Monthly Archives: October 2016

Tyler Cowen on Inequality

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He writes (link is to enormous PDF file)

if American productivity growth had not slowed after 1973, today the median household would earn $30,000 more each year. Alternatively, if income inequality had not accelerated after 1973, today the median household would earn an extra $9,000 more. That is less than one-third of the loss from the productivity slowdown.

His point is that we should pay more attention to productivity. Of course, many policies that ostensibly reduce inequality serve to harm productivity. And there are some ideas, included in Tyler’s essay, that could help with both. Reducing occupational licensing, for example.

My guess is that on policy issues, Tyler is not terribly far from his “opponent” in the volume, Melissa S. Kearney. If anything, her proposals for reducing inequality would take longer to work than his.

Probably the most contentious debate in the volume concerns the employment-reducing effects of government tax and transfer programs. Robert Moffit says that the effect is small, while Casey Mulligan says that it is large. It would be nice to see if they could pin down the reason for their difference of opinion–is it that Mulligan looks at more programs in more detail, or do they take a different view of the shape of the labor supply curve?

Cowen and Pinker: Two Moments

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If I forget to put up a link, just Google for it. Tyler Cowen had a conversation with Steven Pinker. I found two moments interesting.

1. Tyler posed a scenario in which anyone with $10,000 could afford to blow up a large part of a major city. He asked how long it would be before someone carried out such a deed. The implication is that in spite of past trends in which rates of violence are down, we should not be optimistic about the future.

Pinker objected that it might never become that inexpensive to destroy a city. He also seemed to suggest that somehow our culture might evolve so that nobody would want to do that.

Another way to treat the scenario is to say that yes, it could happen, but it could still happen in a context in which the overall rate of violence is declining. One or two such explosions would not destroy civilization. But if people believe that it is becoming commonplace, then we would be in big trouble.

The David Brin solution is the transparent society, in which surveillance is effective. Brin’s solution to the threat of tyranny is to have ordinary people able to see into and affect their government at the same time as government can identify threats of mass destruction.

2. At the end, Bryan Caplan asks Pinker if there is not a conflict between Pinker’s view of the triumph of reasons and the fact that Pinker thinks that many intelligent people are wrong on important issues. I thought that Pinker was flummoxed by this question.

First of all, Pinker recommended “naming and shaming” those who would quash free speech. I think that “naming and shaming” is itself a form of speech suppression.

I would define the problem as bad ideas becoming fashionable among intellectual elites. A big part of the problem is that there is not a good feedback mechanism between the bad ideas and their consequences. The people who proclaim their allegiance to socialism do not have to live in Venezuela. They do not even have to live in Denmark. They get to impose regulations on others’ lifestyles, while reducing regulations that might impinge on their own.

If David Cutler were an Entrepreneur

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He would buy a hospital. Let me explain. The IGM forum polled economists to see if they agreed with this statement:

Long run fiscal sustainability in the US will require some combination of cuts in currently promised Medicare, Medicaid and Social Security benefits and/or tax increases that include higher taxes on households with incomes below $250,000.

Most economists agreed, as would I. However, Cutler disagreed, writing

There are ways of making the health care programs much more efficient, which would obviate the need for tax increases for some time.

He thinks he knows how to compensate health care providers more efficiently. If he were an entrepreneur, he would buy a hospital and prove his theories there. But he is a professor, so testing his theories is an all-or-nothing proposition, and we will have to pay for it.

The Expert or the guy in the Bar?

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Sebastian Mallaby writes,

The saving grace of anti-expert populists is that they do discredit themselves, simply because policies originating from the gut tend to be lousy.

…Democracy is strengthened, not weakened, when it harnesses experts.

Read the whole essay, which gives you insight into Mallaby’s world view, as well as a few tidbits from his biography of Greenspan. I strongly recommend the book, although I am quite opposed to his world view.

A Sebastian Mallaby or David Brooks will ask: who would you rather have in charge? An expert, or a random guy in a bar?

If that indeed is the choice, then give me the expert. But I want an option that says “None of the above.” Or, to put it another way, I want an expert with so much humility that the expert does not try to mess with orders that emerge naturally. Unfortunately, we live in a society in which “humble expert” has become an oxymoron.

Tyler Cowen on the Universal Basic Income

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He writes,

If two able-bodied people live next door to each other, and one works and the other chooses to live off universal basic income checks, albeit at a lower standard of living, I wonder if this disparity can last. One neighbor feels like she is paying for the other, and indeed she is.

Compared to what, Tyler? Today’s fragmented hodge-podge of programs puts many of the working poor in 100 percent tax brackets. If the problem is to give able-bodied males an incentive to participate in the labor force, the solution is not to maintain a system in which somebody who earns $30,000 a year is no better off than someone who earns $10,000 a year.

Maybe the term “universal basic income” sends the wrong signal. How about “repeal and replace food stamps, housing subsidies, welfare, and Medicaid with a negative income tax?”

Brad DeLong on Joel Mokyr’s New Book

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DeLong writes,

perhaps 10,000 well-educated Europeans thought of themselves as participants in the search for useful knowledge. Knowledge flowed between them and the tens of thousands of “trained engineers, capable mechanics, and dextrous craftsmen”, the (rather few) industrialist-inventors such as Josiah Wedgwood, and the (rather more) entrepreneurs who had little abstract interest in science or innovation, but found that in a competitive market economy, the dynamic few drag along the inertial many.

DeLong says that he prefers the view of Robert Allen. who

places the origins of the Industrial Revolution in the British Midlands in the eighteenth and early nineteenth centuries. In Allen’s view, the only route to modern economic growth required an array of elements never seen together before in Britain. Among them were high, imperialism-driven wages; cheap coal next to an ample canal network; and an open trading network allowing for a vast expansion of textile exports.

Here, you can see the contrast between a materialist view (Allen’s) and an idea/culture view (Mokyr’s). I think that this is a very important division in economics, and I am strongly on the idea/culture side.

I have been thinking about this in the context of my latest book Specialization and Trade. I ask myself, what would make someone unable to grasp its insights? I think that the bias toward materialist explanations of social phenomena is a major factor. What seems obvious to me, coming from a culture/idea perspective, is just downright baffling to people who instinctively think the other way. (Note that Brad has thought about these issues–he is not just coming at them from instinct.)

Michael Mandel and Dietrich Vollrath on Manufacturing Productivity

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Mandel writes,

Since 1994, multifactor productivity has declined in nine out of 18 domestic manufacturing industries. And if domestic manufacturing can’t become more efficient, it will have a tough time competing in the global economy and an even tougher time adding jobs.

Multifactor productivity sounds like something that is tangible and very important. But it is basically what is left over after you subtract from the value of output the measured value of all inputs, including capital. So, if you under-estimate the value of some input, you over-estimate multifactor productivity, and conversely.

Mandel goes on to write

there’s a simple way that domestic factories can increase their productivity, expand their market share, and hire more workers. The answer (perhaps surprisingly) is to invest more in information technology.

Actually, if the value of new capital investment is properly measured, more investment will not increase multifactor productivity at all. Mandel may be correct that manufacturing is ripe for more investment in information technology. But basing his argument on multifactor productivity does not persuade me.

Speaking of the meaning of productivity measurements, Dietrich Vollrath has a nice rant (pointer from Mark Thoma). One of many excellent paragraphs:

If MFP is stagnant but the manufacturing sector has shed workers, then this means either value added in manufacturing has fallen (it has not) or the other inputs like capital have risen (they must have). This indicates that labor productivity, value-added divided by number of workers only, must be rising.

Interventionism

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Noah Smith writes,

economists were more likely than the public to support the U.S. auto bailouts, by 58.6 percent to 52 percent. They were also more likely to support President Barack Obama’s economic stimulus bill, by 52.8 percent to 43.4 percent. More economists — over 97 percent — were in favor of tax hikes, and fewer supported school-voucher programs.

He cites a paper by Sapienza and Zingales.

On a related note, Barry Eichengreen praises capital controls.

It’s fair to say that the vast majority of economists are deeply skeptical about (if not downright hostile toward) their imposition. Yet it is not hard to find evidence in international financial markets of the kind of distortions that are likely to lead to imperfect information and, as a result, to economically inefficient and socially undesirable outcomes.

Pointer from Mark Thoma.

In a related essay, Smith argues that the current debate in economics is between the center-left and the radical left.

The New Center-Left Consensus is attractive to academics and policy wonks. It draws on an eclectic mix of mainstream economic theory, empirical studies and historical experience. It refuses to assume, as many conservatives and libertarians do, that free markets are always the best unless there is a glaring case for government intervention. It’s more willing to entertain all kinds of ways that government can improve the economy, from welfare to infrastructure spending to regulation, but it also recognizes that these won’t always work. . .

But there’s a second strain of progressive economic thinking that is gaining attention and strength. This alternative could be called the New Heterodox Explosion. It’s basically a movement to purge mainstream economics from progressive policy-making and thought.

Smith and the left dismiss those of us who favor free markets as outmoded and simple-minded. So the real debate is between economists who believe that elite mainstream economists know best how to fix the economy and others who believe that complexity theorists or evolutionary economists know best how to fix the economy.

I think that he accurately portrays the state of the discussion. I cannot think of a period in my life when market-oriented economists had less respect, unless it was the early 1960s when “fine tuning” had yet to be discredited.

AT&T and Time-Warner

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Tyler Cowen writes,

it is hard to see where the efficiencies from the deal are supposed to come from

That is an understatement. AT&T seems to have some combination of excess cash and ability to borrow at attractive interest rates. If I were a shareholder, I would want the company to pay me a large dividend, and then leave it up to me how much I want to invest in Time-Warner.

My guess is that the people who want to block the merger are concocting scenarios of bad behavior or excessive control that are highly implausible. However, I find scenarios in which the merger provides social benefits to be at least as implausible.

I see this sort of transaction as indicative of some sort of distortion in capital markets. One or both of those companies should have returned more cash to shareholders, and for some reason they didn’t.