Economics

Or just a way to get rid of political opponents?  The news on this front is by no means entirely bad.  Xi Lu and Peter L. Lorentzen report:

In order to maintain popular support or at least acquiescence, autocrats must control the rapacious tendencies of other members of the governing elite. At the same time, the support of this elite is at least as important as the support of the broader population. This creates difficult tradeoffs and limits the autocrat’s ability to enforce discipline. We explore this issue in the context of Chinese leader Xi Jinping’s ongoing anti-corruption campaign. There have been two schools of thought about this campaign. One holds that it is nothing but a cover for intra-elite struggle and a purge of Xi’s opponents, while the other finds more credibility in the CCP’s claim that the movement is sincere. In this article, we demonstrate three facts, using a new dataset we have created. First, we use the political connections revealed by legal documents and media reports to visualize the corruption network. We demonstrate that although many of the corrupt officials are connected, Xi’s most prominent political opponent, Bo Xilai, is less central by any network measure than other officials who were not viewed as challenging Xi’s leadership. Second, we use a recursive selection model to analyze who the campaign has targeted, providing evidence that even personal ties to top leaders provided little protection. Finally, using another comprehensive dataset on the prefectural-city level, we show that the provinces later targeted by the corruption campaign differed from the rest in important ways. In particular, it appears that promotion patterns departed from the growth-oriented meritocratic selection procedures evidence in other provinces. Overall, our findings contradict the factional purge view and are more consistent with the view that the campaign is indeed primarily an attempt to root out systemic corruption problems.

The pointer is from the excellent Kevin Lewis.

I am not endorsing these claims, but I do enjoy a good rant.  It is an object lesson in showing how (some) people think about jobs, status, rivalry, and money.

First venture capital is generally consider where washed-out Wall Streeters go, when they can’t cut it in real finance. Very few b-school students start out trying to get into VC. And no, generally Silicon Valley people are not nearly as smart as HFT/algo quants. The type of kids who go to Google or Facebook are generally the Ivy CS students from the upper half of their class who are good at white-boarding problems (e.g. reverse a linked list). The truly brilliant kids, Putnam winners, math olympiads, core kernel contributors, etc. disproportionately go the quant route. (In which at least half will wind up in Chicago).

SV is generally a worse deal than HFT or quant trading. Starting comp is at least 50% higher than the big five tech firms, and goes up at a much faster rate. And definitely way higher than startups, which nearly always under-pay. It’s true in tech you can become a multibillionaire, but that’s extremely unlikely even for the most talented. In general SV is a bad deal for everyone except the small set of people lucky or connected enough to be at the top. Outside founder level, virtually no one gets rich from startups anymore. The equity and options comp is pathetic at best, if not outright fraudulent. (“You’ll be getting 1% of outstanding shares… from this round…”). Even founders have to live on 70k salaries in the Bay Area, then are frequently screwed over or cliff’d by their VCs. For every Google, heck for every Apigee, there’s a thousand no-name flame-outs, where no one but the VCs walk away with a dime.

Compare to quant trading. Compensation is cold hard cash, usually paid out annually, if not quarterly. Not lottery ticket equity with four year cliffs, unlimited dilution and byzantine share classes. Most comp is directly tied to individual trading performance, with clear results from trading everyday. No politics, extremely meritocratic, no being at the random whims of whether your app takes off fast enough to overcome your burn rate. Firms actually compete for talent and pay accordingly, instead of colluding to keep wages suppressed. Unless your ambition is to top the Forbes list, HFT’s a much better deal for someone extremely intelligent like a Math Olympiad. The probability of making “f-you money” before 40 is at least an order of magnitude higher as a prop quant than in the Valley.

That is from Doug.

This Andrew Gelman post on the replication crisis and the role that blogs have played in generating that crisis starts off slow but just builds and builds until by the end it’s like holy rolling thunder. Here is just one bit:

Fiske is annoyed with social media, and I can understand that. She’s sitting at the top of traditional media. She can publish an article in the APS Observer and get all this discussion without having to go through peer review; she has the power to approve articles for the prestigious Proceedings of the National Academy of Sciences; work by herself and har colleagues is featured in national newspapers, TV, radio, and even Ted talks, or so I’ve heard. Top-down media are Susan Fiske’s friend. Social media, though, she has no control over. That’s must be frustrating, and as a successful practioner of traditional media myself (yes, I too have published in scholarly journals), I too can get annoyed when newcomers circumvent the traditional channels of publication. People such as Fiske and myself spend our professional lives building up a small fortune of coin in the form of publications and citations, and it’s painful to see that devalued, or to think that there’s another sort of scrip in circulation that can buy things that our old-school money cannot.

But let’s forget about careers for a moment and instead talk science.

When it comes to pointing out errors in published work, social media have been necessary. There just has been no reasonable alternative. Yes, it’s sometimes possible to publish peer-reviewed letters in journals criticizing published work, but it can be a huge amount of effort. Journals and authors often apply massive resistance to bury criticisms.

If you are interested in the replication crisis or the practice of science read the whole thing.

Aside from the content, I also love Gelman’s post for brilliantly mirroring its metaphor in its structure. Very meta.

According to Donner: “The whole point of the game [is] to prevent an artistic performance.” The former world champion Garry Kasparov makes the same point. “The highest art of the chess player,” he says, “lies in not allowing your opponent to show you what he can do.” Always the other player is there trying to wreck your masterpiece. Chess, Donner insists, is a struggle, a fight to the death. “When one of the two players has imposed his will on the other and can at last begin to be freely creative, the game is over. That is the moment when, among masters, the opponent resigns. That is why chess is not art. No, chess cannot be compared with anything. Many things can be compared with chess, but chess is only chess.”

That is Stephen Moss at The Guardian.  Along related lines, I very much enjoyed Daniel Gormally’s Insanity, Passion, and Addiction: A Year Inside the Chess World.  It’s one of my favorite books of the year so far, but it’s so miserable I can’t recommend it to anyone.  It’s a book about chess, and it doesn’t even focus on the great players.  It’s about the players who are good enough to make a living — ever so barely — but not do any better.  It serves up sentences such as:

Surely the money in chess is so bad that this can’t be all you do for a living?  But in fact in my experience, the majority of chess players rated over 2400 tend to just do chess.  If not playing, then something related to it, like coaching or DVDs.  That’s because we’re lazy, so making the monumental effort of a complete change in career is just too frightening a prospect.  So we stick with chess, even though the pay tends to be lousy, because most of our friends and contacts are chess players.  Our life is chess.  As a rough estimate, I would say there are as many 2600 players making less than £20,000 a year.

And:

Stability. I had this conversation with German number one Arkadij Naidisch at a blitz tournament in Scotland about a year ago. (there I go, name-dropping again.)  He suggested that a lot of people don’t achieve their goals because they just aren’t stable enough.  They’ll have a fantastic result somewhere, but then that’ll be let down by a terrible tournament somewhere else.

…The problem is it’s hard to break out of the habits of a lifetime.  Many times at home I’ve said to myself while sitting around depressed about my future and where my chess is going, “tomorrow will be different.  I’ll get up and study six-eight hours studying chess.”  But it never happens.

Overall biography and autobiography are far too specialized in the lives of the famous and successful.

Discrimination is costly, especially in a competitive market. If the wages of X-type workers are 25% lower than those of Y-type workers, for example, then a greedy capitalist can increase profits by hiring more X workers. If Y workers cost $15 per hour and X workers cost $11.25 per hour then a firm with 100 workers could make an extra $750,000 a year. In fact, a greedy capitalist could earn more than this by pricing just below the discriminating firms, taking over the market, and driving the discriminating firms under. The basic logic of employer wage discrimination was laid out by Becker in 1957. The logic implies that discrimination is costly, especially in the long-run, not that it doesn’t happen.

discriminationA nice test of the theory can be found in a paper just published in Sociological Science, Are Business Firms that Discriminate More Likely to Go Out of Business? The author, Devah Pager, is a pioneer in using field experiments to study discrimination. In 2004, she and co-authors, Bruce Western and Bart Bonikowski, ran an audit study on discrimination in New York using job applicants with similar resumes but different races and they found significant discrimination in callbacks. Now Pager has gone back to that data and asks what happened to those firms by 2010? She finds that 36% of the firms that discriminated failed but only 17% of the non-discriminatory firms failed.

The sample is small but the results are statistically significant and they continue to hold controlling for size, sales, and industry.

As Pager notes, the cause of the business failure might not be the discrimination per se but rather that firms that discriminate are hiring using non-rational, gut feelings while firms that don’t discriminate are using more systematic and rational methods of hiring.

As she concludes:

…whether because of discrimination or other associated decision making, we can more confidently conclude that the kinds of employers who discriminate are those more likely to go out of business. Discrimination may or may not be a direct cause of business failure, but it seems to be a reliable indicator of failure to come.

Lewis Davis has a newly published paper on that topic with the more elegant title “Individual Responsibility and Economic Development: Evidence from Rainfall Data.”  Here is the abstract:

This paper estimates the effect of individual responsibility on economic development using an instrument derived from rainfall data. I argue that a taste for collective responsibility was adaptive in preindustrial societies that were exposed to high levels of agricultural risk, and that these attitudes continue to influence contemporary social norms and economic outcomes. The link between agricultural risk and collective responsibility is formalized in a model of optimal parental socialization effort. Empirically, I find a robust negative correlation between rainfall variation, a measure of exogenous agricultural risk, and a measure of individual responsibility. Using rainfall variation as an instrument, I find that individual responsibility has a large positive effect on economic development. The relationships between rainfall variation, individual responsibility and economic development are robust to the inclusion of variables related to climate and agricultural and institutional development.

This kind of investigation is always going to be fraught with uncertainty and also controversy, given imperfections of data and methods.  Nonetheless I find this one of the more plausible macro-historical hypotheses, perhaps because of my own experience in central Mexico, where varying rainfall still is the most important economic event of the year, though it is rapidly being supplanted by the variability of tourist demand for arts and crafts.  And yes, they are largely collectivist, at least at the clan level, with extensive systems of informal social insurance and very high implicit social marginal tax rates on accumulated wealth.

Have you noticed it rains a lot in England?

Here are earlier and ungated/less gated versions of the paper.

That is my latest Bloomberg column, here is one excerpt:

Looking at a broad swath of history, I see three major forces that can make financial systems safer: people being scared by recent events, solid economic growth and reduced debt in comparison to the value of equity. The financial crisis gave us the first on that list as perhaps its main “gift” (for now), but Dodd-Frank may have worsened economic growth problems.

On the plus side, we might like to think that Dodd-Frank improved the debt-equity balance by pushing banks to raise more capital. But that, too, now stands in doubt.

Last week Natasha Sarin and Lawrence H. Summers of Harvard University released a paper questioning whether Dodd-Frank has made big U.S. banks safer at all. The authors look at a variety of measures, including options prices, the ratio of market prices to book values, bank share volatility relative to overall market volatility, credit-default swap spreads and the value of preferred equity shares for banks. In every metric, it seems that the big banks are at least as risky as they were before the crisis, in part because they have lower capital values.

And this:

It’s a common economic prescription that regulation should insist that banks carry high levels of capital to withstand losses in bad times. But although Dodd-Frank raised statutory capital requirements, it may have drained banks of some of their true economic capital by regulating and sometimes prohibiting valuable banking activities. The ratio of market price to book value has declined for the biggest banks, and that is one sign of falling values for true economic capital, even though banks have met the letter of law by increasing capital as the regulations specified. Sarin and Summers note that measures of bank capital, as defined by regulators rather than the market, have little predictive power for bank failures.

Do read the whole thing.

The Department of Justice has sent a letter to UC Berkeley threatening a lawsuit unless the university modifies all of its free online educational materials to meet conditions of accessibility. In response the Vice Chancellor for Undergraduate Education writes:

…we have attempted to maximize the accessibility of free, online content that we have made available to the public. Nevertheless, the Department of Justice has recently asserted that the University is in violation of the Americans with Disabilities Act because, in its view, not all of the free course and lecture content UC Berkeley makes available on certain online platforms is fully accessible to individuals with hearing, visual or manual disabilities.

…We look forward to continued dialog with the Department of Justice regarding the requirements of the ADA and options for compliance. Yet we do so with the realization that, due to our current financial constraints, we might not be able to continue to provide free public content under the conditions laid out by the Department of Justice to the extent we have in the past.

In many cases the requirements proposed by the department would require the university to implement extremely expensive measures to continue to make these resources available to the public for free. We believe that in a time of substantial budget deficits and shrinking state financial support, our first obligation is to use our limited resources to support our enrolled students. Therefore, we must strongly consider the unenviable option of whether to remove content from public access.

In short, the DOJ is saying that unless all have access, none can and UC Berkeley is replying that none will. I sympathize with UC Berkeley’s position. The cost of making materials accessible can be high and the cost is extremely high per disabled student. It would likely be much cheaper to help each disabled student on an individual basis than requiring all the material to be rewritten, re-formatted and reprogrammed (ala one famous example).

An even greater absurdity is that online materials are typically much easier to access than classroom materials even when they do not fully meet accessibility rules. How many teachers, for example, come with captions? (And in multiple languages?) How about volume control? How easy is it for the blind to get to campus? In theory, in-class materials are also subject to the ADA but in practice everyone knows that that is basically unworkable. I guarantee, for example, that professors throughout the UC-system routinely show videos or use powerpoints that do not meet accessibility guidelines. Thus, by raising the costs of online education, the most accessible educational format, the ADA may have the unintended consequence of slowing access. Put simply, raising the costs of online education makes it more difficult for anyone to access educational materials including the disabled.

Addendum: By the way, if you are wondering, all of MRU’s videos for our Principles of Microeconomics and Principles of Macroeconomics courses are captioned in English and most are also professionally captioned in Spanish, Arabic and Chinese.

Paul Krugman is upset that many Millennials are toying with the idea of voting for Gary Johnson rather than Hillary Clinton.  He offers a number of arguments, here is one of them:

What really struck me, however, was what the [Libertarian Party] platform says about the environment. It opposes any kind of regulation; instead, it argues that we can rely on the courts. Is a giant corporation poisoning the air you breathe or the water you drink? Just sue: “Where damages can be proven and quantified in a court of law, restitution to the injured parties must be required.” Ordinary citizens against teams of high-priced corporate lawyers — what could go wrong?

That is the opposite of the correct criticism.  The main problem with classical libertarianism is that it doesn’t allow enough pollution.  Under libertarian theory, pollution is a form of violent aggression that should be banned, as Murray Rothbard insisted numerous times.  OK, but what about actual practice, once all those special interest groups start having their say?  Historically, under the more limited government of the 19th century, it was big business that wanted to move away from unpredictable local and litigation-driven methods of control, and toward a more systematic regulatory approach at the national level.  There is a significant literature on this development, starting with Morton Horwitz’s The Transformation of American Common Law.

If you think about it, this accords with standard industrial organization intuitions.  Established incumbents prefer regulations that take the form of predictable, upfront high fixed costs, if only to limit entry.  And to some extent they can pass those costs along to consumers and workers.  The “maybe you can sue me, maybe you can’t” regime is more the favorite of thinly capitalized upstarts that have little to lose.

So under the pure libertarian regime, big business would come running to the federal government asking for systematic regulation in return for protection against the uncertain depredations of the lower-level courts.  It is fine to argue the court-heavy libertarian regime would be unworkable for this reason, or perhaps it would collapse into a version of the status quo.

That would be a much more fun column: “Libertarian view untenable, implies too high a burden on polluters.”  I’m not sure that would sway the Bernie Brothers however.

Some of the criticisms of libertarianism strike me as under-argued:

And if parents don’t want their children educated, or want them indoctrinated in a cult…Not our problem.

Rates of high school completion were below 70% for decades, until recently, in spite of compulsory education.  Parents rescuing children from the neglect of the state seems at least as common to me as vice versa.

And what is the status quo policy on taking children away from parents who belong to “cults”?  Unusual religions can be a factor in contested child custody cases (pdf), but in the absence of evidence of concrete harm, such as beatings or sexual abuse, the American government does not generally take children away from their parents, cult or not.  Germany and Norway differ on this a bit, for the most part this is, for better or worse, the American way.  That’s without electing Gary Johnson.

By the way, Gary Johnson slightly helps Hillary Clinton.  Although probably not with New York Times readers.

That is my latest Bloomberg column, hardly anyone has a consistent and evidence-based view on this deal.  Here is one bit:

Critics who dislike Monsanto for its leading role in developing genetically modified organisms and agricultural chemicals shouldn’t also be citing monopoly concerns as a reason to oppose the merger — that combination of views doesn’t make sense. Let’s say for instance that the deal raised the price of GMOs due to monopoly power. Farmers would respond by using those seeds less, and presumably that should be welcome news to GMO opponents.

Yet on the other side:

What does Bayer hope to get for its $66 billion, $128-a-share offer? The company has argued that it will be able to eliminate some duplicated jobs and expenses, negotiate better deals with suppliers and invest more funds in research and development. Maybe, but the broader reality is less cheery. There is a well-known academic literature, dating to the early 1990s, showing that acquiring firms usually decline in value after tender offers, especially after the biggest deals. Mergers do not seem to make companies more valuable or efficient.

And this:

The whole Bayer-Monsanto case is a classic example of how a vociferous public debate can disguise or even reverse the true issues at stake. If Bayer fails to close the deal for Monsanto, Bayer shareholders may be the biggest winners. The biggest losers from a failed deal may be its opponents, who will spend the rest of their lives in a world where misguided judgments of corporate popularity have increasing sway over laws and regulations.

Do read the whole thing.

Robert Shiller on Open Borders

by on September 19, 2016 at 10:41 am in Economics | Permalink

Nobelist Robert Shiller writes that the next revolution will be an anti-national revolution:

For the past several centuries, the world has experienced a sequence of intellectual revolutions against oppression of one sort or another. These revolutions operate in the minds of humans and are spread – eventually to most of the world – not by war (which tends to involve multiple causes), but by language and communications technology. Ultimately, the ideas they advance – unlike the causes of war – become noncontroversial.

I think the next such revolution, likely sometime in the twenty-first century, will challenge the economic implications of the nation-state. It will focus on the injustice that follows from the fact that, entirely by chance, some are born in poor countries and others in rich countries. As more people work for multinational firms and meet and get to know more people from other countries, our sense of justice is being affected.

Oddly, however, Shiller’s argument focuses not on immigration but on trade agreements. Trade agreements, he argues, will equalize wages through the factor price-equalization theorem but to do this we need a strengthening of the welfare state. The latter part of the argument and how it resolves with the former is, shall we say, underdeveloped.

In Africa this process seems not to work as well. According to one 2007 study of 90 developing countries, Africa is the only region where urbanisation is not correlated with poverty reduction. The World Bank says that African cities “cannot be characterised as economically dense, connected, and liveable. Instead, they are crowded, disconnected, and costly.”

I say the one big problem is premature deindustrialization:

What ties them [African cities] together, and sets them apart from cities elsewhere in the world, according to the Brookings Institution, an American think-tank, is that urbanisation has not been driven by increasing agricultural productivity or by industrialisation. Instead, African cities are centres of consumption, where the rents extracted from natural resources are spent by the rich. This means that they have grown while failing to install the infrastructure that makes cities elsewhere work.

That is from The Economist, the article is interesting throughout.

After Texas high school builds $60-million stadium, rival district plans one for nearly $70 million

Need I say more?  I will nonetheless:

In Frisco, which neighbors Allen and McKinney, the district will pay $30 million over several years to use the Dallas Cowboys’ new 12,000-seat practice field for high school football and soccer games, as well as graduation ceremonies.

Here is a nice bit of fiscal illusion:

In McKinney [one of the stadium-building districts], school taxes for property owners amount to $1.63 per $100 of assessed valuation. The tax rate had been higher in the recent past, but it fell 5 cents this year, partly because the district had dropped some old debt. Because of the 5-cent decrease, district officials repeatedly note, property owners will see their taxes go down, even as the new stadium goes up.

Jim Buchanan would be proud.  And it’s a good thing we have the public sector to protect us from negative-sum status-seeking games!

The original pointer is from Adam Minter.

I will second Bryan Caplan’s post:

Last week, my colleague Dan Klein kicked off the Public Choice Seminar series.  During the introduction, I recalled some of his early work.  But only after did I realize how visionary he’s been.

In 1999, when internet commerce was still in its infancy, Klein published Reputation: Studies in the Voluntary Elicitation of Good ConductSeventeen years later, e-commerce towers before us, resting on a foundation of reputational incentives – everything from old-fashioned repeat business to two-sided smartphone reviews.

In 2003, long before Uber, Airbnb, or serious talk of driverless cars, Klein published The Half-Life of Policy Rationales: How New Technology Affects Old Policy Issues.  This remarkable work explores how technological change keeps making old markets failures – and the regulations that arguably address them – obsolete.  (Here’s the intro, co-authored with Fred Foldvary).  Fourteen years later, the relevance of Klein’s thesis is all around us.  Transactions costs no longer preclude peakload pricing for roads, decentralized taxis and home rentals, or full-blown caveat emptor for consumer goods.  So why not?

I’m not going to say that Klein caused these amazing 21st-century developments.  But he did foresee them more clearly than almost anyone.  Hail Dan Klein!

Some of Dan’s work, and later work (much of which is covered at MR), you will find here and here.  For instance, his later work on academic bias also was well ahead of its time and prefigured subsequent events, so this is actually a running streak.

Bowling alone and for peanuts too:

In 1964, “bowling legend” Don Carter was the first athlete in any sport to receive a $1 million endorsement deal ($7.6 million today). In return, bowling manufacturing company Ebonite got the rights to release the bowler’s signature model ball. At the time, the offer was 200x what professional golfer Arnold Palmer got for his endorsement with Wilson, and 100x what football star Joe Namath got from his deal with Schick razor. Additionally, Carter was already making $100,000 ($750,000) per year through tournaments, exhibitions, television appearances, and other endorsements, including Miller, Viceroys, and Wonder Bread.

…Of the 300 bowlers who competed in PBA events during the 2012-2013 season, a select few did surprisingly well. The average yearly salary of the top ten competitors was just below $155,000, with Sean Rash topping the list at $248,317. Even so, in the 1960s, top bowlers made twice as much as top football stars — today, as the highest grossing professional bowler in the world, Sean Rash makes significantly less than a rookie NFL player’s minimum base salary of $375,000.

In 1982, the bowler ranked 20th on the PBA’s money list made $51,690; today, the bowler ranked 20th earns $26,645.

The article, by Zachary Crockett, suggests numerous hypotheses for the economic decline of bowling, but ultimately the answer is not clear to me.  I would suggest the null of “non-bowling is better and now it is better yet.”  A more subtle point is that perhaps bowling had Baumol’s “cost disease,” but under some assumptions about elasticities a cost disease sector can shrink rather than ballooning as a share of gdp.

For the pointer I thank Mike Donohoo.