Category Archives: Tyler Cowen is my Favorite Blogger

Robert Solow on Piketty

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Solow writes,

if the economy is growing at g percent per year, and if it saves s percent of its national income each year, the self-reproducing capital-income ratio is s / g (10 / 2 in the example). Piketty suggests that global growth of output will slow in the coming century from 3 percent to 1.5 percent annually. (This is the sum of the growth rates of population and productivity, both of which he expects to diminish.) He puts the world saving / investment rate at about 10 percent. So he expects the capital-income ratio to climb eventually to something near 7 (or 10 / 1.5). This is a big deal, as will emerge. He is quite aware that the underlying assumptions could turn out to be wrong; no one can see a century ahead. But it could plausibly go this way.

…The labor share of national income is arithmetically the same thing as the real wage divided by the productivity of labor. Would you rather live in a society in which the real wage was rising rapidly but the labor share was falling (because productivity was increasing even faster), or one in which the real wage was stagnating, along with productivity, so the labor share was unchanging? The first is surely better on narrowly economic grounds: you eat your wage, not your share of national income. But there could be political and social advantages to the second option. If a small class of owners of wealth—and it is small—comes to collect a growing share of the national income, it is likely to dominate the society in other ways as well. This dichotomy need not arise, but it is good to be clear.

Both Tyler Cowen and Solow make the same point about wages, but they do so subtly. Let me be blunt: Piketty’s nightmare scenario, in which capital accumulates and has a high return, is a terrific scenario for wages in absolute terms. If workers care about what they can consume, as opposed to the ratio of their net worth to that of the capital owners, they would hate to see any policy that might interfere with the high rates of investment that Piketty is envisioning. Note, however, that I personally would not concede that the distinction between workers and capital-owners is as clear-cut as it is in the Solow growth model.

The tone of Solow’s review is generally laudatory. It also is by far the clearest explanation of Piketty’s argument that I have read. It reflects Solow’s command of the logic of economic growth as well as his abilities as a teacher.

I think that Solow arrives at a higher evaluation of the book than I would for two reasons. First, Solow gives Piketty the benefit of the doubt on nearly every uncertain issue. For example, on the crucial assumption that Piketty makes that the rate of return on capital remains steady even as the capital-income ratio creeps ever higher, Solow writes,

Maybe a little skepticism is in order. For instance, the historically fairly stable long-run rate of return has been the balanced outcome of a tension between diminishing returns and technological progress; perhaps a slower rate of growth in the future will pull the rate of return down drastically. Perhaps. But suppose that Piketty is on the whole right.

On another issue, the fact that inequality is high between different workers, not just between workers and capitalists, Solow offers a hand-waving defense of Piketty. Solow writes,

Another possibility, tempting but still rather vague, is that top management compensation, at least some of it, does not really belong in the category of labor income, but represents instead a sort of adjunct to capital, and should be treated in part as a way of sharing in income from capital…

it is pretty clear that the class of supermanagers belongs socially and politically with the rentiers, not with the larger body of salaried and independent professionals and middle managers

To this, I would say: why draw the line at supermanagers? Why not say that the salaries of college professors that are paid out of university endowments are “a way of sharing income from capital”? The way I look at it, the amount of income that does not represent “a sort of adjunct to capital” (including human capital) is miniscule, perhaps less than 1 percent of GDP.

My second disagreement with Solow is that he, like Piketty, omits any discussion of risk as a component of “r.” In that regard, Tyler Cowen’s skeptical review better accords with my own thinking.

The way I see it, Piketty and Solow work with models that incorporate homogeneous workers (with no differences in human capital) and homogeneous capital (with no differences in ex ante risk or ex post returns). The real world is so far removed from those models that I simply cannot buy into the undertaking.

I’d Connect These Data Points

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1. From Atif Mian and Amir Sufi.

We are now five full years from the end of the recession (if you buy NBER dating). And housing starts are still below any level we’ve seen since the early 1990s!

Pointer from Mark Thoma.

2. Shaila Dawan writes,

Nationally, half of all renters are now spending more than 30 percent of their income on housing, according to a comprehensive Harvard study, up from 38 percent of renters in 2000. In December, Housing Secretary Shaun Donovan declared “the worst rental affordability crisis that this country has ever known.”

Pointer from Tyler Cowen.

By the way, I saw this coming, and so I made a big investment last year in several companies that own and manage apartments. The performance of these investments was terrible, particularly when compared with the overall market. Go figure.

College Sports Spending

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Tamar Lewin reports,

Even as their spending on instruction, research and public service declined or stayed flat, most colleges and universities rapidly increased their spending on sports, according to a report being released Monday by the American Association of University Professors.

She reports that colleges contest this report.

“This comes from the American Association of University Professors, which has a vested interest in finding that too little money is going to faculty and too much to sports and administration,” Mr. Hartle [senior vice president of the American Council on Education] said. “If you just look at the percentage increases, without the base they’re working from, it’s hard to tell what it means.”

Pointer from Tyler Cowen.

Even if the AAUP is talking its book, I think that they may be right. College spending on facilities in general, and athletic facilities in particular, is out of control. Consider this:

Our athletic facilities are among the best in Division III. In 2006, we acquired the former headquarters and practice facility of the Baltimore Ravens. The grounds are now home to Mustang Stadium, a 3,500-seat facility for the football, men’s and women’s soccer, field hockey and men’s and women’s lacrosse teams, and Owings Mills Gymnasium, a 38,000 square foot complex for the men’s and women’s basketball, and men’s and women’s volleyball teams. Caves Sports and Wellness Center is the primary training facility for more than 800 Mustang student-athletes.

That is from Stevenson University, a very low-tier institution located in a suburb northwest of Baltimore.

In general, this is one of my pet peeves. I also could cite Brandeis University–even though it was practically broke due to the Madoff scheme, it proceeded with a totally unnecessary rebuilding of its admissions office. Or I could cite Swarthmore college–I would love to get a measure of the square footage of facilities per student. I am sure that it is ridiculous. It was huge when I went there, and since then the facilities appear to me to have increased by more than the number of students.

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.

Better Education?

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1. Jay Mathews writes,

The dollars involved are astonishing, at least to me. Every English, math or science AP test at the three Stafford schools with a passing grade from independent College Board readers meant a $100 check for the student and another for the teacher. Checks totaling $90,800 went to students and $145,370 to teachers.

Pointer from Tyler Cowen. Mathews reports that this resulted in a big increase in AP tests taken and passed at the affected schools.

On the one hand, I find this plausible. These days, high school seniors are much less motivated about AP tests. I tell my students that when I was in high school, we were much less well behaved and less deferent to authority than today’s students. But it would never have occurred to us to slack off for an AP exam. I even remember a student who spent most of the year getting high still pulled it together for his AP tests.

I teach AP courses, and I have seen motivation trump ability in terms of scores. So if money motivates students to do well on the tests, then I can imagine a significant effect. Whether this means anything in terms of overall long-term learning is less clear, I suppose. And I am not sure why a $100 check for a student is any more motivating than the value of replacing a college credit. If it is, then parents who are paying for college tuition should offer their kids very large checks for passing AP courses.

2. John Cochrane and Russ Roberts discuss John’s Ph.D-level MOOC course on asset pricing. Cochrane says,

One thing I learned was there is a larger demand to watch the videos and take some quizzes than there is to do 15 hours a week of hard problem sets.

Later,

the MOOC experience is not just a complete substitute for taking a class. It is also a set of tools and materials that are the foundation for somebody else teaching class. Much the same way a textbook is.

Much later,

one thing this might do is to give us classes that are both more specialized in a topic and more specialized to the person. There could be–there are already 100 Introduction to Finance classes. And there is one out there that is exactly right for your interest and your level. So to some extent the MOOC is going to do that. The thing it’s not going to do, which I would do with you for a 1-on-1, is of course, I would not give a lecture. We would talk and it would be a lot more of me listening. In my other instruction life, I’m a flight instructor. Which is done one on one, and where assessing the student’s competence is really important. And where assessing the student’s misconceptions about how things work is really important. And that’s what you do when you are one-on-one and the guy needs to learn how to fly the plane. And by 1-on-1 sort of quizzing, I’ll pose a puzzle; you tell me the answer; I’ll go, is that really how it works? We really explore what you understand and what you misunderstand. That’s the way you teach 1-on-1 classes, and that’s the thing that’s hard to do on a MOOC. Would you really trust a pilot of your plane who said, I learned to fly on a MOOC and a simulator? He might be darned good. And he would certainly have run through all sorts of accident scenarios that the MOOC and the simulator did, but there might be a few remaining misconceptions about things that had gotten through the process that you might worry about.

Virginia Postrel on Crowdfunding

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She writes,

“It’s a way to access capital, but what it’s also become is a market-testing and validation platform,” Ringelmann told the Dent the Future conference on Tuesday. “What we’re doing is creating pre-markets for ideas,” she said.

This makes sense to me. If I think of crowdfunding as angel investing, it holds no appeal to me at all. Angel investing by qualified investors is a dangerous game. Unless you are a whip-smart business lawyer, you can easily get hosed when the next investment round starts. I can’t imagine ordinary civilians making a profit at it.

But I am a very strong believer in test-marketing products. I like the idea of asking “Would you pay for this if I developed it?”

Pointer from Tyler Cowen.

Technology or the Safety Net?

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The Financial Times reports,

Non-store retail, which includes online shops, recorded a boom in sales – up 31 per cent to $380bn. But the number of establishments rose only 12 per cent to 66,339 while employment in the sector was down slightly.

Pointer from Tyler Cowen. The gist of the article is that the U.S. economy is becoming more capital intensive.

Casey Mulligan, who gave a talk yesterday on his book The Redistribution Recession, says that 2/3 of the shortfall in employment can be explained by additions to the safety net. The big ones are extending unemployment compensation from 26 weeks to 99 weeks and taxpayers now supplying 65 percent of the cost of COBRA (health benefits) for people who lose jobs. Mulligan combines the various safety-net enhancements made since 2007 with standard estimates of how the “wedge” between the net gain to the worker from employment and the cost of compensation to employers affects hours worked, and that is how he arrives at his 2/3 figure.

In short, the economy has become more capital intensive since 2007 in large part due to the expansion of the safety net. Mulligan pointed out that this does not mean that the expansion was wrong, but he says you should not expect to return to the same rate of labor force participation that we had a few years ago as long as the new measures remain in place. And it will get worse once health care reform takes hold–including many Republican proposals as well as Obamacare. I do not have details on how health reform affects employment–that is the topic of Mulligan’s new book.

Mulligan would like suggestions for a title for the new book. I might suggest “Side Effect: Health Care Reform and the Job Market”

Did Jeff Bezos Join the Club?

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Mathew Ingram reports,

Much of the media world has been waiting with bated breath since Jeff Bezos bought the Washington Post for $250 million last year, eager to see some sign of the Amazon founder and CEO’s hand at work. The first tangible evidence appeared on Tuesday, when the newspaper announced a major national subscription partnership that will offer free digital access to readers of other newspapers in major U.S. cities.

Pointer from Tyler Cowen.

Thirteen years ago, I wrote,

First of all, the “silo” model tries to maintain an anachronistic wall between the content in one silo and content in other silos. In the world of physical magazines, it certainly makes sense that a subscription to “Business Week” does not entitle you to read “Forbes.” Clearly, they are two separate physical collections of paper.

On the Internet, however, this distinction is not a physical necessity. Most consumers in fact pick and choose articles from a variety of online magazines. In contrast to the physical world, consumers can engage in extensive content aggregation without imposing meaningful costs at the margin.

…While I would not pay to subscribe to an individual online journal, I might be willing to pay to join a club that gives me access to a variety of journals as well as to helpful annotations. Annotations might consist of Lawrence Lee’s recommendations for articles on Internet marketing or Virginia Postrel’s comments on articles about policy issues.

A club could offer several different levels of membership. The most expensive membership could entitle you to personal chat time with famous authors. Or it could entitle you to 24-hour response time to inquiries that you submit to human experts. Or it could entitle you to use the most sophisticated indexing and cross-reference tools.

Bezos apparently is moving in the direction of the club.

Crimea and the Bay of Pigs

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Tyler Cowen has suggested a number of ways to model the Crimean crisis.

I do not have a model, but I do have an analogy: The Bay of Pigs invasion of 1961. Just as Russia has always had an interest in Crimea, the U.S. has always had an interest in Cuba. Some differences between the two events:

1. The Russian takeover was better planned and executed.

2. The Russian takeover seems to have had more popular support among those affected.

3. The Russian takeover involved fewer casualties.

4. There were no sanctions visited on the U.S. for the Bay of Pigs (although some versions of the history of the Cuban missile crisis suggest a link between our invasion and the decision to install missiles).

5. In 1961, there was no European union, and its predecessor The European Coal and Steel Community made no claims of wielding “soft power” in world affairs.

On the Crimean crisis, I find myself quite out of synch with the harsh rhetoric of the Republican right and even the Obama Administration.