Alex Tabarrok

Is Piketty’s Data Reliable?

by on October 18, 2017 at 7:25 am in Books, Economics, History | Permalink

When Thomas Piketty’s Capital in the Twenty-First Century first appeared many economists demurred on the theory but heaped praise on the empirical work. “Even if none of Piketty’s theories stands up,” Larry Summers argued, his “deeply grounded” and “painstaking empirical research” was “a Nobel Prize-worthy contribution”.

Theory is easier to evaluate than empirical work, however, and Phillip Magness and Robert Murphy were among the few authors to actually take a close look at Piketty’s data and they came to a different conclusion:

We find evidence of pervasive errors of historical fact, opaque methodological choices, and the cherry-picking of sources to construct favorable patterns from ambiguous data.

Magness and Murphy, however, could be dismissed as economic history outsiders with an ax to grind. Moreover, their paper was published in an obscure libertarian-oriented journal. (Chris Giles and Ferdinando Giugliano writing in the FT also pointed to errors but they could be dismissed as journalists.) The Magness and Murphy conclusions, however, have now been verified (and then some) by a respected figure in economic history, Richard Sutch.

I have never read an abstract quite like the one to Sutch’s paper, The One-Percent across Two Centuries: A Replication of Thomas Piketty’s Data on the Distribution of Wealth for the United States (earlier wp version):

This exercise reproduces and assesses the historical time series on the top shares of the wealth distribution for the United States presented by Thomas Piketty in Capital in
the Twenty-First Century….Here I examine Piketty’s US data for the period 1810 to 2010 for the top 10 percent and the top 1 percent of the wealth distribution. I conclude that Piketty’s data for the wealth share of the top 10 percent for the period 1870 to 1970 are unreliable.
The values he reported are manufactured from the observations for the top 1 percent inflated by a constant 36 percentage points. Piketty’s data for the top 1 percent of the distribution for the nineteenth century (1810–1910) are also unreliable. They are based
on a single mid-century observation that provides no guidance about the antebellum trend and only tenuous information about the trend in inequality during the Gilded Age. The values Piketty reported for the twentieth century (1910–2010) are based on more
solid ground, but have the disadvantage of muting the marked rise of inequality during the Roaring Twenties and the decline associated with the Great Depression. This article offers an alternative picture of the trend in inequality based on newly available data and a reanalysis of the 1870 Census of Wealth. This article does not question Piketty’s integrity.

You know it’s bad when a disclaimer like that is necessary. In the body, Sutch is even stronger. He concludes:

Very little of value can be salvaged from Piketty’s treatment of data from the nineteenth century. The user is provided with no reliable information on the antebellum trends in the wealth share and is even left uncertain about the trend for the top 10 percent during
the Gilded Age (1870–1916). This is noteworthy because Piketty spends the bulk of his attention devoted to America discussing the nineteenth-century trends (Piketty 2014: 347–50).

The heavily manipulated twentieth-century data for the top 1 percent share, the lack of empirical support for the top 10 percent share, the lack of clarity about the procedures used to harmonize and average the data, the insufficient documentation, and the spreadsheet errors are more than annoying. Together they create a misleading picture of the dynamics of wealth inequality. They obliterate the intradecade movements essential to an understanding of the impact of political and financial-market shocks on inequality. Piketty’s estimates offer no help to those who wish to understand the impact of inequality on “the way economic, social, and political actors view what is just and what is not” (Piketty 2014: 20).

One of the reasons Piketty’s book received such acclaim is that it fed into concerns about rising inequality and it’s important to note that Sutch is not claiming that inequality hasn’t risen. Indeed, in some cases, Sutch argues that it has risen more than Piketty claims. Sutch is rather a journeyman of economic history upset not about Piketty’s conclusions but about the methods Piketty used to reach those conclusions.

Vaping Saves Lives

by on October 13, 2017 at 7:25 am in Economics, Law, Medicine | Permalink

E-cigarettes are less dangerous than cigarettes but are equally effective at delivering nicotine. Levy et al. estimate that if smokers switched to e-cigarettes millions of life-years would be saved, even taking into account plausible rates of non-smokers who start to vape. (It’s worth noting that the authors are all cancer researchers, statisticians and epidemiologists concerned with reducing cancer deaths.)

A Status Quo Scenario, developed to project smoking rates and health outcomes in the absence of vaping, is compared with Substitution models, whereby cigarette use is largely replaced by vaping over a 10-year period. We test an Optimistic and a Pessimistic Scenario, differing in terms of the relative harms of e-cigarettes compared with cigarettes and the impact on overall initiation, cessation and switching. Projected mortality outcomes by age and sex under the Status Quo and E-Cigarette Substitution Scenarios are compared from 2016 to 2100 to determine public health impacts.

Compared with the Status Quo, replacement of cigarette by e-cigarette use over a 10-year period yields 6.6 million fewer premature deaths with 86.7 million fewer life years lost in the Optimistic Scenario. Under the Pessimistic Scenario, 1.6 million premature deaths are averted with 20.8 million fewer life years lost. The largest gains are among younger cohorts, with a 0.5 gain in average life expectancy projected for the age 15 years cohort in 2016.

Vaping saves lives but the FDA has in the past tried to impose severe regulations on the industry and to make vaping less pleasurable. (Aside: It’s interesting that liberals tend to favor other risk-reducing devices such as condoms in the classroom but disfavor vaping while conservatives often take the opposite sides. I don’t think either group is basing their choices on the elasticities.)

The FDA, for example, has tried to ban flavored e-cigarettes. In a new NBER paper, Buckell, Marti and Sindelar calculate that:

…a ban on flavored e-cigarettes would drive smokers to combustible cigarettes, which have been
found to be the more harmful way of getting nicotine (Goniewicz et al., 2017; Shahab et al., 2017).
In addition, such a ban reduces the appeal of e-cigarettes to those who are seeking to quit; ecigarettes
have proven useful as a cessation device for these individuals (Hartmann-Boyce et al.,
2016; Zhu et al., 2017), and we find that quitters have a preference for flavored e-cigarettes.

Fortunately, the new FDA commissioner Scott Gottlieb has signaled a more liberal attitude towards vaping. It could be the most consequential decision of his tenure.

Hat tip: The excellent Robert Wilbin from 80,000 Hours.

Today about a third of all new marriages are between couples who met online. Online dating has an interesting property–you are likely to be matched with a total stranger. Other matching methods, like meeting through friends, at church or even in a local bar are more likely to match people who are already tied in a network. Thus, the rise of online dating is likely to significantly change how people connect and are connected to one another in networks. Ortega and Hergovich consider a simple model:

We consider a Gale-Shapley marriage problem, in which agents may belong
to different races or communities. All agents from all races are randomly
located on the same unit square. Agents want to marry the person who is
closest to them, but they can only marry people who they know, i.e. to whom
they are connected. As in real life, agents are highly connected with agents
of their own race, but only poorly so with people from other races.

Using theory and random simulations they find that online dating rapidly increases interracial marriage. The result happens not simply because a person of one race might be matched online to a person of another race but also because once this first match occurs the friends of each of the matched couples are now more likely to meet and marry one another through traditional methods. The strength of weak ties is such that it doesn’t take too many weak ties to better connect formerly disparate networks.

Interracial marriage, defined to include those between between White, Black, Hispanic, Asian, American Indian or multiracial persons, has been increasing since at least the 1960s but using the graph at right the authors argue that the rate of growth increased with the introduction and popularization of online dating. Note the big increase in interracial marriage shortly after the introduction of Tinder in 2009!

(The authors convincingly argue that this not due to a composition effect.)

Since online dating increases the number of potential marriage partners it leads to marriages which are on average “closer” in preference space to those in a model without online dating. Thus, the model predicts that online dating should reduce the divorce rate and there is some evidence for this hypothesis:

Cacioppo et al. (2013) find that marriages created online were less likely to
break up and reveal a higher marital satisfaction, using a sample of 19,131
Americans who married between 2005 and 2012. They write: “Meeting a
spouse on-line is on average associated with slightly higher marital satisfaction
and lower rates of marital break-up than meeting a spouse through
traditional (off-line) venues”

The model also applies to many other potential networks.

Hat tip: MIT Technology Review.

Richard Thaler wins the Nobel for behavioral economics! An excellent choice and one that makes my life easier because you probably already know his work. Indeed his work may already have influenced how much you save for retirement, how you pay your taxes and whether you will donate a kidney or not. In Britain, Thaler’s work was one of the inspirations for the Behavioral Insights Team which applies behavioral economics to public policy. Since being established in 2010 similar teams have been created around the world including in the United States.

Thaler’s intellectual biography Misbehaving (available free as kindle for Amazon Prime members is this a nudge?) is a fun guide to his work. Thaler will be the first to tell you he isn’t that smart. Relative to other Nobel prize winners that might even be true. None of his papers are technically difficult or excessively math heavy and most of his ideas are pretty obvious–obvious once you have heard them! Thaler cannot have been the first person in the world to notice that people like cashews but also like it when you take the cashews away to prevent them from eating more than they really want to eat (preferences Thaler noted at a dinner party of economists). But other people, especially economists, dismissed the evidence in front of their noses that people weren’t as rational as their theories suggested–People will be more careful with big decisions. Errors will cancel. Markets will take care of that–There were plenty of reasons to go back to pondering the beautiful austerity of theory. Thaler, however, especially after reading Kahneman and Tversky’s Judgment under Uncertainty: Heuristics and Biases realized that their could be a theory of misbehaving, a theory of irrational choice.

That theory is now called behavioral economics. It’s not as clean and straight as neo-classical theory. We still don’t know when one bias, of the many that have been documented, applies and when another applies. So much depends on context and what we bring to it that perhaps we never will. Nevertheless, there is no longer any question that some features of choice and the economy are better explained via systematic biases than by purely rational decision making.

In addition to Misbehaving and Nudge (the latter with Cass Sunstein who brought these ideas to law and government) you can find many of Thaler’s key ideas in the Anomalies column of the Journal of Economic Perspectives. Probably this is the first economics Nobel to be given for a popular column! In many ways, however, these columns made Thaler’s reputation. The anomalies column was always a highlight of the issue and I remember discussing and debating these columns with Tyler and many others as they appeared. The same was true throughout the economics profession. Even economists like an anomaly.

One of the most important applications of behavioral economics has been to savings. Savings decisions are difficult because it’s not obvious how much to save or even how to save (bank accounts, mutual funds, Roth IRA, 401k etc. etc.). In addition, the decision can be administratively complex with annoying paperwork, and the benefits of good decision making don’t occur until decades into the future. Perhaps most importantly, we don’t receive clear and quick feedback about our choices. We don’t know whether we have saved too little or too much until it’s too late to change our decision. As a result, many of us fall back on defaults. These are the motivating ideas behind Thaler’s recommendations to set default rules such that people are automatically enrolled in pension plans that invest in low-cost market indices. Such default rules have changed saving behavior in the United States and around the world. Thaler’s Save More Tomorrow plans also ask people whether they want to plan today to save more of their raises, a simple yet profound change in default that makes it easier to save by lowering the perceived cost.

Thaler’s research is even changing football. His paper with Cade Massey, Overconfidence vs. Market Efficiency in the National Football League looked at “right to choose decisions” in the player draft. On the one hand, millions of dollars are made and lost on these decisions and they are being made repeatedly by professionals; thus, the case for rational decisions would seem to be strong. But on other hand, people are overconfident, they tend to make extreme forecasts, there is a winner’s curse, there is a false consensus effect (you think that everyone likes what you like), and there is present bias. These biases all suggest that decisions might be made poorly, even given the big stakes. Massey and Thaler find that it’s the latter.

Using archival data on draft-day trades, player performance and compensation, we compare the market value of draft picks with the historical value of drafted players. We find that top draft picks are overvalued in a manner that is inconsistent with rational expectations and efficient markets and consistent with psychological research.

Moreover, and this is the kicker, Massey and Thaler’s research has passed the market test! Bill Belichick started to pay attention first (econ undergrad natch) and now other smart teams are applying Thaler’s research to improve their choices.

Few economists have had more practical influence than Richard Thaler and behavioral economics is still on the upswing.

Sentence of the Day

by on October 4, 2017 at 3:35 pm in Economics | Permalink

…we show that the industries where concentration has risen the most are also those where there has been the fastest growth in productivity and innovation.

From Van Reenen and Patterson at HBR based on The Fall of the Labor Share and the Rise of Superstar Firms.

Here’s the latest video from Principles of Macroeconomics at MRUniversity. As always these videos can be used with any textbook but they go great with the best textbook, Modern Principles of Economics. The video is on situations when fiscal policy doesn’t work well or can even reduce growth and GDP.

Mercedes-Benz Adopts What3Words

by on October 3, 2017 at 11:21 am in Travel | Permalink

I’ve covered What3Words the innovative addressing system several times before. Here’s some news:

Forbes: What3words (w3w) has a surprisingly simple and efficient way to find an address and get you there. The London startup has divided the world into a grid pattern of 57 trillion 3m x 3m squares and given each one a unique 3-word address. It means anyone can accurately find any location and share it instantly, removing the ambiguity from the search process.

At the Frankfurt Motor Show this week, Mercedes Benz announced it would be integrating this radical new address system into a selection of its models from 2018. “The United Nations and the Red Cross use us in disaster zones, and now Mercedes has realized that there is a problem in the developed world with accurate mapping systems and they have employed our software,” says Giles Rhys Jones, w3w’s chief marketing officer.

Hat tip: Samir Varma.

India Fact of the Day

by on September 28, 2017 at 9:31 am in Economics | Permalink

IBM now has more employees in India than in the United States.

Some 130,000 employees in India out of 380,000 worldwide with less than 100,000 in the United States.

More of interest from the NYTimes.

Kill the Jones Act Now!

by on September 27, 2017 at 7:24 am in Current Affairs, Economics | Permalink

The purpose of the 1920 Jones Act was to protect American shipping interests by giving them a monopoly on US port-to-port traffic. The Act requires that all ships transporting goods between U.S. ports have to be constructed in the United States and owned and crewed by U.S. citizens (or permanent residents).

The Act, however, wasn’t enough to save the US industry. As a result, we have the worst possible situation. Extremely expensive US port-to-port shipping and only a tiny US shipping industry to show for it. By one account, there are less than one hundred Jones-Act-eligible ships.

The expense of US water transport pushes shippers to move goods by air and coastal highway which is wasteful but usually not deadly. But as Salim Furth points out the Jones Act could be deadly for Puerto Rico:

Even though Trump granted a brief waiver from the Jones Act following Hurricanes Harvey and Irma, the Department of Homeland Security announced last week that it would not grant a Jones Act waiver to Puerto Rico. It justified its decision on the basis that the Jones Act fleet is sufficient to the task.

But the Jones Act fleet already imposes much higher shipping costs on Puerto Rico than on nearby islands, and it operates near capacity in normal times. To involve mainland American workers and businesses in Puerto Rico’s recovery requires a rapid increase in capacity and speed—something far beyond the ability of America’s moribund crony capitalist shippers.

If the cost to Puerto Rico doesn’t get President Trump’s attention then perhaps this will–The Jones Act benefits socialist Venezuela!

Puerto Rico’s badly damaged energy sector relies on oil imports from Venezuela, a socialist dictatorship that uses its revenue to prop up anti-Americanism in Latin America. If issued a waiver, Puerto Rico could switch to cheaper, cleaner natural gas from sources such as Pennsylvania and Texas.

The Jones Act shouldn’t be temporarily lifted, the Jones Act should be killed.

The Roodman Replication

by on September 26, 2017 at 7:25 am in Economics | Permalink

David Roodman, working for the Open Philanthropy Project, has completed an absolutely tremendous replication and extension of many papers in the literature on deterrence and crime. He reaches two conclusions. First:

I estimate, that at typical policy margins in the United States today, decarceration has zero net impact on crime. That estimate is uncertain, but at least as much evidence suggests that decarceration reduces crime as increases it. The crux of the matter is that tougher sentences hardly deter crime, and that while imprisoning people temporarily stops them from committing crime outside prison walls, it also tends to increase their criminality after release. As a result, “tough-on-crime” initiatives can reduce crime in the short run but cause offsetting harm in the long run.

Second:

Empirical social science research—or at least non-experimental social science research—should not be taken at face value. Among three dozen studies I reviewed, I obtained or reconstructed the data and code for eight. Replication and reanalysis revealed significant methodological concerns in seven and led to major reinterpretations of four. These studies endured much tougher scrutiny from me than they did from peer reviewers in order to make it into academic journals. Yet given the stakes in lives and dollars, the added scrutiny was worth it. So from the point of view of decision makers who rely on academic research, today’s peer review processes fall well short of the optimal.

My paper on Three Strikes with Eric Helland was one of the papers that Roodman replicated. (Fortunately, it did replicate with the exception of one error in a table.) I can vouch that Roodman gave us tougher scrutiny than did the peer reviewers.

Not surprisingly, I don’t agree with all of Roodman’s conclusions but rather than pushing back I think it more important to underline how impressive the replication project is. There are many review papers in economics but a replication project of this magnitude is nearly unprecedented. In our paper on the National Science Foundation, Tyler and I advised the NSF to put more efforts into replication. We wrote:

The NSF could support replication studies on a significant scale. A significant fraction of economic research does not easily replicate…Replication and reproducibility studies are true public goods that are not rewarded highly by most top journals or by the tenure process at research universities.

Roodman and OPP have demonstrated the value of replication on a large scale.

Water Runs Downhill: Toronto Edition

by on September 25, 2017 at 10:42 am in Economics | Permalink

Globe and Mail: More than 1,000 planned purpose-built rental units have instead been converted to condominiums in the Greater Toronto Area since Premier Kathleen Wynne’s government expanded rent control in the spring, according to a new report that warns the region’s rental supply crisis is poised to worsen.

And given how rent control can destroy cities this is a foreboding sign:

The report also warns that 85 per cent of the province’s existing stock of purpose-built rental buildings are more than 35 years old and will require higher levels of investment to maintain.

Another Cost of Global Warming

by on September 22, 2017 at 9:52 am in Economics, Law, Science | Permalink

This paper documents a small but systematic bias in the patent evaluation system at the United States Patent and Trademark Office (USPTO): external weather variations affect the allowance or rejection of patent applications. I examine 8.8 million reject/allow decisions from 3.5 million patent applications to the USPTO between 2001 and 2014, and find that on unusually warm days patent allowance rates are higher and final rejection rates are lower than on cold days. I also find that on cloudy days, final rejection rates are lower than on clear days. I show that these effects constitute a decision-making bias which exists even after controlling for sorting effects, controlling for applicant-level, application-level, primary class-level, art unit-level, and examiner- level characteristics. The bias even exists after controlling for the quality of the patent applications. While theoretically interesting, I also note that the effect sizes are relatively modest and may not require policy changes from the USPTO. Yet, the results are strong enough to provide a potentially useful instrumental variable for future innovation research.

From a paper by Balázs Kovács, here. Hat tip Kevin Lewis.

Google City!

by on September 21, 2017 at 7:24 am in Economics | Permalink

Amazon is looking for a city for its new headquarters. Boring! Google is looking to build a city. The FT reports:

Google’s parent company was working on a sweeping plan to build a city from the ground up, the executive in charge of its urban innovation business said on Tuesday, in an attempt to prove that a technologically-enabled urban environment can improve quality of life and reduce cities’ impact on the environment.

…“We actually want to build a new city, it is a district of the city, but one that is of sufficient size and scale that it can be a laboratory for innovation on an integrated basis,” said Dan Doctoroff, head of Sidewalk Labs, at a talk to the San Francisco Bay Area Planning and Urban Research Association.

Sidewalk was “quite far along” in its search for a city with which to partner to build a testing ground for new approaches to transport, infrastructure and possibly even governance and social policy, he said.

As I said in my NYTimes op-ed on private cities (with Shruti Rajagopolan):

The world is building more cities, faster than ever before. China used more cement in the last three years than the United States used in the entire 20th century. By 2050, India will need new urban infrastructure to house an additional 404 million people — a task comparable to building every city in the United States in just 35 years.

…As the world urbanizes, we need to experiment with new urban forms and new forms of urban planning, and privately designed and operated cities — proprietary cities — like Jamshedpur, India, or Reston, Va., may provide answers.

By the way, Virginia’s private city, Reston, was just named by Money magazine as one of the best places to live in the United States.

Here’s the second MRUniversity video from India. It’s a little different than what we have done before and a bit of an experiment; an interview with Shannon D’Souza one of the proprietors of my favorite coffee shop in Mumbai, Koinoina Coffee. We talk about what it’s like doing business in India.

Enjoy! And if you are in Mumbai do stop by Koinoina Coffee Roasters in Chuim village and tell them Alex sent you.

The Color of Law

by on September 19, 2017 at 7:25 am in Books, Economics, History, Law | Permalink

Richard Rothstein’s The Color of Law is a good history of government discrimination against African-Americans in the housing market. Most notably, the FHA and the VA refused to guarantee mortgage loans or loans to builders unless the neighborhood was segregated. Indeed, the FHA wouldn’t even insure a project if there were too many African Americans living nearby.

In 1940, for example, a Detroit builder was denied FHA insurance for a project that was near an African American neighborhood. He then constructed a half-mile concrete wall, six feed high and a foot thick, separating the two neighborhoods, and the FHA then approved the loan.

Rothstein is no libertarian but to his credit he does acknowledge that one of the few anti-segregation forces in the early twentieth century was the Lochner influenced reasoning of the Supreme Court. In Louisville, Kentucky, wealthy blacks began to buy houses in previously white neighborhoods. In response, the city passed an ordinance making it illegal for blacks to move into majority-white neighborhoods and vice-versa. The NAACP organized a test case. Warley, an African American, agreed to buy a house from Buchanan, if not prevented by law from doing so. Buchanan then argued that the law reduced the value of his house because he could not sell to Warley or other African-Americans. Thus, the ordinance was a taking which violated the 14th Amendment right not to be deprived of property without due process of law.

The State of Kentucky responded with a brief arguing that segregation was divinely ordained and that “negroes carry a blight with them wherever they go.” The racism was sickening but Kentucky also had the great mass of intellectuals behind it because they were asserting the progressive belief that the state’s police powers could and should overrule individual rights, especially property rights. Under Lochner, however, “unreasonable, unnecessary and arbitrary interference with the right and liberty of the individual to contract” violated the 14th Amendment. Rothstein writes:

“In 1917, the Supreme Court overturned the racial zoning ordinance of Louisville, Kentucky, where many neighborhoods included both races before twentieth-century segregation….The Court majority was enamored of the idea that the central purpose of the Fourteenth Amendment was not to protect the rights of freed slaves but a business rule: “freedom of contract.” Relying on this interpretation, the Court had struck down minimum wage and workplace safety laws on the grounds that they interfered with the right of workers and business owners to negotiate individual employment conditions without government interference. Similarly, the Court ruled that racial zoning ordinances interfered with the right of a property owner to sell to whomever he pleased.”

Sure, it’s a grudging acknowledgment, but most people don’t even do that so give Rothstein credit where credit is due.

Governments evolved other measures to promote segregation such as zoning laws and the white-subsidy systems of the FHA and VA. Nevertheless, Buchanan v. Warley was likely an very important decision. Bill Fischel goes so far as to argue that Buchanan v. Warley prevented apartheid in America.

Addendum: On segregation and Lochner, see David Bernstein’s excellent book Rehabilitating Lochner from which I have also drawn.