Category: Political Science

*Winner-Take-All Politics*, the new book by Jacob Hacker and Paul Pierson

by  Tyler Cowen in

That's the new book by Jacob Hacker and Paul Pierson.  I have a different take on the main argument, but this is an important book for raising some of the key questions of our time.  I would recommend that people read it and give it serious thought.  The writing style is also clear and accessible.  Two of the key arguments are:

1. Skill-based technological change is overrated as a cause of growing income inequality among the top earners.

2. "The guilty party is American politics."

You'll find an article-length version of some of the Hacker-Pierson argument here, although the book covers much more.

I agree with #1, so let me explain why my take on #2 differs:

1. Median income starts stagnating in 1973 and income inequality starts exploding in 1984, according to the authors.  However, I consider this a "long" time gap for the question under consideration, namely whether there is a direct causal relation and whether people at the top are using politics to skim from people further below in the income distribution.  Furthermore income growth stagnates around 1973 for many countries, not just the United States, and most of those countries never experienced the subsequent "inequality boom" of the Anglosphere.  If they avoided the later inequality, why didn't they also avoid the stagnation?  The discussion of the causal issues here isn't convincing and the authors' hypothesis is not compared to alternatives or tested against possible disconfirming evidence.  

2. There is a lot of talk of unions, but I could concede various points and that's still just a ten to fifteen percent one-time wage premium, when workers are unionized.  It won't much explain persistent changes in growth rates over time, whether for the top one percent or the slow income growth at the median.  Furthermore the main U.S. sectors are harder to usefully unionize than, say, Canada's mineral and resource wealth or Europe's manufacturing.

3. The authors underestimate the role of finance in driving the growth in income inequality.  Their p.46 shows a graph suggesting that non-financial professionals are 40.8% of the top 0.1 percent.  Maybe so, but the key question is what percentage of income those professionals account for.  The Kaplan and Rauh paper, not cited in this book, suggests a central role for finance.  In 2007 the top 5 hedge fund earners pulled in more income than all the CEOs of the S&P 500 put together.  On top of that, some "non-financial" incomes are driven by financial market trading, such as in energy or commodity companies.  And a lot of top-earning lawyers are doing financial deals, etc.

Turn to Table 7 of the paper cited by the authors, p.56 here.  The "non-financial" category still looks bigger but it's incomes in the finance category which grow most rapidly and Bakija and Heim suggest that stock options and asset price movements account for a big share of the growth in "non-financial" incomes.  My view is that the increasing liquidity of financial markets drove much of the trend, which was distributed across both the "non-financial" and the "financial" sector.  If liquid financial markets allow a privately-owned warehouse company to buy a trucking company on the cheap, and profit greatly (plus the managers pull in a lot), I am calling that a financial markets development, even though it's in the "non-financial" sector.

4. Let's say the story at the top is mostly one of finance.  You could describe that as: "some change in financial markets led to rapid income growth for the top earners and politics did nothing about that."  Fair enough.  But it's still a big leap from that claim to portraying politics as the active force behind the change.  Politics was only the allowing force and I don't think there was much of a conspiracy, even if various wealthy figures did push for deregulation or more importantly an absence of new regulation.  I also don't think anybody was expecting incomes at the top to rise at the rates they did; it was a kind of pleasant surprise for the top earners to be so lucratively rewarded.  So the major change is left unexplained, for the most part, and the whole story is then shifted onto the passive actor, namely the public sector, which is elevated to a major causal role which it does not deserve.

5. pp.47-51 the authors talk about tax rates.  If we had kept earlier high marginal rates, the top earners would not have received nearly so much and also they would not have worked so hard.  Maybe so, yet this won't much explain the stagnating pre-tax incomes at the median and it doesn't fit very well into the overall story, unless you wish to make a complicated "lower tax revenue, lower quality public services, MP of the median earner goes down" sort of story. 

6. If the top earners are screwing over their wage earners in the big companies, by pulling in excess wages, options, and perks, we should observe non-stagnant median pay for people who avoid working in firms with fat cat CEOs.  Or we should observe talented lower-tier workers fleeing the big corporations, to keep their wages up.  Yet no evidence for these predictions is given, nor are the predictions considered.  It is likely that the predictions are false.

7. To the extent the high incomes at the top come through capital markets, it is either value created or a transfer/redistribution.  You can argue over the percentages, but to the extent it is the former it is not at the expense of the median.  To the extent it is the latter, the losers will be other investors, not the median earner or household, who does not hold much in the way of stock (lower pension fund returns don't count in the measure of median stagnation).

8. What follows p.72 is an engaging, readable progressive history of recent American politics, but the economic foundations of the underlying story have not been pinned down.

9. In my view, most likely we have two largely separate phenomena: a) median wage growth slows in 1973 because technology stagnates in some regards, and b) liquid financial markets, in various detailed ways, allow people with resources to earn a lot more than before.  Politics may well play a role in each development, but with respect to b) its role has been largely passively, rather than architectural and driving.

Anyway, I found it a very useful book for organizing my thoughts on these topics.

Addendum: Matt Yglesias comments.

The Institutional Causes of China’s Great Famine, 1959-61

by  Tyler Cowen in

Written by Xin Meng, Nancy Qian, and Pirerre Yared, this paper is a very good applied study of Mises and Hayek:

This paper investigates the institutional causes of China’s Great Famine. It presents two empirical findings: 1) in 1959, when the famine began, food production was almost three times more than population subsistence needs; and 2) regions with higher per capita food production that year suffered higher famine mortality rates, a surprising reversal of a typically negative correlation. A simple model based on historical institutional details shows that these patterns are consistent with the policy outcomes in a centrally planned economy in which the government is unable to easily collect and respond to new information in the presence of an aggregate shock to production.

You can find ungated copies here.

A new theory of monopsony, or how to bargain with trapped miners

by  Tyler Cowen in

In an effort to dominate the miners, the team of psychologists led by Mr Iturra has instituted a series of prizes and punishments. When the miners behave well, they are given TV and mood music. Other treats – like images of the outside world are being held in reserve, as either a carrot or a stick should the miners become unduly feisty.

In a show of strength, the miners have at times refused to listen to the psychologists, insisting that they are well. ''When that happens, we have to say, 'OK, you don't want to speak with psychologists? Perfect. That day you get no TV, there is no music – because we administer these things,''' said Dr Diaz. ''And if they want magazines? Well, then they have to speak to us. This is a daily arm wrestle.''

Here is more.  Here is one upshot:

''NASA told us we have to receive the arrows, so that they don't start shooting the arrows at each other,'' said Dr Diaz.

''So we are putting our chests forward – now they can target the doctors and psychologists.''

In other words, don't be too nice to the miners.  For the pointer I thank The Browser.

Why aren’t we using monetary policy to stimulate aggregate demand?

by  Tyler Cowen in

My NYT column today is about why we can't move to a three percent inflation target (which I favor, at least for some number of years) and how we might make the leap.  Excerpt:

…if the Fed announces a commitment to a higher inflation target but fails to establish its credibility, it will have shown impotence. It would be a long time before the Fed was trusted again, and the Fed might even lose its (partial) political independence. All of a sudden, the Fed would end up “owning” the recession.

Part of the credibility problem stems from the political environment, especially in Congress. Imagine the day after the announcement of a plan for 3 percent inflation. Older people, creditors and workers on fixed incomes – all connected to powerful lobbies – would start to complain. Republicans would wonder whether they had found a new issue on which to campaign, namely, opposition to inflation. And Democrats would worry about what position to take. Presidents of some regional Fed banks would probably oppose the policy publicly.

…The Fed lost some of its political independence during the financial crisis. It undertook major rescue operations in conjunction with the Treasury, and these bailouts proved extremely unpopular. Congress has taken a closer look at Fed operating procedures and will engage in a one-time audit of the Fed’s emergency lending. When it comes to inflation, the Fed cannot easily turn to Congress and simply ask to be trusted.

This is the sad side story of our financial crisis: especially when it comes to financial matters, a great deal of trust has been lost. There is the prospect of a free lunch right before us, yet it is unclear that we will be able to grab it.

…In failing to push harder for monetary expansion, is Mr. Bernanke a wise and prudent guardian of the limited discretionary powers of the Fed? Or is he acting like a too-hesitant bureaucrat, afraid to fail and take the blame when he should be gunning for success?

A few points:

1. For reasons of space, I could not note that the so-called "robust Reagan recovery" had price inflation of over four percent a year.  Many conservatives shy away from recognizing this.

2. Three percent inflation also would help the currently impossible state of the real estate market, by lowering the real value of debts.

3. I do not mean to discriminate against Scott Sumner's nominal gdp idea, but it is easier to explain an inflation rate target to a public audience.  Here is my earlier column on Scott.

4. Maybe we are in a new political economy equilibrium where each government agency is given "one shot" at a problem.  Treasury had its one shot with the stimulus plan.  The Fed had its exotic monetary policy operations and deal-making during the crisis.  Maybe in bad times voters aren't happy no matter what, and no one is allowed to try twice.  We have not yet thought through the political economy of this scenario.

5. If the Fed can't make the commitment today, when did it go wrong?  Perhaps at the peak of the crisis, when it was operating with a high degree of discretion, and various radical actions were viewed as justified, it should have announced that, to complete recovery, the three percent price inflation commitment would commence after the dust had settled.  That would have required Magnus Carlsen-like levels of foresight, however.  If nothing else, Bernanke may not have realized that some version of #4 was operating.

6. Contra Mark Thoma, I am not so worried about time consistency problems, provided that Congress supports the Fed.  As long as the economy is weak, it's in the Fed's interest to keep up the three percent inflation.  If people know that in better times we will eventually settle back to two percent inflation, I don't think this undercuts the whole idea.

7. It remains instructive to read Bernanke's 1999 Japan piece, for instance:

BOJ officials have strongly resisted the suggestion of installing an explicit inflation target. Their often-stated concern is that announcing a target that they are not sure they know how to achieve will endanger the Bank’s credibility; and they have expressed skepticism that simple announcements can have any effects on expectations. On the issue of announcement effects, theory and practice suggest that “cheap talk” can in fact sometimes affect expectations, particularly when there is no conflict between what a “player” announces and that player’s incentives. The effect of the announcement of a sustained zero-interest-rate policy on the term structure in Japan is itself a perfect example of the potential power of announcement effects.

With respect to the issue of inflation targets and BOJ credibility, I do not see how credibility can be harmed by straightforward and honest dialogue of policymakers with the public.

Maybe I'm too Straussian or too Freudian here, but I read him as trying to promote the commitment, without being totally sure it is possible; note the "distancing" language at the critical points of the argument.  I believe Bernanke wrote this next part before he completely understood the incentives of bureaucracies to conserve information:

But if BOJ officials feel that, for technical reasons, when and whether they will attain the announced target is uncertain, they could explain those points to the public as well. Better that the public knows that the BOJ is doing all it can to reflate the economy, and that it understands why the Bank is taking the actions it does. The alternative is that the private sector be left to its doubts about the willingness or competence of the BOJ to help the macroeconomic situation.

The markets speak

by  Tyler Cowen in

I read so much blogospheric debate on the future of the Republican Party.  As for the 2012 Republican nominee, at Intrade.com, Romney is still leading the pack in the 31 range, and Palin remains in the 17-18 range.  John Thune is very much underdiscussed, given that his chance of winning the nomination seems to be about as large as Palin's. 

As Robin Hanson would say, politics isn't about policy.  Of course if you think these numbers are wrong, go and improve them.

Scary sentences

by  Tyler Cowen in

It seems the Obama administration is looking for any possible argument to justify its policy of assassinating U.S. citizens without legal restraint.  But that's not always easy to manage:

“The more forcefully the administration urges a court to stay out because this is warfare, the more it puts itself in the uncomfortable position of arguing we’re at war even in Yemen,”

The administration doesn't want any possibility of judicial review:

…they are seeking to have the lawsuit dismissed without discussing its merits. For example, officials say, the brief is virtually certain to argue that Mr. Awlaki’s father has no legal standing to file a lawsuit on behalf of his son.

Is the administration trying to figure out the law, and then follow it, or to simply push through whatever it wants to do?

*The Globalization Paradox*

by  Tyler Cowen in

The author is Dani Rodrik and the subtitle is Democracy and the Future of the World Economy and it is due out early next year.

It is a very good introduction to the Rodrik world view.  If you already know the Rodrik worldview, I am not sure it offers anything new.  Still, it is worth reading through the Rodrik worldview more than once.  I prefer the Rodrik "every country is different" tack to the "globalization, nation-state, democracy — choose two" emphasis (and here), and this book slants in that direction, though it has both. 

When it comes to the "choose two" approach, I wonder at what margin must we choose — doesn't Sweden have all three today?  Doesn't politics involve a lot of juggling balls in the air anyway?  A country with a high rate of productivity growth can manage all sorts of tensions and a country without such growth cannot; I would sooner start the analysis with that distinction.

What is the most likely source of doomsday in 2012?

by  Tyler Cowen in

Alek has a request:

1) While I'm far from a doomsayer, I'm wondering what is the best way to bet in favor of the world ending in 2012? Betting against is pretty obvious.

I am taking this to ask what is the most likely cause of the destruction of all civilization, circa 2012, and not how to collect on the bet, in which case he should read Pascal.  (If the 2012 end of the world won't be a total surprise, any leveraged short position should do, but spend the money quickly!)

Here are some hypotheses, but my answer is: destruction of the earth by space aliens.

Here are previous MR posts on The Fermi Paradox.  Rampaging space aliens would explain why we don't see more civilizations out there, plus predatory ways imply that contact is short-lived, thereby making our current lack of contact more likely in the Bayesian sense.

We could be living in some kind of "branching/splitting" theory where the highest number of branches come right before everything ends and for Bayesian reasons we expect to be right up against that final point.  Still, why should we think that maximum branching/splitting is coming in 2012?  After a Lakers threepeat, are there no more possible worlds to create?  

The overwhelming probability from a nuclear exchange, at least circa 2012, is that it would remain limited, albeit highly destructive.  A pandemic is unlikely to kill more than a billion people.  A very large asteroid or a super-volcano explosion can be considered other leading contenders for world-enders.

A few nights ago Natasha and I saw The Day the Earth Stood Still, 1951 version.  It's more a tract on foreign policy than science fiction and Klaatu of course is a stand in for the United States.  I hadn't seen it in over twenty years and I'm astonished how well the movie captures and presages today's current mix of paranoia and utter unpreparedness, vis-a-vis "aliens."  It works poorly when Klaatu dons the rhetoric and tactics of the United States in galactic affairs, combined with equally clumsy implied threats, backed by no moral authority but superior hardware.  It's one of the scariest, and best, movies to watch in 2010, with a superb Bernard Herrmann soundtrack and it also has good shots of WDC in 1951.  I won't give away the ending but a careful listen shows it's as pessimistic about the aliens as anything.  Supposedly the movie deeply influenced Ronald Reagan and brought him to the arms control table.

*Pictures of the Socialistic Future*

by  Tyler Cowen in

In his preface, Bryan Caplan writes:

Yet almost no one questioned the socialists' idealism.  By 1961, however, the descendents of the radical wing of the Social Democratic Party had built the Berlin Wall — and were shooting anyone who tried to flee their "Workers' Paradise."…Who could have foreseen such a mythic transformation?

Eugene Richter, that's who, in 1893.  There is now a reissue of Richter's Pictures of the Socialistic Future.  There is an interview with Bryan Caplan about the book here.  Here is the book on-line and free.

The rule of law, or the rule of men (women)?

by  Tyler Cowen in

The Obama administration on Thursday told health insurers that it will track those who enact "unjustified" rate increases linked to the health overhaul and may block those companies from a new marketplace for insurance coverage.

Kathleen Sebelius, secretary of Health and Human Services, issued the warning in a letter to Karen Ignagni, the insurance industry's top lobbyist.

Ms. Sebelius said some insurers were notifying enrollees that their insurance premiums will increase next year as a result of the law's new benefits.

…"There will be zero tolerance for this type of misinformation and unjustified rate increases," Ms. Sebelius wrote. "We will not stand idly by as insurers blame their premium hikes and increased profits on the requirement that they provide consumers with basic protections."

Nowhere is it stated that these rate hikes are against the law (even if you think they should be), nor can this "misinformation" be against the law.  Here is further information, including a copy of the letter, which is worse than I had been expecting.

Fiscal stimulus coming to Haiti

by  Tyler Cowen in

Experts said the presidential and legislative elections could very well be the economic stimulus quake-ravaged Haitians have been awaiting since the devastating Jan. 12 earthquake left an estimated 300,000 dead, and wiped-out jobs. The campaigns are expected to hire tens of thousands of Haitians.

“It's like a cash transfer to the population, a sort of cash-for-work program,'' said Leslie Voltaire, a former government minister who plans to hire 10,000 Election Day monitors and a helicopter to get around Haiti's mountainous terrain.

The full story is here.  And was the last election a model of Downsian competition?  Maybe not:

In the 2006 presidential race, which saw Haitian President René Préval beat out 34 other candidates, experts speculated that a candidate needed between $3 million and $6 million to mount a strong challenge.

It is now also believed that the country can no longer afford to have senatorial elections every two years.

What stance will (should) Republicans take on payroll tax cuts?

by  Tyler Cowen in

 Let's say you are a Republican policymaker and you already contradict yourself by a) "we can afford to extend the Bush tax cuts" and b) "we can't afford the current version of Social Security" not to mention c) "tax cuts for business are good."  Do you still favor both a) and c)?  And what if you have to pile on d) "Everything Obama proposes is bad" and yet c) leads you to e) "we should defund the very system which we can no longer afford"?  What comes out at the end?  I am curious.