If the federal government boosts the Earned Income Tax Credit, or for that matter just lowers tax rates on lower-income workers, firms have an incentive to hire more labor (and also an incentive to expand hours for individual workers).  Those effects are large, for a fixed EITC boost, to the extent the demand for labor is elastic.

Note that if EITC boosts only labor demand, without the scale of business expanding as well, the marginal product of labor will fall somewhat, undoing some of the beneficial net wage effects.  On the other hand, if the scale of business expands, some of the benefit is reaped by capital and natural resource owners as well.

OK, now say we cut corporate tax rates.  Companies do more of…something, maybe we’re not quite sure what.  Labor is targeted less directly, though in “simple stupid” theory we treat labor as the main marginal cost.  So if corporate rates don’t have a large impact on activity overall, they might have a disproportionate impact on labor demand within the changes that do happen.  For instance, if plant size stays the same, you hire more labor to distribute more product.

As with EITC, to the extent the elasticity of demand for labor is small, the quantity of labor hired won’t go up much, nor will wages.

Maybe a corporate rate cut will induce an increase in overall scale and activity, and thus the hiring of more capital and resources, in addition to labor.  That may mean a smaller immediate boost to labor returns, but in the longer run labor is combined with more capital and resources and thus may maintain a higher marginal product.

EITC does have the advantage of being more directly targeted to labor.  But in the world-states where that targeting matters, labor ends up surrounded by not enough capital.  Cutting the corporate tax rate is more likely to favor scenarios where the demand for labor goes up, capital thickens around labor, and labor remains relatively non-commoditized.  This may go especially well for workers when there are increasing returns to scale.

The economics of these cases are fairly similar, albeit with the afore-mentioned difference in terms of targeting.  That difference may or may not favor EITC.  In any case, for me it is strange if people favor an EITC boost but are skeptical about cuts in the corporate rate.  Both require an elastic demand for labor, if they are to be effective in raising wages.

Egalitarians tend to think the more “naked,” targeted subsidy to labor will be more effective than removing disincentives to production, but that doesn’t really follow.

Note also that cutting corporate probably lowers avoidance/fraud, whereas boosting the EITC would increase tax fraud.

Tuesday assorted links

by on October 17, 2017 at 12:36 pm in Uncategorized | Permalink

Already, there are 14,000 one-story cinder block Dollar Generals in the U.S.—outnumbering by a few hundred the coffee chain’s domestic footprint. Fold in the second-biggest dollar chain, Dollar Tree, and the number of stores, 27,465, exceeds the 22,375 outlets of CVS, Rite Aid, and Walgreens combined.

Here is the full Bloomberg piece, by Mya Frazier.  One point here is that “retail concentration,” which we do observe in the data, is unlikely to lead to very high prices.  A subtler point is that the dollar store sector itself is somewhat concentrated.  But that is yet another way of seeing why concentration indices can be misleading: “They’ve taken over a big chunk of the nation’s dollar stores!” isn’t exactly a recipe for sustained high prices, if anything the contrary.  Yet another point is that we may be rather deliberately moving to an uglier but cheaper world.

Request for requests

by on October 17, 2017 at 9:18 am in Sports, Weblogs | Permalink

What would you all like to hear about?  I do pay some heed, sometimes.

Another plausible thing to believe…is that someone who holds a stock for a minute, or a quarter anyway, might pay more attention to this sort of stuff [longer-term company prospects] than someone who holds it for 10 years. It is hard to pay attention to anything for 10 years, plus a buy-and-hold investor might well be an index fund, or a casual retail investor, who doesn’t care at all about the underlying fundamentals of the company. The short-term shareholders have a clear incentive to demand long-term improvements: They’re going to sell their shares, so they want the price of the shares to go up, and the way to get a share price up is to discount in future growth.

If you combine those — debatable! — ideas then you might conclude that medium-term active shareholders are more likely to hold managers to account and demand long-term productivity improvements than are long-term shareholders who never sell. On the other hand, the managers might prefer the long-term shareholders, since managers — according to another fairly standard piece of financial-economics theory — love not being held accountable by shareholders.

That is from Matt Levine at Bloomberg, much more at the link.

This excellent book is titled Hoover: An Extraordinary Life in Extraordinary Times.  Here is one good bit:

Knowing that he could not manage what he could not measure, Hooover made Commerce botha producer and a clearinghouse of relevant information on the U.S. economy.  Once again, he turned to like-minded experts, this time primarily in the academic community.  Hoover announced the Advisory Committee on Statistics and recruited to it such luminaries as Edwin Gay, the first dean of the new Harvard Business School; Edwin Seligman, the Columbia economist and a founder and past president of the American Economic Association; and Cornell’s Walter Willco, a past president of the American Statistical Association and a former co-director of the U.S. Census.  Another eminence, Julius Klein, the Harvard economist and historian, was recruited to head Hoover’s Bureau of Foreign and Domestic Commerce and allowed to increase its budget by a factor and six and its personnel by a factor of five.  In short time, these and other initiatives turned Commerce into a vast reservoir of information on every aspect of economic life from steel to motion pictures…

The scope of Hoover’s activities in Commerce was stupendous.  Singlehandedly doing enough work for an entire cabinet, he was said to be “Secretary of Commerce and Undersecretary of Everything Else.”

Recommended, note that Hoover was in fact one of the most qualified men ever to have become president.

From my email, by Jason N. Doctor:

You provide a good perspective on Blade Runner 2049.  In addition to the biblical references and themes, I was also impressed by the psychology and philosophy of mind references:

1)  After every event where he eliminates a replicant, “K” must take a cognitive interference test similar to those used most recently by Sendhil Mullianathan and Eldar Shafir to study the effects of economic scarcity on cognition–but to test if killing a replicant heightens his emotions by perhaps putting him in a moral quandary.

2) On the door to his apartment, some graffiti reads “F*** off Skinner”.  This seems odd in its prominence.  B.F. Skinner developed, to an extreme, John Watson’s radical suggestion that behavior does not have mental states. Skinner’s ideas shutout discussions of whether or not machines could support mental states. Of course, rational economics by similar methodologic scruple ignores mental states.

3)  The movie promotes the idea that there is no computation without representation.  Ana de Armis’ character formulates mental symbols in her relationship with K and behaves in accordance with interdefined internal states (we can’t predict some of her actions directly from stimuli). We are led to believe that she qualitatively experiences real love (though we cannot know) .  In irony, one of these mental symbols involves a longing to be a “real girl” by means that are unrelated to the mind-body problem.  She wants to being taken off the network, so that she can be in one place, just as are neurophysiologic organisms.

>All in all, the movie legitimizes the notion of (hardware agnostic) mental representations and takes a fairly hard stance in opposition to behaviorist constraints on psychological explanations. So it is a critique of behavioral psychology and indirectly rational economics.

Monday assorted links

by on October 16, 2017 at 12:43 pm in Uncategorized | Permalink

A few of you have asked about Trump decertifying the Iran deal.  I think it is a big mistake, keeping in mind the old chess maxim “The threat is stronger than the execution.”  If we slap them, they slap us back by doing something like, say, green-lighting the Iraqi invasion of Kurdistan.  Whatever next level of escalation we might consider, I don’t think it would do us much good.

That said, I find most defenses of the Iran deal shocking in their naivete or perhaps self-deception.  The deal didn’t do much good in the first place, and came to pass because the Europeans weren’t going to uphold the previous sanctions anyway.  As it stands, the Iranians continue to enrich uranium and develop and test long-range missiles, and they could buy a bomb from North Korea as quickly as it would take to deliver the package.  Furthermore, they still support terrorism on a large scale, talk gleefully about the destruction of Israel, and in general their citizenry favors the idea of the government having nuclear weapons.  They simply decided that a slower path toward nuclear weapons, rooted in stronger international economic relations, was in their national interest.  However much you think they have or have not violated the formal terms of the treaty, they’re using the treaty to get a better, richer, and more stable version of nuclear weapons.  Israel and Saudi Arabia, the two countries that don’t have the luxury of wishful thinking on these issues, understand this quite well.

The thing is, Trump’s action won’t change any of this, and will only make us seem less reliable, should someday further action be required.  It is a foolish, high time preference move, but those who support it — Trump included — often have a better understanding of the underlying realities than do the critics.

That is a new and important piece by Zachary Mabel and Tolani A. Britton, here is the abstract:

Research on college dropout has largely addressed early exit from school, even though a large share of students who do not earn degrees leave after their second year. In this paper, we offer new evidence on the scope of college late departure. Using administrative data from Florida and Ohio, we conduct an event history analysis of the dropout process as a function of credit attainment. Our results indicate that late departure is widespread, particularly at two- and open-admission four-year institutions. We estimate that 14 percent of all entrants to college and one-third of all dropouts completed at least three-quarters of the credits that are typically required to graduate before leaving without a degree. Our results also indicate that the probability of departure spikes as students near the finish line. Amidst considerable policy attention towards improving student outcomes in college, our findings point to promising new avenues for intervention to increase postsecondary attainment.

Here are ungated copies of the paper. I take these numbers as implicit evidence for an “acculturation” theory of education, where close to the end of the process some people decide they don’t want to join the “people with a college degree community.”

For the pointer I thank the excellent Kevin Lewis.

*The Hard Thing About Hard Things*

by on October 16, 2017 at 12:20 am in Books, Education | Permalink

I loved this book, by Ben Horowitz of Andreessen-Horowitz, the venture capital firm.  While it is hard to pull bits from the broader stories, here are a few:

Most business relationships either become too tense to tolerate or not tense enough to be productive after a while.  Either people challenge each other to the point where they don’t like each other or they become complacent about each other’s feedback and no longer benefit from the relationship.

And:

People always ask me, “What’s the secret to being a successful CEO?”  Sadly, there is no secret, but if there is one skill that stands out, it’s the ability to focus and make the best move when there are no good moves.  It’s the moments where you feel most like hiding or dying that you can make the biggest difference as a CEO.

And:

The first rule of organizational design is that all organizational designs are bad.

And:

The purpose of process is communication.

And:

By far the most difficult skill I learned as CEO was the ability to manage my own psychology.

Finally:

CEO is an unnatural job.

Definitely recommended, it is one of my five favorite management books ever.  Furthermore, its lessons are relevant for people in academic, media, and policy worlds, unlike many other management books.  Is that because of an emphasis on talent evaluation and also work in teams and small groups?

Sunday assorted links

by on October 15, 2017 at 2:13 pm in Uncategorized | Permalink

The Trump administration is demanding the World Bank allocate less capital toward Chinese projects:

“The bottom line here is right now we’ve got too high a percentage of the World Bank’s balance sheet that’s going to countries and to projects that already have ample borrowing capacity,” a senior Treasury official told Reuters, which noted that China is the IBRD’s biggest recipient of development loans, totaling $2.4 billion.

As I understand it, the World Bank makes money on these loans and there is a cross-subsidy of other Bank activities, most of all aid.  A World Bank that stopped such loans would be poorer and less skilled, and over time could devolve into one of the poorer, less effective poverty-fighting parts of the United Nations, without much of a political power base at that.

Yet China has several trillion dollars worth of reserves.  They seem to like, and be willing to pay for, World Bank infrastructure expertise when bundled with the loans.  Given the overall Chinese record in this area, it is hard to argue they don’t know how to build up an infrastructure.  So why do they borrow then?  I think of the Chinese leadership as like a university president who doesn’t want to spend down the endowment to boost immediate consumption.

It is bad if/when the current equilibrium goes away.  Yet it also is unlikely that the United States will continue to underwrite the building up of its major geopolitical rival.  We (in essence) guarantee some loans to them so they in turn can make loans to us, also guaranteed by us.  That’s a lot of guaranteeing.  In return we receive an out-sized role running and staffing the World Bank, which you can think of as a “soft power” endowment of sorts.  In return the Chinese can hold onto a larger foreign currency endowment and receive some expertise.

That American lead WB role is worth less over time as multilateral capital flows continue to decline relative to private sector flows, and as more emerging economies require less aid.  Furthermore China has set up its own development bank for Asia, namely the AIIB.  More generally, we seem less interested in helping the Chinese maintain the size of their endowment, and perhaps they are not so favorably inclined toward our soft power endowment either.  On top of that, receiving the infrastructure expertise continues to decline in value for the Chinese, as they develop more and more of their own expertise.  At this point, they should be telling us how to build infrastructure.

And so the arrangement is likely to unravel.  I don’t approve of Trump pulling the plug on this one, but more realistically that was the underlying trend in any case.

The biggest losers probably are the aid-receiving poorest African countries who currently free-ride upon the Bank’s indirectly American-guaranteed, China-funded staffing, higher expertise, and higher prestige.

China and America probably lose too, as each country will find it harder to maintain its chosen kind of endowment.  And the pretense of cooperation will fade, which has good and bad effects but mostly bad.

I hardly expected the movie to be so drenched in Tarkovsky (“The Zone” and Solaris, maybe a bit of The Sacrifice), and the now-famed sex scene draws from Bergman’s Persona.  Overall, the colors and palette were stunning, and the use of sound was as impressive as in any movie, do see this one in IMAX.  It hardly makes any concessions to the Hollywood vices of this millennium and indeed much of the Tysons Corner audience seemed to be baffled.

Think of the main plot line as showing a world where the Christ miracle is inverted and what that would have to mean for everything else.  Much of the plot is sprawling, some of the references are too heavy-handed or scattered (Moses and the Dalai Lama and Kafka and Star Wars 1-2 are thrown in for good measure, and few will grok the Galatians reference), and the whole thing could have been fifteen minutes shorter.  Still, this is a worthy sequel to one of the best movies of the 1980s or is that the 1990s?  Carla Juri steals the show, and furthermore it resolves the main plot puzzle of the original Blade Runner rather economically.

Also on the plus side, Adam Driver does not appear in this movie.

During much of the 1982-2001 period, the Western world seemed to be moving in a very favorable direction, indeed most of Asia too.  Over time, Westerns intellectuals and commentators came to expect triumphant feelings and relatively low levels of stress.

9/11, the financial crisis, and now Brexit/Trump/populism/nationalism have upset this feeling.  The level of stress is now especially high in part because it was, not long ago, especially low.  The contrast is difficult for us to stomach, and comparisons with say Richard Nixon or Andrew Jackson help only a little.

In the postwar era, running up through the 1980s, the objective level of stress was much higher than today.  The risk of nuclear war was pretty high, overt racism was much more common, the safety net was much weaker, and it was far from clear that so much of the world would develop economically or become democratic.  Yet all this came right after the easily-remembered stress of World War II, and so it felt like a relief nonetheless.

As a kind of coincidence, memories of World War II wore off just as stress-relieving positive events were kicking into full gear.  That gave America an especially long period of low stress, unprecedented by historical standards.

We are not used to feeling as much stress as we do today.  Yet even in the optimistic scenarios in my predictions, the level of stress today is relatively low compared to what we can rationally expect for the next few decades.