Economics

It is very much a twist on Adam Smith’s argument about the division of labor:

One further remark however, which I cannot omit, is that the people in America are necessitated, by their local situation, to be more sensible and discerning, than nations which are limited in territory and confined to the arts of manufacture. In a populous country, where arts are carried to great perfection, the mechanics are, obliged to labour constantly upon a single article. Every art has its several branches, one of which employs a man all his life. A man who makes heads of pins or springs of watches, spends his days in that manufacture and never looks beyond it. This manner of fabricating things for the use and convenience of life is the means of perfecting the arts; but it cramps the human mind, by confining all its faculties to a point. In countries thinly inhabited, or where people live principally by agriculture, as in America, every man is in some measure an artist— he makes a variety of utensiles, rough indeed, but such as will answer his purposes— he is a husbandman in summer and a mechanic in winter— he travels about the country— he convenes with a variety of professions— he reads public papers— he has access to a parish library and thus becomes acquainted with history and politics, and every man in New England is a theologian. This will always be the case in America, so long as their is a vast tract of fertile land to be cultivated, which will occasion emigration from the states already settled. Knowledge is diffused and genius routed by the very situation of America.

That is from his Sketches of American Policy, #29.

From a loyal MR reader:

I’m very curious about the macroeconomics of the sheepskin effects. Traditional productivity forecast research tends to assume the wage premium is entirely human capital. Eg, Bosler/Daly/Fernald/Hobijn use a mincer equation with five education dummies http://www.frbsf.org/economic-research/files/wp2016-14.pdf   Jorgensen’s approach dividing workers into types also assumes this is not an issue.

If sheepskin effects are purely relative status effects, then the impact on total output and income should be zero, right? This implies increasing educational attainment will have a much smaller impact on productivity and output than typical productivity forecasts imply.

But it seems to me like showing you are “high ability”, if that’s all it does, makes you able to be slotted into higher ability jobs, and that this won’t simply give you a leg up on other workers but increase the number of higher ability jobs filled.

Anyway, I’m sort of thinking out loud but would be curious to read a blog of your thoughts on this, so consider this a bleg!

In the simplest Spence signaling model, the output goes to workers, and if one more worker sends the signal and boosts his or her wage, the non-signaling workers will receive an equal amount less.  That is an equilibrium condition, but it makes less sense as an account of dynamics.  As a practical matter, it’s not clear why the employers should revise their opinion downwards for the marginal products of these less educated workers.  You could say that competition makes them do it, but it’s tough to have good intuitions about an equilibrium that is hovering between/shifting across a varying degree of pooling and separating.

As a more general extension of Spence, a richer model will have market power and payments to capital and labor.  If one more worker finishes school, that worker is paid more and the higher wage serves as a tax on production.  Yet it is a tax the boss does not perceive directly.  The boss thinks he is getting a better worker for the higher wage, but in the counterfactual with more weight on the pooling solution, the boss would have hired that same person, with the same marginal product, at a lower wage.  The “whole act of production” will be and will feel more costly, including at the margin, but the boss won’t know how to allocate those costs to specific factors.  By construction of the example, the boss however will think that the newly educated laborer is the one factor not to be blamed.  So he’ll cut back on some of the other factors, such as labor and land.  Labor in the company will be relatively more plentiful, and the marginal product of labor in that company will fall.  So the incidence of a boost in the sheepskin effect falls on the land and capital that have to move elsewhere, plus to some extent the declining marginal products and thus wages for the remaining workers in the firm under consideration.  Note that outside firms are receiving some influx of capital and land, and so in those firms the marginal product of labor and thus its wage will go up somewhat.

Or so it seems to me.  The trick is to find some assumptions where the hovering between/moving across a varying degree of pooling vs. separation is not too confusing.

That is in the FT, here is the closing paragraph:

In most other ways, Cowen’s thesis is deeply troubling. Democracy requires growth to survive. It must also give space to society’s eccentrics and misfits. When Alexis de Tocqueville warned about the tyranny of the majority, it was not kingly despotism that he feared but conformism. America would turn into a place where people “wear themselves out in trivial, lonely, futile activity”, the Frenchman predicted. This modern tyranny would “degrade men rather than torment them”. Cowen does a marvellous job of turning his Tocquevillian eye to today’s America. His book is captivating precisely because it roves beyond the confines of his discipline. In Cowen’s world, the future is not what it used to be. Let us hope he is wrong. The less complacent we are, the likelier we are to disprove him.

The review very well captures the spirit and content of the book.  Here is Barnes&Noble, here is Amazon.  Here are signed first editions, here is Apple.

Today I spoke at Brookings India on Online Education and India. One of the things I discussed was how online technology and AI can dynamically adjust content to the needs of an individual learner. An Indian firm, Mindspark, is a leader in mathematics education that is synchronized to an individual student’s actual ability regardless of grade. The ubiquitous Karthik Muralidharan with co-authors Abhijeet Singh and Alejandro Ganimian have an important paper doing a RCT on Mindspark, finding large gains in math ability and also in Hindi ability for students who win vouchers to the program. David Evans at Development Impact the World Bank blog has an excellent post on the Mindspark RCT.

I want to focus on a different issues: the personalization of education is especially important in India because classes often contain students of widely different abilities. Here’s a graph from Muralidharan et al. showing the student’s grade along the horizontal axis with the student’s actual ability on the vertical axis. The students are drawn from a sample of Delhi public schools.

Grades

The graph shows two things of importance. First, if most students were operating at grade level the dots/students would be clustered around the blue line. But very few students in grade 6 are operating at a grade 6 level–most are operating at a grade 3 or 4 level and some even at a lower level. The distribution of ability level in the same grade is extreme. No math teacher can be expected to teach students in the same class who are operating at grade levels 2-7. Even if the teacher teaches to the level of the average student the material will go over the heads of many. As a result, many students do not progress. Indeed, the second point is shown by the red line, the best-fit line for academic growth. The growth in achievement is slower than the growth in the standard. As a result, over time students fall further and further behind the standard.

Keeping all students in the same grade at a similar level of ability would be excellent and the best way to do this is by teaching to a student’s actual ability but the only way to do that on an economical basis is through online learning and AI technology.

There’s two versions of this.

1. One or a small group of entrepreneurs owns the robots.

2. The government owns the robots.

I see how we get from where we are now to 1. How would we get to 2, and is 2 better than 1?

That is a comment and request from Mark Thorson.  It’s embedded in a longer thread, but I suspect you can guess the context.

I would focus on a prior question: what is government in a world where everything is done by the robots?  Say that most government jobs are performed by robots, except for a few leaders (NB: Isaac Asimov had even the President as a robot).  It no longer makes sense to define government in terms of “the people who work for government” or even as a set of political norms (my preferred definition).  In this setting, government is almost entirely people-empty.  Yes, there is the Weberian definition of government as having a monopoly on force, but then it seems the robots are the government.  I’ll come back to that.

You might ask who are the residual claimants on output.  Say there are fifty people in the government, and they allocate the federal budget subject to electoral constraints.  Even a very small percentage of skim makes them fantastically wealthy, and gives them all sorts of screwy incentives to hold on to power.  If they can, they’ will manipulate robot software toward that end.  That said, I am torn between thinking this group has too much power — such small numbers can coordinate and tyrannize without checks and balances — and thinking they don’t have enough power, because if one man can’t make a pencil fifty together might not do better than a few crayons.

Alternatively, say that ten different private companies own varying shares of various robots, with each company having a small number of employees, and millions of shareholders just as there are millions of voters.  The government also regulates these companies, so in essence the companies produce the robots that then regulate them (what current law does that remind you of?).  That’s a funny and unaccustomed set of incentives too, but at least you have more distinct points of human interaction/control/manipulation with respect to the robots.

I feel better about the latter scenario, as it’s closer to a polycentric order and I suspect it reduces risk for that reason.  Nonetheless it still seems people don’t have much direct influence over robots.  Most of the decisions are in effect made “outside of government” by software, and the humans are just trying to run in place and in some manner pretend they are in charge.  Perhaps either way, the robots themselves have become the government and in effect they own themselves.

Or is this how it already is, albeit with much of the “software” being a set of social norms?

Replacing social norms by self-modifying software –how big of a difference will it make for how many things?

Here are some names that could fit the bill according to the folks at DB:

Kevin Warsh – currently a visiting fellow at the Hoover Institution, he served on the Board of Governors from 2006 until 2011. The report described him as “an experienced private financial market practitioner with strong Republican credentials”.

Jerome Powell – a current Fed governor “viewed as having conventional/centrist views about the economy and markets with slightly hawkish leanings”.

John Taylor – an economics professor at Stanford whose views “would fit with Republican views for a more rules-based Fed.” But, the report added, “his policy leanings — more aggressive rate increases and the stronger dollar that would result — would work against Trump’s pro-growth agenda.”

John Cochrane – another professor, from the University of Chicago with conservative leanings, whose “recent research has delved into more unorthodox topics, such as whether Fed policy rates and inflation could be positively related, i.e., that low policy rates may lead to low inflation and vice versa.”

That is from Jessica Dye at the FT, expect the list of names to evolve with time.

That is the new and excellent book by Jonathan Buchsbaum, offering the first comprehensive history of the debates over free trade and the “cultural exception,” as it has been called.  It is thorough, readable, and goes well beyond the other sources on this topic.

To be sure, I disagree with Buchsbaum’s basic stance.  He views “advertising dollars” as something attached to Hollywood movies like glue, giving them an unassailable competitive advantage, rather than an endogenous response to what viewers might wish to watch.  The notion that French or other movie-makers could possibly thrive by innovating and exploring new quality dimensions seems too far from his thought.  And he writes sentences such as: “France sought quickly to regulate multiplex development,” yet without wincing.

Perhaps his best sentence is the uncharacteristic: “Other commentators during the 1980s observed wryly that the only real European films were U.S. films, for only U.S. films succeeded in crossing borders in Europe.”

He spends a fair amount of time criticizing me, usually a positive feature in a book.  Furthermore, he delivers very strongly on the basic history and narrative, and draws upon a wide variety of sources.  So this one is definitely recommended to anyone with an interest in these topics.

That is the theme of my latest Bloomberg column, here is the opening bit:

“Why should it be different this time?” That’s the most common response I hear when I raise concerns about automation and the future of jobs, and it’s a pretty simple rejoinder. The Western world managed the shift out of agricultural jobs into industry, and continued to see economic growth. So will not the jobs being displaced now by automation and artificial intelligence lead to new jobs elsewhere in a broadly similar and beneficial manner?

And:

Consider, for instance, the history of wages during the Industrial Revolution. Estimates vary, but it is common to treat the Industrial Revolution as starting around 1760, at least in Britain. If we consider estimates for private per capita consumption, from 1760 to 1831, that variable rose only by about 22 percent. That’s not much for a 71-year period. A lot of new wealth was being created, but economic turmoil and adjustment costs and war kept down the returns to labor. (If you’re wondering, “Don’t fight a major war” is the big policy lesson from this period, but also note that the setting for labor market adjustments is never ideal.)

By the estimates of Gregory Clark, economic historian at the University of California at Davis, English real wages may have fallen about 10 percent from 1770 to 1810, a 40-year period. Clark also estimates that it took 60 to 70 years of transition, after the onset of industrialization, for English workers to see sustained real wage gains at all.

From that turmoil, we also received Marxism and agricultural subsidies for generations!  Do read the whole thing

For years, muscular dystrophy patients in the United States have been purchasing the drug deflazacort — used to stabilize muscle strength and keep patients mobile for a period of time — from companies in the United Kingdom at a manageable price of $1,600 a year.

But because an American company just got approval from the Food and Drug Administration to sell the drug in the United States, the price of the drug will soar to a staggering $89,000 annually, the Wall Street Journal reported last week.

Because the FDA restricts the importing of drugs from overseas if a version is available domestically, patients are stuck with the new, expensive version. This makes deflazacort the perfect case for advocates of international drug reciprocity — a reform that would make it easier for consumers to buy drugs that have been approved in other developed countries.

That is the introduction to an interview with yours truly in the Washington Post. I discuss thalidomide and the race to the bottom argument. Here is one other bit:

IT: Do you have any thoughts about the potential for FDA reform under this new administration and Congress?

AT: Peter Thiel’s speech at the Republican National Convention reminded us that we used to take big, bold risks — like going to the moon. Today, to say a project is a “moon shot” is almost a put-down, as if going to the moon never happened. We have become risk-averse and complacent, to borrow a term from my colleague Tyler Cowen. The result of the incessant focus on safety is playgrounds without teeter totters, armed guards at our schools and national monuments, infrastructure projects that no longer get built, and pharmaceutical breakthroughs that never happen.

The new administration is unpredictable, but when it comes to the FDA, unpredictable is better than business as usual.

The administration has yet to appoint a great FDA commissioner. Early names floated included Balaji Srinivasan, Jim O’Neill, Joseph Gulfo, and Scott Gottlieb but Srinivasan seems to have removed himself from the running. O’Neill would be great but I don’t think the US is ready, so that leaves Gulfo and Gottlieb. My suspicion is that Trump will like Gulfo because of Gulfo’s entrepreneurial experience but, as I said, the new administration is unpredictable.

There is a new NBER paper on this topic by Alexander Wagner, Richard J. Zeckhauser, and Alexandre Ziegler, here is the abstract:

The election of Donald J. Trump as the 45th President of the United States of America on 11/8/2016 came as a surprise. Markets responded swiftly and decisively. This note investigates both the initial stock market reaction to the election, and the longer-term reaction through the end of 2016. We find that the individual stock price reactions to the election – that is, the market’s vote – reflect investor expectations on economic growth, taxes, and trade policy. Heavy industry and banking were relative winners, whereas healthcare, medical equipment, pharmaceuticals, textiles, and apparel were among the relative losers. High-beta stocks and companies with a hitherto high tax burden benefited from the election. Although internationally-oriented companies may profit under some plans of the new administration, several other arguments suggest a more favorable climate for domestically-oriented companies. Investors have found the domestic-favoring arguments to be stronger. While investors incorporated the expected consequences of the election for US growth and tax policy into prices relatively quickly, it took them more time to digest the consequences of shifts in trade policy on firms’ prospects.

Having read through the paper, this does not to me look mainly like a shift from consumers (domestically-oriented and retail stocks are doing well enough).  It is closer to “companies overall benefit from greater wealth creation, though some will benefit considerably more than others, with some trade worries built in.”  The tax component is significant.

Again, the market is often wrong, but this is at the very least a…um…”public relations problem” for the Democrats.  The worse you think Trump is, the worse this problem becomes!

And please, don’t tell me on Twitter about the stock market not predicting your favorite catastrophe from history.  That point would not pass through an Intro to Stats course intact.

Jeremy McLellan is a comedian but like all great comedians he captures truths and complexities underneath the laughs.

Valentine’s Day is a just a fake holiday invented by Hallmark to sell greeting cards. So what have you invented recently to make people happy? Nothing, that’s what!

In three lovely sentences McLellan recaps Hayek versus Galbraith on the nature of advertising, consumer demand and entrepreneurship. Entire dissertations could be written parsing this out.

The world’s largest exporter of roses is an Indian firm, Karuturi Global, which has leased 3,000 square kilometers of land in Ethiopia.

I talked today about globalization and the price system using Valentine’s Day and the rose market as a jumping off point. I spoke at the Sarla Anil Modi School of Economics at NMIMS in Mumbai. The students were excellent. Lots of well informed, enthusiastic questions, and debate.

Here is a bit of what I said:

I had heard and read so much about Dugin but had never read him.  The subtitle is Introduction to Neo-Eurasianism, and here were a few of my takeaway points:

1. His tone is never hysterical or brutish, and overall this comes across as scholarly (except for the appended pamphlet on “Global Revolution”), albeit at a semi-popular level.

2. He is quite concerned with tracing the lineages of Eurasian thought, thus the “neo” in the subtitle.  Nikolai Trubetzkoy gets a lot of play.  The correct theories of history are cyclical, and the Soviet Union was lacking in spiritual and qualitative development and thus it failed.

3. Dugin is a historical relativist, every civilization has different principles of development, and we must take great care to understand the principles in each case.  Ethnicities and peoples represent “inestimable wealth” and they must be preserved against the logic of a globalized, unipolar world.

4. Geography is primary.  Russia-Eurasia is a “steppe and woods” empire, whereas America is fundamentally an Atlantic, seafaring civilization.  Globalization tries to universalize what is ultimately quite a culture-specific point of view, stemming from the American, Anglo, and Atlantic mindsets.

5. Eurasian philosophy ultimately can contain, in a Hegelian way, anti-global philosophies, as well as the contributions of Foucault, Deleuze, and Debord, not to mention List, Gesell, and Keynes properly understood.

6. “It is vitally imperative for Turkey to establish a strategic partnership with the Russian Federation and Iran.”

7. The integration of the post-Soviet surrounding territories is to occur on a democratic and voluntary basis (p.51).  The nation-state is obsolete, so this is imperative as a means of protecting ethnicities and a multi-polar world against the logic of globalization.  Nonetheless Russia is to be the leader of this process.

8. “America’s influence is the most negative tendency in the world…”, and American think tanks and the media are part of this harmful push toward a unipolar world; transhumanism is worse yet.  Tocqueville, Baudrillard, and Dugin are the three fundamental attempts to make sense of America.  The Statue of Liberty resembles the Greek goddess of hell, Hecate.

9. The Eurasian economy must be subjugated to “higher civilizational spiritual values.”  City-dwellers are often a problem, as they too frequently side with the forces of globalization.

10. “Japan…is the objective leader of the Pacific.”  It must be liberated from the Atlanticist sphere of influence.  Nary a nod to China.

11. On Moldova: “Archaic?  Let it be archaic.  It’s great!”  At times he does deviate from #1 on this list.

12. Putin is his own greatest enemy because he leans too far in the liberal direction.

13. Dugin enjoys writing with bullet points.

14. “Soon the world will descend into chaos.”

Apart from whatever interest you may hold in these and other particulars, this is a good book for rethinking the notion of intellectual influence.  Very very few Anglo-American intellectuals have had real influence, but Dugin has.  That is reason enough to read this tract.

Addendum: Here is good background on what Dugin is up to these days.  His current motto: “Drain the swamp.”

A while ago I had some email with Noah Smith on this topic, now we are getting somewhere, this is from a new NBER working paper by Daniel M Hungerman, Kevin J. Rinz, and Jay Frymark:

We use a dataset of Catholic-parish finances from Milwaukee that includes information on both Catholic schools and the parishes that run them. We show that vouchers [funded by the government] are now a dominant source of funding for many churches; parishes in our sample running voucher-accepting schools get more revenue from vouchers than from worshipers. We also find that voucher expansion prevents church closures and mergers. Despite these results, we fail to find evidence that vouchers promote religious behavior: voucher expansion causes significant declines in church donations and church spending on non-educational religious purposes. The meteoric growth of vouchers appears to offer financial stability for congregations while at the same time diminishing their religious activities.

I’ve long maintained that the fiscal effects of vouchers, if they were implemented on a much larger scale, are the elephant in the room.  For better or worse.

I consider this question at some length in my forthcoming The Complacent Class, and now there is a new study by Greg Kaplan and Sam Schulhofer-Wohl, consistent with my conclusions:

We analyze the secular decline in gross interstate migration in the United States from 1991 to 2011. We argue that migration fell because of a decline in the geographic specificity of returns to occupations, together with an increase in workers’ ability to learn about other locations before moving. Micro data on earnings and occupations across space provide evidence for lower geographic specificity. Other explanations do not fit the data. A calibrated model formalizes the geographic specificity and information mechanisms and is consistent with cross-sectional and time-series evidence. Our mechanisms can explain at least half of the decline in migration.

As I put it in the book, if you are a dentist you probably are not going to move from Columbus, Ohio to Denver, Colorado for higher dentist wages.  Rather you will figure out pretty early on which location you prefer and then stay there.

Hat tip goes to the excellent Kevin Lewis.