Month: December 2012

Most Popular MR Posts from 2012

Here are some of the most popular MR posts as measured by page views from 2012:

1. Introducing Marginal Revolution University – we asked you to spread the word about MRUniversity and you did making this the most viewed page this year. Thanks!

2. Krugman’s Response to Alex and the original Krugman v. Krugman.

3. Racism by Political Party. This one showed up on television.

4. Robert Solow on Hayek and Friedman and MPS. Tyler should let loose more often.

5. Firefighters Don’t Fight Fires. A graph is worth a thousand words.

6. A Bet is a Tax on Bullshit. I don’t think the scheme I outlined is quite right but I worked for a long time on the final paragraph and I was pleased that it was widely quoted.

7. Why economic mobility measures are overrated. Lots of meat in this post and in Tyler’s related posts What does the inequality-immobility link mean? and Krugman on income mobility and my Stasis, Churn and Growth.

8. Debtor’s Prison for Failure to Pay for Your Own Trial. An issue that should be more widely reported.

9.  How savage has European austerity (spending cuts) been? Not that savage.

10. The Google Trolley Problem. A famous philosophical puzzle now must be answered in practice.

Among other meaty posts which were highly linked too were Tyler’s posts Why Old Keynesianism is looking worse these days; A simple theory for why so many smart young people go into finance, law and consulting and favorite non-fiction books of 2012. Also on the list were my posts Noble Matching and one of my favorites, Patent Theory on the Back of a Napkin.

A good year as we move towards MR’s tenth.

Are robots and aging demographics self-cancelling problems?

Dean Baker says yes:

This is one where a baseball bat might be necessary. If you are concerned that a falling ratio of workers to retirees is going to make us poor then you are not concerned that excessive productivity growth will leave tens of millions without jobs. Let’s try that again. If you are concerned that a falling ratio of workers to retirees is going to make us poor then you are not concerned that excessive productivity growth will leave tens of millions without jobs.

It is possible for too much productivity growth to be a problem, if the gains are not broadly shared. It is also possible for too little productivity growth to be a problem as a growing population of retirees imposes increasing demands on the economy. But, it is not possible for both to simultaneously be problems.

That is missing the point, as there is too much talk of “productivity growth” per se and not enough of either distribution or political economy.  If robots concentrate wealth in the hands of IP owners, wages for many workers might fall or remain stagnant.  That is a problem.

Similarly, if robots concentrate wealth in the hands of IP owners, it may be hard to drum up the tax revenue to support a higher dependency ratio.  The wealthy may produce a blocking political coalition or capital simply may be harder to tax for mobility, accountancy, and Laffer curve-like reasons.  There is then a problem with the dependency ratio.

We then have both problems, no contradiction.

Note that we can get out of at least one half of this mess if the robots are especially good at taking care of old people.  That seems unlikely to me, at least in earlier stages of robot development, but of course it is not impossible.  In reality, many old people would fare somewhat better if our economy were somewhat more like that of Mexico, namely with cheaper land and cheaper servants.  You could imagine robots lowering wages by say ten percent, yet still labor wouldn’t be cheap enough for most old people to afford much more in the way of servants.

Paul Krugman makes the argument for austerity

…it’s overwhelmingly likely that these [Social Security] projections will be hugely off in one or more ways.

No immediate moral from me, except as a reminder that all those long-term budget discussions in which people act as if we really know what the state of Social Security will be three decades from now are basically just boring science fiction.

Here is more, and this post too.  I bought, and still buy, that kind of argument when it comes to climate science and it seems to work for some number of fiscal issues as well.  Better safe than sorry.

Note, by the way, that to the extent the “robots” argument is true, some of the decline in work in the short-term will not be reversed anytime soon and thus the output gap is smaller — perhaps considerably smaller — than Keynesians have been claiming.

Working Conditions in China: Supply and Demand

The NYTimes has a lengthy and self-congratulatory article on improved working conditions in Chinese factories which it suggests are due to negative publicity from earlier NYTimes articles. Indeed, as soon as the NYTimes starts to investigate, we are presented with this boardroom set piece:

“The world is watching!” [Foxconn Chairman] Mr. Gou yelled, according to multiple people. “We are going to fix this, right here!”

The Times articles, part of a larger series, are well written and informative and no doubt they have prodded some changes at certain companies. China, however, is a very big place and the real story of better working conditions is a story of supply and demand.

Wages in Chinese factories have been low because wages in China’s agricultural interior were even lower and the great migration from the country to the city, one of the largest migrations in human history, meant that there was a ready supply of workers desperate for work and the more work the better. Even today many workers want longer hours:

In March, when Foxconn announced that workers’ hours would be reduced to China’s legal limits, employees began complaining. “Absolutely I’d like to do overtime to work more than 60 hours, but now there’s a ceiling on it,” said Ma Changqiao, a 23-year-old at Foxconn’s Chongqing factory.

As the great migration leveled off, however, wages began to rise. At first, workers wanted all of the increase in wages in money but as the more basic needs of workers and their families have been met the demand for better working conditions and more leisure has increased and this has made it profitable for firms to supply better working conditions.

Thus, the real story of better working conditions is not a spate of negative publicity, a mere blip in the face of much larger forces, but rising wages with a touch of Maslow’s hierarchy.

To its credit, the NYTimes article provides evidence for the larger story although you have to dig past the self-congratulatory material. The article notes, for example, that working conditions are also improving rapidly in little known companies not subject to NYTimes oversight:

The factory, in Chongqing, makes computers for Hewlett-Packard, a company with little of Apple’s glamour. It is operated by Quanta, a little-known Taiwanese manufacturer.

Inside the plant, amid thousands of workers in bright white uniforms, are occasional flashes of pink worn by people like Zhang Xuemei, a bubbly 19-year-old with glinting earrings whose sole job is to chat with co-workers.

For eight hours a day, Ms. Zhang collects complaints about the factory’s free meals and dorms. She listens to workers who are divorcing, homesick or arguing with managers. When she finds someone suffering, she refers them to the company’s full-time doctor or professional counselors.

Quanta’s 10-story dormitories feel like a college campus. There is a free movie theater, television rooms, a large martial arts gym, two spacious karaoke bars, a huge cafeteria and an aerobics hall playing a Chinese remix of “Gangnam Style.”

and here is the key

And the amenities are partly selfish: one of the biggest problems for Chinese factories is that workers are constantly leaving. Hewlett-Packard hopes that by improving living conditions, turnover and training costs will fall.

Addendum: Tim Worstall points out that “Manufacturing wages have been improving at 14% a year (yes, after inflation) since 2000. That’s a decade before anyone started to agitate about the working conditions at these factories. Or at least it’s a decade before anyone took any notice of such agitation.”

What does OIRA do?

That is the new paper by Cass Sunstein:

Since its creation in 1980, the Office of Information and Regulatory Affairs (OIRA), a part of the Office of Management and Budget (OMB), has become a well-established institution within the Executive Office of the President. This essay, based on public documents and the author’s experience as OIRA Administrator from 2009-2012, attempts to correct some pervasive misunderstandings and to describe OIRA’s actual role. Perhaps above all, OIRA operates as an information-aggregator. One of OIRA’s chief functions is to collect widely dispersed information – information that is held by those within the Executive Office of the President, relevant agencies and departments, state and local governments, and the public as a whole. Costs and benefits are important, and OIRA does focus on them (as do others within the Executive Branch, particularly the National Economic Council and the Council of Economic Advisers), above all in the case of economically significant rules. But for most rules, the analysis of costs and benefits is not the dominant issue in the OIRA process. Much of OIRA’s day-to-day work is devoted to helping agencies to work through interagency concerns, promoting the receipt of public comments on a wide range of issues and options (for proposed rules), ensuring discussion and consideration of relevant alternatives, promoting consideration of public comments (for final rules), and helping to ensure resolution of questions of law, including questions of administrative procedure, by engaging relevant lawyers in the executive branch. OIRA seeks to operate as a guardian of a well-functioning administrative process, and much of what it does is closely connected to that role.

What is the social cost of gun ownership?

Via @JustinWolfers, finally we can see some numbers, provided by Philip J. Cook and Jens Ludwig:

This paper provides new estimates of the effect of household gun prevalence on homicide rates, and infers the marginal external cost of handgun ownership. The estimates utilize a superior proxy for gun prevalence, the percentage of suicides committed with a gun, which we validate. Using county- and state-level panels for 20 years, we estimate the elasticity of homicide with respect to gun prevalence as between +0.1 and + 0.3. All of the effect of gun prevalence is on gun homicide rates. Under certain reasonable assumptions, the average annual marginal social cost of household gun ownership is in the range $100 to $1800.

By no means should you take this as the last word, but it is one place to start.

How much might marginal tax rates be going up?

Gerald T. Prante and Austin John have a new paper and a report for us:

This paper compares state-by-state estimates of the top marginal effective tax rates (METRs) on wages, interest, dividends, capital gains, and business income for tax year 2012 to the rates scheduled for 2013 under scheduled law. Scheduled tax law for 2013 assumes the expiration of the 2001 and 2003 tax cuts and the new PPACA taxes. Overall, the average top METR on wage income is scheduled to increase by approximately six percentage points (41.8 percent to 47.8 perent), while taxes on dividends would increase the greatest (19.0 percent to 47.9 percent). The top METRs on wages, dividends, interest, and partnership/sole proprietor income would exceed 50 percent in California, Hawaii, and New York City.

How many bankruptcies to come in higher education?

Bryan Caplan doubts that on-line education will lead to many bankruptcies in higher education.  To provide a contrasting point of view, I see the landscape as follows:

1. The absolute wages of college graduates have been falling for over a decade, even though the relative premium over “no college degree” is robust.  Still, absolute wages do determine the long-term viability of any revenue model.  And note that a pretty big chunk of the relative college wage premium is captured through post-secondary education only.

2. The “debt bubble” behind a lot of recent higher education expansion won’t be repeated anytime soon.

3. A large number of institutions in the top one hundred will move to a hybrid on-line model for a third or so of their classes and they will do so gradually, without seriously disrupting norms of conformity or eliminating campus life.  In fact this will become the new conformity and furthermore through time-shifting it may increase the quantity and joy of drunken parties and campus orgies.  Eventually these on-line classes will be sold for credit to outside students.  Some top schools will sell credits in this manner, even if the more exclusive Harvard and Princeton do not.  Many lesser schools will lose a third or so of their current tuition revenue stream.  Note that the prices for these on-line credits, even if hybrid, will likely be much lower, plus lesser schools lose revenue to the schools better at designing on-line content.

4. Some state governors will try to put out a supposedly semi-passable degree from their state schools for 10k a year, with some on-line components of course.  That will put price and revenue pressure on many other schools.

So let’s say you are Trinity International University, in Deerfield, Illinois, 1,265 students, nominal tuition about 26k.  I had never heard of that place before doing a quick search through U.S. News rankings.  Still, it is rated in the second tier.  Will it survive?  Maybe their Evangelical orientation will push them through.  Maybe it will sink to 500 students.

How about Lynn University, in Florida, also second tier, nominal tuition listed as 32k?  1,619 students, but how many by say 2032?

I don’t think bankruptcy, literally interpreted, is the likely legal outcome (for one thing, these schools probably don’t have enough debt for bankruptcy law to be relevant).  Still, I think it is quite possible that one hundred or more schools in the U.S. News rankings will find their enrollments or at least their tuition revenue streams cut in half or more within twenty years.  They will be shells of their former selves, though on-line education might not even be their major economic challenge.  It will be one of three or four major whammies facing them.  Higher education as a general practice of course still will thrive, as will community colleges.

One key question is whether on-line education will encourage consolidation or not.  Under one vision, on-line offerings shore up the smaller schools, because you can go to them for the atmosphere while taking German III purely on-line.  (Even then, they survive but the revenue stream takes a huge whack.)  Under another vision, on-line — for most students — works best in hybrid form, mixed with various face-to-face forms, and the larger schools will have a much easier time getting this off the ground in a workable manner.

Two additional comments on Bryan’s post.  First, he thinks that for on-line education “…the dollars of venture capital raised are laughable.”  Yet keep in mind that the major players are or can be backed by the endowments of the top universities.  In any case, why raise extra money before you are able to spend it?  If these on-line efforts get any traction at all, the funding and lines of credit will be there.

Second, advocates of the relevance of the signaling model should be relatively optimistic about on-line education.  Because it is hard to pay attention in the on-line schoolhouse, it provides an especially potent signal!  And you always face the temptation to upgrade your signal by subbing in some Top School on-line credits for some of your Podunk University credits.  (Sooner or later Podunk will have to accept such credits.)  Social pressures for conformity will encourage rather than stop that trend.  On the other hand, if you subscribe to a learning model for higher education, there are some very legitimate questions as to how well the on-line product can teach you what you need to know, at least for people with some fairly wide variety of learning styles.

Conformity pressures and signaling may militate against the “stay at home all day” forms of on-line education, but not against on-line education more generally, in fact quite the contrary.  In my view Bryan is underestimating the economic problems to be faced by a wide range of colleges and universities, and putting up a not very plausible model of non-conformist on-line ed as the major threat.

Addendum: Matt Yglesias comments.