Must-reads: January 28, 2016

Posted on by Brad DeLong

Must-read: John Quiggin: “Education: An Investment, Not a Filter”

Posted on by Brad DeLong

Must-Read:John Quiggin: Education: An Investment, Not a Filter: “Implicit in this statement is the ‘screening’ theory of education…

…The idea that doing a degree might equip you with useful specific knowledge, or with general skills in reasoning, writing and so on, doesn’t get mentioned…. However, the long-term evidence is clear: in Australia, as everywhere else in the world, the wage premium for graduates has remained large enough to make going to university a very good decision, even as the proportion of young people undertaking university education has risen from a tiny minority in the mid-20th century to around 40 per cent today. One interpretation of this is that, over the past century or more, the entire world has been engaged in more and more elaborate screening for no good reason. A more plausible explanation is that technological change has eliminated the kinds of jobs that used to employ kids with a Year 10 education (the median level of achievement when I was young), and replaced them with jobs that need the skills (specific and general) of a university graduate. There’s every reason to think that these trends will continue in the future, so we are going to need more education not less…

Must-read: Noah Smith: “Book Review: ‘Economics Rules'”

Posted on by Brad DeLong

Must-Read: Noah Smith: Book Review: “Economics Rules”: “I love a good book about econ philosophy-of-science…

Economic Rules: The Rights and Wrongs of the Dismal Science, by Dani Rodrik, is my favorite book in this vein to come out in quite some time…. I do have one big problem: the first two chapters. These chapters consist entirely of Rodrik’s very general thoughts on economic models, and what they should and shouldn’t be used for. The problem with these early chapters is the audience. Economists will already have heard most or all of these philosophical ideas. Non-economists, in contrast, will probably not understand…. These early chapters… fall into an uncanny valley, too old-hat for economists but too inside-baseball for non-economists.  So I fear that many readers may get turned off early….

Rodrik really shines when he talks about his own field, development econ. He gives a vivid recounting of the Washington Consensus – why it was adopted, why it went wrong, and how the mistakes could have been avoided. The story of the Washington Consensus provides the perfect backdrop for Rodrik’s ideas about what economists and models should do. The episode demonstrates why it’s important for policy advisors to look at a bunch of alternative models, and use personal judgment to choose which ones to use as analogies for reality. It is the perfect example of the ‘models as fables, economists as doctors’ worldview that Rodrik is trying to lay out. In fact, I wish more of the book had been about trade and development….

I find myself pretty much in agreement…. It’s very difficult to sum them all up (so go read the book), but here’s a few that really stood out: Rodrik notes that economists tend to present a much more simplistic, pro-market stance to the public than they show in their research and behind closed doors…. Rodrik strongly criticizes the New Classical and RBC macro theorists…. Rodrik tries to counter the criticism that economists ignore things like norms. In doing so, he basically says ‘The evidence shows that norms often matter, and economists pay attention to the evidence.’… This is a great book, and a quick read. Get it and read it if you haven’t.

Must-read: Richard Mayhew: “School Lunches and Medicaid: a BFD”

Posted on by Brad DeLong

Must-Read: Richard Mayhew: School Lunches and Medicaid: a BFD: “[‘Interested State agencies that administer the National School Lunch Program (NSLP)…

…can now use Medicaid data to certify students for free and reduced priced lunches.’] Kids who have enough to eat and are not worried about having enough to eat have two significant advantages over kids who don’t have enough to eat and have to worry about that. The first is simple, they have more energy to spend on high intensity activities of play and learning (speaking as a dad of a first grader, those two things should be very close to the same a good chunk of the time). Secondly and slightly more subtly, kids who are not worried about their next meal are able to devote high complexity cognitive processes to other things. Kids (and adults) have a finite amount of brain horsepower available at any given time. Not worrying about food frees up capacity for other things. Kids who are worried about food are devoting a limited brain budget to that task and not to other things.

The free and reduced price school lunch program in most districts… has a significant amount of paperwork and potential stigma…. People who… have signed up for Medicaid or CHIP… have routine income verification processes…. Allowing states to use pre-exisiting data to pre-qualify kids for free or reduced price school lunches will help a few more kids get a quality daily meal or two in their stomachs which should their well being in addition to school performance. It is also an example of the government working to actively improve peoples’ lives while streamlining the interaction. If we could only make it mandatory that states use Medicaid or SNAP eligiblity data to drive the full array of income qualified social services instead of silo-ing different categories of assistance, so duplication and administrative burden increases wasted costs without providing qualified individuals the services and assistance that they need.

Must-read: Mark Thoma: “Why GDP Fails as a Measure of Well-Being”

Posted on by Brad DeLong

Must-Read: Mark Thoma: Why GDP Fails as a Measure of Well-Being: “Catherine Rampell provides a nice summary of the alternative measures that have been proposed…

…However, none of these alternatives deal with the main problem… how to measure the full impact of technology on our lives…. GDP assigns a zero value to goods with a zero price, but those goods aren’t valued at zero and as they become more prominent, we’ll need to find a way of including the benefits they provide in our measures of the standard of living…. When you hear that your standard of living has gone up, ask yourself what has happened to leisure time?… How much of technology’s benefits might have been missed–how often do you use Wikipedia? And how was the additional GDP distributed across the population–did it mostly go to the 1 percent?…

Obamacare increases the salience of antitrust in health insurance markets from “important” to “essential”

Posted on by Brad DeLong

As the extremely sharp Aaron Edlin has taught me, apropos of the current wave of proposed health insurance mergers—Aetna-Humana, Anthem-Cigna, and Centene-HealthNet:

The coming of Obamacare makes any willingness on the part of antitrust authority to allow these mergers to go through extremely dangerous and destructive policy indeed.

The imposition of the individual mandate to purchase health insurance makes maintaining competition in health insurance markets significantly more important. Usually, the exercise of market power and the ability to easily collude implicitly or explicitly made possible by large market shares are curved by the possibility of exit. The “exit the market and buy something else” option for consumers is the one competitor that the firm cannot acquire and merge with. It is the one competitor with which the firm cannot collude, implicitly or explicitly.

Imposing an individual mandate to purchase is a wise policy in a marketplace where the major market failure is adverse selection. It threatens to be a catastrophic policy in the marketplace where the major market failure is the exercise of sellers’ market power.

(AP Photo/J. Scott Applewhite, File)

The forthcoming-behavioral-economics of abundance: Project Syndicate

Posted on by Brad DeLong

Over at Project Syndicate: Economics in the Age of Abundance: 250 years ago in the richest society that was then or ever had been–Imperial Augustan-Age Britain–the adolescents sent to sea by the Marine Society to be officers’ servants were half a foot–15 cm–shorter than their counterpart gentry’s sons whose heights were recorded as they entered the army as officers. 150 years ago the working class of the United States–the richest working class that was then or ever had been–was still spending roughly 2/5 of extra income at the margin simply on more calories. Pre-Industrial Agrarian-Age human populations, even Mid-Industrial populations, and a third of the world today were and are under what nutritionists and public-health experts see as severe and damaging nutritional biomedical stress. READ MOAR

What’s happened to U.S. housing inequality?

Posted on by David Hudson

Over the past year or so, economists have been paying more attention to the role of housing in economic inequality in the United States. Many have pointed to the value of housing as the prime reason for the decline in the share of income going to labor. Research by Matt Rognlie of the Massachusetts Institute of Technology finds that the increase in the share of income going to capital since 1948 has gone entirely to housing. Because the distribution of housing is more equal than the distribution of other forms of capital, income shifting toward housing instead of other capital has a less severe effect on income and wealth inequality. But what’s happened to the distribution of the value of housing over this time?

A new research paper by David Albouy of the University of Illinois at Urbana-Champaign and Mike Zabek at the University of Michigan looks at the path of housing inequality in the United States from 1930 to 2012. The two economists use data from U.S. Census surveys that asked respondents about the value of their home or the amount of rent they paid. Their results show a fall and rise of housing inequality that follows the same U-shaped pattern found in studies of income and wealth inequality over the same time period. Housing inequality in the United States declined from 1930 through 1970 and then started to increase.

What explains this increase? There are multiple possible explanations. The first is that the rich may be moving into bigger or higher-quality houses or apartments than the rest of the population. The economists look at this by seeing how much housing inequality would have increased if the characteristics of U.S. households and housing units hadn’t changed since 1970. The result is that housing inequality would be slightly lower, but the difference is, as the authors say, “vanishingly small.”

Another possible explanation is that housing inequality has risen as different areas of the country saw the value of their homes and land increase quicker than other areas. But Albouy and Zabek point out that housing inequality has risen mostly within cities, not between them.

Instead, it looks as though the main driver of the rise in the housing inequality is the value that people are putting on different neighborhoods. Increased housing segregation seems to be the main culprit, as the rich decide to use their increased income to live in rich neighborhoods, which in turn increases housing inequality.

If this truly is the dynamic pushing up housing inequality, this means there is a tight relationship between income inequality and housing inequality. Higher income inequality translates into more income segregation. This means more housing inequality, which increases the level of wealth inequality.

The inequality of housing is still lower than the inequality of, say, stock ownership. But if our concerns about the shifting of income away from labor to housing are to be assuaged by the lower level of housing inequality, we should be aware that housing inequality is on the rise. And that may continue to be the case unless something is changed.

(AP Photo/Chris O’Meara)

Must-reads: January 27, 2016

Posted on by Brad DeLong

Must-read: Nathan Goldschlag and Alex Tabarrok: “Is Regulation to Blame for the Decline in American Entrepreneurship?”

Posted on by Brad DeLong

Must-Read: Nathan Goldschlag and Alex Tabarrok: Is Regulation to Blame for the Decline in American Entrepreneurship?: “Mounting evidence suggests that economic dynamism and entrepreneurial activity are declining in the United States…

…Over the past thirty years, the annual number of new business startups and the pace of job reallocation have declined significantly. A variety of causes for these trends have been suggested, including an increasing ability of firms to respond to idiosyncratic shocks, technology induced changes in the costs of hiring and training, and increasing regulation.

This research combines data from the Statistics of U.S. Businesses, which contains measures of the decline in economic dynamism, with RegData, a novel dataset leveraging the textual content of the Code of Federal Regulations. RegData contains annual industry level measures of the stringency of regulation. By combining these data, we are able to estimate the extent to which changes in the level of federal regulation can explain decreasing entrepreneurial activity and dynamism. We find that Federal regulation has had little to no effect on declining dynamism.