Month: June 2015

Things to Read on the Afternoon of June 15, 2015

Posted on by Brad DeLong

Must- and Should-Reads:

Over at Equitable Growth—The Equitablog

Might Like to Be Aware of:

Must-Must-Read Monday Smackdown: Senator Sessions Edition

Posted on by Brad DeLong

Must-Must-Read: Steve Benen: The importance of setting Sessions straight: “The Senate Judiciary Committee held a… hearing…

…which became notable for one very specific reason. As much of the political world wait for the Supreme Court to issue its ruling in the King v. Burwell case, Republicans at least pretend to believe that the Affordable Care Act was written in such a way as to deny subsidies – on purpose – to consumers who enrolled through healthcare.gov. To that end, Sen. Jeff Sessions (R-Ala.) thought he was making an important point yesterday, addressing the Constitutional Accountability Center’s Elizabeth Wydra:

I think maybe, Ms. Wydra, the statute could have just been written, ‘Our goal is to make available health care for all Americans.’ That wasn’t what the law said, however.’

Soon after, Wydra had a chance to respond.

Sen. Sessions joked that the statute should have been written to say to health care ‘should be available for all Americans.’ Well, point of fact, Title I of the act is titled, ‘Qualify, affordable health care for all Americans. So that is the stated purpose of the law and it wouldn’t make any sense for Congress to have written the tax-credit eligibility to defeat that purpose.

Well, look at that. We just saw the entire King v. Burwell controversy get resolved in 41 seconds. Someone let the justices know their input is no longer required. The whole thing was caught on video. The New Republic’s Brian Beutler described the exchange as a ‘succinct, pithy demolition’ of the ‘bad faith’ arguments behind the King v Burwell case. I couldn’t agree more…. As Sessions put it yesterday, if the law’s authors… still walking around, telling anyone who’ll listen… wanted to make affordable care available to everyone, they should have put that language in the Obamacare statute itself. But that’s what makes Wydra’s response so brutal: the ACA’s authors did put that language in the Obamacare statute itself.
 
Just once, I want to hear an ACA critic admit what is plainly true: King v. Burwell is a brazenly stupid con, but they’re playing along with the charade because they really hate the president and his signature domestic policy initiative. Pretending the case is anything but a laughingstock is, at this point, simply impossible.

State-Level Fiscal Policy: Tyler Cowen’s Language Strikes Me as Somewhat Aesopian…

Posted on by Brad DeLong

The sharp Tyler Cowen writes:

Tyler Cowen: Has fiscal conservatism met an impasse at the state level?: “The latest from Louisiana is that taxes are going up…

…but in a strange way that won’t be called a tax increase…. It is even weirder than that sounds.  Combine that with the recent fiasco in Kansas…. Fiscal conservatism has been stymied at the state level… for many other states, especially those governed by Republicans…. Trying to cut taxes at the state level doesn’t seem like a useful or productive way forward. If you have a better revisionist take on Louisiana and Kansas, please do put it in the comments, I would gladly read it, and if you have something really good I will pass it along.  But I see myself as stating what has to be the default hypothesis for the time being–should we not all come out and admit this?

There were always three arguments for aggressive state level revenue-cutting (including the cutting of money flowing into the state from the federal government by taking advantage of John Roberts’s empowering states to reject the ObamaCare Medicaid expansion while keeping standard Medicaid, and including dragging your feet on ObamaCare Exchange outreach). They were:

  1. Lower state tax rates/avoiding the ObamaCare morass would unleash a wave of entrpreneurship and enterprise within your state that would quickly produce higher revenues to keep state budgets in shape.

  2. Lower state tax rates/avoiding the ObamaCare morass would attract entrepreneurship and enterprise from neighboring states (in Kansas, cough, from across State-Line Road) that would quickly produce higher revenues to keep state budgets in shape.

  3. Once the tax cut was in place, politicians would find that those crying against the cuts would have less political weight and actually care less than those benefitting from the tax cuts. (Though it was never clear whether the argument was that programs could be cut without actually losing much in the way of value because (a) government spending at the state level was massively inefficient, or because (b) government spending at the state level went to people who were now politically powerless).

I thought that, while (1) and (3a) were certainly false, (2) and (3b) were likely enough to be true that the Brownbacks in Kansas and the Jindals in Louisiana would be able to claim political and budgetary victories even as their policies lowered societal welfare in Kansas and Louisiana.

Now when Tyler Cowen writes:

Trying to cut taxes at the state level doesn’t seem like a useful or productive way forward…

He is saying: (1), (2), (3a), and (3b) have all failed to materialize, in such a way that Kansas and Louisiana are now deeply embarrassing for even semi-technocratic small-government advocates nationwide. And the only remaining question is which of the implementers and their ideologues–Jagadeesh Gokhale, Michael Cannon, and company at Cato; Arthur Laffer; Stephen Moore at the Club for Growth; and the others cranking up the noise machine; and Brownback, Jindal, and company in office–were in on the con, which were simply deluded, and how far do semi-technocratic small-government advocates need to distance themselves from the crew in order to maintain political and policy credibility?

This is actually surprising to me: I would have bet a decade ago that the combined probability of either (2) or (3b) in either Kansas or Louisiana was well north of 50%…

Must-Read: Marshall Steinbaum: Sampling Bias in “Firming Up Inequality”

Posted on by Brad DeLong

Must-Read: Marshall Steinbaum: Sampling Bias in “Firming Up Inequality”: “Firming Up Inequality [Song, Price, Guvenen, and Bloom (2015)]…

…estimates the extent to which increasing inequality in the distribution of earnings from labor is caused by rising within- vs. between- inequality. But its statistical sampling from the Social Security Master Earnings File (MEF) is biased in a way that reduces inequality in the sample relative to the population, arti

Must-Read: Peter Orszag: Congress Doesn’t Understand Health Costs, or Care

Posted on by Brad DeLong

Must-Read: Peter Orszag: Congress Doesn’t Understand Health Costs, or Care: “More effort is needed to constrain [health care] cost growth…

…Yet the House of Representatives is set to vote this week to do the opposite–by repealing the Independent Payment Advisory Board…. It’s crucial that the Senate not follow suit…. It’s crucial to move more forcefully away from fee-for-service payments and toward payments that reflect the value of care. Doing so will require a series of nimble adjustments based on evidence showing which incentives and other strategies work well. It would be foolish to bet the ranch on any one untested approach. The Independent Payment Advisory Board was created by the Affordable Care Act… to provide a backstop if health costs grow… [and make] Congress will be more likely to act if members know that failing to do so means the IPAB will step in. Those favoring repeal of the IPAB either oppose a shift away from fee-for-service payment, or believe that Congress is about to become much more adept at complicated payment reform than it has ever been in the past…

Must-Read: Peter Orszag: Congress Doesn’t Understand Health Costs, or Care

Posted on by Brad DeLong

Must-Read: Peter Orszag: Congress Doesn’t Understand Health Costs, or Care: “More effort is needed to constrain [health care] cost growth…

…Yet the House of Representatives is set to vote this week to do the opposite–by repealing the Independent Payment Advisory Board…. It’s crucial that the Senate not follow suit…. It’s crucial to move more forcefully away from fee-for-service payments and toward payments that reflect the value of care. Doing so will require a series of nimble adjustments based on evidence showing which incentives and other strategies work well. It would be foolish to bet the ranch on any one untested approach. The Independent Payment Advisory Board was created by the Affordable Care Act… to provide a backstop if health costs grow… [and make] Congress will be more likely to act if members know that failing to do so means the IPAB will step in. Those favoring repeal of the IPAB either oppose a shift away from fee-for-service payment, or believe that Congress is about to become much more adept at complicated payment reform than it has ever been in the past…

Mis-measuring U.S. income inequality at the very top

Posted on by Casey Schoeneberger

A recent working paper by David Price and Nicholas Bloom of Stanford University, Fatih Guvenen of the University of Minnesota, and Jae Song of the Social Security Administration argues that nearly the entire rise in earnings inequality in the U.S. labor market between 1980 and 2012 is accounted for by rising inequality in average wages across firms. In other words, it isn’t that well-paid chief executives are pulling away from their employees, but rather that the salaries at some firms are pulling away from their competitors—even within the same industry.

The working paper, “Firming Up Inequality,” got a lot of attention because it conflicts with research that shows rising inequality is due in large part to skyrocketing compensation by “supermanagers,” a position advanced by Thomas Piketty of the Paris School of Economics in his book “Capital in the 21st Century” and in separate research by Piketty, Emmanuel Saez at the University of California-Berkeley, and Stefanie Stantcheva at Harvard University, in their 2014 American Economic Journal: Policy  paper “Optimal Taxation of Top Labor Incomes: a Tale of Three Elasticities.” Other analysis of extraordinary CEO pay comes courtesy of the Economic Policy Institute.

My new research note, however, shows that the sampling procedure in “Firming Up Inequality” is biased in two distinct ways. Together, these two statistical biases reduce the scale of rising earnings inequality and hence minimize the very phenomenon the paper seeks to investigate. Importantly, both sources of bias get worse the more inequality grows, which is exactly what happened over the period studied in the paper.

The first problem is that the paper analyzes only a single 1/16th random sample of the distribution of labor earnings in the United States over the full period studied. Normally taking such a large sample of a population wouldn’t bias the outcomes, but it does when the variable of interest is very unequal, as is the case with labor earnings. Analyzing a 1/16th sample biases inferences about inequality because by its very nature a random sampling misses some observations—and the point of inequality is that a small number of observations matter a great deal.

For simplicity, imagine an extreme case with a population of 16 people in which 15 earn nothing and only one person has any earnings. If you select one person at random from this population to estimate the average earnings of all 16 people, then the result will be biased downward (to zero in this case). On average, in 15 out of 16 cases, the estimate of average earnings for the group will be zero, which is too low. Of course, in 1 out of 16 cases—when the highest earner is chosen—the estimate of the average wage of the population will be too high.

Critically, the higher the income of the one person who earns anything, the more biased the result. Continuing with the simple example, the difference between the average wage estimate of zero and the true average wage would be larger.

The second problem is that the paper “Winsorizes,” or caps, the earnings of the top 0.001 percent of earners. The reason why capping top earnings introduces bias is obvious—it eliminates information about the earnings of the very highest earners. The larger share of total earnings they control, the more bias that procedure introduces. The paper does not report the exact number of capped earners, but public data from the U.S. Social Security Administration suggests that in 2013 this would exclude about 1,500 people, who collectively earn at least $40 billion. As a result, the procedure greatly reduces the degree of measured inequality because earnings disparities are so extreme at the very top.

In the note, I conclude that the first source of bias (the small sample) alone is probably not large enough to affect the results, given the current actual level of inequality. But in combination with the second bias from capping top earnings, the results change significantly, especially when “Firming Up Inequality” makes inferences about whether and how much CEO pay contributes to rising inequality.

The most important point here is not biased sampling in this one paper, but rather that inequality inherently introduces a number of methodological concerns that wouldn’t matter if income and wealth were distributed more equally. In “Capital in the 21st Century,” Piketty reports that the share of income of the top one percent was 8 percent in 1979, rising to 20 percent in 2012. If the top 1 percent share were still 8 percent, then the statistics in “Firming Up Inequality” wouldn’t be biased. Because it’s 20 percent, they probably are.

What happens when firms can choose wages?

Posted on by Nick Bunker

In an introductory economics course, students are shown models of the labor market that assume the market is perfectly competitive. Wages are set by supply and demand, the well-known mechanisms of the market, and firms take these wages as given. Supply and demand are very important, but there’s increasing evidence that individual firms do have the ability to set wages as they balance other factors that also affect profits. Whether this observation is true has important implications for how we think about the labor market and economic inequality.

How exactly might perfectly competitive models of the labor market not hold up to scrutiny? What other models might do better at explaining the world around us? There are two telling models of imperfect labor market competition. First is the efficiency wage model, in which higher wages can boost the productivity of workers by boosting morale. In these cases, employers have a reason to raise wages because it can help the bottom line.

The second model is what’s known as a monopsony, in which employers have some degree of power in the marketplace because they have enough purchasing power over labor. In these cases, the level of employment in the overall economy is affected by the wages offered by employers rather than the other way around. So offering a higher wage might actually increase the pool of available labor.

So what are the implications of these two models? As two posts by Nobel Laureate Paul Krugman and one by the University of Massachusetts-Amherst’s Arindrajit Dube show, employers with some control over pay can actually raise wages a bit without seeing much of a decline in profits. As Krugman depicts in one of his posts, the trade-off between higher wages and higher profits is small and might even be zero. This result, if it actually holds up in the real world, would mean that firms can somewhat control wages and thus could raise them without seeing a major dent in profits. Krugman points to the recent experience of Walmart as an example reflecting the efficacy of these models.

But the implications of the models don’t stop here. Economics commentator Robert Waldmann points out that they might resolve a riddle in economics research posited by Harvard University economist George Borjas, who notes findings that indicate minimum wage increases don’t raise unemployment and that more immigration has a small effect on wages. Yet, as Waldmann points out, there’s only a contradiction between the two results Borjas point to if one believes the labor market is perfectly competitive. If one believes competition in the market is imperfect, then Krugman and Dube may be onto something.

Of course, we shouldn’t take these models too far. Employers may have some control over wages, but perfectly competitive models may also be good tools for explaining other trends in the labor market. Still, many of the labor market policies that are used to reduce inequality in the market, such as raising the minimum wage or increasing unionization, don’t seem to have the negative effects on the efficiency of firms and economic growth that the perfectly competitive models would have us believe. The implications could be significant.

Must-Read: David Zweig: The Facts vs. David Brooks

Posted on by Brad DeLong

Must-Read: David Zweig: The facts vs. David Brooks: “The passage from ‘The Road to Character’ reads…

…‘In 1950, the Gallup Organization asked high school seniors if they considered themselves to be a very important person. At that point, 12 percent said yes. The same question was asked in 2005, and this time it wasn’t 12 percent who considered themselves very important, it was 80 percent.’ Over the course of my search I discovered other iterations…. During a 2011 appearance on ‘Real Time With Bill Maher,’ for example, Brooks tells the same exact story, except… not in 2005 or 2006, but in 1998. The NYT’s… reviewer noted that the passage in question was similar to one in an earlier Brooks book, ‘The Social Animal,’ only… ‘with slightly different dates.’… (Amazingly, to the New York Times reviewer, the late 1980s and 2005 are only ‘slightly different dates.’)….

The thing I keep wondering is how did Brooks get nearly every detail of this passage wrong? He said Gallup… when… academics. He merged a data set from 1948 and 1954 into 1950. He said the second data set was from 2005, when it was from 1989…. He said it was high school seniors, when it was 9th graders. And he said 80 percent answered true, when that was only so for boys. Can one accidentally get this many details wrong?… If it wasn’t an accident, why would Brooks deliberately falsify nearly every detail in a passage of his book, let alone one that is a cornerstone of the book’s PR campaign?…. In addition to his factual errors, it’s worth noting that Newsom and Archer challenge Brooks’s interpretation…. One question had a huge jump, ostensibly supporting the case of less humility over time… [but] the overall subset [of]… Ego Inflation… had a relatively small increase…. It’s generally not sound to spotlight one question in isolation, especially if it contrasts with the findings of the overall study or subset.

Must-Read: Paul Krugman: I’m With Stupid

Posted on by Brad DeLong

Must-Read: Paul Krugman: I’m With Stupid: “James Montier… castigat[es] economists for their…

…belief that central bank-set interest rates matter…. Janet Yellen, Larry Summers, and yours truly…. [But] if you were going to look for economists who blindly repeat doctrine… neither Janet Yellen nor Larry Summers would be top picks…. Montier… [says] interest rates move… [and] business investment is… unaffected…. Here’s what I wrote some years ago:

Back in the old days, when dinosaurs roamed the earth and students still learned Keynesian economics, we… learned… that the transmission mechanism worked largely through housing…. Fed policy, by moving interest rates, normally exerts its effect mainly through housing….

Montier seems to have forgotten about housing…. Are there times when monetary policy… can’t do the job? Of course. Summers and I have been talking about the zero lower bound since the 1990s…. There’s plenty of real stupidity in the world; we don’t need to… critique… imaginary stupidity.