Category: Economics

Remember Tom Peters? The 1996 Guinness Book of World Records listed him as the world’s most highly paid management consultant. His In Search of Excellence was one of the earliest mega-hits among management books, you might recall that he flirted with various Hayekian ideas about the market as a discovery mechanism. Today’s Financial Times looks at Peters today and asks, quite literally, whether he has lost his mind. It describes a Tom Peters seminar as “a combination of Billy Graham and Sid Vicious.” Peters admits to being proud of the inconsistencies in his thoughts, but to my mind the FT evinces no evidence of real craziness. Several years ago Fortune magazine raised the same issue, I cannot find an on-line copy but again I am waiting for the smoking gun.

Make up your own mind, visit Tom’s web site. Be warned that not all of it is rigorous, consider the following:

An Aussie reporter asked me recently about the origins of “Re-imagine.” I answered in terms of war & peace & commercial effectiveness alike. The following leapt from my lips, and I was intrigued by what I’d said. Dangerous, I well know; and it may wear off. But herewith, not a bad rationale, at the highest level of abstraction, for what we’re about and the possible importance thereof…

Tom admits that he was overoptimistic about Silicon Valley — at least he will admit he was wrong — and says that the increased difficulty of valuing intangible assets is behind the recent corporate scandals.

Devah Pager’s article in the latest American Journal of Sociology demonstrates an important relationship between race, criminal record and employment. She sent out pairs of black and white young men to apply for entry level jobs, gave them similar records except that one was randomly selected to have a criminal background. She then analyzed who was called back for an interview and got some interesting results:

1. Unsurprisingly, for both blacks and whites, reporting a criminal record drastically reduced the chances of a call back.

2. Black men *without* the criminal history were less likely to be called back than white men *with* criminal records.

3. Having a criminal record is more damaging for black applicants than for white applicants.

This, I think, is a nice challenge to the whole statistical discrimination thesis, where employers use race as a proxy for other unmeasured variables. The Pager study shows that even when employers have full information on their applicants, they often prefer a white ex-convict than a similar black man without a criminal record.

Update: Dmitri Masterov writes to tell me about point #2 – Pager showed that the difference between the two groups was not statistically significant.

If workers are paid their marginal product its difficult to understand why some CEOs are paid such high wages. But think of the CEO’s wage as a prize. Valuable prizes make everyone else work hard in order to become the CEO. With this model, the tournament model (JSTOR) of Lazear and Rosen, it may even make sense that CEO wages go up as profits go down. After all, shouldn’t prizes be set highest when motivation is most required? No doubt, some will see this argument as more proof that economists are just shills for the capitalist class.

In case you know someone looking for an academic job, here is an excellent link, full of good advice, courtesy of Claudia Goldin, thanks to Brad DeLong for the pointer.

I’ve been reading the new book The New Geography of Global Income Inequality, by sociologist Glenn Firebaugh. The data work is intensive, here are a few things I have learned:

1. Knowing what country an individual lives in explains about 70 percent of the observed variation in income across individuals (p.11).

2. If we could magically eliminate all income inequality within nations, the world’s total income inequality would shrink by at most one-third. Most of the relevant inequality is across different nations (p.11).

3. Global income inequality is falling, contrary to what many critics charge (pp.17-18). So the world’s poor are catching up to the world’s rich (p.18), on average.

4. Most poor countries are not catching up, most of all Africa. The world’s poor are catching up, on average, once we weight countries by population. The growth of China, and to a lesser extent, India, has driven the improved prospects of the poor and the decline in cross-nation inequality (passim).

5. If we compare the United States to Western Europe, there is considerably less inequality within the United States.

As you might surmise, I found this book to be excellent and highly instructive. It reads more like an extended article than a book, but nonetheless it delivers on the substance.

Addendum: Daniel Drezner offers some interesting remarks, with links, on Paul Krugman’s recent writings on inequality.

Subsequent addendum/clarification: Firebaugh (p.193) writes: “average income is much more unequal across nations in Western Europe than across states in the United States.” He does not (and could not) argue that “within a single nation equality” is less in Europe. Here are Gini coefficients for the various European nations and the United States.

I hear very good reports about the new IMF Chief Economist, Raghuram Rajan, formerly at the University of Chicago. Here is an interview with him, from the Chicago Sun-Times. Also read this link, for more on Rajan and his book with Luigi Zingales, Saving Capitalism from the Capitalists.

America has had persisting trade deficits, so some economists think the dollar is due for a big plunge. The magazine The Economist cites some commentators as suggesting a 40 percent decline against the Euro. Read the commentary of Brad DeLong, who resists making such a prediction himself. See Brad’s longer and more detailed discussion, where he raises the possibility that capital inflow into the U.S. will slow down and the dollar will plummet. He tells us that the whole process has gone on far longer than he would have expected, but again he stops short of offering his own prediction. He wonders when foreign investors will start worrying about the risk of a huge dollar depreciation.

I am more optimistic than the doomsayers (N.B.: I do not read Brad as belonging to this group, though perhaps he is flirting with the idea of joining), in part because I think that strong growth and productivity, which currently appear to be in the cards, can avoid or postpone a “day of reckoning” of this kind. America is simply a good place to invest, and will remain so for the foreseeable future. The dollar did decline by over 50 percent in the 1980s, against major currencies, but at that time high dollar values were more obviously a speculative bubble in the first place.

No, not paper routes or roadside car washes, this is about the tough stuff, like Moroccan children in carpet factories. 186 million children, between the ages of 5 and 14, perform illegal child labor. 111 million of these jobs involve hazardous work. Kaushik Basu offers his analysis and observations in the latest issue of Scientific American.

Obviously wealth is the best cure for hazardous and oppressive child labor. By the latter part of the 19th century, child labor was declining in the richer nations.

Basu notes that many anti-child labor campaigns backfire. A 1990s boycott of Nepalese carpets, made with child labor, led many of those children to become reemployed as prostitutes. Boycotts are ineffective when the available alternatives are worse. Anti-child labor regulations can backfire for another reason as well. Many children work simply to help their families achieve a threshold level of income, such as subsistence. The lower the wage that the children earn (think of the regulations as lowering the net returns from child labor), the more they will need to work to reach that threshold.

We learn also that history matters. Adults who worked as children are more likely to send their children out to work, even after adjusting for income.

Basu is skeptical of many interventions but he does not recommend laissez-faire. He argues that there are “multiple equilibria,” and that government can move an economy, in the right stage of development, from one equilibrium to another. The more children that work, the lower the overall level of wages, and the lower the stigma from sending one’s child out to work. Basu argues you can “tip” an economy into considerably less child labor. If you can cut out a big chunk of child labor, wages rise, making child labor for many other families less necessary. The stigma attached to child labor rises as well, and fewer people will send their children out to work. Once an economy is moving away from child labor, the process can happen quite rapidly.

According to one estimate, between 15 and 17 percent of all households in the United States could benefit financially from filing bankruptcy. Only about one-tenth of them do so. I learned this from The Two-Income Trap (reviewed by me immediately below). The book draws on the research of Michelle J. White, here is her on-line summary of her work. This also suggests that current bankruptcy law is unsustainable in the long run, here is one of many calls for reform.