Category: Economics

Further results on social security wealth and inequality

From a recent paper by John Sabelhaus and Alice Henriques Volz:

…the present value of Social Security benefits for everyone who has paid anything into the system was $73.3 trillion in 2019. Thus, the present value of Social Security benefits is estimated to be roughly double all other household-sector pension and retirement account assets combined, and approximately three-fourths the size of all conventionally measured household net worth. Social Security is also an important retirement wealth equalizer, as employer-sponsored pension and retirement accounts accrue disproportionately to high wealth families.

…the bottom 50 percent of persons aged 35 to 44 in 2016 had average Bulletin net worth of only $13,500. However, the same group had average expected SSW of nearly $40,000, the difference between a PDV of benefits around $125,000 and a PDV of taxes around $85,000. Again, this is unsurprising given that low wealth individuals have much lower lifetime incomes, and the Social Security tax and benefit formulas are inherently progressive, even though differential mortality offsets some of that redistribution….although incorporating SSW into household wealth has a substantial impact on wealth inequality levels, it does not change overall trends in top wealth shares. While the top ten percent share of SCF Bulletin wealth (within age-sorted and person-weighted) increased from 58 percent to 66 percent between 1995 and 2016, the expanded wealth share that includes both DB wealth and SSW increased from 40 percent to 47 percent.

That is via the excellent David Splinter, one of the most important economists working today, and here is his new paper Presence and Persistence of Poverty in U.S. Tax Data.  And here is the previous MR post on wealth inequality and social security.

The Consequences of Treating Electricity as a Right

In poor countries the price of electricity is low, so low that “utilities lose money on every unit of electricity that they sell.” As a result, rationing and shortages are common. Writing in the JEP, Burgess, Greenstone, Ryan and Sudarshan argue that “these shortfalls arise as a consequence of treating electricity as a right, rather than as a private good.”

How can treating electricity as a right undermine the aim of universal access to reliable electricity? We argue that there are four steps. In step 1, because electricity is seen as a right, subsidies, theft, and nonpayment are widely tolerated. Bills that do not cover costs, unpaid bills, and illegal grid connections become an accepted part of the system. In step 2, electricity utilities—also known as distribution companies—lose money with each unit of electricity sold and in total lose large sums of money. Though governments provide support, at some point, budget constraints start to bind. In step 3, distribution companies have no option but to ration supply by limiting access and restricting hours of supply. In effect, distribution companies try to sell less of their product. In step 4, power supply is no longer governed by market forces. The link between payment and supply has been severed: those evading payment receive the same quality of supply as those who pay in full. The delinking of payment and supply reinforces the view described in step 1 that electricity is a right [and leads to] a low-quality, low-payment equilibrium.

The Burgess et al. analysis coheres with my observations in India where “wire anarchy” is common (see picture). It’s obvious that electricity is being stolen but no one does anything about it because it’s considered a right and a government that did do something about it would be voted out of power.

The stolen electricity means that the utility can’t cover its costs. Government subsidies are rarely enough to satisfy the demand at a zero or low price and so the utility rations.

The consequences for electricity consumers, both rich and poor, are severe. There is only one electricity grid, and it becomes impossible to offer a higher quantity or quality of supply to those consumers who are willing and sometimes even desperate to pay for it.

Moreover,the issue is not poverty per se.

…the vast majority of customers in Bihar expect no penalty from paying a bill late, illegally hooking into the grid, wiring around a meter, or even bribing electricity officials to avoid payment. These attitudes are in stark contrast to how the same consumers view payment for private goods like cellphones. It is debatable whether cellphones are more important than electricity, but in Bihar we find that the poor spend three times more on cellphones than they do on elec-tricity (1.7 versus 0.6 percent of total expenditure).

Burgess et al. frame the issue as “treating electricity as right,” but one can can also understand this equilibrium as arising from low state capacity and corruption, in particular corruption with theft. In corruption with theft the buyer pays say a meter reader to look the other way as they tap into the line and they get a lower price for electricity net of the bribe. Corruption with theft is a strong equilibrium because buyers who do not steal have higher costs and thus are driven out of the market. In addition, corruption with theft unites the buyer and the corrupt meter reader in secrecy, since both are gaining from the transaction. As Shleifer and Vishny note:

This result suggests that the first step to reduce corruption should be to create an accounting system that prevents theft from the government.

Burgess et al. agree noting, “reforms might seek to reduce theft of electricity and nonpayment of bills” and they point to programs in India and Pakistan that allow utilities to cut off entire neighborhoods when bills aren’t paid. Needless to say, such hardball tactics require some level of trust that when the bills are paid the electricity will be provided and at higher levels of quality–this may be easier to do when there are other sources of authority such as trusted religious leaders.

In essence the problem is that the government is too beholden to electricity consumers. If the government could commit to a regime of no or few subsidies, firms would supply electricity and prices would be low and quality high. But if firms do invest in the necessary electricity infrastructure the government will break its promise and exploit the firms for temporary electoral advantage. As a result, the consumers don’t get much electricity. The government faces a time consistency problem. Independent courts would help to bind the government but those often aren’t available in developing countries. Another possibility is a conservative electricity czar who, like a conservativer central banker, doesn’t share the preferences of the government or the voters. Again that requires some independence.

In short, to ensure that everyone has access to high quality electricity the government must credibly commit that electricity is not a right.

Spock’s Brain

The Santa Monica Observer noted the death of soap opera actress Marj Dusay who also appeared as the alien thief in the classic Start Trek episode “Spock’s Brain”:

…The episode is generally regarded by most fans, and those who took part in its production, as the worst episode of the series. William Shatner called this one of the series’ worst episodes, calling the episode’s plot a “tribute” to NBC executives who slashed the show’s budget and placed it in a bad time slot.

Leonard Nimoy wrote: “Frankly, during the entire shooting of that episode, I was embarrassed – a feeling that overcame me many times during the final season of Star Trek.”

…In his book What Were They Thinking? The 100 Dumbest Events in Television History, author David Hofstede ranked the episode at #71 on the list.

The rock band Phish performs a song entitled “Spock’s Brain”

So what? Well here is the part that caught my attention:

The episode was referenced in Modern Principles: Microeconomics by Tyler Cowen and Alex Tabarrok of George Mason University as an example of how it is virtually impossible to have a command economy; in that not even Spock’s brain could run an economy.

In other words, we also thought it was one of the worst episodes ever because of the bad economics. Econ instructors should use our textbook! Where else can you learn about Spock’s Brain and the command economy?

By the way, I’m pretty sure the obit was AI generated but heh the AI did a good job! I am aware of the irony.

Maybe they are the ones who know?

The top 1% are the only affluent group consistently more inclined than the general population to attribute variation in drive and IQ to both internal causes, particularly to innate causes (the top 1% also differ from the other affluent, at p < .01).  This said, the affluent are not more dismissive than others of environmental causal explanations.  Interestingly, across all income groups, “environmental” explanations for drive and IQ are more popular than the two internal explanations.

That is from a new paper (and here) by Elizabeth Suhay, Marko Klašnja, and Gonzalo Rivero.

Social security and trends in inequality

Recent influential work finds large increases in inequality in the U.S., based on measures of wealth concentration that notably exclude the value of social insurance programs. This paper revisits this conclusion by incorporating Social Security retirement benefits into measures of wealth inequality. Wealth inequality has not increased in the last three decades when Social Security is accounted for. When discounted at the risk-free rate, real Social Security wealth increased substantially from $5.6 trillion in 1989 to just over $42.0 trillion in 2016. When we adjust for systematic risk coming from the covariance of Social Security returns with the market portfolio, this increase remains sizable, growing from over $4.6 trillion in 1989 to $34.0 trillion in 2016. Consequently, by 2016, Social Security wealth represented 58% of the wealth of the bottom 90% of the wealth distribution. Redistribution through programs like Social Security increases the progressivity of the economy, and it is important that our estimates of wealth concentration reflect this.

That is from a new paper by Sylvain Catherine, Max Miller, and Natasha Sarin, I look forward to reading it soon.  It is at least possible that the Saez-Zucman results are coming under further question.

Just to repeat part of the abstract, I find this sentence striking: “When discounted at the risk-free rate, real Social Security wealth increased substantially from $5.6 trillion in 1989 to just over $42.0 trillion in 2016.”  That’s a lot.

And this one: “Consequently, by 2016, Social Security wealth represented 58% of the wealth of the bottom 90% of the wealth distribution.”  Wow.

Free Tool to Run the Double Oral Auction Experiment

The double oral auction was one of the first experiments that Vernon Smith ran. He was expecting to find that the supply and demand model didn’t work. Instead, the results changed his life and led to a Nobel prize:

I am still recovering from the shock of the experimental results. The outcome was unbelievably consistent with competitive price theory. … But the result can’t be believed, I thought. It must be an accident, so I will take another class and do a new experiment with different supply and demand schedules. (Smith 1991)

I’ve run similar experiments in my principles class. The exercise is fun for the students and it’s always amazing to see how quickly the equilibrium is attained even though none of the participants has any idea what the equilibrium price and quantity are. The experiment can be run with paper and pencil or a laptop in a small class but that gets cumbersome for a larger class. Fortunately, there are some free tools.

Here’s Hampton and Johnson describing Kiviq.us.

Kiviq.us provides an online version of the double oral auction that works on all student Internet-enabled devices, including smartphones and iPads, without requiring students or instructors to download any special software. Results can be projected on a screen for debriefing. Instructors can set key parameters. A version with price controls can be setup. The use of the experiment is free for instructors and students. Students do not have to give their email address to play.

The design is the classic market experiment for introducing students to demand and supply. Joseph (1970) makes a strong case for the benefits of the “market experiment” in teaching based on experience with high school and undergraduate students. The original experiment was created by Smith (1962).

….After a trading session, instructors can debrief showing dynamically the history of bids, asks, trades, individual attribution of bids/asks (by clicking the chart), individual total earnings, and the underlying demand and supply curves.

Modern Principles of Economics introduces the supply and demand model and Smith’s classic experiment and thus is an ideal accompaniment.

Why have stock markets been falling so much?

That is the topic of my latest Bloomberg column, note first of all that the virus is a kind of referendum on global response capabilities, and so far we have been failing (with Singapore as a possible exception).  Here is another bit:

…investors now have a better sense of what other investors think about risk. Before Covid-19, investors did not have much direct information about what other investors thought about the robustness of the global economy. Their expectations were not seriously being tested.

When a new shock to the system comes along, however, everyone gets to observe everyone else’s selling behavior. And investors have learned that the faith of their fellow investors is not as strong as they had thought. That raises the risk premium on holding stocks, and in turn causes share prices to fall more. Given how much this pandemic is a truly new event, and that the process of trading itself generates information about the forecasts of other investors, price volatility can be expected to continue.

And this:

The stock market is scared by the fact that it took so long for the stock market to be scared.

Developing…

Emergent Ventures winners, seventh cohort

Nicholas Whitaker of Brown, general career development grant in the area of Progress Studies.

Coleman Hughes, travel and career development grant.

Michael T. Foster, career development grant to study machine learning to predict which politicians will succeed and advance their careers.

Evan Horowitz, to start the Center for State Policy Analysis at Tufts, to impose greater rationality on policy discussions at the state level.

John Strider, a Progress Studies grant on how to reinvent the integrated corporate research lab.

Dryden Brown, to help build institutions and a financial center in Ghana, through his company Bluebook Cities.

Adaobi Adibe, to restructure credentialing, and build infrastructure for a more meritocratic world, helping workers create property rights in the evaluation of their own talent.

Shrirang Karandikar, and here (corrected link), to support an Indian project to get the kits to measure and understand local pollution.

Jassi Pannu, medical student at Stanford, to study best policy responses to pandemics.

Vasco Queirós, for his work on a Twitter browser app for superior threading and on-line communication.

My 2013 NYT column on pandemics

The government should resist the strong temptation to skimp on rewards. Many health care breakthroughs come through university research programs and government grants, but bringing an innovation to fruition and managing wide and rapid distribution usually requires the profit-seeking private sector. In any single instance, the government could save money by confiscating rights, but in the longer run this would discourage the search for additional remedies.

If anything, the American government — or, better yet, a consortium of governments — should pay more for pandemic remedies than what market-based auctions would yield. That’s because, if a major pandemic does arise, other countries may not respect intellectual property rights as they scramble to copy a drug or vaccine for domestic distribution. To encourage innovations, policy makers need to bolster the expectation of rewards.

I agree with the circulating critiques of current Trump administration policy, but the Democrats are no angels in this matter either.  For instance:

Unfortunately, the United States lacks strong political coalitions for many beneficial public health measures. The Democratic Party has focused on insurance coverage and Medicaid expansion as political issues, while often wishing to lower prices of drugs or to weaken patent protection. The Obama administration’s new budget lowers spending on pharmaceuticals by an estimated $164 billion over 10 years, mostly through bargaining down Medicare drug prices. That makes it hard for the Democrats to embrace lucrative rewards for pharmaceutical companies or vaccine producers.

Here is the full column.

Cultural biases in equity analysis

Vesa Pursiainen covers this topic in a new paper.  Most concretely:

My estimates suggest that a Norwegian analyst is 8.4 %-points more likely to assign a buy rating to a Danish firm than an Austrian analyst. Similarly, a Norwegian analyst is 6.7 %-points more likely to assign a buy-recommendation to a British firm than a French analyst.

And here is the abstract:

A more positive cultural trust bias by an equity analyst’s country of origin toward a firm’s headquarter country is associated with significantly more positive stock recommendations, controlling for analyst-month and firm-month fixed effects. The cultural bias effect is stronger for eponymous firms whose names mention their home country. The bias effect varies over time, increasing with negative sentiment. I find evidence of a negative North-South bias emerging during the European debt crisis, a UK-Europe divergence amid Brexit, and a Franco-British bias during the Iraq war. The share price reaction to buy recommendations by more positively biased analysts is weaker.

And from the conclusion:

This paper provides evidence that cultural biases have a significant effect on equity analysts’ stock recommendations. I further find that there is substantial time variation in the effect of such biases, and that the strength of the bias effect is highly correlated with the general sentiment. In other words, bad economic times, when the level of pessimism is high and con- sumer confidence low, are also the times when cultural biases have the largest effect. These findings are all the more significant since equity analysts are financial market professionals that are often supposed to be less susceptible to behavioral biases than non-professionals. To the extent that these results generalize to the rest of the population, they suggest a link between times of economic hardship and increased cultural biases. This might contribute to the rise of nationalism and populism during economic downturns.

My finding that the salience of the firm’s nationality affects the strength of analysts’ cultural biases is also novel in the finance literature. While there is a vast literature on priming effects in psychology literature and, to a lesser extent, in experimental economics, my results suggest that there might be interesting new applications in financial markets and in non-experimental settings that have not been fully explored.

Finally, I find evidence that significant political events can introduce new cultural biases that are strong enough to affect stock recommendations. The much-discussed North-South divide in Europe and the stereotypes of lazy Mediterraneans invoked during the European debt crisis created a clearly visible negative bias in the stock recommendations of North European analysts on South European companies. Similarly, the diplomatic rifts between the UK and the rest of Europe amid the Brexit process, as well as between France and the UK over the Iraq war can be seen in analyst stock recommendations. 

For the pointer I thank the excellent Samir Varma.

How has my thinking on prizes vs. grants evolved?

Chris, a loyal MR reader, writes to me:

I’ve been turning to your insights on prizes vs. grants over the years. Your Google talk from 2007 is without question the best discussion I’ve found of their respective merits…I was wondering if your thinking on prizes vs. grants has evolved, and in particular [TC has added the numbers here]:

1. In the Google talk, you talked about an equilibrium in which there would be a growing ecosystem of big prizes complementing one another. I’m not sure it has turned out this way. Do you agree, and what happened? Did the “failure” of some high profile prizes (e.g. the Google Lunar XPrize) dampen down the enthusiasm?

2. More generally, there seemed to be an expectation in the 2000s and early 2010s that prizes would take off and become a more significant feature of the R&D funding landscape. Again, I don’t think that has really happened. What explains that?

3. Looking specifically at government funding of R&D, do you think there is an equilibrium in which grants can coexist with prizes? Or do grants squeeze out prizes through some form of adverse selection (the best researchers opting for grants over prizes)?

4. How important do you think public choice reasons are for us being in a grant-dominated equilibrium? It seems that the science sector has done a great job of positioning itself as something other than an interest group, with its interests squarely aligned with the public good. (Even suggesting that the science sector is also an interest group seems slightly heretical. It’s interesting that Dominic Cummings, for all his radicalism, seems to see little need for any reform of the science/research ecosystem beyond ARPA).

First a general remark: I now see the current scientific (and cultural) establishment as having more implicit prizes than I used to realize.  In fact, getting a grant is one of the biggest prizes you can receive, if the grant is sufficiently prestigious.  By an “implicit prizes,” I mean a prize where the target achievement is not quite spelled out, but if “we” (however defined) judge you to have achieved enough, we will pour grants, status, and high quality social networks into your lap.  For instance, Alex and I have received significant “prizes” for writing MR, although none of those prizes have names or bring explicit public recognition, as opposed to general recognition.  We have in contrast never received a grant to write MR, so are prizes really so under-provided?

So my current thinking is a bit less “grants vs. prizes,” and somewhat more “implicit prizes vs. explicit prizes, each combined with grants to varying degrees.”  Implicit prizes are more flexible, but they also are easier to cheat with, since the standard of achievement is never quite clear.  Implicit prizes also are much more valuable to people who can use, build, and exploit their social networks, and of course that is not everyone (but shouldn’t we be giving more prizes to those people?).  Implicit prizes also can be revoked through subsequent loss of status.  Implicit prizes are more likely “granted” by the hands of social networks rather than judging panels, all of those features being both cost and benefit.

Now to the specific points:

1. As the venture capital ecosystem grows, and as the value of publicity rises (it is easier to monetize scientific and other sources of fame), and there are more “influencers in the broad sense,” there are more implicit prizes to be had.  And did the Lunar XPrize fail?  If an end is not worth accomplishing, a prize is one way to find that out.

2. In addition to my point about the proliferation of implicit prizes, the scientific, academic, and political communities are far too conservative in the literal sense of that word.  How many top schools experiment with different tenure procedures?  Different ways of running a department?  It is sad how difficult it is to experiment with changes in academia and science, whether the topic be prizes or not.

3. The best researchers get both grants and prizes (one hopes).

By the way, here is a recent piece on the empirics of prizes, mostly positive results.

The Advance Market Commitment

NBER: Ten years ago, donors committed $1.5 billion to a pilot Advance Market Commitment (AMC) to help purchase pneumococcal vaccine for low-income countries. The AMC aimed to encourage the development of such vaccines, ensure distribution to children in low-income countries, and pilot the AMC mechanism for possible future use. Three vaccines have been developed and more than 150 million children immunized, saving an estimated 700,000 lives. This paper reviews the economic logic behind AMCs, the experience with the pilot, and key issues for future AMCs.

That’s Kremer, Levin and Snyder. Definitely deserving of a Nobel and kudos to Bill and Melinda Gates for being early and major supporters.