Alex Tabarrok

Not Moving to Opportunity

by on March 19, 2016 at 7:28 am in Economics | Permalink

InterstateMigrationLabor market mobility in the United States has declined. Interstate migration is down (graph at right from Molloy, Smith, Trezzi and Wozniak) and so is in-state-migration, especially for the less well educated. Where once people responded to shocks by moving to opportunity now they are likely to stay put and retire early or take-up disability insurance. Ben Leubsdorf at the WSJ reviews some of the evidence:

“A state typically returns to normal after an adverse shock not because employment picks up, but because workers leave the state,” economists Olivier Blanchard and Lawrence Katz wrote in a 1992 paper.

This time might be different in some ways. Three economists wrote in a National Bureau of Economic Research working paper last year that compared with the prerecession years, mass layoffs after 2007 prompted a “muted” migration response and many workers instead dropped out of the labor force.

In a new paper, also cited by Leubsdorf, Danny Yagan at Berkeley suggests that reduced migration is only part of the problem. What has made the aftermath to the 2008-2009 recession so bad is that migration is low at the same time that it has become more necessary than ever. The 2008-2009 recession was especially localized, it hit some places harder than others and in a way that appears to be permanent. But migration has been too slow to solve the problem.

The usual story is that in-and-out migration equalizes wage, unemployment and employment rates across the nation. Some places may be harder hit than others but movement quickly makes the US into one labor market. In the aftermath of this recession, however, that isn’t happening for employment rates. Using a clever research design that looks at workers with similar education and skills doing the same jobs at the same large firms but in different locations, Yagan finds that location continues to matter years after the recession has ended. Workers who worked in the places hardest hit in the 2007-2009 recession have employment rates today that are 1% lower than similar workers in regions that were less hard hit. Convergence has been unusually slow:

I conclude that living in a hard-hit area has caused enduring joblessness and exacerbated inequality. If the latest convergence speed continues, employment differences across the United States are estimated to return to normal in the 2020s—more than a decade after the great recession.

Jeff Kaufman writes:

Buses are much safer than cars, by about a factor of 67 [1] but they’re not very popular. If you look at situations where people who can afford private transit take mass transit instead, speed is the main factor (ex: airplanes, subways). So we should look at ways to make buses faster so more people will ride them, even if this means making them somewhat more dangerous.

Here are some ideas, roughly in order from “we should definitely do this” to “this is crazy, but it would probably still reduce deaths overall when you take into account that more people would ride the bus”:

  • Don’t require buses to stop and open their doors at railroad crossings.
  • Allow the driver to start while someone is still at the front paying.
  • Allow buses to drive 25mph on the shoulder of the highway in traffic jams where the main lanes are averaging below 10mph.
  • Higher speed limits for buses. Lets say 15mph over.
  • Leave (city) bus doors open, allow people to get on and off any time at their own risk.

Other ideas?

Excellent recognition of tradeoffs. Pharmaceuticals should also be more dangerous.

Hat tip: Slate Star Codex.

Uber drivers carry more passengers per mile driven or hour worked than do taxi drivers. In other words, the Uber system is more productive than the taxi system. That’s the big finding from a new paper by Judd Cramer and Alan B. Krueger.

On average, the capacity utilization rate is 30 percent higher for UberX drivers than taxi drivers when measured by time, and 50 percent higher when measured by miles, although taxi data are not available to calculate both measures for the same set of cities.

Four factors likely contribute to the higher utilization rate of UberX drivers: 1) Uber’s more efficient driver-passenger matching technology; 2) Uber’s larger scale, which supports faster matches; 3) inefficient taxi regulations; and 4) Uber’s flexible labor supply model and surge pricing, which more closely match supply with demand throughout the day.

Krueger co-authored an earlier paper on Uber drivers commissioned by Uber but this paper was not commissioned.

No experiment can ever be replicated so each attempted replication must assume that the things which differ don’t matter. The more and the more important the things that we can plausibly assume don’t matter, the stronger is the original study. Chemistry students have done the same experiments for hundreds of years and that’s useful because we can plausibly assume that who and when the experiment is conducted doesn’t matter. The recent brouhaha between Nosek et al. and Gilbert et al. illustrates a weaker case.

In their critique of Nosek et al., Gilbert et al. say that some of their replications failed because things were different.

An original study that asked Israelis to imagine the consequences of military service was replicated by asking Americans to imagine the consequences of a honeymoon

Now that sounds like two very different studies but Nosek provides important context. The original study in question wasn’t about military service or honeymoons it was about the conditions that promote reconciliation between victims and injurers after an injustice has been committed. The original study asked Israelis what they would do and how they would feel about a specific injustice. Namely you and a co-worker have been working on a project for a long-time but just before submission you are called away for reserve duty [male]/maternity leave [female]. Your co-worker takes credit for all the work and gets promoted while you later get demoted. The study then went on to ask questions about the conditions necessary for reconciliation. The reserve duty/maternity leave bit was just the story element needed to explain the situation not the focus of the study.

Nosek et al. tried to replicate the study in the United States where being called up for reserve duty is less common than in Israel and where being demoted for taking maternity leave could raise legal issues so they substituted ‘had to leave for honeymoon’. Everything else was the same. One of the original authors approved the new design.

Nosek et al. were not able to replicate the original findings. Is this because they didn’t replicate the study or because the study failed to replicate? Gilbert et al. say Nosek et al. failed to replicate the study.

In my view, Gilbert et al. are caught on the horns of a dilemma. If the studies don’t replicate they aren’t interesting and if the studies replicate but only under extremely precise conditions they also aren’t interesting. We are interested in general features of the human condition not in descriptions of the choices that 75 female and 19 male Israeli students made at a particular point in time. Moreover, if changes in wording matter then surely so does the fact that the original study was on Israeli’s in 2008 and the replication used Americans in 2013 (a lot has changed over these years!) and so must also a hundred other differences. But if so, what’s the point?

Hat tip: Andrew Gelman who has more to say.

Marginal Revolution University has a brand new feature, Econ Duel! Our first Econ Duel features Tyler and me debating the question, Is education more about signaling or skill building?

People often bunch their activities at common points in time. Most people work from 9 am to 5 pm rather than from 10 pm to 6 am. One reason is that these are daylight hours, but another reason is because everyone else is working during this time. If you and your coworker are in the office at the same time, it is easier to collaborate. Furthermore, it makes working more fun to be there with other people.

…Most generally, many economic activities bunch or cluster in time because it pays to coordinate your economic actions with those of others. That just means that we want to be investing, producing, and selling at the same time that others are investing, producing, or selling. In short, economic activity tends to cluster together in time just as it clusters together in space. (What do we call a cluster of economic activity in space? A city.)

The desire to coordinate work-time amplifies shocks and so can contribute to business cycles (hence, time bunching is one of the transmission and amplification mechanisms discussed in our principles textbook from which the quote is drawn).

People “also like to party at the same time and to see movies and concerts with other people” so there is a desire to coordinate leisure-time as well as work-time. The coordination of leisure-time is the subject of an excellent paper by Young and Lim, Time as a Network Good: Evidence from Unemployment and the Standard Workweek, in Sociological Science.

WeekendEffectFrom the abstract:

Drawing on two independent data sets, with more than half a million respondents, we show that both workers and the unemployed experience remarkably similar increases in emotional well-being on weekends and have similar declines in well-being when the workweek begins. The unemployed look forward to weekends much the same as workers. This is in large part because social time increases sharply on weekends for both workers and the unemployed. Weekend well-being is not due to time off work per se but rather is a collectively produced social good stemming from widely shared free time on weekends. The unemployed gain comparatively little benefit from their time off during the week, when others go to work.

Figure 2, from their paper, shows the basic story. Workers report more positive emotions (top panel) and fewer negative emotions (bottom panel) than the unemployed but both workers and the unemployed are happier and less stressed on weekends.

Thus, coordinated leisure is more valuable than free time per se.

The benefits of coordination also occur at longer time scales. It’s March Break at GMU this week so both my wife and I have some free time. Unfortunately, GMU’s March Break is not coordinated with that of Fairfax County schools so we can’t plan any family travel time! In two weeks, the situation will be reversed. Ugh.

George Mason University could raise the value of its March Break to many of its employees by coordinating with Fairfax County Schools–a free way to raise faculty and staff salaries! If only some Angel could make this possible.

The benefits of coordinated leisure also suggest that a national holiday is of more value than everyone having a day off but potentially a different day, so-called flex-time. I wouldn’t go as far as the French, who shut down in August, but it’s odd that the United States has lots of winter holidays but only one summer holiday. Let’s coordinate to create a national summer holiday. A 3-day summer-weekend will increase everyone’s happiness.

Teacher quality can be measured using value-added student achievement scores. Value-added scores, however, let us do much more. We can measure the value not only of different teachers but of different teaching methods. Thus, value-added scores and more generally big data are tools not just to weed out low-quality teachers but to raise the quality of all teachers.

At Brookings Thomas Kane reports on new research evaluating textbooks.

We matched each teacher to the students they were teaching and assembled data on students’ demographic characteristics, performance on prior state tests, and the averages of such characteristics for the peers in their classroom. We also estimated each teacher’s impact on student performance in the prior school year (2013-14) to use as a control. (We wanted to account for the fact that more effective teachers may choose to use particular textbooks.) After controlling for the measures of student, peer, and teacher influences above, we estimated the variance in student outcomes on the new assessments associated with the textbook used.

The textbook effects were substantial, especially in math. In 4th and 5th grade math classrooms, we estimated that a standard deviation in textbook effectiveness was equivalent to .10 standard deviations in achievement at the student level. That means that if all schools could be persuaded to switch to one of the top quartile textbooks, student achievement would rise overall by roughly .127 student-level standard deviations or an average of 3.6 percentile points. Although it might sound small, such a boost in the average teacher’s effectiveness would be larger than the improvement the typical teacher experiences in their first three years on the job, as they are just learning to teach.

What makes this research especially important is that textbooks have no unions and it’s easy to replace one textbook with a better textbook. Moreover:

An annual report on the effectiveness of textbooks would transform the market, by providing publishers and software developers with a stronger incentive to compete on quality.

The Bailout Barometer

by on March 3, 2016 at 11:39 am in Economics | Permalink

BarometerResearchers at the Richmond Fed estimate that some 61% of all private financial liabilities have been explicitly or implicitly guaranteed by the Federal Government–that’s up from less than 50% in 1999.

The biggest explicit guarantees are for banking accounts through the FDIC, the guarantees for Freddie Mac and Sallie Mae and guarantees for private pension accounts. The biggest implicit guarantees are for bank accounts greater than $250,000 and money market funds.

See here for greater details.

It’s a strange capitalist society that guarantees so many private financial liabilities. There are good and true arguments for each element in the list, of course, but don’t commit the fallacy of composition. Many good and true arguments can add up to a bad and false conclusion.

 

Here’s a cool new feature at MRUniversity. Click on the settings icon (the gear) in one of our videos and you will find options for subtitles. English subtitles are useful for the deaf or those with hearing loss and also helpful for those learning English as a second language. In addition, we now have professional subtitles for our Principles of Microeconomics class in French, Arabic and Spanish. We have started in on Chinese and we have more languages on the way. Our Principles of Macroeconomics is subtitled in English and Spanish (so far!).

Actually, thanks to Google Translate, we have machine-translated subtitles in dozens of different languages including Turkish, Hindi, and Vietnamese. The machine translated versions are a bit crude, of course, which is why we are adding professional translations but the machine versions are getting better all the time!

The Logic of Closed Borders

by on February 29, 2016 at 3:24 pm in Economics, Law | Permalink

Bloomberg: At least 100 workers at the construction site for Tesla Motors Inc.’s battery factory near Reno, Nevada, walked off the job Monday to protest use of workers from other states, a union official said.

Local labor leaders are upset that Tesla contractor Brycon Corp. is bringing in workers from Arizona and New Mexico, said Todd Koch, president of the Building and Construction Trades Council of Northern Nevada.

“It’s a slap in the face to Nevada workers to walk through the parking lot at the job site and see all these license plates from Arizona and New Mexico,” Koch said in an interview. Those who walked out were among the hundreds on the site, he said.

Erik Brynjolfsson tweeted “Build a wall! And make New Mexico pay for it.” Or perhaps require that Nevada carpenters be licensed.

Brookings has a good memo on four ways occupational licensing reduces both income and geographic mobility. Here is point 1:

Since state licensing laws vary widely, a license earned in one state may not be honored in another. In South Carolina, only 12 percent of the workforce is licensed, versus 33 percent in Iowa. In Iowa, it takes 16 months of education to become a cosmetologist, but just half that long in New York. This licensing patchwork might explain why those working in licensed professions are much less likely to move, especially across state lines:

The graph, is from the excellent White House report on occupational licensing. The first blue column says that workers in heavily licensed occupations are nearly 15% less likely to move between states than those in less licensed occupations–this is true even after controlling for a number of other variables that might differ across occupations and also influence mobility such as citizenship, sex, number of children, and education.

The orange column provides another test. An occupational license makes it difficult to move across states but not within a state. If workers in licensed occupations had lower rates of mobility for some other reason than the license then we would expect that workers in heavily licensed occupations would also have lower rates of within state mobility. The orange bars show that workers in heavily licensed occupations do have slightly lower rates of within state mobility but not by nearly enough to explain the dramatically lower rates of between state mobility.

Lower rates of worker mobility mean that workers are misallocated across the states in a similar way that price controls or discrimination misallocate resources and reduce total wealth. Lower rates of workforce mobility also increase the persistence of unemployment.

To its credit, the Federal government is investing in efforts to make licenses more portable including encouraging “cross-State licensing reciprocity agreements to accept each other’s licenses.” Cross-state reciprocity agreements sound like an excellent idea.

The latest court decision in the Apple-Samsung patent war was a resounding defeat for Apple. Whatever you think about the merits of the case, however, Tim Worstall points out that the system isn’t working:

It’s easy enough to forget that the smartphone patent wars are still rumbling along. The actual competitive issues were all settled some years ago, the market has entirely moved on from the issues that were being discussed. However, the court cases over those patents carry on: and that’s exactly what is wrong with the system that we’ve got at present.

..taking 5 years to decide (assuming that there won’t be yet more appeals) in a market with a new generation of devices at least every year simply isn’t timely. Those competitive issues over who gets to sell what based upon copying or innovation have receded way back into the mists of time. None of the products under discussion are still on sale and haven’t been for a couple of years now. Whatever market opportunity either party had, either Apple or Samsung, is dead and gone now. But we’re still trying to decide over who should have that market opportunity? It’s just not working.

Yesterday, I pointed out that generic drug prices are falling. So what accounts for the small number of large price increases in the generic drug market? It’s a combination of market shenanigans, supply shocks, and FDA delay.

The markets where price increases have been large tend to be relatively small. Daraprim, for example, is only prescribed some 8-12 thousand times per year in the United States. The small size of these markets is no accident. Keep in mind that whatever one may think of Shkreli, he did show a kind of entrepreneurial genius in scouring the universe of drugs in the United States to select one where monopoly power could be so effectively exploited. Shkreli found a market where 1) the total size of the market was low so there wasn’t much competition but 2) the drug treated a serious illness and 3) there wasn’t a good substitute so the value of the drug to the small number of patients was very high.

In addition, Shkreli knew that he had at least a 3-4 year window of opportunity to exploit monopoly power. To compete with Daraprim a competitor would have to submit an Abbreviated New Drug Applications (ANDA) to the FDA. Despite the name, Abbreviated, it costs at least five million dollars to go through the process and right now there is a backlog of nearly 3,000 ANDAs at the FDA’s Office of Generic Drugs. In recent years, it has taken 3- 4 years to get a generic drug approved. The cost is too high and the delay too long.

(I am focusing on the standard route to market entry and ignoring the possibility of importation or compounding which I discussed earlier. I’m also ignoring that Daraprim is unusual in that it was approved in 1953 before the current FDA system of safety and efficacy trials, and the FDA is being absurdly cagey about whether they would allow a simple ANDA for Daraprim. I may write about that in a future post– see here for a related case.)

So what’s the good news? In 2012 Congress passed the Generic Drug User Fee Act (GDUFA). Modeled after the very succesful PDUFA, the act earmarks fees paid by generic drug manufacturers to the FDA’s Office of Generic Drugs. As a result of those fees, the FDA has hired more reviewers and they are rapidly reducing the backlog. That’s the first piece of good news.

A second piece of good news is that FDA delay isn’t the only cause of the backlog. Another cause of the ANDA backlog was an unexpected increase in the number of ANDAs. I would have been much more worried if the number of ANDAs had decreased. Despite new user fees and some increase in regulation the increase in submissions is evidence that the US generic market is competitive, vibrant, and profitable.

The generic drug market in the United States has been very successful. We are constantly told, for example, that US pharmaceutical prices are the highest in the world and that is true for patented drugs but generic drug prices in the US are among the lowest in the developed world and most prescriptions are of generics.

We can address the price hiccups in the generic market by opening up to more world suppliers, speeding up the ANDA process and keeping costs of entry low. Overall, however, we shouldn’t let the price hiccups detract attention from the fact that the generic drug market is competitive, vibrant and thriving and we want to keep it that way.

The Good News on Generic Drugs

by on February 22, 2016 at 7:28 am in Economics, Medicine | Permalink

Who could resist the story of Martin Shkreli and Turing Pharmaceuticals?  Shkreli is like a villain straight from central casting; having made millions, perhaps fraudulently, as a hedge manager, he turned to pharmaceuticals where, as CEO of Turing, he bought up the marketing rights to Daraprim (pyrimethamine), a drug used by pregnant women and AIDS patients (natch), and jacked up the price from $13.50 a pill to $750 a pill. Not content with monopolizing pharmaceuticals, Shkreli also aimed to monopolize hip hop music. Shkreli on his own was a great story but add some big price increases for a handful of other generic drugs and Shrekli became an irresistible lead to a story about seemingly widespread increases in generic drug prices.

If we dig deeper, however, the big news about generic drugs is good news. Generic drug prices are falling. Three recent studies of generic drug prices all point in the same direction. Express Scripts, a large prescription drug manager, found that:

From January 2008 through December 2014, a market basket of the most commonly used generic medications decreased in price by 62.9%.

In an excellent overview the Department of Health and Human Services concluded that:

…drug acquisition costs fell for a majority of generic Medicaid prescriptions measured by both volume and total generic expenditures.

Finally the AARP studied the prices of generic drugs used by older Americans and found that:

Between January 2006 and December 2013, retail prices for 103 chronic-use generic drugs that have been on the market since the beginning of the study decreased cumulatively over 8 years by an average of 22.7 percent.

— The cumulative general inflation rate in the U.S. economy rose 18.4 percent during the same 8-year period.

Patented drugs are increasing in price so to evaluate the benefit of price decreases for generics it’s important to know that between 80 to 90 percent of all prescriptions in the United States are for generic drugs.

Tomorrow: The Good News on the FDA and ANDAs.

A strongly worded letter from Krueger, Goolsbee, Romer and Tyson to Sanders and his economic team chastising them for unrealistic, unscientific numbers. (No indent).

Dear Senator Sanders and Professor Gerald Friedman,

We are former Chairs of the Council of Economic Advisers for Presidents Barack Obama and Bill Clinton. For many years, we have worked to make the Democratic Party the party of evidence-based economic policy. When Republicans have proposed large tax cuts for the wealthy and asserted that those tax cuts would pay for themselves, for example, we have shown that the economic facts do not support these fantastical claims. We have applied the same rigor to proposals by Democrats, and worked to ensure that forecasts of the effects of proposed economic policies, from investment in infrastructure, to education and training, to health care reforms, are grounded in economic evidence.  Largely as a result of efforts like these, the Democratic party has rightfully earned a reputation for responsibly estimating the effects of economic policies.

We are concerned to see the Sanders campaign citing extreme claims by Gerald Friedman about the effect of Senator Sanders’s economic plan—claims that cannot be supported by the economic evidence. Friedman asserts that your plan will have huge beneficial impacts on growth rates, income and employment that exceed even the most grandiose predictions by Republicans about the impact of their tax cut proposals.

As much as we wish it were so, no credible economic research supports economic impacts of these magnitudes. Making such promises runs against our party’s best traditions of evidence-based policy making and undermines our reputation as the party of responsible arithmetic. These claims undermine the credibility of the progressive economic agenda and make it that much more difficult to challenge the unrealistic claims made by Republican candidates.

Sincerely,

Alan Krueger, Princeton University
Chair, Council of Economic Advisers, 2011-2013

Austan Goolsbee, University of Chicago Booth School
Chair, Council of Economic Advisers, 2010-2011

Christina Romer, University of California at Berkeley
Chair, Council of Economic Advisers, 2009-2010

Laura D’Andrea Tyson, University of California at Berkeley Haas School of Business
Chair, Council of Economic Advisers, 1993-1995