Paging Mark P

Mark Thoma posted this today.

I think the whole idea of charter schools has some merit as a means of educational experimentation.  But if this sort of cheating occurs, it makes it impossible to trust the data and that removes most of the benefit of being able to "let a thousand flowers bloom in the hopes that one will be especially amazing".  It could be an isolated incident, but even a single case this egregious makes it much harder to trust that education reform is adhering to strict metrics. 

[My response is here -- Mark P]

Urban Sprawl

Mark Thoma's site has a link to Paul Krugman's discussion of the association between sprawl and low social mobility.  It appears that if you do a plot of urban density versus social mobility of the lowest quintile to the highest quintile you get a very surprising linear relation: as density drops it looks like persistent inequality rises.  Paul Krugman is appropriately skeptical that this is the whole story:

Is the relationship causal? You can easily think of reasons for spurious correlation: sprawl is associated with being in the sunbelt, with voting Republican, with having weak social safety net programs, etc.. Still, it’s striking.

Matt Yglesias adds additional data about what happens with kids who move into high density urban areas as well as a few other possible explanations:

So what drives this? The study does not really make a high-powered effort to draw strong causal inferences. But the study does show that kids who moved into a high-mobility area at a young age do about as well as the kids born in high-mobility areas, but kids who move as teenagers don't. So there seems to be a factor that isn't parent-driven. The authors report that tax policy, the existence and affordability of local colleges, and the level of extreme local wealth do not appear to be strong correlates of intergenerational mobility. Metro areas where the poor are geographically isolated from the middle class have less intergenerational mobility, while metro areas with more two-parents households, better elementary and high schools, and more "civic engagement" (measured through membership in religious and community groups) have more.

 So clearly it would be a mistake to over-interpret these data. But they do have one major policy piece embedded into them -- it makes absolutely no sense to subsidize sprawl as a positive good.  It may not be worth it to try and discourage it, but generally there are a lot of laws (think zoning laws and car centered transportation grids) that implicitly subsidize sub-urban communities.

There are still pieces to be considered -- like does the poorest quintile do objectively better or worse in the low social mobility environments (you can justify low mobility if everyone is better off as a result).  However, the two extremes in Paul Krugman's graph are Atlanta (low density and mobility) and Los Angeles (high density and mobility).  It's not 100% clear that it is better to be poor in California than Georgia, but it isn't like it is far worse in California so far as I can tell.  Maybe Mark can weigh in here? 

But this all points to a big picture that urban planning is actually a much bigger deal than I had previously realized. 

Intellectual Property

Mark Thoma points us towards a potentially really important finding:

By linking a number of different datasets that had not previously been used by researchers, Williams was able to measure when genes were sequenced, which genes were held by Celera's intellectual property, and what subsequent investments were made in scientific research and product development on each gene. Williams' conclusion points to a persistent 20-30 percent reduction in subsequent scientific research and product development for those genes held by Celera's intellectual property.
 

As we have long discussed on this blog, the justification for intellectual property is to encourage and promote innovation.  There has long been a concern that the innovation would have happened with or without the patent (software patents are a good example of this phenomenon) but a general consensus that the profits from patents increase innovation (due to the rewards generated by a successful innovation).  However, if the granting of a patent were shown to decrease innovation then the argument for granting them would be weakened.

If granting a patent reduces future innovation and the patented innovations would have occurred with or without the patent then the patent process becomes pure rent seeking.  It's clear that these two conditions do not universally hold (i.e. medication discovery as currently constructed is too expensive without a clear path to future profits).  But the possibility that this could be true for same areas of technology is a sobering thought indeed. 

Dual Class shares and free markets

Andrew Gelman weighs in on dual class shares: 

Now I’m just confused here. Who’s supposed to be “concerned” here? As a New Yorker subscriber, am I supposed to be concerned that dual-class firms underperformed the market? I just don’t get it. Why should I care? If the shares underperform the market, people can buy a piece of Facebook for less. That’s fine too, no?

I think that Andrew would be completely correct in a perfect market (one in which all of Mark Thoma's issues are not present).  If some financial products give a piece of the return while others give ownership plus return then people could choose which ones to purchase. 

However, the modern American economy has fallen in love with the 401(k) as an investment vehicle.  This leads to two problems.  One, investors are generally not free to switch to a different fund because they dislike the investment decisions of the fund that they are in.  Since the individual investor bears all of the losses of bad decisions but the employer has control of the fund (and has an incentive to cut costs) you have a classic principal agent problem.

This problem is made worse by giving a limited group of people control over a group investment.  One can easily imagine the small group making decisions that benefit them at the expense of the majority of shareholders.  Again, not necessarily a problem in an open market.  But with the constraints that individual investors are under this could be problematic as they lack the freedom to enter or exit the market. 

This is why I wax poetic about Social Security (or the Canada Pension Plan): they shift the risk from small investors (who generally can't bear it) to large entities (that can).  I totally get that there are total social resources constraints, but I would rather that they be dealt with openly.  Instead I see the stock market becoming a worse and worse deal just as a large American cohort (the "Baby Boom") is about to retire. 

I am not sure that this is a good thing. 

See also Matt Ygelasis and Felix Salmon.

Question about Airlines

Mark Thoma tweets:

MarkThoma Mark Thoma
Just once, I'd like to be able to get on the plane at the scheduled time, and make all my connections. Once doesn't seem to much to ask. Grr

I cannot agree more. Why is it so difficult for modern airlines to provide basic services? Why is the city bus more likely to be on schedule than Delta Airlines?

Statements that I violently disagree with

From Tyler Cowen via Scott Sumner:

Congratulations to Matt Yglesias on his new gig. He’s arguably the best progressive economist in the blogosphere, which isn’t bad given that he’s not an economist. I said “arguably” because Krugman’s a more talented macroeconomist. But Yglesias can address a much wider variety of policy issues in a very persuasive fashion. So he’s certainly in the top 5. His blog is the best argument for progressive policy that I’ve ever read. (But not quite persuasive enough to convince me.)

Now do not get me wrong: I post a lot about Matt Yglesias because I think that he is a fine thinker and has some really nice points to make. But there is now way he is competitive to be the top progressive economist in the blogosphere. I can't claim to be an expert but, off the top of my head, I have have:

Noah Smith
Paul Krugman
Bradford Delong
Mark Thoma

Plus the Worthwhile Canadian Initiative folks occasionally drift into progressive territory and are always worth reading. And this is just off the top of my head and including blogs I read regularly. Again: the provocative policy thinker with good ideas and a solid grasp of economists label definitely applies to Yglesias. But I find him a very odd choice for #1 given the alternatives. If anything, I find him awfully centrist on economic matters, at times (which, I suppose, could explain the appeal).

Unemployment

Mark Thoma is strident:

The use of the term "slackers" is telling. You see, there's plenty of work for the industrious, our unemployment problem is due to laziness. There are plenty of jobs -- pay no attention to the fact that the number of unemployed is far, far greater than the number of jobs -- people don't really want to work. It has nothing to do with the crash of Wall Street destroying the economy, and the bounce back and present good fortune on Wall Street has nothing to do with the government bailing them out -- it was their hard work that fixed the problems.

I think that it is worth keeping in mind how dynamic the world is. There was a time, during the Clinton administration, where the willingness to work was enough to ensure employment in much of America. But the current unemployment rate suggests that many people who would like to work can't.

I really don't understand the disconnect here. Large enterprises need to be helped out by the government? Isn't that industrial policy?

From a health care point of view, unemployment is associated with all sorts of medical ills in the United States. Medical services are so expensive that unemployed people may neglect basic preventative care and end up in the (much more expensive) emergency room. Plus, it is likely that unemployment itself (a source of chronic stress and deprivation) may also have negative health impacts.

I really wonder when we will face up to this as a joint problem!

Easily worth a thousand words... Maybe even fifteen hundred

From Mark Thoma.

What do you do when things are tight?

I was reading two different pieces today and I thought that they had a really interesting link between the two of them.

From Dana Goldstein:

While we're on the subject of Wisconsin, I find Scott Walker sort of terrifyingly simple-minded but charismatic. His education platform is basically Race to the Top plus vouchers while somehow massively cutting education budgets. (Huh?)

From Mark Thoma:

Local school districts have cut 154,000 education jobs since August 2008.

So my question is this: why is the push for excellence being connected with schemes to reduce manpower costs? If the argument is that education is a key priority then why are we not increasing funding for education? Instead we have the odd situation where the state wants education to improve while cutting expenses.

Usually when this contradiction shows up, the government is seeking cover for the decision to cut services. If cutting expenses also results in better outcomes than we are all better off, right? Or it could be an attempt to remove the more senior (and thus higher paid) teachers to minimize the impact of budgetary decisions that have already been made. But that is a different conversation, isn't it?

Now consider another area that the state runs that is in a similar position, namely the military. Is anybody seriously arguing that some soldiers do not pull their weight? That we could be more effective with a smaller force? After all, wasn't there a movie (Rambo, for example) where a single heroic special forces soldier was more effective than a brigade? But if the administration began talking about waste and cost effectiveness then you would be certain what they really wanted was cover for cuts. Now imagine they talked about those lazy soldiers who re-enlisted or who were only interested in rewards? Who needs a veterns administration when soldiers are fighting for principle and principle alone?

Would such cuts make sense? Either for the military or for education it is a matter of opportunity cost. But maybe the best conversation to have is one about the trade-off between the options. Taxes hurt economic growth but lack of education or defence can both lead to fairly bad long term outcomes. I am not sure where the balance is but I'd prefer to have the conversation openly. Pretending that test scores plus cuts will somehow improve education seems odd.

More efficient models of defense and education may both exist, but then the optimal path seems to be to show the efficiencies first and implement the cuts second.

Defining Denominators

Via Mark Thoma, I discovered this very interesting article looking at group of gross domestic product by working age population (WAP):

When one looks at GDP/WAP (defined as population aged 20-60), one gets a surprising result: Japan has actually done better than the US or most European countries over the last decade. The reason is simple: Japan’s overall growth rates have been quite low, but growth was achieved despite a rapidly shrinking working-age population.

The difference between Japan and the US is instructive here: in terms of overall GDP growth, it was about one percentage point, but larger in terms of the annual WAP growth rates – more than 1.5 percentage points, given that the US working-age population grew by 0.8%, whereas Japan’s has been shrinking at about the same rate.

Another indication that Japan has fully used its potential is that the unemployment rate has been constant over the last decade. By contrast, the US unemployment rate has almost doubled, now approaching 10%. One might thus conclude that the US should take Japan as an example not of stagnation, but of how to squeeze maximum growth from limited potential.

This is a very good illustration of how important it can be to understand the structure of a population under study. I don't know if the proposed metric is the most relevant metric for the phenomenon under study but it's sure interesting how it completely changes the interpretation of the result. That could have very profound policy results when we consider questions like "would it be a bad thing to emulate Japan's industrial policy?".

Unemployment

A new post by Mark Thoma fits in, I think, with recent thoughts about minimum wage. It is true that, as the time of unemployment increases, some workers will find jobs that are vastly inferior (but way better than nothing). This suggests that the unemployment rate will become a less and less reliable marker of the strength of the economy.

Now, it might be true that some of this could be an unrealistic expectation of compensation on the part of workers who had unusually good jobs during the past expansion. But I note that the financial industry (apparently where the recession began) is not necessarily hurting:

"Wall Street earned $21.4 billion during the first three quarters of 2010," Comptroller Tom DiNapoli said.

"While much less than last year's record of $61.4 billion, which was fueled by federal assistance, the securities industry is on track in 2010 for the second-highest level of profitability on record," he said.

So I think we should be sceptics about narratives that include the need for "shared sacrifice" from all segments of society. I do note that the idea that last year's record profits where fuelled by government assistance ironic given the concerns over matters like pay forK-12 teachers. I don't have a good road map forward except to note that simple solutions and metrics seem unlikely to be helpful under these conditions.

Health Care

We haven't talked as much about Health Care lately, because I have been slammed by my first year of teaching. But I did want to highlight this post by Aaron Carroll:

You ready for this? They didn’t ship the medication. Why? It’s on back-order.

So explain this to me, awesome insurance system. You will only allow me to get my medication from one pharmacy, which is not local, and which you own and run. And you won’t send the medication early, which would provide a safe buffer. And then you run out of the medication. And then you don’t tell me until the day I run out. And then you don’t really tell me, you leave me a cryptic message on my voice mail that I would usually not be able to get until I arrive home and you are closed.

Will you allow me to go to another pharmacy? Sure. But you won’t cover it. Will you have the medication soon? Yeah, you hope to have it tomorrow.

I don’t believe you.

Do you have any concern – whatsoever – that I am without my medication for a period of time? That it’s entirely your fault?

I’m a model patient. I pay all my bills. I go to the doctor. I get the labs done. I refill the meds on time with a weeks’ advance. I follow the rules. And you screw me.

Are we really sure that the health care system in the United States meets the requirements for market efficiency*? Really?


* And, if you have not read the classic post by Mark Thoma then now is as good a time as any. Well worth the ten minutes to breeze through it and it is a very good way of evaluating whether a particular market is likely to be efficient.

The indispensable Professor Thoma

Having spent a lot of time recently on the issue of compensation, this post by Mark Thoma caught my eye:

Greg Mankiw complains that if taxes go up for people with incomes as high as his, he won't work as hard and that means he won't be able to leave as much for his kids. Incentives matter he says. If that's the case, I wonder why someone who is trying to take away the incentive for his kids to work hard and be successful on their own doesn't leave academia and become a high paid consultant.

I'm sure Greg Mankiw could clean up as a consultant. The same effort he puts into academics would be much more highly compensated somewhere else. The fact that he decided to become an academic in the first place indicates that it's not all about the money.

As Greg Mankiw makes clear every chance he gets, he's at Harvard. That tells me that the return to his ego is every bit as important as the financial return. I'd further guess that even if the New York Times stopped paying him for his column, he'd write it anyway. It's a boost to his ego and reputation that he'd want even without whatever small payment he gets for each column (he could make more by using the time to prepare a talk "to a business group, consulting on a legal case, [or] giving a guest lecture," so the opportunity cost of the column is quite high).

I have only anecdotal evidence for the following statement (but it is pretty damned extensive anecdotal evidence so here goes):

When it comes to assumptions, statisticians and economists (particularly freshwater economists) tend to take opposite approaches. Statisticians generally insist on running through more assumptions than the listener has any interest in hearing about, often including those of no relevance to the situation you're in. (A former manager of mine once joked that it was easy being a statistician -- whatever the question, you just answered "it depends.") Economists tend to leave assumptions unsaid, even the really important ones that probably aren't being met.

I can give you plenty of examples of these buried assumptions (if you can make it through a chapter of Freakonomics without finding a few you're not paying attention), but there are also economists who do their best to unearth these assumptions, to bring them back into the debate where they belong. One of the best and most diligent of those diggers is Mark Thoma.

Which brings us back to Greg Mankiw's recent column. On one level, Mankiw's argument is sound. Every product that reaches the marketplace did start with the producer asking "Is this worth my while?" Tax rates do factor into that calculation, so, yes, there can a situation where dropping the Bush tax cuts would cause someone to decide not to make a product.

But there are a couple of big assumptions here. First, since we're talking about a return to Clinton (not Eisenhower) era tax rates here, a product would have to be just barely worth doing now -- the drop in returns under the proposed change is very small. Since this is known economic territory, we know that Clinton's tax increase caused at most a trivial number of products and services to be dropped for the reason Mankaw suggests and the Clinton rates were as high or higher than anything proposed by Obama. (Mankiw gets around this by starting out talking about the income tax increases for people making over 250K then slipping in the estate tax about half a page down, leaving most readers with the impression that making the income tax slightly more progressive will cut his take home pay in half but that's more a case of lying through misdirection than of burying the assumption).

The second, and more important assumption is where Thoma really shines. The idea that a producer will stop making a product if the tax rate passes a certain point assumes that primary return on that product is taxable, an assumption that is in no way justified here. As Thoma points out, the compensation Mankiw receives in the form of ego-stroking and reputation-building far exceed the $650 he gets for each column. I would add to that the satisfaction of influencing the debate. Conservative groups spend millions of dollars getting anti-tax arguments in the papers. When Mankiw does it, the papers send him the check.

When the compensation for a product or service is overwhelmingly non-taxable, an increase in tax rates will almost never cause a provider to drop that product or service. Mankiw is smart enough to be aware of this (he is at Harvard, after all); he just doesn't want the rest of us to realize it.

It is possible to have a simple question in a complex field

Kartik Athreya packs a lot of stupid into one PDF and though Mark Thoma does a good job of unpacking most of it, there are, inevitably, statements that could use additional rebuttal. Here's an example:

It is precisely from this low-level vantage point that I am totally puzzled by the willingness of many who fearlessly and breathlessly opine about economics, especially macro- economic policy. Deficits, short-term interest rate targets, sovereign debt are all chewed over with a level of self-assuredness that only someone who doesn’t know more could. The list of those exhibiting this zest also includes, in addition to those mentioned above, some who might know better. They are the patron saints of the “Macroeconomic Policy is Easy: Only Idiots Don’t Think So” movement: Paul Krugman and Brad Delong. Either of these men will assure their readers that it’s all really very simple (and may even be found in Keynes’ writings).

There's an obvious but important point that Dr. Athreya either manages to miss or avoid, namely the distinction between a simple field and a simple question. In almost all fields, even the most complex and challenging, there are simple, easily-answered questions.

Krugman and Delong frequently argue that some colleagues, policy-makers, journalists or politicians have reached the wrong conclusion about a simple point in macroeconomics. They sometimes also contend that some of these errors are partially the result of idealogical thinking or outside influence (both of which have occasionally been observed in economics).

Dr. Athreya is free to dispute Krugman and Delong's arguments either by showing that the question is not simple or that it is simple but they still got it wrong. If he could actually prove either he could really advance the debate. Instead he seems to argue that the existence of simple questions implies a simple discipline.

And for someone of Dr. Athreya's qualifications and accomplishments, that's kind of simple-minded.

Robert Samuelson would not make a good statistician

Robert Samuelson is taking considerable heat for this column in the Washington Post complaining about the way we measure poverty. Dean Baker and Mark Thoma posted detailed and highly critical responses that listed several problems with Samuelson's argument. Both of them, however, skipped over at least one serious statistical flaw in the column.

Here's the quote from Samuelson:

Second, the poor's material well-being has improved. The official poverty measure obscures this by counting only pre-tax cash income and ignoring other sources of support. These include the earned-income tax credit (a rebate to low-income workers), food stamps, health insurance (Medicaid), and housing and energy subsidies. Spending by poor households from all sources may be double their reported income, reports a study by Nicholas Eberstadt of the American Enterprise Institute. Although many poor live hand-to-mouth, they've participated in rising living standards. In 2005, 91 percent had microwaves, 79 percent air conditioning and 48 percent cellphones.

The fallacy here is closely related to the phenomena of the wrong-way coefficient. You fit a model and you see a statistically significant variable with the wrong sign. For a fairly silly example, you build a model predicting how long it takes travellers to get from New York City to DC and you find that the indicator for being searched by a uniformed officer has a negative coefficient which would suggest that being searched somehow shortens your travel time. The explanation for this counterintuitive result is that there's a relationship between this variable and one or more of the other variables in your model. In this case there's a strong correlation between being searched and flying vs. driving.

For people living in residences with functioning kitchens, good ventilation and a land line, getting a microwave, an air conditioner and a prepaid cellphone clearly represents an increase in well being. If, however, there is an inverse relationship among the poor between having a stove/having a microwave, or ventilation/AC or land line/cell, then the high incidence rates could easily indicate a lower standard of living.

For an example of how not having a stove could make having a microwave more likely, check out this story from NPR:

So many immigrants, homeless people and others of limited means living in single-room occupancies (SROs) have no kitchens, no legal or official place to cook. To get a hot meal, or eat traditional foods from the countries they've left behind, they have to sneak a kind of kitchen into their places. Crock pots, hot plates, microwaves and toaster ovens hidden under the bed. And now, the latest and safest appliance, the appliance that comes in so many colors it looks like a modern piece of furniture: the George Foreman Grill. It is, quite literally, a hidden kitchen.

For me, a George Foreman grill would be a luxury purchase, but not having one doesn't mean I'm worse off than the next guy I see pushing a shopping cart with all of his belongings down the street.

"Markets Are Not Magic"

An old post from Mark Thoma that's worth another look.

"The economics profession is in crisis"

This may sound strange but all this soul searching by economists like Mark Thoma makes me think that the field might be on the verge of extensive reassessment and major advances.

From the Economist's View:

The fact that the evidence always seems to confirm ideological biases doesn't give much confidence. Even among the economists that I trust to be as fair as they can be -- who simply want the truth whatever it might be (which is most of them) -- there doesn't seem to be anything resembling convergence on this issue. In my most pessimistic moments, I wonder if we will ever make progress, particularly since there seems to be a tendency for the explanation given by those who are most powerful in the profession to stick just because they said it. So long as there is some supporting evidence for their positions, evidence pointing in other directions doesn't seem to matter.

The economics profession is in crisis, more so than the leaders in the profession seem to understand (since change might upset their powerful positions, positions that allow them to control the academic discourse by, say, promoting one area of research or class of models over another, they have little incentive to see this). If, as a profession, we can't come to an evidence based consensus on what caused the single most important economic event in recent memory, then what do we have to offer beyond useless "on the one, on the many other hands" explanations that allow people to pick and choose according to their ideological leanings? We need to do better.

(forgot to block-quote this. sorry about the error)