Economics – Page 14 – Difficult Run

Doing Right Is Profitable

December 9, 2017 by Walker

Image result for board meeting

At least according to a report by the non-profit research organization JUST Capital. As detailed in Forbes,

JUST Capital polls, on a continuous basis, more than 50,000 Americans, asking them over and over again a series of simple questions on what makes for a just company: Is pollution important? Are wages important? Do benefits matter?

These polls determine how JUST Capital measures corporate justness. The metrics range from worker pay and worker treatment, to leadership and ethics, job creation, customer treatment, supply chains and environmental performance. JUST Capital then proceeds to apply these metrics to individual companies to determine the most just companies in the nation — the 100 highest-ranking in measures of fair and responsible corporate behavior within its ranking of the largest 897 publicly-traded firms in the U.S.

Here’s what its most recent study found: Stock market indexes based on the leaders of JUST Capital’s 2016 rankings outperformed the Russell 1000 index throughout the decade ending in 2016 within a range of 1-4 percentage-points.

Most of these companies also:

• Generated 3.5% higher 5-year Return on Invested Capital.

• Pay roughly 20% more workers a living wage

• Have almost 17% more women board members

• Created 1.8x more jobs in America

• Provide employees more flexible working hours and paid time off

• Pay 8x fewer consumer-related fines

• Recycle about 3x more waste in % terms

• Are 2x more likely to have sound supply chain policies

• Donate about 2x as much of their profit to charity

The piece concludes,

What this all amount to is more than simply an exhortation to the American private sector to “do the right thing.” It’s not just a wake-up call to “do what’s best for your company long-term” but most importantly, it will do what will get this country booming for the top 20 percent of Americans as well as Wall Street. Our markets need the sort of demand our American consumers can fulfill with money they’ve earned — we need their spending power to drive all the growth we’re capable of creating. And to spend, they need to earn. Enlightened CEOs will making sure their employees will earn fair wages importantly because they are the true value creators of the 21^stcentury.

At the Ethical Systems blog, they mention Milton Friedman’s (in)famous 1970 essay in connection with this report:

In 1970 Milton Friedman wrote a now famous essay in the NY Times Magazine declaring that the social responsibility of business is to increase its profits. Since then, writers and researchers have been debating whether this accurately reflects the responsibilities of business in society. In the decade since the Global Financial Crisis these debates have become particularly critical, with some participants questioning the basic principles of free market capitalism and whether they serve our current societal needs.

But what if the best way to do right by shareholders was to run a socially responsible business?

What’s funny is that Friedman wouldn’t object, as he clarified in a 2005 Reason essay. Comparing his and Whole Foods’ John Mackey’s philosophy, Friedman writes,

Here is how Mackey himself describes his firm’s activities:

1) “The most successful businesses put the customer first, instead of the investors” (which clearly means that this is the way to put the investors first).

2) “There can be little doubt that a certain amount of corporate philanthropy is simply good business and works for the long-term benefit of the investors.”

Compare this to what I wrote in 1970:

“Of course, in practice the doctrine of social responsibility is frequently a cloak for actions that are justified on other grounds rather than a reason for those actions.

“To illustrate, it may well be in the long run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government….

“In each of these…cases, there is a strong temptation to rationalize these actions as an exercise of ‘social responsibility.’ In the present climate of opinion, with its widespread aversion to ‘capitalism,’ ‘profits,’ the ‘soulless corporation’ and so on, this is one way for a corporation to generate goodwill as a by-product of expenditures that are entirely justified in its own self-interest.

“It would be inconsistent of me to call on corporate executives to refrain from this hypocritical window-dressing because it harms the foundations of a free society. That would be to call on them to exercise a ‘social responsibility’! If our institutions and the attitudes of the public make it in their self-interest to cloak their actions in this way, I cannot summon much indignation to denounce them.”

…Finally, I shall try to explain why my statement that “the social responsibility of business [is] to increase its profits” and Mackey’s statement that “the enlightened corporation should try to create value for all of its constituencies” are equivalent.

Note first that I refer to social responsibility, not financial, or accounting, or legal…Maximizing profits is an end from the private point of view; it is a means from the social point of view. A system based on private property and free markets is a sophisticated means of enabling people to cooperate in their economic activities without compulsion; it enables separated knowledge to assure that each resource is used for its most valued use, and is combined with other resources in the most efficient way.

Of course, this is abstract and idealized. The world is not ideal. There are all sorts of deviations from the perfect market–many, if not most, I suspect, due to government interventions. But with all its defects, the current largely free-market, private-property world seems to me vastly preferable to a world in which a large fraction of resources is used and distributed by 501c(3)s and their corporate counterparts.

Does Increasing the Minimum Wage Raise Prices?

December 28, 2018December 7, 2017 by Walker

According to a new job market paper, yes:

Minimum wage laws in the US typically institute a schedule of increases rather than one-off hikes. After the corresponding legislation is passed, the minimum wage increases in steps over several years to the final value set in the law. Especially the later steps are known long in advance, and firms may increase prices in anticipation of higher future minimum wages. To take this possibility into account, we estimate the minimum wage elasticity of grocery prices at the time future increases become known and when they are implemented. We collect legislation dates for every increase, and show that these dates capture a salient event at which people get information about future minimum wage hikes. We combine this data with monthly store-level price indices for about 2000 grocery stores during the 2001–2012 period, which we construct from grocery store scanner data. We find robust significant effects on grocery prices at the time of legislation, but not at the time of implementation of minimum wage increases. Our baseline estimate of the overall minimum wage elasticity of prices in grocery stores is about 0.02. The average minimum wage legislation increases binding minimum wages by about 20% over several years. Our estimates suggest that such an increase raises grocery prices by 0.4% over three months around the time legislation is passed, long before the final level of the new minimum wage is implemented. During these three months, price inflation in grocery stores almost doubles relative to its average rate.

In a second step, we estimate the minimum wage elasticity of grocery store cost using county-sector level data from the Quarterly Census of Employment and Wages and sectorlevel data on grocery stores’ labor cost share. We find that the minimum wage elasticity of costs is about the same size as the minimum wage elasticity of prices. Our results thus suggest a full pass-through of all future cost increases at the time minimum wage legislation is passed. This forward-looking behavior is qualitatively consistent with the predictions of pricing models with nominal rigidities.

Finally, we calculate the welfare cost of grocery stores’ price response based on consumption data from the Consumer Expenditure Survey. We show that low-income households are disproportionately affected, since they spend a larger share of their expenditures at grocery stores. In particular, the price response of grocery stores alone undoes at least 10% of the nominal income gains of the poorest households. For other income brackets, this number ranges between 3% and 13%. Overall, the price response reduces the nominal gains for all households, but also makes minimum wage increases less redistributive in real than in nominal terms (pgs. 1-2).

In short, the cost of minimum wage increases are passed on to consumers. What’s worse, poor consumers are hurt the most.

Are Democrats Outdoing Republicans When It Comes to Family Values?

April 11, 2018December 1, 2017 by Walker

Not really, despite what Nicholas Kristof has recently claimed. As W. Brad Wilcox of the University of Virginia explains,

Here, Kristof is indebted to a book by family scholars Naomi Cahn and June Carbone, Red Families v. Blue Families, which makes the case that blue states have more successful and stable families than do red states. Arkansas, for instance, has one of the highest divorce rates in the nation, whereas Massachusetts has one of the lowest.

…But this state-based argument obscures more than it illuminates about the links between partisanship and family life for ordinary families in America. Scholars and journalists who have bought into the idea that red Americans are hypocrites on family values because some red states do poorly when it comes to family stability are committing what is called the “ecological fallacy” of conflating the family behaviors of individual conservatives with the family behaviors of states dominated by conservatives.

…Indeed, when we look not at states but at counties in the United States, we see that counties that lean Republican across the country as a whole have more marriage, less nonmarital childbearing, and more family stability than counties that lean Democratic. In fact, an Institute for Family Studies report I authored found, “teens in red counties are more likely to be living with their biological parents, compared to children living in bluer counties.” So, even at the community level, the story about marriage and family instability looks a lot different depending on whether or not one is looking at state or county trends. At the county level, then, the argument that Red America is doing worse than Blue America isn’t true.

Finally, when we turn to the individual level, the conservatives-are-family-values-hypocrites thesis really falls apart. Republicans are more likely to be married, and happily married, than independents and Democrats, as Nicholas Wolfinger and I recently showed in a research brief for the Institute for Family Studies. They are also less likely to cheat on their spouses and less likely to be divorced, compared with independents and Democrats. So, Donald Trump is the exception, not the norm, for Republicans.

He continues,

When it comes to family stability, Republican parents are less likely to be divorced. In fact, Republican parents who have ever been married are at least 5 percentage points less likely to have been divorced, compared with their fellow citizens. The 2017 American Family Survey also indicates Republicans are less likely to have their first child outside of marriage, compared with Democrats and independents. So, contra Kristof, it’s actually Republicans, not Democrats, who are more likely to enjoy a stable, happy family life anchored around marriage…When American parents are separated by whether or not they have a college degree, it turns out that Republican parents have about a 10-percentage-point advantage in the likelihood that they are in their first marriage. In both college-educated communities and less-educated communities, then, it looks like Republican parents are more likely to be raising their children in their first marriage…[E]ven [when] we limit our focus to whites, we still see that white Republican parents are more likely to be in their first marriage. Specifically, 62 percent of white Republican parents are in their first marriage, compared with 54 percent of white Democratic and 44 percent of white independent parents…When we break out parents by those who attend religious services frequently (several times a month or more) versus parents who attend infrequently or never, Republicans still have an advantage in both the more religious and less religious groups. In fact, in both groups, Republican parents are more likely to be in first marriages than their fellow citizens. Moreover, even after controlling for religiosity, as well as education, race, ethnicity, region and age, the data indicate that Republican parents are still more likely to be in their first marriage, compared with Democrats.

“[B]ecause married parents are more prosperous and less dependent on government for their financial security,” he writes, “[Republicans] are less likely to gravitate to the Democratic Party and more likely to gravitate to the party of small government and lower taxes. Indeed, counties with large numbers of lower-income single parents are more likely to lean Democratic, partly because the Democratic Party supports policies designed to provide them with more financial security. The figure below is illustrative of the link between family structure and voting at the county level in 2016.”

Wilcox highlighted this last point in a City Journal article back in July:

The problem with the progressive approach to poverty is that it denies the importance of culture and character to household prosperity—especially when it comes to marriage…Wendy Wang of the Institute for Family Studies and I recently co-authored a report, The Millennial Success Sequence, which demonstrates and quantifies the extent to which early life choices correlate with personal affluence. Though young people take a variety of paths into adulthood—arranging school, work, and family in a dizzying array of combinations—one path stood out as most likely to be linked to financial success for young adults. Brookings scholars Ron Haskins and Isabel Sawhill have identified the “success sequence,” through which young adults who follow three steps—getting at least a high school degree, then working full-time, and then marrying before having any children, in that order—are very unlikely to become poor. In fact, 97 percent of millennials who have followed the success sequence are not in poverty by the time they reach the ages of 28 to 34.

Sequence-following millennials are also markedly more likely to flourish financially than their peers taking different paths; 89 percent of 28-to-34 year olds who have followed the sequence stand at the middle or upper end of the income distribution, compared with just 59 percent of Millennials who missed one or two steps in the sequence. The formula even works for young adults who have faced heavier odds, such as millennials who grew up poor, or black millennials; despite questions regarding socioeconomic privilege, our research suggests that the success sequence is associated with better outcomes for everyone. For instance, only 9 percent of black millennials who have followed the three steps of the sequence, or who are on track with the sequence (which means they have at least a high school degree and worked full-time in their twenties, but have not yet married or had children) are poor, compared with a 37 percent rate of poverty for blacks who have skipped one or two steps. Likewise, only 9 percent of young men and women from lower-income families who follow the sequence are poor in their late twenties and early thirties; by comparison, 31 percent of their peers from low-income families who missed one or two steps are now poor.

…Young men and (especially) women who put “marriage before the baby carriage” get access to the financial benefits of a partnership—income pooling, economies of scale, support from kinship networks—with fewer of the risks of an unmarried partnership, including breakups. By contrast, millennials who have a baby outside of marriage—even in a cohabiting union—are likelier to end up as single parents or paying child support, both of which increase the odds of poverty. One study found that cohabiting parents were three times more likely to break up than were married parents by the time their first child turned five: 39 percent of cohabiting parents broke up, versus 13 percent of married parents in the first five years of their child’s life. The stability associated with marriage, then, tends to give millennials and their children much more financial security.

In a Hoover Institute interview, Yuval Levin commented, “Today’s progressivism–for all of its talk of communitarianism and of ‘we’ and of ‘You didn’t build that’–the purpose of it really is to liberate the individual from dependence on other people. It is in fact based on a very radical individualism that at the end of the day wants total moral individualism and is willing to abide some economic collectivism to get there.”[ref]On the flip side, Levin points out that American conservatives tend to borrow their political rhetoric from the most radical individualists in the revolutionary tradition (e.g., Jefferson, Paine), despite being more family-based in practice.[/ref] The data above seem to confirm this suspicion.

Political Opposition to Immigration

April 6, 2018November 28, 2017 by Walker

Image result for anti immigration

From a recent job market paper:

In this paper, I exploit variation in the number of immigrants received by US cities between 1910 and 1930 to study the political and economic consequences of immigration. Using a leave-out version of the shift-share instrument (Card, 2001), I show that immigration had a positive and significant effect on natives’ employment and occupational standing, as well as on economic activity. However, despite these economic benefits, the inflow of immigrants also generated hostile political reactions, inducing cities to cut tax rates and limit redistribution, reducing the vote share of the pro-immigration party, and increasing support for the introduction of immigration restrictions.

Exploiting variation in immigrants’ background, I document that natives’ backlash was increasing in the cultural distance between immigrants and natives. These findings suggest that opposition to immigration may arise not only because of economic, but also because of cultural considerations. Moreover, they highlight the existence of a potential trade-o§. Immigrants may bring larger economic gains when they are more different from natives. However, higher distance between immigrants and natives may trigger stronger political backlash. Ultimately, by retarding immigrants’ assimilation, and favoring the rise of populism and the adoption of inefficient policies, natives’ reactions may be economically and socially costly in the medium to long run (pg. 38-39).

A 2016 paper found that accurate information regarding immigration can change minds, but I’m becoming less and less hopeful.

Myths About the 1 Percent

November 21, 2017 by Walker

Gallup’s Jonathan Rothwell has provided some important insights about inequality in the U.S., from zoning laws to a lack of competition among the elites. In a recent New York Times piece, he lays out the evidence against certain myths regarding the 1% in a succinct fashion. Here are some “common misconceptions” about income inequality:

Trade: “A rise in international trade — as a share of G.D.P., measured as either imports or exports using data from the Penn World Tables — is associated with equality, not inequality. The United States imports only a small fraction of the value of its total economy, whereas Denmark and the Netherlands are highly dependent on imports.”
Information Technology: “Countries with higher rates of invention — as measured by patent applications filed under the Patent Cooperation Treaty, an indicator of patent quality — exhibit lower inequality than those with less inventive activity. As it happens, tech industries in the United States have contributed just a tiny bit to the rise of the 1 percent, and the salaries of engineers and software developers rarely reach the 1 percent threshold of an annual income of $390,000.”
Decline of Unions: “Unions are thought to redistribute income from owners to workers, but there is no correlation across countries between the change in labor’s share of G.D.P. since 1980 and an increase in the income share of the top 1 percent. Britain saw an increase in the labor share of G.D.P. but also one of the sharpest increases in inequality. The Netherlands saw a large fall in labor’s share but no rise in inequality. Scandinavian countries are heavily unionized and egalitarian, but Denmark experienced a large decrease in the share of workers represented by unions from 1980 to 2015, according to O.E.C.D. data, and very little change in inequality. Unionization rates dropped precipitously in the Netherlands and especially New Zealand over the period, but inequality rose as much if not more in Spain, where unionization rates rose.“
Immigration: “There is no correlation between changing immigration shares since 1990 and rising top-income shares. In fact, the countries that have absorbed the most immigrants — on a per-capita basis — have seen overall income inequality (measured by the Gini coefficient) fall. An assumption implicit in this argument is that immigrants drag down earnings at the bottom of the distribution, making inequality worse. If this were an important factor, rising inequality should coincide with large gaps in income between foreign-born and native-born adults. It doesn’t. My analysis of data from the Gallup World Poll from 2009 to 2016 shows that foreign-born adults earn 37 percent less than native-born adults in the Netherlands, after adjusting for age and gender. This is the largest gap among O.E.C.D. countries, and yet, the country saw no change in top-income inequality. Canada (minus 8 percent) and Britain (minus 7 percent) have small gaps but high and rising inequality.”
Manager Compensation: “Most top earners in the United States are neither executives nor even managers. People in those occupations make up just over one-third of all top earners in the United States. This share has been falling — particularly for corporate executives — and is lower than in many other advanced countries. In Denmark, Canada and Finland, close to half of top earners are in managerial occupations, according to my analysis of data from the Luxembourg Income Study.”

So what gives?

The groups that have contributed the most people to the 1 percent since 1980 are: physicians; executives, managers, sales supervisors, and analysts working in the financial sectors; and professional and legal service industry executives, managers, lawyers, consultants and sales representatives.

…A new book, “The Captured Economy” by Brink Lindsey and Steven Teles, argues that regressive regulations — laws that benefit the rich — are a primary cause of the extraordinary income gains among elite professionals and financial managers in the United States and of a reduction in growth.

This year, the Brookings Institution’s Richard Reeves wrote a book about how people in the upper middle class have shaped both legal and cultural norms to their advantage. From different perspectives, Joseph Stiglitz, Robert Reich and Luigi Zingales have also written extensively about how the political power of elites has undermined markets.

Problems cited by these analysts include subsidies for the financial sector’s risk-taking; overprotection of software and pharmaceutical patents; the escalation of land-use controls that drive up rents in desirable metropolitan areas; favoritism toward market incumbents via state occupational licensing regulations (for example, associations representing lawyers, doctors and dentists that block efforts allowing paraprofessionals to provide routine services at a lower price without their supervision).

These are just some of the causes contributing to the 1 percent’s high and rising income share. Reforming relevant laws can make markets more efficient and egalitarian, and in contrast with trade, immigration and technology, the political causes of the 1 percent’s rise are directly under the control of citizens.

In short, populists (trade), conservatives (immigration, IT), and leftists (executive compensation, unions) are wrong. It’s protectionist regulations that are the problem.

What are the Effects of Short-Term Incentives?

November 15, 2017 by Walker

Image result for carrot and stick ceo

I’ve written about the negative effects of corporate “short-termism” before. A new study takes a look at the criticisms of short-term incentives. The researchers explain,

Critics of short-term incentives argue that they lead the CEO to take myopic actions that boost the short-term stock price at the expense of long-run value. These critics however, rarely back this up with rigorous evidence. This is partly confirmation bias – willingness to accept ‘evidence’ that confirms one’s prior belief, no matter how flimsy. Since the current political environment is distrustful of businesses, people may be more willing to accept ‘evidence’ that CEOs act in ways that destroy value for personal gain. For example, a recent McKinsey study showed that firms that invested more have enjoyed superior long-run returns, and interprets this finding as “finally, evidence that managing for the long term pays off” (Barton et al. 2017).

…In our most recent work on the topic (Edmans et al. 2017b), we study the long-term consequences of short-term incentives by examining two corporate actions with similarities to investment cuts, but whose long-run consequences could be measured more accurately:

Repurchases: These boost the short-term stock price (Ikenberry et al. 1995). CEOs with short-term concerns might have incentives to undertake them. Also like investment cuts, repurchases can either be myopic (if financed by scrapping valuable projects) or efficient (if financed by free cash that would otherwise have been wasted). The long-term stock return measures the return that the firm obtains from the repurchased stock. So, unlike investment cuts, the long-term stock return can be used to diagnose the value implications of the repurchase, even if the return was not caused by the repurchase.

M&A: This has different advantages to repurchases. First, M&A has an announcement date, allowing us to cleanly calculate short- and long-term returns. Second, M&A is a much more significant event than an investment cut (or repurchase) – it is arguably the most transformative corporate decision that a firm can undertake – and so it is likely that at least a significant portion of long-run stock returns would be attributable to the M&A. Indeed, prior research (e.g. Agrawal et al. 1992) has used long-run stock returns to assess the long-term value implications of M&A.

Studying “the relationship between vesting equity and repurchases, and vesting and M&A announcements, between 2006 and 2015,” the researchers found that

a one-standard-deviation increase in vesting equity is associated with a 1.2% increase in a firm’s likelihood of conducting a share repurchase in a given quarter, compared to the unconditional repurchase probability of 37.5%. This translates into $6.16m annualised, compared to the finding in Edmans et al. (2017a) of an annualised fall in investment of $1.8m. While economically meaningful, this magnitude is also plausible: a too-large, myopic repurchase may have prompted the board to step in and block it. We find similar results for M&A. A one-standard deviation increase in vesting equity is associated with a 0.6% increase in a firm’s likelihood of announcing an M&A in a given quarter, compared with the unconditional probability of 15.8%.

…A one-standard-deviation increase in vesting equity is associated with an annualised 0.61% higher return over the two quarters surrounding a repurchase, but a 1.11% (0.75%) lower return during the first (second) year after the repurchase. For M&A, the negative association with long-run returns persists for longer. A one-standard-deviation increase in vesting equity is associated with an annualised 1.47% higher return over the two quarters surrounding an M&A announcement, but a 0.81%, 0.35% (insignificant), 0.72%, and 0.62% lower return in the first, second, and third, and fourth subsequent years.

They conclude,

The results are consistent with Graham et al. (2005), who used a survey to find that 78% of executives would sacrifice long-term value to meet earnings targets. We studied a CEO’s actual behaviour and found that short-term incentives indeed have negative long-term consequences. The current debate on CEO pay typically focuses on how big it is. As a consequence, in the UK and US, there will soon be disclosure of pay ratios. Our results suggest that the horizon of CEO incentives is a more important dimension to reform.

Does Population Diversity Lead to Economic Growth?: Evidence from the Age of Mass Migration

April 6, 2018November 11, 2017 by Walker

A brand new study seeks to answer the following questions:

“Does having a very diverse population at one point in time lead to persistently higher levels of economic growth?”
“Is the economic impact of diversity only evident in the short term, vanishing once the different population groups become part of the society’s ‘melting pot’?”

The researchers “assess these questions by examining the extent to which the high degree of cultural diversity in US counties generated during the Age of Mass Migration of the late 19th and early 20th centuries has left an enduring impact on the economic development of those US areas that witnessed the greatest heterogeneity in population. Their analysis

identif[ies] the presence of a strong and very long lasting impact of diversity on county-level economic development. Counties that attracted migrants from very diverse national and international origins over a century ago are significantly richer today than those that were marked by a more homogeneous population. Highly diverse counties after the Age of Mass Migration strongly benefited from the enlarged skillset and the different perspectives and experiences the arriving migrants brought with them and from the interaction among those different groups. The result was a surge of new ideas and a newfound dynamism that was quickly translated into lofty, short-term economic gains. These gains proved durable and, albeit in a reduced way, can still be felt today.

Yet the benefits of diversity came with a strong caveat: the gains of having a large number of groups from different origins within a territory (fractionalisation) only materialised if the diverse groups were able to communicate with one another (low polarisation). Hence, past population diversity in the US has become a double-edged sword: it has worked only where the different groups were able to interact, that is, in those places where the ‘melting pot’ really happened. Where such ‘bridging’ did not occur, groups and communities remained in their own physical or mental ghettoes, undermining any economic benefits from a diverse environment.

Moreover, the benefits from diversity have remained over time. Where high levels of diversity have been coupled with ‘bridging’ across groups – high population fractionalisation with low polarisation – the associated economic gains were felt in the short, medium, and long term. With the exception of the highly turbulent 1920s to 1940s, a strongly positive and robust impact of fractionalisation on regional income levels, as well as a negative one of polarisation is evident…The only change in this enduring relationship is that both connections, while remaining strongly statistically significant, became weaker after the 1920s.

They conclude,

At a time when many developed countries are rapidly closing down their borders to immigration, trying to shield what – particularly in the case of Europe and Japan – are still rather homogeneous populations from external influences and the perceived security, economic, and welfare threats often unjustly associated with migrants, restricting migration will limit diversity and is bound to have important and long-lasting economic consequences. By foregoing new migration, wealthy societies may be jeopardising not only the short-term positive impact associated with greater diversity, but also the enduring positive influence of diversity on economic development.

The large, positive, and persistent impact of societal diversity on economic development seen in the US would therefore be difficult to replicate – something that ageing and lethargic societies across many parts of the developed world can ill afford. However, if migration is to be encouraged, it is of utmost importance that mechanisms facilitating the dialogue across groups and, hence, the integration of migrants are in place to guarantee that diversity is transformed into higher and durable economic activity over the short, medium, and long term.

The Radical, Alien Nature of Early Christianity: Thoughts on Hart

November 30, 2017November 7, 2017 by Walker

Theologian David Bentley Hart has an interesting piece in The New York Times titled “Are Christians Supposed to Be Communists?” Hart writes:

If the communism of the apostolic church is a secret, it is a startlingly open one. Vaguer terms like “communalist” or “communitarian” might make the facts sound more palatable but cannot change them. The New Testament’s Book of Acts tells us that in Jerusalem the first converts to the proclamation of the risen Christ affirmed their new faith by living in a single dwelling, selling their fixed holdings, redistributing wealth “as each needed” and owning all possessions communally. This was, after all, a pattern Jesus himself had established: “Each of you who does not give up all he possesses is incapable of being my disciple” (Luke 14:33).

This was always something of a scandal for the Christians of later ages, at least those who bothered to notice it. And today in America, with its bizarre piety of free enterprise and private wealth, it is almost unimaginable that anyone would adopt so seditious an attitude.

While Christianity “was not a political movement in the modern sense,” it “was a kind of polity, and the form of life it assumed was not merely a practical strategy for survival, but rather the embodiment of its highest spiritual ideals. Its “communism” was hardly incidental to the faith.” He points out that “the New Testament’s condemnations of personal wealth are fairly unremitting and remarkably stark,” going on to cite Matt. 6:19-20, Luke 6:24-25, and James 5:1-6. “While there are always clergy members and theologians swift to assure us that the New Testament condemns not wealth but its abuse, not a single verse (unless subjected to absurdly forced readings) confirm the claim.”

The early Christians saw “themselves as transient tenants of a rapidly vanishing world, refugees passing lightly through a history not their own.” Many fourth and fifth-century theologians “felt free to denounce private wealth as a form of theft and stored riches as plunder seized from the poor. The great John Chrysostom frequently issued pronouncements on wealth and poverty that make Karl Marx and Mikhail Bakunin sound like timid conservatives.”

He concludes,

No society as a whole will ever found itself upon the rejection of society’s chief mechanism: property. And all great religions achieve historical success by gradually moderating their most extreme demands. So it is not possible to extract a simple moral from the early church’s radicalism.

But for those of us for whom the New Testament is not merely a record of the past but a challenge to the present, it is occasionally worth asking ourselves whether the distance separating the Christianity of the apostolic age from the far more comfortable Christianities of later centuries–and especially those of the developed world today–is more than one merely of time and circumstance.

While I think Hart is correct about the radicalism of the early Christian church, he only briefly mentions a major driving force behind their radicalism: they saw “themselves as transient tenants of a rapidly vanishing world.” The early Church was more-or-less a Jewish apocalyptic movement. Believing the world is going to end soon tends to produce radical practices.[ref]The same is true for early Mormonism.[/ref] And while the Book of Mormon may be a little more nuanced in regards to wealth,[ref]See Jacob 2:17-19.[/ref] it’s not by much.[ref]For example, see my essay in As Iron Sharpens Iron: Listening to the Various Voices of Scripture.[/ref] So what does our economic world look like today compared to that of 1st-century Palestine? Harvard historian Niall Ferguson writes,

Despite our deeply rooted prejudices against ‘filthy lucre’…money is the root of most progress…[T]he ascent of money has been essential to the ascent of man. Far from being the work of mere leeches intent on sucking the life’s blood out of indebted families or gambling with the savings of widows and orphans, financial innovation has been an indispensable factor in man’s advance from wretched subsistence to the giddy heights of material prosperity that so many people know today. The evolution of credit and debt was as important as any technological innovation in the rise of civilization, from ancient Babylon to present-day Hong Kong. Banks and the bond market provided the material basis for the splendours of the Italian Renaissance. Corporate finance was the indispensable foundation of both the Dutch and British empires, just as the triumph of the United States in the twentieth century was inseparable from advances in insurance, mortgage finance and consumer credit.[ref]The Ascent of Money: A Financial History of the World, pgs. 2-3.[/ref]

What was Jesus’ economic world like? Religious studies scholar Philip Harland explains,

First, the ancient economy of Palestine was an underdeveloped, agrarian economy based primarily on the production of food through subsistence-level farming by the peasantry. The peasantry, through taxation and rents, supported the continuance of a social-economic structure characterized by asymmetrical distribution of wealth in favor of the elite, a small fraction of the population. Peasants made up the vast majority of the population (over 90 percent…)…[W}ealth in the form of rents, taxes, and tithes flowed toward urban centers, especially Jerusalem (and the Temple), and was redistributed for ends other than meeting the needs of the peasantry, the main producers. The city’s relation to the countryside in such an economy, then, would be parasitic, according to this view (pg. 515).

Bruce Longenecker of Baylor University provides the following estimates about Greco-Roman urban life (pg. 264):

3% of the population was wealthy (e.g., imperial to municipal elites).
17% had a moderate surplus (something like a middle class).
80% were just above, just at, or just below the subsistence level.

According to economist Edd Noell,

The direction of income to particular favored groups shaped attitudes toward wealth accumulation in first-century Palestine. Indeed, in the New Testament era, it can be argued that the rich or wealthy “as a rule meant [those who were] ‘avaricious, greedy’” (Malina 1987, 355), rather than those who held a specific level of net worth. The wealthy obtained their standing by extractive or redistributive actions; resentment was generated toward these individuals who “impose tributes, extract agricultural goods, and remove them for ends other than peasants want” (Hanson and Oakman 1998, 113). This notion dovetailed with the notion that participation in the economy was a zero-sum game. Schneider asserts that in Palestine “the rich were very often (though not always) people who had made a bargain with the devil Rome”; the gouging of the typical farmer through overpayment of taxes and other means suggests that “we will comprehend the New Testament better if we understand that financial advantage in Israel often implied direct involvement with political evil and injustice” (2002, 121). Hanson and Oakman add that “rich and powerful people could be looked upon as robbers and thieves as much as benefactors” (1998, 111) (pgs. 100-101).

Interestingly enough, this seems to fit the distinction between extractive and inclusive institutions outlined by Acemoglu and Robinson in their book Why Nations Fail: The Origins of Power, Prosperity, and Power. Reviewing their book, philosopher Bas van der Vossen comments,

Inclusive institutions empower people across society, and thus tend to benefit all. Extractive institutions empower only some, and thus tend to benefit only small groups of people…On the economic side, inclusive institutions secure people’s rights to private property, including private property rights over productive resources, and allow these to be held broadly across society. These allow societies to experience the kinds of specialization, exchange, investment, and innovation that increase productivity…Extractive economic institutions, by contrast, are those that limit or altogether prevent the ability of people across society to individually own private and productive property, engage in commercial and profit-seeking activities, and enjoy the fruits of their investments and innovations. Such institutions stifle productivity.

…It is important to stress here that Acemoglu and Robinson do not deny that economic growth can occur under extractive institutions. Such ‘extractive growth’ can happen either because of strong policies of state investment in highly productive sectors of the economy (as in Caribbean slave-economies from the sixteenth until the eighteenth century, or the Soviet Union until the 1970s), or because pockets of inclusive economic institutions exist in a larger extractive setting (as in South Korea in the 1960s and 70s).

But such growth never lasts. Extractive economies sooner or later stop growing, or collapse altogether, due to a lack of innovation, state incompetence, conflict and corruption, or the withering away of whatever small inclusive parts may have existed. Only inclusive economic institutions, protected by inclusive political institutions, can offer the kinds of sustained investment, innovation, flexibility, and creative destruction that create a continued path of growth and prosperity (pgs. 68-69).

But here’s the clincher:

The philosophical literature on global justice and ethics contains disturbingly many theories that proceed in ways that are strangely disconnected from the best empirical studies about poverty and prosperity. Sometimes the empirical insights are simply set aside or even ignored. And even those who do engage with them or focus on the role of institutions frequently fail to see the forest for the trees. Hence, we read proposals for new global institutions (ignoring that the quality of domestic institutions is at least as important), we see arguments for extensive redistribution (ignoring that such policies will be counter-productive if not accompanied by institutional changes in developing countries), and so on.

The most important lesson that Why Nations Fail (and other works like it) contains for philosophers working on global justice is this: getting our economic institutions right is just as important as getting our political institutions right. And the evidence strongly indicates that this means endorsing market societies, with strong property rights over private and productive resources and economic freedom for all.

It is hard to say why these facts have been ignored or denied by philosophers for so long. Perhaps the hostility toward inclusive economic institutions is that they are seen as contestable parts of neoliberal, libertarian, or other free market perspectives. But this is to miss the point. Among the most exemplary inclusive countries are European welfare states like Denmark, Sweden, and Germany. Strong property rights and robust economic freedom are compatible with a variety of redistributive policies. Why Nations Fail is far from a libertarian manifesto. And if even those countries are too much market-oriented for our taste, well, I propose we get over it. There is simply too much at stake (pg. 74).

Now what’s my point? Do I think Hart is wrong? No. Far from it. I think he’s absolutely right about the text and the early Christians. However, the text has a specific historical, economic, and socioreligious context. And this context explains the condemnations of wealth and the lack of concern for material prosperity.[ref]Oddly enough, some sociological and textual evidence suggests that even Jesus and his closest disciples were financially well-off.[/ref] But in a world that hasn’t ended, how are modern Christians supposed to apply these alien and radical teachings? What about the Bible’s concern for the poor?[ref]The Law of Moses had rules in place to make sure the poor were provided for (Ex. 21:2-6; 23:10-11; 22:25-27; Lev. 19:9-10; 25:3-7, 25-27; Deut. 14:28-29; 15:12-15; 24:19-21; 26:12-13). The prophets consistently reminded Israel and its rulers of their obligations to the poor (Isa. 10:1-4; Amos 2:6-7; 4:1; Ezek. 18). Oppressors of the poor were considered wicked (Ps. 37:14; Prov. 14:31) and God himself would provide and protect the poor (Isa. 41:17; Ps. 140:12). The prophetic concern for the economically disadvantaged continued with the ministry of Jesus, who declared his mission to involve “preach[ing] the gospel to the poor” (Luke 4:18). Christ taught that to feed the hungry and thirsty, clothe the naked, visit the sick and imprisoned, and host the stranger—“the least of these”—was to do so unto him (Matt. 25:35-40). In Jesus’ view, the one thing the rich man lacked was to “sell whatsoever thou hast, and give to the poor…and come, take up the cross, and follow me” (Mark 10:21). The Christian charge to care for the poor continued in the early Christian communities, with Paul seeking a collection for the poor of the Jerusalem church (Gal. 2:1-10; 1 Cor. 16:1-4; Rom. 15:25-27). See also Michael D. Coogan, “Poor,” in The Oxford Companion to the Bible, ed. Bruce M. Metzger, Michael D. Coogan (New York: Oxford University Press, 1993).[/ref] Does it matter that the poor in developed nations are richer than the rich in Jesus’ time and even today are some of the wealthiest people on the planet?[ref]Try playing around with different income adjustments at Giving What We Can. If you’re making $10,000 annually as a single person (a little over $2,000 below the 2017 U.S. poverty threshold), you’re still in the richest 20% of the world population. If you’re making $20,000 as a couple with two kids (over $4,000 below the 2017 U.S. poverty threshold), you’re still in the richest 20% of the world population. And this is just income. We’re not even touching on the innovations and technological advances that make life materially better today.[/ref] Does it matter that global markets and inclusive economic institutions have reduced extreme poverty to its lowest levels in human history?

Surely it matters. It has to. I can’t fathom that it wouldn’t. But this makes me ask a question that–as a committed Christian–bothers me a great deal: how relevant is the New Testament for today regarding practical matters? If the world hasn’t and isn’t ending any time soon, does it make much sense to “not worry, saying, ‘What will we eat?’ or ‘What will we drink?’ or ‘What will we wear?’” (Matt. 6:31, NRSV)? If the Kingdom of God is at hand, then financial concerns and the like are certainly trivial. But since the Kingdom is about 2,000 years late, what are we supposed to do? Concerns for and alleviation of the poor among early Christians must have been thought of as a relatively short-term deal, seeing that social and economic justice would be fully achieved in the soon-to-come Kingdom of God. But since we appear to be in for the long haul, do Jesus’ teachings need to be recontextualized? Do they need to be–to borrow Nephi’s words–“liken[ed]…unto us, that it might be for our profit and learning” (1 Ne. 19:23)? Or have we, as Hart suggests, truly strayed from the real intent of Christ’s words?

I’m not exactly sure. It’s a paradox I live with as one who is supposed to be a “stranger and pilgrim” (1 Peter 2:11) in a world that is getting better by virtually every empirical measure.[ref]Granted, I belong to a church that believes in continuing revelation, which somewhat eases the tension. But Mormonism is full of its own paradoxes.[/ref]

Maybe the paradox is the point. But it sure sucks at times.

Are We Mismeasuring Economic Growth?

December 22, 2017November 1, 2017 by Walker

According to a new Economic Letter from the San Francisco Fed, we may be failing to account for the economic growth brought about by creative destruction. The authors write,

[O]ne needs to keep in mind that measured productivity growth is designed to capture growth in market activities. Thus, it may not fully capture the growth in people’s economic welfare because it misses out on important dimensions such as increasing lifespans and rising home production. So, even if the measurement is correct, a slowdown in measured productivity growth does not necessarily reflect a slowdown in welfare growth. For example, many recent IT innovations involve nonmarket activities such as time spent on social media and time saved from shopping online. Although these areas may improve welfare, they have not historically been covered by productivity measurements, so ignoring them cannot directly contribute to any growing understatement of market-sector growth.

This Economic Letter focuses on measuring growth from innovation in parts of the economy that have traditionally been within the scope of productivity measurement. Past research has found that measurement problems in the IT sector associated with market production and offshoring activities cannot explain much of the growth slowdown (see Aghion et al. 2017 for references). In this Letter, we consider whether errors in measuring innovation outside the IT sector can explain the substantial slowdown.

They continue,

When a product disappears without being replaced by a new version from the same producer in the same location, the BLS typically fills in or “imputes” the missing price and then starts tracking a new item. In particular, the BLS imputes inflation for the disappearing item to be the same as inflation for similar products that remain on the market. The BLS resorts to such imputation roughly twice as often as it directly estimates quality changes (Aghion et al. 2017).

In doing such imputation, the BLS assumes the inflation rate is the same for changeovers from old to new producers as it is for all surviving items. This may not be an accurate assumption of the true values. Research since Schumpeter (1942) highlights growth driven by so-called creative destruction. Under creative destruction, new producers replace existing producers precisely because they introduce a product with a lower quality-adjusted price. The items that survive are those that do not experience creative destruction. Most of these surviving items have not been updated at all, according to the BLS. Hence, by using the inflation of surviving products to approximate the inflation rate of products that disappear, the BLS could be overstating the inflation rate of the disappearing products.

To quantify the extent of missing growth caused by imputation bias, in Aghion et al. (2017), we and our colleagues analyze the market share of incumbent producers—that is, the sales of incumbents relative to total sales. When two products have the same quality, the producer who sells at a lower price will sell more and hence have a higher market share. More specifically, a product whose price relative to its quality—quality-adjusted price—is lower will have a higher market share. By this logic, the market share of incumbent products shrinks when their quality-adjusted prices increase relative to products made by new market entrants. Imputation assumes that these inflation rates are the same, so that incumbent market shares should be stable. If instead incumbent market shares tend to shrink over time, then this would be a sign that imputation overstates the inflation rate for creatively destroyed products, leading to an understatement of growth. The more incumbent market shares shrink, the larger the bias.

Their measurements yield two main findings:

“First, we estimate missing growth to be about 0.6% per year on average from 1983 to 2013. By this estimate, roughly one-fourth of true growth is missed.”
“Second, while there are fluctuations, no clear trends emerge for missing growth. In particular, missing growth has not systematically increased over time, as reflected in the true growth series. There is a substantial decline in productivity growth post-2004 even after adjusting for missing growth.”

They conclude,

[W]e find that missing growth has been relatively constant over time, so true productivity growth has slowed, even after accounting for this bias. Although the bias does not explain much of the sharp decline in productivity growth, its magnitude is economically significant—nearly 0.6% per year on average, or about one-fourth of true growth.

Measuring real growth properly is useful for addressing a host of questions. For example, existing studies use measured inflation to calculate the real income of children relative to their parents. Chetty et al. (2017) find that 50% of children born in 1984 achieved higher incomes than their parents at age 30. Adjusting for missing growth would raise the real income of children about 17% relative to their parents, increasing the fraction of those who do better than their parents by a meaningful amount. Thus, to the extent that inflation is overstated due to imputed values, a larger fraction of children appear to be better off economically than their parents. This improvement in economic welfare can shine a bit more positive light on current conditions, despite the gloom of slower productivity growth.

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this:

Share this: