Category: Economics
Workplace sentences to ponder
It really is time to hurry up and give Bill Baumol that Nobel Prize:
…In the past sixteen years, 94 per cent of the net jobs created were in education, healthcare, social assistance, bars, restaurants, and retail, even though those sectors only employed 36 per cent of America’s workforce at the start of the millennium…
Average hourly pay in these sectors, weighted by their relative sizes, has consistently been about 30 per cent lower than in the rest of the economy…
And since typical jobs in bars, restaurants, and retail involve far fewer hours than normal, weekly pay packets for workers in these growing industries were more than 40 per cent lower than workers in the rest of the economy. Average weekly earnings are now 3 per cent lower than they would have been if the distribution of employment had stayed the same as in January, 2000…
That is from Matthew C. Klein, who is riffing on Ryan Avent, don’t forget Ryan’s new book.
A new (old) argument against a guaranteed basic income
Later this year, roughly 6,000 people in Kenya will receive regular monthly payments of about a dollar a day, no strings attached, as part of a policy experiment commonly known as basic income.
…In a recent GiveDirectly blog post, the charity’s Kenya-based official, Will Le, explains that refusal rates in East Africa have typically held steady between 4% and 6% in past cash transfer trials. They’ve been especially low in countries like Uganda and Rwanda. In one Kenyan region known as Homa Bay, however, the rates have risen as high as 40%.
…GiveDirectly’s investigations have shown that people who refuse the cash are skeptical. They find it “hard to believe that a new organization like GiveDirectly would give roughly a year’s salary in cash, unconditionally,” Le writes. “As a result, many people have created their own narratives to explain the cash, including rumors that the money is associated with cults or devil worship.”
Here is the full story, the pointer is from the excellent Samir Varma. And here is the GiveDirectly response.
Samir also refers us to this study of why not all states have legalized medical marijuana, here is one result: “If all 50 states had legalized medical marijuana by 2014, according to their estimates, that could translate to savings of $1.5 billion per year in Medicaid spending.”
What is the social value of Uber?
That is my latest column for Bloomberg, here is the method:
Uber calculates figures for surge pricing at times of high demand, but it rounds off. So a computation of market conditions that might lead to a surge price that is 1.249 times higher than normal fares is rounded down to 1.2, but 1.251 would be rounded up to 1.3. Yet the initial, unrounded 1.249 and 1.251 estimates represent almost the same underlying market tightness.
Using data from Uber, the authors therefore could see how the demand for Uber varied with surge prices that vary (say from 20 percent to 30 percent above normal fares) even when market conditions are roughly constant.
Here is the source:
A new paper by Peter Cohen, Robert Hahn, Jonathan Hall, Steven Levitt…and Robert Metcalfe…
They conclude UberX produces about $6.8 billion in consumer surplus a year. My caveat:
If anything, this method underestimates the worth of Uber, as it doesn’t capture what economists call “option value.” Let’s say you walk home with a guy or gal late at night, hoping something nice will happen. But you’re not quite sure, as he or she might make the wrong noises about a particular political candidate, and then you would wish to bail out quickly. Uber would be the safety net. Most of the time you don’t end up using the service or recording a transaction that would count for this study, but you can start making plans because you know you have Uber as a fallback.
Or consider those urban residents who have ditched their cars altogether. They know they can take Uber to the local market if they need to, even if most of the time they have not run out of milk and dog food. Similarly, the existence of Uber is helping some localities economize on mass transit expenditures.
The study also doesn’t measure how Uber might help get the U.S. to the next level of market innovation, which in this case might mean a network of on-demand, self-driving vehicles.
Do read the whole thing.
The Irony of Hillary Clinton’s Data Analytics
Barack Obama’s campaign adopted data but Hillary Clinton’s campaign has been molded by data from birth. Politico has the remarkable story:
Staff in Clinton’s analytics department sit under a sign that hangs from the ceiling with the words “statistically significant” printed on it. And overnight, in some of the few hours that headquarters isn’t whirring with activity, the team’s computers run 400,000 simulations of the fall campaign in what amounts to a massive stress-test of the possibilities on Nov. 8.
…“I have never seen a campaign that’s more driven by the analytics,” [one] strategist said. It’s not as if Kriegel’s data has ever turned around Clinton’s campaign plane; it’s that her plane almost never takes off without Kriegel’s data charting its path in the first place.
…Among the pioneering areas Kriegel’s analytics team has studied, according to people familiar with the operation, is gauging not just whom to talk to, how to talk to them and what to say — but when to say it. Is the best time to contact a voter, say, 90 days before the election? 60 days? One week? The night before? It is a question Obama’s team realized was crucial to mobilizing voters in 2012 but had never been truly analyzed. With a full calendar of competitive primaries, Kreigel and his team had plenty of chances to run rigorous, control-group experiments to ferret out answers to such questions earlier this year.
Here is one fascinating bit on the algorithms that were used to estimate delegate flippability in the primary:
First, the campaign ranked every congressional district by the probability that campaigning there could “flip” a delegate into Clinton’s column. Because every district has a different number of delegates allocated proportionally (in Ohio, for instance, 12 districts had 4 delegates each while one had 17), this involved polling and modeling Clinton’s expected support level, gauging the persuadability of voters in a particular area and then seeing how close Clinton was to a threshold that would tip another delegate in her direction. (At the most basic level, for instance, districts with an even number of delegates, say 4, are far less favorable terrain, as she and Bernie Sanders were likely split them 2-2 unless one of them achieved 75 percent of the vote.)
That so-called “flippability score” was then layered atop which media markets covered which seats. If a media market touched multiple districts with high “flippability” scores, it shot up the rankings. Then the algorithm took in pricing information, and what television programs it predicted the most “flippable” voters would be watching, to determine what to buy.
The irony? More questions are being asked, more data is being collected and more randomized experiments are being run in the effort to win the presidency than will ever be used to choose policy by the presidency. Sad.
Those new service sector jobs, installment #1437, Cambodian fortune teller edition
Why stick with that NGO when global markets beckon?:
In the northwest corner of Phnom Penh’s Boeng Keng Kang market, a new stall is creating a buzz among shoppers.
Its occupant is a 28-year-old former U.S. Peace Corps volunteer who offers tarot-card readings in Khmer. And customers say her predictions are on point.
With strings of fake leaves hanging from the ceiling, colorful paper butterflies affixed to one wall, and a sign that reads “Mantis Magic,” the booth—which has been open for two weeks—stands out from the neighboring hairdressers and food stalls.
“I didn’t have a job, I needed something to do and I wanted to help people through my spiritual work. I was getting messages to do this, so I just followed my gut,” said Eileen, who speaks conversational Khmer and asked to be identified only by her first name so that her mother in the U.S. would not find out about her new trade.
Originally from New York, Eileen said she graduated from West Virginia University with degrees in gender studies and criminal investigations before relocating to Cambodia nearly five years ago with the Peace Corps.
After spending two years writing grant proposals for a local NGO while pursuing a master’s degree in development at the Royal University of Phnom Penh, she grew restless and earlier this year decided to pursue a passion for mysticism she had cultivated since the age of 10.
A Cambodian friend helped her lease the market stall two weeks ago, Eileen said. She said she had met with unexpected financial success, earning about $450 since opening while charging 10,000 riel (about $2.50) per session.
Here is the full story, by Maria Paulo Brito and Ouch Sony, it has other interesting points, and for the pointer I thank Dustin Palmer.
And, via Kaushal Desai, here is a 16-year-old British girl who earned £48,000 helping Chinese parents name their babies.
Does Chinese parental matchmaking matter?
There is a new NBER paper on this topic by Fali Huang, Ginger Zhe Jin, and Lixin Colin Xu, the results are striking:
While parental matchmaking has been widespread throughout history and across countries, we know little about the relationship between parental matchmaking and marriage outcomes. Does parental involvement in matchmaking help ensure their needs are better taken care of by married children? This paper finds supportive evidence using a survey of Chinese couples. In particular, parental involvement in matchmaking is associated with having a more submissive wife, a greater number of children, a higher likelihood of having any male children, and a stronger belief of the husband in providing old age support to his parents. These benefits, however, are achieved at the cost of less marital harmony within the couple and lower market income of the wife. The results render support to and extend the findings of Becker, Murphy and Spenkuch (2015) where parents meddle with children’s preferences to ensure their commitment to providing parental goods such as old age support.
Here is an earlier SSRN version.
Does supply-side economics deserve a second look?
That is the topic of my latest Bloomberg column, which focuses on Edward Conard’s new book The Upside of Inequality (not a good descriptive title for the book, in my view). Conard’s central idea is that risk-bearing equity capital is the truly scarce asset in most economic situations, and economic analysis should adapt accordingly. He is very creative in seeing some of the implications of this view, for instance:
This framework makes Conard a revisionist on the U.S. trade deficit. The traditional story is that Americans buy goods from, say, East Asia, and the sellers respond by investing those dollars back in the U.S., a win-win situation. Conard believes that analysis would hold only if people who accumulate cash from foreign transactions invest their funds into risky, innovative enterprises.
But too often they buy government securities, and so Conard views the U.S. trade deficit as something that makes the government bigger without making the economy more dynamic. This confounds the traditional libertarian defense of free trade by indicating that we are not really getting market-oriented investments when the funds return.
That is the kind of argument that few people are willing to accept, yet they typically don’t have a good rejoinder to it either. And on supply-side economics here are my comments:
Maybe supply-side economics isn’t as wrong as its reputation indicates. Maybe the earlier supply siders just spent too much time focusing on one supply obstacle – high taxes – when other barriers were bigger problems.
…Cuts in marginal tax rates became overrated after the Reagan recovery years of the 1980s, but maybe after the failed Bush experience they are now somewhat underrated.
Perhaps no economic policy is going to work especially well in a time when median incomes are falling. If we can clear away other impediments to supply, tax cuts may prove potent once again. Don’t forget that there are decades of research in economics showing that tax incentives matter.
Ditto!
I disagreed with much in Conard’s book, but found it very stimulating to ponder. It puts many of the pieces together in a new and different way.
One reason why the press doesn’t give you-know-who the benefit of the doubt
Somehow — I can’t imagine why — this financial matter has fallen down the memory hole as of late. Here are a few paragraphs from Wikipedia:
In 1978 and 1979, lawyer and First Lady of Arkansas Hillary Rodham engaged in a series of trades of cattle futures contracts. Her initial $1,000 investment had generated nearly $100,000 when she stopped trading after ten months…
Various publications sought to analyze the likelihood of Rodham’s successful results. The editor of the Journal of Futures Markets said in April 1994, “This is like buying ice skates one day and entering the Olympics a day later. She took some extraordinary risks.”[3] USA Today concluded in April 1994 after a four-week study that “Hillary Rodham Clinton had some special treatment while winning a small fortune in commodities.”[9] According to The Washington Post‘s May 1994 analysis, “while Clinton’s account was wildly successful to an outsider, it was small compared to what others were making in the cattle futures market in the 1978–79 period.” However, the Post’s comparison was of absolute profits, not the percentage rate of return.[14] In a Fall 1994 paper for the Journal of Economics and Finance, economists from the University of North Florida and Auburn University investigated the odds of gaining a hundred-fold return in the cattle futures market during the period in question. Using a model that was stated to give the hypothetical investor the benefit of the doubt, they concluded that the odds of such a return happening were at best 1 in 31 trillion.[15]
Financial writer Edward Chancellor noted in 1999 that Clinton made her money by betting “on the short side at a time when cattle prices doubled.”[16] Bloomberg News columnist Caroline Baum and hedge fund manager Victor Niederhoffer published a detailed 1995 analysis in National Review that found typical patterns and behaviors in commodities trading not met and concluded that her explanations for her results were highly implausible.[17] Possibilities were raised that broker actions such as front running of trades, or a long straddle with the winning positions thereof assigned to a favored client, had taken place.[14][17]
That said, I fully grant such matters are not closely correlated with ultimate political performance. But I am seeing so, so much apologia, selective event citation, and wishful thinking these days…
What is also interesting is that this is another case where — relative to actual legal priorities — one can correctly suggest that an actual prosecution was not warranted.
Please do note I regard it as my first priority to try to understand and also explain the (rather dire) situation we are in, rather than to put maximum thumb weight on the outcome I would most like to see happen.
Does economic freedom lower happiness inequality?
There should be a whole category of “results that aren’t true as stated but are interesting nonetheless.” Here is a new paper by Daniel L. Bennett and Boris Nikolaev:
This article examines the relationship between economic freedom and happiness inequality for a large sample of countries. We find that economic freedom is negatively associated with happiness inequality and robust to several alternative measures of happiness inequality, including the standard deviation, mean absolute difference, coefficient of variation, and Gini coefficient. Among the economic freedom areas, legal system and sound money are negatively correlated with happiness inequality. Drawing on the Engerman-Sokoloff hypothesis, we use a measure of factor endowments as an instrument for economic freedom to provide a further robustness test, finding a negative association between economic freedom and happiness inequality.
Two points. First, the influence of economic freedom often diminishes once you control for the quality of government in a particular locale. This is perhaps more of an “all good things go together” result than any particular causal story. Second, many of these results are mediated by the “hard money” component of economic freedom. But hard money is not economic freedom per se, but rather it may be proxying for some successful cultural attitudes.
For the pointer I thank the excellent Kevin Lewis. Also via Kevin, here is another published result you shouldn’t quite believe as stated: “…the combination of feeling tired and happy may enhance acceptance of atypical or unusual ideas, which could potentially help creative thought.”
Mike Rowe on Charles Koch
I agree wholeheartedly with Mike Rowe that college has been oversold and that we need a greater focus on and respect for vocational education. I’ve also been impressed with Rowe’s honesty and intelligence as is evident in this recent post discussing his work with Charles Koch on vocational education.
If you haven’t seen it, my name appeared a few weeks ago in a headline next to Koch Industries. What could possibly go wrong?
Well, let’s have a look.
Pablo Elvira says…Mike – I’ve never written a “protest” email before now, but I’m compelled. Your association with The Koch Brothers has obliterated my trust in you.
Steven Stahl writes… I have lost a huge amount of respect for you. Mike, you are better than this.
Mande Smogor says…Charles Koch promotes fear mongering on climate change, and basically destroy minorities, the elderly, anyone who isn’t rich, and unions. Morally and ethically I am profoundly disconnected from Mike Rowe right now. #SoLongDecadeLongCelebrityCrush…etc, etc.
You can set your watch by it. Whenever my name appears next to an individual on someone’s “List of Known Enemies,” people line up to tell me why they can no longer be my friend, or watch my shows, or support my foundation. From Glenn Beck to Bill Maher, my proximity over the years to the “wrong guy” has prompted hundreds of Facebook friends to scoop up their marbles and stomp off in a huff….
Like most of you, my opinion of public figures is influenced by what I read in the press, and what I read about The Brothers Koch leaves little doubt they they ride with The Four Horsemen of The Apocalypse. Over the last few years though, my opinion has changed. Partly, because I took it upon myself to read beyond the headlines, and partly because I came to learn that our foundations are aligned on a number of issues important to me.
…We met a few years ago in California. I had just given a speech about the disastrous consequences of removing vocational education from high schools, and Charles was in the audience. One of his people invited me to lunch, and I said sure. I was eager to see the horns and smell the sulphur for myself. Surprisingly, I found neither. What I found, was a 78-year-old man with more energy and enthusiasm than I could match. We spoke at length, and I learned a number of surprising things.
I learned for instance, about his passion for criminal justice reform. He’s frustrated by the fact that punishments no longer fit the crime, and angered that minor drug offenders and rapists often serve comparable sentences. He’s proud that Koch Industries does not ask those applying for employment to “check the box” with regard to previous incarceration. He told me that once a debt is paid, the balance sheet should be clear. I was surprised, because the man I had read about seemed very much at odds with a crusader for the formerly incarcerated.
We then talked at length about the dangers of a two-tiered economic system, and his belief that cronyism was at the heart of so much unfairness in today’s society. Charles told me about a documentary his foundation funded that exposed the obscene policy of charging people (black women, primarily) thousands of dollars for a license that allows them to legally braid hair in their communities. I watched it later, and it made me angry. It also made me think about the hundreds of entrepreneurs I’d met over the years who expressed similar frustrations in their own industries. Again, I was surprised. I had read nothing from anyone about Koch’s concern for the little guy. Not what I expected.
But I was most surprised by his commitment to reinvigorate the skilled trades. I knew his foundation focused on many forms of higher education, but I had no idea we shared a common view regarding the skills gap. He pointed out that countless small businesses begin with a tradesperson who learned a skill that was in demand. I shared my belief that a chronic skills gap was more troubling than chronic unemployment, because the existence of opportunity that people don’t care about is more alarming than a lack of opportunity overall.
In short, we found ourselves in violent agreement on a number of things important to us both, and after lunch, he told me to let him know if mikeroweWORKS could ever use his help. (In hindsight, it’s entirely possible he was just being polite, but he would soon learn just how literal I can be.)
When I got involved with Project Jumpstart in Baltimore, I called Charles and told him about their incredible track record preparing inner city kids and non-violent offenders for a career in the trades. At base, Jumpstart is a pre-apprenticeship program for the construction trades. The placement rate is an astonishing 80%. Jumpstart not only trains people for the job at hand, it helps them solve problems that often prevent people in their position from succeeding. They pay a stipend, for instance, while being trained. They help with transportation to the job site, and provide extraordinary mentorship and follow up. But there are also consequences. Trainees can lose their stipends if they don’t comply with the rules. I spoke with many of the graduates, and they all talked about how important the “real world training” was to their success. When I told Charles about the program, his foundation stepped up.
When SkillsUSA came around this year, I told him I was speaking at their opening ceremony. He wasn’t familiar with the program. When I explained its impact on the next generation of skilled tradespeople, he was once again intrigued. He wanted to know how an organization that did so much good, and consisted of nearly 400,000 kids, was unknown to so many. I told him the challenge facing SkillsUSA was not so different than the challenge facing many companies looking to recruit skilled labor – basic awareness. I told him my foundation made sure that kids who qualified for the National Finals had their transportation and lodging covered, if they couldn’t afford to get there on their own. Charles liked that, and he doubled the resources we had allocated for this year’s event.
Most recently, The Koch Foundation allowed mikeroweWORKS to help more people than ever before through our Work Ethic Scholarship Program….
So – to Pablo, Steven, Mande, and anyone else compelled to share their disappointment – I get it. But look – if I only associate with “approved people,” or limit my relationships to those who see the world exactly as I do, then I might as well build a church and preach only to the choir. Where is the fun in that? The truth is, progress only happens when people find common ground and build something on it. And when it comes to closing the skills gap, we need progress.
Good for Rowe! It’s well known, of course, but my own institution, George Mason, has also benefited from Charles Koch’s investments in education.
The growing tech company demand for economists
Here is one bit from Steve Lohr’s longer article at the NYT:
For the moment, Amazon seems to be the most aggressive recruiter of economists. It even has an Amazon Economists website for soliciting résumés. In a video on the site, Patrick Bajari, the company’s chief economist, says the economics team has contributed to decisions that have had “multibillion-dollar impacts” for the company.
Another Amazon jobs site lists openings for economists. As of Friday, there were 34.
Seeing this emerging job market, the National Association for Business Economics held its first meeting for technology company economists in April in San Francisco. Another is set for October in Silicon Valley.
The article has many other interesting segments.
New results on common ownership
If firms are commonly owned by the same mutual funds and pension funds, why should they compete with each other? This question won’t quite die. There is a new paper by Miguel Anton, Florian Ederer, Mireia Gine, and Martin C. Schmalz on this question, and they actually find some serious evidence that a lot of jointly owned firms don’t compete against each other so vigorously.
Standard corporate finance theories assume the absence of strategic product market interactions or that shareholders don’t diversify across industry rivals; the optimal incentive contract features pay-for-performance relative to industry peers. Empirical evidence, by contrast, indicates managers are rewarded for rivals’ performance as well as for their own. We propose common ownership of natural competitors by the same investors as an explanation. We show theoretically and empirically that executives are paid less for own performance and more for rivals’ performance when the industry is more commonly owned. The growth of common ownership also helps explain the increase in CEO pay over the past decades.
Here is a related paper on the same topic. I still don’t believe it, but I can’t tell you what is wrong with these claims either…
Signaling and the evolution of female wages
How do partisans of the signaling model of education explain female wage growth over the last few decades? It’s easy for the human capital theory: female education went up and so did female productivity (plus discrimination fell, but let’s put that aside for now).
But if those women were just signaling, their productivities are about the same and yet their wages are way higher. Are they now massively overpaid? That hardly seems possible — when will the en masse firing begin?
Alternatively, perhaps the women were considerably underpaid in 1963, because their lack of interest in educational signaling branded them as lower quality workers. (Again, this has to be an effect net of discrimination.) But why would that have been a rational inference for employers to make? If a woman didn’t go to college or graduate school back in 1963, there were plenty of obvious sociological reasons why not, and it didn’t much signal low intelligence or low conscientiousness. It shouldn’t have lowered wages, not in the signaling model. So in 1963 there was a discrimination-based underpayment, but it is hard to argue for a signaling-based underpayment to women as a class.
You also might think that female wages have gone up since 1963 because women have been socialized to desire work and money more. But if that socialization raises productivity, it still won’t support a signaling story, which treats productivity as fixed due to type. Furthermore then the door is open for socialization theories of education, even if college is not the only source of socialization.
So why then have net-of-discrimination female wages gone up so much, if not for the human capital story?
You will note that the signaling theory seems most plausible as an explanation of what happens right after people get out of college, and thus it appeals to many students and also to some academics. Signaling theories of wages are least plausible as they try to explain broad patterns of wage movements over time, and then you must bring in human capital considerations. In similar fashion, signaling theories won’t explain the relative wage stagnation since 1999 and many other longer-term puzzles; they just don’t play in this arena.
Here are some data on female wages and labor supply over this period.
Addendum: Bryan Caplan refers me to this piece of his on related issues. And here is my Econ Duel with Alex on education and signaling.
Why are movie stars paid more than firefighters?
Here’s an excellent letter from Don Boudreaux. I admit he had me at the title, Thinking At the Margin: It’s Revolutionary:
…I agree that most people are troubled that the likes of Tom Brady and Jennifer Lawrence earn far higher pay than does any firefighter or school teacher. But this reality reflects not people’s correct understanding of a failing economy but people’s incorrect understanding of a successful economy. It reflects also a failure of economists to better teach basic economics to the general public. So let me ask: would you prefer to live in a world in which the number of people who can skillfully fight fires and teach children is large but the number of people who can skillfully play sports and act is very tiny, or in a world in which the number of people who can skillfully fight fires and teach children is very tiny but the number of people who can skillfully play sports and act is large?
I’m sure that you’d much prefer to live in a world in which skills at fighting fires and teaching children are more abundant than are skills at playing sports and acting. Precisely because saving lives and teaching children are indeed far more important on the whole than is entertainment, we are extraordinarily fortunate that the numbers of our fellow human beings who possess the skills and willingness to save lives and to teach children are much greater than are the numbers who can skillfully play sports and act.
The lower pay of fire fighters and school teachers simply reflects the happy reality that we’re blessed with a much larger supply of superb first-responders and educators than we are of superb jocks and thespians. Were it the other way around, then while we’d be better entertained with more top-flight sporting events and movies, all but the richest amongst us would suffer significantly greater risks of being unable to educate our children and of dying in house fires and from other mishaps.
Is economic growth good for the environment?
Maybe so, at least in some significant ways. There is a new paper from Nature, by Oscar Venter et.al. It strikes me as an oversimplification in some ways (carbon? what if there is a biodiversity “wall”?), but still many of the core points are valid and indeed empirically verifiable:
Human pressures on the environment are changing spatially and temporally, with profound implications for the planet’s biodiversity and human economies. Here we use recently available data on infrastructure, land cover and human access into natural areas to construct a globally standardized measure of the cumulative human footprint on the terrestrial environment at 1 km resolution from 1993 to 2009. We note that while the human population has increased by 23% and the world economy has grown 153%, the human footprint has increased by just 9%. Still, 75% the planet’s land surface is experiencing measurable human pressures. Moreover, pressures are perversely intense, widespread and rapidly intensifying in places with high biodiversity. Encouragingly, we discover decreases in environmental pressures in the wealthiest countries and those with strong control of corruption. Clearly the human footprint on Earth is changing, yet there are still opportunities for conservation gains.
For the pointer I thank Charles C. Mann.