Tyler Cowen's Blog, page 482

I didn’t mean to leave anybody out

From my entering class at Harvard, that is.  A few emails prompt me to produce a longer list:

Douglas Elmendorf, now head of the CBO in addition to his previous illustrious career in research and policy.

Rob Stavins, teaches at the Kennedy School and is one of the leading researchers in environmental economics including climate change.

Perry Mehrling, we’ve covered him a lot on MR, most of all I love his book on Fischer Black.

Asher Blass, living in Israel, working as a partner in a consulting firm, for a while he was chief economist at Bank of Israel.  I recall Asher once telling me that an individual can have a larger impact in a country with a small population.

Kenneth Kuttner, he has spent time at the San Francisco Fed and co-authored several important papers on money and credit.  Now at Williams College.

John Nachbar, a noted theorist at Washington University and for a while he was department chair.

David Corbett, he now works as a lawyer.

Allen Sanguines, he was brilliant in theory, he is now the President of Rasaland, a development fund in Mexico.

Mark Sundberg, a while ago he was at the World Bank.

Mary Hirschfeld, former Jeopardy champion, went on to get a Ph.D in theology at Notre Dame, now teaching humanities at Villanova.

Greg Duffie, macro and money, professor at Johns Hopkins.

Richard Grossman, at Wesleyan, he is well known in financial history.

Hamish Stewart, has done well recognized work in economics and philosophy.

Deborah Weiss, for a while she was my colleague at GMU Law, now she is living in Texas and raising a family.

My earlier coverage of the class was here.  Our TAs included Michael Mandel and Nobu Kiyotaki.  There are more, perhaps Miles can help me out in the comments.

The De Benoist conservative (?) critique of Hayek

Here is the concluding bit:

Hayek’s efforts differ from classical liberalism because of his attempt to re-ground the doctrine at the highest possible level without recourse to the fiction of the social contract and by attempting to avoid the critiques usually made of rationalism, utilitarianism, the postulate of a general equilibrium or of pure and perfect competition founded on the transparency of information. In order to do this, Hayek is forced to raise the stakes and to turn the market into a global concept necessary because of its totalizing character. The result is a new utopia, predicated on as many paralogisms and contradictions. Actually, as Caille put it, were it not for “the welfare state’s failure to achieve social peace, the market order would have been swept away a long time ago.” A society based on Hayek’s principles would explode in a short time. Furthermore, its institution can only be the product of a pure “constructivism” and would undoubtedly require a dictatorial state. As Albert O. Hirschman writes, “this allegedly idyllic privatized citizenship, which only pays attention to its economic interests and indirectly serves the public interest without ever playing a direct role — all of this can only be achieved within nightmarish political conditions.”[56] That today “national thought” is being reinvigorated by this type of theory says a lot about the collapse of this thought.

The full essay is here, and for the pointer I thank Bill.

Just yesterday on my doorstep I received the book The Great Persuasion: Reinventing Free Markets since the Depression, by Angus Burgin, which offers a lengthy contrast between Hayek and Friedman, among other matters.  It looks interesting: “Postwar conservative thought was more dynamic and cosmopolitan than has previously been understood.”

What is the ideal “development economics” Twitter feed?

I have some suggestions:

https://twitter.com/#!/GdnDevelopment

@Viewfromthecave

@ OECD_Centre

https://twitter.com/#!/blogageco

https://twitter.com/#!/WorldBankPSD

https://twitter.com/#!/clairemelamed

@Shanta_WB

@whydev

@cblatts

@evavivalt

@deankarlan

@m_clem

@RachelStrohm

Some of them are shirkers, I know.  Whom else do you recommend?

Assorted links

1. What fast food workers say you should never eat, via  Chris F. Masse.

2. Mexico is now the sweetheart of foreign investors.

3. A popular Haitian TV show.

Empirical Evidence, Sexual Harassment, and the Economic Way of Thinking

An improvement in a district’s schools will increase house prices in that district. A burger and fries will cost more than a burger. All else the same, cars that get more miles per gallon will sell for higher prices than cars that get fewer miles per gallon. I trust that most people would not find these statements objectionable.

All else equal, an improvement in workplace conditions will reduce wages. Now that looks slightly different than “A burger and fries costs more than a burger” but it’s really not. Think of the worker as buying better working conditions with a lower wage, thus better working conditions (burger plus fries) cost more (lower wage) than worse working conditions (burger alone).

Conceptually the burger story and the workplace story are very similar but the latter causes Henry Farrell to object:

…where you will find me objecting, and quite vociferously too, is to the suggestion that we ought to employ simple econ 101 style analysis in order to figure out the tradeoffs, and the appropriate solutions. This style of analysis has an awful lot of presuppositions built into it, and these presuppositions are politically loaded.

Let’s take the case of labour relations. If, as Matt argues, you ought to start with a model of firms, each of which has a cost function such that the total compensation they can offer is fixed, and any increase in costly rights (such as not having your body searched to stop you smuggling widgets out between your arse-cheeks) is inevitably associated with a proportionate decline in wages, then, indeed, you will end up concluding that compulsory rules forbidding body searches will lower overall choice without really benefitting anyone. But you only get to that result because of what you are assuming in the first place. You are assuming that there isn’t any real distributional action happening within the firm – and in particular, that the firm’s owners don’t have any surplus (that they are able to extract because e.g. of workers’ weaker bargaining position) that could be reallocated through regulation. In other words, you are only ‘refuting’ the people you disagree with, because you assume away the problem that they are worried about.

(FYI, Henry is responding to a smart and devastating post by Matt Yglesias that no doubt rankled because Matt is a liberal.)

Henry gets the economics wrong (the model does not require perfect competition) but let’s ignore that and look to his larger point:

The lesson here is straightforward. Simple economic models can be quite useful, but they should be employed with very considerable caution. In particular, one should always think carefully about whether the assumptions of your model blind you to factors that are important to the debate that you are applying them to. As a secondary matter, you should also look to the empirical support for your model – intuitively appealing models are frequently wrong.

Now. what are you expecting to follow this paragraph? Surely, some empirical evidence that the model is wrong. None follows. Henry seems to think that economists have never thought about their assumptions or tested their models. Nothing could be further from the truth so let me provide some empirical evidence about the model of compensating differentials:

Here is Jonathan Gruber and Alan Krueger (n.b. both of them have worked for Obama) on workers’ compensation:

This paper empirically examines the incidence of the workers’ compensation program to infer the likely consequences of mandated health insurance proposals. In certain industries, such as trucking and carpentry, workers’ compensation insurance costs are quite large, and vary tremendously within states over time, and across states at a moment in time. This variation is used to identify the incidence of the program. Empirical analysis of two data sets suggest that changes in employers’ costs of workers’ compensation insurance are largely shifted to employees in the form of lower wages.

Here is Gruber on mandated maternity leave:

I consider the labor-market effects of mandates which raise the costs of employing a demographically identifiable group. The efficiency of these policies will be largely dependent on the extent to which their costs are shifted to group-specific wages. I study several state and federal mandates which stipulated that childbirth be covered comprehensively in health insurance plans, raising the relative cost of insuring women of childbearing age. I find substantial shifting of the costs of these mandates to the wages of the targeted group. Correspondingly, I find little effect on total labor input for that group.

And, dare I mention it, here is Joni Hersch in a recent paper in the AER on sexual harrasment:

Workplace sexual harassment is illegal, but many workers report that they have been sexually harassed. Exposure to the risk of sexual harassment may decrease productivity, which would reduce wages. Alternatively, workers may receive a compensating differential for exposure to sexual harassment, which would increase wages. Data on claims of sexual harassment filed with the Equal Employment Opportunity Commission are used to calculate the first measures of sexual harassment risks by industry, age group, and sex. Female workers face far higher sexual harassment risks. On balance, workers receive a compensating wage differential for exposure to the risk of sexual harassment.

Henry goes wrong because he doesn’t want to conclude that sexual harassment is ok but he thinks that the only way to deny that conclusion is to deny that wages are higher so he rejects the model, he rejects the assumptions that he thinks (incorrectly!) are driving the model and he assumes without looking for any evidence that wages are in fact not higher. (Talk about being blinded by assumptions!).

Matt Yglesias, by the way, is much smarter on this point, he doesn’t reject the model but gives several extensions, such as externalities, that may change the conclusion.

Here is another way to think about sexual harassment and the model. What the theory and the empirical results are saying is that people exposed to a higher risk of sexual harassment are paid more, just as people exposed to a higher risk of death are paid more. In the case of risk, however, the firm’s owners (shareholders) are paying higher wages but also getting the benefits of risky work. But in the case of sexual harassment the shareholders are paying higher wages but not getting the benefits of sexual harassment. In other words, from the firm’s point of view sexual harassment is a bit like employee theft – with the stealing being done by the harassers. (I alluded to this point in my original post and Miles Kimball made it as well.) Thus, shareholders may benefit if the government can reduce sexual harassment at low cost, precisely because they would then be able to pay lower wages without losing productive workers.

Now this analysis is not complete or the only way to frame the issue (again see Yglesias for other approaches). It may bother some people that in this version the biggest gainers from sexual harassment law may well be the firm owners rather than the previously harassed (but does it bother you that the among the biggest gainers from better schools may be property owners without children?) Nevertheless, the principle here is clear, the way to think about these issues is not to throw out economic reasoning but to apply the reasoning ever more deeply.

Why is American labor mobility falling?

From The Economist:

The first [reason] is that the mix of jobs offered in different parts of America has become more uniform. The authors compute an index of occupational segregation, which compares the composition of employment in individual places with the national profile. Over time, their figures show, employment in individual markets has come to resemble more closely that in the nation as a whole.

This homogenisation reflects the rising importance of “non-tradable” work…

Yet a more uniform job distribution alone cannot account for falling mobility. As Messrs Kaplan and Schulhofer-Wohl point out, mobility has fallen for manufacturers, where jobs are more dispersed, as well as for service-sector workers. What is more, if workers know that they can find jobs they want in different places, they may become more willing to move for other reasons—to be by the coast, for example, or to savour a particular music scene. Yet survey data reveal that moves for these other reasons have not risen. The authors suggest another force is also reducing migration: the plummeting cost of information.

…In recent decades, however, it has become much easier to learn about places without moving house. Deregulated airlines and innovative online-travel services have slashed travel costs, allowing people to visit and assess different markets without moving. The web makes it vastly easier to study every aspect of a potential new home, from the quality of its apartment stock to the surliness of its baristas, all without leaving home. Falling mobility isn’t simply caused by labour-market homogenisation, the authors argue, but also by greater efficiency. People are able to find the right job in the ideal city in fewer hops than before.

When will the mini-apartment arrive?

Could apartments in New York City get any smaller? Mayor Michael Bloomberg hopes so. On Monday he announced a competition for architects to submit designs for apartments measuring just 275 to 300 square feet (25.5 to 28 square meters) to address the shortage of homes suitable and affordable for the city’s growing population of one- and two-person households.

Here is more, and for the pointer I thank Asher Meir.

*Climbing the Charts*

The author is Gabriel Rossman and the subtitle is What Radio Airplay Tells Us About the Diffusion of Innovation.

In other words, there is lots of payola.  My blurb is:

Gabriel Rossman is the leading researcher in the sociology and economics of the music industry, and this book shows him at the top of his research and exposition powers.

You can buy it here.  Rossman blogs here, and he is on Twitter here.

Assorted links

1. There will be a new Malcolm Gladwell book.

2. Farrant paper on Hayek and Chile (pdf).

3. Russ Roberts interviews Joseph Stiglitz.

4. Classic Nintendo Games are (NP-)Hard, and on Peer Instruction, good overview here.

5. tweet.gmu.edu.

Pictures of Spain

Grandiose projects across Spain now sit empty and dying. The New York Times focuses in on Ciudad de la Luz, a mega-movie studio built far from cultural centers that is now foundering.

Ciudad de la Luz has become a prominent example of Valencia’s frenzy of modern-day pyramid building, which left a legacy of $25.5 billion in regional debt and bankrupt infrastructure projects as well as the backlash now building against it.

Valencia’s other investments included a harbor for superyachts, an opera house styled like the one in Sydney, Australia, a futuristic science museum, the biggest aquarium in Europe and a sail-shaped bridge, not to mention an airport that never had a single arrival or departure. It also attracted extravagant events like the America’s Cup and Formula One racing.

The Daily Mail takes a look at Spain’s “ghost airport,” a billion Euro project that was meant to serve 5 million passengers a year and is now closed after just three years in operation.

The Socialist regional government spent millions propping up the venue, promoting the project with advertising campaigns and approving a €140 million guarantee to keep it afloat.

But, last October, it saw its final commercial flight, by Vueling. The airport remained open for another six months, the staff still being paid to deal with a handful of private arrivals.

It finally closed in April, but even though it is now closed to air traffic, maintenance tasks still have to be carried out.

The 4,000 metre runway has to be continually painted with yellow crosses, so pilots flying over the airport will know they cannot land there.

Private money appears to have also taken a bath on many of these projects although it’s always difficult to say after government guarantees and kickbacks. The Times quotes one tourist on the meaning:

“I understand now why there’s a financial crisis in Europe,” said Bryce Matuschka of New Zealand. “The bridge is a real work of art, and the aquarium is great, but for some of these buildings you just have to ask, What was all that money spent for?”

I don’t think that’s quite right. My view is that rather than causing a crisis, bad investments are mostly masked by a boom and revealed by a crisis. Still, “infrastructure spending” doesn’t always create jobs; sometimes it’s better to stick with slow rail and sewers.