The Living Constitution
Laurence Tribe writes in today's New York Times regarding the health care law:
Since the New Deal, the court has consistently held that Congress has broad constitutional power to regulate interstate commerce. This includes authority over not just goods moving across state lines, but also the economic choices of individuals within states that have significant effects on interstate markets. By that standard, this law’s constitutionality is open and shut.
Quite so; but what Tribe forgets is that the constitution is a living document. The constitution's meaning is not fixed by the New Deal. The constitution evolves to meet the needs of the people in the here and now. Tribe's interpretation of the commerce clause, which may have been appropriate for the age of steel and iron, is not necessarily right for the age of genes and bytes. We are fortunate, the constitution lives.
A License to Kill Shampoo
The WSJ has a good piece on licensing, with the usual amusing stories.
Texas, for instance, requires hair-salon "shampoo specialists" to take 150 hours of classes, 100 of them on the "theory and practice" of shampooing, before they can sit for a licensing exam…
A shampoo specialist in Texas, for instance, learns about neck anatomy and must practice skills such as regulating water temperature. "There's a lot of different things that go into it," says Elizabeth Perez, the state's cosmetology program manager.
Morris Kleiner offers the economist's interpretation:
"Occupations prefer to be licensed because they can restrict competition and obtain higher wages,"….
Mr. Kleiner estimates that across the U.S. economy, occupational licensing adds at least $116 billion a year to the cost of services, which amounts to about 0.1% of total consumer spending. In a look at dentistry, Mr. Kleiner found that the average price of dental services rose 11% when a state made it more difficult to get a dental license.
Does licensing improve quality?
But whether licensing guarantees better-quality work is an open question. Several academic studies in the 1970s and '80s found that licensure boosted quality in professions such as dentistry, optometry, plumbing and real-estate sales. More recent studies have found no evidence that licensing improves the quality of teachers or mortgage brokers.
I love that last sentence. The WSJ does offer some interesting tests:
…a look at consumer complaints about manicurists suggests licensing doesn't necessarily correlate with quality.
Alabama has perhaps the strictest licensing requirements in the nation: 750 hours of schooling and a written and practical exam. The state gets, on average, four public complaints a year about poor service, according to the Alabama Board of Cosmetology.
Connecticut, which doesn't require manicurists to get licenses, has averaged just six complaints a year to the state over the past five years. Two-thirds of those complaints are about gift certificates that aren't honored, according to data from the consumer protection division of the state attorney general's office.
Certification can serve many of the legitimate roles of licensing without the anti-competitive effects of licensing. I hope that is OK with you.
Addendum: Doug in the comments points us to this instant classic in the Palm Beach Post comparing unlicensed hair dressers, "garage cutters," to back-alley abortionists and quoting one salon owner:
"Even with the standards we have, you see a lot of dry hair and wrong color. Imagine what we'd have without these regulations."
Are IVs Going the Way of the Atlantic Cod?
It's hard to come up with a good instrumental variable (plausible source of exogenous randomization) so when someone does come up with one (e.g. legal origin) it's tempting to want to use it again and again. Unfortunately, as Randall Morck and Bernard Yeung point out in Economics, History and Causation, IVs with more than one use are deeply problematic. If a variable is a good IV for X then it can't also be a good IV for Y without also controlling for X and vice-versa. What this means is that every new use of an IV casts doubt on every previous use. Or as, Morck and Yeung, memorably write:
A Tragedy of the Commons has led to an overuse of instrumental variables and a depletion of the actual stock of valid instruments for all econometricians. Each time an instrumental variable is shown to work in one study, that result automatically generates a latent variable problem in every other study that has used or will use the same instrumental variable, or another correlated with it, in a similar context. We see no solution to this. Useful instrumental variables are, we fear, going the way of the Atlantic cod.
I am not quite so pessimistic, I don't see this as a fundamentally new problem or one specific to IVs. Nevertheless, I appreciate their advocacy for a wide variety of empirical methods as a solution to the over-fishing problem.
Among the alternative methods Morck and Yeung recommend, are event studies and Granger causality. I couldn't help but laugh at the last. But I wholeheartedly applaud their primary recommendation which is greater use of and respect for narrative history.
World Income Inequality
Here, courtesy of Catherine Rampell of Economix, is a remarkable chart from Branko Milanovic's book The Haves and Have Nots. Along the horizontal axis are within-country income percentiles running from the bottom 5% (1st ventile) to the top 5% (20th ventile). Along the vertical axis are world income percentiles.
The graph shows that the bottom 5% of Brazilians are among the poorest people in the world but the top 5% are among the richest. Thus the vertical range of the curve tells us about within-country inequality.
Comparing between countries we see that the poorest 5% of Americans are among the richest people in the world (richer than nearly 70% of other people in the world). The poorest 5% of Americans, for example, are richer than the richest 5% of Indians.
Counting and Adding
Very enjoyable lecture on partition numbers. Deep but accessible, especially first half. Hat tip: The Endeavour.
The Ethics of Economics
Ed Glaeser has a good post, The Moral Heart of Economics, on the underlying ethical theories of economics. Tyler and I also discuss this isssue in our chapter on ethics in Modern Principles.
Even though the predictions of economics are independent of any ethical theory, there are ethical ideas behind normative economic reasoning. An economist who rejects the idea of exploitation in kidney purchases, for example, is treating the seller of kidneys with respect–as a person who is capable of choosing for himself or herself even in difficult circumstances.
Similarly, economists don’t second-guess people’s preferences very much. If people like wrestling more than opera, then so be it; the economist, acting as economist, does not regard some preferences as better than others. In normative terms, economists once again tend to respect people’s choices.
Respect for people’s preferences and choices leads naturally toward respect for trade–a key action that people take to make themselves better off. As we saw in Chapter 9 on externalities, economists recognize that trade can sometimes make the people who do not trade worse off. Nonetheless, the basic idea that people can make decisions and know their own preferences leads economists to be very sympathetic to the idea of noncoercive trade.
Economists also tend to treat all market demands equally, no matter which person they come from. Whether you are white or black, male or female, quiet or talkative, American or Belgian, your consumer and producer surplus count for the same in an economic assessment of a policy choice.
None of this it to say that economists are always right in their ethical assumptions. As we warned you in the beginning, this chapter has more questions than answers. But the ethical views of economists–respect for individual choice and preference, support for voluntary trade, and equality of treatment–are all ethical views with considerable grounding and support in a wide variety of ethical and religious traditions.
Perhaps you have heard that Thomas Carlyle, the Victorian-era writer, called economics the “dismal science.” What you may not know is that Carlyle was a defender of slavery and he was attacking the ethical views of economics. Economists like John Stuart Mill thought that all people were able to make rational choices, that trade not coercion was the best route to wealth, and that everyone should be counted equally, regardless of race. As a result, Mill and the laissez-faire economists of the nineteeth century opposed slavery, believing that everyone was entitled to liberty. It was these ethical views that Carlyle found dismal. We beg to differ.
Assorted Links
3. In Defense of Ligers. I agree.
Kuwaiti Gift Exchange
KUWAIT CITY–Kuwait's ruler is marking several key anniversaries by literally paying tribute – handing out 1,000 dinar ($3,559) grants and free food coupons for every citizen in the Gulf nation.
The state news agency KUNA reports Monday that Sheik Sabah Al Ahmed Al Sabah has ordered the gifts for all the estimated 1 million Kuwaiti citizens.
It even covers newborns until Feb. 1….The food program is expected to offer free staples such as rice, eggs and milk until March 2012.
Hmmm, what could account for this sudden urge to gift?
Negative Externalities
Snopes verified. Hat tip: Ben Cahill.
Assorted Links
1. Sadly, on some days, I feel that all journals are like this one.
2. TED talks set to music, including, In Praise of Free Trade and Free Rhythms.
4. Drunken scientists slosh alcohol on experiment, create new superconductor.
Stata Resources
Here are some Stata resources that I have found useful. Statistics with Stata by Hamilton is good for beginners although it is overpriced. For the basics I like German Rodriguez’s free Stata tutorial best, good material can also be found at UCLA’s Stata starter kit and UNC’s Stata Tutorial; two page Stata is good for getting started quickly.
Christopher Baum’s book An Introduction to Modern Econometrics using Stata is excellent and worth the price. The world is indebted to Baum for a number of Stata programs such as NBERCycles which shades in NBER recession dates on time series graphs–this was a big help in producing graphs for our textbook!–so buy Baum’s book and support a public good.
I have found it hugely useful to peruse the proceedings of Stata meetings where you can find professional guides to using Stata to do advanced econometrics. For example, here is Austin Nichols on Regression Discontinuity and related methods, Robert Guitierrez on Recent Developments in Multilevel Modeling, Colin Cameron on Panel Data Methods and David Drukker on Dynamic Panel Models.
I found A Visual Guide to Stata Graphics very useful and then I lent it to someone who never returned it. I suppose they found it very useful as well. I haven’t bought another copy, since it is fairly easy to edit graphs in the newer versions of Stata. You can probably get by with this online guide.
German Rodriguez, mentioned earlier, has an attractively presented class on generalized linear models with lots of material. The LSE has a PhD class on Stata, here are the class notes: Introduction to Stata and Advanced Stata Topics.
Creating a map in Stata is painful since there are a host of incompatible file formats that have to be converted (I spent several hours yesterday working to convert a dBase IV to dBase III file just so I could convert the latter to dta). Still, when it works, it works well. Friedrich Huebler has some of the details.
The reshape command is often critical but difficult, here is a good guide.
Here are many more sources of links: Stata resources, Stata Links, Resources for Learning Stata, and Gabriel Rossman’s blog Code and Culture.
China Fear of the Day
This NYTimes piece on China and solar power is a must read as it touches upon environmentalism, protectionism, nationalism, the stimulus, the financial crisis and more! Here are a few grafs and comments.
Aided by at least $43 million in assistance from the government of Massachusetts and an innovative solar energy technology, Evergreen Solar emerged in the last three years as the third-largest maker of solar panels in the United States.
But now the company is closing its main American factory, laying off the 800 workers by the end of March and shifting production to a joint venture with a Chinese company in central China. Evergreen cited the much higher government support available in China…[and] plunging prices for solar panels. World prices have fallen as much as two-thirds in the last three years…
Good news, right? Plunging prices for solar is just what we want and shouldn't we applaud subsidies for green energy? Not so fast according to the article:
…solar power experts see broader implications. They say that after many years of relying on unstable governments in the Middle East for oil, the United States now looks likely to rely on China to tap energy from the sun…
China monopolizes the sun!
Ian A. Bowles, the former energy and environment chief for Gov. Deval L. Patrick…said the federal government had not helped the American industry enough or done enough to challenge Chinese government subsidies… “The federal government has brought a knife to a gun fight,” Mr. Bowles said.
I guess Bowles didn't get the memo about the new civility, or perhaps that only applies domestically. The reporters also seem to signal their views.
Evergreen’s joint-venture factory in Wuhan occupies a long, warehouselike concrete building in an industrial park located in an inauspicious neighborhood. A local employee said the municipal police had used the site for mass executions into the 1980s.
Woah, a little gratuitous no?
See here for more of interest including a discussion of how the financial crisis and the Lehman bankruptcy are involved.
Hat tip: Daniel Akst.
ZMP v. Sticky Wages
I find myself in the unusual position of being closer to Paul Krugman (and Scott Sumner, less surprising) than Tyler on the question of Zero Marginal Product workers.
The ZMP hypothesis is too close to a rejection of comparative advantage for my tastes. The term ZMP also suggests that the problem is the productivity of the unemployed when the actual problem is with the economy more generally (a version of the fundamental attribution error).
To see the latter point note that even within the categories of workers with the highest unemployment rates (say males without a high school degree) usually a large majority of these workers are employed. Within the same category are the unemployed so different from the employed? I don't think so. One reason employed workers are still fearful is that they see the unemployed and think, "there but for the grace of God, go I." The employed are right to be fearful, being unemployed today has less to do with personal characteristics than a bad economy and bad luck (including the luck of being in a declining sector, I do not reject structural unemployment).
To see the importance of sticky wages consider the following thought experiment: Imagine randomly switching an unemployed worker for a measurably similar employed worker but at say a 15% lower wage. Holding morale and other such factors constant, do you think that employers would refuse such a switch? Tyler says yes. I say no. If wages were less sticky the unemployed would be find employment
By the way, the problem of sticky wages is often misunderstood. The big problem is not that the wages of unemployed workers are sticky, the big problem is that the wages of employed workers are sticky. This is why stories of the unemployed being reemployed at far lower wages are entirely compatible with the macroeconomics of sticky wages.
Although I don't like the term ZMP workers, I do think Tyler is pointing to a very important issue: firms used to engage in labor hoarding during a recession and now firms are labor disgorging. As a result, labor productivity has changed from being mildly pro-cyclical to counter-cyclical. Why? I can think of four reasons. 1) The recession is structural, as Tyler has argued. If firms don't expect to ever hire workers back then they will fire them now. 2) Firms expect the recession to be long – this is consistent with a Scott Sumner AD view among others. 3) In a balance-sheet recession firms are desperate to reduce debt and they can't borrow to labor hoard. 4) Labor markets have become more competitive. Firms used to be monopsonists and so they would hold on to workers longer since W<MRP. Now that cushion is gone and firms fire more readily. What other predictions would this model make?
It would be interesting to know why Paul Krugman thinks productivity has become counter-cyclical but I believe he has yet to address this important topic.
Addendum: Paul Krugman gives his answer and The Economist offers a review with many links.
The Music of the Market
Mr. Frost and his team work out of a small, beige corner office with arched windows that used to be a library. There, at about 10:15 most workday mornings, one of them pushes a button on a computer. Across Wall Street, three musical notes – an F, an E and a D – sound on trading terminals, alerting traders that the Fed is in the market.
From the NYTimes.
Hat tip Daniel Lippman.
Liberal Compromise and Conservative Power
Paul Krugman has complained bitterly that Obama has compromised the progressive agenda. A new Gallup poll shows that such compromise may be an almost inevitable result of conservative and liberal ideologies.
Gallup recently polled a sample of Americans on whether it was more important for politicians to stick with their beliefs, even if little is accomplished, or compromise and get something done. Very conservative Americans were markedly more in favor of politicians sticking with their beliefs while very liberal Americans voted for compromise.
Importantly, this tells us not just about the beliefs of conservatives and liberals but about the incentives of conservative and liberal politicians. Conservative politicians face a high price of compromise and liberal politicians face a low price. Moreover, everyone knows this so conservative politicians can credibly commit that they will not compromise while liberal politicians cannot. As a result, liberals compromise more than conservatives.
If you can pull it off, credibly commiting not to compromise is a neat trick because you can get more of what you want even without an increase in basic aspects of political power such as votes. But where does the credibility originate? Is it inherent to the respective ideologies? The term conservative certainly suggests an unwillingness to change let alone compromise. Or, to turn full circle, perhaps conservative politicians are better at using apocalyptic rhetoric to instill anti-compromise feeling in their constitutients which in turn gives conservative politicians greater power.
Hat tip to L. Indyk.