Month: August 2006

Russ Roberts has the scoop.

Via Brad DeLong:

Income inequality soared in the late 1990s.  Why?  A decomposition by
region and sector can tell you pretty much exactly: it was the tech
bubble and the stock boom. Capital gains and stock options
realizations.  Much of it in just five places in the whole country:
Manhattan, King County WA, and Santa Clara, San Francisco and San Mateo
Counties, CA.  Take out those five, as Travis Hale and I showed in a
paper, and the between-counties component of income inequality (which
isn’t all of it, but it isn’t chopped liver, either) doesn’t go up at
all.

Meanwhile, earnings inequality went down in the same time.  Why?  Full
employment.  This component of inequality is closely tied to utilization
rates and unemployment.  It varies with hours worked, and overtime
earned, more than anything else.  It is, in short, a macroeconomic
phenomenon.

Addendum: Here is more wisdom from that blog, on welfare reform, an overrated event in terms of its significance, though I will demur on the minimum wage question.

From the Richmond Fed, the focus is Latin America.  Here is one insightful bit of many:

RF: What is your opinion of Hernando de Soto’s The
Other Path? What lessons can policymakers in Latin
America take from that book?

Calvo: The main lesson is that regulations must be
simplified as much as possible in order to encourage the development
of the formal sector and, thus, most likely enhance the
pace of technical progress. However, I am skeptical that a major
overhaul of government regulations will have a major effect in
the short or medium term. The reason is that the informal sector
strongly relies on tax evasion and, unless you implement a
major tax moratorium – accompanied by substantially lowered
tax rates –firms are likely not to move to the formal sector,
even if all the red tape is eliminated. Moreover, a moratorium is
likely to have detrimental moral hazard implications.

Don Boudreaux has a superb post over at Cafe Hayek whacking the myth that health care costs put America at a competitive disadvantage or that a government takeover per se would lower said costs.  Don puts comparative advantage to good use in this clip:

Even if all American producers suffer production-cost increases of 15
(or whatever) percent, some American firms will nevertheless enjoy a
comparative advantage in production compared with foreign firms.  The
continued relevance of the principle of comparative advantage does not
mean that such cost increases are inconsequential; Americans will be
poorer than otherwise if American producers are burdened with the need
to pay higher costs without any offsetting increase in quantity or
quality of output.  But the problem isn’t international
"competitiveness"; many American firms will continue to export.  The
problem is costs that are unnecessarily high — a problem that
ultimately is reflected in lower standards of living of consumers who
buy from, and workers who work for, American businesses.

But read the whole thing.

Michael Schwartz [my link] earned an economics doctorate from Stanford Univeristy before spending five years as an assistant profesor of microeconomics at Harvard University.  His research papers include "Synchronization under Uncertainty."

These days, Mr. Schwartz is thinking about how to use economics to save attractive women from unwanted solicitations on an Internet dating site [TC: he needs to confer with Miss Passey].  One idea employs the concept of "scarcity," rationing the number of messages each lothario can send.  Another uses full disclosure, by displaying how many people a suitor has already approached.

…A person familiar with the matter says Yahoo aims to build a team of more than a dozen economists.

…Mr. Schwartz…[is] currently writing a research paper about economic markets where one side of a potential transaction is eager to profess its preference for the other side, as is often the case with hiring and online dating.  The unequal relationship make such markets complicated and unpredictable.

That is from today’s Wall Street Journal, p.1, "Hoping to Overtake its Rivals, Yahoo Stocks Up on the Academics."

Gayle Allard and the ever-interesting Peter Lindert write:

How have labor market institutions and welfare-state transfers affected
jobs and productivity in Western Europe, relative to industrialized
Pacific Rim countries?  Orthodox criticisms of European government
institutions are right in some cases and wrong in others.  Protectionist
labor-market policies such as employee protection laws seem to have
become more costly since about 1980, not through overall employment
effects, but through the net human-capital cost of protecting senior
male workers at the expense of women and youth.  Product-market
regulations in core sectors may also have reduced GDP, though here the
evidence is less robust.  By contrast, high general tax levels have shed
the negative influence they might have had in the 1960s and 1970s. 
Similarly, other institutions closer to the core of the welfare state
have caused no net harm to European jobs and growth.  The welfare
state’s tax-based social transfers and coordinated wage bargaining have
not harmed either employment or GDP.  Even unemployment benefits do not
have robustly negative effects.

These are underexplored but not easy to explore questions; here is the paper.

I would feel better if Ireland were removed from the data set, since a booming economy can afford many sins.  After this adjustment, coordinated bargaining wouldn’t look as good.  And when we calculate average productivity, should not the unemployed count for "zero productivity," or even negative, in the appropriate measure?  I believe that tax rates matter, but only at particular thresholds.

I also would like to argue the following: "Don’t think we can pick and choose the egalitarian interventions which turn up as the very best in econometric studies.  We are unlikely to know in advance which policies are the least harmful and politics is even less likely to turn those proposals into legislation." 

But would I be committing The Libertarian Vice?