left to equalize access to health care services. My reading of Handle’s comment is that what is likely to happen if Republicans win in 2016 is a weak right turn, which will not solve the basic problem and not satisfy the goals of the right to foster a flexible, innovative health care system.

I will repeat my mantra that what individuals want is unlimited access to medical services without having to pay for them. To the extent that politicians attempt to satisfy this, they create incentives for ever-increasing spending. That describes the status quo, which Obamacare did not change.

From where we are now, it is hard to move either left or right. Households and businesses are basically satisfied, despite grumbling about higher health insurance premiums and higher deductibles. Health insurance companies are basically satisfied, despite grumbling about regulation. Health care providers are basically satisfied, despite grumbling about insurance company practices. So the politically winning approach is to tell everyone “you can keep your ___.”

Ricardo Hausmann on the Causes of Poverty and Inequality

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He writes,

The poor people are not being exploited. They’re being excluded from the higher productivity activities. It’s not that the capitalists are taking a very large share of what they produce. It’s just that they produce very little in the first place.

Emphasis in the original. What does he mean by “excluded from”?

if somebody is expected to be poor, you don’t want to open a bank account for him because the fixed cost of opening a bank account is not going to be recouped through the little money or the few transactions that a poor person is going to make. So banks decide not to include the poor. The same thing happens with other services: if you are going to consume very few kilowatts or kilobytes, it doesn’t pay to connect you and if your expected wage is low relative to a bus ride, it does not pay to commute to work. As a consequence, this generates a trap in which you don’t connect people because they’re poor and because they’re not connected, they’re unproductive and hence poor.

He concludes:

policies can be very important in determining the universality of access to some inputs. I think it’s very important to have a serious discussion of what are these inputs that need to be accessed universally and what is a reasonable strategy to get there.

There are important ideas here. My thoughts.

1. As a metaphor for these ideas, think of people as either living on the grid (where they can be highly productive) or off the grid (where they live in poverty).

2. The tangible components of the grid grid include water and sewage facilities, electricity, communication and transportation infrastructure, and schools.

3. The less tangible components of the grid include property rights, reliable low-cost financial intermediation, a well-functioning legal system, cultural norms that support economic activity, and what Garett Jones calls the Hive Mind (high average intelligence).

4. Both in theory and in practice, the grid requires a stable, well-functioning government. Sorry, anarcho-capitalists.

5. Nonetheless, the grid is very much an emergent phenomenon. You cannot create the grid from scratch. Sorry, seasteaders and charter-city enthusiasts. Sorry, Ricardo Hausmann?

Dean Baker, Watch Your Back

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He writes,

This argument seriously misrepresents the issues with Fannie Mae and Freddie Mac. The real problem was that they issued trillions of dollars in MBS that were implicitly backed up by the government. At the time they failed in the summer of 2008, the generally held view in financial circles was that the government would be obligated to honor their MBS regardless of whether or not it kept Fannie Mae and Freddie Mac in business. In other words, the issue was not the $180 billion bailout (about which elite types routinely and misleadingly say we made a profit) the issue was the huge amount of bad MBS that helped propel the housing bubble.

This was a direct result of the perverse incentives created by a system where private shareholders and top executives stood to profit by passing risk off to the government. This incentive does not exist today. This incentive does not exist today. (The line is repeated because policy folks have a hard time understanding it.) As long as Fannie and Freddie are essentially public companies, that do not offer high returns to shareholders and pay outlandish salaries to CEOs, no one has incentive to take excessive risks.

Pointer from Mark Thoma. The argument to which he refers is that government support for mortgage securitization is fine, you just do not want to depend on one or two big securitizers.

I think that Baker should watch his back, because the ruthless housing finance lobbyists are back in action. For saying similar things, I have had quite a few epithets hurled at me (“Koch brothers mouthpiece” being one of the milder ones). Agree or disagree with Dean Baker, at least you can say that his opinions are not for sale to the mortgage finance lobby.

Which Economist Are You? The Game

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I played (you can play here), and I got Steven Kaplan. His field is not one that interests me that much, he is not a familiar figure to me. But coincidentally, James Pethokoukis recently interviewed him. I agree with much of what Kaplan says in the interview, but I have my doubts about what he says near the end:

you have an increased regulatory burden on small businesses that everybody talks about – I think is real. And that would be my guess why you see fewer of the kind of mom-and-pop type startups. And you see – but you see no diminution on the high potential startups because they’re high potential enough that regulation doesn’t actually matter.

My guess is that the mom-and-pops are suffering more from competition than from regulation. I think of the challenge of opening up an independent retail store when there are so many advantages held by large chains and by Amazon and Wal-Mart. I think of the challenge of opening an “average” restaurant when there are now chains in every niche, where 30 years ago the only ones not in fast-food hamburgers were KFC, Taco Bell, and Pizza Hut. I think of individual medical practices giving way to large organizations–some of that is driven by health care policy, but I think that some of it is natural evolution, as the share of medical care that is produced by factors other than doctor-labor-time increases. I think of small retail financial firms (brokers, local banks) giving way to much larger institutions. There, too, regulatory influences are pervasive, and you have to attribute some of the concentration to Too Big to Fail. But on the other hand, big banks were over-regulated as of 1975, and I would attribute most of the consolidation that has taken place over the past 40 or 50 years to natural market forces operating in a regulatory environment that allowed more competition.

If you put it all together, I think that it takes a lot more brainpower to start a successful company of any type today than it did 50 years ago. Meanwhile, the large enterprises can afford to acquire lots of brainpower, so there is not a whole lot of it sitting around to start mom-and-pops.

Going back to the IGM survey, my most outlandish opinions relative to the IGM panel of experts were:

–I disagree that health insurance subsidies will produce benefits that exceeds the costs

–I strongly disagree that performance of a teacher’s students on standardized test scores can predict how well the teacher does at improving future outcomes of students.

I think the evidence on health spending is that at the margin it has no effect on outcomes.

I think that the studies that purport to show that teachers make a difference are a suspect molehill next to the mountain of evidence for the null hypothesis. And even if they do make a difference, test scores are too noisy an indicator to rely on.

Brad DeLong Stumbles

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He writes,

The combination of representative-agent modeling and utility-based “microfoundations” was always a game of intellectual Three-Card Monte. Why do you ask? Why don’t we fund sociologists to investigate for what reasons–other than being almost guaranteed to produce conclusions ideologically-pleasing to some–it has flourished for a generation in spite of having no empirical support and no theoretical coherence?

Pointer from Mark Thoma.

About the very same methodology, Olivier Blanchard famously wrote, “The state of macro is good.” Instead, Brad DeLong has stumbled over the truth, but will he pick himself up as if nothing happened?

We have one historical macroeconomic path, and we have many interpretive frameworks from which to choose. We can reconcile very disparate frameworks to the observed data. How shall we choose among frameworks?

The “microfoundations” criteria, whether used by New Classicals or New Keynesians, are silly. The macro-economy is not one owner-worker employed (or not) in a single GDP factory.

Still, there is something to be said for using microeconomic principles to guide your interpretive framework in macroeconomics. Every economist does so. We just diverge in which microeconomic principles we use as focal points.

In my view, the workhorse AS-AD model is already too aggregated. I am convinced by neither DeLong’s Wicksellian version nor Sumner’s Market Monetarist version. Instead, A short version of my macro framework is here. A longer version is in progress.