Tyler Cowen's Blog, page 339

Do positive wealth shocks stick?

There is a new paper by Hoyt Bleakley and Joseph P. Ferrie, titled “Up from Poverty? The 1832 Cherokee Land Lottery and the Long-run Distribution of Wealth.”  This paper uses a very clever experimental design, relying on random, lottery-based allocations of land.  The question is how much winning this land lottery helped people in the longer run.  Here is the abstract:

The state of Georgia allocated most of its land to the public through a system of lotteries. These episodes provide unusual opportunities to assess the long-term impact of large shocks to wealth, as winning was uncorrelated with individual characteristics and participation was nearly universal among the eligible population of adult white male Georgians. We use this episode to examine the idea that the lower tail of the wealth distribution reflects in part a wealth-based poverty trap because of limited access to capital. Using wealth measured in the 1850 Census manuscripts, we follow up on a sample of men eligible to win in the 1832 Cherokee Land Lottery. We assess the impact of lottery winning on the distribution of wealth 18 years after the fact. Winners are on average richer (by an amount close to the median of 1850 wealth), but mainly due to a (net) shifting of mass from the middle to the upper tail of the wealth distribution. The lower tail is largely unaffected.

The bottom line is that the grants increased inequality, many people were helped a great deal, and a large chunk of people weren’t helped at all.  An ungated version of the paper is here.

Bets, beliefs, and portfolios: some further observations on the theses of Bryan Caplan

Bryan Caplan thinks that portfolios don’t reveal much about actual beliefs,.  Here is one of his arguments:

Even prominent Nobel prize-winning economists admit they follow simple rules of thumb when they invest.  So unless people’s beliefs are carved in stone, how could portfolios possibly reveal much about their beliefs?  Tyler is a case in point: He changes his mind a hundred times a day, but he follows a simple financial strategy that hasn’t varied in years.

I view it differently.  I don’t trade in public markets but I vary my allocations by changing how much money I spend and how to allocate my time.  Perhaps not coincidentally, this puts me square into the world of classical finance theory as represented by “the mutual fund theorem,” with a static equity portfolio of fixed proportions and some unique covariances on my human capital.  I call that rationality not inertia.

Bryan, you will note, is a founder of the theory of rational irrationality, which suggests you become more rational as the private stakes from your decisions go up.  These days he is wishing to argue that the truly small stakes reflect what you really think, through the lens of mental accounting and compartmentalization.  Of course that would undercut or at least drastically relativize his earlier theory.  I say he has made a large and successful career bet — much bigger than any of his piddly ante monetary bets — on the theory of rational irrationality, so he must really agree with me after all.

It also happens that Bryan’s emphasis on simple rules of thumb will work against his interest in person-to-person bets as a metric of authenticity.  If you don’t change or examine your overall portfolio very often, that means some reasonably wide range of portfolios is a matter of indifference or near indifference to you, if only because fine-tuned improvements are hard to find.  (Do you really give matters a re-ponder when a firm in your portfolio pays dividends?)  In that case, however, the small bets won’t be authentic either.  One could compartmentalize one’s personal bets quite easily and say to oneself — whether consciously or not — “I can make this small bet: it still keeps my overall portfolio within that broad range of indifference.”  Which indeed it does.  The bet is then undertaken for expressive reasons, which is fine, nothing against that, but for me it is more fun to cheer for Tony Parker (without betting on him).  I think of these small personal bets as akin to sports loyalties most of all and not as a unique window into our real beliefs.

The small person-to-person bets pay off (or not) in terms of pride, including for some people the pride in betting itself.  One relevant substitute is to attempt to produce pride using your own internal mental accounting of your own predictions and so we must make the broader portfolio comparison.  What the $$ betters are signaling is a lack of vividness for their own internal mental worlds.  In my mind, I’m already betting an optimal amount of pride through my own mental accounting.  Maybe some of us are already betting too much internal pride on external events; after all, the variance of pride introduces some new exogenous risk into life and perhaps we should be trying to move in the opposite direction toward greater pride indifference to external events.  That is what the Stoics thought.

Most of all, I fear that Bryan’s results are coming from an asymmetric approach where he applies positive observation to large portfolios and normative recommendations to small bets.  Bryan could go for a “positive vs. positive” comparison, in which case he would point out that people trade and adjust their large portfolios all the time, but don’t make small bets on public policy nearly as much.   Alternatively, he could try a “normative vs. normative” comparison, in which case would you sooner recommend that people drop their inertia for their large portfolios or for their small ones?  To even raise such a question is to answer it.

Do you want to find out “what a person really thinks”?  Look  at whom they married, how much money they spend, and how they devote their time.  That is the most important portfolio of them all.

Just don’t bet that Bryan and I are going to agree anytime soon.

Why are there not more science majors?

There is a new paper (pdf) by Ralph Stinebrickner and Todd R. Stinebrickner on this topic, and here is their bottom line conclusion:

We find that students enter school quite optimistic/interested about obtaining a science degree, but that relatively few students end up graduating with a science degree. The substantial overoptimism about completing a degree in science can be attributed largely to students beginning school with misperceptions about their ability to perform well academically in science.

Assorted links

1. New paper on MIT’s openness to Jewish economists, by E. Roy Weintraub.

2. The last telegram has not yet been sent.

3. How well or badly did the sequester work out?  In most areas we were told something far from the truth.

4. Is there such a thing as a basic emotion?  Very interesting piece.

5. Claims about Japanese rice, and new Chinese law says children must visit their elderly parents.

6. Why Ezra Klein won’t replace Google Reader.

7. The Holy Quran Park.

New evidence on marginal tax rates and income

There is a new paper (pdf) from Karel Mertens:

This paper estimates the dynamic effects of marginal tax rate changes on income reported on tax returns in the United States over the 1950-2010 period. After isolating exogenous variation in average marginal tax rates in structural vector autoregressions using a narrative identification approach, I find large positive effects in the top 1% of the income distribution. In contrast to earlier findings based on tax return data, I also find large effects in other income percentile brackets. A hypothetical tax reform cutting marginal rates only for the top 1% leads to sizeable increases in top 1\% incomes and has a positive effect on real GDP. There are also spillover effects to incomes outside of the top 1%, but top marginal rate cuts lead to greater inequality in pre-tax incomes.

What is the most ridiculous thing someone has ever tried to convince you of?

Here is a Quora forum on that topic, with some good answers.

I liked this response by Shivang Agarwal:

That Windows is trying to find a solution to the problem just occurred.

Why don’t dying firms raise prices?

Bryan Caplan asks:

“Demand is more elastic in the long-run than the short-run.”  It’s a textbook truism.  Implication: Raising prices is often a bad idea even if profits instantly rise.  In the long-run, demand will get more elastic, and the price-gouging firm will discover that its behavior was penny-wise and pound-foolish.

This all makes sense, but there is an awkward implication: Once firms realize that they’re dying, they ought to raise prices.  By the time long-run demand elasticity kicks in, they’ll be out of business.  Why not opportunistically take advantage of the situation?

Yet as far as I can tell, this almost never happens.  When firms are on their last legs, they tend to cut prices, or at least hold them steady.

What gives?  Is the textbook truism false?  Is this a corporate governance problem – the current CEO never wants to admit that the end is nigh?  Or what?

I can think of a few examples of this phenomenon.  Dying academic book publishers for instance seem to be raising prices.   This also may explain some aspects of the market for oil.  Arguably to the extent Saudi Arabia perceives itself as running out of oil, they feel less need to keep the market price down to limit investment in energy substitutes.  But why are there not more examples?  Is demand too low for reasons of selection?  Does internal collapse within the firm, and personnel departures, raise the shadow value of bringing in revenue sooner rather than later?

Assorted links

1. How kids rate and review Pixar movies, and Steven Pinker’s desert island discs.

2. A short essay on measurement and its consequences.

3. Kenneth Minogue has passed away.

4. The political culture that is Sweden (Sörmland).

5. Why genre rules eBooks.

6. Greg Mankiw on Jason Furman.

7. Kurt Schuler’s monetary economics reading list.

8. What are the best pens of all time? (speculative)

Superconducting Levitation

You have probably seen a super-cool levitation video before but this one has a nice explanation of the effect and a Mobius strip.

Hat tip: Boing Boing.

Cash Transfers to the Poor

Chris Blattman, author of one of the key papers on cash transfers to the poor, takes a page from Albert Hirschman’s book and practices a bit of self-subversion.

First, the message can be misunderstood. It is not, “Cash transfers to the poor are a panacea.” More like, “They probably suck less than most of the other things we are doing.” This is not a high bar.

Second, cash transfers work in some cases not others. If a poor person is enterprising, and their main problem is insufficient capital, terrific. If that’s not their problem, throwing cash will not do much to help. I recommend the paper for details….

Third, a cash transfer to help the poor build business is like aspirin to a flesh wound. It helps, but not for long. The real problem is the absence of firms small and large to employ people productively. The root of the problem is political instability, economic uncertainty, and a country’s high cost structure, among other things. A government’s attention is properly on these bigger issues.

If I were an enterprising young researcher looking for an idea and experiments that will prove powerful in five years, I would try to find the stake I can drive into the heart of the cash transfer movement.

…That is not depressing. That is science. We should welcome it.

In that spirit: I look forward to the stake-wielders.