I’ve been waiting for a paper like this

by  Tyler Cowen in

Steve Kaplan and Joshua Rauh write:

We consider how much of the top end of the income distribution can be
attributed to four sectors — top executives of non-financial firms
(Main Street); financial service sector employees from investment
banks, hedge funds, private equity funds, and mutual funds (Wall
Street); corporate lawyers; and professional athletes and celebrities. 
Non-financial public company CEOs and top executives do not represent
more than 6.5% of any of the top AGI brackets (the top 0.1%, 0.01%,
0.001%, and 0.0001%).  Individuals in the Wall Street category comprise
at least as high a percentage of the top AGI brackets as non-financial
executives of public companies.  While the representation of top
executives in the top AGI brackets has increased from 1994 to 2004, the
representation of Wall Street has likely increased even more.  While the
groups we study represent a substantial portion of the top income
groups, they miss a large number of high-earning individuals.  We
conclude by considering how our results inform different explanations
for the increased skewness at the top end of the distribution.  We argue
the evidence is most consistent with theories of superstars, skill
biased technological change, greater scale and their interaction.

Here is the link, here is the non-gated version.  How about this bit from the text?:

…the top 25 hedge fund managers combined appear to have earned more than all 500 S&P 500 CEOs combined (both realized and estimated).

This is important too:

…we do not find that the top brackets are dominated by CEOs and top executives who arguably have the greatest influence over their own pay.  In fact, on an ex ante basis, we find that the representation of CEOs and top executives in the top brackets has remained constant since 1994.  Our evidence, therefore, suggests that poor corporate governance or managerial power over shareholders cannot be more than a small part of the picture of increasing income inequality, even at the very upper end of the distribution.  We also discuss the claim that CEOs and top executives are not paid for performance relative to other groups.  Contrary to this claim, we find that realized CEO pay is highly related to firm industry-adjusted stock performance.  Our evidence also is hard to reconcile with the arguments in Piketty and Saez (2006a) and Levy and Temin (2007) that the increase in pay at the top is driven by the recent removal of social norms regarding pay inequality.  Levy and Temin (2007) emphasize the importance of Federal government policies towards unions, income taxation and the minimum wage.  While top executive pay has increased, so has the pay of other groups, particularly Wall Street groups, who are and have been less subject to disclosure and social norms over a long period of time.  In addition, the compensation arrangements at hedge funds, VC funds, and PE funds have not changed much, if at all, in the last twenty-five or thirty years (see Sahlman (1990) and Metrick and Yasuda (2007)).  Furthermore, it is not clear how greater unionization would have suppressed the pay of those on Wall Street.  In other words, there is no evidence of a change in social norms on Wall Street.  What has changed is the amount of money managed and the concomitant amount of pay.

There is a great deal of analysis and information (though to me, not many surprises) in this important paper.  The authors also find no link between higher pay and the relation of a sector to international trade.

Will people on TV start making more sense?

by  Tyler Cowen in

Ezra Klein has a neat argument:

…the incentives are changing.  Assume that the incentive for going on television is to raise your profile (which is about 75 percent correct).  If I went on television five years ago, a large part of my incentive would be to make the host like me.  After all, these appearances pass in an instant, and most of you would never see the program.  So if I want to reach the maximum number of people with my arguments and do the most to increase my visibility, I want to keep coming back.

Now, however, with YouTube and GoogleVideo and online archiving, a single, contentious appearance can be seen on the internet a million times.  Everyone, after all, has seen Stewart berate Tucker Carlson on Crossfire, but very few of us had actually tuned in that day.  Similarly, my segment on the Kudlow show, replayed on the internet a few thousand times, did much more for my reputation among the audience relevant to my success than have my more friendly, but bland, appearances on other shows.

Making sense often requires you to be disruptive, and not long ago, being disruptive was probably a bad idea.  Now it’s a good one.  And since the channels are wising up and putting their videos online with advertising before them, they also want widespread online dissemination of appearances, and so their incentives are increasingly aligned with mine.  Does this mean more folks will be making sense?  Not necessarily.  But it means there might be more room for sense-making.

Or is Ezra just being deliberately disruptive to get links?  How will TV hosts respond to maintain equilibrium?  Invite fewer uncontrolled guests?  Invite fewer guests period?  Or will contestability force hosts to invite more disruptive guests?

Is it bad to become like your parents?

by  Tyler Cowen in

Ask your mother what she did to avoid turning into her mother!

Who, after all, has faced a more similar problem?  Of course do exactly what she says.

Alternatively, probably you are already like your mother.  Almost certainly you are very much like some time-slice version of your mother. 

How would the younger version of your mother have felt about how she turned out, if that younger version could look ahead in time and see her 2007 self?  Your words suggest "not so happy," when you write "the prospect of me ultimately turning into her also scares me to death. Frankly, I do not think she would like it either."

So deviate from her, and deviate from how she would have felt at your age.

In other words, embrace turning into your mother.

Seriously.

What’s wrong with Harry Potter (no spoilers)

by  Tyler Cowen in

Bad economics, says Megan McArdle.  Excerpt:

The low opportunity cost attached to magic spills over into the
thoroughly unbelievable wizard economy. Why are the Weasleys poor? Why
would any wizard be? Anything they need, except scarce magical objects,
can be obtained by ordering a house elf to do it, or casting a spell,
or, in a pinch, making objects like dinner, or a house, assemble
themselves. Yet the Weasleys are poor not just by wizard standards, but
by ours: they lack things like new clothes and textbooks that should be
easily obtainable with a few magic words. Why?

Addendum: Here is the nerdiest sentence Ezra Klein will ever write.

How to avoid Harry Potter spoilers

by  Tyler Cowen in

Highly capitalized and reputation-conscious mass media will give you warnings in advance.  Clicking on links — yes and that includes innocuous-looking links — is the most dangerous thing you can do.  Just don’t click on links or MP3 files for a while.

While we are on the topic of links, here is a great post on why doomsday analysis is wrong.  (There are no HP spoilers behind the link.  Seriously.  Really.  I mean it.  It’s statistics, Bayesian approaches vs. frequentism, and when the world will end.  It’s Andrew Gelman, who can’t even send a text message.  I can’t either.)  So please do save for your retirement.

Comments on this post are…um…open. 

The wisdom of Hal Varian

by  Tyler Cowen in

For decades, many of the brightest graduates in economics sought their fortune in finance.  In coming years, they will seek it in marketing, as the Internet gives all companies the information-rich environment once available only in financial markets.

There is much more here; Varian of course is now working full-time for Google.  Thanks to Chris F. Masse for the pointer.

MarginalRevolution book forum

by  Tyler Cowen in

OK people, we’re going to do an MR book forum on Greg Clark’s A Farewell to Alms: A Brief Economic History of the World.  Pre-order it, get it July 27.  (Guess whose book you can buy it with, for a two-fer discount?)  We’ll start the first chapter or so about a week after that and I’ll discuss the book sequentially.

The New York Times calls this book "the next blockbuster in economics"; here is my column on the book.  Here’s the book’s home page.  Arnold Kling has had some very good posts on the book as well.

And yes I will play the role of helpful critic.  Keep marginalism in mind.  Contrary to what many of you suggested, my view is not that all criticism is worthless.  I said "use Google" but that means you are indeed Googling to something by a critic and then reading it.  You are reading "critics" on Amazon as well.  It remains very likely, however, that the marginal act of criticism isn’t worth very much, relative to using Google.

But ah…which act of criticism is the marginal one?  Can we be infra-marginal?  Here’s hoping the world googles to our forthcoming symposium, and perhaps Greg will join in.

I may soon pick a work of fiction as well, though I am less sure that will work.  In the meantime, please don’t discuss Clark’s book in the comments, we’ll save that for the future.  And I would be curious to hear what kind of pace you could bear for the forum.

If the forum goes well, I’m thinking of doing Keynes’s General Theory, chapter by chapter (no, wise guy, that’s not the work of fiction!), but first I want to see if there is interest in the forum for an easier book of more general interest.

Addendum: Last I looked Greg’s book rose from about #10,000 on Amazon.com to #169 today, and was still rising, so I am glad some of you seem to be interested…

Netherlands fact of the day

by  Tyler Cowen in

Some 12,000 more people have registered as organ
donors in the Netherlands since a Dutch TV hoax that featured a
"competition" for a kidney.

The Big Donor Show was revealed to be a hoax as the fake donor was apparently about to reveal her choice of patient.

But Dutch media say the number of people registering as
organ donors has jumped since the hoax. The usual monthly figure is
just 3-4,000.

Will this greater interest in organ donation last?  Here is the link and story.

Economists who collect art

by  Tyler Cowen in

Here is the story, here is one bit at the end:

Now that the Bhagwatis have acquired a strong collection, they have decided to shift their focus away from expanding their art holdings.  The couple will be working more with charities and philanthropy.  Ms. Desai is also writing her 10th book, which is about America and the opportunities it offers to reinvent yourself. 

Thanks to David Quinn for the pointer.

History lesson

by  Tyler Cowen in

The Aztecs were soon dominating Central Mexico, and overawed others as they built and extended their empire.  While the capital city housed over 200,000, the valley and its surroundings held an addition million people.  Thousands of public buildings, canals, and causeways impressed everyone who came, including the Spanish. 

Here, or try Charles Mann’s 1491, one of my favorite books.  Try reading him on the selective breeding of corn, still one of mankind’s most impressive scientific feats.  Or:

The Maya, Inca, and Aztec empires [were] greatly advanced in the topics agriculture, writing, and engineering and astronomy.

You might think that some kind of dysgenic breeding has kicked in since, but a) there is zero evidence for that, and b) it is more plausible to cite a few negative supply shocks.  You know, like the pandemic that wiped out 90 percent of the Aztecs or more, their virtual enslavement by the Spanish, the move from trade-based cities to the isolated hacienda system, and the subsequent malnutrition and demoralization and cultural devastation, all of which amounted to perhaps the most extreme destruction of a civilization ever seen.

James Heckman, Nobel Laureate writes:

This paper develops a model of skill formation that explains a variety of findings established in the child development and child intervention literatures.  At its core is a technology that is stage-specific and that features self productivity, dynamic complementarity and skill multipliers.  Lessons are drawn for the design of new policies to alleviate the consequences of the accident of birth that is a major source of human inequality.

Try these papers too, plus previous MR posts on the Flynn Effect.  IQ is worth talking about, but compare Heckman’s models and data to much of the IQ literature — those models are not very well specified, nor given our current state of knowledge about either growth or IQ can they be — and you’ll see I do mean what I am saying. 

If you do wish to try a "genetic argument," there is much more evidence for the "predisposition to debilitating alcoholism" claim.  I’d estimate that half of the adult males of Oapan — the village I cite and direct descendants of the Aztec empire I might add — are debilitated alcoholics.

Please leave your comments on the already-active previous thread.

MR book club

by  Tyler Cowen in

I’ve thought of running a week-long or five-day MR symposium of a book of general interest to MR readers.  Each day I would "review" one part of the book, in sequence.  You could read along and of course comment, but the posts also would be fully intelligible to people who weren’t reading the book at all.

If we did this, which book would you like to have covered, not counting some of the books we discussed yesterday…?

What I haven’t been reading

by  Tyler Cowen in

1. Taxi: A Social History of the New York Cabdriver, by Graham Hodges, 44 out of 240 pp.

2. Kim MacQuarrie, The Last Days of the Incas, 169 out of 522 pp., it is actually quite good.

3. Kiwis Might Fly, by Polly Evans, 1 out of 310 pp.

4. Gold: The Once and Future Money, by Nathan Lewis, 13 out of 447 pp., some of you will love it.

5. Cosmonaut Keep, by Ken MacLeod, 77 out of 352 pp., sorry guys.