Category: Education

Why do wealthy parents have wealthy children?

by  Tyler Cowen in

From Andreas Fagereng, Magne Mogstad, and Marte Rønning

Abstract: We show that family background matters significantly for children’s accumulation of wealth and investor behavior as adults, even when removing the genetic connection between children and the parents raising them. The analysis is made possible by linking Korean-born children who were adopted at infancy by Norwegian parents to a population panel data set with detailed information on wealth and socio-economic characteristics. The mechanism by which these Korean-Norwegian adoptees were assigned to adoptive families is known and effectively random. This mechanism allows us to estimate the causal effects from an adoptee being raised in one type of family versus another.

Here is a (possibly gated) link.

The Great Walter Williams, Radical Troublemaker

by  Alex Tabarrok in

Our colleague, the great Walter Williams, died on Tuesday shortly after teaching his last class–which is exactly how he would have wanted to go. He was 84 and had been teaching at George Mason since 1980. As Don Boudreaux writes in the WSJ:

For 40 years Walter was the heart and soul of George Mason’s unique Department of Economics. Our department unapologetically resists the trend of teaching economics as if it’s a guide for social engineers. This resistance reflects Walter’s commitment to liberal individualism and his belief that ordinary men and women deserve, as his friend Thomas Sowell puts it, “elbow room for themselves and a refuge from the rampaging presumptions of their ‘betters.’ ”

Walter taught UCLA-Chicago price theory to multiple generations of George Mason students. His students loved him. He secured funding for me when I was a  student, for which I have always been grateful. You can find many of his graduate exam questions here. They are tough!

Walter led a remarkable life recounted in his autobiography, Up From the Projects. He was arrested for disorderly conduct several times and drafted into the army. He was later court-martialed but, acting as his own attorney, he wins his case. He’s sent to Korea and when asked to fill in a form stating his race he writes Caucasian because the Negros got all the worst jobs. He tells his commanding officer that he has pledged to defend the constitution against all enemies foreign and domestic and that he, the commanding officer, is a domestic enemy of the constitution. He writes to complain to President John F. Kennedy. The army gives him an honorable discharge. His wife, Connie, helps him to become more mannerly. It was only when he discovered economics, however, that he learned to combine trouble-making with discipline. He was interviewed a few years ago on these themes by Jason Riley for the WSJ:

“I was more than anything a radical,” says Mr. Williams. “I was more sympathetic to Malcolm X than Martin Luther King because Malcolm X was more of a radical who was willing to confront discrimination in ways that I thought it should be confronted, including perhaps the use of violence.

“But I really just wanted to be left alone. I thought some laws, like minimum-wage laws, helped poor people and poor black people and protected workers from exploitation. I thought they were a good thing until I was pressed by professors to look at the evidence.”

During his junior year at California State College in Los Angeles, Mr. Williams switched his major from sociology to economics after reading W.E.B. Du Bois’s “Black Reconstruction in America,” a Marxist take on the South’s transformation after the Civil War that will never be confused with “The Wealth of Nations.” Even so, the book taught him that “black people cannot make great progress until they understand the economic system, until they know something about economics.”

He earned his doctorate in 1972 from UCLA, which had one of the top economics departments in the country, and he says he “probably became a libertarian through exposure to tough-mined professors” — James Buchanan, Armen Alchian, Milton Friedman — “who encouraged me to think with my brain instead of my heart. I learned that you have to evaluate the effects of public policy as opposed to intentions.”

Walter was never politically correct. He once demanded that our Dean do something about the lack of representation of Asian-Americans on the GMU basketball team. He enjoyed his iconoclasm but his provocations were designed to get people to stop and think not to offend. It’s not clear that this is possible anymore.

Walter was a brilliant communicator. GMU Econ Chair Daniel Houser noted:

That Walter is so beloved by legions of non-economists speaks not to his dumbing down of economics in order to attain popularity. Instead, it speaks to his unusual mastery of economics to make it accessible and relevant to ordinary men and women.”

Walter was always his own person, perhaps best reflected in this interview with Nick Gillespie.

Gillespie: Let’s talk a little bit about the broad-based libertarian movement. Do you feel that you are part of a libertarian movement?

Williams: No, I don’t.

Gillespie: So, what are you then?

Williams: I am not a part of a movement. I have never been part of a movement, I just do my own thing.

I miss him already. There is no replacement. Here is Suffer No Fools, an excellent video-biography of the great Walter Williams.

American Ph.Ds are failing at start-ups

by  Tyler Cowen in

We document that since 1997, the rate of startup formation has precipitously declined for firms operated by U.S. PhD recipients in science and engineering. These are supposedly the source of some of our best new technological and business opportunities. We link this to an increasing burden of knowledge by documenting a long-term earnings decline by founders, especially less experienced founders, greater work complexity in R&D, and more administrative work. The results suggest that established firms are better positioned to cope with the increasing burden of knowledge, in particular through the design of knowledge hierarchies, explaining why new firm entry has declined for high-tech, high-opportunity startups.

Here is more from Thomas Åstebro, Serguey Braguinsky, and Yuheng Ding.

Why you should use *Modern Principles* for your class

by  Tyler Cowen in

Alex has had numerous posts on Modern Principles, but here is my two cents.  A textbook, as the name indicates, is a book.  It has to be conceived of as a book, and thought of as a book, and written as a book, and ideally it should be read as a book.  There are many other textbooks out there, and I do not wish to name names, but consider the following question.  Which are the authors who really love books?  Who spend their lives reading books?  And indeed writing books.  And who spend their lives studying what makes books good or bad?  Who view books as truly essential to their overall output?

An ancillary question to ask is who are the authors who are truly dedicated to video, and to on-line communication more generally, as an independent outlet for their efforts and creativity?

Here is information on our new fifth edition, better than ever.  Because we love books.

Teaching Modern Principles Online

by  Alex Tabarrok in

I’ve been teaching hundreds of students the principles of economics using Modern Principles of Economics and its online course management system and the response has been excellent. Most students like the class but what always surprises me is that some students like the online class better than any other class they have ever taken. A good lesson about different learning styles. Some reviews:

  • I wanted to say thank you for the way you teach your class. I just started it and it is way better than I expected. The videos you made are why I’m thanking you. In high school I would always have to go home and watch videos explaining what the teacher taught us….your class is already the best class I have taken in my life because it fits the way I learn. I’ve never really written an email like this so forgive me if it breaks the usual business casual email approach. Thank you again!
  • I am a student a George Mason…I would like to say that these classes are the best online classes I have taken and wish all my classes would be like this! Especially with Mason being mostly online and all of my classes being online this semester, I think that this class’s design should be an outline for other online classes. The videos themselves are very well edited and can be fun to watch! Instead of just watching a PowerPoint online and taking notes, being able to see the professor speak, while incorporating graphs, and even animations makes the class much more enjoyable, and in my case easier to absorb. Another aspect I wish all online classes did is giving quizzes along with the videos to check information learned. Speaking from my experience in your previous class the “Learning Curve” and other pre-test activities did wonders for me when preparing for chapter tests and exams. Overall, these classes are a great experience and I look forward to this semester in Econ 104! As a little side note, my favorite videos/lessons from last semester where the ones where you and Professor Cowen would debate over subjects learned in class. It gave useful insight and thinking to both sides of the argument.
  • I really liked how it was set up with the videos. As someone who has diagnosed ADHD, this type of online class, and class in general has made it so much easier for me to constantly go back on videos to hear what the professors were saying and trying to teach us. Honestly best class experience I’ve ever had, and I wish more were like it.
  • Prof. Tabarrok’s videos that accompanied our course material were of high quality. Even though this was a distance learning course, I felt that I got an in depth lecture for each section of the course. I did not feel that I was left to read the book myself; it was like I had great in-person lecture that I could re watch again and again.
  • Since this is an online course, I expected it to be very short cut and not interactive. This course was the total opposite. Being able to watch videos about professors genuinely teaching economics and answering questions while following the video was so helpful.The aspects of the course allowed me to connect with different imperative issues & solutions across the world.

Who Mismanages Student Loans and Why?

by  Tyler Cowen in

From Kimberly Rodgers Cornaggia and Han Xia:

With a license to use individually identifiable information on student loan borrowers, we find that a majority of distressed student borrowers manage their debt sub-optimally and that suboptimal debt management is associated with higher loan delinquency. Cross-sectional analysis indicates that loan (mis)management varies significantly across student gender, ethnicity, and age. We test several potential selection-based explanations for such demographic variation in student loan management, including variation in students’ overconfidence, consumption preferences and discount rates, and aversion to administrative paperwork. Motivated by federal and state allegations against student loan servicers, we also test for the presence of treatment effects. Overall, the empirical evidence supports the conclusion that loan servicers’ differential treatment across borrowers play an important role in student loan outcomes.

Here is a key background fact:

Broadly, subsidized student borrower assistance programs include provisions for loan forbearance, loan deferment, and
income-driven repayment (IDR) options for financially distressed borrowers.

Borrowers should switch to those provisions more than they do, with older students, non-traditional students, males, and non-whites performing less well than others.  Here is the link to the paper, via the excellent Kevin Lewis.

My podcast with Darren Lipomi

by  Tyler Cowen in

He is a well-known chemist (and more) at UC San Diego. We started with classic Star Trek and then moved into textiles, chemistry, music vs. sound, nanobots against Covid, how to interview, traveling during a pandemic, art collecting and voodoo flags, the importance of materials science, and much more.  Mostly he interviewed me, though it went a bit both ways.

Almost 100% fresh material and topics, and here is the Spotify link.

MIT graduate micro exam, 1961

by  Tyler Cowen in

From the archives of Irwin Collier (I won’t do any extra indentation):

Economics Candidates: Answer any FOUR questions (thirty minutes each).
S.I.M. Candidates: Answer any TWO questions (thirty minutes each).

  1. Within the framework of static, partial-equilibrium theory, indicate under what circumstances advertising will reduce product prices in the long run, (a) if the advertiser is a simple monopolist, (b) if the advertisers are members of a large, perfectly symmetrical, Chamberlinian group of suppliers of differentiated products (the number of firms being large enough to rule out oligopolistic relationships, and variable in accordance with a long-run-equilibrium condition of zero profit for all firms).
  2. How is a firm’s demand schedule for a particular factor of production derived (a) when that factor is the only variable one, and (b) when the quantities of all factors are variable? Show which of these demands is, if anything, the more elastic.
  3. The demands for two products are: q1 = q2 = 54 – p1 -p2. How would you characterize their relationship? If they are produced by separate sellers at constant average costs of c1 = 12 and c2 = 6, respectively, calculate each man’s equilibrium price, quantity, and profit under each of the following conditions:
    1. Each seller assumes that the other’s price is a constant;
    2. The second seller behaves that way and the first seller realizes that he does;
    3. Both sellers maximize their joint profit and share it equally.
  4. Two countries can produce food (F) and clothing (C) with labor (L) as the only factor of production. Country A has 20 billion units of L, each of which can produce either 5 units of F or 2 units of C. Country B has 10 billion units of L, each of which can produce either 8 units of F or 6 units of C. Everyone always spends half of his income on F and the other half on C. In a purely competitive equilibrium with balanced trade between the two countries (and no transportation costs), what is the effect on the quantities of F and C produced and consumed in each country? Could either country benefit by imposing a tariff on the imported good?
  5. What are the various reasons why a free-private-enterprise economy may fail to allocate its resources in an optimally efficient way? Explain.
  6. Discuss the roles of “real” and “monetary” elements in a satisfactory theory of interest. Is it logically possible to fashion an interest theory exclusively in terms of one or the other of those elements? Explain.

TC again: I don’t think current graduate students (outside of MIT and a few other places) would do very well on #1, nor do I think they would understand what is being asked on #6, much less have a good answer.  On #5, I wonder how many would give a sufficiently analytical answer rather than just repeating a bunch of cliches from media and social media?

What should I ask Benjamin M. Friedman?

by  Tyler Cowen in

As noted, Ben has a new and very interesting book coming out Religion and the Rise of Capitalism.  He is also the author of the superb The Moral Consequences of Economic Growth, and the earlier Day of Reckoning, about the economic policies of the Reagan administration.  Ben has been a leading macroeconomist since the 1970s, and he taught me Ph.D. macro at Harvard in 1984, one of my favorite professors I might add.  Here is Ben on scholar.google.com.

So what should I ask him?

International Trade in Modern Principles

by  Alex Tabarrok in

The Trump tariffs are the biggest change in trade policy since Smoot-Hawley. Whatever the economic merits of the Trump tariffs, they make great material for textbook authors! As we illustrate in the new edition of Modern Principles, drawing on a great paper by Flaaen, Hortaçsu and Tintelnot. The excerpt illustrates our approach throughout our textbook, Modern Principles, modern applications.

—-

Now that you know how to analyze international trade using demand and supply, let’s see how well the theory holds up by looking at what happened in the market for washing machines after the Trump tariffs were put into place in January of 2018. The tariff came in two parts. The first 1.2 million washing machines were taxed at a rate of 20% and all remaining imports were taxed at a rate of 50%. The tariffs were put in place for three years with slight declines (to 18% and 45% and 16% and 40%) in the 2nd and 3rd year respectively. A 50% tariff on washing machine parts was also included to prevent manufacturers from avoiding the duty by shipping parts to the United States for quick assembly.

Before the tariffs were put into place, about 3.8 million washing machines were imported per year. Once the tariffs began, imports declined by 1.2 million units to approximately 2.6 million washing machines per year. Figure X shows the price index for laundry equipment in the United States. Prices for washer and dryers had been declining since at least 2013, but the moment tariffs were imposed prices jumped dramatically. (Slight declines in prices were also seen in 2019 when the tariff rate decreased modestly).

Economists estimate that the tariff increased the price of washing machines by about 12%. That’s actually a smaller increase in price than one might guess from the size of the tariff but it turns out that dryer prices also increased by about 12%. Dryers were not subject to the tariff. So why did dryer prices increase? Washers and dryers are typically bought together in a package. Manufacturers, therefore, tend to focus on the package price and they “smoothed” out the washer tariff over both washers and dryers. Looking at thousands of goods, economists estimated that the Trump tariffs were on average entirely passed on to consumers, just as the simple supply and demand model predicts.

Another important prediction of the supply and demand model is that the tariff will increase the prices of all washing machines, whether produced domestically or imported. When the tariff is first put into place, domestic producers have lower costs than foreign producers and, as a result, they sell more and increase output. As domestic producers increase their output, however, their costs rise until in equilibrium domestic and foreign producers are, once again, selling for the same price. In fact, this is exactly what happened. Domestic producers like Whirlpool raised their prices at least as much as did foreign producers.

The Trump tariffs did have one unexpected consequence. In the model, it’s natural to think of domestic producers as being domestically owned firms, but that is not necessarily the case. Whirlpool, a domestic producer of washing machines, did produce more because of the tariffs but something else happened. The foreign producers, Samsung and LG, expanded their US factories! That’s good for US workers in the washer and dryer industry. Nevertheless, the expansion of Samsung and LG was probably an unwelcome surprise to Whirlpool, which may have expected that the tariffs would give them more of a competitive advantage in the domestic market than they ended up getting.

The increase in domestic production from both domestically owned and foreign owned firms resulted in about 1800 new jobs in the washer and dryer industry. Remember trade policy does not influence the total number of jobs in an economy. The jobs created in the washer and dryer industry came at the expense of jobs lost in US export industries. The new jobs in the protected industry, however, are visible and they are important politically, because the President can point to them as a benefit of his policies. Thus, it’s an interesting question to ask, how much did consumers pay to create these jobs?

The tariffs increased washer and dryer prices by about 12% or $88 each on combined sales of 17.4 million units. The total cost to consumers, therefore, was approximately $1.56 billion per year. The government took in an extra $82.2 million in tariff revenues, which we count as a plus, so the total cost was about $1.46 billion per year. The cost per job created was therefore a whopping $811,000 per job (1.46 billion/1800). Instead of creating jobs by paying more for washers and dryers, US consumers would have been much better off paying each new worker in the laundry industry $100,000 to enjoy a nice vacation!

My Conversation with Jimmy Wales

by  Tyler Cowen in

It was excellent throughout, here is the audio, video, and transcript, here is part of the summary:

Jimmy joined Tyler to discuss what happens when content moderation goes wrong, why certain articles are inherently biased, the threat that repealing section 230 poses to Wikipedia, whether he believes in Conquest’s Law, the difference between “paid editing” and “paid advocacy editing,” how Wikipedia handles alternative accounts, the right to be forgotten, his unusual education in Huntsville, Alabama, why Ayn Rand is under- and over-rated, the continual struggle to balance good rules and procedures against impenetrable bureaucracy, how Wikipedia is responding to mobile use, his attempt to build a non-toxic social media platform, and more.

Here is an excerpt:

COWEN: I’m the rare person who actually has no sock puppets. Why not allow sock puppets? What exactly is wrong with them? So what if a person has more than one identity out there, as long as you can monitor the identity that is operating on Wikipedia?

WALES: That’s a great question. In fact, we do try to make a distinction between a sock puppet and a legitimate alternate account. We actually have procedures whereby you can declare a legitimate alternate account to the arbitration committee so that you’re insulated from any bad harms if it’s found out. Some of the keys are that we rely on trust.

One of the things that is really important to us — we do a lot of what we call “not voting.” It’s voting, but it’s really a straw poll. The votes — typically, they’re not the final word, and if somebody comes into a discussion and pretends to be five different people, arguing that something should be deleted, and there are two actual different people arguing that it should be kept, that’s deceptive. It kind of skews the balance.

People who are reviewing that say, “Well, I think we should keep it, but I see there are five people here with a different opinion, so maybe I’m wrong.” That bulking up your impact by double-voting on something, by pretending to be different people, is super problematic.

The other problematic sock puppeting is a sock puppet to conceal your conflict of interest. I remember we had one notorious case of a PR firm that had engaged in quite a lot of problematic editing.

One of their accounts — it made a lot of edits and pretended to be a retired fellow who was a car collector. There were all these pictures of old cars and so on. They had a whole persona created that seemed like a lovely chap who just liked to edit Wikipedia, but in fact, it was just somebody at the PR firm who was giving a cover, and I think that kind of deception is problematic.

The good examples of multiple accounts would be someone who wants to edit in a controversial area. As an example, let’s say you’re a well-known person, and suppose you took an interest in our entries on pedophilia, not because of any prurient interests but simply because you think this is actually an important topic of social impact.

Well, you probably wouldn’t necessarily want to be known at your university as the guy who edits the pedophilia articles on Wikipedia. That’s just not easy for people to be open about, even if you’re doing all the right things. So you might say, “Yes, I actually want to edit in some areas of World War II history under this identity, but I’m going to do some work over here, and I really prefer it not to be tied back to my real-life identity.” And that’s kind of okay, as long as you’re not voting in elections with two accounts and things like that.

Definitely recommended.

Platform Economics in Modern Principles

by  Alex Tabarrok in

Why is Facebook free? Why are credit cards less than free? Why do singles bars sometimes have women drink free nights but never men drink free nights? All of these questions are in the domain of platform economics. Platform economics is new. Tirole and Rochet practically invented the field with a seminal paper in 2003–and that paper was one of the reasons Tirole won the Nobel prize in 2014. Despite being new, platform economics deals with goods which are fundamental to the modern economy. Thus, Tyler and I thought that it was incumbent upon us to teach some of the intuition behind platform economics in Modern Principles of Economics. But students have enough new material to learn, so we set ourselves a challenge–explain the intuition of platform economics using principles that the students already know. Surprisingly, platform economics can be taught with just two principles: externalities and elasticities.

In our chapter on externalities we offer the students a puzzle. Why do some firms offer their workers free flu shots? The answer, as memorably illustrated in this video, is that the firm “internalizes the externality.” When one worker gets a flu shot, other workers at the firm are less likely to get sick. In principle, the workers could subsidize one another to achieve the efficient outcome but transactions costs makes that solution impractical (the Coase theorem). The firm, however, is already involved in transactions with all the workers and, as a result, it can subsidize flu shots and reap the benefits of workers taking fewer sick days. How much the firm should subsidize flu shots depends on the elasticity of flu shots with respect to the price and on the elasticity of sick days with respect to vaccinated workers.

Now what does this have to do with Facebook? Well think about seeing ads as a bit like getting a flu shot–seeing ads has a benefit to you but it’s also a bit of a pain so if you had a choice you might not watch that many ads. But advertisers want you to see ads–in other words, Facebook users who see ads create a positive externality for advertisers. The platform firm, Facebook, internalizes this externality and that means subsidizing ad-seeing by selling Facebook at a zero price to readers and instead charging advertisers. As we put it in Modern Principles:

Imagine that Facebook begins with a positive price for both readers and advertisers (PR>0 and PA>0). Readers, however, are likely to be sensitive to the price so a small decrease in price will cause a large increase in readers (very elastic demand). Thus, imagine that Facebook lowers the price to readers and thus increases the number of readers. With more readers, Facebook can charge its advertisers more, so PA increases. Indeed, if the demand for advertisers increases enough, it can even pay Facebook to lower the price to readers to zero! Thus, the key to Facebook’s decision is how many more readers it will get when it lowers the price (the reader elasticity), how much those readers are worth to advertisers (the externality of readers to advertisers) and how high can it increase the price to advertisers (the advertiser elasticity).

More in the textbook!