Walker

Walker joined Difficult Run as an editor in August 2013. He graduated from the University of North Texas with an MBA in Strategic Management and a BBA in Organizational Behavior and Human Resource Management. He's currently a grad student in Government at Johns Hopkins University. He has been published in SquareTwo, BYU Studies Quarterly, Dialogue, Graziadio Business Review, and Economic Affairs. He also contributed to Julie Smith's (ed.) 'As Iron Sharpens Iron: Listening to the Various Voices of Scripture'. His other online writing can be found at Worlds Without End and Times & Seasons. He lives in Denton, Texas, with his wife.

Would Raising Top Earners’ Income Tax Rates Decrease Wealth Inequality?

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Probably not. Reporting on a 2016 study, RealClearScience explains,

To distill the finding, a team of researchers based out of Tel-Aviv University first developed an algorithm to model wealth inequality in the United States between 1930 and 2010. Primarily based on income from wages, income from wealth (profits, rents, dividends, etc.), and changes in capital value (property, shares, etc.) the resulting model correlated closely (p=.96) with historical data on wealth inequality.

The researchers then used their model to predict the future. What would happen, they wondered, if income inequality was varied? In their model, income inequality was tied to a metric called the Gini index, a statistical measure of inequality used for decades. They found that altering income inequality to a Gini index of 0.1 (very low inequality) resulted in the top 10% controlling 78.6% of wealth in 2030, while raising income inequality to a Gini index of 0.9 (very high inequality) resulted in the top 10% controlling 79.3% of wealth in 2030, hardly a significant difference.

The article continues,

According to the researchers, the lack of effect isn’t actually surprising.

“When income tax is increased, the top earners, who are not necessarily the wealthiest individuals in the population, have a larger difficulty of accumulating wealth, with respect to the wealthiest. On the other hand, it barely affects the wealthiest individuals. Therefore, such an increase might even deepen the wealth gap.”

“Progressive taxation, which might have a significant effect on the distribution of income, will have a small effect on wealth inequality,” they add.

The team behind the current study is not the only group to return such a result. Just last year, experts at the Brookings Institute created their own model and found that increasing the top tax rate from 39.6% to 50% wouldn’t even dent income inequality, let alone wealth inequality.

Does Coworker Complementarity Matter?

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According to a new Harvard working paper, the answer is “yes”. Not only that, it demonstrates the importance of specialization. The paper concludes,

Division of labor allows workers to specialize, but also makes them dependent on one another. That is, specialization often implies co-specialization: coworkers need to acquire different, yet complementary expertise. I have quantified these interdependencies in terms of the match and substitutability among coworkers, using Swedish administrative data that describe workers’ educational attainment in terms of 491 different educational tracks. Coworker match is measured by how often these tracks co-occur in establishments’ workforces, whereas substitutability is measured as the degree to which different educational tracks give access to the same occupations.

The effects of coworker match on wages are positive and substantial. Causal estimates imply that working with well-matching coworkers yields returns of a similar magnitude as having a college degree. Moreover, better coworker matches are associated with lower job-switching rates. In contrast, being easily substituted by coworkers diminishes wages and is associated with elevated job-switching rates. Given the positive wage effects, I have argued that the component of a worker’s coworker match that is orthogonal to coworker substitutability can be thought of as a measure of how complementary a worker is to her coworkers. This coworker complementarity rises over the course of a worker’s career in a way that closely tracks the Mincer curve. Furthermore, I have shown that well-established wage premiums are to some extent contingent on working with complementary coworkers. For instance, college-educated workers who have few complementary coworkers earn about the same as workers who only completed secondary school. Similarly, the urban wage premium is about nine times larger for workers in the top quintile of the complementarity distribution compared to those in the bottom quintile. Finally, for workers with post-secondary degrees or higher, the large-plant premium, i.e., the relatively high wages paid by large establishments, can be wholly attributed to the fact that these establishments employ larger numbers of complementary coworkers.

These findings highlight a salient fact of modern societies: high levels of specialization make skilled workers reliant on coworkers who specialize in areas that are complementary to their own field of expertise. This interdependence of coworkers has consequences for how we should think about returns to schooling at a societal level, for the implied coordination challenges in upgrading education systems, and for the role urban labor markets play as places where workers match to coworkers, not just to employers (pgs. 41-42).

Check it out.

Total BS: Short Video featuring Harry Frankfurt

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Image result for on bullshitSeveral years ago, philosopher Harry Frankfurt released his brief essay On Bullshit through Princeton University Press. The basic idea was that bullshit was different from a lie. A liar knows (and cares about) what the truth is and attempts to hide or distort it. Bullshitters, on the other hand, are more interested in persuading without any regard for the truth. The rhetoric could be true or false, but the only thing that truly matters to a bullshitter is that the audience is convinced. In short, liars conceal the truth. Bullshitters (sometimes) conceal their disinterest in the truth.

You can see Frankfurt discussing this concept in the fairly new[ref]2016[/ref] video below.

What is the Impact of Immigration on Labor Markets?

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Yes, this is another immigration post.

A 2017 article in the St. Louis Fed’s The Regional Economist looks at the impact immigration has on U.S. labor markets. The researchers drew on “state-level data from the U.S. Census Bureau for the years 2000, 2005 and 2010 for wages and immigration figures…For wages, we used inflation-adjusted pretax wages and salary incomes of the employed population between the ages of 18 and 60. Finally, we used the Bureau of Labor Statistics’ seasonally adjusted unemployment rate.”

The data “reveals that the relationship between unemployment and immigration is weak to nonexistent, even during this crisis period.”

Furthermore, it “reveals a weak to nonexistent correlation” between wages and immigration, even during economic crises.

But what about the impact on low-skilled workers? “A study by economist David Card addresses this question,” the authors write. “It discusses the consequences of the Mariel boatlift episode, when about 125,000 Cubans emigrated from Cuba’s Mariel port to Miami between May and September 1980. These immigrants had relatively low skills (i.e., less than the average Cuban worker). Card found no evidence that low-skilled wages and the unemployment rate among low-skilled workers changed in Miami.” This is most likely due to the fact that “immigrants and native workers may not be perfect substitutes. It was suggested in one study that immigrants do not so much compete directly with natives as they create conditions for increased specialization by which natives perform more communication-intensive work and immigrants do manual tasks.”

Just more evidence to consider in this controversial debate.

Roots of the Gender Wage Gap

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I’ve written about the gender wage gap before. An October 2016 article in the St. Louis Fed’s The Regional Economist “examine[s] the evolution of the wage gap by cohorts” as well as “the evolution over the life cycle to gain further insight into the patterns and possible causes of the gender wage gap.” The researchers find that

the gap increases with age, at least after the age of 24, which is the age by which the majority of individuals have completed their education. Thus, the gender gap when workers are 24 is substantially smaller than the gap when workers are in their mid-30s. This fact is well-known, and one of the main reasons for this pattern is that men and women make different choices over the life cycle. As they get older, women are more likely than men to work fewer hours outside the home and have breaks in their labor force participation (yielding less accumulated experience and possibly fewer labor market skills) and are less likely to hold highly compensated jobs with promotion prospects.

But why a gap at all?

Specifically, firms often have costs of hiring and training workers. When they hire people for jobs with good promotion prospects and jobs that require training and long hours, they are likely to seek individuals who are less likely to leave the labor force or to reduce their hours substantially. While some women are more inclined to participate in the labor market and work full time, women in general are still more likely to reduce hours or leave the labor force, especially during childbearing years, relative to what men are likely to do. This can lead to lower wages for equally qualified women. Furthermore, since many factors affecting labor supply are not known to employers at the time of hiring, even women who are likely to work long hours and are attached to the labor market as much as men are may earn lower wages because, on average, women with the same qualifications as men are less attached to the labor force than men are.

This type of discrimination is often called statistical discrimination because group affiliation and group averages adversely affect individuals in the group. Over time, employers can typically observe work experience, whether individuals were working and whether they were working full time or part time. Therefore, employers can increasingly identify workers who are less attached to the labor market and, as a result, discrimination of the type described above goes down with age. Since this type of discrimination is more likely to be directed at women, the wages of women who work full time continuously may grow relative to the wages of men due to a decline in discrimination.

They note,

We investigated the changes in the education composition of men and women who work full time continuously in each cohort. For the group working full time continuously in the first cohort [1941-1950], females were more educated than males up to age 28; however, the wage gap is declining when males are more educated than females. In the second cohort [1951-1960], the education gap among those working full time continuously declines (with females being more educated than males in all age groups). Thus, education composition does not explain the evolution of the gender pay gap differences in that group.

They conclude,

By comparing the differences in the evolution of the gender pay gap not only by age but by full-time/part-time status, we demonstrated the importance of statistical discrimination and its relationship to labor force participation of women. As one would expect, this type of discrimination plays a smaller role for the third cohort (born 1961-1970) because women in this cohort are more attached to the labor force than women in the past.

A World Without Borders

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Open borders, according to economist Nathan Smith writing in Foreign Affairs, is the

complete freedom of migration worldwide, with rare exceptions for preventing terrorism or the spread of contagious disease. Borders would still exist in such a world, but as jurisdictional boundaries rather than as barriers to human movement. Ending migration controls in this way would increase liberty, reduce global poverty, and accelerate economic growth. But more fundamentally, it would challenge the right of governments to regulate migration on the arbitrary grounds of sovereignty.

Smith points out that

Gallup has estimated that 640 million people worldwide want to emigrate from their current country of residence. Yet the true number could be much greater—economists such as John Kennan predict that in the absence of border controls, global labor markets would tend toward equilibrium, which in practice would mean the migration of several billion people to the West. (In the short to medium run, the true number of immigrants would be closer to Gallup’s estimates, but over the long run that figure might reach into the billions, as stocks of immigrants and their descendants accumulate in destination countries.) The more efficient allocation of labor would result in global increases in productivity, leading the world economy to nearly double in size. This increased economic activity would, moreover, disproportionately benefit the world’s poorest people. 

Smith acknowledges,

At current levels of benefits, a vast influx of immigrants would bankrupt the welfare state, as newcomers would not be able to pay enough in taxes to finance the benefits to which they would be entitled. (A possible solution might involve curtailing welfare programs, or at least their generosity to the foreign-born.) It follows that open borders would probably lead to a large increase in visible extreme poverty in the West. Yet impoverishment by Western standards looks like affluence to much of the world. And far from creating such poverty, open borders would actually be alleviating it. The new huddled masses, although worse off than the average Western natives, would be better off in their new countries than they were at home. The only difference would be that without borders, Westerners would see the poverty that today is kept comfortably out of sight.

He concludes,

Opening borders would expand the scope of freedom, strengthen respect for rights, and widen the realm of actions that governments, including democratic ones, are not allowed to take. This endeavor is an extension of the liberal project that has animated the West since the Enlightenment. And those who sympathize with abolishing migration restrictions, but fear how popular backlash against immigration has recently affected Western democracy, should ask themselves whether freedom can really be secure if its growth is curtailed; whether respect for rights can be compatible with the exclusion of the foreign-born; and whether, in the United States, immigrants are really a greater threat to freedom and the rule of law than are native-born devotees of the president, Donald Trump.

Read the whole thing.

Did the EPA Change Its Stance on Fracking?

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Image result for epaAccording to The New York Times,

The Environmental Protection Agency has concluded that hydraulic fracturing, the oil and gas extraction technique also known as fracking, has contaminated drinking water in some circumstances, according to the final version of a comprehensive study first issued in 2015. The new version is far more worrying than the first, which found “no evidence that fracking systemically contaminates water” supplies. In a significant change, that conclusion was deleted from the final study.

So why the change? Is there new evidence demonstrating that fracking is in fact a danger to water sources? Not really. CBS reports,

The government report notes concerns over well leaks and waste water spilling above ground. The agency didn’t pinpoint any damage related to the fracking deep underground itself. “What we found is that although the overall incidents of impacts is low, that there are vulnerabilities,” said EPA science adviser Thomas Burke. The EPA is taking a tougher stance than ever before. Language in an earlier draft of the report downplaying fracking concerns was removed. It said: “We did not find evidence that these mechanisms have led to widespread, systemic impacts on drinking water resources.” Burke explained why they omitted the lighter language. “The gaps in information unfortunately do not allow us to say how much, what is the rate of the impact. And so that sentence was removed,” Burke said.

Elsewhere, Burke told reporters, “While the number of identified cases of drinking water contamination is small, the scientific evidence is insufficient to support estimates of the frequency of contamination…Scientists involved with finalising the assessment specifically identified this uncertainty in the report.”

The above can hardly be interpreted as a seismic, anti-fracking change. Science writer Ronald Bailey observes,

First, most of the instances and speculations cited in the EPA report are applicable to all oil and gas wells, not just to wells created by means of fracking. These include harms caused by spills, leaks due to faulty well casings, and inadequate treatment and disposal of fluids and water that flow from wells.

Focusing chiefly on the process of fracking itself—creating cracks by injecting pressurized fluids into shale rocks as a way to release trapped oil and natural gas—the EPA report looks at four pathways by which fracking specifically could contaminate drinking water supplies. Most of the agency’s findings are couched in conditional language. They include the possibility that fluids and natural gas could migrate via fracked cracks that might extend directly into drinking water aquifers; because well casings for horizontal drilling might be less able to withstand the high fracking pressures they may be more likely to leak allowing contaminants to migrate; migration might occur when a fracked well “communicates” with a nearby previously drilled well that is not able to withstand the additional pressures from newly released natural gas; and fracked cracks might intersect with natural faults allowing contaminants to migrate into drinking water supplies.

The EPA cites the results of lots of computer models that find that migration of fluids and natural gas by these four pathways is possible. However, given the fact that by some estimates as many as 35,000 fracked oil and gas wells are drilled each year in the United States, it is astonishing how few examples of actual contamination and other harms are identified in the EPA report…Given even the limited quantitative findings in the EPA’s final report, the agency should have reaffirmed its original more qualitative statement that there is little “evidence that these mechanisms have led to widespread, systemic impacts on drinking water resources.”[ref]Bailey has more to say about global environmental trends.[/ref]

Read the report for yourself: “However, significant data gaps and uncertainties in the available data prevented us from calculating or estimating the national frequency of impacts on drinking water resources from activities in the hydraulic fracturing water cycle” (pg. 2). The 2015 draft report read, “We did not find evidence that these mechanisms have led to widespread, systemic impacts on drinking water resources in the United States” (pg. 6). These two reports communicate virtually the same thing. The newest report still, to quote the draft, “did not find evidence that these mechanisms have led to widespread, systemic impact on drinking water resources in the United States.” The language is simply massaged to emphasize “data gaps and uncertainties.” Both the draft and final reports acknowledge that fracking can impact drinking water sources under certain circumstances. That’s not a revelation. What the draft highlighted was the infrequency of these incidents. What the new report highlights is a lack of good data to quantify the frequency. However, the takeaway for the scientifically minded is nearly identical: there is no evidence that fracking has “led to widespread, systemic impact on drinking water resources.” Nonetheless, better data and continual research is needed (absence of evidence is not evidence of absence and whatnot).

Future evidence may indeed condemn fracking mechanisms or at least call for better regulations. For now, that evidence is sorely lacking. Natural gas is both economically and environmentally beneficial. We need to be careful not to squash it due to faulty interpretations of government reports.

The Regulatory State

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“Between 1970 and 2008,” reports The Economist,

the number of prescriptive words like “shall” or “must” in the code of federal regulations grew from 403,000 to nearly 963,000, or about 15,000 edicts a year, according to data compiled by the Mercatus Centre, a libertarian-leaning think-tank. Between 2008 and 2016, under Mr Obama, about the same number of new rules emerged annually.

The unyielding growth of rules, then, has persisted through Republican and Democratic administrations…Several factors explain it. First, Congress has neither the staff nor the expertise to write complex, technical laws. So lawmakers happily let experts in government agencies fill in the blanks. What Congress does write itself, it writes sloppily. In 2015 the Supreme Court found “more than a few examples of inartful drafting” in the Affordable Care Act. One such error nearly saw the court strike down crucial parts of law; only semantic gymnastics saved it. The “Chevron deference”, a doctrine from a 1984 court ruling, gives agencies wide latitude to interpret laws when they are vaguely written.

Second, America’s division of powers makes it easy for interest groups to defend any one regulation, tax break or policy. That forces administrations to solve problems by taping yet more rules onto whatever exists already, rather than writing something simple from scratch. Over time, this gums up the system, resulting in what Steve Teles of Johns Hopkins University has dubbed a “kludgeocracy”. This explains, for instance, why over half of Americans have to pay a professional to fill out their tax return for them (in Britain, for comparison, most people need not even complete one).

The biggest culprit though? What the article calls “the habits of Washington’s bureaucracy”:

When a government agency writes a significant regulation—mostly defined as one costing more than $100m—it must usually prove that the rule’s benefits justify its costs. Its analysis goes through the Office of Information and Regulatory Affairs (OIRA), a nerdy outpost of the White House. The process is meticulous. The OECD, a club of mostly rich countries, finds that America’s analysis of regulations is among the most rigorous anywhere.

But once a rule has cleared the hurdle, there is little incentive for agencies ever to take a second look at it. So it is scrutinised only in advance, when regulators know the least about its effects, complains Michael Greenstone, of the University of Chicago. The OECD ranks America only 16th for “systematic” review of old red tape. (The leading country, Australia, has an independent body tasked with dredging up old rules for review.)

…The endless pile-up of regulation enrages businessmen. One in five small firms say it is their biggest problem, according to the National Federation of Independent Business, a lobby group. (Many businessmen grumble in private about the Obama administration’s zealous regulatory enforcement). Based on its own survey of businessmen, the World Economic Forum ranks America 29th for the ease of complying with its regulations, sandwiched between Saudi Arabia and Taiwan.

Read the whole piece.[ref]I’ve highlighted a few Mercatus Center studies on regulation here and here.[/ref]

 

Why Is the United States so Rich?

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Harvard economist Martin Feldstein answers this in a newly-released NBER paper. He explains (in excerpts provided by AEI’s James Pethokoukis),

The sustained higher rate of real GDP growth in the United States over a longer period of time has resulted in a substantially higher level of real GDP per capita in the United States than in other major industrial countries. In 2015, real GDP per capita was $56,000 in the United States. On a purchasing power basis, the real GDP per capita in that same year was only $47,000 in Germany, $41,000 in France and the United Kingdom, and just $36,000 in Italy. So the official measures of real GDP clearly point to the cumulative result of higher sustained real growth rates in the United States than in the major industrial countries of Europe and Asia.

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How is this rate of real GDP growth achieved? Feldstein lists 10 reason:

(1) An entrepreneurial culture. Individuals in the United States demonstrate a desire to start businesses and grow them and a willingness to take risks. There is no penalty in the U.S. culture for failure and for starting again. Even students who have gone to college or to a business school show this entrepreneurial desire. The successes in silicon valley and with such firms as Facebook inspire entrepreneurial activities.

(2) A financial system that supports entrepreneurial activities. The United States has a more developed system of equity finance than the countries of Europe and a decentralized banking system that helps local entrepreneurs. The equity finance system includes “angel investors” willing to finance start-up firms and a very active venture capital market that helps finance the growth of firms. The national system of small local banks that provide loans to new businesses includes more than 7,000 individual small banks that are important in their local communities.

(3) World class research universities. These produce much of the basic research that drives the high-tech entrepreneurial activities. Faculty members and doctoral graduates often spend time in new businesses that are located near these universities. The culture of the universities and of the businesses welcomes these overlapping activities between academia and the private sector. The great research universities attract talented students from around the world, many of whom end up remaining in the United States.

(4) Labor markets that generally link workers and jobs unimpeded by large trade unions, state-owned enterprises, or excessively restrictive labor regulations. In the private sector, less than seven percent of the labor force is unionized. There are virtually no state-owned enterprises. While labor laws and regulations affect working conditions and hiring rules, they are much less onerous than in Europe. State level licensing rules are the probably the most serious barrier to job changing and to interstate mobility.

(5) A growing population, reflecting both natural growth and immigration. The growing population means a younger and therefore more flexible and trainable workforce. A high degree of geographic mobility within the United States increases the effectiveness of the labor force. The higher level of real income makes the United States an attractive destination for ambitious and talented young people around the world. Although there are restrictions on immigration to the United States, there are also special rules that provide access to the U.S. economy and a path for citizenship (“green cards”) based on individual talent and industrial sponsorship. A separate special “green card lottery” provides a way for eager people to come to the United States.

(6) A culture and a tax-transfer system that encourages hard work and long hours. The average employee in the United States works 1800 hours per year, substantially longer than the 1500 hours worked in France and the 1400 hours worked in Germany. Of course workers in some Asian countries work much longer hours, with working hours over 2200 per year in Hong Kong, Singapore, and Korea.

(7) A supply of energy that makes North America energy independent. The private ownership of land and mineral rights has facilitated a rapid development of fracking to expand the supply of oil and gas.

(8) A favorable regulatory environment. Although the system of government regulations needs improvement, it is less burdensome on businesses than the regulations imposed by European countries and the European Union.

(9) A smaller size of government than in other industrial countries. According to the OECD, outlays of the U.S. government at the federal, state and local levels totaled 38 percent of GDP while the corresponding figure was 44 percent in Germany, 51 percent in Italy and 57 percent in France. The higher level of government spending in other countries implies that not only is a higher share of income taken in taxes but also that there are higher transfer payments that reduce incentives to work. …  So Americans have a higher pre-tax reward to working and can keep a larger share of their earnings.

(10) The U.S. has a decentralized political system in which states compete. The competition among states encourages entrepreneurship and work effort and the legal systems protect the rights of property owners and entrepreneurs. The United States political system assigns many legal rules and taxing power to the fifty individual states. The states then compete for businesses and for individual residents by their legal rules and tax regimes. Some states have no income taxes and have labor laws that limit unionization. States provide high quality universities with low tuition for in-state students. They compete also in their legal liability rules. The legal systems attract both new entrepreneurs and large corporations. The United States is perhaps unique among high-income nations in the degree of decentralization.

Each of these points is worth considering.

Against Democracy: Interview with Jason Brennan

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This is part of the DR Book Collection.

Image result for against democracyWhen I shared Jason Brennan’s newest book Against Democracy on my Facebook wall, I got a little push back in both the thread and even in a personal email. How could anyone be against democracy? Isn’t this just elitist snobbery at best and totalitarianism in the making at worst? In short, no. Following the election, I finished off Ilya Somin’s Democracy and Political Ignorance and Bryan Caplan’s The Myth of the Rational Voter, both of which showed convincingly that our country consists of a politically ignorant and misinformed electorate. Brennan surveys this literature to demonstrate that voters often choose policies that would make us all worse off. He then dives into the political psychology literature and finds that political participation tends to make us mean and dumb (I told him that chs. 2-3 alone were worth the price of the book). Brennan divides the electorate into three categories:

  • Hobbits: the typical nonvoter; mostly ignorant and apathetic to politics and social science.
  • Hooligans: pretty much everyone else; consumes political information in a highly-biased way and ignores evidence contrary to their position.
  • Vulcans: rare; rational and scientific; can articulate opposing views well; interested in, but dispassionate about politics.

When judged from an instrumentalist point of view (i.e., judging institutions and systems based on their performance, not some supposed intrinsic value), the case for democracy seems far weaker than is often assumed. The evidence he presents helps him build his case for epistocracy: the rule of the knowledgeable. Yet, this isn’t some technocratic bureaucracy, but a way to mitigate the negative outcomes of poor voter knowledge.

The book is packed with tons of information and rigorous arguments. I hardly do it justice with the description above. Even if you’re not convinced to be an epistocrat, the solid social science alone makes the book worth reading. One of the most interesting books I’ve read in some time.

You can see an interview with Jason Brennan discussing the book below.