Month: February 2020
I do not think that the main explanation for this is the increasing age requirements for America’s best jobs. Instead, I contend that this sorting is an efficient response to the standardization of entry-level jobs and bureaucratization of hierarchies . Most firms are not well-equipped to efficiently utilize the top tier of smart, talented but raw new employees. Sending them off to consulting firms is a rational response from the point of view of both the young employees as well as the companies.
(Since the number of startup founders and scientists is relatively small, the real cost of this talent allocation is to Fortune 500 companies. I will therefore focus on large companies. I will also just focus on consulting, though I believe the arguments apply equally to law, finance, and perhaps big tech.)
Most corporate entry-level programs do not offer much stratification between the smart, highly motivated individual and the more average performer. Fifty years ago a bright, ambitious new college graduate had no choice but to pay one’s dues by starting at the bottom like everyone else and then work one’s way to the top–albeit at a faster rate than today. Today that same graduate can select into the fast track via consulting.
Moreover, this is an equilibrium that–at least in the short- to medium-term–makes sense for all players. The ambitious young graduate receives a wage premium in exchange for higher productivity. The consulting firm gets to hire the smart people it needs to build its pyramid. And even the Fortune 500 company gets to gain from the intelligence of the new graduate when it hires the consulting firm; arguably this company is a loser on net compared to fifty years ago (when it received access to the talent but did not have to pay the consulting firm to act as a middleman), but the equilibrium is still tenable.
My own experience at GE and a top management consulting firm is a good example of this in action. I joined GE through one of its leadership development programs but found my peers to be less talented and hard-working than I had hoped. Unsurprisingly, I also found the roles to be uninspiring and poor uses of my time. After less than two years, I left to join a top consulting firm. I was challenged from day one and at times was not sure if I would make it. My bosses asked much more of me, but they also better resourced me. My productivity was an order of magnitude higher than at GE, and I was accordingly paid nearly twice as much.
For further evidence, consider that 90% of US companies have predefined pay bands based on experience. Given one’s experience level, it is difficult to make considerably more than one’s peers in the first few years (which is the purpose of pay bands). Contrast that with consulting: an average graduate with an engineering degree (the highest earning of all degrees) earns $69k but a new associate at McKinsey earns $105k. The disparity only widens for lower-earning degrees.
One counterargument is that the sorting done by consulting firms is based mostly on the prestige of one’s university education (whether undergraduate or graduate). Obviously all the smart people did not go to the Ivy League, and besides, don’t those schools screen for a narrow type of excellence anyways?
Yes, this is certainly true. However, I think it is also true that most people who can gain admission into one of these schools and pass the rigorous battery of consulting interviews are, by most reasonable measures, smart. Their willingness to self-select into consulting indicates their work ethic. It is far from a perfect screen, but it is a relatively effective one given how easy it is to utilize.
Thus, it is rational (at least in this narrow sense) for young people to self-select into consulting…
There is a bit more at the link.
Here is my first CWT with him, I will be doing another, based in part around Ross’s new book The Decadent Society: How We Became the Victims of Our Own Success, reviewed by me enthusiastically here. So what should I ask him?
I am pleased to announce that Martin Gurri is joining Mercatus as an affiliated scholar. As you probably may know, Martin is the author of The Revolt of the Public and the Crisis of Authority in the New Millennium, one of the more important and more prophetic social science books of our time.
Here is Martin’s recent short piece for Mercatus on revolt, populism, and reaction. Here is a 21-minute podcast with Martin.
3. Obituary for the great George Steiner (NYT). Much as I admire the knowledge of Lehmann-Haupt, the piece does not come close to reflecting just how much Steiner knew and could command in his writings and language.
5. “This may provide exploratory evidence that “state capacity” in certain domains eg innovation, health and education – might be important. This adds to the debate on “state capacity libertarianism” and in terms of current UK policy may inform on whether investing in an “ARPA organisation” or other areas of state capacity is a positive return on investment.” Here are the regressions. Lots at the link, and very nice visuals, a dose of sanity in exposition too, all from Ben Yeoh.
By Ronald S. Calinger, what a beautiful book, clearly written, conceptual in nature, placing Euler in the broader history of mathematics, the funding of science, and the Enlightenment, all in a mere 536 pp. of text. Here is one bit:
At midcentury Leonard Euler was at the peak of his career. Johann I (Jean I) Bernoulli had saluted him as “the incomparable L. Euler, the prince among mathematicians” in 1745, and Henri Poincaré’s later description of him as the “god of mathematics” attests to his supremacy in the mathematical sciences. Euler continued to center his research on making seminal contributions to differential and integral calculus and rational mechanics, and producing substantial advances in astronomy, hydrodynamics, and geometrical optics; the state projects of Frederick II required attention especially to hydraulics, cartography, lotteries, and turbines. At midcentury, when d’Alembert and Alexis Claude Clairaut in Paris, Euler in Berlin, Colin Maclaurin in Scotland, and Daniel Bernoulli in Basel dominated the physical sciences, Euler was their presiding genius.
Nor had I known that Rameau sent his treatise on the fundamental mathematics of music to Euler for comments.
Definitely recommended, you can order it here.
How do geographically concentrated income shocks influence the long-run spatial distribution of poverty within a city? We examine the impact on housing prices of a cholera epidemic in one neighborhood of nineteenth century London. Ten years after the epidemic, housing prices are significantly lower just inside the catchment area of the water pump that transmitted the disease. Moreover, differences in housing prices persist over the following 160 years. We make sense of these patterns by building a model of a rental market with frictions in which poor tenants exert a negative externality on their neighbors. This showcases how a locally concentrated income shock can persistently change the tenant composition of a block.
Here is the new AER piece by Attila Ambrus, Erica Field, and Robert Gonzalez. What might be the modern applications of this insight?
That is the topic of my latest Bloomberg column, here is one excerpt:
The first and perhaps most important effect will be to make Trump’s nationalism seem ordinary, even understated. Hundreds of flights to China have already been canceled, countries are refusing to receive (or deciding to quarantine) Chinese nationals or visitors from China, and China itself is severely limiting travel within the country. Whether or not these prove effective measures, the idea of travel bans and restrictions no longer seems extreme or unconstitutional. Even if voters are confusing normal times with times of pandemic, on this issue Trump’s instincts now seem almost prescient.
When the flight of Americans returning from Wuhan was sent to Alaska last week instead of San Francisco, and subject to quarantine, very few political complaints were heard, including from leading Democrats. There might still be arguments about whether that was a justified violation of civil liberties, but the notion that a pandemic requires the federal government to take such measures, without a congressional vote, is not seriously contested.
That is going to help any incumbent president who believes in the strong exercise of executive power, as does Trump.
There is much more at the link.
4. Interns: “A résumé audit study with more than 11,500 applications reveals that employers are more likely to respond positively when internship applicants have previous internship experience. Employers are also less likely to respond to applicants with black-sounding names and when the applicant is more distant from the firm.”
In a new paper, Robert Ellickson makes a simple but important point: local land-use zoning freezes land use into place preventing land from moving from low-value to high-value uses even over many decades.
Recall the neighborhood where you spent your childhood. For most Americans, it would have been a neighborhood of detached single-family houses.My thesis in this Article is simple: if you were to visit that same neighborhood decades from now, it would remain virtually unchanged. One reason is economic: structures typically are built to last. But a second reason, and my focus here, is the impact of law. The politics of local zoning, a form of public land use regulation that has become ubiquitous in the United States during the past century, almost invariably works to freeze land uses in a neighborhood of houses.
…The zoning strait-jacket binds a large majority of urban land in the United States. Los Angeles and Chicago, two of the nation’s densest central cities, permit the building of only a detached house on, respectively, 75% and 79% of the areas they zone for residential use. In suburban areas, the percentage typically is far higher. In a companion study of zoning practices of thirty-seven suburbs in Silicon Valley, Greater New Haven, and Greater Austin, I found that, in the aggregate, these municipalities had set aside 91% of their residentially zoned land (71% of their total land area) exclusively for detached houses.
…Absent overly strict regulation, suppliers of goods in a market economy are able to adapt to changes in supply and demand conditions. The freezing of land uses in a broad swath of urban America prevents housing developers from responding to changes in consumer tastes about where and how to live.
I’m in India and they have similar problem, except in India it’s agricultural land that is frozen in place and made difficult to transform to new uses (in the process depriving farmers of the true value of one of their only assets and creating opportunities for regulatory arbitrage that politically-connected special interests exploit by buying at the farm price, obtaining approvals to convert that other cannot obtain and then selling at the much higher post-conversion price.)
Freezing agricultural land in place seems backward because ubanization is clearly India’s future but it’s no less backward than what has happened in the United States. In both cases, an important right in the land bundle was expropriated and collectivized and the market process of creative destruction impeded.
We analyze how a sales tax levied on all food products impacts the consumption of healthy food, unhealthy food, and obesity. The sales tax can stimulate the consumption of healthy meals by lowering the time costs of food preparation. Moreover, the sales tax lowers obesity under more general conditions than a tax on unhealthy food (fat tax) and a subsidy on healthy food (thin subsidy). We calibrate the model using recent consumption and time use data from the US. The thin subsidy is counterproductive and increases weight. While both the sales tax and the fat tax mitigate obesity, the former imposes a lower excess burden on consumers.
It seems that if you try to tax fat directly, individuals can readily substitutes into other foodstuffs that are bad for them, or bad for their weight. If you place a sales tax on food in general, individuals substitute into eating more at home, and there the food is healthier in the first place and furthermore the time-intensiveness of production will limit the number of dishes prepared and thus quantity and in turn obesity.
In 2016, the Liberian government delegated management of 93 randomly selected public schools to private providers. Providers received US$50 per pupil, on top of US$50 per pupil annual expenditure in control schools. After one academic year, students in out-sourced schools scored 0.18 σ higher in English and mathematics. We do not find heterogeneity in learning gains or enrollment by student characteristics, but there is significant heterogeneity across providers. While outsourcing appears to be a cost-effective way to use new resources to improve test scores, some providers engaged in unforeseen and potentially harmful behavior, complicating any assessment of welfare gains.
That is by Mauricio Romero, Justin Sandefur, and Wayne Aaron Sandholtz in the new AER. The gains are real, and not the result of student selection. That said costs are higher with the private contracting. Better partner selection would have improved the program greatly, though the authors note that some of the most promising partners ex ante ended up being the biggest troublemakers ex post. Some of the schools, for instance, allowed a possibly unacceptable degree of sexual abuse of the students. There is perhaps potential for dynamic reoptimization of permissible partners to yield very real gains, though this may or may not be supported by the available political economy incentives.
The authors suggest, by the way, that outsourcing or contracting out to the private sector often does better when quality is relatively simple, such as with water services, food distribution, and simple forms of primary health care, such as immunization. In their view, for advanced health care and prisons, contracting is less effective, due to the vaguer nature of product quality.
This is in any case a very important paper, likely to be one of the best and most significant of the year.
For the Mumbai’s perpetual honkers, who love to blare the horns of their vehicles even when the traffic signal is red, the Mumbai Traffic Police has quietly come up with an unique initiative to discipline them in order to curb the alarming rise in the noise pollution levels in the country’s commercial capital.
From Friday (January 31, 2020), it has installed decibel meters at certain select but heavy traffic signals to deter the habitual honkers through a campaign named ‘The Punishing Signal’.
Joint Police Commissioner (Traffic) Madhukar Pandey said that the decibel monitors are connected to traffic signals around the island city, and when the cacophony exceeds the dangerous 85-decibel mark due to needless honking, the signal timer resets, entailing a double waiting time for all vehicles.
1. How Billie Eilish and Finneas make things (11 minute video).
2. “With a difference-in difference estimation, we provide evidence that the end of the government-controlled Salon contributed to start the price increase of the Impressionists relative to the insiders.”
3. Diamond-finding enterprises (New Yorker).
6. “We show that the increasing prevalence of unwantedness across birth order explains a substantial part of the documented birth order effects in education and employment. Consistent with this mechanism, we document no birth order effects in families who have more control over their own fertility.”
This three-volume set is quite the remarkable achievement, and it would have made my best books of 2019 list (add-ons here) had I known about it earlier. It starts with “An audit of violence after 1966,” and then goes back to the seventeenth century to begin to dig out what happened. It has more detail than almost anyone needs to know, yet at the same time it remains unfailingly conceptual and relies on theoretical social science as well, rather than merely reciting names and dates. How about this?:
The breakdown of hegemonic control in Northern Ireland [mid- to late 1960s] exemplifies Tocqueville’s thesis that, when a bad government seeks to reform itself, it is in its greatest danger.
Here is an excerpt from volume II:
The thesis advanced here is that hegemonic control was established between 1920 and 1925 by the UUP, and, aside from a few exceptional moments, exercised successfully until 1966. After 1925 opportunities for effective opposition, dissent, disobedience, or usurpation of power were minimal. The major possibilities of disruption came from the outside, from independent Ireland or from Great Britain, from geopolitics, or the world economy. Eventually, when external forces of disruption combined with major endogenous changes, hegemonic control would be contested, and would shatter. But at no juncture did Northern nationalists or Irish Catholics in the North internalize the UUP’s rhetoric, or become significantly British by cultural designation. When the civil-rights movement learned to exploit the claim to be British citizens entitled to British rights, the regime’s days were numbered.
I will continue to spend time with these volumes, which will not be surpassed anytime soon. Unlike in so many history books, O’Leary is always trying to explain what happened, or what did not. You can order them here.
As a side note, I find it shocking (and I suppose deplorable) that no American major media outlet has reviewed these books, or put them on its best of the year list, as far as I can tell. We are failing at something, though I suppose you can debate what. And I apologize to O’Leary for missing them the first time around.
Mathis Lohaus writes to me:
Thanks for doing the Conversations. I greatly enjoyed Acemoglu, Duflo, and Banerjee in short succession after the Christmas break. Your question about “top-5 journals” and the bits about graduate training reminded of something I’ve had on my mind for a while now:
For the average PhD student, how hard is it to become a tenured economist — compared to 10, 20, 30, 40 … years ago? (And how about someone in the top 10% of talent/grit?)
Publication requirements have clearly become tougher in absolute terms. But how difficult is it to write a few “very good” papers in the first place? On twitter, people will sometimes say things like “oh, it must have been nice to get tenure back in 1997 based on 1 top article, which in turn was based on a simple regression with n = 60”. I wonder if that criticism is fair, because I imagine the learning curve for quantitative methods must have been challenging. And what about the formal models etc.? Surely those were always hard. (I vaguely remember a photo showing difficult comp exam questions…)
More broadly, early career scholars now have tons of data and inspiring research at their fingertips all the time. Also, nepotism and discrimination might be less powerful than in earlier decades…? On the other hand, you have to take into account that many more PhDs are awarded than ever before. I suspect that alone is a huge factor, but perhaps less acute if we focus only on people who “really, really want to stay in academia”.
A different way to ask the question: When would have been the best point in time to try to become an econ professor (in the USA)?
I would love to hear about your thoughts, and/or input from MR readers.
I always enjoy questions that somewhat answer themselves. I would add these points:
1. The skills of networking and finding new data sets are increasingly important, all-important you might say, at least for those in the top tier of ability/effort.
2. Fundraising matters more too, because the project might cost a lot, RCTs being the extreme case here.
3. Managing your research team matters much more, and the average size of research team for influential work is much larger. Once upon a time, three authors on a paper was considered slightly weird (the claim was one of them virtually always did nothing), now four is quite normal and the background research support is much higher as well.
Recently I was speaking to someone on the job market, wondering if he should be an academic. I said: “In the old days you spent a higher percentage of your time doing economics. Nowadays, you spend a higher percentage of your time managing a research team doing economics. You hardly do economics at all. So if you are mainly going to be a manager, why not manage for the higher rather than the lower salary?”
That was tongue in cheek of course.
On the bright side, learning today through the internet is so much easier. For instance, I find YouTube a good way to learn/refresh on new ideas in econometrics, easier than just trying to crack the final published paper.