The Null Hypothesis Strikes Again

Timothy Taylor looks at an OECD report on the effect of making a student repeat a grade. He quotes this sentence:

In practice, however, grade repetition has not shown clear benefits for the students who were held back or for school systems as a whole.

One interpretation of this is that the marginal benefit of an additional year of schooling is zero. However, that interpretation is not something that anyone wants to discuss.

And I could put the same headline on Tyler Cowen’s post about a study in France.

DeLong-term Productivity Trend

Brad writes,

My problem is that I believe in the slow diffusion of technology, the importance of incremental improvements, the usefulness of the incentives provided by the fact that it is easy to make a lot of money by figuring out a cheaper way to produce and supply things that people are willing to pay a lot of money for, and the law of large numbers. These make me think that–modulus the business cycle and measurement error–total factor productivity should be smooth in the level and smooth in the growth rate as well: whatever processes were going on last year that led to invention, innovation, deployment, and thus higher productivity in a potential-output sense ought to be almost as strong or only a little stronger this year.

The entire post is interesting. I think that the view that there are no sudden economic regime changes is difficult to shake. Probably my best argument against a post-2003 productivity slowdown is that we are seeing the continued expansion of education and health care, two sectors where there is essentially no reasonable way to measure productivity to begin with. Also, quality-adjustment in the goods sector is getting harder to measure, because goods tend to overlap with services (is Amazon Kindle really mostly a good, as opposed to a service)>

Pointer from Tyler Cowen.

Tyler Cowen vs. Ezekiel Emanuel

Tyler writes,

And to sound petty for a moment, I don’t want to pass away during the opening moments of a Carlsen-Caruana match, or before an NBA season has finished (well, it depends on the season), or before the final volumes of Knausgaard are translated into English. And this is a never-ending supply. The world is a fascinating place and I fully expect to appreciate it at the age of eighty, albeit with some faculties less sharp. What if the Fermi Paradox is resolved, or a good theory of quantum gravity developed? What else might be worth waiting for?

Off hand, I would say

1. Grandchildren
2. Medical progress to reverse degenerative illness

Worst News I’ve Read in a Long Time

Ezekiel Emanuel writes,

Crimmins found that between 1998 and 2006, the loss of functional mobility in the elderly increased. In 1998, about 28 percent of American men 80 and older had a functional limitation; by 2006, that figure was nearly 42 percent. And for women the result was even worse: more than half of women 80 and older had a functional limitation. Crimmins’s conclusion: There was an “increase in the life expectancy with disease and a decrease in the years without disease. The same is true for functioning loss, an increase in expected years unable to function.”

Read the whole thing. I mean it. This is an excellent and important article. Pointer from Tyler Cowen.

The more optimistic view of aging is represented by Gregg Easterbrook.

In your comments, please spare me the snark about Emanuel, Obamacare, and death panels. Speak to the point of what happens to quality of life after age 75. We know many examples of people for whom it was good. But on average is Emanuel correct, and is he correct that we have seen in recent decades, if anything, a deterioration in the quality of life among the very old?

Spectrum Price Discrimination Using Zero-rated Apps

The Washington Post reports,

Apps and Web sites that don’t count against the users’ data plan are popping up both in the United States and abroad, often under names like Wikipedia Zero or Facebook Zero.

Pointer from Tyler Cowen.

If what wireless companies need is congestion-pricing or peak-load pricing, then my prediction would be that we will not see zero-rated apps that allow video anywhere, any time. To get that, you will have to pay something.

There is now a vocal “net neutrality” chorus that will fight any form of price discrimination in wireless services, including fighting zero-rated apps. I think that they are misguided and represent no actual consumers. However, the FCC will do everything to make them seem important, because that in turn justifies having the FCC do more regulatory meddling.

Trends and Cycles

Tyler Cowen writes,

The arrival of the cyclical event, in due time, makes the negative underlying trend more visible. At first people blame everything on the cycle/crash, but a look at the slow recovery, combined with a study of pre-crash economic problems, shows more has been going on.

Read the whole thing. I found it difficult to excerpt.

If you insist on Keynesian methodology, then trend and cycle are separate by construction. You wait until there is full employment, and then you draw a line connecting the full-employment dates and call that the trend.

In real time, this does not work so well. In the 1970s, we never got back to what was thought to be full employment. So economists had to first re-define full employment as the NAIRU and then allow for drift in the NAIRU. In fact, to speak of NAIRU drift is to speak of a phenomenon that is neither purely trend nor purely cycle.

From a PSST or Schumpeterian perspective, there is no distinction between trend and cycle. There are booms, during which new projects are launched with optimism while the businesses they are destined to destroy continue in blithe ignorance or denial. There are busts, during which out-moded businesses get shut down but entrepreneurs have not yet figured out uses for the resources that have been freed, and for various reasons unemployed workers appear to have higher reservation wages than their value to firms.

The idea that what is described as a cycle is more like the recognition/amplification of a trend makes sense to me.

Note also the new paper by Acemoglu, Autor and others on the role of imports in what they call the “employment sag” that has taken place since 2000. The macroeconomic story may ultimately be less about the 2008-2009 financial crisis and more about the challenges that the economy faced in dealing with the great factor-price equalization.

Why I would be inclined to replace the FCC and the FDA

Francis Fukuyama writes,

Institutions are created to meet the demands of specific circumstances, but then circumstances change and institutions fail to adapt. One reason is cognitive: people develop mental models of how the world works and tend to stick to them, even in the face of contradictory evidence. Another reason is group interest: institutions create favored classes of insiders who develop a stake in the status quo and resist pressures to reform.

Pointer from Tyler Cowen.

The same holds true in business. Business organizations develop group-think biases and constituencies that resist change. However, if this gets to the point where the organization becomes dysfunctional, the market weeds out the organization. Government agencies lack such a weeding-out mechanism.

Overall, I found Fukuyama’s views did not correspond well with mine. I am concerned with the fundamental knowledge gaps that plague government policymakers. I think that the difference between market competition and government monopoly is significant. I also think that there are diseconomies of scale and scope in government.

Gentrification’s Flip Side

Elizabeth Kneebone writes,

The economically turbulent 2000s have redrawn America’s geography of poverty in more ways than one. After two downturns and subsequent recoveries that failed to reach down the economic ladder, the number of people living below the federal poverty line ($23,492 for a family of four in 2012) remains stubbornly stuck at record levels. Today, more of those residents live in suburbs than in big cities or rural communities, a significant shift compared to 2000, when the urban poor still outnumbered suburban residents living in poverty.

I got to this by reading an article linked to by Tyler Cowen.

You may recall the Haiku I wrote based on my road trip:

Bike-friendly beyond all sense
Poor people moved…to where?

Basically, I explain the phenomenon as follows.

1. Spending shifts from goods to education and health care (long-term trend. See Kling-Schulz, The New Commanding Heights)

2. Inner cities become impoverished, as manufacturing relocates and urban blight drives out the middle class.

3. The biggest urban employers become universities and hospitals. As they expand their presence in cities, they employ a lot of educated professionals. This leads to gentrification.

4. The urban poor get pushed out to the suburbs.

It seems to me that a lot of economic trends can be explained by the New Commanding Heights story.

Paul Ryan on Income Assistance

On the safety net, his Expanding Opportunity plan says,

It should always pay to work. But fixing these incentives is no easy task. To phase out benefits more slowly would mean to subsidize millions of middle- and even upper-income families; in other words, it would be prohibitively expensive. But lowering the effective marginal tax rate at the bottom of the income scale by reducing the amount of aid would mean deep cuts for the most vulnerable.

Suppose we are talking about cash assistance. You can pick two of the following three characteristics:

1. Enough money for people with no income to be able to obtain basic needs, such as food and medical care.

2. Low implicit marginal tax rates, meaning that as people earn their own income, their cash benefits phase out slowly (or not at all).

3. Low overall budget cost.

What Ryan is saying is that he will leave it up to the states to deal with these trade-offs. His thinking is that if aid is administered locally through community and non-profit agencies, those institutions can attach the appropriate conditionality to receiving aid. If someone is able to work but does not seek or accept work, the agency can cut that person off. It is harder for a remote Washington agency to make the determination of who is trying to find work and who is not.

These local providers also can customize aid. As Ryan puts it,

it makes little sense to provide a household with a consistent stream of SNAP benefits when what the household may need most is reliable transportation to and from work. Giving providers this kind of flexibility will allow them to intervene early on with targeted benefits in cases where short-term assistance can prevent someone from falling into deeper poverty.

I strongly agree with Ryan that conditionality and customization ought to be applied at the local level, not the Federal level. However, my own view is that only some income assistance should be conditional and customized. I would like to see the Federal government provide assistance that depends on income but is otherwise unconditional. I think that the government assistance should phase out at a low rate of, say, 20 percent or 25 percent as an individual’s earnings rise.

My thinking is that this federal assistance might not be sufficient to satisfy condition (1). State and local governments would fill in the “needs gaps.” They would do so by looking carefully at individual household situations, attaching conditions and customizing.

Ryan would address the issue of Federal income assistance by expanding the Earned Income Tax Credit (EITC) so that it covers childless workers. Also, he writes,

another potential area of reform should focus upon EITC simplicity and delivery. If families received
the credit with their paychecks, the link between work and the EITC would be that much clearer.40 This reform
would also allow low-income to keep more of their money if it could reduce improper payments (which
amounted to $13.3 billion in fiscal year 2013 alone); they wouldn’t have to rely on tax-preparation firms to get
the credit. The most recent attempt at creating a periodic EITC was through the Advance EITC, which
experienced low take-up rates and extremely high rates of fraud and noncompliance.43 This proposal, therefore,
would direct the Treasury Department to investigate further how to provide a work-based tax credit that may
appear on a worker’s paycheck.

Finally, I commend Stephanie Mencimer of Mother Jones for offering a serious, informed critique of what I am calling conditionality and customization. She concludes,

the safety net today really doesn’t deliver the kind of customized service that Ryan thinks it should. It’s just too expensive, too hard to provide on a large scale, and in the end, not all that more effective than simply giving people money they need to keep the lights on until they can get back on their feet on their own.

Read the whole thing. Pointer from Tyler Cowen. Again, I think that some assistance should be customized/conditional, and funded at the state and local level. Federal assistance should look more like straight cash, with crude, simple rules.