Month: May 2007

Glenn Hubbard favors tradeable permits over a carbon tax

Here is the scoop.  John Tierney, citing Ron Bailey, disagrees; I score this one for Tierney if only on public choice grounds.  Key argument:

The prospect of a cap-and-trade system in America has already set off a lobbying frenzy in Washington by industries hoping to write the rules to their advantage.  Given legislators’ eagerness to please their hometown industries, it’s easy to imagine them being just as generous as European politicians.  By contrast, a carbon tax would be more straightforward – simpler to establish and enforce…

Read Greg Mankiw as well.

Are You a Good Liar?

Are you a good liar? Most people think that they are, but in reality there
are big differences in how well we can pull the wool over the eyes of others.
There is a very simple test that can help determine your ability to lie. Using
the first finger of your dominant hand, draw a capital letter Q on your

Some people draw the letter Q in such a way that they themselves can read it.
That is, they place the tail of the Q on the right-hand side of their forehead.
Other people draw the letter in a way that can be read by someone facing them,
with the tail of the Q on the left side of their forehead. This quick test
provides a rough measure of a concept known as "self-monitoring". High
self-monitors tend to draw the letter Q in a way in which it could be seen by
someone facing them. Low self-monitors tend to draw the letter Q in a way in
which it could be read by themselves.

High self-monitors tend to be concerned with how other people see them. They
are happy being the centre of attention, can easily adapt their behaviour to
suit the situation in which they find themselves, and are skilled at
manipulating the way in which others see them. As a result, they tend to be good
at lying. In contrast, low self-monitors come across as being the "same person"
in different situations. Their behaviour is guided more by their inner feelings
and values, and they are less aware of their impact on those around them. They
also tend to lie less in life, and so not be so skilled at

Long time readers will not be surprised to learn that I find it difficult to see things from other people’s perspective and thus, consistent with the theory, I am a lousy liar!

More here.  Hat tip to Koettke

Should immigration be family-based?

How should we select legal immigrants?  Under the status quo, about two-thirds of new legal arrivals come through family connections; the new immigration bill would (over time) move toward a points system and favor skills.  This stimulating article suggests that the change would favor the suburbs and penalize New York City.  The city’s economic revival depended (and still depends) on immigrant-run, family-connected small businesses.  I liked this sentence:

These days, in a Lower East Side neighborhood that has been a cradle of
family chain migration to America for 200 years, the deli at Delancey
and Allen Streets is a 24-hour operation run by a man from Bangladesh –
one of about 70 relatives to follow a Bangladeshi seaman who jumped
ship here in 1941.

The focus on skills has many advantages, but might it destroy New York City?  In contrast, Northern Virginia, with its high-tech firms, would benefit from the reforms.  Los Angeles, which has a higher percentage of illegals, and a higher concentration of Mexicans, stands in a very different position than does New York.

A skills-based system would probably bring more men and fewer women; in many poorer countries women do not have good educational opportunities.  If the men are allowed to bring over spouses from the home country, this could mean less assimilation; female arrivals are more likely to marry out of group.

Henry Farrell pointed out that a skills-based system might drive greater "brain drain" in poor countries; in his view America’s gain would be the world’s loss.  Alternatively, by sending their skilled citizens, poor countries might received improved skilled returners, more remittances, and more business connections.  Arguably this has worked for India.  The new entry requirements also might increase the incentive for third world residents to
acquire skills, and of course not all of the skill-seekers will end up
migrating.  Overall I do not believe the net effect here is known.

If family members are left out of legal immigration, might they have the greatest demand to then come as illegals?

The bottom line: A very big change is in the works here, yet I don’t feel I have a good handle on it.

Here is George Borjas on point systems.  Comments are open, but please don’t rehash the usual debates, try to make new points and please focus on legal arrivals only.

Was there anything to the Cambridge capital debates?

Many readers raise this topic in the comments.  Sadly I must characterize the Cambridge capital debates as a fruitless diversion.  The non-neoclassicals won virtually every point on the modeling, but it doesn’t much matter when it comes to the substance.  The critics showed that:

1.  There is no unique measure of roundaboutness or capital intensity which is independent of the interest rate (i.e., market prices). 

2. Since equations with exponents often have multiple roots, sometimes more than one interest rate can serve as an equilibrium in a simple capital theory problem.

On #1, I say so much the worse for roundaboutness.  (By the way, I tried to find a good definition of "roundaboutness" on-line but I couldn’t; that is indicative.)  The concept of risk is in any case far more useful for macro, capital theory, and finance.  While the risk idea has its own problems, no credit goes to the Cambridge critics there. 

On #2, multiple equilibria of the Cambridge sort are not a major problem or issue in modern capital markets.  A variety of forces — including money markets, loanable funds and institutional frictions — hold interest rates in place.  No real world interest rate is determined solely by the solution to a single equation with exponents.  Empirically, interest rates do not suddenly leap to another equilibrium under stable basic conditions.  The single-equilibrium supply and demand model for interest rates, modified possibly by credit rationing, seems to explain the real world reasonably well.  Whatever puzzles exist do not seem attributable to the existence of multiple roots for an equation with exponents.

If you readers are not careful in your comments, you might soon get a post on the contributions of Piero Sraffa.

Responses to Comments – Round 1

To Indiana Jim: Thanks for your question. I do not combine war
spending and entitlement spending. The former is in the so-called
“discretionary” portion of the budget; the latter is in the “mandatory”
portion (i.e., it is based on a predetermined formula set by past
legislation and will be paid out under that formula until it is

To Freelance: Thank you very much.

To Adrian: Yes. Occasionally bribing foreign governments has been
used successfully, although it has been done covertly for obvious
reasons. But after 9/11, I don’t think we had that option with Al-Qaeda
and the Taliban in Afghanistan. And some terrorist movements are so
fanatical that bribing them is unlikely to work.

To John Thacker: I do not argue that current defense spending is
unsustainable. It could be more efficient, but the levels by historical
standards as a portion of GDP are quite low, as you point out. But this
will still be the second most costly war in U.S. history if it
continues to the end of the year. The cost of entitlements is, as you
point out, likely to grow, and these could squeeze many other programs
in the budget, including defense, in the next decade. They would have
to be reformed even if there were zero money spent for defense because
they are financially unsustainable.

True, FDR promised a balanced budget when he took office, but he
rapidly abandoned that pledge well before the war. But you are correct;
I was underscoring FDR’s call to make sacrifices at home to support the
troops on the battlefield through taxes, borrowing and the other things
you correctly mentioned.

To Barkley Rosser: I agree that Medicare presents a more difficult
problem than Social Security, which in fact, as you correctly point
out, enjoys a surplus. But neither is sustainable over coming decades
given the current trajectories of benefit payments and inflows. The
danger is that neither program will be sustainable without some
reforms, and the sooner they occur the less disruptive they will be.
The alternative is a bid increase in borrowing and/or taxes as well as
a drawing of funds from other programs. In all of these cases, we leave
our children a very bad legacy.

To Mr. Noah: What kind of guide do you need?

To Jay Livingston: Yes, I am. Great to hear from you. Where are you
living now? What great times we had together at Pocono. Hope you are
well. Best regards.

To Barkley Rosser: I agree with your May 28 posting in which you
said that the Social Security System is not in crisis, and indeed there
is a chance that it will not be for some time. But there is a high
probability that inflows will fall far short of benefits within a
couple of decades. That was the risk in the early 1980s, when with a
few changes the Greenspan Commission put it on a sustainable basis and
improved the chances that it would be there for many decades to come.
All I am arguing is for a few adjustments today, similar to those in
1983; to be sure that it is around for those who need it for a very
long time. And I do not want to see it reach a point where it gets so
out of balance that major change will be required, so let’s make minor
ones today.

More of my responses to your comments will be posted tomorrow.

Thanks again,

Robert D. Hormats
author of The Price of Liberty

Justin Wolfers wants to know

And can you think of a better reason than that?

There is currently some very unusual activity going on in the election markets at
InTrade: Over the past two weeks, there appears to have been a concerted effort
to bid up the price of the contract tied to Hillary winning the Presidency, and
on the back of essentially no news, the price climbed from about 25, up to 40,
and now is at about 35.  My usual coauthor, Eric Zitzewitz, suggested that
this looks a lot like manipulation, and the best evidence of this (apart from
the absence of any news) is that over the same period, the odds on Hillary
winning the Democratic nomination are essentially unchanged at 50.  It
just can’t make any sense to buy PRES.CLINTON at 40, when
2008DEM.NOM.CLINTON is at 50. 

All told though, this manipulator has been
surprisingly successful.  And this is where our experiment comes in.
I wonder whether the manipulator will be just as successful when a broader
audience becomes aware of this possibility?  We tried a first experiment a
week ago – Eric mentioned this anomaly while at a prediction markets
conference in Palm Desert (Robin was with
us).  In turn, this led to a bit of pressure on the price, but the
manipulator held firm.  We were wondering whether a simple post on
Marginal Revolution (tipped off by a loyal reader) pointing to this mis-pricing
might lead to further price pressure?  As such, if you were to blog on the
mis-pricing, that would serve a second purpose, of giving us truly experimental
variation in public attention.  And all of this holds the promise of
learning a bit more about manipulation in prediction markets.

OK people, trade away!

Addendum: Here is Eric Zitzewitz, over at Chris Masse, on same.  And Koleman Strumpf says no manipulation.

Sentences about income mobility

So, if everybody’s income is 50 percent higher than their parents’,
that shows up as zero income mobility.  On the other hand, if average
income stays constant, but a lot of low-earning parents have
high-earning children, and vice-versa, that shows up as high income

That is Arnold Kling.  Here is much more from Brink Lindsay.  He writes:

…is measured income mobility between generations really on the decline
in the U.S.?  Not according to Gary Solon of the University of Michigan,
who is probably the leading American researcher in the field.  (He is on
the advisory board of the Economic Mobility Project.)  His most recent research
on the subject, in a paper co-authored with Chul-In Lee, concludes that
“intergenerational income mobility has not changed dramatically over
the last two decades.”

I once wrote (read the whole thing):

1. "Age-adjusted parental wealth, by itself, explains less than 10 percent of the variation in age-adjusted child wealth."

2. 20 percent of parents in the lowest quintile of the parent’s
wealth distribution have children who end up in the top two quintiles
of their generation. One-quarter of the parents in the highest wealth
quintile end up with kids in the two lowest quintiles.

3. The age-adjusted intergenerational wealth elasticity is 0.37.
What does this mean? If parents have wealth 50 percent over the mean in
their generation, the wealth of their children will be 18 percent above
the mean in the childrens’ generation.

That all said, I think there remains a very real disaggregated problem concerning income mobility.  Given the rising size of the college earnings premium, many more people should be going to college but are not.  Not every country in Europe has the same problem.  Here is my previous column on that topic.  Since I do not think there is a single unique bottleneck preceding higher education, and many of the issues are sociological, I do not think this problem will prove easy to fix.

Educated women don’t like globalization and trade as much

Michael Hiscox of Harvard reports:

We examine new survey data on attitudes toward international trade showing that women are significantly less likely than men to support increasing trade with foreign nations. This gender gap remains large even when controlling for a broad range of socio-economic characteristics among survey respondents, including occupational, skill, and industry-of-employment differences that feature in standard political-economy models of individuals’ trade policy preferences. Measures of the particular labor-market risks and costs associated with maternity do not appear to be related at all to the gender gap in trade preferences. We also do not find any strong evidence that gender differences in non-material values or along ideological dimensions have any affect on attitudes toward trade. The data do clearly reveal that the gender gap exists only among college-educated respondents and is larger among older cohorts. We argue that differences in educational experience – specifically, exposure to economic ideas at the college level – appear to be most plausible explanation for gender differences in attitudes toward trade. The findings suggest the possibilities of a renewed theoretical and empirical focus on the political roles played by ideas, not just among policymakers but also among the broader electorate. In practical terms, there are also implications for trade policy outcomes in different contexts and for how debates over globalization contribute to broader gender divisions in politics.

I considered titling this post "Your girls’ minds are being poisoned," but I’ve learned repeatedly that a big chunk of you don’t know when I am joking.  I don’t however, see selective education as the relevant difference.  Perhaps education is correlated with a female (and often male) decision to adopt a self-identity as a "caring person."  Given the difference between the seen and unseen, a’la Bastiat, and the imperfect state of economics education, that makes those people critics of globalization.

Is neoclassical economics a Mafia?

Here is my short essay on that topic, riffing on Christopher Hayes’s recent article.  You’ll find other related essays and links here (David Warsh and Paul Krugman will be joining in at some point).  Here is my bottom line:

There’s much talk in Hayes’ article about discrimination against heterodox economists, but he gives surprisingly little attention to which of their valid propositions have been neglected. I’d like to see a simple list and start the debate there.

Addendum: James Galbraith is mad at me and responds.  And Max Sawicky has much to say about me.

Facts about cinematic subsidies

For every dollar received in global (non-Austrian) box office by Austrian films, 28 dollars are spent on film subsidies. 

Scroll through this document to page four for comprehensive — and scary — EU figures.  Only the Czech Republic and Poland, both of which have very low subsidies, have ratios under one.  France and Denmark, two of the more successful European film-producing countries, have ratios between three and four, meaning that four dollars are spent to produce one dollar of overseas revenue.

It is remarkably difficult to make movies that people in other countries wish to see, and it is not obvious that film subsidies are helping matters.

Pay for performance and wage inequality

Lemieux, MacLeod, and Parent get to the point:

We document that an increasing fraction of jobs in the U.S. labor
market explicitly pay workers for their performance using bonuses,
commissions, or piece-rates.  We find that compensation in
performance-pay jobs is more closely tied to both observed (by the
econometrician) and unobserved productive characteristics of workers. 
Moreover, the growing incidence of performance-pay can explain 24
percent of the growth in the variance of male wages between the late
1970s and the early 1990s, and accounts for nearly all of the top-end
growth in wage dispersion (above the 80th percentile).

Here is the link, here is a non-gated version.  It is perhaps simplistic to say the people at the top now earn more because they can, but simplistic is not the same as wrong.  For me the puzzle is why the world held back so much on bonus pay for so long.