Stasis, Churn, and Growth

by  Alex Tabarrok in

Paul Krugman and Brad DeLong have criticized Tyler (original and reply) on income mobility. In an effort to clarify, let us consider some simple societies. In each society there are three families, A,B,and C, each with two generations.

In society one there is no generational mobility, each generation has the same income as the previous generation. Let’s call this society Stasis.

Society Stasis
Family Generation 1 Generation 2
A 100 100
B 50 50
C 25 25
Total 175 175

 

In the second society, some generations rise and some generations fall but there is no growth, let’s call this society Churn.

Society Churn
Family Generation 1 Generation 2
A 100 25
B 50 50
C 25 100
Total 175 175

 

Brad DeLong thinks that Churn is “unambiguously” better than Stasis but he doesn’t tell us how he arrived at this conclusion. Paul Krugman also seems (it is a bit unclear) to think that Churn is better than Stasis and he adds that anyone who thinks otherwise is anti-American.

If someone likes the idea of riches going to rags almost as much as they like the idea of rags going to riches then I can see why they would think that Churn is unambiguously better than Stasis. In economics, however, we try to evaluate outcomes with more than our aesthetic preferences or moods and when we look more carefully at the preferences of the people in these societies I see ambiguity or, to be more precise, not much to choose between Stasis and Churn.

The most obvious metric is total aggregate utility and in a static sense total aggregate utility is identical in each society and in each generation. So not much to choose between Stasis and Churn on aggregate utility grounds. What about an individual choosing which society to join from behind a veil of ignorance? Again, no go, there is no difference in expected utility between Stasis and Churn from behind the veil of ignorance.

Tyler moves beyond static utility to consider some dynamic issues which could make Churn worse than Stasis, namely “habit formation and frame of reference effects.” I can see those possibilities but in my view they don’t resolve the tie.

We might resolve the tie by adding more considerations to the model; for example, perhaps society Churn has more liberty (desert/justice etc.) and that is why it churns. In this case, I personally would break the tie in favor of Churn but then the deciding factor would have been liberty not mobility. Thus, let’s keep the focus on mobility and look at one more society.

Let us consider a third society, Growth.

Society Growth
Family Generation 1 Generation 2
A 100 200
B 50 100
C 25 50
Total 175 350

 

Here at last we have some non-ambiguity. Growth is better than Stasis or Churn; aggregate utility is increasing over time and indeed every family is better off in Growth than in Stasis or Churn. Notice, however, that Growth has relative stasis, that is, there is no relative generational mobility. So now we come to the crux of the issue. Suppose that you agree with me that there isn’t much to choose between Stasis and Churn and that Growth is better than either Stasis or Churn. Do you want to add some Churn to Growth? Why? If there isn’t much difference between Stasis and Churn then how can adding Churn to Growth make it better? It doesn’t and that is why economic mobility measures are overrated. What we should care about is growth.

The public choice approach to monetary policy

by  Tyler Cowen in

It remains neglected, even today.  Yet Martin Fackler is on the case when it comes to Japan (or try this link):

By speeding the flood of less expensive imported products into Japan, the strong yen is contributing to a broader drop in the prices of goods and services, known as deflation, that has helped retirees stretch their pensions and savings. The resulting inaction on the yen, according to a growing number of economists and politicians, reflects a new political reality, with already indecisive leaders loath to upset retirees from the postwar baby boom who make up nearly a third of the population and tend to vote in high numbers.

‘‘Japan’s tolerance of the strong yen and deflation is rooted in a clash of generations,’’ said Yutaka Harada, a professor of political science and economics at Waseda University in Tokyo. ‘‘And for now, the seniors are winning.’’

The problem, many economists warn, is that the victory comes at a high price, mortgaging the future by hastening the hollowing out of the economy as companies move abroad, and contributing to the deflation that has already exacerbated a nearly two-decade decline in Japan. It may also, ultimately, be self-defeating, threatening the very industries that created the huge trade surpluses sustaining Japan’s still comfortable living standards.

How many major political battles do the elderly actually lose?  I get a little worried about the conflation between nominal and real, and the blurring of short- vs. long-run time horizons, but still this is a point worth making:

‘‘The strong yen robs from youth, but there is not much awareness here yet of generational inequalities,’’ said another lawmaker, Keiichiro Asao, with the opposition Your Party.

Krugman on income mobility

by  Tyler Cowen in

Krugman wrote:

True, Cowen isn’t advocating a complete caste society — but it’s actually not clear why, since he is suggesting that we’ll be happier as a society if people stay comfortably in the class into which they were born.

He compares my position to this poem:

The rich man in his castle,
The poor man at his gate,
God made them high and lowly,
And ordered their estate.

Uh, no.  What I wrote was that for fixed levels of income there was no gain per se from having a higher rate of mobility churn, if not accompanied by higher standards of living.  I also wrote that the best way to get useful upward mobility was to have a high rate of economic growth and spread across many income classes.  Think of it as the difference between positive-sum notions and metrics of mobility vs. zero- or negative-sum notions and metrics.  Read my first point:

If the general standard of living is rising (and I am more than willing to admit problems in this area for the United States), mobility takes care of itself over time.  I find it more useful to focus on slow growth, if indeed that is the case.  Just look at income growth for non-wealthy families and that is more useful than all the mobility measures put together.

Or read my follow-up post:

I see two big and very real problems: slow income growth for many income classes and a problem with excessively high returns to finance at the very top.

Let’s put it this way.  Paul Krugman is a great economist.  But of all the people in my RSS feed, in terms of his quality and skill as a reader, he is not in the top 90 percent.

Signaling flips

by  Tyler Cowen

A while ago Bryan and Arnold had an interesting exchange as to whether on-line education might ever “flip” into being a higher-status signal than is currently the case.  A conversation with Karina points me to one interesting example of a signal status flip, this time from Beirut (and possibly other places as well?):

Apparently, here in Beirut, nose jobs have become so popular that those who cannot afford them, or don’t even actually need them, can still opt to wear bandages across their nose…to fake a nose job. Yup. The newest trend to hit the Beirut fashion scene is the post-op nose bandage.

There is a bit more here.

What does a contract with Coursera look like?

by  Tyler Cowen in

The contract [with University of Michigan] reveals that even Coursera isn’t yet sure how it will bring in revenue. A section at the end of the agreement, titled “Possible Company Monetization Strategies,” lists eight potential business models, including having companies sponsor courses. That means students taking a free course from Stanford University may eventually be barraged by banner ads or promotional messages. But the universities have the opportunity to veto any revenue-generating idea on a course-by-course basis, so very little is set in stone.

And this stunner:

When and if money does come in, the universities will get 6 to 15 percent of the revenue, depending on how long they offer the course (and thus how long Coursera has to profit from it). The institutions will also get 20 percent of the gross profits, after accounting for costs and previous revenue paid. That means the company gets the vast majority of the cash flow.

The full story is here, and for the pointer I thank my colleague Debra Lattanzi.

Is Modern Music Boring?

by  Alex Tabarrok in

Here, via Kevin Drum, is statistical evidence that modern pop music is boring or at least more homogeneous than in the past (yes, Tyler already linked to Kevin’s post but I wanted to link to the underlying dataset (see below)).

We find three important trends in the evolution of musical discourse: the restriction of pitch sequences (with metrics showing less variety in pitch progressions), the homogenization of the timbral palette (with frequent timbres becoming more frequent), and growing average loudness levels.

The picture at right shows the timbral variety:

Smaller values of β indicate less timbral variety: frequent codewords become more frequent, and infrequent ones become even less frequent. This evidences a growing homogenization of the global timbral palette. It also points towards a progressive tendency to follow more fashionable, mainstream sonorities.

The underlying data is from the Million Song Dataset which looks pretty cool and is open.

Medicaid wars, continuing

by  Tyler Cowen in

Phil Galewitz and Matthew Fleming surveyed all 50 states to find out how Medicaid budgets are changing. They found that 13 states had made cuts this year..Seven have Democratic governors; six are led by Republicans. Three are in the south and an equal number are in New England. Two, California and Connecticut, seem to really like the Medicaid program: They volunteered to start the health law’s Medicaid expansion early, well before it’s required in 2014. Others, like Louisiana and Florida, are not fans at all: They plan to sit out that Obamacare provision.

All told, it’s pretty hard to find any narrative that explains why these states have cut their Medicaid programs, aside from some broad truths: Budgets are still squeezed and Medicaid is eating up a growing chunk of state spending.

From Sarah Kliff, here is more.

Markets in everything, Indonesian traffic jockeys

by  Tyler Cowen in

To reduce the number of cars on the road, lawmakers have designated several main arteries as what they call “Three in One zones.” During the morning and afternoon rush, you can’t drive there unless you have at least three people on board. That’s why, near the entrances to the zones, men, women and children line up – raising their index finger – offering to rent themselves to commuters in a hurry.

20-year-old Litjak climbs into a black sedan, cradling her 2-month-old daughter Nabilah. Together, they’ll help a college student get to class on time. The baby gives Litjak a competitive advantage, providing two passengers for the price of one.

Litjak says she can make at least two trips in a morning, collecting two or three dollars to help pay for household expenses. She never worries about her safety, and she likes the work. People who can afford to pay have nice cars, so she sits in air conditioned comfort, listening to the radio.

She and others in this line of work are called traffic jockeys. They dress neatly each day and may have regular customers. For some, it’s their only income. Others, like 21-year-old Adik, see this as an easy way to make extra cash when he’s not on the job parking cars.

Here is more, and for the pointer I thank Nick Lawler.  It is not legal to work as a traffic jockey in Indonesia.

Assorted links

by  Tyler Cowen

1. Why is UK employment up and output down?

2. Genetics vs. paleoanthropology?

3. Price inflation and stock returns (pdf), and here, and here, and most recently here; “There is a consistent lack of positive relation between stock returns and inflation in most of the countries.”  I am urging a) a bit of caution, and b) engagement with the literature on this topic.  I do favor a more expansionary monetary policy, but I see the balance of evidence as different from how it is frequently portrayed in the blogosphere.

4. New archery gold medal winner is legally blind, and here.

Who reads Chinese fashion magazines?

by  Tyler Cowen

 Lena Yang, general manager of Hearst Magazines China, who oversees nine publications including Elle and Marie Claire, says that the typical reader of Hearst Magazines in China is a 29.5-year-old woman who is more likely to be single than married. She has an average income of about $1,431 a month and spends $938 a season on luxury watches, $982 on handbags and shoes and $1,066 on clothes.

Ms. Yang says these women often live at home and turn to their parents and grandparents to pay for them. The study also showed that many readers in their 20s saved little.

“Most of them, they are a single child,” Ms. Yang said. “That means they don’t have to pay for their rent. So all of that goes to pocket money. They have the parents support them and the grandparents. They actually have six persons to support them.”

Here is more.