Monday, September 15, 2014

An alternative Venn Diagram for Mark Perry

I really hope I don't have to explain to everyone what's so wrong about this post by Mark Perry on the minimum wage.

All the law of demand says is that demand curves slope down.

No one that I know that is doubtful about modest minimum wages hurting employment disagrees that demand curves slope down. If you think they are arguing demand curves slope up you need work a little harder at understanding the conversation you are inserting yourself into.

Sunday, September 14, 2014

Documents on Koch intentions on FSU econ department hiring


Note, this is an internal memo about the Kochs' expectations. Because of the outrage this caused (even in the absence of these documents) the advisory group was eventually restricted in how much they could impact these decisions.

This is really not good for anyone that cares about economics as an objective science and people who receive Koch money (which is not inherently bad at all of course), should be saying that.

Friday, September 5, 2014

My minimum wage paper is out at EPI

You can find it here. The idea is to communicate to a broad audience the fact that the "credibility revolution" in econometrics matters a great deal for the minimum wage debate, and that if we divide studies according to whether they employ quasi-experimental methods or fixed effects models the quasi-experimental methods (which are strongly preferred) tend to produce the "no disemployment effect" results. That should matter for the debate.

I also include some cautions about how to apply this research to policy. These are every bit as important. I've had one discussion with a journalist so far about the paper and the fast-food strike for a $15 minimum. I did the math for him on how big an increase that $15 would entail and compared it to Figure A in my paper and flatly told him that you can't justify this with the existing research - our strong priors ought to be that it will reduce employment, with perhaps a few high wage metropolitan areas as the exception.

An excerpt from the report I like ("matching methods" is a more user-friendly term that I use to talk about quasi-experimental methods - that is all well-defined up front and defined in even more detail in the endnotes - the idea is that in all quasi-experimental methods you are matching some treatment case to some comparison case):
"It is difficult to overstate how uncontroversial it is in the field of labor market policy evaluation to assert the superiority of matching methods to the nonmatching approaches described above.9 The seminal evaluations of the effects of job training programs, work-sharing arrangements, employment tax credits, educational interventions, and housing vouchers all use at least some sort of matching method, if not an actual randomized experiment. In their widely cited survey article on non-experimental evaluation, Blundell and Costa Dias (2000) do not even mention state-level fixed-effects models when they list the five major categories of evaluation methods. In a similar article, Imbens and Wooldridge (2009) do mention fixed-effects models as a tool for policy evaluation, but clarify that these were used before more advanced methods were developed, noting that the modern use of fixed-effects models is typically in combination with other more sophisticated techniques. For example, Dube, Lester, and Reich (2010) also use a fixed-effects model, but more importantly it is a fixed-effects model that utilizes rigorous matching strategy to identify the effect of the minimum wage. Sometimes fixed-effects models are the best available option if no natural experiment or other matching opportunity emerges to provide a more rigorous approach. Well specified fixed-effects models can still be informative. But faced with the choice between a well matched comparison group and a fixed-effects model, the former is unambiguously the stronger study design."

Tuesday, August 26, 2014

Yes, Acemoglu and Robinson's review of Piketty is very strange

I'm only about two thirds done with Piketty - it's been very busy this summer between events, getting the dissertation proposal off the ground, and starting work again at the Urban Institute. But I just happened to get to one of the parts in Piketty that Acemoglu and Robinson quote, and it turns out to be an extremely dishonest rendition. They quote this to show that Piketty doesn't think institutions matter (from page 365): 

"The fundamental inequality r > g can explain the very high level of capital inequality observed in the nineteenth century, and thus in a sense the failure of the French revolution.... The formal nature of the regime was of little moment compared with the inequality r > g.". 

So what is in that ellipses? He explains that the revolution didn't change the course of inequality (relative to monarchical Britain) because the new institutions that were established were much closer to Britain than popular perception in France at the time suggested! It was NOT a big change in institutions, which was why the French revolution did not shift the parameters of the model. Immediately after this he goes on to discuss changes in institutions in the 20th century that WERE substantial enough to impact inequality, and he even reviews how inter-country differences in these institutions explain differences between (for example) Germany and France.

In other words, the real point of this section is that institutions matter a lot, regardless of what the hype and propaganda around the Revolution really said. And not only did A&R get that wrong - they deliberately removed the portion of the quote where he made the point.

I have always taken one of the central theses of Piketty's book to be that institutions are central in shaping wealth and income distributions. He says that over and over again. All of the explanations for the empirical changes in the distribution over time are either (1.) institutions, or (2.) shocks (which, given the nature of these shocks, inevitably also have institutional origin). Apparently it's not just Acemoglu and Robinson that missed this memo. I have since had conversations with people who suggest that discussion of institutional determinants of inequality is minimal and that Piketty is just "covering his butt" when he mentions it. But as far as I can tell that's the whole point - the analysis is grounded in inequality.

Piketty without institutions in the capital share of income section could probably survive. Piketty without institutions in the inequality section of the book simply wouldn't exist any more. I mean, you'd have the data I guess, but the analysis is entirely institutional until you get to the last third of the book where he brings some of the subsumed Solow model (all that r > g stuff) back in to talk about with institutions

"Cover your butt" for these people seems to mean "have as your main emphasis for several hundred pages". This is like saying Milton Friedman wasn't all that concerned with money!

Thursday, August 21, 2014

Am I the only one to find the Acemoglu and Robinson review of Piketty strange?

I have taken one of the central tenets of Piketty to be that institutions are central to the determination of wealth and income inequality. The "laws of capitalism" act on capital ratios and even the capital share of income, but given an institutional environment that determines r (in conjunction, of course, with technology itself). And certainly institutions determine wealth and income distributions more broadly.

That's like the one thing that he says over and over and over again: institutions, institutions, institutions.

But Acemoglu and Robinson have a review out that seems like it has a lot of interesting stuff on the focus on the top shares, etc., but that centrally claims that Piketty doesn't think institutions matter.

This seems really strange to me.

Reswitching and the Minimum Wage: An Austrian doing Sraffian Economics that is not Bob Murphy

Don Boudreaux walks through an interesting exercise where the minimum wage leads to switching between two production techniques as a possible reason for increased employment as a result of the minimum wage. The logic from Don is as follows:
"Suppose that the two lowest-cost options for Acme Co. to produce Q amount of output X are as follows (and reckoned on an hourly cost basis):

1)  10 hours of low-skilled labor combined with 50 dollars of capital expenses;

2) 11 hours of skilled labor combined with 30 dollars of capital expenses.

If the prevailing hourly wage for low-skilled workers is $7.25, then Acme Co.’s hourly production costs will be $122.50 if it goes with option 1.  ($72.50 for ten hours of low-skilled labor plus $50 of capital expenses.)  If the prevailing hourly wage for skilled workers is $8.41 or higher, then Acme will use option 1; it will produce X using low-skilled rather than skilled labor.  (If Acme employs 11 skilled workers at $8.41 per hour, and uses with these workers $30 of capital every hour, Acme’s hourly production costs are $122.51 – higher than the total costs of hiring ten low-skilled workers at $7.25 per hour along with $50 worth of capital each hour.)

Now let the minimum wage be raised to (say) $8.41 per hour.  If Acme continues to produce Q amount of X each hour by employing ten low-skilled workers, along with $50 worth of capital, Acme’s hourly production costs would rise from $122.50 to $134.10.  (Ten low-skilled workers at $8.41 per hour = $84.10; adding $50 of hourly capital expenses sums to $134.10 per hour.)  But by instead employing 11 skilled workers at $8.41 per hour, along with $30 worth of capital, Acme’s hourly production costs will rise only by one cent, to $122.51."
First, I want to give kudos to Don for spelling this out when many people (myself included) were confused by a previous post where he said that increased supply from a minimum wage might increase overall employment. Actually that still confuses me and it's not at all what he has here (here it's a demand shock, not a supply shock that's occurring). This provides a sensible (likelihood is another question I'll get to in a moment) explanation of a result that empirical analyses seem to point to - and a result that is not one that is particularly amenable to Don's own views on the minimum wage as policy.

It's also interesting, though, because reswitching situations like this are typically highlighted by left-heterodox economists and Sraffians, most notably during the Cambridge capital controversy. For all Don complains about fairly standard models with turnover, fixed hiring costs, and monopsony power as explanations of the minimum wage, this invocation of reswitching is a much bigger departure from received neoclassical economics.

So what do we make of it? In practice I doubt it's a major contributor to the lack of a disemployment effect in the best empirical analyses. A lot of the studies have focused on low-skill service sector work where the opportunity for this sort of reswitching seems like it would be minimal. It seems like it would be much easier as a manager to make low-skill workers more productive than it would be to change a production process, particularly because the reswitching usually involves a capital-labor substitution of some sort. Add in the fixed costs of making the switch in the first place and it just doesn't seem likely. But if there are any good examples where something like this is going on that would be really interesting and I'd love to hear about it. The result is so anomalous I think it's likely that lots of things are going on to drive the result and this might be part of the puzzle.

My review of Peter Boettke's book "Living Economics"

Is here.

Some outtakes:
"Peter Boettke’s Living Economics gets off to an inauspicious start. Although the book’s principal plea is for people to “live” economics passionately, it begins with a rhetorical assault on one of the greatest and most passionate practitioners of economics in the history of the science, John Maynard Keynes. To the average economist or economics student, Boettke seems to be sending mixed signals from the outset. Are we supposed to be “living economics” or policing ourselves for any traces of Keynesianism—or “mainstream economics”, or “market failure”, etc.?"

"Credulous readers of Boettke are likely to walk away with the impression that a “Smithian Keynesian” is an oxymoron. Such credulous readers will find themselves woefully unprepared for real world interactions with economists outside the George Mason University orbit. Rather than engage those who see things differently as scientists, Boettke unfortunately chooses to brands their views as “dogma” (p. 304) or a “disease on the body politic” (p. 12). This is not just my interpretation. A more sympathetic David Gordon, in his review of the book, describes Boettke as waging “a battle” against “false doctrine”, a doctrine that is promoted in a “quest” for a “false god”.

It’s little wonder that Boettke occasionally feels that his perspective on economics is marginalized! Who would want to talk economics with someone that’s going to call them a dogmatist or wage a battle against them, and then present said battle to students as good economics?"

Krugman's other forays into public choice

David Henderson rightly praises a recent post by Paul Krugman on the motivations to go to war, and notes the use of public choice logic in the post. Really it's just good old fashioned political economy. "Public choice" is more a name for a particular group of political economists and the literature they produce, but the approach of explaining the incentives of "the sovereign" is long-standing. I agree with David it was a great piece on war, but I have a different favorite Krugman foray into public choice - one that I think is in woeful need of elaboration by other economists: his discussion of public choice explanations of austerity.

Public choice dealings with fiscal policy I think have had a lot more success as micro explanations - explaining why certain spending decisions get made or not - than as macro explanations of the broader fiscal stance. My favorite illustration of this is Democracy in Deficit, published by Buchanan and Wagner in 1977 to explain oh how awful Keynes was for fiscal responsibility. Publication of the book came after several decades of declining federal debt as a share of GDP, right before debt as a share of GDP would reach its lowest point in the post-war period in 1981 (and right after a very-close-to-lowest-point in 1974). After the late 1970s when Keynes was tossed as a guide for fiscal policy, monetary policy ruled the macro-stabilization roost, and tax and spending decisions were made on a non-Keynesian basis of course the debt began to climb rapidly. I'm not claiming the debt burden will never climb under Keynesian principles. It ought to sometimes! But the entire public choice framework for thinking about fiscal policy from a macro perspective was completely out of sync with what was going on in the real world, outside their office windows.

Enter Paul Krugman.

A year ago (almost exactly a year ago, as it happens), Paul Krugman was blogging about an issue that has bugged me for a while now - what is a good economic explanation for why politicians are embracing austerity? Why has federal spending flat-lined in the midst of a depression? Why have we been flirting with and actually imposing shut-downs. Why the sequestration? And why have comparable policies been put in place in Europe? It is perhaps the most important public choice/political economy problems of our time but we aren't making nearly as much progress on the answer as we are on more standard macro questions (like how monetary and fiscal policy work in a liquidity trap). Krugman decided to reach back to Kalecki (1943) for insights, following Mike Konczal's lead (as well as Naomi Klein, but I think Kalecki is the more fertile route for academics). A sampling:

"Noah Smith recently offered an interesting take on the real reasons austerity garners so much support from elites, no matter hw badly it fails in practice. Elites, he argues, see economic distress as an opportunity to push through “reforms” — which basically means changes they want, which may or may not actually serve the interest of promoting economic growth — and oppose any policies that might mitigate crisis without the need for these changes... And the lineage goes back even further. Two and a half years ago Mike Konczal reminded us of a classic 1943 (!) essay by Michal Kalecki, who suggested that business interests hate Keynesian economics because they fear that it might work — and in so doing mean that politicians would no longer have to abase themselves before businessmen in the name of preserving confidence."

I think this explanation has potential merit in particular cases. A simpler, general explanation is of course that voters have an antipathy to deficits and often analogize governments to households and perhaps the political system is responding to those demands accordingly. It's a little unsatisfying for an economist because the argument is based on preferences and ignorance, but "unsatisfying for economists" is not always the same thing as "wrong". In that case, the answer is perhaps stronger economics education.

I am not sure we have a great answer yet - it needs more work (perhaps Econlib can spearhead something, David?). But I do believe that getting a grip on the political economy of austerity is one of the more important questions that economists are going to have to grapple with. I can muse but my day to day work is in empirical labor stuff and I am getting less scope to be creative lately (hopefully once a few obligations have passed that might change a little). What we need is someone with expertise in public choice and political economy to tackle it. Any takers?

Monday, August 4, 2014

Two more points on the Phillips Curve discussion

I know this Magness guy is really not worth the time investment, but before I leave this behind I wanted to share this great passage from Samuelson-Solow on the difficulty of pinning down microfoundations (which, as you'll recall from the last post, is the point of the paper - to discuss competing microfoundational explanations of the Phillips Curve floating around in the 50s). From page 191:

"We have concluded that it is not possible on the basis of a priori reasoning to reject either the demand-pull or cost-push hypothesis, or the variants of the latter such as demand-shift. We have also argued that the empirical identifications needed to distinguish between these hypotheses may be quite impossible from the experience of macrodata that is available to us; and that, while use of microdata might throw additional light on the problem, even here identification is fraught with difficulties and ambiguities."

They go on to talk about a hypothetical natural experiment (they don't use that term obviously) and how it could potentially sort things out.

This is, of course, the Lucas critique. It just took Lucas to really make it stick.

The second point I want to make is that when you're talking about history of thought you really need to distinguish between what contribution (say) Friedman actually made to the discussion and what contribution Friedman said he made (or even what contribution the textbook or the Nobel prize committee said he made... because you don't do intellectual history by polling practitioners). It's trivial to find Friedman saying those crazy Keynesians didn't realize the Phillips Curve isn't stable. If the question is "how did Friedman describe his own research program" that has a different answer from the question of "how did Friedman fit into the history of the Phillips Curve".