scream it from the rooftops

Scream it from the rooftops (all in one breath)

Gary Burtless writes:

Instead of subsidizing low-wage employers, most [government] assistance programs reduce the availability of low-skill adults who are willing to work for low pay and lousy benefits. By shrinking the pool of workers willing to take the worst jobs, the programs tend to push up rather than push down wages at the bottom of the pay scale. Low-wage employers do not receive an indirect subsidy from the programs. Many must pay somewhat higher wages or recruit more intensively to fill their job vacancies.

There is much more at the link, including a considerations of programs which are an exception to this generalization, such as EITC.

Scream it from the rooftops: happiness inequality is declining

There is less happiness inequality today than in the 1970’s or 1980’s. And this has occurred despite large increases in income and consumption inequality. Betsey Stevenson and I spell out these facts in a lot more detail in a new paper, “Happiness Inequality in the United States,” forthcoming in the Journal of Legal Studies.

That’s Justin Wolfers, here is much more.  This is one reason — but not the only reason — why so many moral arguments from the Left fall on deaf ears when it comes to most Americans.  Of course happiness inequality is more fundamental than either income or wealth inequality because we care about outputs, not inputs.

By the way, here is a roof access cage ladder.

Scream it from the Rooftops

Shark’s Fin and Sichuan Pepper: A Sweet-Sour Memoir of Eating in China, by Fuchsia Dunlop, due out in mid-April.

She is one of the writers I revere most.  And yes, I know she is usually a cookbook writer, but I do mean her writing, not just her recipes.  The more general point is you should expect to see many of the best writers, today, in new media and genres, not in the old.  I saw notice of this, by the way, in the vastly superior to almost anything else London Review of Books.

Bryan Caplan, scream this from the rooftops

If you measure people's thoughts, rather than asking them about their feelings, it seems they really enjoy the time they spend with their kids.  Here is an excerpt from BPS Research Digest:

In terms of pleasure, the results confirmed earlier findings,
suggesting that we spend an awful lot of time doing things we don't
find pleasurable, including "work" and "shopping". Out of 18 key
activities, "time with children" and "sex" both came in around
mid-table, far below "outdoor activities" and "watching TV". However,
consideration of the ratings for "reward" (as opposed to pleasure) told
a rather different story, with "work" now the top scorer, and "time
with children" not far behind.

Commuting, however, cannot be saved by a similar move.

Scream this from the rooftops

We can’t just bargain down the prices of pharmaceutical drugs without adverse consequences.  It is hard to measure the effects here, but yesterday I came across this piece of serious empirical work:

EU countries closely regulate pharmaceutical prices whereas the U.S. does not.  This paper shows how price constraints affect the profitability, stock returns, and R&D spending of EU and U.S. firms.  Compared to EU firms, U.S. firms are more profitable, earn higher stock returns, and spend more on research and development (R&D).  Some differences have increased over time.  In 1986, EU pharmaceutical R&D exceeded U.S. R&D by about 24 percent, but by 2004, EU R&D trailed U.S. R&D by about 15 percent.  During these 19 years, U.S. R&D spending grew at a real annual compound rate of 8.8 percent, while EU R&D spending grew at a real 5.4 percent rate.  Results show that EU consumers enjoyed much lower pharmaceutical price inflation, however, at a cost of 46 fewer new medicines introduced by EU firms and 1680 fewer EU research jobs.

Here is the paper.  Here is a non-gated copy.  Here is my column on medical R&D.  Here is a previous installment in the series "Scream this from the rooftops."

Scream this from the rooftops

Ed Glaeser writes in his new abstract:

Does bounded rationality make paternalism more attractive? This Essay argues that errors will be larger when suppliers have stronger incentives or lower costs of persuasion and when consumers have weaker incentives to learn the truth. These comparative statics suggest that bounded rationality will often increase the costs of government decisionmaking relative to private decisionmaking, because consumers have better incentives to overcome errors than government decisionmakers, consumers have stronger incentives to choose well when they are purchasing than when they are voting and it is more costly to change the beliefs of millions of consumers than a handful of bureaucrats. As such, recognizing the limits of human cognition may strengthen the case for limited government.

Yes, some NBER Working Paper Abstracts should be screamed from the rooftops.  Here is the paper itself.  Glaeser also offers some arguments against "soft paternalism":

1. Soft paternalism is an emotional tax on behavior which yields no government revenues.

2. Soft paternalism can cause bad decisions just as easily as hard paternalism.

3. Public monitoring of soft paternalism is much more difficult than public monitoring of hard paternalism.

4. While hard paternalism will be limited by public opposition, soft paternalism is particularly attractive because it builds public support.

5. Soft paternalism can build dislike or even hatred of subgroups of the population.

6. Soft paternalism leads to hard paternalism.

7. Soft paternalism complements other government persuasion. 

Get this:

Soft paternalism requires a government bureaucracy that is skilled in manipulating beliefs.  A persuasive government bureaucracy is inherently dangerous because that apparatus can be used in contexts far away from the initial paternalistic domain.  Political leaders have a number of goals, only some of which relate to improving individual well-being.  Investing in the tools of persuasion enables the government to change perceptions of many things, not only the behavior in question.  There is great potential for abuse.

Thanks to Daniel Klein for the pointer.

Trade and inequality, revisited — Rooftops edition

Another way of investigating the relationship between inequality and
trade with poor countries implies that China may actually help the
poor, suggests new work from University of Chicago economists Christian Broda and John Romalis.

Instead of focusing purely on what’s produced outside of the
country, Broda and Romalis turn their attention to an interesting but
obvious relationship between imports and consumption within our border:
The goods exported by poorer countries are typically consumed by
lower-income Americans. Our typical methods of quantifying inequality,
however, don’t take this into account.

At the same time, inflation in the price of these goods has fallen
behind inflation in services, which make up a greater portion of what
wealthier people buy. Taken together, these trends imply that official
measures may be overstating the rise in inequality.

Looking at trade data between 1994 and 2005, Broda and Romalis
construct inflation rates for different income groups and find that
rates for the richest outpaced rates for the poorest by about 4 percent
over the period. Since income inequality between the top and bottom 10
percent of earners grew by about 6 percent, the different inflation
rates among income groups wipes out about two-thirds of the rise in
inequality
.

The emphasis in that last sentence is mine.  It continues:

China’s role in this new way of analyzing inequality is large, accounting for about 50 percent of the total reduction.

And scream this part from the rooftops too [how do you scream a parenthesis?]:

(A very interesting aside. Broda and Romalis also find that the poor
are more likely than the rich to buy newer goods. Because of the lag in
how quickly the CPI tracks new products, the researchers argue that
once this "new goods bias"
which serves to keep official inflation rates higher than they actually
are since newer goods are typically cheaper, is factored out,
inequality between the rich and the poor between 1994 and 2005 may not
have changed at all.)

Here is the link.  Again, here is the Broda and Romalis paper.  If this holds up it is big, big news and we must revise many claims that have been made about inequality, trade, and China.

Are pharmaceutical drug prices too high?

Hillary Clinton has proposed a new plan to bring down prescription drug prices, but so far the reception is cool.  Here is one comment:

But when I ran it by some health economists and other health policy experts, several strongly disliked the idea because it misunderstands the diversity of companies in the pharmaceutical industry. They say it would create perverse incentives that could raise instead of lower the costs of developing new drugs.

“This is an astonishingly naïve approach,” said Amitabh Chandra, a professor of public policy at Harvard University, in an email. He argues that the plan could encourage wasteful research spending without necessarily doing much about the prices charged for medications.

That is from Margot Sanger-Katz at the NYT, not the Heritage Foundation.

I would stress a different point, and this concerns pharmaceutical prices more generally, not just the Clinton plan.  Higher prices induce more innovation, and those innovations benefit patients in many countries.  Note that connection is true even if you think most innovations come from universities or the NIH rather than being hatched Big Pharma.  There is still a pot at the end of the rainbow for the significant innovators in this process.

OK, so how much does innovation go down if prices go down?

Here is an earlier post by Alex on Frank Lichtenberg’s estimation: “Thus, price controls or other restrictions that reduce prices are almost certainly a bad idea.”

Here is another earlier post by Alex, citing Megan, noting that Apple spends three cents of every dollar on R&D, and other inconvenient facts and that was from 2009.

If the advocate of lower drug prices does not have clear quantitative evidence for a conclusion of “lowering drug prices will not harm innovation very much,” commit the analysis to the flames, for it harbors nothing but sophistry and illusion.  And while agnosticism about elasticities might weaken the argument for keeping prices high, that’s not an argument for lowering prices, that is an argument for agnosticism.

This same point applies to most commentaries on TPP I might add, and intellectual property analysis.  Write it on the bathroom wall: “Without an elasticity, there is no answer.”  And scream it from the rooftops while you are at it.

Did Iceland reject fiscal austerity?

Scott Sumner serves up the appropriate links.  He cites Mark Sadowski, who tells us:

…Iceland’s general government budget ran a surplus equal to 1.8% of GDP in 2014, or a change in fiscal stance since 2009 equal to 11.5% of GDP. This can be found on Table A1 of the April 2015 IMF fiscal Monitor.

…Table A3 shows that Iceland’s general government cyclically adjusted balance rose from a deficit of 10.0% of potential GDP in 2009 to a surplus of 2.7% of potential GDP in 2014, or a change of 12.7% of potential GDP…

But even this tends to understate the amount of fiscal austerity that Iceland has engaged in. This is because it includes the increase in spending attributable to rising interest payments on the national debt. To get a proper idea of the amount of fiscal austerity that Iceland has engaged in (i.e. cuts in direct spending and increases in taxes) one has to look at the general government cyclically adjusted primary balance which can be found in Table A4.  Iceland’s general government cyclically adjusted primary balance rose from a deficit of 6.9% of potential GDP in 2009 to a surplus of 6.2% of potential GDP in 2014, or a change of 13.1% of potential GDP.

…By this standard Iceland has done about 30% more austerity than Ireland, over double that of the UK, roughly two and a half times as much as the US, and approximately five and a half times as much as Latvia. The only country that has done more fiscal austerity is Greece.

None of this should come as a surprise. When nearly all the other OECD members were busy implementing fiscal stimuli in early 2009, Iceland (joined only by Ireland) was engaged in a massive fiscal consolidation.

Scream it from the rooftops: massive fiscal austerity in Iceland.  (Or should that be something like “gegnheill ríkisfjármálum austerity á Íslandi!”)  There is plenty more detail and argumentation in Mark’s post.  Here is my previous post on Iceland.

The reckoning hour is near…

The problem is that Mr. Tsipras has not convinced his creditors that he is serious about reform or that his team is remotely on top of the detail. He needs a game-changer. This should, indeed, be a rupture — but with his left faction, not his creditors.

That is from Hugo Dixon, file it under “Scream it From the Rooftops.”  You will note, by the way, that the far-left faction accounts for 30 to 40 of the 149 coalition seats in the Greek parliament, so such an action would not be easy.  It is still not too late, however, if only…

How effective is the minimum wage at supporting the poor?

The highly esteemed and extremely proficient Thomas MaCurdy has a new piece in the JPE (jstor) on exactly that question.  The news does not surprise me:

This study investigated the antipoverty efficacy of minimum wage policies.  Proponents of these policies contend that employment impacts are negligible and suggest that consumers pay for higher labor costs through imperceptible increases in goods prices.  Adopting this empirical scenario, the analysis demonstrates that an increase in the national minimum wage produces a value-added tax effect on consumer prices that is more regressive than a typical state sales tax and allocates benefits as higher earnings nearly evenly across the income distribution.  These income-transfer outcomes sharply contradict portraying an increase in the minimum wage as an antipoverty initiative.

MaCurdy also writes:

About 35 percent of the total increase in after-tax benefits goes to families with income less than two times the poverty threshold, a common definition of the working poor or near-poor; nearly 13 percent goes to families principally supported by low-wage workers defined as earning wages at or below 117 percent…of the new 1996 minimum wage; and only about 14 percent goes to families with children on welfare.

Unlike most public income support programs, increased earnings from the minimum wage are taxable.  Over 25 percent of the increased earnings are collected back as income and payroll taxes…Even after taxes, 27.6 percent of increased earnings go to families in the top 40 percent of the income distribution.

File under “Scream it From the Rooftops!”  I do not see an ungated copy, but here is an earlier 2000 paper (pdf) by MaCurdy, with O’Brien-Strain, with broadly similar conclusions.

From that same JPE issue, cream skimming effects seem to be pretty small when it comes to school choice.

A message for all our readers in the United Kingdom

From Scott Sumner, but endorsed by me in full:

Take the current situation in the UK.  If I’m not mistaken, the British political system is different from that in America.  British governments are basically elected dictatorships, with no checks and balances.  Even though the Bank of England is independent, the government can give it whatever mandate it likes.  If I’m right then both fiscal and monetary policy are technically under the control of the Cameron government.

So I read the UK austerity critics as saying:

“Because you guys are too stupid to raise your inflation target to 3%, or to switch over to NGDP targeting, fiscal austerity will fail.  We believe the solution is not to be less stupid about monetary policy, but rather to run up every larger public debts.”

Is that right?  Is that what critics are doing?

Some will argue that my views are naive, that Cameron would be savagely attacked for a desperate attempt to print money as a way of overcoming the failures of his coalition government.  Yes, but by whom?  Would this criticism come from Ed Balls?  Perhaps, but in that case he would essentially be saying:

“It’s outrageous that the Cameron government is trying to use monetary stimulus to raise inflation from 2% to 3%, whereas they should be using fiscal stimulus to raise inflation from 2% to 3%.”

I’m sorry to have to repeat this over and over again, but what 99% of pundits on both sides of the Atlantic are treating as a debate about “stimulus” and “austerity” is actually a debate about stupidity.  I’m not saying the pundits are stupid (Krugman certainly understands what I’m saying) but rather they are addressing their audience as if the audience was stupid.

Don’t talk down to Cameron and Osborne!  Don’t say “austerity will fail.”  Say “austerity will work, but only if the BOE becomes much more aggressive, otherwise it will fail.”  That sort of advice would be USEFUL.  Instead we are getting a bunch of pundits getting ego boosts because they can say “I told you so.”

Scream it from the rooftops!

The newest and best data on income inequality

The paper is by Bakija, Cole, and Heim, find it here.

There is much to say about this paper, but first of all the Kaplan and Rauh work, which I have cited several times, seems to offer incorrect estimates of the professions of the higher earners.  Here is the authors' corrective chart: Kaplan 

Here is a summary of their broader results:

Our findings suggest that the incomes of executives, managers, supervisors, and financial professionals can account for 60 percent of the increase in the share of national income going to the top percentile of the income distribution between 1979 and 2005. We also demonstrate significant heterogeneity in income growth across and within occupations among people in the top percentile of the income distribution, suggesting that factors that changed in the same way over time for all high income people are probably not the main cause of increasing inequality at the top. The incomes of executives, managers, financial professionals, and technology professionals who are in the top 0.1 percent of the income distribution are found to be very sensitive to stock market fluctuations. Most of our evidence suggests that financial market asset prices, corporate governance, entrepreneurship, and income shifting across corporate and personal tax bases may be especially important in explaining the dramatic rise in top income shares.

I would reword this as a) "it's complicated," and b) "a lot of them made the money in capital markets."  It does remain the case that top incomes in finance rose by far most rapidly.

In this very careful and rigorous paper, here is a "scream it from the rooftops" result:

…we find that a one percent increase in the net of tax share is associated with an 0.7 percent reduction in incomes earned by people in the top 0.1 percent of the income distribution, which would imply that if we were to raise top marginal tax rates further on these taxpayers, the increase in deadweight loss would be substantially larger than the increase in revenue raised [emphasis added]. However, we find essentially no evidence at all of any responsiveness of people below the top 0.1 percent…

Better stock up on those cough drops.

For the pointer I thank Adam Looney.

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