Many Indian children can use math to solve market problems, but not school problems
The untapped math skills of working children in India: Evidence, possible explanations, and implications (with A. V. Banerjee, S. Bhattacharjee & R. Chattopadhyay)
It has been widely documented that many children in India lack basic arithmetic skills, as measured by their capacity to solve subtraction and division problems. We surveyed children working in informal markets in Kolkata, West Bengal, and confirmed that most were unable to solve arithmetic problems as typically presented in school. However, we also found that they were able to perform similar operations when framed as market transactions. This discrepancy was not explained by children’s ability to memorize prices and quantities in market transactions, assistance from others at their shops, reliance on calculation aids, or reading and writing skills. In fact, many children could solve hypothetical transactions of goods that they did not sell. Our results suggest that these children have arithmetic skills that are untapped by the school system.
Sourced here.
Sticky wages are part of the macro labor market story, but not at the center
I can recommend to you this new survey by Lars Ljungqvist and Thomas J. Sargent, just published in the American Economic Review. The serious work on unemployment these days is using models of matching markets, and varying returns to finding matches during tough times, including recessions. That is how to think about the job creation process for unemployed workers, who do not currently have a nominal wage to even be sticky. Here is their abstract:
To generate big responses of unemployment to productivity changes, researchers have reconfigured matching models in various ways: by elevating the utility of leisure, by making wages sticky, by assuming alternating-offer wage bargaining, by introducing costly acquisition of credit, by assuming fixed matching costs, or by positing government-mandated unemployment compensation and layoff costs. All of these redesigned matching models increase responses of unemployment to movements in productivity by diminishing the fundamental surplus fraction, an upper bound on the fraction of a job’s output that the invisible hand can allocate to vacancy creation. Business cycles and welfare state dynamics of an entire class of reconfigured matching models all operate through this common channel.
As you will see in the paper, sticky or constant wages still can play a significant role in these accounts, but they are one part of a broader story. This is useful from the concluding remarks:
The fundamental surplus fraction is the single intermediate channel through which economic forces generating a high elasticity of market tightness with respect to productivity must operate. Differences in the fundamental surplus explain why unemployment responds sensitively to movements in productivity in some matching models but not in others. The role of the fundamental surplus in generating that response sensitivity transcends diverse matching models having very different outcomes along other dimensions that include the elasticity of wages with respect to productivity, and whether outside values affect bargaining outcomes.For any model with a matching function, to arrive at the fundamental surplus, take the output of a job, then deduct the sum of the value of leisure, the annuitized values of layoff costs and training costs and a worker’s ability to exploit a firm’s cost of delay under alternating-offer wage bargaining, and any other items that must be set aside. The fundamental surplus is an upper bound on what the invisible hand could allocate to vacancy creation. If that fundamental surplus constitutes a small fraction of a job’s output, it means that a given change in productivity translates into a much larger percentage change in the fundamental surplus. Because such large movements in the amount of resources that could potentially be used for vacancy creation cannot be offset by the invisible hand, significant variations in market tightness ensue, causing large movements in unemployment.
One very simple way to put the point is that unemployment is not always such an easy problem to fix and labor markets are not always so easy to steer. This is a far cry from the simple Phillips curve talk I see so often in the financial press.
Here are ungated copies.
Thursday assorted links
Alan Krueger on opioids and labor force participation
I haven’t had a chance to look at this one, but here is the headline summary from Brookings:
The new paper, published in the Fall 2017 edition of the Brookings Papers on Economic Activity, makes a strong case for looking at the opioid epidemic as one driver of declining labor force participation rates.
In fact, Krueger suggests that the increase in opioid prescriptions from 1999 to 2015 could account for about 20 percent of the observed decline in men’s labor force participation during that same period, and 25 percent of the observed decline in women’s labor force participation.
Here is the Brookings link.
Muslim integration into Western Europe
Here is my Bloomberg column on that topic.
The economics of Bitcoin mining
There is a new paper (pdf) by Huberman, Leshno, and Moallemi on that topic, I found it very useful. Here is the abstract, non-newbies can skip ahead to the second paragraph:
Many crypto-currencies, Bitcoin being the most prominent, are reliable electronic payment systems that operate without a central, trusted authority. They are >enabled by blockchain technology, which deploys cryptographic tools and game theoretic incentives to create a two-sided platform. Profit maximizing computer servers called miners provide the infrastructure of the system. Its users can send payments anonymously and securely. Absent a central authority to control the system, the paper seeks to understand the operation of the system: How does the system raise revenue to pay for its infrastructure? How are usage fees determined? How much infrastructure is deployed?
A simplified economic model that captures the system’s properties answers these questions. Transaction fees and infrastructure level are determined in an equilibrium of a congestion queueing game derived from the system’s limited throughput. The system eliminates dead-weight loss from monopoly, but introduces other inefficiencies and requires congestion to raise revenue and fund infrastructure. We explore the future potential of such systems and provide design suggestions.
Recommended to many of those who are otherwise merely baffled.
Robin Hanson updates his forager vs. farmer schema
The post is interesting throughout, here are the closing paragraphs:
The left is more okay with people forming distinct subgroups, even as it thinks more in terms of treating everyone equally, even across very wide scopes, and including wide scopes in more divisive debates. The right wants to make redistribution more conditional, more wants to punish free riders, and wants norm violators to be more consistently punished. The left tends to presume large scale cooperation is feasible, while right tends to presume competition more. The left hopes for big gains from change while the right worries about change damaging things that now work.
Views tend to drift leftward as nations and the world gets richer. Left versus right isn’t very useful for prediction individual behavior outside of politics, even as it is the main parameter that robustly determines large scale political ciliations. People tend to think differently about politics on what they see as the largest scales; for example, there are whole separate fields of political science and political philosophy, which don’t overlap much with fields dealing with smaller scale politics, such as in clubs and firms.
I shouldn’t need to say it but I will anyway: it is obvious that a safe playful talky collective isn’t always the best way to deal with things. Its value varies with context. So sometimes those who are more reluctant to invoke it are right to be wary, while at other times those who are eager to apply it are right to push for it. It is not obvious, at least to me, whether on average the instincts of the left or the right are more helpful.
Do read the whole thing.
Japan facts of the day
The real interest rate Japan pays on its debt has fallen steadily. With short-term interest rates now negative, the country gets paid to borrow for short periods. The interest bill is even more manageable after factoring in revenues from Japan’s foreign exchange reserves and other public financial assets. As a result, economic stimulus under Mr Abe has finally stabilised Japan’s debt after years of relentless increase. It was 237 per cent of GDP in 2012. The International Monetary Fund forecasts 232 per cent of GDP for 2022.
Low interest rates mean the existing debt simply does not matter that much for fiscal sustainability. More importantly, and belying its reputation for wasteful public works, Japan has made a series of tough decisions on healthcare and pension spending. Real per capita outlays on the elderly have fallen. Tax revenues are up by six percentage points of GDP since 2000. “If this approach continues,” write Mr Weinstein and Mr Greenan, “Japan may very well avoid either a financial crisis or a major inflationary episode.”
That is from Robin Harding at the FT.
Young Americans are also less spiritual
Another common narrative about trends in American religious belief says that spirituality has replaced religion. …That might have been true at one time, but no longer. iGen’ers are actually less spiritual as well as being less religious. iGen’ers and late Millennials ages 18 to 24 are the least likely of all age/generation groups to say they are a “spiritual person,” showing a pronounced break even with older Millennials in their late twenties and early thirties…
Of course, these differences could be due to age instead of generation; perhaps younger people have always been less spiritual. However, slightly fewer 18- to 24-year-olds in 2014-2016 (48%) described themselves as a moderately or very spiritual person than in 2006-2008 (56%).
That is from the new and excellent Jean M. Twenge, iGen: Why Today’s Super-Connected Kids are Growing Up Less Rebellious, More Tolerant, Less Happy — and Completely Unprepared for Adulthood.
Wednesday assorted links
1. What it is like to be a fashion model (NYT).
3. The privacy battle over India’s biometric database.
4. The politics of the Silicon Valley wealthy (NYT). They like redistribution, don’t like regulation, and really, really think surge pricing is OK. Here is the underlying research.
5. Why is Disney letting black markets in associated fan products thrive?
When In India, Get a Haircut!
Here is the first of our MRUniversity videos made in India! It was a lot of fun to make. The video introduces the Balassa-Samuelson effect (also called the Penn effect) and why we need purchasing power parity corrections. Eventually, we will update our entire Development Economics course to the same production quality. Enjoy!
What I’ve been reading
1. George W. Bush, Portraits of Courage: A Commander in Chief’s Tribute to America’s Warriors. Not only are the paintings good, but this book is the perfect antidote to too much time spent on Twitter, especially if you read the text about all the injuries sustained.
2. Dennis C. Rasmussen, The Infidel and the Professor: David Hume, Adam Smith, and the Friendship That Shaped Modern Thought. A beautifully written book, with wonderful balance, about a beautiful friendship. Recommended.
3. Richard White, The Republic for Which It Stands: The United States During Reconstruction and the Gilded Age, 1865-1896. This will make the year’s “best of” list for sure. I’m not usually a fan of reading a 900 pp. plus survey book to cover a period of more than three decades. Usually too much stays superficial, and the author does not apply consistent quality standards to the whole work, if any of it. But this book is interesting and informative on virtually every page, and it is unfortunately all too relevant for the current day. Here is a good Kyle Sammin review.
Two books I have only browsed, but both look good:
Lizzie Collingham, The Hungry Empire: How Britain’s Quest for Food Shaped the Modern World, with a slightly different title for the U.S. edition, and
Brian Fagan, Fishing: How the Sea Fed Civilization.
There is also:
Thomas S. Mullaney, The Chinese Typewriter: A History, is a thorough and informative treatment of what its title suggests. Here is a WSJ review.
John L. Campbell and John A. Hall, The Paradox of Vulnerability: States, Nationalism & the Financial Crisis, considers the state capacities of Denmark, Ireland, and Switzerland in responding to the financial crisis. I liked what was there, though wanted more.
Barry Riley, The Political History of American Food Aid: An Uneasy Benevolence, I have only perused bits, but it seems to be the book to read or own on this topic.
Social media are making price gouging too difficult these days
That is the topic of my latest Bloomberg column. Here is one bit:
Let’s say bottled water was selling at $42.96 a case at the local Best Buy, as shown in this photo. A customer can take out his or her smartphone, snap a photo and post it on social media. The photo may go viral, and many people, including the legal authorities, will be mad at the company.
The reluctance to raise prices is especially strong for nationally branded stores. A local merchant may not care much if people in Iowa are upset at his prices, but major companies will fear damage to their national reputations. The short-term return from selling the water at a higher price is dwarfed by the risk to their business prospects. More and more of the value of business capital is intangible capital, more than 84 percent of the S&P 500 by some estimates. That’s why Best Buy so quickly apologized for its store selling the water at such a high price, blaming the incident on an overzealous local manager.
Consider an alternative: Instead of raising prices to very high levels, let’s say that the local big-box store sells out quickly during an emergency and has empty shelves for water. If those photos circulate, they will be interpreted as signs of general tragedy and want, rather than selfish corporate behavior. It’s too subtle an image to snap the price tag at pre-storm levels, contrast it with the empty shelves, and lecture your Facebook friends about the workings of market-clearing supply and demand and the virtues of flexibly adjusting prices.
Beware the culture of the image! As I’ve said before, we should levy a micro-tax on photos on Twitter.
Here is Don Boudreaux on price gouging. Here is David Henderson on price gouging. I agree with them both.
Where does the gravity equation come from?
From Thomas Chaney, in the latest JPE:
The gravity equation in international trade states bilateral exports are proportional to economic size, and inversely proportional to geographic distance. While the role of size is well understood, that of distance remains mysterious. I offer an explanation for the role of distance: If (i) the distribution of firm sizes is Pareto, (ii) the average squared distance of a firm’s exports is an increasing power function of its size, and (iii) a parameter restriction holds, then the distance elasticity of trade is constant for long distances. When the firm size distribution follows Zipf’s law, trade is inversely proportional to distance.
Here are earlier, ungated versions.
Tuesday assorted links
1. The new movie Columbus is a masterpiece. Don’t wait for Netflix, a big screen is essential.
2. Is China actually banning all cryptocurrency trading? I doubt it, but this one is worth watching.
3. The weekly culture that is Britain.
4. Will the blockchain fund neo-medievalism?
5. Are men more irrationally exuberant than women?
6. Is Jacinda Adern the Kiwi Donald Trump? She is also “…former president of the International Union of Socialist Youth.“