The Value of Political Connections
In an excellent paper titled, Revolving Door Lobbyists, Jordi Blanes i Vidal, Mirko Draca and Christian Fons-Rosen use data on the lobbying revenues of ex-Senate staffers to show:
[L]obbyists connected to US Senators suffer an average 24% drop in generated
revenue when their previous employer leaves the Senate. The decrease in revenue is out of line with
pre-existing trends, it is discontinuous around the period in which the connected Senator exits Congress
and it persists in the long-term. The sharp decrease in revenue is also present when we study separately
a small subsample of unexpected and idiosyncratic Senator exits. Measured in terms of median revenues
per ex-staffer turned lobbyist, this estimate indicates that the exit of a Senator leads to approximately
a $177,000 per year fall in revenues for each affiliated lobbyist….We also fi nd evidence that ex-sta ffers are more likely to leave the lobbying industry
after their connected Senator or Representative exits Congress.
Here is the key figure showing the drop in revenues at the time the Senator exits:
From my paper on for-profit education
Up through the 1980s, the Philippines offered a relatively level playing field for non-profit and for-profit institutions of higher education. What was the result?:
Unlike Filipino non-profits, the for-profits typically did not have entrance examinations, and accepted any student who has completed a secondary education and can pay the relevant fees (Zwaenepoel 1975, pp.163-4). From a survey of Manila institutions, the for-profit institutions had an average student to fulltime faculty ratio of 27:1, whereas the non-profit religious institutions had an average ratio of 19:1 (Miao 1971, pp.71-2). For-profit institutions tend to invest in classrooms to accommodate large enrollments, rather than investing in library facilities, book holdings, or laboratory facilities. Furthermore, Filipino for-profit institutions tend to limit their class offerings to low-cost, labor-intensive classes, such as teacher education and commerce (Zwaenepoel 1975, pp.322, 342, 348, 587). As of 1970, nonsectarian institutions (typically for-profits) spent four percent of their total budget on sites, equipment, and facilities, whereas sectarian institutions (typically non-profits) spent a much higher 12.41 percent (Isidro and Ramos 1973, p.157). As of 1971, for-profits held an average of 2.58 books per student, whereas non-profits held an average of 8.9 books per student (Zwaenepoel 1975, pp.347-8).
Filipino for-profits also produce a different kind of education. Students from for-profit institutions tend to take standardized vocational exams in much greater number, although they pass them at a lower rate. These facts reflect both the vocational emphasis of for-profits as well as the lower academic reputation of their students. Based on a sample of institutions from the Manila area (from 1963 and 1968), students from nonprofit religious institutions pass these standardized tests at an average rate of 38 percent, whereas students from for-profit institutions pass the same tests at a lower rate of 18 percent. For-profits, however, produce a much greater number of students taking the tests, and therefore pass a much greater number of students through the tests. Students at for-profits are approximately ten times more likely to take the tests. Adjusting for the lower pass rate from for-profits, the for-profits are putting about five times the number of students through the tests as the non-profits, even though for-profits educated no more than three-fifths of all Filipino students at the time (Miao 1971, p. 207).
This is broadly similar to the patterns we see in the United States. You might conclude that the for-profit status is more useful when an external test takes care of the signaling, and that a non-profit status is required when no test certifies quality. But why exactly should that be the case? Is the non-profit institution, by being so jealous of reputation, perks, and donations itself, a better producer of signals? If signaling yields so much private value, why can't a private for-profit make a sufficiently strong commitment to a credible signal?
My paper has been published in this book.
Assorted links
Guess who is lobbying against marijuana legalization?
Yup, beer distributors and the police. Ryan Grim of The Huffington Post does a very nice job on the politics:
The California Beer & Beverage Distributors is spending money in the
state to oppose a marijuana legalization proposition on the ballot in November,
according to records filed with the California Secretary of State. The beer sellers are the first
competitors of marijuana to officially enter the debate; backers of the
initiative are closely watching liquor and wine dealers and the pharmaceutical
industry to see if they enter the debate in the remaining weeks…
Public Safety First is largely funded by a different industry whose interests are threatened by the legalization of marijuana: law enforcement. Police forces are entitled to keep property seized as part of drug raids and the revenue stream that comes from waging the drug war has become a significant source of support for local law enforcement. Federal and state funding of the drug war is also a significant supplement to local forces' budgets.
Amusingly, the Teamsters and the teachers (!) are supporting legalization:
The Service Employees International Union, a major presence in California, has endorsed the proposition. The Teamsters in September made its first successful foray into organizing pot growers. The United Food and Commercial Workers is backing the initiative and organizing cannabis club employees in the Bay Area. The teachers union, citing the revenue that could be raised for the state, is also backing the initiative.
What is the signaling value of finishing high school?
According to a new paper from Paco Martorell and Damon Clark, not so much:
Although economists acknowledge that various indicators of educational attainment (e.g., highest grade completed, credentials earned) might serve as signals of a worker’s productivity, the practical importance of education-based signaling is not clear. In this paper we estimate the signaling value of a high school diploma, the most commonly held credential in the U.S. To do so, we compare the earnings of workers that barely passed and barely failed high school exit exams, standardized tests that, in some states, students must pass to earn a high school diploma. Since these groups should, on average, look the same to firms (the only difference being that “barely passers” have a diploma while “barely failers” do not), this earnings comparison should identify the signaling value of the diploma. Using linked administrative data on earnings and education from two states that use high school exit exams (Florida and Texas), we estimate that a diploma has little effect on earnings. For both states, we can reject that individuals with a diploma earn eight percent more than otherwise-identical individuals without one; combining the state-specific estimates, we can reject signaling values larger than five or six percent. While these confidence intervals include economically important signaling values, they exclude both the raw earnings difference between workers with and without a diploma and the regression-adjusted estimates reported in the previous literature.
The full paper you will find here. This to me looks like a fairly clean test. I still think signaling matters a great deal, but that is distinct from thinking that a high school diploma is the relevant form of such signaling.
The Irish haven’t in fact tried “austerity”
The escalating cost of bailing out Anglo Irish Bank is set to balloon the deficit to at least 25 per cent of GDP this year, cancelling out the benefits of previous austerity budgets.
Markets in Everything: Lookup Before You Hookup
Today's dating scene is tough to navigate, which is why Intelius
developed Date Check, a free mobile app that deciphers fact from
fiction in the palm of your hand. Simply enter a name, phone number or
email address and instantly get accurate and comprehensive results.
With features like Sleaze Detector, Compatibility, $$$, Interests and
Living Situation, you can be in the know on the go.
Some of you may recall the scene from Amazon Women on the Moon in which this idea was featured as a joke. I also recall but couldn't find online a scene from the great movie GATTACA in which a women on a date kisses a man and then rushes to the ladies room to have the DNA on her lipstick analyzed for suitable qualities. How long untill we have that technology?
Hat tip: Chris Rasch.
*Winner-Take-All Politics*, the new book by Jacob Hacker and Paul Pierson
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.
Is the Fed doing more than U.S. commentators are suggesting?
The FT consistently paints the recent Fed as being somewhat dovish. Here is one example:
The Federal Reserve broke a taboo yesterday when it said quite baldly that inflation in the US is now below the level “consistent with its mandate”. In other words, it is too low. This is a very big statement for any central banker to make, since the greatest feather in their collective cap is that they successfully combated inflation after the 1970s debacle…Since that period, most central bankers have been careful to avoid any language which even hints that a rise in inflation is acceptable to them. I can certainly find no previous record of the FOMC saying that inflation is too low, so it was a jolt to see this stated so starkly in the Fed statement yesterday.
…Bernanke Fed may be even more dovish than the Alan Greenspan Fed of 2003, and that is saying quite a lot. However sympathetic you are to the need for further monetary easing (and actually I am towards the sympathetic end of the spectrum), it is not difficult to see why the dollar has been falling, and gold rising, in the markets today.
The culture that is France
In the latest in a series of unusual efforts to make Paris green, the city is now offering residents free sparkling water to try to wean Parisians not from red wine, but from overconsumption of plastic bottles.
It comes from a water fountain and the idea already has been tested in Italy:
“We chill the water between 6 and 8 degrees Celsius,” said Philippe Burguière, the spokesman for Eau de Paris, “and then we inject carbon dioxide into regular tap water to make the bubbles thin and tasty.”
There is more here and for the pointer I thank Yana.
The high rate of employment for Mexicans in New York
In a time of widespread joblessness, Mexicans in New York have proved unusually adept at finding and keeping work. Of the city’s 10 largest immigrant groups, they have the highest rate of employment and are more likely to hold a job than New York’s native-born population, according to an analysis of the most recently available census data. They are even employed at a greater rate than Mexicans nationwide.
And as they have filled the city’s restaurant kitchens and building sites, they have acquired a reputation for an extraordinary work ethic.
There is more here. There are interesting implications for whether current unemployment is all about demand and whether marginal productivities justify the expected costs of hiring (some groups of) non-Mexicans:
One reason Mexicans have found work in such numbers, experts say, is that many are illegal immigrants, and less likely to report workplace abuses to the authorities for fear of deportation.
“Illegal immigrants are very convenient,” said Demetrios Papademetriou, president of the Migration Policy Institute, a nonpartisan research group in Washington. “Employers are quite interested in employing people who are willing to work and to overlook some labor laws.”
…Across the country, immigrants in general are more likely to be employed than the American-born. They tend to be more willing to move in pursuit of jobs and to take any job they can find, especially if they lack access to unemployment benefits.
The evolution of premium pricing in Japan
This article is a little hard to excerpt, but it's not so long and well worth the read. Here is one bit:
High prices in Japan are mostly a direct product of governmental policy. [TC: There is then talk of tariffs, cartels, and inefficient retail.]…So when foreign brands come into the Japanese market, the most obvious brand positioning has been to go “above” the domestic makers and be “premium.” This almost necessarily means pricing at a higher level than the standard Japanese price, which as we know, was already very high. When Brooks Brothers came to Japan in 1979, for example, they logically needed to set prices above the Japanese copies of their items like oxford cloth button-down shirts and ties. More recently, the standard $25 T-shirt at Supreme in New York was set at around $60 in Japan.
The rest of the article explains why U.S. brands now try the strategy of undercutting the Japanese prices.
For the pointer I thank Conrad Clark.
One simple point on Social Security reform
Social Security offers cash benefits, whereas Medicare is an in-kind benefit, in the form of health care (which in turn is distinct from health, itself another in-kind benefit). Therefore always cut Medicare first. (Addendum: a better phrasing here is "At current policy margins, or those we are likely to encounter, always cut Medicare first.")
That's all.
Addendum: Ezra Klein comments.
*Doing More With Less*
That's a new book out, edited by Joshua C. Hall, and it is a collection of essays with the subtitle Making Colleges Work Better. My essay in the volume, co-authored with Sam Papenfuss, is a look at for-profit higher education. It's not about the recent lending scandals, but rather the general question of why for-profits do quite well in vocational areas and in areas where the student is eventually certified by relatively objective tests. Non-profits, in contrast, remain dominant in the liberal arts and in areas where quality is harder to measure. What can we learn from this pattern of market segmentation about a) the true nature of education, and b) trust and agency problems in both non-profits and for-profits? These cross-sectional questions have received surprisingly little attention and for-profit education in general has not attracted much research scrutiny, relative to its size and rate of growth. Yet these questions date back to Plato, Socrates, and the Sophists. Overall I believe that the not-for-profit model for higher education is robust.
Here is an interesting article on the recent growth in elite for-profit schools at the high school level and below.