Category: Economics
Divorce and higher education
The social conservatives are turning out to be right about many things:
In this paper we evaluate the degree to which the adverse parental divorce effect on university education operates through deprivation of economic resources. Using one million siblings from Taiwan, we first find that parental divorce occurring at ages 13-18 led to a 10.6 percent decrease in the likelihood of university admission at age 18. We then use the same sample to estimate the effect of parental job loss occurring at the same ages, and use the job-loss effect as a benchmark to indicate the potential parental divorce effect due to family income loss. We find the job-loss effect very little. Combined, these results imply a minor role played by reduced income in driving the parental divorce effect on the child’s higher education outcome. Non-economic mechanisms, such as psychological and mental shocks, are more likely to dominate. Our further examinations show that boys and girls are equally susceptible, and younger teenagers are more vulnerable than the more mature ones, to parental divorce.
That is from a recent NBER Working Paper by Yen-Chien Chen, Elliott Fan, and Jin-Tan Liu.
Nonetheless, I suspect there is more to it than this. I can’t speak to the circumstances of Taiwan, but on average I think of women as suffering the most from non-divorce, not men. It is not sufficiently discussed how much the higher growth rates of earlier times might have been achieved at the expense of women, at least in the short run. It might in some ways boost economic growth to, through discrimination, allocate more very smart women to the teaching of grade school, and to keep them in unhappy marriages, “for the sake of the children.” And yet those outcomes are entirely unjust, and the contemporary world has decided it will not accept them.
More on street-by-street zoning
A number of commentators on my recent column have suggested that allowing street-by-street zoning would lead to more restrictionist outcomes than under the status quo. It might well be true that the improvement will be zero, but if new construction already is constrained at zero perhaps matters won’t get much worse. I see two reasons, however, for believing a number of streets would be willing to make bold or at least modest experiments in the direction of more development.
First, if you are considering more development for a larger area, say half of a county, you might worry that traffic problems will become much worse and thus the veto rights will prevail. In contrast, if a street of say thirty homes decides to add three homes more, they probably are less worried about the net traffic impact of that very small decision (unless running kids over in that very street is the main worry). Of course, if every street makes a matching decision, aggregate traffic still will go up a lot. But in essence, by breaking the problem down street by street, the traffic veto motives are weakened in prisoner’s dilemma-like fashion.
Of course you might think all that extra traffic and development is a bad thing, but that is a different and indeed opposite critique from fearing excess restrictionism.
Second, a lot of streets just aren’t up to making these decisions across a long series of legally complex variables. I can well imagine that generalized holding companies spring up to represent individual streets in their negotiations with the municipality/county/developer — whatever. Imagine negotiating companies funded by the developers, whether directly or indirectly, which in turn fund additional amenities for the street whenever new revenue is generated by a micro-local decision. Coase! “Well…if you will accept these five new homes, the developer will donate some money to park maintenance and a scholarship at the K-12 school.” It might not even amount to illegal bribery.
I don’t think street-by-street zoning is “the answer” to NIMBY, rather it is one idea worth experimenting with on a limited basis. If it works well, it can spread. If you start trying it in already NIMBY-dysfunctional areas, I just don’t see the downside.
Saturday assorted link
1. And yet so few people are celebrating: “Labor share being higher and corporate profit share being lower as a % of GDP than previously thought”.
You don’t need any other link for today, that explains so much of our intellectual and policy world.
Addendum: On the new Robert Barro gdp double-counting hypothesis, which lies behind all of this, here is a good MR comment:
The algebra is fine as it is, but I take strong issue with the idea that GDP “mismeasures” something. As any decent intro macro course will tells its students, “GDP is not a measure of welfare.” Indeed, the Kuznets quotes that Barro points to are exactly of this nature; we have this high profile GDP number, but it doesn’t do what you want it to do – or at least not ALL the things you want it to.
What Barro does here is construct a new measure – present discounted value of consumption – and shown how it relates to GDP (and GDP’s present discounted value). In addition, he provides a capital income / labor income decomposition for both measures (GDP having such an exact decomposition because of constant returns to scale, Euler’s identity for homogenous functions, and marginal-value input prices). He then says present discounted value of consumption, and its associated decompositions, are “right” while the other the construction GDP is “wrong” and thus gives “misstated” decompositions. Of course, “right/wrong” and “correct/incorrect” begs the question – right about WHAT? Correct for WHAT?
Barro says that in present discounted value terms GDP “double counts” investment. The “double counting” is only relative to how things are calculated for the present discounted value of consumption. This just reflects the fact that GDP counts production, while consumption only counts consumption. Market clearing, saving, and no storage imply that in every period consumption will be less than production. Specifically, looking at present values, future consumption in part reflects past savings i.e. past investments. GDP counts the production from the investment part (e.g. making the car) and the consumption part (e.g. driving the car), while consumption only counts the consumption part. If what you’re after is welfare – sure only count consumption. If what you’re after is production, well then you count production. Absolutely, GDP is higher than consumption. All Barro has done is given a more precise statement of how much bigger, in a PDV sense, GDP will be than consumption.
Noting that the “capital” share of GDP and the “capital” share of consumption are different is more word games. Indeed, assigning similar names to decompositions of different constructs is completely arbitrary. Barro doesn’t explain why the “capital share” of one thing is more important than the “capital share” of some other thing. In practice, we care about the “capital share” because it tells us something about the structure of the economy – i.e. with Cobb Douglas the capital share of GDP is used to calibrate the alpha parameter. Skimming the paper, its not immediately obvious what the structural parameter linked to the “capital share” of PDV consumption is, but I wouldn’t be surprised if its just alpha/2. Ok, the “capital share” of something different concept spits out a different number. For an RBC/neoclassical type, not thinking about the structural parameters is an obvious mistake…
More interesting than the LEVEL of any value is how these values change over time, and what this implies for the changing structure of the economy. Barro’s attempt to say the level of the capital share is “wrong” misses the point – we aren’t after the capital share per say, we’re after alpha. And since the two “capital shares” are proportional, a rising GDP capital share is the same as a rising PDV consumption capital share. The mystery continues, just with scaled down numbers…
But I think that means Barro is basically correct.
Street-by-street zoning
That is the theme of my latest Bloomberg column, think of it as a new way to push for YIMBY. Here is one excerpt:
I call this idea “street by street zoning,” and it has been outlined in a recent paper by John Myers, co-founder of London YIMBY. The basic idea is simple: Let each street decide on its own how it wants to zone commercial activity, including construction. Of course, in some contexts the deciding entity won’t be a street but rather a block or some other very small neighborhood area.
That might sound a little crazy, like a 1960s hippie commune dream. Yet the idea has hidden potential. If streets chose their own zoning, city-level zoning rules could be quite general and open-ended, opening up the possibilities for more construction and also for more mixed-use neighborhoods. With that liberalizing backdrop, residents on any given street always have the option of more restrictive zoning.
The upside is that street-by-street zoning would allow so much room for experimentation. Some zoning reforms might increase home values; a street might decide to allow for multiple dwellings on a lot (an in-law apartment in a backyard barn?), or make it easier to “upzone” by making it easier to rebuild. And what about allowing, say, a small Sichuan restaurant on each residential street — would that boost home values? Maybe not, but at least there’d be a way to find out.
And:
Some of these problems may be a feature rather than a bug. If outside developers find local communities easier to manipulate than a city-wide board, it may actually result in more new construction. If neighbors on some streets really are not sure what they want, maybe it’s not a bad thing if they are nudged toward approving more new construction.
Imagine dealing with the developers on Coasean terms. There is much more analysis at the link.
Robert Barro says we double-count investment
Here is the VoxEu piece, excerpt:
Gross or net product includes gross or net investment when it occurs, and includes the corresponding present value a second time when additional rental income results from the enhanced stock of capital. Thus, from the standpoint of the intertemporal budget constraint for consumption, aggregates such as GDP and national income overstate the resources available for consumption.
I quantify the double-counting problem within a standard model used by economists, the steady state of the neoclassical growth model (Barro 2019). With reasonable parameters, GDP overstates the potential for consumption by 28%, while national income exaggerates this potential by 9%. Thus, for example, in international comparisons, countries that invest and save larger fractions of their incomes artificially appear to be too rich when gauged by per capita GDP.
And:
Using typical parameter values, the capital income share based on GDP is around 40%. With the conventional adjustment to allow for depreciation, the computed capital income share for national income is reduced to 24%. With the additional adjustment to calculate permanent income, the share falls further, to 16%. Hence, the proper accounting treatment of investment makes a major difference in calculating the division of aggregate income between capital and labour.
I wish I knew this area of national accounting better than I do — opinions?
Here is the full NBER working paper. All via Ilya Novak.
Markets in everything, Russian science edition
Our team in Russia received a tip from the local research community to a new form of publication fraud. The tip led to a website, [redacted] set up by unscrupulous operators to serve as a virtual marketplace where authors can buy or sell authorship in academic manuscripts accepted for publication. This kind of peer-to-peer sharing, in “broad daylight” is not something we’ve seen before – so we conducted a quick analysis of the site, and its data, before taking swift action to alert our friends and colleagues in the scientific community.
There are no author names, or journal names indicated on the site – the journal name is available to buyers only. Sometimes as many as five authorships in a single article are offered for sale, with prices varying depending on place in the list of authors.
Here is the full story, via Brandon.
Tabarrok, Rationally Speaking
The excellent Julia Galef interviewed me for the podcast Rationally Speaking, primarily discussing Why are the Prices So D*Mn High. Rationally Speaking (link to archive) is one of my favorite podcasts so this was a real treat.
John Maynard Keynes, “National Self-Sufficiency,” 1933
That was then, this is now:
There may be some financial calculation which shows it to be advantageous that my savings should be invested in whatever quarter of the habitable globe shows the greatest marginal efficiency of capital or the highest rate of interest. But experience is accumulating that remoteness between ownership and operation is an evil in the relations among men, likely or certain in the long run to set up strains and enmities which will bring to nought the financial calculation.
I sympathize, therefore, with those who would minimize, rather than with those who would maximize, economic entanglement among nations. Ideas, knowledge, science, hospitality, travel–these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible, and, above all, let finance be primarily national. Yet, at the same time, those who seek to disembarrass a country of its entanglements should be very slow and wary. It should not be a matter of tearing up roots but of slowly training a plant to grow in a different direction.
For these strong reasons, therefore, I am inclined to the belief that, after the transition is accomplished, a greater measure of national self-sufficiency and economic isolation among countries than existed in 1914 may tend to serve the cause of peace, rather than otherwise. At any rate, the age of economic internationalism was not particularly successful in avoiding war; and if its friends retort, that the imperfection of its success never gave it a fair chance, it is reasonable to point out that a greater success is scarcely probable in the coming years.
And here is Keynes anticipating Dani Rodrik:
But I am not persuaded that the economic advantages of the international division of labor to-day are at all comparable with what they were. I must not be understood to carry my argument beyond a certain point. A considerable degree of international specialization is necessary in a rational world in all cases where it is dictated by wide differences of climate, natural resources, native aptitudes, level of culture and density of population. But over an increasingly wide range of industrial products, and perhaps of agricultural products also, I have become doubtful whether the economic loss of national self-sufficiency is great enough to outweigh the other advantages of gradually bringing the product and the consumer within the ambit of the same national, economic, and financial organization. Experience accumulates to prove that most modem processes of mass production can be performed in most countries and climates with almost equal efficiency. Moreover, with greater wealth, both primary and manufactured products play a smaller relative part in the national economy compared with houses, personal services, and local amenities, which are not equally available for international exchange; with the result that a moderate increase in the real cost of primary and manufactured products consequent on greater national self-sufficiency may cease to be of serious consequence when weighed in the balance against advantages of a different kind. National self-sufficiency, in short, though it costs something, may be becoming a luxury which we can afford, if we happen to want it.
Here is the full text, whether or not you agree this is interesting throughout, and the prose is lovely too.
Age-Weighted Voting?
The young will experience the effects of policies passed today for the greatest length of time but this is not reflected in their voting power. Put differently, the time-horizon of (self-interested) older voters is short so perhaps this biases the political system towards short time-horizon policies such as deficit spending or kicking the can down the road on global warming. Philosopher William MacAskill offers an alternative, age-weighted voting.
…one way of extending political time horizons and increasing is to age-weight votes. The idea is that younger people would get more heavily weighted votes than older people, very roughly in proportion with life expectancy. A natural first pass system (though I think it could be improved upon) would be:
- 18–27yr olds: 6x voting weight
- 28–37yr olds: 5x voting weight
- 38–47yr olds: 4x voting weight
- 48–57yr olds: 3x voting weight
- 58–67yr olds: 2x voting weight
- 68+yr olds: 1x voting weight
Note that, even with such heavy weights as these, the (effective) median voter age (in the US) would go from 55 to 40. (H/T Zach Groff for these numbers). Assuming that the median voter theorem approximately captures political dynamics of voting, weighting by (approximate) life-expectancy would therefore lengthen political horizons somewhat, but wouldn’t result in young people having all the power.
… In this scenario, all citizens get equal voting weight, it’s just that this voting power is unequally distributed throughout someone’s life.
MacAskill asks the right questions:
- Do younger people actually have more future-oriented views?
- Does extending political horizons by 20 years provide benefits from the perspective of much longer timescales?
- Are younger people less well-informed, and so apt to make worse decisions?
- Is this just a way of pushing particular (left-wing) political views?
- What would actually happen if this were put in place, and how good or bad would those effects be?
- What’s the best mechanism for implementing age-weighting voting?
- What would be the best plan for making age-weighting voting happen in the real world?
See the whole thing for some brief suggestions on answers.
I don’t have a major objection to the proposal, I just don’t think it would improve politics very much. Rational ignorance means that voters don’t know much and rational irrationality means that they don’t care to know more. The problem is collective decision making per se rather than the time-horizon of the non-existent median voter. Still the space of possible governance designs is far larger than the space that we have investigated, let alone used, so I applaud exploration in the design space.
My Macro Musings podcast with David Beckworth
It is here, mostly about big business. Note that David’s podcast usually covers macro, and it is probably the best macro podcast out there, you can access it here.
Every era’s monetary and financial institutions are unimaginable until they’re real
That is the column subtitle, the actual title is “The Lesson of Bretton Woods.” Note that yesterday was the 75th anniversary of the signing of the final agreement. Here is one excerpt:
The Bretton Woods arrangements also seemed highly unlikely until they were in place. They involved a complicated system of exchange rate pegs, capital controls and a “gold pool” (and other methods) to control gold prices and redemption ratios. What’s more, the whole thing was dependent on America’s role as global hegemon, both politically and economically. The dollar still was tied to gold, and the other major currencies tied to the dollar, but as the system evolved it required that no one was too keen to redeem dollars for gold (the French unwillingness to abide by this stricture was one proximate cause of the collapse of Bretton Woods).
I don’t think a monetary economist from, say, 1890 could have imagined that such an arrangement would prove possible, much less successful. Yet the Bretton Woods arrangements had a wonderful track record, as the 1950s and 1960s generated strong economic growth for both the U.S. and Western Europe.
At the same time, once Bretton Woods ended in the early 1970s, few people thought it was possible to turn back the clock. The system required the U.S. to be a creditor nation, to hold much of the world’s gold stock, and for countries such as France to defer to American wishes on gold convertibility. Once again, the line between an “imaginable” and “unimaginable” monetary arrangement proved to be a thin one.
As I point out in the piece, today’s arrangements of fiat currencies and (mostly) floating rates were unimaginable to most previous thinkers, including Keynes. Here is the column’s closing bit:
So as you consider the legacy of Bretton Woods this week, remember that core lesson: There will be major changes in monetary and institutional arrangements that no one can even imagine right now. Assume the permanency of the status quo at your peril.
Human Capitalists
That is the title of a new and important paper by Andrea L. Eisfeldt, Antonio Falato, and Mindy Z. Xiaolan. It seems that perhaps the share of labor in gdp has not fallen much after all:
The widespread and growing practice of equity-based compensation has transformed high-skilled labor from a pure labor input into a class of “human capitalists”. We show that high-skilled labor income in the form of equity claims to firms’ future dividends and capital gains has dramatically increased since the 1980s. Indeed, in recent years, equity-based compensation represents almost 45% of total compensation to high-skilled labor. Ignoring such income results in incorrect measurement of the returns to high-skilled labor, with important implications for macroeconomics. Including equity-based compensation to high-skilled labor cuts the total decline in the labor share since the 1980’s by over 60%, and completely reverses the decline in the high skilled labor share to an increase of almost 1%. Correctly measuring the return to high-skilled labor can thus resolve the puzzling lack of a skill premium in recent data, as well as the corresponding lack of evidence of complementarity between high-skilled labor and new-economy physical capital. Moreover, tackling the capital structure question of who owns firms’ profits is necessary to provide a link between changing factor shares and changing income and wealth shares. We use an estimated model to understand the rise of human capitalists in an economy with declining capital goods prices. Finally, we present corroborating cross section and time series evidence for complementarity between high-skilled labor and physical capital using our corrected measure of the total return to human capitalists.
Since smart people are bearing more and more risk, this may be another reason why income inequality is rising.
Via the excellent Kevin Lewis.
A carbon tax in a Hotelling model
It is rare that anyone wishes to broach this general topic, on either side of the debate. This is from a new working paper by Geoffrey Heal and Wolfam Schlenker:
We highlight important dynamic aspects of a global carbon tax, which will reallocate consumption through time: some of the initial reduction in consumption will be offset through higher consumption later on. Only reserves with high enough extraction cost will be priced out of the market. Using data from a large proprietary database of field-level oil data, we show that carbon prices even as high as 200 dollars per ton of CO2 will only reduce cumulative emissions from oil by 4% as the supply curve is very steep for high oil prices and few reserves drop out. The supply curve flattens out for lower price, and the effect of an increased carbon tax becomes larger. For example, a carbon price of 600 dollars would reduce cumulative emissions by 60%. On the flip side, a global cap and trade system that limits global extraction by a modest amount like 4% expropriates a large fraction of scarcity rents and would imply a high permit price of $200. The tax incidence varies over time: initially, about 75% of the carbon price will be passed on to consumers, but this share declines through time and even becomes negative as oil prices will drop in future years relative to a case of no carbon tax. The net present value of producer and consumer surplus decrease by roughly equal amounts, which are almost entirely offset by increased tax revenues.
Here is an earlier MR post on the same topic, and it gives more of the theoretical intuition.
Air Pollution Kills
In recent years I have substantially increased my estimate of the deadly nature of air pollution. It’s not that I had a contrary opinion earlier but the number and range of studies showing surprisingly large effects has raised this issue in relative importance in my mind. I would not have guessed, for example, that the introduction of EZ Pass could reduce pollution near toll booths enough to reduce the number of premature and low birth weight babies. I also find the following result hard to believe yet also hard to dismiss given the the accumulating body of evidence. Diane Alexander and Hannes Schwandt find that Volkswagen’s cheating diesel cars increased the number of low birth weight babies and asthma rates. Here are some details:
In 2008, a new generation of supposedly clean diesel passenger cars was introduced to the U.S. market.These new diesel cars were marketed to environmentally conscious consumers, with advertising emphasizing the power and mileage typical for diesel engines in combination with unprecedented low emissions levels. Clean diesel cars won the Green Car of the Year Award in 2009 and 2010 and quickly gained market share. By 2015, over 600,000 cars with clean diesel technology were sold in the United States. In the fall of 2015, however, it was discovered that these cars covertly activated equipment during emissions tests that reduced emissions below official thresholds, and then reversed course after testing. In street use, a single “clean diesel” car could pollute as much nitrogen oxide as 150 equivalent gasoline cars.Hereafter, we refer to cars with “clean diesel” technology as cheating diesel cars.
We exploit the dispersion of these cheating diesel cars across the United States as a natural experiment to measure the effect of car pollution on infant and child health. This natural experiment provides several unique features. First, it is typically difficult to infer causal effects from observed correlations of health and car pollution, as wealthier individuals tend to sort into less-polluted areas and drive newer, less-polluting cars. The fast roll-out of cheating diesel cars provides us with plausibly exogenous variation in car pollution exposure across the entire socio-economic spectrum of the United States. Second, it is well established that people avoid known pollution, which can mute estimated impacts of air pollution on health (Neidell, 2009). Moderate pollution increases stemming from cheating diesel cars, a source unknown to the population, are less likely to induce avoidance behaviors, allowing us to cleanly estimate the full impact of pollution. Third, air pollution comes from a multitude of sources, making it difficult to identify contributions from cars, and it is measured coarsely with pollution monitors stationed only in a minority of U.S. counties. This implies low statistical power and potential attenuation bias for correlational studies of pollution (Lleras-Muney, 2010). We use the universe of car registrations to track how cheating diesel cars spread across the country and link these data to detailed information on each birth conceived between 2007 and 2015. This setting provides rich and spatially detailed variation in car pollution.
We find that counties with increasing shares of cheating diesel cars experienced large increases both in air pollution and in the share of infants born with poor birth outcomes. We show that for each additional cheating diesel car per 1,000 cars—approximately equivalent to a 10 percent cheating-induced increase in car exhaust—there is a 2.0 percent increase in air quality indices for fine particulate matter (PM2:5) and a 1.9 percent increase in the rate of low birth weight. We find similar effects on larger particulates (PM10; 2.2 percent) and ozone (1.3 percent), as well as reductions in average birth weight (-6.2 grams) and gestation length (-0.016 weeks). Effects are observed across the entire socio-economic spectrum, and are particularly pronounced among advantaged groups, such as non-Hispanic white mothers with a college degree. Effects on pollution and health outcomes are approximately linear and not affected by baseline pollution levels. Overall, we estimate that the 607,781 cheating diesel cars sold from 2008 to 2015 led to an additional 38,611 infants born with low birth weight. Finally, we also find an 8.0 percent increase in asthma emergency department (ED) visits among young children for each additional cheating diesel car per 1,000 cars in a subsample of five states.
Another surprising result is that on a global scale air pollution reduces life expectancy more than smoking. In part, because a single individual can’t quit air pollution.
Globally, the AQLI reveals that particulate pollution reduces average life expectancy by 1.8 years, making it the greatest global threat to human health. By comparison, first-hand cigarette smoke leads to a reduction in global average life expectancy of about 1.6 years. Other risks to human health have even smaller effects: alcohol and drugs reduce life expectancy by 11 months; unsafe water and sanitation take off 7 months; and HIV/AIDS, 4 months. Conflict and terrorism take off 22 days. So, the impact of particulate pollution on life expectancy is comparable to that of smoking, twice that of alcohol and drug use, three times that of unsafe water, five times that of HIV/AIDS, and more than 25 times that of conflict and terrorism.
Suppose Big Business did hate your family, what would that look like?
That is from Sure.