Tyler Cowen's Blog, page 199

Minimum wage hikes and real net wages

Richard McKenzie reports:

…past experience has confirmed the nonmonetary impact of a minimum-wage hike on workers, not only in reduced fringe benefits but in increased work demands and decreased job training. For example:

When the minimum wage was increased in 1967, economist Masanori Hashimoto found that workers gained 32 cents in money income but lost 41 cents per hour in training — a net loss of 9 cents an hour in full-income compensation.
Similarly, Linda Leighton and Jacob Mincer in one study, and Belton Fleisher in another, concluded that increases in the minimum wage reduce on-the-job training and, as a result, dampen long-run growth in the real incomes of covered workers.
Additionally, North Carolina State University economist Walter Wessels determined that a wage increase caused New York retailers to increase work demands. In most stores, fewer workers were given fewer hours to do the same work as before.
More recently, Mindy Marks found that the $0.90 per hour increase in the federal minimum-wage rate in 1990 reduced the probability of workers receiving employer-provided health insurance from 66.2 percent to 63.1 percent, and increased the likelihood that covered workers would be reduced to part-time work by 26 percent.

Wessels also found that for every 10 percent increase in the minimum wage, workers lose 2 percent of nonmonetary compensation per hour. Extrapolating from Wessels’ estimates, an increase in the federal minimum wage from $7.25 to only $9.00 an hour would make covered workers worse off by 35 cents an hour.

And if the minimum wage were raised to $10.10 an hour, for example, the estimated 16.5 million workers earning between $7.25 and $10.10 could lose nonmonetary compensation more valuable than the $31 billion in additional wages they are expected to receive.

I would be skeptical or agnostic about some of those particular estimates, but surely the general point holds, and is hardly ever mentioned by advocates of hiking the minimum wage.

Krugman’s review of Piketty

You will find it here.  Excerpt:

Just about all economic models tell us that if g falls—which it has since 1970, a decline that is likely to continue due to slower growth in the working-age population and slower technological progress—r will fall too. But Piketty asserts that r will fall less than g. This doesn’t have to be true. However, if it’s sufficiently easy to replace workers with machines—if, to use the technical jargon, the elasticity of substitution between capital and labor is greater than one—slow growth, and the resulting rise in the ratio of capital to income, will indeed widen the gap between r and g. And Piketty argues that this is what the historical record shows will happen.

Krugman calls the book “awesome,” but here are his critical remarks:

I don’t think Capital in the Twenty-First Century adequately answers the most telling criticism of the executive power hypothesis: the concentration of very high incomes in finance, where performance actually can, after a fashion, be evaluated. I didn’t mention hedge fund managers idly: such people are paid based on their ability to attract clients and achieve investment returns. You can question the social value of modern finance, but the Gordon Gekkos out there are clearly good at something, and their rise can’t be attributed solely to power relations, although I guess you could argue that willingness to engage in morally dubious wheeling and dealing, like willingness to flout pay norms, is encouraged by low marginal tax rates.

My own review is still due out in about a week’s time.

Are computers coming up with answers we cannot understand?

In mathematics at least the answer appears to be yes:

A computer has solved the longstanding Erdős discrepancy problem! Trouble is, we have no idea what it’s talking about — because the solution, which is as long as all of Wikipedia’s pages combined, is far too voluminous for us puny humans to confirm.

A few years ago, the mathematician Steven Strogatz predicted that it wouldn’t be too much longer before computer-assisted solutions to math problems will be beyond human comprehension. Well, we’re pretty much there. In this case, it’s an answer produced by a computer that was hammering away at the Erdős discrepancy problem.

Fortunately,

…it may not be necessary for humans to check it. As Gil Kalai of the Hebrew University of Jerusalem, Israel, has noted, if another computer program using a different method comes up with the same result, then the proof is probably right.

There is more here, via Gabriel Puliatti on Twitter.

What makes most restaurant reviews worthless

Not just the general reason why they are bad, but rather a very specific reason.  Caitlin Dewey reports about:

…a new paper appropriately titled “Demographics, Weather and Online Reviews.” The study analyzed 1.1 million online reviews of 840,000 restaurants, looking for exogenous — or external — factors in the data. In other words, they wanted to figure out what makes us like or dislike a restaurant, beside the restaurant itself.

The results can be surprising. The diners’ education levels? No effect on actual ratings. Population of the area? Again, not so much.

But reviewers consistently gave worse ratings when it was raining or snowing outside than when it was clear. And reviewers usually liked restaurants better on warm and cool days, rather than very hot or very cold ones.

In researcher Saeideh Bakhshi’s words: “The best reviews are written on sunny days between 70 and 100 degrees … a nice day can lead to a nice review. A rainy day can mean a miserable one.”

Not surprisingly, restaurants in California and Hawaii are popular.

Assorted links

1. What happens when you conduct a census of the Mexican educational system?

2. Monopsony in motion, MP3 file, a song by the Anarchist Econometricians of A.  What do you know about them?  And Felix Salmon on Wonkonomics.

3. Can robots solve the Malaysian mystery?

4. Do poverty traps really exist?

5. An early history of cryptocurrencies.

6. A watch for blind people (mostly being bought by the sighted, note “you can check the time in a social or work setting without appearing rude.”)

7. Medicare average is over.

Matt Rognlie on secular stagnation

In the comments of Askblog, Matt writes:

…the “secular stagnation” hypothesis is in dire need of some cogent back-of-the-envelope estimates, and I don’t think it holds up very well. A long-term fall in the average real interest rate from, say, 2% to -1%, would be absolutely extraordinary. It would imply massive increases in the valuation of long-lived, inelastically supplied assets like land, and massive increases in the quantity of long-lived, elastically supplied capital like structures.

Just to illustrate how extreme the implications can be, consider the following (sloppy) calculation. The BEA’s average depreciation rate for private structures is currently about 2.5%. A decline in the real interest rate from 2% to -1% implies a decline in user cost r+delta from 4.5% to 1.5%, of a factor of three. If the demand for structures is unit elastic (as economists, unjustifiably from an empirical standpoint, tend to assume with Cobb-Douglas functional forms), this would imply a threefold increase in the steady-state quantity. Since structures are already 175% of GDP, this would imply an additional increase of 350% of GDP, more than doubling the overall private capital stock and nearly doubling national net worth. The transition to this level would require such an extraordinary, prolonged investment boom that we would not face slack demand for many, many years.

(There are many things wrong with this calculation, but even an effect a fraction of this size serves my point, especially when you keep in mind that land values would be skyrocketing as well. The bottom line is that proponents of secular stagnation have not yet contended with some of the basic numbers.)

There is more here.  That is via David Beckworth.

I am still waiting for a model of secular stagnation that rationalizes both a negative real interest rate and positive investment, which indeed we are observing in most countries circa 2014.  That means, by the way, I don’t quite agree with Matt’s sentence “The transition to this level would require such an extraordinary, prolonged investment boom that we would not face slack demand for many, many years.”  There are some “reasoning from a price change” issues floating around in the background here.  Is it the productivity of just new capital that has fallen to bring the natural interest rate to negative one?  Or the rate of return on old capital too, in which case the value of the extant capital stock is not given by the calculation in question?  Tough stuff, but you know where the burden of proof lies.  Can this all fit together with the fact that nominal gdp is now well above its pre-crash peak?  And that we are seeing positive net investment?  In any case I agree with Matt’s broader point that the implied magnitudes here don’t seem to fit the facts or even to come close.

Speaking of Piketty (or did I mean to write “speaking of Scott Sumner?”), Scott has a question:

…here’s what confuses me.  Some of the reviews seem to imply that Piketty argues that real rate of return on capital represents the rate at which the wealth of the upper classes grow.  Is that right?  If so, what is the basis of that argument?  I don’t think anyone seriously expects the grandchildren of a Bill Gates or a Warren Buffett to be 10 times as wealthy as they are.

Speculative advice for (some) third world country checkpoints

John McAfee serves up many (speculative) points of interest:

The most powerful tool a traveler can possess is a Press card. It will allow you to completely bypass the “documentation” process if you have limited time or limited funds and don’t want to deal with it. I have dozens stashed in all my vehicles, in my wallet, in my pockets, in my boats.

I am paranoid about being caught without one when I need one. They have magical properties if the correct incantations are spoken while producing them. A sample incantation at a police checkpoint (this will work in any Third World country):

“Hi, I’m really glad to see you.” (produce the press card at this point). I’m doing a story on Police corruption in (fill in country name) and I would love to get a statement from an honest police officer for the story. It’s for a newspaper in the U.S. Would you be willing to go on record for the piece?” You can add or subtract magic words according to the situation. Don’t worry about having to actually interview the officer. No sane police person would talk to a reporter about perceived corruption while at the task of being perceived to be corrupt. He will politely decline and quickly wave you through. If you do find the rare idiot officer who wants to talk, ask a few pointed questions about his superiors and it will quickly awaken his sensibilities. He will send you on your way.

The press card is powerful, but has risks and limitations. Do not attempt this magic, for example, at a Federale checkpoint in Mexico on a desolate road late at night. You will merely create additional, and unpleasant work for the person assigned to dig the hole where they intend to place you.

Here is another bit:

Smile and, if possible, joke. Say something like: “I’d like to stay and chat but I’m in a hurry to meet a girl. Her husband will be back soon.” This will go a long way toward creating a shared communion with the officers and will elicit a shared-experience type of sympathy.

The advice is interesting throughout, but caveat emptor, please.

For the pointer I thank Patrick.

Economic policy of Modi bleg

I would like this post and its comments to be a useful resource for people looking to read about Modi’s economic policies, whether from the past in Gujarat or for his likely future in a national leadership post.

Please do offer your suggestions for reading, or put forward your own insights, economics and analytics only.  If you are simply offering your opinion about Indian politics, or non-economic aspects of Modi, which occasion all sorts of non-factual emotional reactions, we will delete your comment in the interests of making the section useful and focused overall.

I thank you all in advance for contributing to this resource.

Alabama Texas fact of the day

 ”Revenues derived from college athletics is greater than the aggregate revenues of the NBA and the NHL,” said Marc Edelman, an associate professor at City University of New York who specializes in sports and antitrust law. He also noted that Alabama’s athletic revenues last year, which totaled $143 million, exceeded those of all 30 NHL teams and 25 of the 30 NBA teams.

Texas is the largest athletic department, earning more than $165 million last year in revenue — with $109 million coming from football, according to Education Department data. The university netted $27 million after expenses.

Other major programs such as Florida ($129 million), Ohio State ($123 million), Michigan ($122 million), Southern California ($97 million) and Oregon ($81 million) also are grossing massive dollars.

Those numbers of course are not counting the fundraising value of collegiate athletics.  There is more here, via Michael Makowsky.

Here is our previous post on higher education and athletics.

Assorted links

1. The demand for coordinated sentiment.

2. A small idea to reduce distracted driving.

3. Which two sports have a smaller field than physics predicts? (hint: squash and Jai alai).

4. How U.S. A.I.D. is shifting its strategy.

5. Long-term unemployment and older workers.

6. Using Google Glass at work.

7. Yglesias provides a guide to Piketty.