Paul Krugman reviews Robert Reich

by on December 1, 2015 at 1:45 pm in Books, Economics | Permalink

How much is monopoly power behind inequality?  Is the older explanation of skill-based technical change [SBTC] still in the running?  Here is an excerpt from Krugman’s new NYRoB piece:

SBTC has fared very badly over the past quarter-century, to the point where it no longer deserves to be taken seriously as an account of what ails us.

The story fell apart in stages. First, over the course of the 1990s the skill gap stopped growing at the bottom of the scale: real wages of workers near the middle stopped outpacing those near the bottom, and even began to fall a bit behind. Some economists responded by revising the theory, claiming that technology was hollowing out the middle rather than displacing the bottom. But this had the feel of an epicycle added to a troubled theory—and after about 2000 the real wages of college graduates stopped rising as well. Meanwhile, incomes at the very top—the one percent, and even more so a very tiny group within the one percent—continued to soar. And this divergence evidently had little to do with education, since hedge fund managers and high school teachers have similar levels of formal training.

Something else began happening after 2000: labor in general began losing ground relative to capital. After decades of stability, the share of national income going to employee compensation began dropping fairly fast. One could try to explain this, too, with technology—maybe robots were displacing all workers, not just the less educated. But this story ran into multiple problems. For one thing, if we were experiencing a robot-driven technological revolution, why did productivity growth seem to be slowing, not accelerating? For another, if it was getting easier to replace workers with machines, we should have seen a rise in business investment as corporations raced to take advantage of the new opportunities; we didn’t, and in fact corporations have increasingly been parking their profits in banks or using them to buy back stocks.

In short, a technological account of rising inequality is looking ever less plausible, and the notion that increasing workers’ skills can reverse the trend is looking less plausible still. But in that case, what is going on?

Krugman makes many other points in the review, but overall he is sympathetic toward Reich’s view that growing income inequality has a lot to do with growing monopoly power in markets.

In my view, the “epicycles” of technology plus trade with China and the rise of finance and constrained building do explain a good deal of what is going on.  I don’t feel bad that this theory has four major variables, five if you wish to throw in education.  Besides, the implied boosts in monopoly power sufficient to rationalize the observed increases in income inequality a) are huge, as opposed to the modest changes we have observed, and b) do worse either cross-sectionally, or in the time series, than the tech/trade/finance/land hypotheses.  Contra Reich, the “if these seventeen policies were different, income distribution would be very different” claim doesn’t actually count as an explanation of how the income distribution has evolved in a world which has remained within other policy ranges.  Land values aside, the world awaits a really good paper on monopoly power and American income inequality.  So far we don’t have one, so it is a very speculative hypothesis, with the “glance over the shoulder at the data test” showing mostly negative results.

Enter the Harvard economist Michael Jensen. Dr. Jensen, who is famous in financial circles for championing the concepts of shareholder value and executive stock options, had taken a Landmark course in Boston at the suggestion of his daughter, who mended a rocky relationship with Dr. Jensen after taking the course herself.

“I became convinced we should work to get this kind of transformational material into the academies,” he said, adding that he considers Mr. Erhard “one of the great intellectuals of the century.”

In 2004, with the help of a Landmark official, Dr. Jensen developed an experiential course on integrity in leadership at the Simon Business School at the University of Rochester. The class was offered there for five years, with Mr. Erhard signing on as an instructor during its third year. It has since been taught at several universities around the world as well as at the United States Air Force Academy.

As far as its philosophical underpinnings go, Mr. Erhard struggled a bit to describe the course without resorting to its Delphic phraseology (“ontological pedagogy,” “action as a correlate of the occurring”).

Sitting in front of a bank of computers in his hotel room, he read excerpts from the 1,000-page textbook he is working on, such as: “As linguistic abstractions, leader and leadership create leader and leadership as realms of possibility in which, when you are being a leader, all possible ways of being are available to you.”

The full NYT story, mostly about Erhard, with bits on Heidegger too, is here.  Here is more on Jensen and Erhard.

Danielle Douglas-Gabriel at the WashPost writes that Purdue is going to run an experiment with income contingent loans.

This week, Purdue University [partnered]…with Vemo Education, a Reston-based financial services firm, to explore the use of income-share agreements, or ISAs, to help students pay for college.

Through its research foundation, the school plans to create ISA funds that its students can tap to pay for tuition, room and board. In return, students would pay a percentage of their earnings after graduation for a set number of years, replenishing the fund for future investments.

The Federal government already offers an income based repayment program for student loans but private plans would likely be more flexible and generate more useful information.

Douglas-Gabriel makes a useful point:

Say a student agrees to pay five percent of her income for five years on a $10,000 agreement. If that student lands a $60,000 job after graduation, she could pay $15,000 by the time the contract is up, more if she gets raises along the way. Yet if that same graduate loses her job during that time, she wouldn’t be forced to find the money to pay.

But then concludes with an odd criticism:

Either way students would have to be pretty informed about the earning potential in their field before signing up.

What the example illustrates, however, is that being unlucky or uninformed is less damaging with an income share agreement than with a traditional loan. Loans have the greatest burden when a student overestimates their potential earnings and is poorer than expected. Thus, the loan offers no relief when relief is most needed. In contrast, payments under an income share agreement fall when income falls. An ISA does cost more than a loan when a student underestimates their potential earnings but in this case the student is richer than expected and can easily bear the extra burden. Thus, ISAs offer income insurance.

Douglas-Gabriel also writes:

Some observers worry that students pursuing profitable degrees in engineering or business would get better repayment terms than those studying to become nurses or teachers.

Actually, that is part of the point. An ISA is about improving idiosyncratic risk sharing. To the extent that engineers are reliably expected to earn more than nurses, they should pay a smaller share of their income so the total payment for an education is about the same for both engineers and nurses (fyi, business is not a profitable degree).

Indeed, one of the prospective benefits of ISAs is that differences in prices will better reveal which are the degrees, programs and schools that most generate value-added.

Hat tip: Kevin James.

Addendum: See previous MR posts on this topic.

That is the paper’s subtitle, the title is “An Offer You Can’t Refuse,” and that is the job market paper (pdf) of Sandro Ambuehl of Stanford University.  I found this to be the most interesting job market paper of the year, noting that “most interesting” and “best” are not synonymous, that said I found the quality to be very high too.  The main point is that having commercial economic incentives in place causes us to perceive new information in more positive-sum terms than otherwise would be the case, or at least that is how I interpret his results.

Here is the abstract:

Around the world there are laws that severely restrict incentives for many transactions, such as living kidney donation, even though altruistic participation is applauded. Proponents of such legislation fear that undue inducements would be coercive; opponents maintain that it merely prevents mutually beneficial transactions. Despite the substantial economic consequences of such laws, empirical evidence on the proponents’ argument is scarce. I present a simple model of costly information acquisition in which incentives skew information demand and thus expectations about the consequences of participation. In a laboratory experiment, I test whether monetary incentives can alter subjects’ expectations about a highly visceral aversive experience (eating whole insects). Indeed, higher incentives make subjects more willing to participate in this experience at any price. A second experiment explicitly shows in a more stylized setting that incentives cause subjects to perceive the same information differently. They make subjects systematically more optimistic about the consequences of the transaction in a way that is inconsistent with Bayesian rationality. Broadly, I show that important concerns by proponents of the current legislation can be understood using the toolkit of economics, and thus can be included in cost-benefit analysis. My work helps bridge a gap between economists on the one hand, and policy makers and ethicists on the other.

Of course it also can be said that incentives make individuals less Bayesian in their orientation.  I say who needs Bayesians anyway?  Society is built on a certain faith we all have in the benefits from cooperating with others.  When you know you might be paid to eat an insect, you sample more “yum-pro-insect” propaganda, and you interpret it more favorably.  Furthermore subjects do not in advance predict these self-persuasion effects.  So “bait and switch” marketing techniques may succeed in warming individuals up to ideas, even if the promised prize is eventually yanked.

In any case, how can you not love a paper which has, on p.4, the following sentence: “In the first experiment I use cash to induce subjects to eat whole insects, including silkworm pupae, mealworms, and various species of crickets.”

With or without chili sauce?  The future of commercial society may depend on it.

I enjoyed this sentence too, from p.18:

Participants cannot be forced to ingest insects.

Here is Sandro writing with Muriel Niederle and Al Roth in the AER on the moral plausibility of strong incentives.

Chinese billionaire Liu Yiqian, who doesn’t exactly struggle to afford a plane ticket, can now likely fly free, in first class, with his whole family, anywhere in the world, for the rest of his life.

All because he bought a painting.

Liu was the winning bidder for Amedeo Modigliani’s Reclining Nude at a Christie’s auction earlier this month, offering $170.4 million — and when the sale closes, he’ll be putting it on his American Express card.

Liu, a high-profile collector of Chinese antiquities and art, has used his AmEx in the past when he’s won art auctions. He put a $36-million tea cup from the Ming Dynasty on his AmEx last year, according to reports, and put other artifacts on his card earlier this year. He and his wife said they plan on using their American Express card to pay for the Modigliani, according to news reports after the sale.

And this:

China allows its citizens to transfer no more than $50,000 out of the country in any year, and using his [Liu’s] card could help him get around this limit because he’s just paying back American Express or the bank in China who issues his card.

Hmm…the full story is here, via Ted Gioia.

Following up on my earlier post on Syria, Alexander Burns sends me this very interesting email:

Dear Professor Cowen,

Thanks for your reply tweet regarding your Marginal Revolution post on modelling Syria / Islamic State. I enjoy your books and blog.

I’m writing a thesis at Australia’s Monash University that synthesises Jack Snyder’s work on strategic culture / strategic subcultures with Martha Crenshaw and Jacob Shapiro’s work on terrorist organisations. Two recent presentations:

1.       Mid-Candidature Review Panel slides:

2.       Monash SPS Symposium Presentation on Islamic State:

Several weeks ago I discussed Islamic State with my Mid-Candidature Review panel whilst also reading Gary Antonacci’s Dual Momentum Investing and the Dan Zanger interview in Mark Minervini’s Momentum Masters interviews book. It struck me that Islamic State were like momentum traders for several reasons:

(1) Islamic State have grown rapidly in foreign mujahideen; control of parts of northern Iraq and Syria; and have grown in power projection capabilities. This dynamic is very much like successful momentum traders have worked in a financial markets context using Jesse Livermore’s trend-following approach, William O’Neil’s CANSLIM system, or Paul Tudor Jones II’s speculative activity in Eurodollar and foreign exchange markets.

(2) Islamic State have to-date survived aerial bombardments and have exploited a range of weaknesses in their enemies (e.g. jihadist beheading videos as psychological warfare against the Iraqi Army; Turkey’s borders with Iraq and Syria; and alliance manoeuvers around the Assad regime and the Syrian civil war).

(3) Events like the capture of Mosul, Iraq; combat experience in the Syrian civil war; involvement in oil black markets; and the proclamation on 29th June 2014 of a worldwide caliphate have momentum-like qualities, particularly in terms of creating the psychological climate for nation-building.

(4) Islamic State has outperformed their peer jihadist groups in their growth and ideological impact.

(5) Islamic State’s use of social media to amplify ideological propaganda is more hypermodern and sophisticated than other terrorist groups.

(6) Their rapid growth has led to spillover effects such as the refugee crisis in Europe.

(7) The Western media’s concerns about Islamic State — and their cultural impact — feel like the 1998-2000 part of the 1995-2000 dotcom speculative bubble, albeit in a counterterrorism context.

(8) Your perspective on Islamic State as hypermodern may also be relevant to the proto-Marxist work on accelerationism and postcapitalism (Nick Srnicek and Alex Williams’ Inventing the Future; Steven Shaviro’s No Speed Limit; and Benjamin Noys’ Malign Velocities): contemporary terrorist groups operate in a different political / technological / ‘average is over’ context.

With his permission I reproduced the email as is, though added in a few extra paragraph breaks for ease of reading.

It costs $300 to move a 40-foot container from Rotterdam to Shanghai…Here’s some more context. Let’s say that you want to travel for a year; it’s cheaper to put your personal belongings in a shipping container as it sails around the world than to keep it at a local mini-storage facility.

That is from Ryan Petersen, via Dan Wang.

I can’t say I understand this FT article so well, but I suppose that is the point.  Which are two groups/persons implicated in buying oil from ISIS, or otherwise enabling such trades to take place?

First, Syria.  Or is that “Syria.”

Second, the head of the world chess federation, namely Kirsan Ilyumzhinov: “he is best known for his belief in aliens — he has repeatedly recounted an instance when he was abducted in 1997 by “people in yellow spacesuits”.”  And this:

Mr Ilyumzhinov has a diverse business empire, stretching from sugar to banking, and a network of contacts to match. He regularly meets the Dalai Lama, and he played chess with Libyan president Muammer Gaddafi shortly before his overthrow.

He also has been working with the Syrian central bank.  Here is NYT coverage, here are other sources.  As the old Haitian proverb states, if you’re not confused, you don’t know what’s going on…

Kidney-DiseaseThe latest issue of the American Journal of Transplantation has an excellent and comprehensive cost-benefit analysis of paying kidney donors by Held, McCormick, Ojo, and Roberts. Earlier, Becker and Elias estimated that a payment of $15,000 per living donor would be sufficient to eliminate the US waiting list. The authors adopt a larger figure of $45,000 for living donors and $10,000 for deceased donors and find that even at these rates paying donors generates benefits far in excess of costs.

In particular, a program of government compensation of kidney donors would provide the following benefits (quoting from the article):

  • Transplant kidneys would be readily available to all patients who had a medical need for them, which would prevent 5000 to 10 000 premature deaths each year and significantly reduce the suffering of 100 000 more receiving dialysis.
  • This would be particularly beneficial to patients who are poor and African American because they are considerably overrepresented on the transplant waiting list. Indeed, it would be a boon to poor kidney recipients because it would enable them to reap the great benefits of transplantation at very little expense to themselves.
  • Because transplant candidates would no longer have to spend almost 5 years receiving dialysis while waiting for a transplant kidney, they would be younger and healthier when they receive their transplant, increasing the chances of a successful transplantation.
  • With a large number of transplant kidneys available, it would be much easier to ensure the medical compatibility of donors and recipients, which would increase the success rate of transplantation.
  • Taxpayers would save about $12 billion each year. Dialysis is not only an inferior therapy for end-stage renadisease (ESRD), it is also almost 4 times as expensive pequality-adjusted life-year (QALY) gained as a transplant.

My thoughts on this topic are extremely tentative, hypothetical I would say, but I’ve seen so much other bad commentary I thought I would lay out a possible “model” for what is going on.  I offer this with what I consider to be more than just caveats and qualifications, if you wish simply consider this an exercise in constructing some possibilities to think through.  These are “in my opinion the most likely to be true, compared to alternatives,” but still quite low in terms of their absolute chance of being true.  Here goes:

1. I don’t view Islam as essential to the conflict, though it helps explain some of the second-order causes and effects.

2. I think first in terms of Yugoslavia in the 1990s, which also saw the collapse of an untenable-once-placed-under-pressure nation-state, followed by atrocities.  Building a successful nation state seems to be a “win big, fail big” proposition, and both Yugoslavia and Syria failed.  The West also had its failures leading up to and during the two World Wars, though with a happyish ending.

3. Syria also has become a playground for a proxy war between Iran and Saudi Arabia (among others).  Being a playground for a proxy war is a bad place to be, just ask Vietnam, El Salvador, or Nicaragua.  The mix of #2 and #3 accounts for many of the key features of the crisis, plus as conflict proceeds trust frays and human beings are brutalized, worsening the dynamic.

3b. The proxy war heated up due to a rising Iran, a falling Saudi Arabia, and the collapse of creative ambiguity over roles and responsibilities in what were previously buffer zones.

4. It is very hard to model ISIS, ISIL, Daesh, whatever you wish to call it (the most thoughtful approach I have seen is from Shadi Hamid).  Maybe the group is one fraction crazies, one fraction semi-rational power brokers, and one fraction “momentum traders” who wanted higher status for their local terrorizing and never expected it to get this far and simply could not climb off and stop.  It is hard for groups to back out of strategies which have delivered consistent institutional growth.  In any case, I don’t think of the group as having transitive preferences, even in the intra-profile sense, much less the Arrovian inter-profile sense.

5. I view ISIS as “modern,” or even “hypermodern,” rather than a “return to barbarism.”  The medieval Arabic world was more advanced than Europe in most ways, yet still Islamic ideologically.

6. Islam has the important secondary effect of tying Syria and other Middle Eastern conflicts to disaffected (Muslim) groups living in Western Europe, most of all France and Belgium.  Labor market deregulation, people!

7. Islam has another significant effect.  By melding the political and the theological, it renders the conflict more complex and harder to resolve, and that effect is fundamental to the ideological structure of Islam.  It also helps motivate the proxy war sides taken by Iran (Shii’te) and the Saudis (Sunni).  But note this: when the political order is not up for grabs, Islam does not have the same destabilizing effects.  The merging of the legal and the theological therefore may create greater stability in some equilibria (e.g.,much of Ottoman history, the Gulf monarchies), while less stability in others.

8. The Laffer curve, resource extraction path of ISIS will weaken with time, causing a fiscal starvation and thus a further move toward mean-reducing, variance-increasing strategies.

9. This won’t end well.  Now go read a book on the Taiping rebellion.

Your thoughts are welcome, please try to stick with the analytical and avoid posturing.  And what Russia is up to in Syria is another mystery, best considered another time.

Here is notice from Washington University.  A great man and a great scholar as well.

Opioids for the masses?

by on November 24, 2015 at 1:45 am in Data Source, Economics, Law, Medicine | Permalink

This has long seemed to me an understudied topic, so I was interested to read the job market paper of Angela E. Kilby, who is on the market this year from MIT.  And she does what I like to see in a paper, namely try to figure out whether some practice or institution is actually worth it.

The background is this: “…In the face of concerns that undertreatment of pain was a “serious public health issue,” medically indicated use of these drugs over the past 15 years has increased dramatically, and attitudes have liberalized towards the use of opioids for chronic non-cancer pain.”

When it comes to the increased use of opioids, she finds the following trade-offs:

1. Since 1999, there has been a fourfold increase in drug overdose deaths linked to opiod pain relievers.  In 2013, the number of opiate-linked overdose deaths was 25,117, a higher number than I was expecting.  (But note that most of these can no longer be reduced by the feasible interventions under consideration.)

2. The increased use of opioids seems to pass a cost-benefit test, compared to the passage of a tougher Prescription Monitoring Plan.  With a host of caveats and qualifiers, she measures the pain reduction and other benefits from looser regulation at $12.1 billion a year and the costs of higher addiction rates, again from looser regulation, at $7.3 billion per year.

There is much more to it than what I am reporting, and in general I believe economists do not devote enough attention to studying the topic of pain.

*The Midas Paradox*

by on November 24, 2015 at 12:28 am in Books, Economics, History | Permalink

That is the forthcoming book by Scott Sumner, and the subtitle is Financial Markets, Government Policy Shocks, and the Great Depression.  Here is one of Scott’s brief capsule descriptions of the book:

I will show that if we take the gold market seriously we can explain much more about the Great Depression than anyone had thought possible.  Three types of gold market shocks generated much of the variation shown in Table 1.1: changes in central bank demand for gold, private sector gold hoarding, and changes in the price of gold.  The remaining output shocks are linked to five wage shocks that resulted from the New Deal.  This is the first study to provide a comprehensive and detailed look at all high frequency macro shocks during the Great Depression.

I would stress that Scott devotes far more attention to asset price reactions than do many other studies of economic history; that is perhaps his main methodological innovation, in addition to the economics.

Scott also insists — correctly in my view — that the artificially engineered real wage increases of the New Deal were a true disaster.  This point is underemphasized in most competing accounts, or perhaps even actively denied by many Keynesians.  Yet the evidence here is overwhelming.

This is a very good book, one of the best on the economics of the Great Depression ever written.

Against a financial transactions tax

by on November 23, 2015 at 2:08 pm in Economics | Permalink

Maria Coelho, job market candidate at UC Berkeley, studied this topic and came up with this:

This paper analyzes the effect of the introduction of financial transaction taxes in equity markets in France and Italy in 2012 and 2013, respectively, on asset returns, trading volume and market volatility. Using two natural experiments in a difference-in-differences design, I identify bounds on elasticity estimates for three categories of avoidance channels: real substitution away from taxed assets, retiming (anticipation of transaction realizations and portfolio lock-in), and tax arbitrage (cross-platform and financial instrument shifting). I find large responses on all margins, that account for significantly lower revenues than projected. By far the strongest behavioral response comes from high-frequency trading lock-in on regulated exchanges, with a high tax elasticity of this type of turnover in the order of -9. The results shed light on overlooked features of optimal FTT design, suggesting they may be poor instruments for both revenue-raising and Pigouvian objectives.

The paper is called “Dodging Robin Hood.”  This is consistent with earlier findings on Sweden’s transactions tax, and that proposal continues to be one of the more overrated ideas in American Progressive political discourse.

Principles of Macroeconomics, the new course by Tyler and myself, has just launched at MRUniversity. We will be covering unemployment, inflation, business cycles, growth and much more. The first section which is up now covers GDP including

As usual, all the videos are free and will work with any textbook although of course they go best with the best textbook, Modern Principles.

Here is the introduction to GDP: