Category: Equitablog

The future of marriage and income inequality

Posted on by Nick Bunker

The Pew Research Center today released a new report by Wendy Wang and Kim Parker on the record number of Americans who have never been married. One-fifth of all Americans over the age of 25 in 2012 had never been married. In 1960, that group was only 9 percent of those over 25. The cause for this shift is most likely due to decisions by many young adults to defer marriage as well as to a lack of employed men, as other articles about the report have noted. But the differences in the trend by education level can give us an insight into the possible future of U.S. income inequality.

The report shows starkly that the pool of available and employed men in the United States has been on the decline for decades. In 1960, there were 139 employed and never-married men for every 100 never-married women. By 2012, there were only 91 such men for every 100 never-married women. This reduction in marriage-eligible men, however, varies quite a bit by education level. For Americans with a college degree, the ratio is 88 employed and never-married men per 100 women. The ratio is very similar for those with some college or a two-year degree, 86 men per 100 women. But there’s actually a surplus of men with a high school degree or less. For that group, the ratio is 108 employed and never-married men per 100 women.

These ratios mean that never-married women are likely to marry men who have less education. With a relative under-supply of available college-educated men, a college-educated woman may marry a man with just a high school degree. This process would lead to a reduction in something social scientists refer to as assortative mating, or the process of similar men and women marrying each other. If highly educated workers, who tend to be high income, marry each other while less-educated workers marry each other, then that trend will amplify the trends in income inequality.

Research finds that assortative mating has increased income inequality quite a bit in the United States. But research by Lasse Eika of Statistics Norway, Magne Mogstad of the University of Chicago, and Basit Zafar of the Federal Reserve Bank of New York finds that assortative mating has increased among the less educated, but not the highly educated. This trend fits into idea that highly educated women are finding partners with less education on marriage market because the supply of eligible men is too low. Some share of these women will have to look to lower-educated men who are relatively more available.

So differences in education attainment appear to have a very short-term and mechanical effect on household income inequality than the longer-term effects we often hear about.

The rise of the commercial banking sector and household debt

Posted on by Nick Bunker

The finance industry in advanced economies may be not only a source of rising income inequality but also an increasingly large part of these economies overall. A new working paper released yesterday by the National Bureau of Economic Research shows how the banking sector of the financial services industry has become larger and larger compared to the overall economy. And perhaps more interesting, the paper shows the long-run transformation of commercial banks into primarily mortgage-lending enterprises and the implications of this shift for economic stability and growth.

The paper is by economists Oscar Jorda of the Federal Reserve Bank of San Francisco, Moritz Schularick of the University of Bonn, and Alan M. Taylor of the University of California-Davis. It documents long-run changes in the level and composition of commercial bank lending for 17 advanced countries starting in 1870 and finds three major trends in the data.

The first major finding is that commercial bank credit became increasingly larger compared to the overall economy. The ratio of bank credit to gross domestic product was relatively constant during the 20th century until 1980, after which credit increased substantially. In 1980 the average ratio of bank credit to GDP among advanced economies was 62 percent. By 2010, the ratio had increased 118 percent. These results are a perfect example of financialization, or the idea the finance sector has become increasingly dominant over the overall economy.

The second finding is that increasingly commercial bank credit has shifted toward households in the form of mortgages. According to the authors’ estimates, mortgage lending was, on average, about 35 percent of all bank lending in 1970. By 2007, the year before the financial crisis, mortgage lending was closer to 60 percent of all bank lending. While the share of non-mortgage lending by commercial banks has decreased, their total amount of lending has increased enough that lending to businesses and non-mortgage lending to households has stayed relatively constant.

Put another way, increased lending by commercial banks in advanced economies has led to additional credit for households, not businesses. To be clear, this trend isn’t necessarily true for the finance sector as a whole. Commercial banks have shifted toward mortgage finance and away from lending to businesses, but investment banks, the shadow banking system, and the bond market all still provide those business services. The trend documented here is a change in the sources of different kinds of lending from the commercial banking sector of the finance services industry.

Thirdly, the authors find that mortgages are an important source of financial instability and that mortgage-lending induced crises are harder to bounce back from. Jorda, Schularick, and Taylor confirm earlier findings that increases in credit foreshadow financial crises. But their research specifically finds that increases in mortgage credit are even more predictive of crises. They also corroborate findings that recessions sparked by financial crises are more damaging than other types of recessions brought about by factors such as sovereign debt crises or sudden external shocks caused by rising energy prices. But again they find that mortgage-fueled credit booms are different and in this case more powerful, at least in the post-World War II era.

These findings may be all too obvious for Americans as the U.S. economy is still recovering from the implosion of the housing market beginning in the mid-to-late 2000s. But for advanced economies such as Canada and Australia, both of which look to be in the midst of their own housing bubbles, these results should be urgent alarms.

On a larger scale, economists and policymakers need to grapple with the results presented by Jorda, Schularick, and Taylor. If they hold true then policy toward the banking sector may very well need to be reconsidered. Commercial banks are not primarily in the business of lending to businesses so they in turn can make productive investments. Housing finance isn’t a parochial part of the banking sector. Increasingly, it is the banking sector.

Lunchtime Must-Read: Young Rand Paul (1984): Stealing to Help the Needy

Posted on by Brad DeLong

Young Rand Paul (1984): Stealing to Help the Needy: “To the editors…

…After reading Mr. Wilzrkarth’s editorial (Feb. 2) condemning President Reagan’s plan for a “New Federalism,” every national person should contemplate the essence of the system that has created such a controversy.

The main thrust of the article lies in the assertion that neither state governments nor private charity can absorb the immensity of the welfare system.

We have been taught as Christian people
that it is wrong to steal. But underlying the whole welfare concept is the principle of theft. Money in the form of taxes is confiscated from the producers in society and redistributed to those who can’t or won’t produce. The immoral act of stealing, thus, has become moral in the eyes of society.

Immediately, I sense the horror stricken faces of those persons finishing the previous paragraph. Why, he would let the needy starve! My reply would be: How many realistic people believe there are 22 million Americans who need food stamps to survive? How many open-minded people believe 11 million Americans actually need sustenance? Let us assume a highly unlikely percentage, such as half, truly need some support. If individuals were not burdened by taxes incurred by this wealth transfer system, the truly needy would surely be supported.

Randall H. Paul
Biology, ’85

Things to Read on the Morning of September 23, 2014

Posted on by Brad DeLong

Must- and Shall-Reads:

 

  1. David M. Byrne, Stephen D. Oliner, and Daniel E. Sichel: Is the Information Technology Revolution Over?: “Given the slowdown in labor productivity growth in the mid-2000s, some have argued that the boost to labor productivity from IT may have run its course. This paper contributes three types of evidence to this debate. First, we show that since 2004, IT has continued to make a significant contribution to labor productivity growth in the United States, though it is no longer providing the boost it did during the productivity resurgence from 1995 to 2004. Second, we present evidence that semiconductor technology, a key ingredient of the IT revolution, has continued to advance at a rapid pace and that the BLS price index for microprocesssors may have substantially understated the rate of decline in prices in recent years. Finally, we develop projections of growth in trend labor productivity in the nonfarm business sector. The baseline projection of about 13⁄4 percent a year is better than recent history but is still below the long-run average of 21⁄4 percent. However, we see a reasonable prospect — particularly given the ongoing advance in semiconductors — that the pace of labor productivity growth could rise back up to or exceed the long-run average. While the evidence is far from conclusive, we judge that ‘No, the IT revolution is not over’.”

  2. Paul Krugman: The Temporary-Equilibrium Method: “David Glasner has some thoughts… that I mostly agree with, but not entirely. So, a bit more. Glasner is right to say that the Hicksian IS-LM analysis comes most directly not out of Keynes but out of Hicks’s own Value and Capital, which introduced the concept of ‘temporary equilibrium’… using quasi-static methods to analyze a dynamic economy… simply as a tool…. So is IS-LM really Keynesian? I think yes–there is a lot of temporary equilibrium in The General Theory, even if there’s other stuff too. As I wrote in the last post, one key thing that distinguished TGT from earlier business cycle theorizing was precisely that it stopped trying to tell a dynamic story…. The real question is whether the method of temporary equilibrium is useful. What are the alternatives? One… is to do intertemporal equilibrium all the way… DSGE–and I think Glasner and I agree that this hasn’t worked out too well…. Economists who never learned temporary-equiibrium-style modeling have had a strong tendency to reinvent pre-Keynesian fallacies (cough-Say’s Law-cough), because they don’t know how to think out of the forever-equilibrium straitjacket…. Disequilibrium dynamics all the way?… I have never seen anyone pull this off…. Hicks… often seems to hit a sweet spot between rigorous irrelevance and would-be realism that ends up being just confused…. Glasner says that temporary equilibrium must involve disappointed expectations, and fails to take account of the dynamics that must result as expectations are revised…. I’m not sure that this is always true. Hicks did indeed assume static expectations… but in Keynes’s vision of an economy stuck in sustained depression, such static expectations will be more or less right. It’s true that you need some wage stickiness to explain what you see… but that isn’t necessarily about false expectations…. In the end, I wouldn’t say that temporary equilibrium is either right or wrong; what it is, is useful…”

  3. Lemin Wu et al.: Entertaining Malthus: Bread, Circuses and Economic Growth: “We augment a simple Malthusian model by allowing agents to consume something besides food. Whereas food (in our case: bread) is both enjoyable and necessary for survival, the other good, circuses, is pure entertainment: it has absolutely no impact on survival, but does enhance the quality of life. With this very simple modification, we show that, whereas food supply may remain at subsistence, technological change will have a great impact on the consumption of everything else. Most strikingly, though the population remains bound by a Malthusian constraint, sustained improvements to living standards can no longer be ruled out. We also argue that our model better fits the known historical facts–the widely-held belief that growth prior to the Industrial Revolution was flat is based largely on historical measures of food production. Although food supply throughout history may have been (and for most individuals still is) at or near subsistence levels technological advancements have brought greater convenience and comfort to wealthy and poor alike, a possibility that Malthus himself conceded in his later (and often ignored) work. Therefore, our model not only describes historical growth patterns and demographic transitions better than traditional ‘Malthusian’ models, but is also more in line with Malthus’ later thinking.”

  4. Daniel Davies: Every single IT guy, every single manager…: “In the general debate on email spying and… NSA/Snowden… people who want to dismiss the whole thing as ‘no big deal’ are… totally underestimating the… blind trust… required of them…. Even opponents of ubiquitous surveillance… assume that the institution which has access to your information is the institution which collected it. But that’s not necessarily the case at all. The Leveson Inquiry… demonstrated that the Police National Computer could be accessed by more or less any tabloid journalist with a phone and an account with a crooked detective agency…. Manning and Snowden… have made it clear that mid-level employees can get access to huge amounts of top secret data as long as they’ve got the wit to smuggle it out on a thumb drive. So the question is not so much ‘do you trust the CIA/NSA/MI6/etc?’. It’s “Do you trust every single sysadmin… analyst… middle manager?”. The CIA might not be interested at all in my dull mobile phone conversation metadata, but someone else might–the Leveson inquiry was told how the UK’s PNC was used by one copper to check out his daughter’s new boyfriend…. The policies which might prevent [our data] from being accessed by blackmailers, tabloid journalists, nosey neighbours and basically anyone else, are themselves top secret and not subject to any sort of legal oversight. This isn’t a conspiracy theory…. It’s based on the fact that big and complicated systems are set up to malfunction, particularly if they are able to declare themselves above any regulation…. And the way in which this particular system is set up to malfunction is easily predictable and potentially very damaging to innocent people. I am personally not at the stage where I trust every single person who might be hired for a low level IT job in a security agency, and I’m not sure that I trust an entirely opaque set of safeguards with no accountability either.”

  5. Nick Bunker: How Rising Income Inequality Affects State Tax Revenue: “S&P’s job is to assess the risk of bonds or other fixed-income investments and the creditworthiness of the governments…. According to the new report, rising income inequality is a factor that affects the creditworthiness of state governments, and thus their cost of borrowing and the tax revenue required to pay off their bonds. Over the past several decades, incomes have shifted upward while the tax code hasn’t responded. The result: states are collecting less tax revenue…. [State] spending cutbacks don’t just affect growth and stability. They also have implications for economic inequality. A paper by economists Laurence Ball, of Johns Hopkins University, and Davide Furceri, Daniel Leigh, and Prakash Loungani—all at the International Monetary Fund—finds that fiscal consolidation, or attempts to reduce budget deficits, ends up raising inequality. Particularly noteworthy is their conclusion that focusing primarily on cutting government spending results in larger increases in economic inequality.”

  6. Dylan Scott: This Classic GOP Anti-Obamacare Meme Has Officially Imploded: “Last week… [was] the end of one of the GOP’s favorite anti-Obamacare memes…. It was just a few months ago that Republicans were… theorizing that a third or more of Obamacare sign-ups weren’t paying their bills…. ‘I don’t know how many have actually paid for it’, House Speaker John Boehner (R-OH) said… he believed that fewer people were now covered than before the law. ‘I actually do believe that to be the case’…. Boehner wasn’t alone…. ‘We don’t know how many have paid’… spokesman for Senate Minority Leader Mitch McConnell…. ’20 percent to 33 percent are signing up and then not paying’, Rep. Darrell Issa (R-CA) said…. ‘Im told a low %–perhaps as low as 15%–of people who “enrolled” in #Obamacare actually paid first premium. Will be A LOT of attrition’ — Scott Gottlieb, MD (@ScottGottliebMD) December 6, 2013…. ‘Report: 1/3 of #ObamaCare “enrollees” haven’t paid premiums. How does not paying the premium constitute enrollment? http://t.co/OkkUhsJGyt‘ — Reince Priebus (@Reince)…. Last week’s news, however, was effectively met with crickets…”

  7. Eric Wemple: Alessandra Stanley’s Contempt for New York Times Readers: “The piece launched a thousand tweets with a single-sentence lede: ‘When Shonda Rhimes writes her autobiography, it should be called “How to Get Away With Being an Angry Black Woman”‘…. New York Times Public Editor Margaret Sullivan… [wrote] that the piece was ‘astonishingly tone-deaf and out of touch’. No critique, however, was so damning as the one delivered by … Alessandra Stanley…. ‘I didn’t think Times readers would take the opening sentence literally because I so often write arch, provocative ledes that are then undercut or mitigated by the paragraphs that follow’. Only a gifted critic can pack so much sin into a single sentence. Sin No. 1: Over-healthy self-regard: What Stanley appears to be saying here is that Times readers read her stuff with such care and joy that they know her as the woman who writes self-mitigated ledes. Ahhh, yes, that’s her trademark! Sin No. 2: Deliberate obfuscation: Just what is the purpose of mitigating your own lede? That must be an art form that Stanley and her culture-critic pals delight in executing. From this point onward, the Erik Wemple Blog will start reading Stanley’s work from the third or fourth paragraph. Sin No. 3: Why write a lede at all if your goal in the body of the piece is to undercut it?…”

  8. Kevin Bryan: “Aggregation in Production Functions: What Applied Economists Should Know,” J. Felipe & F. Fisher (2003): “What conditions are required to construct an aggregated production function Y=F(K,L), or more broadly to aggregate across firms an economy-wide production function Y=F(K,L)? Note that the question is not about the definition of capital per se, since defining ‘labor’ is equally problematic when man-hours are clearly heterogeneous, and this question is also not about the more general capital controversy worries, like reswitching…. The conditions under which factors can be aggregated are ridiculously stringent… that the marginal rate of substitution between different types of factors in one aggregation, e.g. capital, does not depend on the level of factors not in that aggregation, e.g. labor. Surely this is a condition that rarely holds: how much I want to use… different types of trucks will depend on how much labor I have at hand…. Why, then, do empirical exercises using, say, aggregate Cobb-Douglas seem to give such reasonable parameters, even though the above theoretical results suggest that parameters like ‘aggregate elasticity of substitution between labor and capital’ don’t even exist?…. Since ex-post production Y must equal the wage bill plus the capital payments plus profits, Felipe notes that this identity can be algebraically manipulated to Y=AF(K,L) where the form of F depends on the nature of the factor shares. That is, the good fit of Cobb-Douglas or CES can simply reflect an accounting identity…. It doesn’t strike me that aggregate production functions are measuring arbitrary things. However, if we are using parameters from these functions to do counterfactual analysis, we really ought know better exactly what approximations or assumptions are being baked into the cake…”

  9. Alan Blinder: Behind the Fed’s Dovish Turn on Rates: “The battle at the Federal Open Market Committee is now on. Score the previous meeting in late July for the inflation hawks, but last week’s meeting went for the doves…. The committee’s hawks would like the phrase ‘significant underutilization of labor’ removed from the statement…. They want the FOMC to stop declaring that interest rates will remain at their current superlow levels ‘for a considerable time’…. The hawks want the Fed to stop saying that it expects to keep interest rates low ‘for some time’…. Plosser dissented again… this time Fisher joined him…. Yet another indicator of rampant disagreement appeared…. Opinions on where the [Federal Funeds] rate should be… for the end of 2016 [range] from 0.25-0.50% to 4%. This is a remarkable degree of disagreement…”

Should Be Aware of:

 

  1. Nick Bunker: Financing the rise in income inequality: “Joaane Lindley… and Steven McIntosh… show… a worker moving into… the U.K finance industry… sees their wages increase by 37 percent…. Finance executives make more than non-finance executives and customer service representatives for financial firms make more than representatives for non-financial firms…. The authors’ preferred explanation is the firm sharing ‘rents’ with its workers…. The large premium for finance workers… results in the industry’s overrepresentation at the very top…. In 2005, about 14 percent of taxpayers in the top 1 percent and 18 percent of those in the top 0.1 percent were employed in the finance industry, compared to just under 8 percent of the top 1 percent and 11 percent of the top 0.1 percent in 1979…”

  2. Jared Bernstein: If the lagging labor force rate doesn’t still embody considerable slack, then why does it increasingly predict wage growth?: “Most work suggests the cyclical part of the [output] gap is falling over time and is now quite minimal, as both the recovery takes hold and ‘scarring’ effects make it tougher for labor force exiters to find their way back into the job market. However, a look at the relationship between the LFPR and wage trends suggests this conclusion may be premature…. Goldman Sachs economists showed… using just unemployment [to forecast wage growth] leads to an upwardly biased forecast in recent data…. Add[ing] the labor force participation rate (LFPR) to the model… tracks the wage trends more closely…. LFPR coefficients… start out insignificant but gain significance as the weak recovery proceeds…”

Morning Must-Read: Alan S. Blinder: Behind the Fed’s Dovish Turn on Rates

Posted on by Brad DeLong

Alan Blinder: Behind the Fed’s Dovish Turn on Rates: “The battle at the Federal Open Market Committee…

…is now on. Score the previous meeting in late July for the inflation hawks, but last week’s meeting went for the doves…. The committee’s hawks would like the phrase ‘significant underutilization of labor’ removed from the statement…. They want the FOMC to stop declaring that interest rates will remain at their current superlow levels ‘for a considerable time’…. The hawks want the Fed to stop saying that it expects to keep interest rates low ‘for some time’…. Plosser dissented again… this time Fisher joined him…. Yet another indicator of rampant disagreement appeared…. Opinions on where the [Federal Funeds] rate should be… for the end of 2016 [range] from 0.25-0.50% to 4%. This is a remarkable degree of disagreement…

It Really Seems as Though Dallas Fed President Richard Fisher Doesn’t Want Real Wages to Increase, or Doesn’t Believe Real Wages Can Increase, or Something: Tuesday Focus for September 23, 2014

Posted on by Brad DeLong
FISHER092214

Tim Duy: Fisher on Wages: “Richard Fisher said Friday the US economy was threatened…

…by higher wages. Via Reuters:

Fisher said on Friday he worries that further declines in unemployment nationally could lead to broader wage inflation. To head that off, and also to address what he called rising excesses in financial markets, Fisher said he prefers to raise rates by springtime, sooner than many investors currently anticipate….

I wondered if he was not misquoted or misinterpreted. But he definitely warns that wage growth is set to accelerate in his Fox News interview…. The crux of his argument is that wage growth accelerates when unemployment hits 6.1%…. He seems genuinely concerned that wage growth is negative outcome–that wage growth in Texas is a precursor to a terrible outcome for the US economy as a whole. His entire tone is odd, and I feel compelled to clean up his argument…. It is reasonable to expect that wage growth will accelerate as unemployment moves below 6%… [although] this is… a test of… [whether] alternative measures of under-utilization more accurately… [measure] slack…. That said, why should Fisher fear wage growth? I don’t see how one can expect real wages to rise in the absence of nominal wage growth in excess of inflation. And once you accept the possibility of real wage growth, you recognize the link between wage growth and inflation could be very weak. And so it is….

FISHERb092214

The past 20 years give no reason to believe that 4% wage inflation cannot happily coexist with 2% price inflation. So if wage inflation does not necessarily translate into price inflation, why worry at all? Why is Fisher even worried about wages? The key is really just this quote:

This is like duck hunting, you shoot ahead of the mallard rather than try to get it from behind, otherwise you can’t hit it.

It is all about the timing…. Rather than act disgusted by higher wage growth, he should say that the Fed needs to ensure that such growth translates into real wage growth, and the Fed accomplishes this by adjusting accommodation to maintain its price inflation target. The Fed wants to hold unemployment in a zone consistent with both real wage growth and low and stable inflation. This requires nominal wage growth in excess of 2%. It follows then that given the unemployment rate is already near 6%, it is not reasonable for the Fed to suggest that the first rate hike is a ‘considerable period’ off…. Stated like this, I suspect a large portion of the FOMC would be sympathetic…. That said, most members lack Fisher’s certainty that wages gains are set to accelerate and indicate that labor market slack has dwindled to the point that it is appropriate to remove financial accommodation. There remains the concern that the unemployment rate is not the best measure of labor market slack…. Moreover, as we now know, showing their anti-inflationary resolve did not do the Fed any favors in 2006 and 2007…. It is reasonable to thus conclude that on average, the Fed has been too tight, not too loose. Hence again why the FOMC is willing to be patient in the normalization process….

I suspect that Fisher has pivoted to concerns about wage inflation because his much feared price inflation has never emerged…

As I said yesterday, there is great uncertainty right now whether the right measure of current macroeconomic slack is something like the unemployment rate or something like the employment-to-population ratio. And the two possibilities produce, via Okun’s Law, very different pictures of how much slack there currently is between current levels of output and employment and potential output and full employment:

NewImage

4% per year nominal wage growth is not a problem as long as it is accompanied by 2%/year increases in prices. In fact, that is the configuration we want to see. And that is the configuration we saw in 1989-1990, 1997-2000, and 2006-2008. And in all three of those episodes it turned out after the fact that urgent tightening of monetary policy then was not what the economy needed–the Fed tightened in 1990-91, and found that it had overdone it when the S&L bankruptcy shock hit financial markets; the Fed tightened in 1999 and refused to loosen in 2000, and found that it had overdone it as tech investment collapsed; the Fed tightened in 2006-2007, and…

By contrast, 2%/year nominal wage growth is a problem: it is accompanied either by sharply widening income inequality or by downward pressure pushing inflation toward and perhaps below 0%/year. And an inflation rate that continually undershoots the Federal Reserve’s 2%/year target (which really ought to be 3% or 4%/year) leaves the economy very vulnerable to any additional negative shocks that might occur, and they will. Federal Reserve policymakers who fear the risks associated with prolonged intervals of very low interest rates really should, right now, by stridently advocating for monetary policies that will get us to 4%/year wage inflation as fast as possible. But they are not. It is a puzzlement…

Morning Must-Read: Kevin Bryan: “Aggregation in Production Functions: What Applied Economists Should Know,” J. Felipe & F. Fisher (2003)

Posted on by Brad DeLong

Kevin Bryan: “Aggregation in Production Functions: What Applied Economists Should Know,” J. Felipe & F. Fisher (2003): “What conditions are required to construct an aggregated production function Y=F(K,L)…

…or more broadly to aggregate across firms an economy-wide production function Y=F(K,L)? Note that the question is not about the definition of capital per se, since defining ‘labor’ is equally problematic when man-hours are clearly heterogeneous, and this question is also not about the more general capital controversy worries, like reswitching…. The conditions under which factors can be aggregated are ridiculously stringent… that the marginal rate of substitution between different types of factors in one aggregation, e.g. capital, does not depend on the level of factors not in that aggregation, e.g. labor. Surely this is a condition that rarely holds: how much I want to use… different types of trucks will depend on how much labor I have at hand…. Why, then, do empirical exercises using, say, aggregate Cobb-Douglas seem to give such reasonable parameters, even though the above theoretical results suggest that parameters like ‘aggregate elasticity of substitution between labor and capital’ don’t even exist?…. Since ex-post production Y must equal the wage bill plus the capital payments plus profits, Felipe notes that this identity can be algebraically manipulated to Y=AF(K,L) where the form of F depends on the nature of the factor shares. That is, the good fit of Cobb-Douglas or CES can simply reflect an accounting identity…. It doesn’t strike me that aggregate production functions are measuring arbitrary things. However, if we are using parameters from these functions to do counterfactual analysis, we really ought know better exactly what approximations or assumptions are being baked into the cake…

Morning Must-Read: Daniel Davies: Every Single IT guy, Every Single Manager…

Posted on by Brad DeLong

Daniel Davies: Every single IT guy, every single manager…: “In the general debate on email spying and… NSA/Snowden…

…people who want to dismiss the whole thing as ‘no big deal’ are… totally underestimating the… blind trust… required of them…. Even opponents of ubiquitous surveillance… assume that the institution which has access to your information is the institution which collected it. But that’s not necessarily the case at all. The Leveson Inquiry… demonstrated that the Police National Computer could be accessed by more or less any tabloid journalist with a phone and an account with a crooked detective agency…. Manning and Snowden… have made it clear that mid-level employees can get access to huge amounts of top secret data as long as they’ve got the wit to smuggle it out on a thumb drive. So the question is not so much ‘do you trust the CIA/NSA/MI6/etc?’. It’s “Do you trust every single sysadmin… analyst… middle manager?”. The CIA might not be interested at all in my dull mobile phone conversation metadata, but someone else might–the Leveson inquiry was told how the UK’s PNC was used by one copper to check out his daughter’s new boyfriend…. The policies which might prevent [our data] from being accessed by blackmailers, tabloid journalists, nosey neighbours and basically anyone else, are themselves top secret and not subject to any sort of legal oversight. This isn’t a conspiracy theory…. It’s based on the fact that big and complicated systems are set up to malfunction, particularly if they are able to declare themselves above any regulation…. And the way in which this particular system is set up to malfunction is easily predictable and potentially very damaging to innocent people. I am personally not at the stage where I trust every single person who might be hired for a low level IT job in a security agency, and I’m not sure that I trust an entirely opaque set of safeguards with no accountability either.

Morning Must-Read: Lemin Wu et al.: Entertaining Malthus: Bread, Circuses and Economic Growth

Posted on by Brad DeLong

Lemin Wu et al.: Entertaining Malthus: Bread, Circuses and Economic Growth: “We augment a simple Malthusian model…

…by allowing agents to consume something besides food. Whereas food (in our case: bread) is both enjoyable and necessary for survival, the other good, circuses, is pure entertainment: it has absolutely no impact on survival, but does enhance the quality of life. With this very simple modification, we show that, whereas food supply may remain at subsistence, technological change will have a great impact on the consumption of everything else. Most strikingly, though the population remains bound by a Malthusian constraint, sustained improvements to living standards can no longer be ruled out. We also argue that our model better fits the known historical facts–the widely-held belief that growth prior to the Industrial Revolution was flat is based largely on historical measures of food production. Although food supply throughout history may have been (and for most individuals still is) at or near subsistence levels technological advancements have brought greater convenience and comfort to wealthy and poor alike, a possibility that Malthus himself conceded in his later (and often ignored) work. Therefore, our model not only describes historical growth patterns and demographic transitions better than traditional ‘Malthusian’ models, but is also more in line with Malthus’ later thinking.