Category: Equitablog

Must-Read: Eduardo Porter: What the Debate on Inequality Is Missing

Posted on by Brad DeLong

Must-Read: It is only fair to note that Eduardo Porter is raising the standard of New York Times news analysis singlehandedly.

The only problem I see is the reflexive “opinions of shape of earth differ” jerk of the “debate… about poverty and inequality” in “Washington” “bogged down… pointless, often surreal”. Claims that we are spending a huge amount of money on our poor and that the government needs to shrink are surreal. But they are not pointless. Claims that we would all benefit in the long run from spending more money on the poor and on a government that was bigger if those could be done the right way are neither pointless nor surreal.

But the rest is gold.

His latest of an increasingly long streak of excellent takes:

Eduardo Porter: What the Debate on Inequality Is Missing: “The actual size of government? Measured by the taxes we pay…

…it was about 25 percent of our gross national product in 1970. It is still about 25 percent of our G.D.P. today. And the share of our wealth spent on the poor, apart from money devoted to the rising cost of health care, has not changed very much, either…. In… ‘Inequality, What Can Be Done?’… Anthony B. Atkinson of Oxford puts forth a set of proposals… a higher minimum wage… a guarantee of government employment up to 35 hours a week… strengthening unions and creating a ‘social and economic council’ where representatives of labor and civil society could have a say in policy, offering a counterweight to corporate power… marginal income tax rates could be pushed higher… a universal capital endowment for every adult….

Many of these ideas may strike classic American economists as outdated lefty proposals that already failed in the 1970s. But they look increasingly relevant in what many are calling the Second Gilded Age. ‘One of the key messages, given the kind of redistribution we need, is that we can’t achieve it simply through taxes and transfers,’ Professor Atkinson told me. ‘We are stuck in a narrow set of ideas. The most important thing is to broaden the agenda.’

Richard Thaler Misbehaves–or, Rather, Behaves

Posted on by Brad DeLong

A good review by Jonathan Knee of the exteremely-sharp Richard Thaler’s truly excellent new book, Misbehaving. The intellectual evolution of the Chicago School is very interesting indeed. Back in 1950 Milton Friedman would argue that economists should reason as if people were rational optimizers as long as such reasoning produce predictions about economic variables–prices and quantities–that fit the the data. He left to one side the consideration even if the prices and quantities were right the assessments of societal well-being would be wrong.

By the time I entered the profession 30 years later, however, the Chicago School–but not Milton Friedman–had evolved so that it no longer cared whether its models actually fit the data or not. The canonical Chicago empirical paper seized the high ground of the null hypothesis for the efficient market thesis and then carefully restricted the range and type of evidence allowed into the room to achieve the goal of failing to reject the null at 0.05 confidence. The canonical Chicago theoretical paper became an explanation of why a population of rational optimizing agents good route around and neutralize the impact of any specified market failure.

Note that Friedman and to a lesser degree Stigler had little patience with these lines of reasoning. Friedman increasingly based his policy recommendations on the moral value of free choice to live one’s life as one thought best–thinking that for people to be told or even nudged what to do–and on the inability of voters to have even a chance of curbing government failures arising out of bureaucracy, machine corruption, plutocratic corruption, and simply the poorly-informed do-gooder “there oughta be a law!” impulse. Stigler tended to focus on the incoherence and complexity of government policy in, for example, antitrust: arising out of a combination of scholastic autonomous legal doctrine development and of legislatures that at different times had sought to curb monopoly, empower small-scale entrepreneurs, protect large-scale intellectual and other property interests, and promote economies of scale. At the intellectual level making the point that the result was incoherent and substantially self-neutralizing policy was easy–but it was not Stigler but rather later generations eager to jump to the unwarranted conclusion that we would be better off with the entire edifice razed to the ground.

As I say often, doing real economics is very very hard. You have to start with how people actually behave, with what the institutions are that curb or amplify their behavioral and calculation successes or failures at choosing rational actions, and with what emergent regularities we see in the aggregates. And I have been often struck by Chicago-School baron Robert Lucas’s declaration that we cannot hope to do real economics–that all we can do is grind out papers on how the economy would behave if institutions were transparent and all humans were rational optimizers, for both actual institutions and actual human psychology remain beyond our grasp:

)Economics tries to… make predictions about the way… 280 million people are going to respond if you change something…. Kahnemann and Tversky… can’t even tell us anything interesting about how a couple that’s been married for ten years splits or makes decisions about what city to live in–let alone 250 million…. We’re not going to build up useful economics… starting from individuals…. Behavioral economics should be on the reading list…. But… as an alternative to what macroeconomics or public finance people are doing… it’s not going to come from behavioral economics… at least in my lifetime…

Yet it is not impossible to do real economics, and thus to be a good economist.

But it does mean that, as John Maynard Keynes wrote in his 1924 obituary for his teacher Alfred Marshall, while:

the study of economics does not seem to require any specialised gifts of an unusually high order…. Is it not… a very easy subject compared with the higher branches of philosophy and pure science? Yet good, or even competent, economists are the rarest of birds.

And Keynes continues:

An easy subject, at which very few excel! The paradox finds its explanation, perhaps, in that the master-economist must possess a rare combination of gifts… mathematician, historian, statesman, philosopher… understand symbols and speak in words… contemplate the particular in terms of the general… touch abstract and concrete in the same flight of thought… study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must lie entirely outside his regard…. Much, but not all, of this ideal many-sidedness Marshall possessed…

John Maynard Keynes would see Richard Thaler as a very good economist indeed.

Jonathan Knee: In ‘Misbehaving,’ an Economics Professor Isn’t Afraid to Attack His Own – NYTimes.com: “The book is part memoir, part attack on… the Chicago School…

…And Professor Thaler is generally happy to name names when detailing the intellectual deficiencies and petty rivalries of his vocation…. The economics profession that Mr. Thaler entered in the early 1970s was deeply invested in proving that it was more than a mere social science…. Early in his career, Professor Thaler created a list of observed behaviors that were obviously inconsistent with the predictions of established orthodoxy. These found names like ‘the endowment effect,’ which leads individuals to systematically value things they already own much more than the identical item in someone else’s hands. ‘Misbehaving’ charts Mr. Thaler’s journey to document these anomalies in the face of economists’ increasingly desperate, and sometimes comical, efforts to deny their existence or relevance….

Professor Thaler’s narrative ultimately demonstrates that by trying to set itself as somehow above other social sciences, the ‘rationalist’ school of economics actually ended up contributing far less than it could have. The group’s intellectual denial led to not just sloppy social science, but sloppy philosophy…. The ‘misbehaving’ of Professor Thaler’s title is supposed to refer to how human actions are inconsistent with rationalist economic theory. It could just as easily refer to his own professional misbehavior in rejecting the prevalent worldview of academic economists at the time. Although not without serious risk to any aspiring academic, hopefully, his book and his career will inspire more miscreants across a wide range of intellectual specialties.

The importance of where you live for U.S. economic mobility

Posted on by Nick Bunker

Robust intergenerational economic mobility is supposed to be one of the defining characteristics of the United States. Yet economic research conducted over the past several years—and then revisited in a study released this week—finds that the degree of mobility across generations seems to depend on where you live and who your neighbors are.  Figuring out what drives that variation has become an important academic endeavor.

The most recent contours of this investigation were set in early 2014, when a group of economists released a study looking at the variation in the level of United States intergenerational mobility in the United States by where families lived. The results were striking. Some sections of the country had mobility levels that rivaled those of high-mobility countries such as Denmark. But other parts of the United States recorded levels so low that there was no comparison among other high-income countries.

The findings of that report, like lots of good research, sparked more questions. Were these patterns a result of certain kinds of people moving to regions where high mobility was already happening? Or was there something about these areas themselves that promoted high levels of mobility? Two of those researchers returned to this question with a new paper. The authors, economists Raj Chetty and Nathaniel Hendren of Harvard University, sort out the effects of location on intergenerational economic mobility. Using about five million observations of family tax records and looking at families that moved when children were young, Chetty and Hendren study the effects of a new location on mobility.

In short, they find that there is something about specific locations that promote economic mobility across generations. More precisely, the authors find that within the United States, 50 to 70 percent of the variation in mobility is due the “causal effects of place.” In other words, if we want to boost intergenerational mobility in the United States we can’t just focus on the attributes of specific individuals. We have to look at how to improve communities and neighborhoods.

But then another question comes up: What are the characteristics of those mobility-promoting places? Chetty and Hendren don’t find a definitive explanation, but they do  suggest some answers by returning to evidence they uncovered in 2014.  In that study, Chetty and Hendren found several variables that were strongly correlated with intergenerational mobility:

  • Measures of race
  • Segregation
  • Income inequality
  • The quality of Kindergarten through 12th grade schools
  • Social capital, or the strength of civic engagement in a community
  • Family structure

In their latest work, Chetty and Hendren test to see if these six correlations are due to the causal effects of location itselfor the characteristics of those that live there—what the authors call the “sorting component.”

Chetty and Hendren find that areas with more African-Americans and single-parent families have lower levels of intergenerational mobility. While about half of this relationship is due to individual characteristics, the other half is due to the negative effects of the place where these people live.  . So areas with high levels of single parents have lower mobility, for example, but only part of that relationship is due to the effect of moving into an area with high levels of single parents.

For two other variables, their initial correlations were much more influenced by the causal effects of place. The correlation of social capital with mobility appears to be entirely caused by the place itself. In other words, if you’re looking to move to an area that has a causal effect on mobility, social capital is a good indicator of where you and your family want to live.

The same goes for the quality of a K-through-12 education. At the level of commuting zone (the larger jurisdiction Chetty and Hendren use, comprised of 741 areas of the country),  correlation between mobility and education is entirely about a correlation with the causal effect of place. But then focusing on the smaller and more numerous counties within commuting zones, they find significant correlations with the sorting component.

When it comes to poverty, inequality and segregation, the results are particularly interesting. In a companion paper with Larry Katz, also of Harvard, Chetty and Hendren find that the Move to Opportunity program, which encouraged several thousand low-income families to move out of high-poverty neighborhoods into low-poverty areas, was quite successful at boosting intergenerational economic mobility. But in this paper, the three authors find that poverty rates are not strongly correlated with the causal effects of places. What are much more strongly correlated with the causal effect are measures of income segregation and income inequality.

While all these correlations are interesting and suggestive, they are still correlations. Yes, they are correlations with a causal effect but they don’t tell us if, for example, social capital is a key factor underpinning the causal impact of living in one place over another. Policymakers no doubt will find this research intriguing as they seek to promote the social and economic variables that produce more mobility-inducing areas, but further research drilling down on causation is still required.

Things to Read at Nighttime on May 5, 2015

Posted on by Brad DeLong

Must- and Should-Reads:

Might Like to Be Aware of:

The Debate Over the TPP

Posted on by Brad DeLong

From last week:

And now:

So I guess I should write something else in addition to this.

Here it is: A rant on the TPP debate revoked by a Twitter exchange.

As one of the people who did the NAFTA economic impact estimates for the Clinton Administration. I definitely have some explaining to do.

Our models showed NAFTA as:

  • a small plus for the American manufacturing sector, including manufacturing workers;
  • a larger but still small plus for American consumers;
  • a substantial plus for Mexico; and
  • a minus for other developing countries that were potential competitors with Mexico for the American market.

In reality, it turned out to be:

  • a substantial short-run minus for Mexico (the 1994–95 financial crisis;
  • a long-run plus for Mexico that I still hope Will be larger than the short-run minus (guaranteed tariff- and quota-free access to the US market is worth a good deal);
  • a bigger plus then I expected for Wall Street;
  • a plus for American consumers;
  • a small minus for American manufacturing; and
  • a minus for other developing countries that were potential competitors with Mexico for the American market.

It turned out that the most important aspect of NAFTA was not the increase in balanced trade from lower trade barriers, and was not the increase in factory construction in Mexico because of increased confidence in Mexico’s government and in US willingness to except Mexican exports and in US manufactured equipment exports to enable that construction.

It turned out that the most important aspect of NAFTA was the Mexican financial liberalization that allowed Mexico’s rich to cheaply purchased political risk insurance from Wall Street by getting their money into New York.

That experience–my personal analytical nadir as an economist, I might add–convinced me that analyzing modern trade agreements as if they were primarily Ricardian deals is likely to lead one substantially astray. One has to think, and think deeply, creatively, and subtly, about all the potential general equilibrium effects. One has to work hard to bound their magnitude.

Thus arguments saying that a Ricardian analysis tells us that the Trans-Pacific Partnership is a good thing tend to undermine my confidence in it. Those making such arguments seem to me either to have not done their homework, or to not particularly care whether the arguments they set forth for it are actually the true arguments for it.

I am ready to believe that dispute settlement is not a threat to American governance. I am ready to believe that regulatory harmonization will be at the top rather than a race to the bottom. I am ready to believe that increase in intellectual-property protection will actually be the benefit of the world–and if not of the world for the United States. I am perhaps willing to believe that America’s obligation to be a benevolent hegemon should not control.

But each time the Ricardian argument is made a chance to make the real arguments is lost. And my confidence that the real arguments are strong ones becomes weaker…

Thus much more effective than yet-another-Ricardian-argument is something like this from Gary Hufbauer:

Gary Hufbauer: Senator Warren Distorts the Record on Investor-State Dispute Settlements: “ISDS provisions enable a foreign investor to seek compensation in an amount determined by an impartial panel of arbitrators…

…if a host government expropriates its property, or regulates its business in an arbitrary or discriminatory manner. Such protections have been deemed necessary in agreements going back at least to a Germany-Pakistan accord in 1959…. Starting with the North American Free Trade Agreement (NAFTA) in 1994, the United States has also included ISDS in the investment chapters in nearly all its free trade agreements (FTAs), now numbering 20. Given this rich history, Senator Warren should be able to cite actual examples of the multiple abuses that she claims have occurred. She has not done so, because she cannot. Senator Warren makes a big deal about the hypothetical outcome of the old Methanex case against California’s regulations on gasoline additives, but the case was decided against the Canadian corporation….

Over the decades, only 13 ISDS cases have been brought to judgment against the United States.  The United States has not lost a single case. Why? Because the United States does not expropriate private property without compensation, and the United States does not enact arbitrary or discriminatory laws against foreign firms. Contrary to what the Senator implies, American taxpayers have not had to cough up millions and even billions of dollars in damages. They have not had to cough up anything. To be blunt, Senator Warren has no facts…. Her op-ed… resorted to hypothetical scenarios that had no basis in 50 years of ISDS history….

Senator Warren… warns that plaintiffs may succeed in suing such countries as Egypt, Germany, and the Czech Republic to overturn their laws. But these are hypothetical scenarios. The cases have not been decided and the countries in question may well prevail. Her descriptions of these lawsuits overlook something that Senator Warren should know as a former law professor: Lawyers often bring cases seeking huge damages precisely when the facts are against their claims. Just look at the 13 ISDS cases brought against the United States and dismissed, or the 175 cases dismissed worldwide. Sounding like a Tea Party politician railing against the United Nations, Senator Warren contends that international courts might replace the US legal system. Again she has the story backwards. The United States has been the chief architect of ISDS and other forms of international dispute settlement precisely because the United States has been able to export its legal principles to other countries….

Since NAFTA was ratified two decades ago, ISDS provisions have been amended to ward off frivolous claims involving environmental, health, and safety regulation of corporate practices. We do not yet know the precise terms of the ISDS provisions in TPP. A good guess is that they will follow the template found in the Korea-US FTA. That template might be further improved by requiring briefs to be published at a suitable time and establishing an appeals mechanism. But just because the existing ISDS template falls short of perfection is no reason to jettison the concept. It is even less of a reason to reject the entire TPP, though that seems to be Senator Warren’s objective.

But I can find nothing analogous and useful on the intellectual-property side…

Greg Ip:

Greg Ip: Obama’s Uphill Push for Free Trade – WSJ: “As American consumers gorged on a flood of cheap Chinese imports…

…American workers took a beating. A study by Gordon Hanson of the University of California at San Diego and four others think the surge cost the U.S. 2 million to 2.4 million manufacturing jobs between 1999 and 2011…. It wasn’t just the WTO at work; because China kept its currency artificially low, it limited the growth of U.S. exports to China, and the American trade deficit ballooned. “It’s entirely understandable that people have a hangover from the recent trade experience of the last two decades,” Mr. Hanson says. “But TPP isn’t about manufacturing. Globalization in that sector is a fait accompli.” The future of trade liberalization, he says, is in agriculture and services where the U.S. advantage is strongest….

Negotiators say it will lay down rules for the rest of the world in sectors such as services and intellectual property where nontariff barriers are especially onerous. This should benefit the U.S. insofar as services are a growing part of U.S. exports…. It would seek to curb new forms of hidden protection such as subsidies provided via state-owned enterprises…. If TPP lives up to its hype, it should demand far less adjustment from the U.S. than it does of other signatories that are expected to meet U.S. standards for how foreign investment, intellectual property, imports and subsidies should be treated…

Over at Grasping Reality: Hoisted from the Archives: “The Uses of the University” Alma Mater Blogging

Posted on by Brad DeLong

Over at Grasping Reality: Hoisted from the Archives: “The Uses of the University” Alma Mater Blogging: Let me put it this way: i

In 1960, the University of California–then overwhelmingly UCB and UCSF and UCLA–was about four times the size of Harvard, 5000 vs. 1200 undergraduates a year, with graduate students and faculty roughly in proportion. Clark Kerr, as president of the University of California in the 1960s, took a look at space constraints in Berkeley and Westwood, took a look at the rising population of California, took a look at increasing wealth, took a look at increasing educational attainment, took a look at the increasing attractiveness of American universities to people abroad, and conclude that the number of undergraduate students who could and would want to take full advantage of a UC education was going to grow eightfold over the next fifty years. So he decided to go all-out to clone UCB and UCLA.

And he did it… READ MOAR

Must-Read: Richard Thaler: The Beauty Contest Game

Posted on by Brad DeLong

Must-Read: Richard Thaler: http://en.m.wikiversity.org/wiki/Economic_Classroom_Experiments/Guessing_Game: “If you pick zero in the ‘Beauty Contest’ game…

…you are smart enough to solve the game for the Nash equilibrium. And you are dumb enough to think everyone else can solve for the Nash equilibrium. And dumb enough to think everyone else will think everyone else will think everyone else will solve for the Nash equilibrium. Infinite regress–you are a singularity of dumb…

Must-Read: Martin Wolf: The British economy after the coalition

Posted on by Brad DeLong

Must-Read: Martin Wolf thinks, rightly, that the Tory-LD coalition should face an accountability moment for making its huge bet on austerity, and thus getting economic policy wrong. But, unfortunately, it seems that they are not: if the Tory-LD coalition loses, it will be for other reasons.

This is very bad news for the long-run rationality of economic policy in the North Atlantic.

Martin Wolf:

Martin Wolf: The British economy after the coalition: “Why should one be desperate to avoid a free loan?…

…Growth-promoting borrowing is needed** In what condition does the coalition government leave the UK economy?… In the last quarter of 2014, UK real gross domestic product per head was 4.8 per cent higher than it had been in the second quarter of 2010…. But it was much the same as in the first quarter of 2007… below its pre-crisis peak… [and] close to 16 per cent below where it would have been if the 1955-2007 trend had continued. Moreover, this huge shortfall cannot be explained by a pre-crisis boom. On the contrary, the economy was close to its long-term trend in 2007…. In the short run, stagnant productivity [has] allowed the economy to combine weak expansion of overall output with decent jobs performance. In the long run, however, productivity determines standards of living….

The necessary ingredient is buoyant demand…. The coalition’s fiscal bite was less bad than its bark. The argument [the coalition] offered for tightening faster than Labour had promised was that it was necessary to stop the UK from being… Greece…. This was wildly exaggerated…. Despite failing to hit its fiscal targets, interest rates on UK public debt have remained astonishingly low: 30-year and 50-year gilts yield 2.4 per cent, while yields on comparable index-linked gilts are close to minus 1 per cent. Why should one be desperate to avoid a free loan? What is needed instead is growth-promoting borrowing…

Must-Read: Josh Brown: Funds Aren’t Cutting Fees, Investors Are

Posted on by Brad DeLong

Must-Read: Josh Brown: Funds Aren’t Cutting Fees, Investors Are: “There is absolutely zero data that links high fund costs with outperformance…

… Investors are leaving higher cost funds and gravitating toward lower cost funds. I would surmise that the education they are getting on financial blogs and from their advisors is helping to drive this trend.

A new Morningstar study released today shows that the asset-weighted expense ratio across all funds (including mutual funds and exchange-traded products, or ETPs, but excluding money market funds and funds of funds) was 0.64% in 2014, down from 0.65% in 2013 and 0.76% five years ago. The trend is being driven more by investors seeking low-cost funds than it is by fund companies cutting fees.

The data is undeniable: the investor class is learning…. There are many more clients now being served by fee-based financial advisors than pure transactional brokers…. With less brokers, there is the commensurate decline in the type of funds brokers favor (the ones that pay them most). Broker-sold or “load” funds are going the way of the dodo…

I am much less optimistic than Josh Brown is. We have a long, long way to go before we have a financial system in which investment-managing intermediaries are truly paid proper fees for performance. If a century and a half of modern financial markets is not enough to teach people that buy-and-hold, continuous commitment, diversification, and rebalancing are the keys, what length of time would be long enough?