Economics puzzle

Some choice quotes from a report tweeted by Felix Salmon:

We researched the 100 U.S. corporations that shelled out the most last year in CEO compensation. At 25 of these corporate giants, we found, the bill for chief executive compensation actually ran higher than the company's entire federal corporate income tax bill.

Accounting games like "transfer pricing" have sent the corporate share of federal revenues plummeting. In 1945, U.S. corporate income taxes added up to 35 percent of all federal government revenue. This year, corporate income taxes will make up just 9 percent of federal receipts. In 1952, the year Republican President Dwight Eisenhower was elected, the effective income tax rate for corporations was 52.8 percent. Last year it was just 10.5 percent.

Among the nation's top firms, the S&P 500, CEO pay last year averaged $10,762,304, up 27.8 percent over 2009. Average worker pay in 2010? That finished up at $33,121, up just 3.3 percent over the year before.

The last is especially puzzling. When salaries rise faster for a specific category of jobs, it tends to signal that the market is finding a shortage of qualified people. It's also the golden time of opportunity for outsiders to break into the market and drop wages.

Or, option B, it is a feature of rent seeking due to a protected market. Which one strikes out humble reader as more likely?

A different point of view on Michael Lewis

See here.

My favorite part:

Yet, Germany is a prosperous and pleasant nation to live in; one of the best in the world. Germany manages to have lower unemployment than the US, despite all their unions and socialistic regulations for hiring and firing: laws which Harvard economist ding a lings will insist would be the ruination of the American economy. How did the Germans manage this?

The stuff on Iceland is first rate as well. Definitely worth the read.

More Freakonomics causality

I tuned in to APM's Marketplace recently and heard the following from Stephen Dubner:

Since the introduction of the ultrasound in Asia, in the early 1980s, it's often been used to determine the gender of a fetus -- and, if it's female -- have an abortion. In a part of the world with big populations, these sex selection abortions have had a big, unintended consequence.

Hvistendahl: I mean there are over 160 million females missing from the population in Asia, and to put that in perspective, it's more than the entire female population of the United States.

So, what happens in a world with too many men? For starters, there's more sex-trafficking, more AIDS, and a higher crime rate. In fact, if you want to know the crime rate in a given part of India, one surefire indicator is the gender ratio. The more men, the more crime. Now, the ultrasound machine didn't create these problems, but it did enable them. So, you have to wonder. What's next?

The hypothesis that increasing the ratio of men to women would produce "more sex-trafficking, more AIDS, and a higher crime rate" is entirely reasonable, but like so much observational data there's a big self-selection factor here. Families and women not involved in the sex trade tend to avoid rough neighborhoods and red light districts. There's also a question about outliers -- a few very bad areas with very high male to female ratios.

Once again, the suggestion that changing gender ratios would have significant social consequences makes perfect sense, but if you want to go from sensible suggestion to well-supported hypothesis, it's not enough to mention a fact that points in the right direction; you also have to show how other explanations (self-selection, sampling bias, etc.) can't explain away your fact. That, unfortunately, is where Freakonomics and many other economists-explain-the-world books and articles fail to make the grade.

"Picked so green you could kick them to market"

That was the dismissive phrase my paternal grandfather used to describe some of his fellow farmers back in the Rio Grande valley. By picking early you got produce that was easier to harvest and to handle but which was absolutely flavorless. It was not something done by farmers who took pride in their work.

At the time my grandfather was engaging in a bit of comic hyperbole. These days he might be understating the case (Barry Estabrook, author of Tomatoland, from an NPR interview):

Yeah, it was in southwestern Florida a few years ago, and I was minding my own business, cruising along, and I saw this open-back truck, and it looked like it was loaded, as you said, with green apples.

And then I thought to myself wait, wait, apples don't grow in Florida. And as I pulled up behind it, I saw they were tomatoes, a whole truckload mounded over with perfectly green tomatoes, not a shade of pink or red in sight. As we were going along, we came to a construction site, the truck hit a bump, and three or four of these things flew off the truck.

They narrowly missed my windshield, but they did hit the pavement. They bounced a few times, and then they rolled onto the shoulder. None of them splattered. None of them even showed cracks. I mean, a modern-day industrial tomato has no problem with falling off a truck at 60 miles an hour on an interstate highway.

In addition to being tasteless, Estabrook also points out that compared to tomatoes from other sources or from a few decades ago, the modern Florida variety have fewer nutrients, more pesticides (particularly compared to those from California), and are picked with what has been described as 'slave labor' (and given the use of shackles this doesn't seem like much of an exaggeration).

As problems go, that one really is pretty fundamental

From Forbes via Salmon:

“Groupon’s fundamental problem is that it has not yet discovered a viable business model,” writes Harvard Business School’s Rob Wheeler. “The company asserts that it will be profitable once it reaches scale but there is little reason to believe this.”

More from Salmon on Dalberg

I'm not surprised when a slick consulting firm like Dalberg turns out to be better at spin than they are at purported job, but I am caught off guard when they can't even manage damage control for a couple of negative stories without digging themselves in deeper. Salmon has the details here.

(while you're there, make sure to check out his take-down of Steve Brill.)

From the New Republic. Seriously.

Here's the actual, honest-to-God headline:

Rick Perry Is a Higher-Education Visionary. Seriously.

I'm way too busy to give this the attention it doesn't deserve but I thought it was a data point worth noting.

Update: Dean Dad (who's generally much more impressed with Kevin Carey than I am) isn't very impressed by Carey's case.

The larger flaw in Carey’s analysis, though, is that it mistakes saying for doing. If Governor Perry really wanted to remake Texas’ higher education system into something more teaching-focused and less research-focused -- a debatable goal, but not an absurd one -- I’d expect to see him beef up the teaching-focusd institutions that already exist. If he shifted state funding from, say, Texas A&M to the state and community colleges, then yes, I could start to buy the argument that he actually means it. If he decided that other parts of the country have the whole “research” thing well in hand, and he wanted to focus Texas on teaching, I’d expect to see him divert money from UT-Austin and send it to the K-12 districts and the community colleges. One could argue the wisdom of that, but at least it would be a vision.

No. He’s endorsing an attack on universities for not being high schools, an attack on community colleges for being high schools, and an attack on K-12 for, well, being there. Yes, some isolated bits of rhetoric could make sense in another context, but that’s not what’s happening. I agree with Carey on the oft-noted paradox that academics who are otherwise liberal become dogmatically, idiotically conservative when discussing their own profession, but their skepticism about Perry is fairer than that. Some of Perry’s rhetoric may be interesting, but at the end of the day, his only vision for higher education is hostility.

Medical Free Markets

This is a very interesting post by Karl Smith:

Lack of jobs is why everyone feels bad, not because they have less or are poorer or the country isn’t producing or consuming as much. And, not to get to meta – in what I hope is an easily readable post – but an economy that makes lots of people feel bad is by definition a bad economy.

Moreover, the feeling that you have now about the economy is not the feeling of lack of value creation. Its not the feeling of socialism.

I wish I had more time to go into this because “what socialism feels like” is an important concept. However, my more conservative readers will may readily get the following example.

Have you ever been pissed off at the fact that your neighborhood school doesn’t teach any of the stuff you want and it feels like your kid is just wasting her valuable time going to all of these pointless classes for no reason. THAT, is what socialism feels like. That is what the lack of value creation feels like.

Its not that you are afraid of losing what you have or that budget constraints are pinching. Its that the stuff which is available to you sucks. It – in extreme cases – is a world where everyone has a job but where no grocery store has fresh milk. It’s a world where everyone gets a pay check but no one can find shoes that fit.

That is what socialism feels like. That is what government getting in the way of the market feels like. In many ways it’s the exact opposite of the way this feels.

Because you know I can’t resist: When you are waiting in your doctor’s office and she is 50mins late and proceeds to be rude to you and not give you “permission” to go buy the drug that you are dying to buy because its finally been “approved.” That’s what socialism feels like.

It is an important insight that much of the current crisis is not caused by excessive government intervention. Now, it could be true that we could get to a bad place with the addition of excessive government oversight, but I think it is fair to accept that we are not there yet.

That being said, I think the argument about seeing medical doctors (and how familiar this experience is in the US) should give us pause when we argue that the current medical system is free market. It isn't. It's also one of our few areas of growth (which Tyler Cowen sees as rent seeking areas absorbing the unemployed) which is also worth thinking about.

I wonder if we are asking the right questions about the long term?

More on Medicare

I had barely finished my last post when Austin Frakt presented the hard numbers:

All told, the cost to the system of raising the Medicare age to 67 would be $11.4 billion in 2014, which is a high price to pay for $5.7 billion in federal savings. It’s exactly a factor of two too high. That’s a massive cost shift. Let’s put it this way, how much would you want to pay for the federal government to save $5.7 billion? I hope your answer is no greater than $5.7 billion. (If not, I’ve got a business proposition for you.) Paying $11.4 billion is a rip off.

It is actually worse than I thought it would be!!

Medical Expenses

From Igor Volsky:

The Center On Budget and Policy Priorities’ (CBPP) Paul N. Van de Water is out with a new report warning lawmakers on the Super Committee against considering proposals that would gradually raise the Medicare eligibility age from 65 to 67 . . .

Van de Water argues that raising the age would actually increase overall system costs and only save the federal government money “by shifting costs to most of the 65- and 66-year-olds who would lose Medicare coverage, to employers that provide health coverage for their retirees, to Medicare beneficiaries, to younger people who buy insurance through the new health insurance exchanges, and to states”

I think that this outcome is obvious from the structure of the problem. It seems obvious to me that single payer systems are able to reduce costs by exerting market power. When I look at procedures, they generally have three costs: out of pocket, insurance reimbursement rates, and medicare rates (in descending order of costs). For a lot of procedures, the costs are thousands of dollars apart.

This is why simply switching to a free market (and going to out of pocket prices) is problematic as a transition (as costs, already the highest in the world, will go up). It also explains why other countries (example: France, Britain, Canada) have decided to go with universal single payer systems: it lower costs (and, if you believe the Incidental Economist, it certainly does not lower quality).

Now it may be that there is a benefit to our current health care system and that other countries may be free riding on our innovations. I am open to this argument. But it is also true that we need to make a decision about what are goals are. If we want to reduce costs (in aggregate) then lowering the medicare eligibility age makes sense (why could it not be 60?).

But if we want to both increase and shift (away from government) the total costs of medical care, that is a lot more concerning. From a societal perspective that seems like an awfully bad deal. It seems unlikely that we are going to increase innovation by all that much by growing the private and medicaid markets by a small fraction. But the costs to those effected by the policy are high.

Why is this a good policy?

More on the vanishing business of writing

Andrew Gelman has a good response to Jonathan Rauch's anti-blogging blog post but I think this section deserves extra comment:

Pace Alex, the average quality of newspapers and (published) novels is far, far better than the average quality of blog posts (and—ugh!—comments). This is because people pay for newspapers and novels. What distinguishes newspapers and novels is how much does not get published in them, because people won't pay for it. Payment is a filter, and a pretty good one. Imperfect, of course. But pointing out the defects of the old model is merely changing the subject if the new model is worse.

You'll notice that he said novels and not short stories. The business model that allowed people to make a living selling short fiction (something people used to do in this country) has been dead for decades, long before the arrival of online content. Rates for freelancers have been flat for almost as long. For the past fifty years it has gotten increasingly difficult to make a living as a writer.

These are worrisome trends -- I suspect it will take a few more decades to realize just how much the loss of the creative middle class has cost us -- but you can't blame this one on the internet.

Never give money to a company that has a Director of Thought Leadership

Felix Salmon adds some sharp commentary to Janet Reitman’s Rolling Stone article on Haiti. He also reminds us of just how flaky the consultants who worm their way into these initiatives can be.

Is there a demographer in the house? -- Texas edition

With the population growth of Texas in the news (see Krugman and Salmon), this seems like a good time to raise a question that's been bothering me for a awhile. If you look at a map of population growth over the past decade, it's hard to miss the impact Katrina had on Louisiana and Mississippi. It's safe to say that some of the growth those states would have experienced was diverted to Texas, but estimating the magnitude of that effect is not nearly so straightforward (and is probably something best left to people who know what they're talking about).

Anybody care to give it a shot?

Options have a cost associated with them

This observation bears repeating:

First, a lack of alternative opportunities can force us to concentrate on developing skills. The kid who spends countless hours practicing football or music becomes much more proficient - and possibly rich - than one who, faced with many opportunities, flits between them and becomes a mere dilettante. A big reason why I got into Oxford - and from there a decent income was a small step - was that, in the days before computer games, I had nothing else to do.

There’s an analogy here with the arts. As Jon Elster points out in Sour Grapes, great art often arises because of constraints. 78 records which limited recordings to three minutes produced lots of great music whereas free jazz and atonality is often unlistenable. Old black and white films with no special effects are often superior to multi-million pound CGI ones. And so on. Excellence often arises from limited choice, and mediocrity from freedom.

I think that this is a very important insight. In sports, we have rules that make the games, themselves, more interesting. A game like Calvinball rapidly becomes uninteresting as one gets older. It is only within a cleanly defined decision space that you can compare degrees of excellence.

I think that this insight has a lot of applications to broader contexts. Removing constraints does not always lead to a uniform improvement in the result. If we took away required classes, I suspect the median student would end up less well educated in epidemiology (is this true for other fields? I'd venture to say that the same would be true in statistics but my exposure beyond that is limited).

I think, as I age, I begin to think that Aristotle (with the ideal of the Golden Mean) was a very clever guy. In particular, it's possible we spend a lot of time comparing two local minima (the two extremes of policy) and ignoring the global maxima (the middle ground between these extremes).

Medicare versus Social Security

I hear this point a lot:

At any politically plausible margin, it makes more sense to take $1 out of Medicare than to take it out of Social Security. Social Security checks can be used to buy health care services.

I think that this analysis neglects one key point. Medical care in the United States (or anywhere, for that matter), is hard to bargain with at the time of a procedure (especially an emergent one). It is hard to discuss prices at the ER door during a myocardial infarct, where minutes matter. Here, the real benefit of medicare is the ability to exert market power to set standardized prices (to avoid the power asymmetry otherwise present in medical bargaining).

It is not ideal, but I have not yet come up with a better idea than collective price setting and my own experiences as an uninsured person in the US were certainly eye-opening in this regard. It was amazing how few doctors would even consider accepting cash for services.

Still more intellectual property silliness

I've got an actual post on this in the works but in the meantime check out these stories.

From the New York Times:

When copyright law was revised in the mid-1970s, musicians, like creators of other works of art, were granted “termination rights,” which allow them to regain control of their work after 35 years, so long as they apply at least two years in advance. Recordings from 1978 are the first to fall under the purview of the law, but in a matter of months, hits from 1979, like “The Long Run” by the Eagles and “Bad Girls” by Donna Summer, will be in the same situation — and then, as the calendar advances, every other master recording once it reaches the 35-year mark.

The provision also permits songwriters to reclaim ownership of qualifying songs. Bob Dylan has already filed to regain some of his compositions, as have other rock, pop and country performers like Tom Petty, Bryan Adams, Loretta Lynn, Kris Kristofferson, Tom Waits and Charlie Daniels, according to records on file at the United States Copyright Office.

“In terms of all those big acts you name, the recording industry has made a gazillion dollars on those masters, more than the artists have,” said Don Henley, a founder both of the Eagles and the Recording Artists Coalition, which seeks to protect performers’ legal rights. “So there’s an issue of parity here, of fairness. This is a bone of contention, and it’s going to get more contentious in the next couple of years.”

With the recording industry already reeling from plummeting sales, termination rights claims could be another serious financial blow. Sales plunged to about $6.3 billion from $14.6 billion over the decade ending in 2009, in large part because of unauthorized downloading of music on the Internet, especially of new releases, which has left record labels disproportionately dependent on sales of older recordings in their catalogs.

“This is a life-threatening change for them, the legal equivalent of Internet technology,” said Kenneth J. Abdo, a lawyer who leads a termination rights working group for the National Academy of Recording Arts and Sciences and has filed claims for some of his clients, who include Kool and the Gang. As a result the four major record companies — Universal, Sony BMG, EMI and Warner — have made it clear that they will not relinquish recordings they consider their property without a fight.

“We believe the termination right doesn’t apply to most sound recordings,” said Steven Marks, general counsel for the Recording Industry Association of America, a lobbying group in Washington that represents the interests of record labels. As the record companies see it, the master recordings belong to them in perpetuity, rather than to the artists who wrote and recorded the songs, because, the labels argue, the records are “works for hire,” compilations created not by independent performers but by musicians who are, in essence, their employees.

Independent copyright experts, however, find that argument unconvincing. Not only have recording artists traditionally paid for the making of their records themselves, with advances from the record companies that are then charged against royalties, they are also exempted from both the obligations and benefits an employee typically expects.

And from Andrew Gelman:

Christian Robert points to this absurd patent of the Monte Carlo method (which, as Christian notes, was actually invented by Stanislaw Ulam and others in the 1940s).

The whole thing is pretty unreadable. I wonder if they first wrote it as a journal article and then it got rejected everywhere, so they decided to submit it as a patent instead.

An interesting observation about the electoral math of Texas

And kudos to the New Republic for giving its interns a chance to do good, high-profile work. From Gabriel Debenedetti:

And Texas, Tucker notes, “is an unusual electoral landscape”—which is to say it’s nearly empty. The Democratic Party in Texas is nearly nonexistent, and puts up only the most pro forma candidates. (“The Democrats are weak in ways that are not even indicated in the low numbers or poor electoral results,” says Jim Henson, director of the Texas Politics Project and a professor of Government at the University of Texas at Austin. “As an organization, the Democrats are just—I can’t even come up with a negative enough word.”) And judging from the low turnouts in the Republican primary elections—the only votes in Texas that really count for anything—even the ruling party in Texas is extremely dispirited. In the 2002, 2006, and 2010 votes in which Perry was elected governor, only around 4 percent of the voting-age population turned out for the Republican primary.

As a result, Perry only needed to convince roughly 2 percent of the voting-age population of the Republican-heavy state that he would be a suitable governor before cruising through the general elections against a pro forma Democratic candidate, or, in 2006, a slate of nominal candidates. In Texas, the “people who vote in primary elections are unusual people,” Tucker stressed to me. “They are more extreme, further to the right.” In other words, Perry was able to repeatedly vault himself to the governorship largely not because he was a persuasive campaigner, but because he catered to the extreme views of a minority of die-hard conservatives.

Wish I had time to discuss this in detail

Check out this interview with Michael Winerip on recent cheating scandals.

When you really want to reach a conclusion

I've heard the argument that unemployment benefits caused higher unemployment before, but I never expected anyone to use Germany's relatively strong numbers to support the case.

Last conference of the year

And so posting on my end is light this week. I'll have new content this weekend, though.

Noah Smith has some smart things to say about libertarians and property rights...

...and you should probably read the whole thing, but I wanted to single out this passage:

That's right: irreducible transaction costs are a fly in the libertarian soup. Completing an economic transaction, however quick and easy, involves some psychological cost; you have to consider whether the transaction is worth it (optimization costs), and you have to suffer the small psychological annoyance that all humans feel each time money leaves their bank account (the same phenomenon contributes to loss aversion and money illusion). Past a certain point, the gains to privatization are outweighed by the sheer weight of transaction cost externalities. (Note that transaction costs also kill the Coase Theorem, another libertarian standby; this is no coincidence.)

This dovetails nicely with this discussion about why the decision-making processes of engineers and scientists are often 'irrational' in the strict economics sense of the word. Like transactions, decision-making algorithms have a cost. In most cases, these costs are fairly small (like the few seconds it takes to decide on a brand of beer) and you can get away with ignoring them, but freshwater economists routinely make arguments for rational behavior that require people to make incredibly complicated calculations almost instantly. What's worse, they continue to make these arguments even when data suggests that people are using other, simpler rules to make their decisions.

Stop by and see what you think

Andrew Gelman has some intriguing news about the possibility of reform in the institutional review board system.

A sentence that you just don't want to hear

Matt Yglesias was writing about an innovative program in the Netherlands when he made the comment:

At this point, it just strikes me as fundamentally unlikely that bold policy innovation is going to come out of the sclerotic United States.

At the time, I mentioned it to Mark (my co-blogger) as one of those sentences that you just don't want to have applied to your country, even in jest. Now Jeffrey Early is willing to ask when was the last time that the United States was a policy innovator. His depressing suggestion is back when Richard Nixon was president.

So here is my question to the blogosphere: what can the United States do to go back to being a leader in policy innovation?

[My own angle is to look at work being done at places like The Incidental Economist to see if we can possibly find an alternative way forward for Health Care Policy]

XKCD

Unfortunately, this problem goes a bit further than star ratings in the App store.(insert comment about happiness research here.)

You might not want to read it while you're eating...

But you really should read Michael Lewis' latest entry. It's one of the best things you'll read on the German economy and almost certainly the only article you'll find describing the country's financial system through scatological metaphors (no, really).

Must-reads

Nate Silver and Felix Salmon take very different views on S&P. I don't know who I'd call the winner -- Silver's case seems slightly more convincing, but Salmon's opinions in these matters carry a lot of weight -- but both pieces are well worth your time.

I think we can all use a distraction now

Which is why the long delayed return of Burn Notice to Hulu is such welcome news to those of us without cable.

Tax Policy

From John Quiggin:

The wealth that has accrued to those in the top 1 per cent of the US income distribution is so massive that any serious policy program must begin by clawing it back.

If their 25 per cent, or the great bulk of it, is off-limits, then it’s impossible to see any good resolution of the current US crisis. It’s unsurprising that lots of voters are unwilling to pay higher taxes, even to prevent the complete collapse of public sector services. Median household income has been static or declining for the past decade, household wealth has fallen by something like 50 per cent (at least for ordinary households whose wealth, if they have any, is dominated by home equity) and the easy credit that made the whole process tolerable for decades has disappeared. In these circumstances, welshing on obligations to retired teachers, police officers and firefighters looks only fair.

In both policy and political terms, nothing can be achieved under these circumstances, except at the expense of the top 1 per cent. This is a contingent, but inescapable fact about massively unequal, and economically stagnant, societies like the US in 2010. By contrast, in a society like that of the 1950s and 1960s, where most people could plausibly regard themselves as middle class and where middle class incomes were steadily rising, the big questions could be put in terms of the mix of public goods and private income that was best for the representative middle class citizen. The question of how much (more) to tax the very rich was secondary – their share of national income was already at an all time low.

This is actually a very constructive addition to the discussion of how to finance government and society in general. When I was growing up, the general idea we had was that serious tax cuts had to focus on the middle class because that was where all of the money was. But 25% of the national income is a lot and it isn't clear that this type of extreme inequality is socially useful. Few people seem to suggest that we should impoverish the rich, but would it be a horrible world where the top 1% had 15% of the post-tax income?

Bad optics

I'm sure there's nothing sinister going on here, but S&P certainly has a gift for looking bad (from Marketplace):

This final note today, in which S&P beats up on Warren Buffet. The billionaire went on CNBC this morning, said he wasn’t worried at all about the debt downgrade and said, in fact, that the downgrade changed his opinion of S&P — not his opinion of U.S. Treasuries.

Funnily enough, couple of hours later, S&P put Buffett’s company Berkshire Hathaway on notice for a possible downgrade.

Hmmm.

Also, we should note here: Berkshire Hathaway’s the single biggest shareholder in S&P’s competitor, Moody’s.

Libertarianism and it's limitations

I have long held that the weak underbelly of libertarian theory (in the modern form) is how to justify current wealth distributions (and thus hold current property rights inviolate). Brad DeLong does a good job of laying out the mental steps required:

Well, let me sketch out the logic of Robert Nozick's argument for his version of catallaxy as the only just order. It takes only fourteen steps:

1. Nobody is allowed to make utilitarian or consequentialist arguments. Nobody.
2. I mean it: utilitarian or consequentialist arguments--appeals to the greatest good of the greatest number or such--are out-of-order, completely. Don't even think of making one.
3. The only criterion for justice is: what's mine is mine, and nobody can rightly take or tax it from me.
4. Something becomes mine if I make it.
5. Something becomes mine if I trade for it with you if it is yours and if you are a responsible adult.
6. Something is mine if I take it from the common stock of nature as long as I leave enough for latecomers to also take what they want from the common stock of nature.
7. But now everything is owned: the latecomers can't take what they want.
8. It gets worse: everything that is mine is to some degree derived from previous acts of original appropriation--and those were all illegitimate, since they did not leave enough for the latecomers to take what they want from the common stock of nature.
9. So none of my property is legitimate, and nobody I trade with has legitimate title to anything.
10. Oops.
11. I know: I will say that the latecomers would be poorer under a system of propertyless anarchy in which nobody has a right to anything than they are under my system--even though others have gotten to appropriate from nature and they haven't.
12.Therefore they don't have a legitimate beef: they are advantaged rather than disadvantaged by my version of catallaxy, and have no standing to complain.
13. Therefore everything mine is mine, and everything yours is yours, and how dare anybody claim that taxing anything of mine is legitimate!
14. Consequentialist utilitarian argument? What consequentialist utilitarian argument?

To be able to successfully explain Nozickian political philosophy is to face the reality that it is self-parody, or perhaps CALVINBALL!

It is step 11 that seems to be the most interesting to me. Nobody really wants to argue for anarchy but that doesn't mean that pools of wealth are good, either. I suspect a false dichotomy is present as other options exist as well.

Furthermore, the system also ignores the influence of wealth on process. Differences in prestige, corruption and credibility can lead to issues with step 5, as well. So I think we need to be careful about making property rights primary. Obviously ownership has important effects in making a specific person responsible for an item (otherwise you can get the "Tragedy of the Commons" issues). But that effect works best on small pieces of property that are directly used by the person (a car, a house, a factory) and seem to become less helpful on larger scales (like in a corporation where you need to hire a management team who then bring in principal agent concerns).

Definitely something to consider.

Jonathan Chait: "I suppose I didn't express myself as well as I could have." -- repeatedly

Jonathan Chait today dismissed this objection (also discussed by Andrew Gelman) that being easily fired really isn't really part of the definition of a professional with the line:

I think Palko's point is pretty obviously just wordplay, but I suppose I didn't express myself as well as I could have.

Normally I'd let it rest there (it was one of the more trivial objections I've raised about Chait's position on education), but we really ought to note that this is not the first time we've seen this line:

But being "treated like professionals" has to mean both the opportunity to earn a good living if you do well and the potential to be fired if you fail.

You can find the full context of that line and my reaction to it here.

My disconnect with Jon Chait

Let me begin with Jon Chait being one of my favorite writers, a must-read, and a person with whom I agree > 90% of the time. I think that the one area we really differ is with teaching:

I think Palko's point is pretty obviously just wordplay, but I suppose I didn't express myself as well as I could have. Being a professional, to most people, means having the opportunity to gain higher pay and recognition with greater success. Such a system also, almost inevitably, entails the possibility of having some consequences for failure. Teaching is very different than most career paths open to college graduates in that it protects its members from firing even in the case of gross incompetence, and it largely denies them the possibility to rise quickly if they demonstrate superior performance.

Obviously the realistic possibility of being fired for gross incompetence would not in and of itself do much to attract more highly qualified teachers, but the opportunity to receive performance-differentiated pay would.

I think I can put my finger on the point of disconnection here. I would gladly take employment In which hard work and results were rewarded (and people who were bad fits were quietly eased out of the profession). These are my favorite work places, as I never want to be in a role where I am not contributing in a substantive way.

But what I think worries me about the attack on teacher tenure is that it seems to be coupled with a small government/austerity movement. I worry that the endgame is no tenure and less compensation (regardless of performance). That approach would open up higher education to worse incentives than it has now and increase the pressure for a parallel (and private) system. Looking at the cost of higher education, my concern is that the poor might be priced out of the education market.

I might be wrong about this pattern, but many countries have balanced job security with quality education (e.g. Canada, Sweden, Finland). I am not against a new pathway, I am just not sure how to increase compensation (to balance against the loss of job security) in the current environment. But I note that Jon Chait is coupling increased compensation opportunities with decreased job security. A reasonable trade, so long as it doesn't fall victim to the desperate need to shrink government that is in the very air these days.

If there is a path forward, I would actually be happy to revisit this question in a positive way. But why is this a burning question in the middle of a period of austerity budgets when it is unclear where the revenue for such reforms would come from?

Another This American Life episode you ought to listen to...

Unless you heard it the first time it ran. The title is "Million Dollar Idea" and it has two stories of interest to OE readers, one on MIT's elevator pitch contest and another memorable piece on the treacherous water of medical PR. On top of that you get an incredible story of a man who figured out a way to rig a game show without actually cheating and the origin of the phrase "the heroin's doing the heavy lifting."

The download is free for the next few days, but you should throw them a few bucks if you can spare it. They do good work.

The discussion continues

Andrew Gelman joins the debate about professionalism and job security. Gelman's posts pretty much always generate high quality comment threads so this will be one to watch.

Declining Salaries for Writers

This is a very sad blog post on the state of pay for role playing game writers. In particular:

Fifteen years ago, I wrote RPGs for 3 cents a word. In these more modern times, though, the pay rate is... wait, it's still 3 cents a word. Come to think of it, the pay hasn't changed much from the golden age of pulps and early sci-fi. The pay is the same as from the 1950s? What's wrong with this picture?
One argument is 'that is all the market will bear'. Okay, but in that same timeframe, other forms of writing (particularly journalism and non-fiction) moved on to dollar-a-word. Sure, we're in a dip for that sort of writing too, with rates often dropped to half that. But a pair o' quarters per word is still a damn site better than RPGing's 3-cents-per.

The part that makes this discussion so painful is that the quality of writing can really make or break what is fundamentally a book project. This is one place where markets really don't seem to be able to adapt as the low rates often lead to weak product. Maybe this is just a consequence of niche markets?

Paul Krugman should continue doing more productive things than watching TV

I think this anonymous commenter may be having a little fun here (The "I said good day" seems a bit over the top), but in case my fondness for obscure references really did go too far, let me close caption my earlier post.

Recently Paul Krugman wrote a smart piece decrying the proliferation of appeal to authority arguments which he closed with the following:

But in any case, this is never an appropriate way to argue — least of all at a time like this, when events have strongly suggested that a lot of work in economics these past few decades, very much including the work on which these guys’ reputations are based, was on the wrong track.

Do I do this myself? Probably on occasion, when I don’t catch myself. But I try not to. I would say that commenters who begin with “I can’t believe that a Nobel prize winner doesn’t understand that …” might want to think a bit harder; mostly, though not always, I have actually thought whatever you’re saying through, and the obvious fallacy you think you’ve found, isn’t. But “Me big famous economist, you nobody” is not a valid argument.

(See John Quiggin and Noah Smith for more on the incident that prompted this)

Having a weakness for snark, I immediately started looking for a silly criticism of Krugman that I could preface with the phrase “I can’t believe that a Nobel prize winner.." I got an opportunity today when Krugman referred to gibberish that sounds like Swedish. The theatrical term for this sort of thing is doubletalk and the acknowledged master of the form is Sid Caesar.

I'm also always on the lookout for excuses to bring in a favorite video clip, like this one from Whose Line Is It Anyway which provides a great example of the form and nicely shows the respect and affection the cast feel for Caesar.



Just to be absolutely clear, I was:

1. Looking for an excuse to use the "Nobel Prize winner" line in an obviously silly and trivial context;

2. Post the Caesar clip;

3. Link to yet another sharp and well-written Krugman post.

In other words, it was a joke.

(And for the record, if I make a disparaging comment about Felix Salmon followed a Kovacs clip, I'll be joking then too.)

Worth keeping in mind

Predictions are hard and sometimes the completely unexpected happens:

You Know, If You Had Told Me a Year Ago That on August 5, 2011 S&P Would Downgrade the U.S, and the 10-Yr Treasury Would Yield 2.5%... I would have laughed at you. I would have said that while there were possible futures in which each of those things happened, they were disjoint futures.

It is humbling to recall just how different events can be from our best possible projections.

A classic natural experiment

This post was requested by Mark.

One interesting natural experiment in diet and exercise was rationing in wartime Britain where the population ate less and exercised more (petrol was also rationed). The results were fairly impressive:

As a result of the balanced diet provided by rationing, children's health improved and on average they were taller and heavier than before the war.

The incidence of anaemia and tooth decay dropped - while the average age at which people died from natural causes increased, despite the stresses and strains of war.

The principles behind rationing sound surprisingly similar to today's health messages: reduced consumption of meat, fats and sugar and more of the sort of foods, such as vegetables, which provide essential vitamins and minerals.

this led to other health benefits:

A war-time regiment would also help reduce your risk of heart disease, Type 2 diabetes and high blood pressure, as well as cancers such as post-menopausal breast cancer, kidney and colon cancer.

The same outcome of rationing was seen in Australia:

The government feared that rationing would result in deterioration in health on the home front but, in fact, the outcome was positive. Rationing resulted in a decline in diet related problems like obesity, diabetes and heart disease.

So it is clear, that whether or not the wartime Commonwealth diet was optimal, there is a known population-level intervention that will result in better health outcomes: restriction of food.

Now, as a matter of public policy, I am clearly opposed to doing this in a coercive manner (but then I still see tobacco smoking as a personal choice). But it is clear that relatively simple diets can have surprisingly positive health benefits.

Paul Krugman needs to watch more TV

From today's Conscience of a Liberal:

Think of it this way: there was a time when you could say that the right had a model of how the economy worked. A silly model, yes, since it depended on implausibly large effects of marginal tax rates on incentives. Still, supply-side economics had a point of sorts.

But can you discern any model in what Malpass wrote, or for that matter in almost anything on the WSJ editorial page? I can’t. All I see is a bunch of prejudices, strung together with some vaguely economistic-sounding phrases, something like someone talking gibberish that sort of sounds like Swedish. In the world according to the WSJ, low taxes are good (unless the people involved are low income lucky duckies), regulation bad, low inflation good, low interest rates bad, strong dollar good — and don’t ask why.

I can't believe a Nobel Prize-winning economist would get this wrong. It's not gibberish; it's double-talk, and this is how it's done:



Co-posted at Mippyville TV.

See update here.

"No linear relationship" does not mean "no relationship"

There's a dangerous type of argument that I've noticed recently: pundits will argue that a certain relationship is non-linear and use this to justify any claim they want to make about that relationship.

The example of the hour is the Laffer curve. The basic concept is so simple we expect every high school algebra student to grasp it: you have a function with a global maxima somewhere between zero and one; if you're to the left of that maxima you want to move to the right; if you're to the right you want to the left. Let me draw a picture I could explain it to reasonably attentive elementary schoolers. (Dynamic laffer effects are a different story that I'll leave to Noah Smith.)

We can argue where the peak is (or where it was in 1960 or 1980), but once you've accepted the basic concept, you have to accept the move-toward-the-peak implication. Despite this, you will routinely see supposedly knowledgeable people on television, in print and online using the Laffer Curve to justify the blanket statement that cutting taxes raises revenue.

We see something analogous with health and fitness journalism. The relationship between calories and weight loss is not linear. Neither is the relationship between aerobic exercise and weight loss. In both cases, it's a strong relationship and you generally won't get in trouble assuming that it's strictly monotonic (within reasonable ranges, of course).

Unless you're an athlete in training or a model getting ready for a swimsuit shoot, you can probably assume that eating less and exercising more will cause you to lose weight, but we still get endless experts citing phenomena like metabolism responding to diet and then concluding that there's no point in going to the gym and passing up that pound o' fries.

p.s. Joseph has a great example of how calorie consumption tends to dominate factors like diet make-up. If he'll answer his damned phone I'll see if we can get a post out of him.

US Credit Rating

From Talking Points Memo:

From the S&P release ...

Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.

I am skeptical, as I said to Mark, that this measure will influence other countries all that much. Japan switched to AA+ and that did not hurt the US, rather it helped. What it really does it mean about 55% of the AAA sovereign debt in the world just vanished. The UK, Canada, Sweden . . . all of these countries are about to pay a lot less for their debt. That actually makes them more creditworthy and not less so so.

By the way, what do all of these countries have in common? They are willing to raise taxes to pay for debt. I remember when Canada began paying down its debt via a national sales tax. Unpopular as the move was, it moved the country firmly into surplus and prevented a ratings cut.

It is quite possible for a country to pay down their debt via internal revenue generation. The survivors on the AAA list are the countries that have been willing to make hard decisions to raise revenue rather than appeal for help.

Question for economic modelers

Has anyone out there run a simulation of what the economy would look like today if two of the big three auto makers had gone under in 2009?

If America's not AAA, is anybody?

I don't mean that in a jingoistic way; I'm simply wondering where the safe harbors are in the aftermath of a US default. The people at Marketplace (which has been doing some great work lately) have been thinking along the same lines:

Heidi Moore: They downgraded the U.S. credit rating. It's like cutting our credit score. We went from a AAA to a AA+ -- which is more than people expected; people thought we'd just be a AA. The importance of this is largely psychological -- we've always been a AAA country. But now that we are a AA+, that's what everyone else will be too. I think everyone else will follow us.

Carney agreed that other countries would be downgraded as well:

John Carney: Remember, we're the country that supports people when they get in trouble. If our credit rating is lower, so is everybody else's.

Grade Inflation

An early stage professor posted this view on grade inflation:

I have to agree with the article that students do tend to expect A's. But mainly because they work hard, and the expectation is that if you work hard and learn the material, you should get an A. I don't really see this grade inflation as a problem. To me, an A grade means you learned the material and showed proficiency in it, not that you performed better than XX% of your classmates. Grades are not a ranking tool, but an indication of proficiency. I think that having a clear expectation of what you need to do to get an A makes it more likely that students will work harder to meet these requirements and learn the material better.

I think that this really is where the grade inflation is coming from. When I was a wee one, back in my home country, the decoding scheme for grades was:

A: Exceptional Work above and beyond expectations
B: Clear Mastery of material and met all expectations
C: Deficiency in one or more aspects of the course
D: Don't take any more courses in this area
F: Fail (with attendant consequences)

I think that the shift to A's being regarded as showing proficiency has been part of the general creep in academic culture. After all, an A average is starting to look like a requirement for entry to graduate school. I remember when a straight B average was solid evidence that a student was ready for graduate level work.

On the other hand, viewed in this light there isn't any real inflation. We have just changed the definitions of performance and introduced right truncation to make it impossible to pick out the really exceptional students by transcripts alone. I, of course, hate this approach but I can see why it might be popular if the focus is "did they get it or not" and reducing the arms race to demonstrate exceptional performance.

Question for Jonathan Chait

From today's post trying to rebut a movie star's comments (not Chait's proudest moment):

The old liberal slogan always demanded that we "treat teachers like professionals." That entails some measure of accountability -- we can debate the metrics -- which allows both that very bad teachers be fired and that very good ones can obtain greater pay and recognition. That's the definition of a professional career track, and the current absence of it is what drives most of the best college graduates into other professions.

Putting aside the compensation question for the moment, Chait is listing being easy to fire as part of the definition of being a professional. Does anyone else find that a bit odd?

Krugman backslides

Just when it looked like the worst of the punning was over, we get this (which is worth reading, despite the title).

(Still better than "Screw your core-age to the sticking place.")

Excuses, excuses, excuses

Just moved so I'm still threading my way around a maze of boxes and I'm getting my wi-fi from the Starbucks around the corner (which wouldn't be so bad if I didn't hate their coffee), so this won't be much of a post but the Matt Yglesias argument Joseph alludes to just doesn't hold up.

There is plenty of support for merit pay among center and right segments, people who are taking Yglesias's exact position here, so his statement is wrong when applied to the general population. Of course, Yglesias is taking about fighting among progressives so the anti-tax line makes even less sense.

Put bluntly (because my laptop's almost out of power), Yglesias is trying to explain why so many progressives are offended by his movement reformer stand without admitting that he might be the one contradicting progressive principles.

A return to education as a topic

This is an interesting perspective from Matt Yglesias about the tensions in the education reform movement:

The ambiguous policy upshot of this is precisely what makes intra-progressive fights over education policy so fraught. The exact same evidence which suggests that we should offer higher salaries to teachers also suggests that many of our current teachers are sub-par. It’s easy to assemble a “let’s spend less money on teachers” coalition, which is just conventional anti-tax politics. And it’s easy to assemble a “let’s give more money to the teachers we have” coalition, which is conventional service provider politics. What’s tricky is a “let’s spend more money precisely in order to get different people in this field” coalition.

I think that there is another angle to all of this discussion that is often forgotten. Current teachers include people who sacrificed earning potential for long-term job security (and did so in an environment where this was a part of their explicit employment contracts). The modern vogue for reneging on promises that are not inconvenient is not helpful to the debate. There may be cases where this is necessary, but it should be a painful last resort and not a routine talking point (see state pensions and the rhetoric about them).

EDIT: Also worth reading is Dana Goldstein's column

Are we entering the Post-coalition age of American politics?

Probably not, but...

Of the many bizarre turns of the past few weeks, the one that really shocked me was the Republicans agreeing to a deal that will very probably end up gutting the Pentagon's budget. Over less that a year, the GOP has alienated seniors by threatening Medicare, scared the hell out of the financial sector with a threatened shut down, and pissed off the military and related industries by disproportionately targeting defense for deficit reduction.

Perhaps this simply fear of Tea Party retaliation or perhaps the party's stated concern for the deficit was more sincere than most of us realized, but either way this pushes the current political situation even further out of the range of data.

Check out Jonathan Chait's sharp summary here.

Is health care choice important?

Aaron Carroll has a nice overview of the situation in Florida where people who campaigned on health care choice seem to be removing for state employees. He quotes this news story:

Florida is changing part of its state-employee health insurance program to offer only one HMO in each county. The state Department of Management Services, which oversees employee insurance, said changes in the program would save an estimated $400 million over two years. The changes also would require thousands of state employees to switch to different HMOs, a process that would begin in late September.

I wonder if these positions are more harmonious than they appear on first glance. If the goal is to make government service less appealing, reducing health care choice (and thus competition) makes these positions less desirable.

Math issues

Felix Salmon's last two posts are brilliant. I strongly recommend reading both of these posts. Seriously!

Heck, I am likely to come back and post on them later today if I have enough time. Paul Krugman and Mark Thoma might be representing the outrage of progressives, but Felix is documenting the damage coldly and dispassionately.

However, this is a statistics blog. So I wanted to visit a comment on one of Felix Salmon's posts:

The top 10% of Americans pays 45% of all taxes, a higher proportion by far than any other country, while the American top 10% earns only 33% of total income.

By comparison, the 10% of the UK earns 32% of total income and pays only 38% of all taxes. And the UK is one of the more progressively taxed countries. The taxes paid by the top 10% of other European countries are on average around 30% of total taxes.

As an epidemiologist (a field that is in love with proportions), I realize how misleading they can be. In the example above, the rich earn roughly the same amount of income. But they pay a higher proportion of taxes. However, is it the proportion of taxes that matters or the absolute tax burden?

Consider a simple example. In two countries there are 10 people. Of these people, nine make 10 units of income per year and one makes 50 unites of income. This is pretty close to the income distribution of the US and UK cited above.

In country A, the nine people pay 2 units of tax per year and the rich person pays 16 units of tax. Total tax revenues are 34 units (or 24% of GDP). The rich definitely pay more as a proportion of taxes but pay 47% of the taxes overall.

In country B, they pay something more like the OECD average (35%). So the nine people pay 3.5 units of tax (31.5) and the rich pay 17.5 units of tax. That is 49 units of tax collected (exactly 35%). The rich pay 36% of the tax burden.

Which country is a low tax country for rich people to live in? One where they pay an effective tax rate of 32% versus 35%? Or one where they pay a higher proportion of total taxes collected?

The trick here is that the US total tax burden is so light that the top 10% can both pay a higher proportion of taxes than in other countries and, at the same time, still pay less absolute tax. That can make proportional analysis potentially misleading.