Revitalizing Liberalism

“[M]aking the case for liberalism is a Sisyphean task,” writes Will Wilkinson at the Niskanen Center. “If the old truths are not updated for each new age, they will slip from our grasp and lose our allegiance. The terms in which those truths have been couched will become hollow, potted mottoes, will fail to galvanize, inspire, and move us. The old truths will remain truths, but they’ll be dismissed and neglected as mere dogma, noise. And the liberal, open society will again face a crisis of faith…Intellectual and moral infrastructure depreciates. There are ongoing costs of maintenance. You can’t successfully defend liberalism once and for all, just like you can’t install a sewage system and flush happily ever after without giving it another thought.” The fading of liberal ideas is captured in the recent work of political scientist Yascha Mounk, as reported last week in The New York Times.

“If we fail to constantly refurbish the case for and commitment to liberalism,” Wilkinson continues,

reinforcing it against the specific damage of the age, our institutions will drift toward generalized opportunistic corruption and declining popular legitimacy. Our culture will drift toward defensive avidity and mutual distrust. Our politics will drift toward primal zero-sum tribal conflict. All of which creates a fat political opening for would-be despots and ends-justifies-the-means zealots. Fascism and communism arose in liberal Europe because the liberal elites got complacent, nobody fixed the pipes, and then awful people with awful ideas rose to power promising to fix damage—and then caused massively more damage.

He concludes,

The fact that liberalism has become rote is central to our problem. Academic left-liberalism is doggedly utopian—and stale. Democratic Party liberalism is incoherent—and stale. Orthodox libertarianism is dogmatically blinkered—and stale. The “classical liberalism” of conservative-libertarian fusionism is phony—and stale. Each of our legacy liberalisms is, in its own way, corrupt. It’s all part of our pitted, pocked, cracked and creaking liberal cultural infrastructure. It doesn’t help to replace rotten wood with rotten wood, rusty pipe with rusty pipe…An effective defense of the open society must begin with an empirically-minded account of its complex inner workings and its surpassing value. Liberal political order is humanity’s greatest achievement. That may sound like hype, but it’s the cold, hard truth. The liberal state, and the global traffic of goods, people, and ideas that it has enabled has led to the greatest era of peace in history, to new horizons of practical knowledge, health, wealth, longevity, and equality, and massive decline in desperate poverty and needless suffering. It’s clearer than ever that the multicultural, liberal-democratic, capitalist welfare state is far-and-away the best humanity has ever done. But people don’t know this! We are dangerously oblivious to the nature of our freedom and good fortune, and seem poised to snatch defeat from the jaws of victory.

I can only hope that some of my posts here at Difficult Run have contributed to this project of making liberalism great again.

Management Quality Matters

Building on the work of Stanford economist Nicholas Bloom and the World Management Survey, new research suggests that management quality matters for firm adaptability to adverse competitive shocks. The researchers explain,

Studying the way that corporations adjust to competitive shocks is difficult, and isolating the role of management even more so. New technology directly affects the productivity of firms, but it simultaneously transforms the competitive environment to which management needs to adapt. It is difficult to disentangle the role of external competitive forces from the direct effects of technological change. Policy shocks provide better opportunities to isolate the firm response because they do not directly emanate from an underlying process that is shaping the productivity of a firm. Recent research has therefore focused on policy shocks, such as a new trade agreement, unexpected exchange-rate shocks, or changes to the minimum wage.

Emerging markets might provide a better setting for a test of the relevance of management practice, because these markets have firms which differ more widely in their governance and management quality. Our recent research focuses on the productivity response of Chinese firms to external labour cost shocks (Hau et al. 2016). Many industries in China feature a large numbers of state-owned firms (SOEs), private Chinese firms, and foreign firms. Each have very different management practices…Chinese firms have undergone regular large labour cost shocks because of large revisions to the minimum wage set at the local level. In the seven-year period from 2002 to 2008 alone, there were more than 17,000 minimum wage increases in China’s 2,852 counties and cities…For firms with many workers at, or near, the minimum wage, these minimum wage increases often had a dramatic impact on average labour cost.

What were the firm responses to the 20% increase in the minimum wage?

The incremental productivity increase of SOEs [state-owned firms] was small and statistically insignificant (indicated by the vertical line representing a 95% confidence interval around the mean effect). Private firms show a statistically significant productivity response if their initial productivity is low, whereas foreign firms show by far the largest productivity increase in the year of the minimum wage increase. The point estimate of incremental TFP growth, just under 10%, is economically large and corresponds to almost a full year of trend growth. External competitive shocks therefore trigger large productivity improvements in some firms, but not in others. Ownership structure accounts for a large proportion of this variation.

Drawing on previous research, the authors draw up three dimensions to measure the quality of firm management:

  1. Monitoring practices: The collection and processing of production information;
  2. Target-setting practices: The ability to set coherent, binding, short-term and long-term targets; and
  3. Incentive practices: Merit-based pay, promotion, hiring, and firing.

Their findings indicate that larger firms–especially foreign-owned–are better managed, while state-owned were the least well managed. The graph below “illustrates that the positive productivity response to the labour cost shock tends to be, ceteris paribus, larger for firms with a higher predicted management quality.”

“The horizontal axis shows the triple interaction between the impact function IF(ws/wmin), the (log) minimum wage increase and the predicted management score (Mgmt_Score). To keep the figure simple, we plotted only those 29,998 firm-year observations for which the minimum wage increase was larger than 20%. For the same minimum wage exposure (or value of the impact function) and the same large minimum wage increase, a firm observation with a low predicted management score will tend to be on the left. Those with a high predicted management score will be to the right.”

The “evidence indicates better-managed firms adapt better to adverse competitive shocks, and suggests that management quality matters for this adaptability.” In other words, management matters.

Does the Amount of Sleep Affect Wages?

Image result for need sleep gif

I’ve discussed the science of sleep here before. Elements of our arguably overstimulated society can make it difficult to get some truly good rest. Not only does this lead to highways full of practically drunk people, it also lowers our productivity at work. For example, new research from one pair of economists find that increased sleep gain lead to wage gains in both the short run and the long run. From the abstract:

We investigate the labor market effects of the single largest use of time—sleep. Motivated by a productive sleep model, we show that sleep is complementary to work in the short run and complementary to home production for non-employed individuals in both the short and long run. Using time use diaries from the United States, we demonstrate in both parametric and non-parametric frameworks that later sunset time reduces worker sleep and wages. After investigating these relationships and ruling out alternative hypotheses, we implement an instrumental variables specification that provides the first causal estimates of the impact of sleep on wages. A one-hour increase in location-average weekly sleep increases wages by 1.3% in the short run and by 5% in the long run.

Employees: Want a raise? Get some sleep.

Employers: Want more productive employers? Let them get enough sleep.