Category: Books

*Winner-Take-All Politics*, the new book by Jacob Hacker and Paul Pierson

by  Tyler Cowen in

That's the new book by Jacob Hacker and Paul Pierson.  I have a different take on the main argument, but this is an important book for raising some of the key questions of our time.  I would recommend that people read it and give it serious thought.  The writing style is also clear and accessible.  Two of the key arguments are:

1. Skill-based technological change is overrated as a cause of growing income inequality among the top earners.

2. "The guilty party is American politics."

You'll find an article-length version of some of the Hacker-Pierson argument here, although the book covers much more.

I agree with #1, so let me explain why my take on #2 differs:

1. Median income starts stagnating in 1973 and income inequality starts exploding in 1984, according to the authors.  However, I consider this a "long" time gap for the question under consideration, namely whether there is a direct causal relation and whether people at the top are using politics to skim from people further below in the income distribution.  Furthermore income growth stagnates around 1973 for many countries, not just the United States, and most of those countries never experienced the subsequent "inequality boom" of the Anglosphere.  If they avoided the later inequality, why didn't they also avoid the stagnation?  The discussion of the causal issues here isn't convincing and the authors' hypothesis is not compared to alternatives or tested against possible disconfirming evidence.  

2. There is a lot of talk of unions, but I could concede various points and that's still just a ten to fifteen percent one-time wage premium, when workers are unionized.  It won't much explain persistent changes in growth rates over time, whether for the top one percent or the slow income growth at the median.  Furthermore the main U.S. sectors are harder to usefully unionize than, say, Canada's mineral and resource wealth or Europe's manufacturing.

3. The authors underestimate the role of finance in driving the growth in income inequality.  Their p.46 shows a graph suggesting that non-financial professionals are 40.8% of the top 0.1 percent.  Maybe so, but the key question is what percentage of income those professionals account for.  The Kaplan and Rauh paper, not cited in this book, suggests a central role for finance.  In 2007 the top 5 hedge fund earners pulled in more income than all the CEOs of the S&P 500 put together.  On top of that, some "non-financial" incomes are driven by financial market trading, such as in energy or commodity companies.  And a lot of top-earning lawyers are doing financial deals, etc.

Turn to Table 7 of the paper cited by the authors, p.56 here.  The "non-financial" category still looks bigger but it's incomes in the finance category which grow most rapidly and Bakija and Heim suggest that stock options and asset price movements account for a big share of the growth in "non-financial" incomes.  My view is that the increasing liquidity of financial markets drove much of the trend, which was distributed across both the "non-financial" and the "financial" sector.  If liquid financial markets allow a privately-owned warehouse company to buy a trucking company on the cheap, and profit greatly (plus the managers pull in a lot), I am calling that a financial markets development, even though it's in the "non-financial" sector.

4. Let's say the story at the top is mostly one of finance.  You could describe that as: "some change in financial markets led to rapid income growth for the top earners and politics did nothing about that."  Fair enough.  But it's still a big leap from that claim to portraying politics as the active force behind the change.  Politics was only the allowing force and I don't think there was much of a conspiracy, even if various wealthy figures did push for deregulation or more importantly an absence of new regulation.  I also don't think anybody was expecting incomes at the top to rise at the rates they did; it was a kind of pleasant surprise for the top earners to be so lucratively rewarded.  So the major change is left unexplained, for the most part, and the whole story is then shifted onto the passive actor, namely the public sector, which is elevated to a major causal role which it does not deserve.

5. pp.47-51 the authors talk about tax rates.  If we had kept earlier high marginal rates, the top earners would not have received nearly so much and also they would not have worked so hard.  Maybe so, yet this won't much explain the stagnating pre-tax incomes at the median and it doesn't fit very well into the overall story, unless you wish to make a complicated "lower tax revenue, lower quality public services, MP of the median earner goes down" sort of story. 

6. If the top earners are screwing over their wage earners in the big companies, by pulling in excess wages, options, and perks, we should observe non-stagnant median pay for people who avoid working in firms with fat cat CEOs.  Or we should observe talented lower-tier workers fleeing the big corporations, to keep their wages up.  Yet no evidence for these predictions is given, nor are the predictions considered.  It is likely that the predictions are false.

7. To the extent the high incomes at the top come through capital markets, it is either value created or a transfer/redistribution.  You can argue over the percentages, but to the extent it is the former it is not at the expense of the median.  To the extent it is the latter, the losers will be other investors, not the median earner or household, who does not hold much in the way of stock (lower pension fund returns don't count in the measure of median stagnation).

8. What follows p.72 is an engaging, readable progressive history of recent American politics, but the economic foundations of the underlying story have not been pinned down.

9. In my view, most likely we have two largely separate phenomena: a) median wage growth slows in 1973 because technology stagnates in some regards, and b) liquid financial markets, in various detailed ways, allow people with resources to earn a lot more than before.  Politics may well play a role in each development, but with respect to b) its role has been largely passively, rather than architectural and driving.

Anyway, I found it a very useful book for organizing my thoughts on these topics.

Addendum: Matt Yglesias comments.

*Doing More With Less*

by  Tyler Cowen in

That's a new book out, edited by Joshua C. Hall, and it is a collection of essays with the subtitle Making Colleges Work Better.  My essay in the volume, co-authored with Sam Papenfuss, is a look at for-profit higher education.  It's not about the recent lending scandals, but rather the general question of why for-profits do quite well in vocational areas and in areas where the student is eventually certified by relatively objective tests.  Non-profits, in contrast, remain dominant in the liberal arts and in areas where quality is harder to measure.  What can we learn from this pattern of market segmentation about a) the true nature of education, and b) trust and agency problems in both non-profits and for-profits?  These cross-sectional questions have received surprisingly little attention and for-profit education in general has not attracted much research scrutiny, relative to its size and rate of growth.  Yet these questions date back to Plato, Socrates, and the Sophists.  Overall I believe that the not-for-profit model for higher education is robust.

Here is an interesting article on the recent growth in elite for-profit schools at the high school level and below.

Negative review of Franzen’s *Freedom*

by  Tyler Cowen in

It is a very good review, as the book has vanished for me.  Here is one excerpt:

…although the narrator of Freedom tells us on the first page, “There had always been something not quite right about the Berglunds,” one need read only that the local school “sucked” and that Patty was “very into” her teenage son, who in turn was “fucking” the girl next door, to know that whatever is wrong with these people does not matter. The language a writer uses to create a world is that world, and Franzen’s strenuously contemporary and therefore juvenile language is a world in which nothing important can happen. Madame Bovary’s marriage sucked, Heathcliff was into Catherine: these words fail the context not just because they are of our own time. There is no import in things that “suck,” no drama in someone’s being “into” someone else. As for the F word, Anthony Burgess once criticized the notion that to use it in matter-of-fact prose is to hark back to “a golden age of Anglo-Saxon candour”; the word was taboo from the start, because it stands for brutal or at best impersonal sex. “A man can fuck a whore but, unless his wife is a whore, he cannot fuck his wife … There is no love in it.” A writer like Franzen, who describes two lovers as “fucking,” trivializes their relationship accordingly. The result is boredom.

Here are three very good sentences:

Too much of it takes place in high school, college, or suburbia; how odd that a kind of fiction allegedly made necessary by America’s unique vitality always returns to the places that change the least. Franzen clearly has little interest in the world of work. (The same applies, incidentally, to whoever edited the novel.)

And this:

Perhaps he can learn a lesson from Freedom: write a long book about mediocrities, and in their language to boot, and they will drag you down to their level.

I thank The Browser for the pointer.

Addendum: Andrew Gelman comments.

*The Uses of Pessimism*

by  Tyler Cowen in

That is the new Roger Scruton book, which I finished with pleasure.  Here is one good passage:

Optimism…is the other side of a kind of existential despair, a longing to retreat from the complexities of the great society to the primordial simplicity of the undifferentiated tribe.  It expresses a kind of distrust of humanity, an inability to allow that we can actually move on from our original nature, and create a flexible, reasonable and charitable "we," which is not a collective "I" at all, but the by-product of individual freedom.  But this distrust is unfounded.  The world is, in fact, a much better place than the optimists allow: and that is why pessimism is needed.

On Austro-European business cycle theory

by  Tyler Cowen in

On the origins of the crisis, Raghuram Rajan writes:

It is true that the European Central Bank was less aggressive, but only slightly so; It brought its key refinancing rate down to only 2 percent while the Fed brought the Fed Funds rate down to 1 percent. Clearly, both rates were low by historical standards. More important, what Krugman does not point out is that different Euro area economies had differing inflation rates, so the real monetary policy rate was substantially different across the Euro area despite a common nominal policy rate. Countries that had strongly negative real policy rates – Ireland and Spain are primary exhibits – had a housing boom and bust, while countries like Germany with low inflation, and therefore higher real policy rates, did not. Indeed, a working paper by two ECB economists, Angela Maddaloni and José-Luis Peydró, indicates that the ultra-low rates by both the ECB and the Fed at this time had a strong causal effect in relaxing banks’ commercial, mortgage, and retail lending standards over this period.

That is taken from Rajan's response to the recent Krugman-Wells review of his book.  I am especially interested in this passage because I once made a version of Krugman's argument myself.

If you read the whole review, and response, you will see that this has become what is known as a "contested exchange."  Hat tip goes to Clive Crook.

Gorillas and Girls

by  Alex Tabarrok in

Ireland's science minister has pulled out of the launch of a book branding evolution a hoax after the event became mired in controversy.

Yes, that's right Ireland's science minister questions evolution. But, he says Mr May the author of the book he was to promote, "Just because you are anti-evolution doesn’t mean you are anti-science."  I suppose this is true if one doesn't count as science biology, molecular biology, botany, paleontology, zoology and a host of other fields that rely on evolution as a key concept.

So the controversy is obvious, right? Not quite. What would a controversy about science be without sex?  It turns out that the author of the book, non-ironically titled "The Origin of Specious Nonsense," is,

Mr May, a self-proclaimed marriage counsellor, writer, poet and philosopher, [who] has presented on various radio stations and once owned a public relations company.

But the ex-Christian evangelist teacher was also the one-time editor of Ireland’s first magazine devoted to sex.

All of this makes the name of the launch party that science minister Conor Lenihan was to attend even more interesting, 'Gorillas and Girls'. Hard to make this kind of thing up.

Hat tip to Dan Cole at Law, Economics, and Cycling.

*The Globalization Paradox*

by  Tyler Cowen in

The author is Dani Rodrik and the subtitle is Democracy and the Future of the World Economy and it is due out early next year.

It is a very good introduction to the Rodrik world view.  If you already know the Rodrik worldview, I am not sure it offers anything new.  Still, it is worth reading through the Rodrik worldview more than once.  I prefer the Rodrik "every country is different" tack to the "globalization, nation-state, democracy — choose two" emphasis (and here), and this book slants in that direction, though it has both. 

When it comes to the "choose two" approach, I wonder at what margin must we choose — doesn't Sweden have all three today?  Doesn't politics involve a lot of juggling balls in the air anyway?  A country with a high rate of productivity growth can manage all sorts of tensions and a country without such growth cannot; I would sooner start the analysis with that distinction.

*Pictures of the Socialistic Future*

by  Tyler Cowen in

In his preface, Bryan Caplan writes:

Yet almost no one questioned the socialists' idealism.  By 1961, however, the descendents of the radical wing of the Social Democratic Party had built the Berlin Wall — and were shooting anyone who tried to flee their "Workers' Paradise."…Who could have foreseen such a mythic transformation?

Eugene Richter, that's who, in 1893.  There is now a reissue of Richter's Pictures of the Socialistic Future.  There is an interview with Bryan Caplan about the book here.  Here is the book on-line and free.

*Sakhalin Island*

by  Tyler Cowen in

That is a book by Anton Chekhov, part memoir, part ethnographic study of a penal colony and the surrounding economic institutions on Sakhalin Island.  I hardly ever hear of this work, but it is both a literary and social science masterpiece; I will teach it next spring in my Law and Literature class.  Here is one review of the book.  This excerpt reminded me of some recent events:

On the fifth line I marked their age.  The women who were already over forty remembered theirs only with difficulty, and had to think for a bit before answering.  Armenians from the Yerevan Region had no idea of their age at all.  One of them answered me: "Might be thirty, but it could be fifty by now."  In cases such as these, the age had to be determined approximately from their appearance and then verified from the relevant prison documents.  Youths of fifteen and slightly older would usually reduce their ages.  Some women would already by married, or have been engaged for ages in prostitution, yet still said they were thirteen or fourteen.  The point about this is that children and juveniles in the poorest families receive a food ration from the state; which is issued only up to the age of fifteen, and here a simple calculation induces young people and their parents to tell lies.

These days, lying about age, and continued existence, seems to a standard practice in Japan.  Here is more on Japan's "missing elderly".  Apparently 884 people are listed as over 150 years of age; it is believed that many of these pensions still are being collected.

What I’ve been reading

by  Tyler Cowen in

1. The Hunger Games, by Suzanne Collins.  It's derivative in its set-up, but still it has a splendid plot.  If you're looking to explore the new trend of adults reading works for "young adults," this is a good place to start.  The bottom line: I've just ordered volumes two and three, not just volume two.

2. W.G. Sebald, On the Natural History of Destruction.  Pitch perfect throughout, you can add Sebald to the list of authors with first-rate contributions to both fiction and non-fiction.

3. John W. Dower, Cultures of War: Pearl Harbor/Hiroshima/9-11.  Combines public choice and behavioral economics approaches to foreign policy, all through the lens of the events mentioned in the subtitle.  Consistently interesting, and it shows how the intelligence failures leading up to the second Iraq War had many precedents.  Dower is the same guy who wrote the excellent books on the Pacific War and Japanese postwar recovery; I recommend his work more generally.

4. Tom Segev, Simon Wiesenthal: The Life and Legends.  Many books on the Holocaust tread on well-tilled ground, but this was original and compelling throughout.  Here is a useful review, although I think it considerably exaggerates how critical the book is of Wiesenthal.  I also very much like Segev's The Seventh Million.

5. Michael Whinston, Lectures on Antitrust Economics.  A very good introduction to current thinking on antitrust policy, through the lens of theory and empirics.