Pursuit of Truthiness

my gut tells me I know economics

Archive for the ‘inequality’ Category

How to care about Equality

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Like many utilitarians and economists, I have a hard time caring about inequality for its own sake, even though many people seem to think it is very important.  Making poor people richer is good on standard utilitarian grounds, but it is hard to imagine wanting to make rich people poorer just to make everyone feel more equal.  How can utilitarians support wealth equality, and redistribution, without putting any value on equality itself?

One reason is as old as utilitarianism itself- the diminishing marginal utility of money.  If rich people don’t value $1000 as much as poor people, in theory we can increase total utility by taking from the rich and giving to the poor.  Wolfers’ finding that happiness rises with the natural log of income supports this.  Of course in practice this leads to incentive problems and an efficiency/equality tradeoff; this lowers the optimal amount of redistribution but gives us no reason to think it is zero.

Second is the fully general trump card against utilitarians (I hope a philosopher can tell me how to get out of this): other people say equality will increase their utility, and you say you want to increase utility, so you should support their desire for equality.

I think one version of this is influential in practice.  An economist like Greg Mankiw might not care about inequality himself, but everyone around him talks about it, so he thinks of more constructive things to say than “your values are silly”.

Another version is the “realpolitik” concern.  Bismark invented the welfare state not because he cared about equality or happiness but to stave off revolution.  Similarly, we might care only about happiness, but realize that voters may be more supportive of happiness-enhancing pro-market policies when inequality is small.  Look at the Economic Freedom of the World Index– Northern European countries like Denmark have high levels of redistribution but are otherwise very free markets.  Denmark is often rated the happiest country in the world.  I would like to see a poli-sci paper on this, or write one if none exists.  If you count the Republicans as the pro-market party (iffy), I have written a paper finding this for the US.  But one should look internationally, as well as looking at survey data on opinion in addition to actual outcomes.

There is one more utilitarian argument for redistribution that I don’t recall hearing, though I am sure it has been made.  Economists like to emphasize that the price system is an amazingly efficient mechanism for allocating resources to their highest valued use.  A common response to this point is that the system is inefficient and unfair, because a poor person who will get 10 utils from a good can be outbid by a rich person who makes 4 times as much money and gets 5 utils from the good.  Somewhere, a rich kid is ignoring or complaining about a toy that a poor kid would love to have but can’t afford.  What I have yet to hear is the obvious corollary of this criticism: the more equal incomes get, the more efficient, fair and utility-enhancing the price system becomes.  The price system more efficiently allocates resources in Denmark than in Mexico.  Perhaps Danish voters are more willing to let prices work because they actually work better in the more equal country of Denmark.

Written by James Bailey

September 19, 2011 at 2:34 pm

Lotto Tickets- A Potentially Good Investment

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Neither normal people nor economists can make much sense of those who buy lottery tickets hoping to make money.  To rescue the lottery from being an “idiot tax” they think of other reasons to play, such as the lottery being “entertainment” or a convenient way to donate to education.  However, in some reasonably common circumstances, the lottery makes perfect sense as an investment.

To see why, you have to calculate the implicit marginal tax rate people face.  The explicit marginal tax rate is what you see when you pay taxes, and for low-income people in the United States it is small.  The implicit tax rate is what you get by considering both taxes paid and subsidies received.  Many government subsidies in the US target the poor, which is nice, but it means that as people work more they receive fewer subsidies- reducing their incentive to work more.  Sometimes, earning more income from work will actually reduce what you are able to consume by making you ineligible for benefits- this means you face an implicit marginal tax of 100% or more.

Why does this matter for the lottery?  By one calculation (shown in the chart below, which I haven’t checked myself, but is close enough to being true for my argument), a significant number of people in the US see nearly no benefit from increasing their income from $15,000 to $40,000.  Say you have a job that pays $20,000.  Getting a second job or investing “responsibly” will not increase your income above $40000 and so will not make you better off.  A winning lottery ticket, however, could shoot you out of the “dead zone” and make you money you actually get to keep.  If you are stuck with a near-100% implicit tax rate until you can drastically increase your income, the lottery makes sense for you.  You just make sure the potential payoff is big enough to get you clear of the poverty trap, so go big or go home.

Written by James Bailey

April 5, 2011 at 10:53 pm

Cool Papers!

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The Location of U.S. States’ Overseas Offices, Andrew Cassey

A paper can do many pages of analysis but often the most interesting part is a simple fact that the author did not discover.  In this case, the best part of the paper was learning that the state of Pennsylvania operates 17 overseas offices to promote the exports of Pennsylvania comanies.  40 U.S. states operate at least one office.   No one in Oklahoma can remember whether their offices opened in 2002 or 2003 (I actually went to a presentation on the history of Oklahoma’s Vietnam offices a couple years ago but I also fail to remember when they said it opened).  The most interesting methodological choice in the paper is to ignore Public Choice and assume that bureaucrats, at least in the Departments of Commerce, have the primary goal of minimizing private transactions costs.

Corruption in Iraq: Conflict, Costs and Causes, Frank Gunter

The author was in charge of U.S. anti-corruption efforts in Iraq and the paper is part of an upcoming book on the political economy of Iraq, making this a very cool paper.  On the other hand, listening to the paper was one of the more depressing half-hours of my life.  It seems that corruption is everywhere and every attempt to change it results in spectacular failure.  Even  worse, the corruption is largely of the “dishonest”, wealth-destroying type rather than the “honest” kind where bribed judges stay bought and corruption is a way of getting things done in the face of crushing regulation.  Of the ten or so causes of corruption identified in the literature, Iraq basically has all of them- including a very high rate of cousin marriage (as high as 60% ?!).

Bailouts and Bankruptcies, Y.J.  Yoon.

Another paper where the facts were the interesting part.  In 2005, there were more bankrupcies than divorces in the U.S.  This is hard to see personally because bankruptcy is socially stigmatized yet relatively easy to hide; when people divorce their friends will almost certainly know but no one talks about going bankrupt.  Another interesting fact is that bankruptcies were high in boom years as well as in recessions.  Yoon dismissed my suggestion that rising end-of-life medical costs could be responsible for rising bankruptcies but he didn’t seem to have looked at the data (not that I have either).  It occurs to me that banks and credit card companies have probably done a lot more research into personal bankruptcy than academic economists have.

The Growth of Social Security: Dynamic Effects of Public Choice, Youngshin Kim

This job market paper was not especially interesting but did prove conclusively that some people at George Mason do math and econometrics.

More facts:

Shrimp fishing is the largest US fishing sector (really?) and yet 85% of shrimp consumed in the U.S. is imported.  U.S. shrimpers have to use “turtle excluding devices”.

Spreading the Wealth Around, Greg Mankiw

The paper is online here.

Mankiw examines the philosophical underpinnings of wealth redistribution.  Economics is utilitarian but most people’s moral intuition is not.  Mankiw proposes a “just desserts” theory in which justice means that people are paid the marginal product of their labor (their ‘innate’ MPl, or their MPl with the institutions of a society? “that’s the next paper”).

In the course of the talk, Mankiw claims that he personally is not in the top 1% of the top 1% of the U.S. income distribution.  So I guess even a best selling principles textbook can’t make you $11 million a year.

“Education is like a wonka bar.  A few people find it gave them golden tickets that give them unimaginable opportunities.  But every gets to enjoy the delicious chocolate of knowledge.”

Mankiw identifies a seeming paradox.  Most people think it is good to tax rich Americans at 33% to support poor Americans, but very few (practically just Peter Singer) think it is a good idea to tax the rich of the world (ie almost all Americans) at 33% and redistribute the money to to poor of the world.  Whatever philosophy these redistributionists have, it can’t be utilitarian (again excepting Peter Singer).

Agent-Based Computational Models

One of these was part of a project to build a model of the Pashtun tribal group, who are of great interest to those trying to stabilize Afghanistan and Pakistan.  The actual model was so far unimpressive, but the presentation did feature the sentence “in our model women do not have any purpose except to marry and make children”.

Another model attempted to simulate agents with limited cognitive capacity, who can consider only six strategies at a time.  It was hard for me to evaluate how well the model worked but it did convince me that the field is worth looking in to.

Better Living Through Economics, John Seigfried

Ok, this is a book not a paper.

It tells 12 stories about how economists changed policy for the better.  Most surprising to me was the extent to which economists were involved in ending the military draft.

While talking about matching markets and signalling, Seigfried gave a great quote from Al Roth (who designed the credible signals in the economics job market and who is at Harvard, and is “normally a humble guy”): “We wouldn’t hire anyone who used a signal on us.  We know you would work for us.  Wasting a signal by signalling up shows you are a bad economist.”

Written by James Bailey

April 4, 2010 at 1:40 pm

Posted in Economics, inequality, Iraq

Does the idea of sustainability survive sustained inquiry?

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In Bob Solow’s 1993 “Economist’s Perspective on Sustainability“, it survives as a “necessarily vague, but useful” idea.  He notes that sustainability has been conflated with other moral ideas about environmental protection, but that sustainability itself does not necessarily mean preserving species or wilderness.  Instead it is about “distributional equity” between the present and the future.  This means that we should be comparing general standards of living- how much are we better off because we make future generations worse off- rather than only the status of the environment.

To Solow, this means that future generations will value our investments as well as our preservation of resources, so they would not necessarily want us to preserve resources at the expense of investment; but he does say that both investment and resource preservation should be preferable to consumption.

His best idea is to clarify all this by looking at the sustainability of past generations.  We are talking about doing well by future generations, but to past people we are one of those future generations!  Are we happy with how sustainable our predecessors’ economy was?

Well, they killed off the dodos and mammoths, used up most of the oil in the continental US, and left a lot of toxic chemicals lying around; so in the purely environmental sense, they did not do very well.  But in a broader sense, they did fine by us; in fact, I think we got the much better end of the deal.  We have a vastly higher standard of living than people did 50 or 100 or 10000 years ago; inter-temporal distributional equity would actually entail more past environmental degradation insofar as it allowed our very poor ancestors a higher standard of living.

This same logic implies that we should worry less about developing countries like China raising their living standards though industrial pollution, since future Chinese people (as well as current and future moralizing Westerners) will have better living standards even after resource degradation and pollution has been accounted for.

Certainly, I am happy that past generations built Philadelphia rather than leaving forests, built Paris rather than leaving plains, built Boston rather than leaving us swamps to enjoy.  I would like to have mammoths around to look at in zoos (or hunt?!!), but I am sure that prehistoric hunter-gatherers got a lot more enjoyment from not starving than I would from having a better zoo.

Perhaps there is some inherent moral value to not polluting, or to preserving wilderness, or (most plausibly) to not causing species to go extinct.  But this is a different thing than sustainability for the sake of future generations of humans; it is instead about valuing other species, or the environment generally, inherently and for their own sake.  Which is another discussion entirely!

Through all this I am on board with Solow.  In my next post, I will show how Solow gets things a bit wrong through oversimplification.

Written by James Bailey

September 4, 2009 at 7:34 pm

Inequality among the Educational Elite

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A new paper from Harvard profs Goldin and Katz examines the data on the earnings and family and education choices of thousands of graduates from Harvard and Radcliffe, with an eye toward gender inequality.

Some highlights:

By the 1970’s, elite women were already going to graduate and professional schools in large numbers.  Since then, the proportion of women in such schools has been steady or in some cases declining.  The exception is the huge increase in the popularity of business school; this change is observed among men as well as women.

Since the 1970’s, the median age of first marriage has risen rapidly, and is now around 30; but the number of children per family has remained fairly steady.

Earnings for both men and women are very high, but median earnings for men are significantly higher.  At the right tail of the distribution, 8% of men make over $1 million annually, but only 2% of women do.

Most of the difference between the men’s and women’s earnings is explained by differences in hours worked, choice of major, choice of professional school, and number of large gaps in employment (ie, to have a baby).  But after controlling for all these things, a gender earnings gap of log 0.3 remains.

In the process of controlling for the impact of college major on earnings, the authors found that economics is the highest earning major, with an earnings gap of log 0.33 =)

Written by James Bailey

January 21, 2009 at 8:57 pm

Posted in Economics, inequality