Category: Economics

I love the main ideas of Jane Jacobs.  Her passing was truly sad for me.  I read her as a teenager.  It shook my world.

Nonetheless I think she is a tiny-teeny bit overrated.  She never coped with the problems of scale.  Nor did she explain how infrastructure should be built.

It is fine to juxtapose the old Greenwich Village against the gargantuan planning of the corrupt Robert Moses.  Few other social scientists of her time grasped the idea of  spontaneous order.  But what to do if a city grows from one million to ten million people, as has happened many times in the Third World?

To be sure, favelas and shanties work far better than their reputations.  Drug gangs aside, they embody many of the best qualities of Jacob’s analysis, or for that matter Hayek’s.  But surely it is a problem when there is no piped water or reliable electricity.  How can you get those services into new areas without some serious planning?  You can call for private sector involvement but it is planning nonetheless and it probably will involve some use of eminent domain.  Or how about new roads?

Perhaps I am unfair to Jacobs, but I read her as thinking we can confront the problems of cities without answering those questions.

It is perhaps unfair to note that Jacobs’s "straight economics" often made little sense, but surely this is relevant to how she understood the major problems of cities.  She doubted the necessity of the nation-state and was suspicious of internal economies of scale under a common legal order.  She promoted "import substitution," which is now a discredited idea among both left-wing and right-wing economists.

Here is a list of Moses’s projects for New York City.  Could the Big Apple have prospered and grown without them?

A Wall Street lawyer gave new meaning to the term
"futures market" when he tried to auction his future Social Security
checks – money did doesn’t now have – on eBay for $200,000 so he could
use the cash for a down payment on a Manhattan apartment.

"I’ve put a lot of money into the Social Security system, so why can’t I sell it to someone else?" mused Thaddeus Wojcik.

File that under "Department of HA!."  Ebay yanked the auction.  Here is the full story, and thanks to Chris D. for the pointer.

Hugo Mialon writes:

Is economics an art?  I address this old, but important, question empirically by examining the impact of rhetorical features of the titles of published economics articles on the ultimate success of these articles, as measured by their cumulative citations over the six-year period following their publication.  Twenty-eight percent of articles in the sample have a fresh figure of speech in their title.  Surprisingly, adding a rhetorical device to the title of an empirical article adds more than four citations to the article’s "lifetime" count, which represents about twenty percent of the lifetime citations of the average empirical article.  This result testifies to the continuing power of rhetoric and poetry in economics science.

Here is the paper.  To be sure, quality of author and article are elusive variables, especially since we cannot assess them by citation counts (here the dependent variable).  Smart authors might write better papers and come up with better and more poetic titles; maybe the poetry is not what matters.

Nonetheless this paper has many fun facts.  Poetry in the title doesn’t help theoretical papers.  Coming from a top school boosts the cites for empirical work more than theory.  Having a research assistant, or a math appendix, correlates negatively with the number of cites for a theory paper.  It is easier for an empiricist at a non-top school to get into the top journals than for a theorist; the latter market shows greater presence of "superstars" in the Sherwin Rosen sense.

My Open Letter on Immigration has been published in German in the Financial Times Deutschland.  The letter will be officially released shortly, in the meantime Brad DeLong, Greg Mankiw and Vernon Smith have been joined as signatories by a number of other prominent economists including Franklin M. Fisher (MIT) , Ed Glaeser (Harvard), Roger H. Gordon (U.C. San Diego) and many others.  I would be delighted to have further signatories from economists and other social scientists.  You can sign by sending an email with your name and affiliation to [email protected].  Thanks!

As MR readers will know, a famous David Card paper shows that the presence of many immigrants in a city does not much lower wages, if at all.

The obvious rejoinder is that cities with growing wages might attract more immigrants.  The new immigrants will cause local wages to fall back down, resulting in a lack of regional correlation between wages and immigration.  Without the immigrants maybe those locales would have had higher wages.  So what does the Card paper really show?

Keep three points in mind:

1. The skeptical story does not consider all possible adjustments.  Had there been no new immigrants in the growing cities, American workers would have moved in to take advantage of the higher wages, thereby pushing wages back down again.  The U.S. has the most mobile labor supply of any developed country.  So the net wage depression effect of new immigrants — taking all supply adjustments into account — still would be zero or very small for many places.

Note that this point, while it responds to Card skeptics, also creates some problems for the Card paper.  It suggests that the labor market is defined at the level of the nation as a whole rather than the city or region.  It is then no surprise — no matter what your view of immigration — if local labor conditions do not much correlate with local wage levels. 

But invoking this point about the national scope of the labor market also blunts fears about how immigrants depress wages.  Suddenly the question is not how many Mexicans are pouring into Texas, California, and Arizona.  The question is rather how many Mexicans are pouring into the United States.  But the larger the relevant market size, the better a job we will do absorbing immigrants.  And the smaller the effect on domestic wages we should expect.  To run a contrasting thought experiment, just try putting them all in Geneva, or better yet Soglio.

2. Have I mentioned capital mobility?  Foreign capital flows into the U.S. all the time.  Even when the Chinese buy T-bills, this frees up domestic private capital to put more people to work.  Having more immigrants encourages more capital to flow in.  If both labor and capital enter the country, there is no reason to expect immigration to lower domestic wages.

3. Are rising wage levels the key factor in drawing Mexicans to a region?  El Paso appears to be one counterexample.  In many cases proximity to the border and clustering effects seem to be more important.  In that case the Card test has less of a problem with endogeneity.  Still, I do not know the formal evidence on this point, so in the comments please pass along your expertise…

I have an op-ed in today’s Wall Street Journal on medical malpractice insurance premiums.  Here’s a sample:

On its face, price gouging is a peculiar explanation
for recent increases in insurance premiums. Is greed new to the world?
Were insurance companies followers of Mother Teresa just a few years
ago? If greed and gouging are the explanations for rising premiums, why
did the St. Paul group — one of the nation’s largest suppliers of
medical malpractice insurance — pull out of the market in 2001? Were
the profits from all that gouging just too much for St. Paul’s guilty
conscience? And consider that almost half of doctors are insured
through mutual, i.e., doctor-owned, insurance companies. Are the
doctors gouging themselves?

The gouging explanation fails more than the credulity
test. Price gouging can work only if firms have monopoly power — so if
gouging is the explanation for higher premiums, we would expect to see
higher premiums in states with less competition. My student, Amanda
Agan, and I tested this hypothesis in a study released two days ago by
the Manhattan Institute. Contrary to the gouging hypothesis, we found
that a 10% increase in industry concentration reduces premiums
by $2,200. The result makes sense if we remember that, to increase
market share, firms don’t raise prices but rather lower them. Wal-Mart
has grown into the nation’s dominant retailer by lowering prices, not
raising them.

I was pawing through the archives, and I found the very first installment of "Markets in Everything."

This study analyzes the role that two psychological attributes–sensation seeking and overconfidence–play in the tendency of investors to trade stocks. Equity trading data are combined with data from an investor’s tax filings, driving record, and psychological profile. We use the data to construct measures of overconfidence and sensation seeking tendencies. Controlling for a host of variables, including wealth, income, age, number of stocks owned, marital status, and occupation, we find that overconfident investors and those investors most prone to sensation seeking trade more frequently.

Here is the full paper.

Here is my latest New York Times column (non-gated).  Excerpt:

Their [Gabaix and Landier) core argument is simple. If we look at recent history,
compensation for executives has risen with the market capitalization of
the largest companies. For instance, from 1980 to 2003, the average
value of the top 500 companies rose by a factor of six. Two commonly
used indexes of chief executive compensation show close to a
proportional sixfold matching increase (the correlation coefficients
are 0.93 and 0.97, respectively; 1.0 would be a perfect match).

By the way, Japanese CEOs are paid much more than many popular or Internet sources indicate.  American CEOs are paid about three times more than their Japanese counterparts (on average), but not forty or so times more.

Following on my Op-Ed from yesterday, one loyal MR reader asks me, in an email, a few questions about immigration.  Here is my first cut at answers:

–Is there no amount of unskilled immigration that is too high? In other words, do you advocate open borders?

I don’t believe in open borders for today’s America.  I would increase current immigration quotas for all groups and allow illegals to move back and forth more readily.  Many current illegals would prefer to spend more time in their home country than is currently possible.  I don’t know exactly how much we can boost immigration and of course I don’t expect political progress on the issue.  But we should start with a twenty percent boost in the yearly quotas.    And how about another twenty percent increase two years later?

–Why do you have faith that federal policy can address the regionalized problems [with immigration] when you don’t trust federal policy to correctly judge which immigrant skills we ought to give priority?

I think the federal government is capable of giving more money to subsidize emergency rooms near the border.  This is an easier task than judging what professions we will need thirty years down the road.

–You mention the success of second-generation offspring of most immigrant groups, but let’s get real, this whole issue is about Mexicans, mostly, not Canadian economists. How have their offspring done? Of course, it might not even matter; if you’re right that a growing supply of unskilled labor isn’t bad, then does it make any difference if the second generation is also unskilled?

David Card and others have plenty of data on how well the second and third generations of Latinos do in assimilating and entering the mainstream of American life.  I find the overall portrait a reassuring one.  I will look for data on Mexicans per se and let you all know if I find anything useful. 

N.B.: If the quality of current Mexican immigration is "lower than you would like," keep in mind the current mix is partly an artifact of current immigration law, which encourages the least rooted and the most desperate to cross the border.   Young male teenagers are those who least mind being cut off from returning home.  Allowing immigrants to come and go would raise the quality of the pool.

"The book is called judge and jury and it’s not just the juries that we put on trial."  That’s from the online video of AEI’s event on my book, Judge and Jury: American Tort Law on Trial.