Monthly Archives: May 2016

Intergenerational Income Immobility

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Guglielmo Barone and Sauro Mocetti write,

We focus on the Italian city of Florence, for which data on taxpayers in 1427 – including surnames, occupations, earnings, and wealth – have been digitalised and made available online. We matched these data with those taken from the tax records relating to the city of Florence in 2011. Family dynasties are identified by surnames. Table 1 offers a first flavour of our results. We report for the top five and bottom five earners among current taxpayers (at the surname level) the modal value of the occupation and the percentiles in the earnings and wealth distribution in the 15th century (the surnames are replaced by capital letters for confidentiality). The top earners among the current taxpayers were already at the top of the socioeconomic ladder six centuries ago – they were lawyers or members of the wool, silk, and shoemaker guilds; their earnings and wealth were always above the median. In contrast, the poorest surnames had less prestigious occupations, and their earnings and wealth were below the median in most cases.

Yes, this is reminiscent of and reinforces the findings of Gregory Clark in The Son Also Rises. Recall my review of Clark’s book.

Alex Tabarrok on Conformity Bias

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He writes,

Today, however, conformity is often counter-productive. Trying to enforce the arbitrary conventions of one’s in-group impedes social cooperation on the scale that makes modernity possible. Conformity also slows the development of new ideas and new ways of doing things–the essence of growth and progress. Even though conformity is now counter-productive the desire to conform and to enforce conformity is buried deep

I think it is much more complicated than that. Conformity is not some dysfunctional behavior pattern left over from our hunter-gatherer environment. Conformity is what makes any form of human progress and social cooperation possible. Re-read my piece on cultural intelligence.

The transition to modernity did not mean that people stopped imitating other people or stopped rewarding conformity or stopped punishing non-conformity. What happened was a shift in who was considered worthy of being imitated, rewarded, or punished. I read Deirdre McCloskey as saying that the prestige of some classes (warriors, hereditary aristocrats, dictatorial religious authorities) gradually declined, while the prestige of merchants and entrepreneurs rose dramatically. Along the way, a vast array of behavioral norms developed in the fields of commerce and politics, giving rise to what we call (classical) liberalism.

An issue that is currently very salient to me, and I believe to Alex as well, is how to sustain Enlightenment-era liberalism in the face of what appear to be powerful challenges. On the right, rising xenophobia represents a challenge (some would argue that the challenge comes from the xenos, who are causing the phobia). On the left, hostility toward capitalism and toward freedom of expression appears to be on the rise.

I share what I see as Alex’s worry that people’s ideas and values are regressing to a pre-Enlightment state. But I think that it is more complicated than just saying that the conformity dial has been turned up.

Norway and Denmark

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I did not try to delve into economic issues there, but here are a few thoughts:

1. Food costs at least three times what it does in the U.S., and hotels everywhere seem comparable to Manhattan in cost. Using airbnb helps cut expenses. Mass transit is efficient but not cheap. Overall, if you want a place where your dollars stretch far, go somewhere else.

2. People in Norway seemed to be very well off. We saw lots of high-end baby strollers, of the brands that cost close to one thousand dollars in the U.S. They cost about the same there. And we were told that many parents own more than one baby stroller, because the one that works best in snow is not the one that you prefer in nice weather. Restaurants in Oslo and Bergen seemed jammed with locals, although perhaps unusually good weather played a part in that. The oil slump dims the outlook for Norway somewhat, and we met someone with a son who is an oil engineer who had recently lost his job.

3. Denmark was a bit harder to read. We saw a lot of for-sale signs on homes on bucolic Bornholm Island, but does that indicate excess supply or the typical churn of a vacation/beach area? Copenhagen’s restaurants were bustling, which suggested affluence. Traditional Danish cuisine, like traditional English cuisine, is honored more in theory than in practice. Ethnic food seems dominant, especially if you include hamburgers as (American) ethnic food.

4. In other countries, governments like to subsidize specific products, such as bread or milk. I did not see much evidence of that in Norway or Denmark. I believe that the subsidies that people get are more general cash payments, such as pensions or paid family leave. This is probably a lot less distortionary.

5. On a day-to-day basis, these are very much market economies. There are credit-card readers everywhere, including the kiosks for purchasing subway tickets. I do not think that anyone misses an opportunity to charge money for something. We were happily using our credit card that does not charge a fee for currency conversion, only to discover late in the trip that establishments routinely add a 3 to 5 percent surcharge for “foreign cards.”

6. These are also very open economies. Everyone learns English. Many also speak other non-native languages. Ports and shipping are major industries.

7. Norway reminded me of eastern Canada in many ways, with abundant water and forest. My guess is that it took a long time for railroads and paved roads to emerge in Norway, because of mountains and other topographic challenges. I can imagine that until as recently as the late 19th century there were many parts of the country that were isolated. That would suggest a historical political structure based more on local clans than on central government, but I do not know if that was the case.

Null Hypothesis Watch

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Scott Alexander takes a look at it.

In summary: teacher quality probably explains 10% of the variation in same-year test scores. A +1 SD better teacher might cause a +0.1 SD year-on-year improvement in test scores. This decays quickly with time and is probably disappears entirely after four or five years, though there may also be small lingering effects. It’s hard to rule out the possibility that other factors, like endogenous sorting of students, or students’ genetic potential, contributes to this as an artifact, and most people agree that these sorts of scores combine some signal with a lot of noise. For some reason, even though teachers’ effects on test scores decay very quickly, studies have shown that they have significant impact on earning as much as 20 or 25 years later, so much so that kindergarten teacher quality can predict thousands of dollars of difference in adult income. This seemingly unbelievable finding has been replicated in quasi-experiments and even in real experiments and is difficult to banish. Since it does not happen through standardized test scores, the most likely explanation is that it involves non-cognitive factors like behavior. I really don’t know whether to believe this and right now I say 50-50 odds that this is a real effect or not – mostly based on low priors rather than on any weakness of the studies themselves. I don’t understand this field very well and place low confidence in anything I have to say about it.

The modesty he expresses at the end goes to far, in my opinion. I think that the right way to put it is that no one should pretend to know very much or have great confidence about claims about how teaching affects outcomes, particularly in the long term.

I actually think that Alexander’s post is the best discussion of this issue that you will find. I have more confidence in what he has to say than I have in any what Raj Chetty’s groupies have to say.

For newcomers to this blog, the null hypothesis is this:

Take any educational intervention. Measure its effects.

1. The effects are likely to be zero in the year that the intervention is introduced.

2. If they are not zero in the year they are introduced, the effects are likely to fade out quickly.

3. If the effects do not fade out quickly, the results are not likely to be replicable using rigorous experimental methods.

4. If the effects are replicable, they are not likely to be replicable at scale.

In short, the null hypothesis is that educational interventions have no effect, if you study them carefully. This includes interventions involving trying to measure and reward teacher quality. On that point, I agree with the teachers’ unions that measures of teacher quality are mostly noise and not signal.

In other service businesses, we let the customer make a subjective judgment of quality. You do not pick your hair stylist or your doctor or your auto mechanic based on some distant economist’s regression analysis. The reason we don’t use customer judgment in education is that we let government, rather than the customer, pick the service provider.

My Song and Dance

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I am back from a trip to Norway and Denmark. The impetus for the trip was an invitation to speak to a group of alumni of the Business Institute in Oslo. My topic was property bubbles.

The morning of my talk, I took a walk along the beautiful path next to the Akers River. My mind wandered, and at one point I tried to recall the steps to this dance, which I had learned recently and only done a few times. My mind also wandered to my talk, and so when I gave it I used the opening 25 seconds of the dance while singing (details below the fold).

Anyway, a lot of the questions were good ones. My favorite was when a guy asked if Norway would be less subject to a bubble because its mortgage loans come with recourse. In most states in the U.S., you can default on your mortgage and owe the bank nothing other than the keys to the house. With recourse loans, after the foreclosure sale, you still owe the bank any deficiency between the sale price of the home and the outstanding balance on the loan. I agreed with the thrust of the question, because recourse loans make people think twice about making speculative home purchases. I certainly think that recourse loans change the dynamics of the housing market. Canada has recourse loans, and that may be one reason that they did not suffer the bubble-and-crash that we did.

In my answer, I also pointed out that the underwriting criteria shift when you have recourse loans. You can be a bit less concerned about the property itself as security for the loan and a bit more concerned with the borrower’s capacity to repay the loan (income and assets) and with the borrower’s conscientiousness (as typically measured by a credit score).

For all the Dodd-Frank legislation and all the mumbo-jumbo about shadow banking, it really would have been simple to prevent the financial crisis of 2008. Recourse on mortgage loans would have done it. In effect, recourse loans give mortgage borrowers more “skin in the game.” Instead, Dodd-Frank tried to envision giving mortgage brokers more skin in the game.

And, of course, removing government support for investor loans probably would have done it as well.
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I Was Wrong

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I recall writing that I thought that Bernie Sanders had a better chance of getting his party’s nomination than Donald Trump did of getting his party’s nomination. So, chalk up another in a series of bad prognostications.

However, I am curious about one thing. Of all the votes cast in primaries (forget caucuses for the moment), how does Sanders’ percent of Democrats compare with Trump’s percent of Republicans? If I read this correctly, then as of March 19 Sanders had roughly 40 percent of Democratic votes and Trump had 37.5 percent of Republican votes. My guess is that both of their shares have gone up since then. Perhaps the answer to my question is here and here.

I think Sanders has out-performed Trump by this measure, although I may be wrong again.

When do you stop reading?

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Tyler Cowen was asked this question.

My answer is based on my classification system for op-eds and political blgs.

1. A piece that speaks to people on the same side as the author and tries to close their minds.

2. A piece that speaks to people on the same side and tries to open their minds.

3. A piece that speaks to people on the other side and tries to open their minds.

I try to read 2 and 3 and to avoid 1. But there is so much 1 being written that even though I try my best to avoid it, I still probably read more of it than anything else.

There is much more pseudo-3 than actual 3. That is, the “advice” to the other side is to admit that you are stupid and evil. It might look like 3 but it is really 1.

The book by Kim Holmes that I have been reading has a bit of 2 and 3. I think it would have been better if he had focused more consciously and consistently on those aspects of his message.

I think that 30 years ago there was much less 1 and more 2 and 3. Back then, people on the left seemed to me to have open minds.

I think that Holmes would blame the influence of post-modern philosophy, which denies that issues can be dealt with through reason.

I blame Paul Krugman.

Venezuela

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I can imagine that this might be a front-page story every day if it were happening in a different country, say, Egypt or Poland.

I find it easy to come up with explanations that are not chartitable toward the news media. Let us stay away from those. Think of charitable interpretations, such as American readers feel little or no connection to Venezuela. Or that this is one of many important stories that Donald Trump has driven off the front page.

What is the best, most charitable reason for the news media not to give more coverage to Venezuela? Serious, nonsarcastic answers only, please.

DC’s Metro as infrastructure

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Popular naratives to describe the problems of the DC metro system:

1. Epitomizes America’s failure to invest enough in infrastructure.

2. Results from unwieldy government structure.

My view:

Metro is an example of over-investment and malinvestment in infrastructure.

Metro’s problem is less one of poor governance than one of lack of economic viability. The demand curve is too far below the cost curve.

What is new is that more of the people who live in DC and are inclined to do without a car are white and affluent rather than black and poor. I do not see why this strengthens the moral case for non-riders to subsidize riders, although I can see how it will strengthen the political ability to advocate for subsidies.