In our principles textbook, Modern Principles: Macroeconomics, Tyler and I illustrate the importance of property rights with the incentive effects of collective farming and the secret agreement of Xiaogang village. We write:
Farmers from 18 households in Xiaogang signed a secret life-and-death agreement ending collective farming with their thumbprints. (From Cowen and Tabarrok, Modern Principles: Macroeconomics)
The Great Leap Forward was a great leap backward – agricultural land was less productive in 1978 than it had been in 1949 when the communists took over. In 1978, however, farmers in the village of Xiaogang held a secret meeting. The farmers agreed to divide the communal land and assign it to individuals – each farmer had to produce a quota for the government but anything he or she produced in excess of the quota they would keep. The agreement violated government policy and as a result the farmers also pledged that if any of them were to be killed or jailed the others would raise his or her children until the age of 18. [The actual agreement is shown at right.]
The change from collective property rights to something closer to private property rights had an immediate effect, investment, work effort and productivity increased. “You can’t be lazy when you work for your family and yourself,” said one of the farmers.
Word of the secret agreement leaked out and local bureaucrats cut off Xiaogang from fertilizer, seeds and pesticides. But amazingly, before Xiaogang could be stopped, farmers in other villages also began to abandon collective property. In Beijing, Mao Zedong was dead and a new set of rulers, seeing the productivity improvements, decided to let the experiment proceed.
For more background, NPR’s Planet Money has a great story on this secret agreement including this:
“Back then, even one straw belonged to the group,” says Yen Jingchang, who was a farmer in Xiaogang in 1978. “No one owned anything.”
At one meeting with communist party officials, a farmer asked: “What about the teeth in my head? Do I own those?” Answer: No. Your teeth belong to the collective.
In theory, the government would take what the collective grew, and would also distribute food to each family. There was no incentive to work hard — to go out to the fields early, to put in extra effort, Yen Jingchang says.
“Work hard, don’t work hard — everyone gets the same,” he says. “So people don’t want to work.”
…Before the contract, the farmers would drag themselves out into the field only when the village whistle blew, marking the start of the work day. After the contract, the families went out before dawn.
“We all secretly competed,” says Yen Jingchang. “Everyone wanted to produce more than the next person.”
It was the same land, the same tools and the same people. Yet just by changing the economic rules — by saying, you get to keep some of what you grow — everything changed.
But what about all the other potential reasons, beyond what their Gini Coefficient was in 1985, for varying levels of social mobility between countries as diverse as Japan, France, and New Zealand?
The most obvious example is just the size of the countries. It’s at least plausible that much bigger countries contain more variety. In fact, if you do something as simple as recreate the Great Gatsby Curve, but use the population of each country as the X-axis, you get a very strong a statistical relationship (log-linear R2 = .64). Big countries have higher IGE. Call it the Moby Dick Curve.
Alternatively, we might see that some countries tend to specialize more than others. As a practical example, part of the reason that a country like Finland can have so much equality and social mobility versus America might be that many more of the relatively poorer farmers who trade food for Finnish mobile phones live and reproduce in other countries. If so, then we might see that if we replace the X-axis with exports as a % of GDP, there could be another statistically significant relationship with IGE. Check (R2 = .48).
Let’s turn the mike over to Alex, our Alex, the Alex, etc., the one who writes for MarginalRevolution:
The rags to riches to rags story of a poor, unemployed fellow who wins the lottery, blows the cash, and ends up just as poor and unemployed as he began is a common trope. (Here is a classic in the genre). In a paper just published in the Review of Economics and Statistics (gated, free version here), Hankins, Hoekstra and Skiba argue that the rags to riches to rags story has a systematic component.
The authors link records of lottery winners to bankruptcy records. The use of the lottery is a great randomization device, although obviously it restricts the sample to people who play the lottery.
The central finding is this: people who win large amounts are just as likely to end up bankrupt as people who win small amounts…
Addendum: Floccina writes in the comments: “Former professional athletes are also an interesting case.” Are the economic variables really driving the dysfunctional social norms, or vice versa, or most likely quite a bit of both?
I’m baffled by people who blame declining marriage rates on poverty. Why? Because being single is more expensive than being married. Picture two singles living separately. If they marry, they sharply cut their total housing costs. They cut the total cost of furniture, appliances, fuel, and health insurance. Even groceries get cheaper: think CostCo.
These savings are especially blatant when your income is low. Even the official poverty line acknowledges them. The Poverty Threshold for a household with one adult is $11,139; the Poverty Threshold for a household with two adults is $14,218. When two individuals at the poverty line maintain separate households, they’re effectively spending 2*$11,139-$14,218=$8,060 a year to stay single.
But wait, there’s more. Marriage doesn’t just cut expenses. It raises couples’ income. In the NLSY, married men earn about 40% more than comparable single men; married women earn about 10% less than comparable single women. From a couples’ point of view, that’s a big net bonus. And much of this bonus seems to be causal.
More plausibly it is the rise in female income (among other factors, including the rise of birth control, read more here) which is behind the decline in marriage, but that doesn’t fit with traditional mood affiliation, which finds the rise in female income to be good (which it is), and the decline in marriage to be — neither good nor bad per se but not exactly worth celebrating. If you can blame capitalism and wage stagnation for the decline of the family among lower earners, so much the better for ideology but as a sociological proposition that is a very weak hypothesis (do you see convincing links to real sociological evidence, showing this to be the dominant factor? No) and as Caplan shows it doesn’t fit with the economics either.
Remind me again, how is wage stagnation supposed to explain the pronounced decline in religiosity, among lower earners, as shown by Murray? It’s well-known that a secular outlook is a normal good, and that on average poorer countries are more religious than wealthier countries.
I’m struck by how many people are offering negative comment on the new Murray book who have not read it, or who do not appear to have read it. I found it to be a much less controversial book than the commentary makes it seem, and actually I had stopped thinking about it, except for all the negative reviews I see it getting. It is unpopular because it disrupts current moral narratives about economic and social decline, as much on the right as on the left I might add, not because it is relying on dubious facts. It is simply redescribing inequality through a somewhat different lens. There’s much less at stake here than meets the eye.
I am pleased that Publisher’s Weekly has offered a starred review to my forthcoming book:
Enlightened consumerism, not ideology, is the surest path to tasty and responsible dining, argues this yummy gastronomic treatise. Economist and restaurant critic Cowen (The Great Stagnation) takes readers along as he eats, shops, and cooks in a diversity of spicy settings, including a Nicaraguan tamale stand, the greens aisle at the Great Wall supermarket chain, backwoods barbeque pits, and his own kitchen, where he wrestles with Mexican cuisine. He focuses on how the interplay between creative suppliers and demanding customers produces good, cheap food, an approach that yields offbeat insights into, for example, why the menu item that sounds the least appetizing usually tastes great and why you should never eat in a place filled with beautiful people having a great time (that restaurant’s specialty, he reasons, is the scene, not the food). Cowen also offers a telling contrarian critique of high-minded food orthodoxies that extols agribusiness, debunks the environmental benefits of locavorism, and toasts genetically modified organisms. Cowen writes like your favorite wised-up food maven, folding encyclopedic knowledge and piquant food porn—“the pork was a little chewy but flavorful, and the achiote sauce gave it a tanginess”—into a breezy, conversational style; the result is mouth-watering food for thought.
You can pre-order the book on Amazon here. For Barnes & Noble here. For Indiebound.org here.
Law #1: People will get jobs doing things that computers can’t do. Law #2: A global market place will result in lower pay and fewer opportunities for many careers. (But also in cheaper and better products and a higher standard of living for American consumers.) Law #3: Professional people will more likely be freelancers and less likely to have a steady job.
[But]…Laws #1 & 2 predict that there will likely be fewer STEM jobs in the future – they are both easily computerized and tradable. People will always be employed in STEM disciplines, many of them highly paid, but they’ll be paid for smarts rather than education. The disciplines will be much more competitive, with older and less talented workers left on the sidelines. Tom Friedman and Alex Tabarrok, reflecting conventional wisdom, are mistaken in maintaining that increasing STEM education is a key to future economic competitiveness.
Jelski instead recommends English lit and psychology, at least if you are young and hot! The logic–computers don’t write well and people don’t want to have sex with or be counseled by computers (yet!),–seems strong but wage rates and unemployment levels don’t support the argument. Jelski is correct about demand but forgets to take into account supply. Thus, the way to go is to be a hot engineer who can write well and get along with other people. (Jelski also forgets that my argument for STEM was in large part about the spillover effects).
I am in strong agreement with Jelski, however, that education is only the first step to success. Education is a tool; to truly succeed one must have skills developed with grit and applied with passion.
A full page anti-immigration ad taken out in a Hong Kong newspaper is making waves. The ad (shown at right; note the locust) reads:
Do you want Hong Kong to pay 1 million HKD per 18 minute raising illegitimate child from mainland?
Hong Kong people have had enough of it!
We understand that you suffer from contaminated milk powder, so we tolerate your raid upon our milk powder; we understand that you don’t have freedom, so we receive you over here through “free pass”; we understand that your education is poor, so we share our educational resource with you; we understand that you don’t read traditional Chinese, so we use “cripple” Chinese character (simplified Chinese) in the following: “Please respect our local culture when you are here, without Hong Kong you are all doomed.”
Strongly demand the government to amend the 24th clause of Basic Laws!
Stop the massive invasion of double negative pregnant women from mainland. (double negative = none of the woman’s parents are from HK)
The ad then went viral with versions of the ad created for Beijing, Shanghai and Guangzhou [text here was corrected, AT] but the Shenzhen version took a different approach. The text here reads:
You are one of us if you come to Shenzhen.
Welcome to Shenzhen!
Because we are all away from home, so welcome here; because this is a big circle Grandpa Deng drew for all of us (metaphor for making Shenzhen special economic region), so welcome here; because you are part of the momentum that keeps Shenzhen going, so welcome here; because of you are the reason behind our 30 years of prosperity, so welcome here; because we want the whole world to know this, so we use English the say the next: “welcome to hometown Shenzhen”.
Warmly welcome every hard worker to Shenzhen!
We wish all Shenzhen people a happy new year and may all your wishes come true!
I am happy to report that I heard another Paul Krugman talk a few nights ago. Krugman had just flown in from Moscow, switching in Houston to a flight to Austin, with little time to spare. Presumably he was very tired, he had a bad cold, he had to speak in a loud barbecue joint and bar, and yet he was entirely lucid and he charmed and instructed the crowd. He even had praise for MarginalRevolution. It was better and better received than if he had given a more traditional lecture.
The same Krugman has a recent blog post, or two, in which he is unhappy with me. I will put some thoughts on that under the fold…
Krugman attacks me for being an anti-Keynesian when in fact I very much prefer New Keynesianism over Old, so the entirety of his critique is boxing at shadows. As an aside, my first published article was in the Journal of Post Keynesian Economics, and as long ago as 1989 I wrote an essay arguing that Keynesian economics explained the Great Depression better than did alternative views; some of my libertarian and Austrian acquaintances still hold that piece against me. Some MR readers also will recall the 12-part symposium I did on Keynes’s General Theory, full of praise for the book, though of course with some criticisms too. I don’t expect Krugman to be an expert in the history of thought of me, but a) he has linked to previous posts of mine making clear my affinity for sticky price reasoning and other new Keynesian ideas, b) it is a rather simple proof that he has rather drastically misread me, as has DeLong, and c) if Krugman doesn’t know my views perhaps he should not attack them in such strident language. By the way, to the extent I like Old Keynesianism, it is for the Shackle-Lachmann-Minsky strand, not IS-LM and the liquidity trap.
Moving on to substance, let’s start with a few reasons why I think the course of the recovery discriminates against Old Keynesianism, though not against new Keynesianism (definitions and contrast here).
1. New Keynesianism has a more optimistic attitude toward mean reversion than does Old Keynesianism. Things are looking a bit better than expected half a year ago, so New Keynesianism gains in status over the Old. Q.E.D. That’s actually enough to establish the entire point.
2. Brad DeLong suggested not long ago that the short-run model, rather than the long-run model, will apply for a minimum of five years, and possibly up to fifteen years. That claim is looking weaker these days and I am happy to admit that I am revising my own previous views on speed of adjustment. It’s one thing to predict we won’t get to four percent unemployment for a long time, but I am now much more skeptical that the short-run model will apply for so many years. (Since the labor force is not a homogeneous aggregate, the long-run model still can be more relevant than the short-run model even when there is residual unemployment.) That is the view I am arguing against and Brad is not made of straw.
3. Krugman’s own writings show he is less worried about the particular perverse consequences of one version of the liquidity trap argument than say a year or six months ago. Remember all the talk of the upward-sloping aggregate demand curve? That would imply more output and the expectation of further output gains can make the liquidity trap worse. Yet how does Krugman respond to the good job market report? He claims, correctly, that it is good news. Full stop. There is no response like “it’s great those people have jobs but I’m worried that the extra output will worsen the liquidity trap.” Common sense rules, as it should, though now it’s time to admit we have moved onto a different and better model.
3. Frankly, it is a bit of an embarrassment for many commentators that the (admittedly weak) recovery is coming right after the end of the fiscal stimulus. Of course this does not refute the standard account of fiscal policy, namely that it can work but is hard to pull off politically in a manner which contributes to sustainable growth. The correct answer for the timing of recovery, relative to the end of stimulus, is “confounding factors,” but that is exactly the point. The confounding factors are more important than we had thought, and the fiscal stimulus not quite as important as we had been led to believe. That is another point against the Old Keynesian view.
5. Liquidity trap models of unemployment stand in tension with Mortensen-Pissarides search models, as Krugman himself has noted in the past. The notion that employer (and worker) expected profit influences search behavior and thus employment, seems to be showing up in the data. That’s a real business cycle mechanism.
6. Corporate profits are strong. Quite possibly the prevalence of labor-saving innovations helps explain why labor market recovery has been slower. That too is a real business cycle mechanism. The persistence of long-term unemployment, even in light of an improving labor market, suggests those particular workers face structural unemployment. That too is a real business cycle mechanism.
7. A lot of people get upset when one praises “real business cycle” models, perhaps having in mind some overly simplified one-person contraption from the early 1980s. The reality is that most economic phenomena and mechanisms fall under this heading, and that the objectionable simple models have been left behind a long time ago in favor of synthetic treatments. I’m the one in the mainstream here (which doesn’t mean I am right), but it does make it odder to be pilloried and insulted for holding those views, as if it were some inexplicable tomfoolery not worthy of professional economists.
8. The old Keynesian view really does have trouble explaining turning points, unless there is a major fiscal or monetary policy action to account for the change. This was well-known as long ago as the 1930s. Brad DeLong cites a passage from Keynes about the depreciation of capital (see my previous coverage here, I am very familiar with this argument), but of course Keynes thought that mechanism was too weak and unreliable and thus he favored a mix of planning and nationalized investment. In any case that mechanism explains only one chunk of the current recovery and furthermore I call a rising MPK a real factor too.
9. Krugman sometimes writes as if new and old Keynesian approaches are simply more and less rigorous versions of the same thing, but they clash on a number of important issues, a few of which I’ve mentioned above. You don’t have to agree with Stephen Williamson on everything, or approve of his tone, to notice that many of his blog posts illuminate significant differences between New and Old Keynesianism. Read through his archives. There’s a lot of very smart stuff in there, even though it has become unstylish to respond to him very much. He knows a lot about macroeconomics, usually more than the people he is criticizing, even if I often disagree with him on methodology.
10. Finally, it’s worth going through Krugman’s citations of his own successful predictions:
Funny enough, I also got those first two predictions right too, and on the third I have argued we haven’t seen real austerity yet. I also was never very proud of myself for getting those predictions right, because I thought it did not show any particular acumen on my part, nor did I think it elevated me to an especially prophetic stature. I actually prefer to think more about all the predictions I got wrong. Here is Scott Sumner on the predictions he got right, an excellent record. Perhaps Krugman’s successful predictions have come from a broader framework and not from Old Keynesianism per se?
In sum, one constructive response to the new data, and my post, would have been: “The Old Keynesian fortress actually is looking weaker these days.”
Another constructive response would have been to try to patch up the growing holes in the Old Keynesian approach, as applied to 2011-12, and try to salvage it vis-a-vis New Keynesianism and/or market monetarism. No need to waste so much time on views which aren’t even in the running.
Addendum: Mark Thoma adds comment. And Ezra Klein comments. Here is Krugman’s response. There is no Orwellian move on my part, I’ve long been fine with new Keynesian ideas and there is a long paper trail to that effect, stretching back many years; to cite “real business cycle theory” in 2012 is in fact to refer to a bunch of them as part of the theory. When it comes to RBC, Krugman is still living in 1983, a point which Stephen Williamson has made a few times as well.
The Department of City Planning recently completed its most ambitious study of parking in Manhattan in three decades. The report found that the way cars are used in the city has changed since the early 1980s, when the Clean Air Act’s stricter codes limited the number of new parking lots. Developers were no longer required to provide parking in new developments, and special permission was needed to build large garages.
When the rules went into effect, 85 percent of off-street parking was taken by commuters. Now, depending on the neighborhood, up to 70 percent of those spaces are used by residents.
Over the last three decades, the number of off-street parking spots in Manhattan has fallen by one-fifth — to 102,000 from 127,000, according to the city study.
In the last six years alone, according to data compiled by Property Shark, 92 parking lots or garages have been sold and redeveloped. From the Avenue of the Americas, where a garage fell for a hotel, the Eventi, with rental apartments on top; to Varick Street, site of a condo-to-be, the humble lot has seen better days.
Good piece in the New York Times making three points about foreign students in U.S. universities 1) State budgets for education have been slashed, 2) foreign students are way up and because they are paying much higher tuition than in-state students they are supporting education for citizens, 3) selling education services is one way our trade deficit with China is balanced.
This is the University of Washington’s new math: 18 percent of its freshmen come from abroad, most from China. Each pays tuition of $28,059, about three times as much as students from Washington State. And that, according to the dean of admissions, is how low-income Washingtonians — more than a quarter of the class — get a free ride.
Not everyone is happy, however. Here is one (ironic?) complaint:
“Morally, I feel the university should accept in-state students first, then other American students, then international students,” said Farheen Siddiqui, a freshman from Renton, Wash., just south of Seattle.
All good news, 243k up but lots more information in the numbers, try @JustinWolfers or @BetseyStevenson for details and interpretation. The “big loser” here?: Old Keynesianism. You really can get a recovery when the real shocks are moderately positive. You will note, as we have been told many many times by many many sources, fiscal and monetary policy have not been extremely pro-active in recent times; in fact the stimulus has been trickling to a close. The big winners, apart from the American public?: real business cycle theory. It is part of any cyclical explanation, whether one likes it or not.
Another big loser is those liquidity trap theories which tell us that positive real shocks are bad for the economy because the AD curve has a perverse slope, etc., and that negative shocks might help spur recovery. That theory is looking very weak, again. I consider it the weakest economic theory that has any currency in the serious economics blogosphere.
In 1789, the political price for our federal constitution included a bailout of the 13 indebted states. But it was by refusing to bail out the states a second time in the 1840s that the United States preserved its federal system, with substantial fiscal independence for state governments. Facing a similar moment, Europe might learn from our experience.
…Appealing to the precedent set by the 1789 bailout, state creditors asked the federal government to bail out the states once again. After an enlightening debate, in the early 1840s Congress declined, so many states repudiated their debts.
In the aftermath of those repudiations, many states rewrote their constitutions to require year-by-year balanced budgets, something they had never done before. As noted, fiscal crises, like the one in Europe today, often produce political rearrangements—at best peaceful ones like these.
There is more here. If that WSJ link doesn’t work for you, type “Thomas Sargent” into news.google.com.
1. Engage with the arguments by Sailer and his ilk that Mexican immigration is different than the waves of the 1920′s, 1880′s, etc.
Specifically, they cite the example of New Mexico, current Latin America, evolving California, etc. where class-based hierarchies that closely mirror IQ differences have proven remarkably stable to all sorts of interventions over the time span of centuries (whether peaceful in the case of NM or violent in the case of the Mexican revolution).
Also, they point out that communication differences as well as the changed nature of the economy now (i.e., many fewer blue collar manufacturing jobs that transition families between immigrant manual labor to white collar knowledge industry workers, fewer overall manual labor jobs such as garment factories, the presence of a welfare state, etc.) make assimilation a much harder proposition.
Interesting to see what Tyler and Alex have to say in response to these arguments…
To that list I would add that, related to TGS, the negative effect of immigration on U.S. educational norms has been more significant than it otherwise might have been. On the other side of the ledger, here are a few relevant factors:
1. The slower influx of Mexicans (100,000 a year vs. a former 500,000 a year) means that assimilation will from now on proceed more rapidly, and certainly more rapidly than the critics had been predicting.
2. The effect of Latino communities in lowering crime rates and revitalizing neighborhoods and cities has been stronger than might have been expected twenty years ago.
3. The notion that Latino migrants to the U.S. might help seed and sustain a broader Latin American economic and democratic boom has become a reality, and this was not obvious twenty years ago.
4. The idea that “the New World” will become a major trading bloc to rival “Chinese Asia” is a more important idea than it might have seemed twenty or even ten years ago. The United States needs extensive Latin connections to maintain its status as active leader of that bloc.
5. Outsourcing is more of a force than we had thought, and the possibility of outsourcing raises the (relative) gains from allowing immigration. I will write more on this in the future, so I’ll leave the details for now.
Overall, the arguments on immigration have changed quite a bit in the last ten to fifteen years, but those changes have cut in both directions.
The puzzle is why firms pay huge sums to big name consulting firms, when their advice comes from kids fresh out of college, who spend only a few months studying an industry they previous knew nothing about. How could such quickly-created advise from ignorant college students be worth the millions paid? Why don’t firms just ask their own internal recent college grads?
Some say that consulting firms use their access to collect data on best practices, data that other firms are eager to pay for. But while this probably contributes, I find it hard to see as the main effect.
My guess is that most intellectuals underestimate just how dysfunctional most firms are. Firms often have big obvious misallocations of resources, where lots of folks in the firm know about the problems and workable solutions. The main issue is that many highest status folks in the firm resist such changes, as they correctly see that their status will be lowered if they embrace such solutions.
The CEO often understands what needs to be done, but does not have the resources to fight this blocking coalition. But if a prestigious outside consulting firm weighs in, that can turn the status tide. Coalitions can often successfully block a CEO initiative, and yet not resist the further support of a prestigious outside consultant.
To serve this function, management consulting firms need to have the strongest prestige money can buy. They also need to be able to quickly walk around a firm, hear the different arguments, and judge where the weight of reason lies. And they need to be relatively immune from accusations of bias – that their advice follows from interests, affiliations, or commitments.
All three of these functions seem to be achieved at a low cost by hiring good-looking kids from our most prestigious schools. These are the cheapest folks you can buy with our most prestigious affiliations, they are smart enough to judge where reason lies, and they have few prior affiliations to taint them with bias. They can not only “borrow your watch to tell you the time,” but can also cow you into submission in accepting that time.
Yes the information contained in consulting advice can be obtained elsewhere at a lower cost. Firms could hire most any smart independent folks, or set up a prediction market. But alas those sources don’t have the raw strength of status to cow opponents into submission, opponents who in practice can block changes no matter what a CEO declares.
So mine is a signaling and status story (surprise surprise). The weight of status often decides outcomes, no matter what the CEOs commands, and so CEOs often need to bring out status ringers, to cow opponents into submission.
A full page anti-immigration ad taken out in a Hong Kong newspaper is making waves. The ad (shown at right; note the locust) reads: