Category: Economics

Tabarrok on Bail

I spoke recently at Brookings on the movement to eliminate cash bail. I think we hold too many people pre-trial and the use of judicial aids such as algorithms could safely increase the number of people released prior to trial as well as reduce the variance and disparity of treatment. Nevertheless, I think eliminating cash bail is a poorly thought out idea that may very well backfire. The proponents of eliminating cash bail also present a misleading picture of who is held on bail, the focus of my remarks at Brookings.

I was the only one at the event to oppose eliminating cash bail and I think the audience was a bit shell-shocked. Certainly, not everyone on the panel agreed with my comments. The American Bail Coalition posted the clip from CSPAN but otherwise had nothing to do with my remarks which begin around 35 seconds in.

The best sentence I read today

Mark [Lutter] has a PhD in Economics from George Mason, but don’t let that fool you into thinking he’s conventional.

Here is the full bit:

Mark Lutter (29) and Tamara Winter (23), United States
Mark and Tamara are building charter cities — a concept where cities are governed by their own charter rather than general law. Imagine a world with dozens of new cities, each with their own distinct style, governance and populace. Mark and Tamara are working to make that vibrant future a reality.

Noteworthy: Mark has a PhD in Economics from George Mason, but don’t let that fool you into thinking he’s conventional. He’s a disagreeable, life-long adventurer. He decided to do his own thing after questioning the profit share in his previous company. He moved to Honduras while it was the murder capital of the world. Now he’s stumbling through Africa looking for city settlers.

They are part of the third cohort of Pioneer winners, congrats to Justin Zheng too and all the others, read through the list for some fascinating ideas and projects to come.  Tamara is a Mercatus alum, follow her here on Twitter, here is Mark.  Here is their institutional website.  Here is various information about Pioneer — apply!

Why is there so much suspicion of big business?

Perhaps in part because we cannot do without business, so many people hate or resent business, and they love to criticize it, mock it, and lower its status. Business just bugs them. After I explained the premise of this book to one of my colleagues, Bryan Caplan, he shrieked to me: “But, but . . . how can people be ungrateful toward corporations? Corporations give us everything! Corporations do everything for us!” Of course, he was joking, as he understood full well that people are often pretty critical of corporations. And they are critical precisely because corporations do so much for us. And do so much to us.

Does my colleague’s outburst remind you of anything? Well, immediately he followed up with this: “Hating corporations is like hating your parents.”

And:

There is another reason it doesn’t quite work to think of businesses as our friends. Friendship is based in part on an intrinsic loyalty that transcends the benefit received in any particular time and place. Many friendships also rely on an ongoing exchange of reciprocal benefits, yet without direct consideration each and every time of exactly how much reciprocity is needed. In addition to the self-interested joys of friendly togetherness, friendship is about commonality of vision, a wish to see your own values reflected in another, a sense of potential shared sacrifice, and a (partial) willingness to put the interest of the other person ahead of your own, without always doing a calculation about what you will get back.

A corporation just doesn’t fit this mold in the same way. A business may wish to appear to be an embodiment of friendly reciprocity, but it is more like an amoral embodiment of principles that usually but not always work out for the common good. The senior management of the corporation has a legally binding responsibility to maximize shareholder profits, at least subject to the constraints of the law and perhaps other constraints embodied in the company’s charter or by-laws. The exact nature of this fiduciary responsibility will vary, but it never says the company ought to be the consumer’s friend, at least not above and beyond when such friendship may prove instrumentally valuable to the ends of the company, including profit.

In this setting, companies will almost always disappoint us if we judge them by the standards of friendship, as the companies themselves are trying to trick us into doing. Companies can never quite meet the standards of friendship. They’re not even close acquaintances. At best they are a bit like wolves in sheep’s clothing, but these wolves bring your food rather than eat you.

Those are both excerpts from my final chapter “If business is so good, why is it so disliked?”, from my book Big Business: A Love Letter to an American Anti-Hero.

The economic ecology of Jews as a rural service minority

The five million Jews who lived in the Pale of Settlement at the turn of the century were overwhelmingly over-represented in towns and in cities. They specialized in seemingly urban occupations, were relatively literate, and were almost absent in agriculture. This pattern persisted overseas where one third of them would eventually immigrate. Hence, Jews were typically characterized as an urban minority. I argue that the opposite was true. The economic ecology of the Jews, the patterns of choices of occupation and location, are described in a model in which Jews were countryside workers with a comparative advantage in rural commerce, complementing agricultural workers, and without comparative advantage in denser urban settings. Using data from the 1897 census, I show that the cross-sectional patterns across districts and localities were consistent with all the predictions of this model. When the share of Jews in the population grew, Jews spilled across two margins—occupational, as manufacturing workers, and geographic, as rural frontier men. Non-Jews were imperfect substitute for Jews, rendering the latter indispensable to the countryside economy. No evidence of urban advantage is evident in the data. Turn of the century Pale of Settlement Jews ought to be understood as rural workers, in and of the countryside. In this light, the patterns exhibited in the US after immigration appear as a sharp break from, rather than a continuation of, old country economic tradition.

That is the abstract of a new paper by Yannay Spitzer.  For the pointer I thank Ilya Novak.

The Hayek auction results are very impressive

You will find them here, for instance Hayek’s copy of Wealth of Nations went for almost 200k, it was estimated in the 4k to 6k range.

“Desktop ephemera and personal effects” were estimated at 200-300 British pounds, went for 87,500 British pounds.  Crazy!  Many of the items went for 10x or 20x their original estimates.

Perhaps Hayek is back in fashion again, if only with the wealthy.

For the pointer I thank Lotta Moberg.

Addendum: Here is BC from the comments section:

So, the central planners couldn’t accurately estimate the values of Hayek’s personal effects because the necessary information was distributed among all the auction participants?

The case for real estate as investment

That is the topic of my latest Bloomberg column, here is one bit:

The authors of the aforementioned study — Òscar Jordà, Moritz Schularick and Alan M. Taylor — have constructed a new database for the U.S. and 15 other advanced economies, ranging from 1870 through the present. Their striking finding is that housing returns are about equal to equity returns, and furthermore housing as an investment is significantly less risky than equities.

In their full sample, equities average a 6.7 percent return per annum, and housing 6.9 percent. For the U.S. alone, equities return 8.5 percent and housing 6.1 percent, the latter figure being lower but still quite respectable. The standard deviation of housing returns, one measure of risk, is less than half of that for equities, whether for the cross-country data or for the U.S. alone. Another measure of risk, the covariance of housing returns with private consumption levels, also shows real estate to be a safer investment than equities, again on average.

One obvious implication is that many people should consider investing more in housing. The authors show that the transaction costs of dealing in real estate probably do not erase the gains to be made from investing in real estate, at least for the typical homebuyer.

Furthermore, due to globalization, returns on equities are increasingly correlated across countries, which makes diversification harder to achieve. That is less true with real estate markets, which depend more on local conditions.

Do read the whole piece.

Work as a safe haven (*Big Business*)

Another surprising feature of these results is that the “work as a safe haven” effect was stronger for poorer people. We don’t know if that is true more generally across larger samples of people, but it points to a potentially neglected and egalitarian feature of life in the workplace. In contemporary American society, poorer individuals are more likely to have problems with divorce, spousal abuse, drug addiction in the family, children dropping out of school, and a variety of other fairly common social problems. These problems plague rich and poor alike, but they are more frequent in poorer families and, furthermore, very often wreak greater devastation on poorer families, which have fewer resources to cope with them. The workplace, however, is a partial equalizer here. At least in this sample, the poorer individuals found relatively greater solace in the workplace than did the richer individuals. The poorer individuals, of course, were paid less at work. But in terms of psychological stresses, a lot of corporations are creating “safe spaces” for individuals who otherwise are facing some pretty seriously bad situations.

That is from my forthcoming book Big Business: A Love Letter to an American Anti-Hero, due out April 9.

The 2019 Public Choice Outreach Conference

It’s time to get your applications in for the 2019 Public Choice Outreach conference, a crash course in public choice for students from all fields and walks of life! Professors, please encourage your students to apply!

When is the Public Choice Outreach Conference?
The 2019 Outreach Conference will be held June 14-16th at the Hyatt Centric Arlington in Rosslyn, VA.

What is the Public Choice Outreach Conference?
The Public Choice Outreach Conference is a compact lecture series designed as a “crash course” in Public Choice for students planning careers in academia, journalism, law, or public policy. Graduate students and advanced undergraduates are eligible to apply. Many past participants of the Outreach seminar have gone on to notable careers in academia, law and business.

What will I learn?
Students are introduced to the history and basic tools of public choice analysis, such as models of voting and elections, and models of government and legislative organization. Students also learn to apply public choice theory to a wide range of relevant issues. Finally, students will be introduced to “constitutional economics” and the economics of rule making.

This is a chance to hear talks from Robin Hanson, Alex Tabarrok, Shruti Rajagopolan, Tyler Cowen and more.

Who can apply?
Graduate students and advanced undergraduates are eligible to apply. Students majoring in economics, history, international studies, law, philosophy political science, psychology, public administration, religious studies, and sociology have attended past conferences. Advanced degree students with a demonstrated interest in political economy or demonstrated interest in political economy are invited to apply. Applicants unfamiliar with Public Choice and students from outside of George Mason University are especially encouraged.

What are the fees involved?
Outreach has no conference fee – it is free to attend. Room and meals are included for all participants. However, ALL travel costs are the responsibility of the participants.

Click here for the 2019 Outreach Application

FDA Tiered Approval

have an interesting op-ed on a tiered approval regime for the FDA:

Instituting a codified approval paradigm based on four tiered levels of clinical effectiveness (biomarkers, clinical signs and symptoms, disease modification and clinical outcomes) — with evidence regarding clinical utility progressively increasing — would greatly reduce the regulatory uncertainty and subjectivity, as well as the time to approval of innovative medicines.

Moreover, the four tiers, coupled with a commitment to apply state-of-the-art technologies (Apple Watch, telemetry and other health monitoring systems) to obtain clinical evidence would allow for additional learnings from use of drugs by practicing doctors treating real world patients. This knowledge would unearth additional uses, information that can be added to the product label to allow safer and more effective use of drugs and the identification of drug combinations that lead to even greater health benefits.

See also Bartley Madden’s work on Free to Choose Medicine which would similarly create dual tracks, one the standard FDA process and a second observational track that would bring drugs to market more quickly with the tradeoff being fewer clinical trials. As clinical trials rise in expense and more treatments are targeted towards smaller patients groups (i.e. personalized medicine) and as statistical techniques improve, we will need and can benefit from reforms to the FDA process along these lines.

Has the Labor Share Declined? Maybe, maybe not.

In a 2017 post Asher Schechter correctly noted:

Of the various ills that currently plague the American economy, one that has economists particularly worried is the decline in the labor share—that is, the part of national income that’s allocated to wages.

Lots of theories have been proposed to explain the decline in labor share including automation, globalization and increased markups. In a big if true paper, Koh, Santaeulalia-Llopis and Zheng argue that all of these theories are wrong because there has been no decline in labor share once we take into account that the BEA changed how intellectual property was treated in the national accounts.

The lack of attention to measurement can severely misguide economic theory. We demonstrated that the change in the accounting treatment of IPP—from expensed to capitalized—gradually implemented by the BEA since 1999 is the sole driver of the decline of the accounting LS. Furthermore, our examination of the accounting assumptions behind the capitalization of IPP—mainly that all IPP investment rents are attributed to capital—indicates that less arbitrary and extreme assumptions on the factor distribution of IPP rents yield a trendless accounting LS. In other words, the LS decline is an artifact of the change in the accounting treatment of IPP in national accounts, and this is at odds with current macroeconomic theory that considers the accounting decline as an economic phenomenon at face value.

Labor share appears to have declined globally. Have most countries changed their accounting practices? Quite possibly, but more investigation is needed. Many of the theories are also quite plausible which perhaps explains the reluctance of theorists to give up on the “fact”. The Koh et al. paper has been circulating for a few years but most seem to brush it off. Autor, Dorn, Katz, Patterson and Van Reenen, for example, say:

Although there is controversy over the degree to which the fall in the labor share of GDP is due to measurement issues such as the treatment of capital depreciation (Bridgman, 2014), housing (Rognlie, 2015), self-employment and proprietor’s income (Elsby, Hobjin, and Sahin, 2013; Gollin, 2002) and intangible capital (Koh, Santaeulalia-Lopis and Zheng, 2016), there is a general consensus that the fall is real and significant.

Wait and see is probably rational at this stage. If the paper makes it through peer-review at the JPE, it will be more difficult to ignore.

It is arresting how many facts are in fact open to question. Maybe.

Hat tip: David Andalfatto somewhere on twitter.

Women’s employment has shaped the course of recent business cycles

This paper studies the impact of changing trends in female labor supply on productivity, TFP growth and aggregate business cycles. We find that the growth in women’s labor supply and relative productivity added substantially to TFP growth from the early 1980s, even if it depressed average labor productivity growth, contributing to the 1970s productivity slowdown. We also show that the lower cyclicality of female hours and their growing share can account for a large fraction of the reduced cyclicality of aggregate hours during the great moderation, as well as the decline in the correlation between average labor productivity and hours. Finally, we show that the discontinued growth in female labor supply starting in the 1990s played a substantial role in the jobless recoveries following the 1990-1991, 2001 and 2007-2009 recessions. Moreover, it depressed aggregate hours, output growth and male wages during the late 1990s and mid 2000s expansions. These results suggest that continued growth in female employment since the early 1990s would have significantly improved economic performance in the United States.

That is the abstract of a new NBER working paper by Stefania Albanesi.

The great retrogression average is over

White, non-college-educated Americans born in the 1960s face shorter life expectancies, higher medical expenses, and lower wages per unit of human capital compared with those born in the 1940s, and men’s wages declined more than women’s. After documenting these changes, we use a life-cycle model of couples and singles to evaluate their effects. The drop in wages depressed the labor supply of men and increased that of women, especially in married couples. Their shorter life expectancy reduced their retirement savings but the increase in out-of-pocket medical expenses increased them by more. Welfare losses, measured a one-time asset compensation are 12.5%, 8%, and 7.2% of the present discounted value of earnings for single men, couples, and single women, respectively. Lower wages explain 47-58% of these losses, shorter life expectancies 25-34%, and higher medical expenses account for the rest.

That is from a new NBER working paper by Margherita Borella, Mariacristina De Nardi, and Fang Yang.

Women in the economics profession

Nearly 100 female economists say a peer or a colleague has sexually assaulted them. Nearly 200 say they were the victim of an attempted assault. And hundreds say they were stalked or touched inappropriately, according to a far-reaching survey of the field.

The results, compiled by the American Economic Association, also reveal deep evidence of gender and racial discrimination within the field. Half of the women who responded to the survey said they had been treated unfairly because of their sex, compared with 3 percent of men. Nearly half of women said they had avoided speaking at a conference or a seminar to guard against possible harassment or “disrespectful treatment.” Seven in 10 women said they felt their colleagues’ work was taken more seriously than their own.

Here is more from Ben Casselman and Jim Tankersley at NYT.

Alan Krueger, RIP

You probably all know by now that Alan Krueger has passed away, nonetheless it seems appropriate to offer tribute and condolences.  Alan and I were together in the same year at Harvard in the economics Ph.D program, and although he was on track to win a Nobel Prize and I have read most of his papers and books, I always associate him more with those years in the mid-1980s.  I am very saddened by the news.