Month: September 2007

Books that are so good I don’t know what to say about them

How to Read The Bible, by James Kugel.

I’m not even going to give you a pithy excerpt or try to find the right adjectives.  It is simply so, so, so good.  If you wish to learn more, here is a NYT review.

As long as we are on the topic of very good books, there is a new and very nice hardcover edition of Adam Smith’s The Wealth of Nations.

Happiness advice from my wife

My wife, a PhD microbiologist, told me once that when she was at work she felt guilty about not being at home with the kids and when she was at home with the kids she felt guilty about not being at work.

This problem may explain a surprising finding from Betsey Stevenson and one of your leading candidates for "most wanted economist blogger," Justin Wolfers.  Stevenson and Wolfers have a new paper showing that happiness is up for men but down for women.   They write:

By most objective measures the lives of women in the United States have improved over the
past 35 years, yet we show that measures of subjective well-being indicate that women’s happiness
has declined both absolutely and relative to male happiness. The paradox of women’s declining
relative well-being is found examining multiple countries, datasets, and measures of subjective wellbeing,
and is pervasive across demographic groups. Relative declines in female happiness have eroded
a gender gap in happiness in which women in the 1970s typically reported higher subjective wellbeing
than did men. These declines have continued and a new gender gap is emerging–one with
higher subjective well-being for men.

One reason is suggested by Stevenson in a NYTimes article on her research with Wolfers and similar independent research from Alan Krueger. 

Ms. Stevenson was recently having drinks with a business school
graduate who came up with a nice way of summarizing the problem. Her
mother’s goals in life, the student said, were to have a beautiful
garden, a well-kept house and well-adjusted children who did well in
school. “I sort of want all those things, too,” the student said, as
Ms. Stevenson recalled, “but I also want to have a great career and
have an impact on the broader world.”

Opportunity brings opportunity cost.

In the NYTimes article David Leonhardt correctly notes that "Although women have flooded into the work force, American society hasn’t fully come to grips with the change."  Alas, all he has to offer as solution is the usual platitudes about subsidized daycare and how men should do more of the housework – peculiar solutions to women’s unhappiness with increased opportunities.  Leonhardt should instead have talked to my wife.

As I wrote this post, I asked my wife about her feeling guilty at home and at work but she told me she no longer feels this way.  "Really?" I asked,  "Why not?"

"I decided to act more like a man and get over it," she responded. 

My favorite things London

No, I am not there, but this was a request from a loyal MR reader.  Here goes:

1. Mystery writer: Eric Ambler, most of all A Coffin for Dimitrios; the villain is pathetic, not fearful, and this is most of all a study in collective mythmaking.

2. Philosopher: Francis Bacon.  I’m not a Straussian but he really does have hidden and deep meanings.  Read Perez Zagorin on Bacon for a guide to the complexity of it all.

Honorary mention goes to Jeremy Bentham, whose proposal for interest-bearing currency, ideas on animal welfare, and Auto-Icon (most of all the text, not just the body) still stand ahead of their time.  He was a subtle thinker, not a one-dimensional simpleton.

3. Favorite song off London Calling: "Jimmy Jazz" remains dearest to my heart.

4. Favorite Alfred Hitchcock movie: Vertigo may be the most complete masterwork, but the best segments of The Birds, Psycho, and Marnie (all inconsistent movies) stick most deeply in my mind.

5. Favorite Henry Purcell recording: The Complete Odes and Welcome Songs, and no, eight discs of this music is not overkill.

6. 17th century economics pamphlet: Nicholas Barbon’s Apology for the Builder.  Barbon to Dudley North is a wonderful period in the history of political economy, spend a few weeks reading that stuff sometime.  This short pamphlet has increasing returns, aggregate demand management, urban economics, and the invisible hand, all well before Adam Smith.

7. Favorite neighborhood to stay in: Kensington, it is leafy green and away from both the monarchy and the hideous theatre district.

8. Favorite painting in: The National Gallery offers stiff competition, but how about this Gauguin, in the Courtauld?  As for carpets, here is the Ardebil, in the Victoria and Albert Museum.

9. Pianist: The elegant Clifford Curzon remains underrated.  He produced a lyrical account of Liszt’s B Minor Sonata plus try his Schubert B flat sonata and his Mozart.

Other stuff: Do I really have anything to add about Chaucer, Blake, Defoe, Forster, Keats, Milton, Samuel Johnson, Dickens, Orwell, Turner, Turing, Mick Jagger, Tim Harford, Stephen Jen, and The Economist?  Maybe, but not today.

Irrational beliefs I hold about carbon emissions

I have two sets of beliefs about global warming.  The first set I infer from the observed "scientific consensus," but applying my "sociology of science" adjustments to the filters of mainstream media, intelligent blogs, reports of peer-reviewed journals, popular science books, and so on.  That means somewhat more skepticism than the postulated consensus, but mostly I buy into the consensus account as our best available estimate.  Procedurally speaking, I am not sure how I could make these beliefs more rational.

The second segment of my beliefs is less rationally grounded.  I believe, for instance, that ocean acidification will, in the long run, be the most dangerous consequence of carbon emissions.  (And by saying that I don’t mean to downgrade the other worries.)

I am aware that this belief isn’t necessarily justified.  It is shared by some scientists as a speculation, and it could turn out to be true, but it is hardly well-grounded as our major worry even though it does seem to be a real worry. 

Still, for whatever reason, I cannot help but believe it, or at least believe it with some excess degree of credence.  Is this because I visited the ocean as a child, and received some mysterious emotional sense of its powers, a sense which I can no longer eradicate from my subconscious?  Or am I more generally attracted to explanations which postulate some deeper but slightly hidden or indirect problem with status quo policies?  (I could look for signs that I hold similar delusions elsewhere.)

I try to keep these beliefs from affecting my policy conclusions, but I am not altogether able to stop holding them.  And even if my belief turns out to be true (which I expect someone to suggest in the comments), I am quite sure my procedural reason for holding it is an irrational one.

Why are there strikes?

The UAW at General Motors has gone on strike.  But why are there strikes at all?  John Kennan wrote (full text gated here):

There is no commonly accepted economic theory of strikes.
The main obstacle is that if one has a theory which predicts when a
strike will occur and what the outcome will be, the parties can agree
to this outcome in advance, and so avoid the costs of a strike..strikes are apparently not Pareto optimal, since a strike means that the pie
shrinks as the employer and the workers argue over how it should be
divided.  If the parties are rational, it is difficult to see why they
would fail to negotiate a Pareto optimal outcome.

Hicks suggested two possible explanations for strikes:
either the union is trying to maintain a "reputation for toughness", or
there is private information on at least one side of the bargaining

The NYT claims that the union had to "draw a line in the sand."  More generally, David Card wonders whether striking workers are forcing employers to reveal how profitable they are.  The firm, if indeed it is profitable, will come back with a higher wage offer, but only if it’s hand is forced.  Otherwise the union does not know how much surplus can be grabbed because the firm will not have to reveal it.  Or can workers, using institutions and morale, somehow precommit to a resistance curve?  Such a precommitment is optimal ex ante (it reaps a greater share of the surplus by conferring a bargaining advantage) but not always best ex post because gains from trade can break down.  That is my guess in this case.

Perhaps Dave Ribar has the wisest comment:

The only "good" news (if you can call it that) is that GM’s
manufacturing workforce has shrunk so much that many fewer workers are
involved than in the earlier UAW strikes.

About 73,000 workers have gone on strike.  Here is the decline of General Motors.


The MR Google Search bar is very useful but it was hard to find so I have made it more prominent near the top left corner.

Also, if you are going to buy anything at Amazon, whether it’s a book Tyler recommended or a diamond engagement ring, then please click to Amazon through the link on the left.  It costs you nothing but it will help to cover Tyler’s prodigious book budget.   Our wives wish that blogging would cover a diamond budget but alas no.

Ed Leamer says “Housing IS the Business Cycle”

Leamer writes:

Of the components of GDP, residential investment offers by far the best early warning sign of an oncoming recession.  Since World War II we have had eight recessions preceded by substantial problems in housing and consumer durables.  Housing did not give an early warning of the Department of Defense Downturn after the Korean Armistice in 1953 or the Internet Comeuppance in 2001, nor should it have.  By virtue of its prominence in our recessions, it makes sense for housing to play a prominent role in the conduct of monetary policy.  A modified Taylor Rule would depend on a long-term measure of inflation having little to do with the phase in the cycle, and, in place of Taylor’s output gap, housing starts and the change in housing starts, which together form the best forward-looking indicator of the cycle of which I am aware.  This would create pre-emptive anti-inflation policy in the middle of the expansions when housing is not so sensitive to interest rates, making it less likely that anti-inflation policies would be needed near the ends of expansions when housing is very interest rate sensitive, thus making our recessions less frequent and/or less severe.

Here is the paper, try this link too

This kind of talk makes me nervous.  The Fed "matters" for at least two reasons.  First, short-term interest rates affect the real economy.  Second, Fed policy is a focal point in a noise trader game and also in a macro "should we expand or should we contract output?" multiple equilibria game.  Given the second factor I am reluctant to strangle so many booms in the cradle.  Furthermore, identified macroeconomic relationships become less stable the very moment a policymaker tries to act on them ("Goodhart’s Law," which is related to the Lucas critique).

We can’t reject unit root models (many of which suggest a gain in the growth rate is on average permanent, noting that "do not reject" is not the same as "accept"), so I say let her rip and don’t take the punch bowl away.  Who knows what tomorrow will bring?

The bottom line: I didn’t feel comfortable in Leamer’s world.  I would sooner say "Comovement IS the Business Cycle."

Bargain in your pajamas, or blog in suit and tie

Johan Almenberg, a loyal MR reader, asks about:

A world in which the difference between office clothing and athletic clothing has been eroded because people work better when they are comfortable.

Under one hypothesis, signaling would break down an all-pajamas equilibrium [TC: oddly I don’t find athletic clothing all that comfortable].  Jamie Cutthroat could look just a little better than his workplace competitor by putting on his tie. 

But if wasteful signaling is the operative force, employers can internalize those externalities in many cases.  A workplace with few outside visitors or external appointments should seek to minimize signaling costs by imposing a maximum dress code (e.g, no ties), not a minimum dress code.  I have heard that Google enforces casual wear on everyone, but maximum dress codes are rare in the corporate world.  Furthermore even minimum dress codes should be subject to "cheating": OK, you can’t wear a tie but the market will provide super nice (and uncomfortable) T-shirts and the signal-constrained employees will wear them to send a new and hitherto unregulated signal.  How much does this happen?

Alternatively, dressing up actually might make people more productive, but then would not at least a few of us blog in suit and tie?

In short, I don’t have a theory of corporate dress that fits the major data points.  My best guess is that signaling by dress is often an efficient means of sorting — Jamie Cutthroat really does want the promotion more than I do — and thus the employer does not want to ban it.

Would carbon tax revenues be too volatile?

Every now and then I come across arguments I have not heard before, and then I pass them along:

…relying on carbon taxes is also a terrible way to finance the government.  We are talking about half a trillion dollars or so in revenue, so the percentage of financing would be quite large.  Income fluctuates, and that is a problem, but the spending on a particular set of items, like fossil fuels, has the potential to fluctuate even more.  Example: suppose we really are facing an oil production peak, and scarcity causes the price to spike?  Every 10% rise in oil prices will tend to cause something like a 5% reduction in long run demand (I’m rounding here – and thanks to Gar Lipow for his valuable work in collating the evidence), but this also means less carbon tax revenue, potentially a lot less.  This is a serious problem, one that the green taxers have not really confronted.

The wise guy answer is that we could buy U.S. government revenue insurance from the Chinese, or barring that, from Dubai.

Addendum: Here are some useful numbers.

Road Pricing

Beginning early next year, drivers in six states will begin testing a
new way to pay for roads and transit: Commuters will be charged for the
miles they drive rather than paying taxes on gasoline purchased.

GPS will make road pricing and auto insurance by the mile common in the near future.  Widespread road pricing will increase investment in private roads.  See Street Smart (I was the general editor) for more.

The Great Compression


Paul Krugman recently blogged:

The middle-class society I grew up in didn’t evolve gradually or automatically.  It was created,
in a remarkably short period of time, by FDR and the New Deal.  As the
chart shows, income inequality declined drastically from the late 1930s
to the mid 1940s, with the rich losing ground while working Americans
saw unprecedented gains.

As you can see, the share of the top ten percent (not counting capital gains) falls steeply at about 1937 and flattens out by about 1942-43, with a slight uptick just afterwards.  But I am puzzled by Krugman’s description of the process.  A few points:

1. 1937-38 were disastrous years for the American economy and also for the middle class, mostly because of bad contractionary monetary policy.  This can be considered a second Great Depression and it aborted a recovery in process.  Robert Higgs has shown convincingly that World War II was an economic disaster, look at the figures at consumption don’t be fooled by aggregate gdp which is inflated by production for the war.

2. Therefore I am not sure when the "unprecedented gains" came during this period.  Yes 1940 was a year of recovery (and part of 1939) but is the claim that the middle class was created in that year?  Surely not but then I am confused.

3. Krugman cites "strong unions, a high minimum wage, and a progressive tax system" as driving the Great Compression — did these factors change so notably in 1937-44?

4. In real terms, relative to the time, the new federal minimum wage of 1938 was not especially high, even compared to the minimum wage today.  And the data are for pre-tax incomes, which means that progressive taxation is unlikely the major part of the story about the distribution of pre-tax income (noting the Yglesias caveat that the rate of tax will influence pre-tax incomes through labor supply).

5. Here are some data on U.S. unionization.  The history does broadly track Krugman’s time frame, as long as one does not obsess over 1937-43 as being special.  Note that optimistic estimates of the union wage premium today run about 15 percent, so it is hard to see unionization as the dominant factor in the change in the distribution of income.

6. The wartime economy, and the scarcity of labor, bid up wages for black workers, women, and many remaining non-drafted male laborers (due to forced saving, however, consumption was low).

7. My explanation of the break in the chart emphasizes a combination of events: top incomes were crushed by the depression of 1937-8, the war economy put a further lid on top of high incomes (for reasons of law and norms; surely the phrase "wartime wage and price controls" deserves to be uttered at least once), and the war economy bid up wages for many people near the bottom and middle of the distribution.  The wealthy classes financed a disproportionate chunk of World War II, it seems.

8. Krugman mentions none of the factors listed in #7.  Admittedly I may be wrong, but are not those factors obvious candidates for an explanation?

9. It is a vitally interesting question why postwar America stayed at this new percentile distribution of income (more or less), even after recovery from the war.  It may be possible to defend a version of Krugman’s broader hypothesis — policy matters for income distribution — in this setting, but the story then puts greater stress on both the equalizing effects of catastrophes and also on path-dependence.  That story might also suggest that strongly negative real shocks would be needed once again to make income distribution much more egalitarian.

10. How about this for an alternative story: "Crush the incomes at the top and then make the fat cats pay much higher wages to protect the world and become a superpower.  Impose wage and price controls as well.  See how long it takes before these distributional effects — which don’t exactly match the distribution of economic talent– reverse themselves in the aggregate."  I’m not sure that’s right but at least it seems to match more of the history.

I am sensitive to the claim that many people misinterpret the words of Paul Krugman, so please do read his whole post.  If he addresses these matters in more detail in his forthcoming book, I will let you know.