Digital Network ID: Inequality
Showing posts with label Inequality. Show all posts
Showing posts with label Inequality. Show all posts

19 Aug 2020

Lottery Winners Don't Get Healthier - Barokong

Alex Tabarrok at Marginal Revolution had a great post last week, Lottery Winners Don't get Healthier (also enjoy the url.)

Wealthier people are healthier and live longer. Why? One popular explanation is summarized in the documentary Unnatural Causes: Is Inequality Making us Sick?

The lives of a CEO, a lab supervisor, a janitor, and an unemployed mother illustrate how class shapes opportunities for good health. Those on the top have the most access to power, resources and opportunity – and thus the best health. Those on the bottom are faced with more stressors – unpaid bills, jobs that don’t pay enough, unsafe living conditions, exposure to environmental hazards, lack of control over work and schedule, worries over children – and the fewest resources available to help them cope.
The net effect is a health-wealth gradient, in which every descending rung of the socioeconomic ladder corresponds to worse health.
If this were true, then increasing the wealth of a poor person would increase their health. That does not appear to be the case. In important new research David Cesarini, Erik Lindqvist, Robert Ostling and Bjorn Wallace look at the health of lottery winners in Sweden (75% of winnings within the range of approximately $20,000 to $800,000) and, importantly, on their children. Most effects on adults are reliably close to zero and in no case can wealth explain a large share of the wealth-health gradient:

In adults, we find no evidence that wealth impacts mortality or health care utilization.... Our estimates allow us to rule out effects on 10-year mortality one sixth as large as the crosssectional wealth-mortality gradient.
The authors also look at the health effects on the children of lottery winners. There is more uncertainty in the health estimates on children but most estimates cluster around zero and developmental effects on things like IQ can be rejected (“In all eight subsamples, we can rule out wealth effects on GPA smaller than 0.01 standard deviations”). (My emphasis above)

Alex does not emphasize the most important point, I think, of this study.  The natural inference is,The same things that make you wealthy make you healthy. The correlation between health and wealth across the population reflect two outcomes of the same underlying causes.

We can speculate what those causes are.  (I haven't read the paper, maybe the authors do.) A natural hypothesis is a whole set of circumstances and lifestyle choices have both health and wealth effects. These causes can be either "right" or "left" as far as the evidence before us: "Right:" Thrift, hard work, self discipline and clean living lead to health and wealth. "Left:" good parents, good neighborhood, the right social connections lead to health and wealth.

Either way, simply transferring money will not transfer the things that produce money, and produce health.

Perhaps the documentary was right after all: "class shapes opportunities for good health."  But "class" is about more than a bank account.

Also, Alex can be misread as a bit too critical: "If this were true." It is true that health and wealth are correlated. It is not true that more wealth causes better health.  The problem is  not just "resources available to help them cope."

Why a blog post? This story is a gorgeous example of the one central thing you learn when doing empirical economics: Correlation is not causation. Always look for the reverse possibility, or that the two things correlated are both outcomes of something else, and changing A will not affect B.   We seldom get an example that is so beautifully clear.

Update:  Melissa Kearney writes,

"Bill Evans and Craig Garthwaite have an important study [AER] showing that expansions of EITC benefits led to improvements in self-reported health status among affected mothers.
Their paper provides a nice counterpoint to the Swedish lottery study, one that is arguably more relevant to the policy question of whether more income would causally improve the health of low-income individuals in the U.S.

Thanks Melissa for pointing it out. This is interesting, but I'd rather not get in to a dissection of studies here -- just who takes advantage of EITC benefits, how instruments and differences do and don't answer these problems. The main point of my post is not to answer once and for all the question -- how much does showers of money improve people's heath -- but to point out with this forceful example for non-economists the possibility that widely reported correlations - rich people are healthier -- don't automatically mean that money showers raise health.

Syverson on the productivity slowdown - Barokong

Chad Syverson has an interesting new paper on the sources of the productivity slowdown.

Background to wake you up: Long-term US growth is slowing down. This is a (the!) big important issue in economics (one previous post).  And productivity -- how much each person can produce per hour -- is the only source of long-term growth. We are not vastly better off than our grandparents because we negotiated better wages for hacking at coal with pickaxes.

Why is productivity slowing down? Perhaps we've run out of ideas (Gordon). Perhaps a savings glut and the  zero bound drive secular stagnation lack of demand (Summers). Perhaps the out of control regulatory leviathan is killing growth with a thousand cuts (Cochrane).

Or maybe productivity  isn't declining at all, we're just measuring new products badly (Varian; Silicon Valley). Google maps is free! If so, we are living with undiagnosed but healthy deflation, and real GDP growth is actually doing well.

Chad:

First, the productivity slowdown has occurred in dozens of countries, and its size is unrelated to measures of the countries’ consumption or production intensities of information and communication technologies ... Second, estimates... of the surplus created by internet-linked digital technologies fall far short of the $2.7 trillion or more of “missing output” resulting from the productivity growth slowdown...Third, if measurement problems were to account for even a modest share of this missing output, the properly measured output and productivity growth rates of industries that produce and service ICTs [internet] would have to have been multiples of their measured growth in the data. Fourth, while measured gross domestic income has been on average higher than measured gross domestic product since 2004—perhaps indicating workers are being paid to make products that are given away for free or at highly discounted prices—this trend actually began before the productivity slowdown and moreover reflects unusually high capital income rather than labor income (i.e., profits are unusually high). In combination, these complementary facets of evidence suggest that the reasonable prima facie case for the mismeasurement hypothesis faces real hurdles when confronted with the data.

An interesting read throughout.

[Except for that last sentence, a near parody of academic caution!]

18 Aug 2020

Zoning common sense - Barokong

Kate Kershaw Downing has posted a worthy letter of resignation from the Palo Alto Housing commission, that seems to be going viral.

Palo Alto is absurdly expensive. People who want to come here for jobs can't afford to live anywhere nearby.  What to do about it?

I have repeatedly made recommendations to the Council to expand the housing supply in Palo Alto so that together with our neighboring cities who are already adding housing, we can start to make a dent in the jobs-housing imbalance that causes housing prices throughout the Bay Area to spiral out of control. Small steps like allowing 2 floors of housing instead of 1 in mixed use developments, enforcing minimum density requirements so that developers build apartments instead of penthouses, legalizing duplexes, easing restrictions on granny units, leveraging the residential parking permit program to experiment with housing for people who don’t want or need two cars, and allowing single-use areas like the Stanford shopping center to add housing on top of shops (or offices), would go a long way in adding desperately needed housing units while maintaining the character of our neighborhoods and preserving historic structures throughout.

She also warns

If things keep going as they are, yes, Palo Alto’s streets will look just as they did decades ago, but its inhabitants, spirit, and sense of community will be unrecognizable. A once thriving city will turn into a hollowed out museum.
I found Ms. Downing's letter noteworthy in that it did not include the usual Bay Area nostrums -- the government must build "affordable housing," freeze rents, ban new construction (yes, this is proposed) or otherwise take counterproductive actions. Those steps can preserve some existing low-income people at high cost -- creating a different kind of museum, really -- but make matters even worse for people who want to move here to work. Few local voices appreciate that expanding supply can do a lot to lower prices, and enhance age and economic diversity.

As the post notes, the coverage and comments in the local newspaper are worth reading as well.  These are local issues, handled by local governments, responsive to the wishes of their local residents. A lot of residents like things just as they are and as they are going, or have quite different views of cause and effect of housing policies.

I'm sorry Ms. Downing is leaving. Good local government depends on hard work by people like her, not crabby bloggers. We all spend too much time focused on Washington and Presidents rather than these kinds of important issues.

Update: Alex Tabarrok at Marginal Revolution on the same letter. Alex points out just how much we have all lost property rights.

17 Aug 2020

Furman on zoning - Barokong

On this day (Clinton vs. Trump debate) of likely partisan political bloviation, I am delighted to highlight a very nice editorial by Jason Furman, President Obama's CEA chair, on the effects of housing restrictions. A longer speech here. The editorial is in the San Francisco Chronicle, ground zero for housing restriction induced astronomical prices. Furman:

When certain government policies — like minimum lot sizes, off-street parking requirements, height limits, prohibitions on multifamily housing, or unnecessarily lengthy permitting processes — restrict the supply of housing, fewer units are available and the price rises. On the other hand, more efficient policies can promote availability and affordability of housing, regional economic development, transportation options and socioeconomic diversity...
...barriers to housing development can allow a small number of individuals to enjoy the benefits of living in a community while excluding many others, limiting diversity and economic mobility.
This upward pressure on house prices may also undermine the market forces that typically determine patterns of housing construction, leading to mismatches between household needs and available housing.
What's even more praiseworthy is what Furman does not say: "Affordable" housing constructed by taxpayers, or by forcing developers to provide it; rent controls; housing subsidies; bans on the construction of market-rate housing (yes, SF does that); bans on new businesses (yes, Palo Alto does that), and the rest of the standard bay-area responses to our housing problems.  The first few may allow a few lucky low-income people to stay where they are, as long as they remain low-income, but does not allow new people to come chase opportunities. Subsidies that raise demand without raising supply just raise prices more. As in child care or medicine.

When President Obama's CEA chair writes an oped, most of which could easily have come from Hoover or CATO, it's a hopeful day, no matter what happens tonight.

Moreover, Furman recognizes that a thousand-point federal program imposed on states and local governments by regulation is not the answer:

While most land use policies are appropriately made at the state and local level, the federal government can also play a role in encouraging smart land use regulations
We have found the enemy, as Pogo said, and it is us.

The real political economy is tough, of course. Current residents vote for restrictions, and not just out of misunderstanding.  Current residents (people like me), who buy expensive houses in this beautiful area, vote to keep things just as they are. Restrictions mean they can't sell houses for $10 million to a developer who wants to put up a 100 story office building and turn it in to Manhattan. But restrictions mean they can sell for $2 million and retire comfortably to Mendocino.  Or stay  right where they are, paying property taxes based on the 1965 value of their house (another big impediment to housing mobility and affordability) and making sure the neighbors don't sell and ruin their view. Renters vote for rent control, affordable housing mandates, and so on that applies to current residents but not to newcomers.  This behavior has a  negative externality on low-income ("low" means out of top 0.5%in SF!)  people who want to move here. But a Trumpian mini-wall of regulation keeps them out. The most local government is not always the best. The most liberal government often acts with effects that are surprisingly conservative.

NYT on zoning - Barokong

Conor Dougherty in The New York Times has a good article on zoning laws,

a growing body of economic literature suggests that anti-growth sentiment... is a major factor in creating a stagnant and less equal American economy.
...Unlike past decades, when people of different socioeconomic backgrounds tended to move to similar areas, today, less-skilled workers often go where jobs are scarcer but housing is cheap, instead of heading to places with the most promising job opportunities  according to research by Daniel Shoag, a professor of public policy at Harvard, and Peter Ganong, also of Harvard.
One reason they’re not migrating to places with better job prospects is that rich cities like San Francisco and Seattle have gotten so expensive that working-class people cannot afford to move there. Even if they could, there would not be much point, since whatever they gained in pay would be swallowed up by rent.
Stop and rejoice. This is, after all, the New York Times, not the Cato Review. One might expect high housing prices to get blamed on developers, greed, or something, and the solution to be government-constructed housing, "affordable" housing mandates, rent controls, low-income housing subsidies (which protect incumbent low-income people, not those who want to move in to get better jobs) and even more restrictions.

No. The Times, the Obama Administration, California Governor Gerry Brown, have figured out that zoning laws are to blame, and they're making social stratification and inequality worse.

In response, a group of politicians, including Gov. Jerry Brown of California and President Obama, are joining with developers in trying to get cities to streamline many of the local zoning laws that, they say, make homes more expensive and hold too many newcomers at bay.
.. laws aimed at things like “maintaining neighborhood character” or limiting how many unrelated people can live together in the same house contribute to racial segregation and deeper class disparities. They also exacerbate inequality by restricting the housing supply in places where demand is greatest.
“You don’t want rules made entirely for people that have something, at the expense of people who don’t,” said Jason Furman, chairman of the White House Council of Economic Advisers.
This could be a lovely moment in which a bipartisan consensus can get together and fix a real problem.

The article focuses on Boulder Colorado, where

.. the university churns out smart people, the smart people attract employers, and the amenities make everyone want to stay. Twitter is expanding its offices downtown. A few miles away, a big hole full of construction equipment marks a new Google campus that will allow the company to expand its Boulder work force to 1,500 from 400.
Actually, The reason Google and Twitter are in Boulder is that things are much, much worse in Palo Alto! A fate Boulder may soon share:

“We don’t need one more job in Boulder,” Mr. Pomerance said. “We don’t need to grow anymore. Go somewhere else where they need you.”

14 Aug 2020

Regional price data - Barokong

Some big news, to me at least: The Bureau of Economic Analysis is now producing "regional price parities" data that allow you to compare the cost of living in one place in the US to another. The BEA news release release is here; coverage from the tax foundation here (HT the always interesting Marginal Revolution). In the past, you could see regional inflation -- changes over time -- but you couldn't compare the level of prices in different places.

The states differ widely. It is in fact as if we live in different countries with different currencies. Hawaii (116.8) vs. Mississippi (86.7) is bigger than paying in dollars vs Euros (118) Yen (times 100, 1.01) and almost as big as pounds (1.30)

The variation across city/country and across cities is even higher:

In 2014, the metropolitan area with the highest RPP was Urban Honolulu, HI (123.5). Metropolitan areas with RPPs above 120.0 also included San Jose-Sunnyvale-Santa Clara, CA (122.9), New York-Newark-Jersey City, NY-NJ-PA (122.3), Santa Cruz-Watsonville, CA (121.8), San Francisco-Oakland-Hayward, CA (121.3), and Bridgeport-Stamford-Norwalk, CT (120.4). The metropolitan area with the lowest RPP was Beckley, WV (79.7), followed by Rome, GA (80.7), Danville, IL (81.1), Morristown, TN (81.9), and Jonesboro, AR (82.0).
No surprise, much of the variation is due to housing. Breaking it out, (look up your town here!)

San Francisco-Oakland-Hayward, CA

All items 121.3

Goods 108.4

Services: Rents 183.9

Services: Other 109.6

San Jose-Sunnyvale-Santa Clara, CA

All items 122.9

Goods 108.2

Services: Rents 200.7

Services: Other 109.3

Beckley, WV

All items 79.7

Goods 92

Services: Rents 52.8

Services: Other 92.5

There is still a 20% difference in the cost of goods and other services, but the variation in rents is really big. When you consider that the cost of real estate drives up other costs, its effect may be even larger: If the barbershop pays higher rent, and the barber pays higher rent, you're going to pay more for haircuts. And this is just rents. Since houses have thin rental markets, the true difference may be larger still. Also, rents are often controlled or poorly measured. I don't know how BLS deals with that.

You can see many uses for even more granular data. But since house price and rent are easy to get, you might get a good approximation by adding granular housing cost data to regional price data.

There are a lot of interesting issues here.

One question it raises is the true picture of inequality. Poor people, especially those who don't work, tend to live in low-rent areas. Relative to local prices, inequality may not be as bad as it seems. (I presume the BLS does something to adjust rents for quality of housing.)

One can also imagine that congresspeople from high price areas will soon ask for higher cost of living adjustments for benefits to their constituents.

This data ought to focus more attention on housing supply restrictions -- the main reason that rents vary so much.

It raises some puzzles too. I notice that the market for academics gives surprisingly little weight to cost of living variations. If you compare offers from a European and US university, nobody expects you to compare "100,000" in each place without converting currency. But nominal academic salaries are quite similar across chasms of cost of living. To some extent universities make it up with absurdly complex and inefficient housing subsidies, but that doesn't make much sense either.  I'm curious to what extent this phenomenon occurs in other markets.

And... who knows? New data always leads to interesting new research. Kudos to the BEA for making this available.

Comments from people who know how this data is constructed, with good parts and pitfalls, are especially welcome.

Update

A colleague who knows a lot about these issues sent some useful information:

...it’s my understanding from conversations with a few people and brief reading on methodology (https://www.bea.gov/regional/pdf/RPP2015.pdf) that they are actually pretty poor measures of local prices. Essentially all of the variation comes from relatively poorly measured housing prices, almost by construction.

That’s because the only local retail price data going into the BEA indices comes from the BLS CPI data, which covers less than 30 cities (and not even on identical products across locations). They’re extrapolating from this small number of cities to all cities in the US by just taking the nearest city with CPI data and re-weighting it with local expenditures shares. So for example, there is no retail pricing data collected for Columbus, but they show up in the BEA metro area price parities. So where are they getting price data from? They just take the prices collected in Cleveland (where BLS collects data) and assume that are the same in Columbus with potentially slightly different weights in the consumption basket. So even if there is wide heterogeneity across cities in prices... this is for the most part not going to get picked up in their local price measures, since they’re imputing prices in most cities using pricing data from other cities. Since most states have either 0 or 1 BLS price collection cities, this means that close to 100% of the within-state variation in their price levels is coming from housing. So to close to a first approximation, these purchasing power indices are really just house price indices since they basically aren’t using data on local prices for anything except housing.

But the housing price data is coming from ACS with various hedonic adjustment. That is notoriously challenging, especially across locations. It’s much easier but still hard to compute house price changes across time using repeat sales indices like core logic, but the housing stock is fundamentally heterogeneous across space which puts huge standard errors on trying to construct the price for an equivalent unit of housing across space, so I take the exact numbers there with a big grain of salt.

So overall I think these indices basically just tell you that housing is more expensive in san francisco and NYC than in oklahoma, but I think their quantitative usefulness is pretty limited. I think to really measure price level differences across locations, scanner data is much more useful since we can measure identical products as well as product availability and varieties. (A weakness is that this can’t capture differences in service prices across space, but it’s hard to adjust for quality there just like for housing, even if we had a census of all service providers prices everywhere in the country). Jessie Handbury and David Weinstein’s 2014 restud paper is the best study I know of trying to take seriously measuring retail price levels across locations using that kind of data. I have no idea how it lines up with the BEA numbers.

From which I take: 1) This is very important 2) The BLS took a useful stab at it with the numbers they have but 3) understand the large limitations of the BLS numbers before you use them 4) get to work, big-data economists, on using scanner data, twitter feeds, amazon purchases, zillow, and everything else you can get your hands on, to produce 21st century granular price indices!

Update 2:

Enrico Moretti has already written a very nice paper, Real wage inequality (Also here)  adjusting inequality measures for local cost of living.

At least 22% of the documented increase in college premium is accounted for by spatial differences in the cost of living.
He creates local price indices. He also takes on the question whether higher prices in hot cities represent more housing -- better amenities -- or just higher prices which you have to pay in order to work high -productivity jobs.

30 Jul 2020

Miserable 21st Century - Barokong

Nicholas Eberstadt in Commentary, (HT Marginal Revolution) offers a revealing look at what's wrong with "middle" America's stagnation. Read the whole thing, but the following snapshot jumped out at me.

He starts with a review, probably familiar to readers of this blog, of the sharp decline in work rates, even among prime-age men and women.

As of late 2016, the adult work rate in America was still at its lowest level in more than 30 years. To put things another way: If our nation’s work rate today were back up to its start-of-the-century highs, well over 10 million more Americans would currently have paying jobs.
Why are so many not working, not studying for work, and not even looking for work? What is going on in their lives? One answer:

The opioid epidemic of pain pills and heroin that has been ravaging and shortening lives from coast to coast is a new plague for our new century...
According to [Alan Krueger's] work, nearly half of all prime working-age male labor-force dropouts—an army now totaling roughly 7 million men—currently take pain medication on a daily basis.
I think Krueger had a different idea in mind: that they are in pain, indicated by medication, so can't be expected to work. How the explosion in disability jibes with a much safer workplace is an interesting puzzle to that view. Eberstadt has a different interpretation, and the lovely thing about facts is they are facts, not interpretations.

We already knew from other sources (such as BLS “time use” surveys) that the overwhelming majority of the prime-age men in this un-working army generally don’t “do civil society” (charitable work, religious activities, volunteering), or for that matter much in the way of child care or help for others in the home either, despite the abundance of time on their hands. Their routine, instead, typically centers on watching—watching TV, DVDs, Internet, hand-held devices, etc.—and indeed watching for an average of 2,000 hours a year, as if it were a full-time job. But Krueger’s study adds a poignant and immensely sad detail to this portrait of daily life in 21st-century America: In our mind’s eye we can now picture many millions of un-working men in the prime of life, out of work and not looking for jobs, sitting in front of screens—stoned.
(Mark Aguiar, Mark Bils, and Kewin Charles and Erik Hurst have a new paper coming soon, which I just saw presented, "Leisure Luxuries and the Labor Supply of Young Men", with some more facts about time-allocation of non-working young men. They emphasize cheaper and better video games and leave out drugs.)

But how did so many millions of un-working men, whose incomes are limited, manage en masse to afford a constant supply of pain medication? Oxycontin is not cheap. As Dreamland carefully explains, one main mechanism today has been the welfare state: more specifically, Medicaid, Uncle Sam’s means-tested health-benefits program. Here is how it works (we are with Quinones in Portsmouth, Ohio):
"[The Medicaid card] pays for medicine—whatever pills a doctor deems that the insured patient needs. Among those who receive Medicaid cards are people on state welfare or on a federal disability program known as SSI. . . . If you could get a prescription from a willing doctor—and Portsmouth had plenty of them—Medicaid health-insurance cards paid for that prescription every month. For a three-dollar Medicaid co-pay, therefore, addicts got pills priced at thousands of dollars, with the difference paid for by U.S. and state taxpayers. A user could turn around and sell those pills, obtained for that three-dollar co-pay, for as much as ten thousand dollars on the street."
You may now wish to ask: What share of prime-working-age men these days are enrolled in Medicaid? According to the Census Bureau’s SIPP survey (Survey of Income and Program Participation), as of 2013, over one-fifth (21 percent) of all civilian men between 25 and 55 years of age were Medicaid beneficiaries. For prime-age people not in the labor force, the share was over half (53 percent). And for un-working Anglos (non-Hispanic white men not in the labor force) of prime working age, the share enrolled in Medicaid was 48 percent.
By the way: Of the entire un-working prime-age male Anglo population in 2013, nearly three-fifths (57 percent) were reportedly collecting disability benefits from one or more government disability program in 2013. Disability checks and means-tested benefits cannot support a lavish lifestyle. But they can offer a permanent alternative to paid employment, and for growing numbers of American men, they do. The rise of these programs has coincided with the death of work for larger and larger numbers of American men not yet of retirement age. We cannot say that these programs caused the death of work for millions upon millions of younger men: What is incontrovertible, however, is that they have financed it—just as Medicaid inadvertently helped finance America’s immense and increasing appetite for opioids in our new century.
The VA has also been a part of getting veterans addicted to pain killers.

If you dozed off, the main point: Half of non-working prime age men take daily pain medication. Half of non-working prime-age people are in Medicaid, which pays for re-sellable opiates. Three-fifths of non-working prime age Anglos receive disability payments. The latter benefits disappear if you take a job, or if you move, a steep disincentive that Nick does not mention.

I knew the story, but was not really clear on the magnitude. Half.

An advantage of government-subsidized drugs Nick points out: crime is down. However, our criminal justice system offers another barrier to employment and advancement:

...rough arithmetic suggests that about 17 million men in our general population have a felony conviction somewhere in their CV. That works out to one of every eight adult males in America today.
In the understatement of the year,

we might guess that their odds in the real America are not all that favorable.
The bottom line

And when we consider some of the other trends we have already mentioned—employment, health, addiction, welfare dependence—we can see the emergence of a malign new nationwide undertow, pulling downward against social mobility.
Actually looking at people's lives in this way is devastating to the nostrum that "inequality" is mysteriously increasing and just needs more transfers, or its just a lack of "jobs" which can be brought back by left-wing "demand" or right-wing trade restrictions.

people inside the bubble are forever talking about “economic inequality,” that wonderful seminar construct, and forever virtue-signaling about how personally opposed they are to it. By contrast, “economic insecurity” is akin to a phrase from an unknown language.
This is I think an inartful choice of language. I hear "insecurity" a lot from the left, for example just how it is that obese people have trouble paying for food. And, Orwellian language or not, they do have a point. "Insecurity" is not the core of the problem. "Barriers to Advancement" sounds too old fashioned. "Caught in the web of awful disincentives" is more accurate but does not sing.

The abstraction of “inequality” doesn’t matter a lot to ordinary Americans. ...The Great American Escalator is broken—and it badly needs to be fixed.
With the election of 2016, Americans within the bubble finally learned that the 21st century has gotten off to a very bad start in America.
Reading the Weekend New York Times, especially the Review, I think this is actually false. Americans within the bubble are still foaming at the mouth with Trump Derangement Syndrome. But when they get a grip,

Welcome to the reality. We have a lot of work to do together to turn this around.

28 Jul 2020

Russ Roberts on Economic Humility - Barokong

Russ Roberts has an excellent essay, What do economists know? on economic humility. (HT Marginal Revolution)

A journalist once asked me how many jobs NAFTA had created or destroyed. I told him I had no reliable idea. ...
The journalist got annoyed. “You’re a professional economist. You’re ducking my question.” I disgreed. I am answering your question, I told him. You just don’t like the answer.
A lot of professional economists have a different attitude. They will tell you how many jobs will be lost because of an increase in the minimum wage or that an increase in the minimum wage will create jobs. They will tell you how many jobs have been lost because of increased trade with China and the amount that wages fell for workers with a particular level of education because of that trade. They will tell you that inequality lowers health or that trade with China reduces the marriage rate or encourages suicide among manufacturing workers. They will tell you whether smaller classrooms improve test scores and by how much. And they will tell you things that are much more complex — what caused the financial crisis and why its aftermath led to a lower level of employment and by how much.
And Russ continues, with great clarity, to explain just how uncertain all those estimates are.

So what do economists know? As Russ points out, much of these kind of estimates are not really produced by economics

...most of the people I am talking about are not economists. They are really applied statisticians. Economics is primarily a way of organizing one’s thinking in considering incentives and costs and the interactions between individuals that we call a market but is really emergent behavior with feedback loops.

This is not an argument against quantification. What economists do know are basic facts,

It is useful to know that 40% of the American work force was in agriculture in 1900 and now the number is 2%. It is useful to understand that that transition (which was most faster in the first half of the 20th century than the last half) did not lead to mass unemployment and starvation.

This is a fact, as distinct from a causal analysis.

Economics leads you to great sensitivity to the fact thatcorrelation is not causation. That many workers lost manufacturing jobs while China was expanding does not prove that China's expansion caused those job losses, or that they would not have occurred in a world otherwise the same but with powerful trade barriers. Rich people drive BMWs. Driving a BMW will not make you rich.  This is the main reason why so many "studies" remain controversial, well covered by Russ.

Still, we haven't answered well enough just what economics is good for. Russ:

Economists generally believe that incentives are very powerful
I'd rather he had said "Economists generally understand.." as "believe" is not a good word for any scientific enterprise. Much of the world makes sense if you recognize the power of incentives.

Yes. In just about every policy question an economist sees an incentive. Where most of our political analysis sees an income transfer. Raise gas taxes? An economist sees an incentive to drive less, move closer to work, carpool, ride a bike, buy a more efficient car. Most of our political system sees only a transfer of income, with current habits unchanged.

But I want to go further. Budget constraints and accounting identities. I think good economists quickly follow the money one more step than most analysts. If you subsidize x, then you must take money away from y. If foreigners are not able to sell things to us, then they cannot get dollars to buy things from us, or to buy assets, or to invest in the US. There is no such thing as "real" vs. "paper" investment -- each person making a "paper" investment is buying someone else's liability, which funds a "real" investment. You can't make American's wages go up, say by banning nurses from the Philippines, and also health care costs go down. We can't all buy or sell stocks -- for every buyer there must be a seller.

Unintended consequences. Our field is, perhaps, best described as a collection of funny stories about unintended consequences. (I became an economist one day very young, reading a newspaper story about a program to get rid of poisonous snakes. The government had offered a bounty on each dead snake. Guess what happened. Hint: It's easy to raise snakes.)  Unintended consequences usually come from forgetting about incentives and budget constraints. My daughter, age about 8, looked up from reading the paper one day and asked, "Dad, if the government makes everyone buy fuel efficient cars, won't they just move further from work and use the same amount of gas as before?"

Supply response, (or demand), and competition. In thinking about banking regulation, a good economist focuses on incentives for new banks to come in, rather than just how to manage the existing ones. In thinking about health care, we are all talking about how to pay for it, not about how to get new competitors to come in and offer better services. In thinking about labor regulation, we forget that the worker's ability to quit and easily get a new job, from a new hungry business trying to unseat the old one, is his or her best defense against a shoddy employer. If a drug company grabs the only FDA approval for a generic and hikes the price up insanely, the answer is competition, let others sell the drug, not price controls.

As you see, I think we're pretty good at identifying causal channels that most analysts ignore, even if we are not always great at quantifying their relative significance. But "not zero" is usually an eye opener in public policy.

The fallacy of composition ought to be right up there with correlation is not causation. Roosevelt tried to raise inflation by raising prices. Alas, you can only raise relative prices that way.  Individually, it seems we can get ahead by getting a better bargain, but my gain must be your loss and the economy does not gain overall. What's good for a business, or a bank, is not necessarily good for an economy or a banking system. A local stimulus can work by transferring resources from somewhere else. That does not mean the overall economy benefits from stimulus. Negotiating better can help one, but only at the expense of another. We can't all negotiate better.

In sum, I think economics provides an excellent set of bullshit detectors. This is my stock answer about my own professional expertise. I may not know what makes the economy grow, or how monetary policy works. But I now with great detail exactly why the ten stories in front of us are all wrong, and typically logically incoherent. That is useful knowledge.

Russ has a lovely closing paragraph, which you might miss:

But an economist when considering a policy of banning autonomous vehicles can think of a lot of other impacts besides the jobs saved and the continuing deaths from human driven cars if such a ban is put in place. One of the things we would think about is how such a ban will effect the incentives to discover future innovation that might also people out of work. We would think about how putting more power in Washington would encourage lobbying for protection. We would think about the children and grandchildren of today’s workers and how restricting technology and changing incentives would affect things. These ideas are not rocket science. But they come easily to economists and not so easily to non-economists. Thinking like an economist is very useful.
So let's call it Hayekian humility. This is the hardest one for so many economists to admit, as we all like to play central planner.

Economics and economic history also teach us humility: No economist in 1900 could have figured out what farmers, horse-shoers, ice deliverers, street-sweepers, and so forth would do when those jobs disappeared. The people involved did. Knowledge of our own ignorance is useful. Contemplating the railroad in 1830, no economist could have anticipated the whole new industries and patterns of economic activity that it would bring -- that cows would be shipped from Kansas to Chicago, and give rise to its fabled meat-packing industry. So, in a dynamic economy, all the horse-drivers, stagecoach manufacturers, canal boat drivers, canal diggers, and so forth put out of work by the railroad, and their children, were not, in the end, immiserized.

So, economics should be much better at being the ark for simple lessons of economic history and experience. Alas our current professional training makes us pretty terrible at this.

PhD training in economics focuses on theory and statistical technique, and prepares you well to do academic research. There are occasionally requirements for economic history, but these are usually economic analyses of particular episodes, i.e. training to do research as an economic historian. The sort of simple facts that Russ mentions just aren't much covered.

This isn't necessarily such a terrible thing. Physics training also doesn't cover its intellectual history that much, except for the lovely practice of repeating classic experiments. But current physics theory encodes everything you need to know about the messy experience that distills that theory. So too, perhaps, one may feel that current economic theory encodes everything you need to know about the experiences that produce such theory.

Obviously, this is a doubtful proposition, but to some extent it's true. A supply-demand curve with a price control, showing how price controls, rent controls, and minimum wages produce shortages, really does encode centuries of hard-won experience. However, social science knowledge is obviously less durable than Physics, and we see how quickly economists, armed with the theory but not the experience, can come to doubt their own knowledge. Economic models are not literal descriptions of the truth, but rather quantiative parables.

Also, many of the "facts" aren't quite facts, and really are always up for review. If we start teaching lessons of history, for example, the old chestnut that stimulus is proved by the rise in output from WWII spending -- never mind the failure of output to collapse after WWII ended, the end of Roosevelt's war on capital, the failure of hundreds of other stimulus programs or the minor fact of a war -- or how the New Deal saved us in the Great Depression, will get passed on along with valuable nuggets such as dreary repetition of experience on the effects of rent controls. Many historical issues are no less settled than the current issues that Russ talks about!

Finally, PhD training really is vocational training to do research, not to advise public policy. The market test is pretty clear -- to do research, you don't need a broad based understanding of economic history. When a research project needs a particular history, it's easy enough to learn that.

So, don't sign me up quite yet as one of those ready-for-retirement economists who bemoan too much math and not enough experience in graduate school. Actually we need more math, as the kinds of stories people talk about especially in finance are well beyond our capacity to model.

But the lack of an ark of experience, especially on microeconomic issues where they are clearer, is noticeable.

17 Jul 2020

Work and incentives. - Barokong

Ed Glaeser has a thoughtful essay at City Journal, "The War on Work -- and How to End It.''

It is interesting that our political class says it wants more Americans to work. Yet there are few activities as hit by disincentives and regulatory barriers than the simple act of paying another person to do something for you.

With wide range and long historical perspective, Ed points out the slow decline in the fraction of the population working, especially prime-age men.

From 1945 to 1968, only 5 percent of men between the ages of 25 and 54—prime-age males—were out of work. ...As of December 2016, 15.2 percent of prime-age men were jobless
These are "out of the labor force," not looking for work. We are arguably at a business cycle peak, with a low unemployment rate -- defined as those looking for work.

Joblessness is disproportionately a condition of the poorly educated. While 72 percent of college graduates over age 25 have jobs, only 41 percent of high school dropouts are working.
Why? I'm not going to restate the whole thoughtful essay but the disincentives caused by safety net programs are a big part of the story:

...Social Security and unemployment insurance,  National disability insurance,  Medicaid and food stamps, housing vouchers...
These various programs make joblessness more bearable, at least materially; they also reduce the incentives to find work. ... After 1984, though, millions went on the disability rolls. And since disability payments vanish if the disabled person starts earning more than $1,170 per month, the disabled tend to stay disabled. The economists David Autor and Mark Duggan found that the share of adults aged 25–64 receiving disability insurance increased from 2.2 percent in 1985 to 4.1 percent 20 years later....
Other social-welfare programs operate in a similar way. Unemployment insurance stops completely when someone gets a job, which may explain why economist Bruce Meyer found that the unemployed tend to find jobs just as their insurance payments run out. Food-stamp and housing-voucher payments drop 30 percent when a recipient’s income rises past a set threshold by just $1. Elementary economics tells us that paying people to be or stay jobless will increase joblessness.

The excellent "Panhandling in Downtown Manhattan: A Preliminary Analysis"  by Gwendolyn Dordick and Brendan O’Flaherty (HT Marginal Revolution) gives a particularly vivid example, Eli the panhandler:

Eli is severely disabled and confined to a wheelchair. He is a slight African-American man in his mid to late forties. He is unable to speak clearly. His uncontrollable twisting movements undermine his ability to maintain eye, but they do little to stop him from trying to let people see his somewhat toothless smile.
Eli is not homeless; he rents a small place uptown. Eli collects Supplemental Security Income (SSI) and Medicaid. Rent, food, utilities and transportation leave him little money for anything else, such as helping out his daughters every now and then, and making monthly payments for his cell phone(1) . [1 Eli bragged that since he switched carriers that he chopped close to $90.00 off his monthly bill.]
Eli held regular employment in the past; he worked in a mailroom for two hours a day, but his hours are constrained by government regulated income limits. The more income Eli has, the less his SSI benefit will be. Furthermore, if his "countable’ income exceeds the allowable limit, he will lose his SSI benefits.(2)   [2 Countable income includes earned income from wages, from self–employment; unearned income, such as Social Security benefits, pensions, State disability payments, unemployment benefits, interest income, and cash from friends and relatives; in-kind income, for food or shelter; and deemed income from a relative (http://www.ssa.gov/ssi/text-report-ussi.htm).]
Some of the highest marginal tax rates in the US apply to people  like Eli. Wouldn't we rather see Eli working in the mailroom?

Back to Glaeser, an important point

Scholars Olivier Blanchard and Justin Wolfers have explained Europe’s persistent unemployment, which they called “hysteresis,” by the interaction of adverse economic shocks and extremely generous welfare states.
The fact that food stamps and disability have huge implied marginal tax rates does not affect people how have a job. Their disincentives kick in when people lose jobs, use the programs, and find it very hard to kick the habit.

Glaeser also mentions occupational licensing and other barriers to employment.

Glaeser mentions housing subsidies, but not their disincentive effects. I hope, as a top real estate economist, he comes back to this topic. Much of our safety net is tied to location. One reason people don't move to follow better jobs is that safety net programs don't follow them or family members well.

Housing subsidies are among the worst offenders. If you win an "affordable housing" lottery in one part of town, you can't afford to move across town or to another town to follow a better job. Or any job. Our government's subsidy of highly leveraged owner occupied houses has impoverished a generation of people who need to leave the factory town when the factory closes.

This is a tough nut. We want our government to target money to people who really need it. But we don't have infinite money. The answer has been to means-test programs, phasing out benefits as people get more income. The answer also has been to make programs somewhat of a pain in the butt, and not so portable. That discourages people who "don't really need it." Many Federal programs have take up rates in the single digit percentages. State and local administration of programs also discourages portability. Once you've gotten on Medicaid and found a doctor who will actually see you, moving once again gets harder.

The answer, I think is perhaps to spend more in order to spend less, and to limit benefits by time not by income; to focus on the incentives of programs not the amounts they spend. If there is less income phase out, the marginal tax rate is lower. The static cost seems larger, but if more people can move out of needing benefits, it may not be larger in the long run. If disability for back pain, say, was for 3 years only, integrated with health care for back pain, has no income limit, is transferable to a new place, we might see a lot more work -- people figuring out new occupations that don't hurt their backs too, more mobility, and in the end less expense.  Benefits need to be much  more portable, we need to let builders build apartments where people want to go.

More deeply, our government is quickly creating a legal class system based on income. You are a "low income person," for life, apparently, much as you once were a serf, tied to place, occupation and status. No. In America "income" should be, as it is, a temporary part of your life, low at times of misfortune, high at times of good fortune, and always beckoning. We are not a class society, but we are fast creating one by legislation.

The disincentive to work comes from the sum of all programs, not each one in isolation. The fragmentation of our programs makes the disincentives harder to see. Glaeser:

Consolidating social policies would be a crucial step. Struggling families now receive food stamps, housing vouchers, Temporary Aid to Needy Families, and other assistance—all of which punish work. If the various programs were combined into a single cash benefit, that benefit could be designed so that the tax on earnings never went above 30 percent. We could follow the lead of Norway on unemployment and disability insurance, allowing the disabled to keep, say, 50 percent of their benefit above the $1,170 threshold, while tightening the requirements for being designated as disabled. [Or, as I suggest, limiting the time] Unemployment insurance could be structured so that payments were no longer contingent upon staying completely out of work.
Reforming the incentives of social programs could be a bipartisan effort (if anything can be a bipartisan effort these days). We spend less, we help people more.

Reform is not impossible.

Twenty years ago, the more economically successful European nations, such as Sweden, Germany, and the Netherlands, reorganized their welfare states to emphasize work and witnessed positive results. Others, including France, Italy, and Spain, did not, and they have struggled. In a sense, the eurozone financial crisis of the past half-decade is the legacy of southern European countries that wouldn’t fix their failing welfare systems. The U.S. needs to decide if it wants to follow the path of Germany or of Spain.
"Socialist" Sweden turned out to be remarkably hard nosed about incentives. If they can do it, so can we.

15 Jul 2020

Automation and jobs - Barokong

I am often asked to opine about whether automation will destroy all the jobs. Yes, we talk about tractors, which brought farm employment from something like 70% of the country at the beginning of the 20th century to about 3% today. And cars, which put the horse drivers out of business. And trains, which put the canal boats out of business.

A more recent case occurred to me. This is what offices looked like in the 1950s and 1960s:

Embed from Getty Images

Typing Pool. Source: Getty Images

This is a "typing pool." There used to be basketball-court sized rooms that looked like this, all over the place, staffed almost exclusively by  women.

Then along came the copier -- many of these women are copying documents by typing them over again with a few sheets of carbon paper -- the fax machine, the word processor, the PC. And that's just typing. Accounting involved similar roomfuls of women with adding machines. Filing disappeared. Roomfuls of women used to operate telephone switchboards, now all automated.

This memory lives on in the architecture of universities. All the old buildings have empty hutches for secretaries.

If you are prognosticating in about 1970, and someone asks, "what will happen now that women want to join the workforce, but office automation is going to destroy all their jobs?" It would be a pretty gloomy forecast.

What actually happened: Female labor force increased from 20 million to 75 million. The female participation rate increased from below 35% to 60%. Women's wages relative to men rose -- they moved in to higher productivity activities than typing the same memo over a hundred times. Businesses expanded. And no, 55 million men are not out on the streets begging for spare change.

Civilian Labor Force Level: Women

Civilian Labor Force Participation Rate: Women

I'm simplifying of course. And surely some people with specific skills -- shorthand, typing without making mistakes, and so on -- who could not retrain didn't do as well as others. But the magnitude of the phenomenon is pretty impressive.

Update. So did women just take all the men's jobs? As MC points out, the male labor force participation rate did decline, from 87.5 to 70.0. That's a big, worrisome decline. But it's 15 percentage points, while the women's increase was 25 percentage points.

But even if women are moving in and men are moving out of employment, that does make the case that you don't just look at who has what jobs now threatened by automation! The typing pool got better jobs.

Please (please!) keep in mind the point here. No, this is not a post about all the ills of the labor market, and "middle class" America, and all the rest. Yes, there are plenty. The narrow point is, will automation mean that all the jobs vanish. In this case, even combined with a large expansion of the people wanting to work, it did not.

Also the male labor force expanded from 45 million to 82 million. So the idea that there is a fixed number of jobs and if women take them men lose them is not true.

24 Jun 2020

Meer On Minimum Wage - Barokong

David Henderson posts a thoughtfuldraft op-ed by Jonathan Meer on minimum wages. Two talents of  great economists are to recognize that averages hide big differences among people, and to imagine all the avenues of substitution and unintended effects of a regulation. The oped excels:

Substitution:

when the minimum wage is raised, employers offset increased labor costs by reducing benefits like the generosity of health insurance. Other benefits, like free parking or flexibility in scheduling, are more difficult to measure but are also likely to be cut back. Employers will likely expect more work effort when they are forced to pay more, changing the nature of jobs. And in the longer run, economists have found that employers shift towards automation and expecting customers to do more things themselves– reducing job growth in ways that aren’t always obvious. This damage takes time to be seen, which is one reason minimum wage hikes, like rent control, often seem appealing.
Who gets jobs?

When debate focuses on the total number of jobs lost or gained, it hides this potentially nasty distribution of the benefits: a recent college graduate with a barista job may get a few more dollars an hour, but the high school dropout finds it harder to get and keep a job. ...
The teenage children of well-off families, earning money to buy video games, are treated the same as single moms struggling to get by. When wages are set at an artificially high rate, why should an employer take a risk on the single mother who needs the occasional shift off to take her kids to the doctor? The kid from a disadvantaged background who needs some direction on how to treat customers appropriately? Or the recently released felon trying to work his way back into the community? Why should employers bother with them when there are plenty of lower-risk people who are willing to work at those artificially high wages?
Assorted comments, especially to dispel the usual you-just-don't-care-you-want-profits-for-big-business calumnies:

It will get much worse in the next recession...Those at the margins of the workforce will be left further behind. Low-wage jobs aren’t easy, don’t pay well, and are rarely fun. But not being able to find work at all is far worse.
Despite the lowest unemployment rates in decades, only 39% of adults without a high school degree had a full-time job in 2018 – and among young African-Americans dropouts, it’s a shocking 26%. It’s hard to believe that the best way to help them find work and start climbing the job ladder is to put the first rung out of reach, making it difficult for them to find work and driving them to illegal employment with few protections.
We should never minimize the struggles of low-income families to get ahead. But good intentions are no substitute for good policy. Minimum wage proponents mean well, but the unintended consequences hurt the worst-off the most.
Jonathan isn't just making this up as us bloggers tend to do. He points to "The Minimum Wage, Fringe Benefits, and Worker Welfare, with Jeffrey Clemens and Lisa B. Kahn

...state-level minimum wage changes decreased the likelihood that individuals report having employer-sponsored health insurance. Effects are largest among workers in very low-paying occupations,
andDropouts Need Not Apply: The Minimum Wage and Skill Upgrading

workers employed in low-paying jobs are older and less likely to be high school dropouts following a minimum wage hike.... job ads in low-wage occupations are more likely to require a high school diploma following a minimum wage hike,
Related, Zachary S. Fone, Joseph J. Sabia, Resul Cesur find exactly the predicted substitution into criminal activity

find that raising the minimum wage increases property crime arrests among those ages 16-to-24, with an estimated elasticity of 0.2. This result is strongest in counties with over 100,000 residents and persists when we use longitudinal data to isolate workers for whom minimum wages bind. Our estimates suggest that a $15 Federal minimum wage could generate criminal externality costs of nearly $2.4 billion.
Hat tip to David Henderson, who posted the draft oped and a link to the excellent Jonathan Meer - James Galbraith debate, and to the indefatigable Marginal Revolution. I saw an early draft of the oped, and hoped Meer would be able to publish it, at least somewhere like WSJ. It's not too late!

Update:

Jonathan passed on this tidbit from Obenauer & von der Nienburg, “Effect of Minimum-Wage Determinations in Oregon,” July 1915, yes 1915

“The belief was very prevalent among store women that the minimum wage had wrought only harm to them as a whole. The experienced women contended that formerly they had gotten through the day without any hurry or strain. If it was necessary to work a few minutes overtime, they did so willingly. Now, they said, they are under constant pressure from their supervisors to work harder; they are told the sales of their departments must increase to make up for the extra amount the firm must pay in wages.”
Plus ça change...

Overall, it's a shame that economists have bought the popular discourse that all that matters are "jobs," as if it were 1933, not the vast range of the terms of employment -- how hard you have to work, hours, tasks, flexibility, side benefits, overtime, and so forth.

21 Jun 2020

Two Videos - Barokong

My Hoover colleague Russ Roberts just finished a nice video on inequality:

Among other takeaways, he stresses that the people who were rich in 1980 are not the same people or even families who are rich now. It is not true that "the rich got richer." He also tracks individuals through time, and poor individuals got richer to.  There is a lot more economic mobility in the US than the standard talking points.

The video is part of Hoover's Policy Edinitiative, and comes with lots of background information. I'll be curious to hear your comments.

A few months ago I went to the Friedberg Economic Institute to give an evolving talk I call "Free to grow" bringing together various themes of this blog and other writing. It's not nearly as polished as Russ's, and I'm still struggling to keep it under 10 hours!

(Click here to see the video.) The Friedberg Institute is a nascent free-market oriented organization in Israel. It mostly sponsors talks and classes for undergraduates, and for alumni of their program. As a result it is forming a club of sorts of talented and interesting young Israelis interested in economic freedom. If you're in Israel, check it out, and if you're invited to talk there, accept!

20 Jun 2020

Clemens on minimum wage - Barokong

Jeff Clemens offers a "roadmap for navigating recent research" on minimum wages in a nice CATO policy analysis.  A review and a doubt.

He discusses the recent claims that minimum wages don't hurt low-skilled people. This is an impressive and readable account of a vast literature. It's not as easy as it seems to evaluate cause and effect in economics.  Evidence from small increases in the minimum wage over short time intervals in some locations in good economic times may not tell you the effects of large increases over longer time intervals in all locations in bad economic times.

The "new conventional wisdom," of small effects, Jeff reports, ignores a lot of the more recent work, and especially work that  uses "data from individual-level administrative records" rather than "aggregate data and survey data," work that runs "experiments whenever possible," and work that "transparently analyzes compact historical episodes in the U.S. experience" (P. 8)

(The "transparency" issue is one that Jeff only touches superficially but I sense an important detailed critique that needs to be written.)

Economics has become more empirical lately, and that's a good thing. But "facts without logic" pose a conundrum. Either the facts or the logic are wrong. Good for science, but one might want vast public policies with the possibility of unintended consequences to ruin a lot of people's lives to wait for facts and logic to be reconciled. Jeff runs through the arguments why large permanent increases in the minimum wage might not hurt, and finds them wanting.

An under-appreciated point: work is far more than just I work, you pay me:

"the details of employees’ schedules, perks, fringe benefits, and the organization of the workplace are central to firms’ management of both their costs and productivity. "
Employers can react to a minimum wage not by cutting back workers, but by selecting better workers, denying fringe benefits, making you pay for uniforms, insisting on schedules that are inconvenient for you but convenient for them, insisting you be on call at all times for example, and so forth. Since we don't have data on these adjustments,

empirical evidence will tend to understate the minimum wage’s negative effects and overstate its benefits.
Jeff, p. 9

Work hours can be at the convenience of the worker or at the convenience of the firm. The pace of work can be fast or slow, safer or riskier, and can require more or less mental energy. Compensation can either include or exclude health insurance, retirement contributions, and other benefits. A job’s location can be more or less preferable, and opportunities for advancement (within or outside the firm) can be more or less ample.
A second effect, which Jeff doesn't mention: Which workers get the jobs will change. Workers who can adapt to inflexible schedules, don't need benefits, are well trained, get the jobs. Economic policy discussion too often takes the average as example and assumes each person is just like the average. The economy is all about how people jobs and businesses are different - "heterogeneity" and "selection" in economic parlance.

A doubt

But let me express a doubt. Why do we discuss minimum wages so much? I think they irritate free-market economists because they are such a clear, simple, and paradigmatic stupid idea. The first insight of your Econ 101 class is that price controls destroy markets:

We see it over and over again, in centuries of experience boiled down to this simple graph. Price controls, rent controls, wage controls all have led over and over again to the same sorry story. And when supply is greater than demand, who gets the good, apartment, or job gets all screwed up.  Don't try to transfer income by screwing up prices. Along with tariffs and disincentives of 100% marginal tax rates, there isn't much more essential to the basic canon of economics.

So, if you're a young ambitious economist, and you want to attract a lot of attention, what could be better than empirical work showing magic: Wait, minimum wages don't hurt employment! Hooray, all the old fogies are wrong! If you are an activist, annoyed by the neoliberal orthodoxy, it's catnip. Hooray, the government can go ahead and control prices and thereby transfer incomes!

And if you're a regular economist, nothing could be more annoying.

So we pay a lot of attention and generate a lot of controversy.

But here is my doubt. Let us line up a list of economic circumstances and government policies that are potentially hurting disadvantaged Americans:

  • Minimum wages. Sure.
  • The rest of the massive set of labor laws, regulations, and taxes, all of which reduce  employment, especially of less skilled workers.
  • A rotten education system, beholden to teachers unions.
  • Criminal justice pathology, including drug laws, life-destroying treatment of innocents, lack of education and training, and laws and rules against hiring people with criminal records.
  • Zoning and building restrictions, resulting in no housing near jobs.
  • Occupational licensing ridiculousness. A thousand hours and a big test to open a nail salon.
  • The death by a thousand cuts of restrictions on low-price low-income entrepreneurship. Business licenses, zoning that disallows businesses in residential areas, laws that make it hard to hire people -- all of which sends low income people to the illegal economy, which is a poor way to transition to the legal economy. A tiny one: permits for and bans on repeated garage sales (I just found out about this).
  • Disincentives of social programs and subsidies, leading to 100% marginal tax rates for many.
  • Disincentives of "affordable" or other subsidized housing.
  • Social background: Many people grow up in neighborhoods where there are no two-parent families, few adults with permanent jobs, widespread crime, no business. Government actions bear a lot of the blame for this.
I could go on. I'll allow "wave of cheap imports from China and floods of low skilled immigrants," from the right, and perhaps "growing monopoly of the huge companies" from the left, even though I think both are silly. Add all the travails facing the kind of people affected by minimum wages you can think of.

What I would like to see, then, is some sense of priorities. Which of these is really hurting people the most? As you can tell I have a hunch that minimum wages are a problem, sure, a particularly clear pathology, sure, a particularly annoying piece of economic ignorance, sure, but that by focusing on them we really aren't focusing on the biggest problems holding many Americans back. We all want to help Americans with low skills and (currently) low incomes to get ahead. (It would be nice if the left acknowledged that occasionally.) But I'm not sure that allowing them to keep working at $9 an hour is the most important step in that direction, or that a $15 per hour minimum (legal!) wage will be the greatest sin of the many things our government does to hold people back.

Update: Jonathan Meer points me to a lovely essay by Tom Leonard, making this point more eloquently than I. No idea is genuinely new I guess! It's not a fight about how to help poor people. It's a fight about economics and the poor people are (as usual) the sorry victims of intellectual warfare:

Minimum-wage effects, at least for current U.S. magnitudes, are small potatoes. Of several more important policy concerns—entitlement reform, health insurance, CPI calculation, for example—none has generated anything like the vituperation that has characterized the minimum-wage controversy. But if the minimum-wage controversy is not especially important to the economy, it is very important to economics, and, thereby, to the status of economics as a policy science.
The reason, I want to argue, is that the core of modern economics— neoclassical price theory—is seen to be at stake. In particular, minimum- wage research has come to be seen as a test of the applicability of neoclassical price theory to the determination of wages and employment. The modern minimum-wage controversy is not just a technical quarrel over the sign and magnitude of wage-elasticity coefficients; it is the latest chapter in a longstanding methodological dispute over whether and in what domains neoclassical price theory can be said to properly apply.
His footnotes are even great

1. In the wake of Card and Krueger 1995, one Nobel laureate intoned, “I tremble for my profession” (Miller 1996). Another made reference to “camp-following whores” (Buchanan 1996). A third eminence called Card and Krueger’s main interlocutors, David Neumark and William Wascher, “heroes” (Barro 1996).
This is the kind of history of economic ideas I wish we had more of.

Refreshing YIMBY at NYT - Barokong

Farhad Manjoo writes an excellent YIMBY (yes in my back yard) essay in the New York Times, remarkably placing the blame squarely where it belongs -- progressive politics.

Across my home state [California], traffic and transportation is a developing-world nightmare. Child care and education seem impossible for all but the wealthiest. The problems of affordable housing and homelessness have surpassed all superlatives — what was a crisis is now an emergency that feels like a dystopian showcase of American inequality.
Just look at San Francisco, Nancy Pelosi’s city. One of every 11,600 residents is a billionaire, and the annual household income necessary to buy a median-priced home now tops $320,000. Yet the streets there are a plague of garbage and needles and feces, and every morning brings fresh horror stories from a “Black Mirror” hellscape: Homeless veterans are surviving on an economy of trash from billionaires’ mansions. Wealthy homeowners are crowdfunding a legal effort arguing that a proposed homeless shelter is an environmental hazard. A public-school teacher suffering from cancer is forced to pay for her own substitute.
At every level of government, our representatives, nearly all of them Democrats, prove inadequate and unresponsive to the challenges at hand. Witness last week’s embarrassment, when California lawmakers used a sketchy parliamentary maneuver to knife Senate Bill 50, an ambitious effort to undo restrictive local zoning rules and increase the supply of housing.
He notices the same hypocrisy that struck me walking past the "all are welcome here" signs in Palo Alto:

Then there is the refusal on the part of wealthy progressives to live by the values they profess to support at the national level. Creating dense, economically and socially diverse urban environments ought to be a paramount goal of progressivism... Urban areas are the most environmentally friendly way we know of housing lots of people. We can’t solve the climate crisis without vastly improving public transportation and increasing urban density. ...
Yet where progressives argue for openness and inclusion as a cudgel against President Trump, they abandon it on Nob Hill and in Beverly Hills. This explains the opposition to SB 50, which aimed to address the housing shortage in a very straightforward way: by building more housing. ...
Reading opposition to SB 50 and other efforts at increasing density, I’m struck by an unsettling thought: What Republicans want to do with I.C.E. and border walls, wealthy progressive Democrats are doing with zoning and Nimbyism. Preserving “local character,” maintaining “local control,” keeping housing scarce and inaccessible — the goals of both sides are really the same: to keep people out.
“We’re saying we welcome immigration, we welcome refugees, we welcome outsiders — but you’ve got to have a $2 million entrance fee to live here, otherwise you can use this part of a sidewalk for a tent,” said Brian Hanlon, president of the pro-density group California Yimby.
It's an obvious point. But it's great to hear this point in the New York Times. An internal reflection on hypocrisy is much more effective than an outside charge.

I don't agree with everything. He starts with a good point,

One continuing tragedy is the decimation of local media and the rise of nationalized politics in its place.
Yes, everyone here in California is so consumed with Trump Apolexy that they don't even notice what the city council is doing. But Manjoo chalks the fundamental problem up to larger representation for rural states in the Senate. Hmm. If the same people who vote for San Francisco zoning have more power to push their agenda on the whole country, I don't see how that makes it better.

Still I see hope. California is a one party state, and the one party is slowly waking up to the fact that it must govern too. Slogans about the great progressive future are fine in opposition, but once you've been in total charge for a while, you do start to own it.  After trying everything else, California is slowly waking up to the fact that we have found the problem and it is us. Subsidies, vouchers, "affordable housing" mandates will never make a dent. Just Let Them Build some housing. It took Nixon to go to China. I was very happy to see the Obama administration recognize the havoc caused by occupational licensing restrictions. The YIMBY self-reflection is not over yet.

14 Jun 2020

Summers tweet stream on secular stagnation - Barokong

Larry Summers has an interesting tweet stream (HT Marginal Revolution) on the state of monetary policy. Much I agree with and find insightful:

Can central banking as we know it be the primary tool of macroeconomic stabilization in the industrial world over the next decade?...There is little room for interest rate cuts..QE and forward guidance have been tried on a substantial scale....It is hard to believe that changing adverbs here and there or altering the timing of press conferences or the mode of presenting projections is consequential...interest rates stuck at zero with no real prospect of escape - is now the confident market expectation in Europe & Japan, with essentially zero or negative yields over a generation....The one thing that was taught as axiomatic to economics students around the world was that monetary authorities could over the long term create as much inflation as they wanted through monetary policy. This proposition is now very much in doubt.
Agreed so far, and well put. "Monetary policy" here means buying government bonds and issuing reserves in return, or lowering short-term interest rates. I am still intrigued by the possibility that a commitment to permanently higher rates might raise inflation, but that's quite speculative.

and later

Limited nominal GDP growth in the face of very low interest rates has been interpreted as evidence simply that the neutral rate has fallen substantially....We believe it is at least equally plausible that the impact of interest rates on aggregate demand has declined sharply, and that the marginal impact falls off as rates fall.  It is even plausible that in some cases interest rate cuts may reduce aggregate demand: because of target saving behavior, reversal rate effects on fin. intermediaries, option effects on irreversible investment, and the arithmetic effect of lower rates on gov’t deficits
Central banks are a lot less powerful than everyone seems to think, and potentially for deep reasons. File this as speculative but very interesting. Larry has many thoughts on why lowering interest rates may be ineffective or unwise.

The question is just how bad this is? The economy is growing, unemployment is at an all time low, inflation is nonexistent, the dollar is strong. Larry and I grew up in the 1970s, and monetary affairs can be a lot worse.

Yes, the worry is how much the Fed can "stimulate" in the next recession. But it is not obvious to me that recessions come from somewhere else and are much mitigated by lowering short term rates as "stimulus." Many postwar recessions were induced by the Fed, and the Great Depression was made much worse by the Fed. Perhaps it is enough for the Fed simply not to screw up -- do its supervisory job of enforcing capital standards in booms (please, at last!) do its lender of last resort job in financial crises, and don't make matters worse.

But how bad is it now? Here Larry and I part company. Larry is, surprisingly to me, still pushing "secular stagnation"

Call it the black hole problem, secular stagnation, or Japanification, this set of issues should be what central banks are worrying about...We have come to agree w/ the point long stressed by Post Keynesian economists & recently emphasized by Palley that the role of specific frictions in economic fluctuations should be de-emphasized relative to a more fundamental lack of aggregate demand.
The right issue for macroeconomists to be focused on is assuring adequate aggregate demand.
My jaw drops.

The unemployment rate is 3.9%, lower than it has ever been in a half century. It fell faster after about 2014 than in the last two recessions.

Labor force participation is trending back up.

Wages are rising faster and faster, especially for less skilled and education educated workers.

There are 8 million job openings in the US.

Why in the world are we talking about "lack of demand?

Larry had a point about secular stagnation in about 2014. The Great Recession was dragging on seemingly forever. There was a good debate about "secular stagnation" vs. sand in the gears -- the cumulative effects of Obamacare, Dodd Frank, and the regulatory war on capital. But those days are over. How can anyone be seriously talking about "lack of demand" now?

Yes, despite the clearly full employment labor market, GDP is growing more slowly than I think is possible, and I can infer Larry agrees. But at full employment slow GDP growth comes from too slow productivity growth.

Let me suggest the alternative:

The right issue for macroeconomists to be focused on is assuring adequate aggregate supply.
[This is me, not Larry]. We need now a "pro-growth" agenda. When you're out of recession and financial crisis, further growth comes from "supply." And there is plenty to work on there. Alas, supply requires a Marie Kondoing of our public life, not a grand new initiative. Fix all they little things: zoning, agricultural policy, tax reform, reducing disincentives of social programs, continued regulatory reform, cutting tariffs, occupational licensing, and on and on. Macroeconomists (and growth economists) should be focusing on microeconomics.

Larry goes utterly in the opposite direction:

Obviously fiscal policy needs to be a major focus, especially given what low or negative interest rates mean for the sustainability of deficits.
But the level of demand is also influenced by structural policies: e.g. pay-as-you-go social security, higher retirement ages, improved social insurance, support for private infrastructure investment, redistribution from the high-saving rich to the liquidity-constrained poor.
OMG. In case you can't read between the lines, the first paragraph means deliberate even larger deficits. "infrastructure investment" in the US today means more $4 billion per mile subways and high speed trains to nowhere. Redistribution to the liquidity constrained means forcibly taking away hard earned money to give it to people who have maxed out their credit cards.

(The latter is an especially pernicious argument. If the point is to give money to those who will consume it more effectively than us hopelessly frugal savers, then give it to the liquidity constrained rich too, and do not give it to the frugal poor.  This is a classic case of an answer in search of a question, as the question does not lead to income-based redistribution.)

Larry isn't quite at the Magical Monetary Theory and Green New Deal blowout here. But I only infer that from his previous statements critical of those for going too far. This is darn close and all in the same direction.

One might defend Larry that previously he was talking about contingency plans for stimulus in a recession. But these are permanent, structural policies that come and stay for a generation.

I thought of Larry as the epitome of centrist, sensible, technocratic Democratic Party stalwarts, alongside say Alan Blinder, who wrote quite sensibly in the WSJ warning against the excesses of Green New Deal and health care for all. I still have hope that that sensible wing of the party will prevail, and join with the sensible wing of Republicans (there still is one) to fix the supply end of our country. But this is an amazing sharp left turn.

Larry's closers with another intriguing thought.

The high inflation and high interest rates of the 1970s generated a revolution in macroeconomic thinking, policy and institutions. The low inflation, low interest rates and stagnation of the last decade has been longer and more serious and deserves at least an equal response
Well put and yes indeed. But in my view, Alvin Hansen's 1939 speculations about eternal lack of demand and a soft version of AOC-Sanders-Warren deficit financed spending blowout and "redistribution" aren't it. Marie-Kondoing the massive clutter and disincentives on the growth side of our economy is.

13 Jun 2020

Inflation, and history - Barokong

Phil Gramm and John Early have an excellent WSJ oped on inflation measurement.

Many conventional inflation measures are  overstated by around 1% per year, because they don't capture quality change well. When the iPhone 22 comes out, and costs (say) the same as the iPhone 21, that looks like there is no inflation. But the iPhone 22 has dozens of new features, so you're really getting "more phone," and there is deflation. Think of all the things like mapping that are now free. It's not just tech. Houses are bigger and better, cars are much better and safer, and lots of services are now free

No price index takes account of the fact that each month more than twice as many people get medical advice from WebMD as visit the doctor’s office in America.
The people who make price indices try hard to account for quality, but the result is still biased.

Now for many uses we don't get too upset about this, just as a clock that's always 5 minutes fast is still useful. In particular, for spotting trends in inflation, is it rising or falling, a steady 1% bias doesn't make much difference.

Where it does make a big difference is when you cumulate inflation over a long period of time. We  do that in the politically charged question, is the average American better off now than his or her parents were in 1975, and if so how much? Now whether 1% per year times 44 years is more inflation or better stuff matters a lot.

When corrected for documented price overstatements, real average hourly earnings from 1975 to 2017 are shown to have risen some 52%, not 6%—an additional $6.77 an hour. Real median household income increased 68%, not 21%—$17,060 more annually.
And published poverty incidence fell by almost half. Combined with the 67% drop in poverty that comes from accounting for all government transfers, poverty incidence sank from 12.3% to about 2%.
In the political debate over the fate of the "middle class" these are huge differences. The mantra-repeated narrative that the "middle class" hasn't advanced at  all  since the 1970s is simply not true. (Quotes because I reject the idea that we are a class society,  and hence the use of this word.)

Gramm and Early emphasize the other long-run issue: when one uses 1% cost of living adjustments in government payments, that too cumulates to dramatic numbers over long time periods

By overstating inflation, CPI indexes inflate real spending in Social Security, federal employee retirement, military retirement and poverty programs like Supplemental Security Income. Overstating inflation also overstates the minimum-income threshold to qualify for Medicaid, food stamps and other subsidies.
If the tax code and transfer payments had been indexed to an even more accurate index embodying all known price-index overstatements, revenues since 2000 would have been more than $1 trillion higher, transfer payments $2.6 trillion lower, and the national debt 23% lower
Gramm and Early's main point: better indices exist. Why don't we start using them?

Since PCEPI and C-CPI-U overstate inflation less than other official indexes, it would seem reasonable to adopt one of them immediately for all historical comparisons, official statistical estimates, and inflation adjustments for taxes and spending
You know the answer, right? Because a lot of voters' checks depend on using an inflated number.

The other issue not mentioned is the great puzzle of our current monetary policy, inflation, and interest rates. Why are interest rates so persistently low? Well, if inflation were really two percent overstated, the world would make a lot more sense. Then we would really have positive two percent real interest rates, because inflation is really zero. I don't see evidence that it's that large, but it sure would make a lot more sense.

The next issue, that I think is much under-studied: the huge local variation in prices, and, via huge variation in what we consume, the inflation experienced by people in different parts of the country. Living in California and especially the Bay Area is like living in a different country with a different currency. Even gas costs twice what it does in the rest of the country. A lot of what appears to be income inequality is just different prices, and especially land prices. (Much of the productivity of tech workers went in to the pockets of existing land owners.) If you get paid 100 yen in Japan, you're not 100 times wealthier than someone who gets paid 1 dollar in the US.  Being paid $100,000 per year in San Francisco is something like that -- and being paid $20 per hour in much of the US is nowhere near the disaster than being paid that much in San Francisco would be.

How much local variation in prices is really variation in quality, and how much is just higher prices? Like the slow 1% bias in national inflation rates, local variation likely doesn't matter for short-run issues, but cumulates over time, so local  variation in the price level is large. And local variation in typical consumption baskets even larger. In my last look at this I could find local inflation rates, but not good price level  comparisons. But I haven't looked that hard.

(Gramm and Early write

Two recent studies, one by Bruce Meyer and James Sullivan and another by Brent Moulton, combine more than 50 credible studies documenting specific overstatements in consumer price indexes.
but the WSJ does not have links.  I can't quite figure out which of the many excellent Meyer and Sullivan papers they have in mind. Be prepared like me to lose some time browsingMeyer's website and Sullivan's website. I think this is Brent Moulton's article.)

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