Economics

College Is Not the Great Equalizer

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That’s one takeaway from a recent post by Brookings fellow Beth Akers:

Essentially, does higher education succeed in lowering intergenerational “stickiness” of socioeconomic status?

Unfortunately, the evidence doesn’t paint as rosy of a picture as we’d like to see. New evidence shows that a college degree might be worth less if you’re raised poor. We can’t say for sure why this is the case, but it’s easy to imagine a number of reasonable explanations. For instance, it’s likely that students who grown up in poorer families attend lower quality institutions. The disparity in returns is so large that individuals who are born into poor families (the lowest quintile of the income distribution) and manage to graduate from college have the same chance of staying in the bottom income quintile as people who are born into rich families (higher income quintile) and don’t complete high school.

Another one is to ignore (or at least temper) the increasingly popular notion that a college education is about knowledge, not a path to higher income:

For a long time we’ve hesitated to talk about education as a financial investment, but that has a done a disservice to the students who can’t really afford the luxury of turning a blind eye to the economic consequences of their decisions. We need to empower students to make good decisions by publishing data on the labor market returns of each program of study covered by the federal student aid program. A large step on this front was taken last year when earnings data for each college was published on a government website. But program level information is also necessary so that students can choose courses of study that are likely to lead them to jobs that will make their college costs worth it.

She adds that we should seek ways to “reduce the risk of investing in higher education including a more robust income driven repayment system in the federal loan program, private market financial products that offer insurance to student borrowers and new business models that offer guarantees to students.”

Check it out.

European Labor Laws and Radical Islam

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The Boston Globe made this interesting observation last week in the wake of the terrorist attack in Brussels:

Long before Tuesday’s terror attacks in Brussels, it was clear that Belgium had become a breeding ground for Islamist extremists. Hundreds of Belgian Muslims — as many as 500, according to one estimate — have gone to Syria and Iraq to fight for ISIS, making Belgium by far Europe’s leading supplier of foreign jihadists. Last November’s horrific slaughter in Paris was masterminded by a Belgian radical, Abdelhamid Abaaoud, and at least four of the men who carried out those attacks were from the Brussels district of Molenbeek. One of them was Salah Abdeslam, who was captured in Molenbeek, after an intense manhunt, on March 19.

For Islamist imams and terrorist ringleaders, such neighborhoods — heavily Muslim, densely populated, with high unemployment and crime rates — have proved fertile territory for recruiting violent jihadists. “There is almost always a link with Molenbeek. That’s a gigantic problem, of course,” Belgium’s prime minister said after the Paris atrocities.

The article continues by explaining that “Muslim communities are not inherently predisposed to violence. The presence of a sizable Muslim population in a non-Muslim-majority country does not inevitably presage jihadist bloodshed or demands for the imposition of sharia. It is true that some 650,000 Muslims live in Belgium, but five times as many — 3.3 million — live in the United States. Why hasn’t America become a hotbed of Islamic extremism? Why aren’t American Muslims by the thousands flocking to fight for ISIS, Al Qaeda, and other terrorist organizations?” Drawing on Pew Research data, the columnist points out that the “United States has been far more successful at assimilating and integrating Muslim immigrants into American society and culture than has Western Europe.” And this is all despite the wars in Afghanistan and Iraq. In other words, “America’s melting pot still works.”[ref]Which is why Trump and Cruz should really shut their mouths.[/ref]

Much of this is surely cultural. But are there any economic factors involved? Journalist and Reason analyst Shikha Dalmia thinks so. “The standard explanation,” she writes, “is that Europe has admitted more Muslims than it can afford to integrate…Failure to spend money on integration means consigning these refugees to segregated Muslim ghettos or banlieues without jobs and without prospects — other than their monthly welfare check — where they become sitting ducks for radicalization.” But this narrative is flawed:

Immigrants don’t need job programs. They need jobs. And, for a variety of reasons, Europe provides much more of the first and America much more of the second. Europe has an army of social workers in various NGOs whose job is to prepare immigrants for jobs. Not so much in America, which may be partially why America has a far better assimilation track record than Europe. Jobs offer immigrants not just a paycheck, but also an entry into their new society, providing them with both the means and motive to learn its language and customs, all of which eliminates the need for formal programs. What is striking in any conversation with Syrian refugees in America is just how ready and willing they are to take just about any job, no matter how lowly or arduous…Yet many European countries have gone out of their way to deny or severely limit job opportunities for asylum seekers and refugees.

…Even after refugees obtain work permits, their upward mobility is greatly restricted in Europe, thanks to the exceedingly rigid labor market in many countries. The unemployment rates of France and Belgium are nearly twice that of the United States. This dismal job market affects immigrants much more than the native born, thanks to Europe’s tough minimum wage laws and other labor regulations that protect incumbents at the cost of newcomers…Europe’s tough hiring-and-firing provisions, demanded by labor unions, are poison for immigrants. Why? Because immigrants inevitably involve more risk and uncertainty than natives, and if employers can’t fire them, notes George Mason University’s Alex Tabarrok, they won’t hire them either. It is not surprising that Muslims in France, which has some of the most protective labor laws in the industrialized world, are two-and-a-half times less likely to receive job interviews than non-Muslims.

This counterintuitive explanation is worth considering.

 

 

Economics? It’s Science

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The Economist reported on a new study that should provide a glimmer of hope to econphiles and cause the discipline’s critics to give pause:

In a paper just published in Science, Colin Camerer of the California Institute of Technology and a group of colleagues from universities around the world decided to check. They repeated 18 laboratory experiments in economics whose results had been published in the American Economic Review and the Quarterly Journal of Economics between 2011 and 2014. For 11 of the 18 papers (ie, 61% of them) Dr Camerer and his colleagues found a broadly similar effect to whatever the original authors had reported. That is below the 92% replication rate they would have expected had all the original studies been as statistically robust as the authors claimed—but by the standards of medicine, psychology and genetics it is still impressive. One theory put forward by Dr Camerer and his colleagues to explain this superior hit rate is that economics may still benefit from the zeal of the newly converted. They point out that, when the field was in its infancy, experimental economists were keen that others should adopt their methods. To that end, they persuaded economics journals to devote far more space to printing information about methods, including explicit instructions and raw data sets, than sciences journals normally would. This, the researchers reckon, may have helped establish a culture of unusual rigour and openness. Whatever the cause, it does suggest one thing. Natural scientists may have to stop sneering at their economist brethren, and recognise that the dismal science is, indeed, a science after all.

Granted, the sample size is small compared to other replication studies. Nonetheless, it suggests that economics may well be the “dismal science,” but at least it is actual science.

The Current State of Minimum Wage Research

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I was reading a Facebook thread recently in which a commenter was complaining about Walmart’s supposedly “evil” business practices and low wages compared to, say, Costco. This same commenter then advocated for the now-popular $15 minimum wage. Readers of Difficult Run are well aware that some of us here have little love for minimum wage laws. Setting aside the reasons Walmart and Costco might pay differently or the net positive effects of Walmart on the economy, I’m just going to point to two recent San Francisco Federal Reserve publications by UCI economist David Neumark. The first summarizes the current state of research on the employment effects of the minimum wage:

Many studies over the years find that higher minimum wages reduce employment of teens and low-skilled workers more generally. Recent exceptions that find no employment effects typically use a particular version of estimation methods with close geographic controls that may obscure job losses. Recent research using a wider variety of methods to address the problem of comparison states tends to confirm earlier findings of job loss. Coupled with critiques of the methods that generate little evidence of job loss, the overall body of recent evidence suggests that the most credible conclusion is a higher minimum wage results in some job loss for the least-skilled workers—with possibly larger adverse effects than earlier research suggested.

As for recent increases in the minimum wage, Neumark makes the following estimate:

Thus, allowing for the possibility of larger job loss effects, based on other studies, and possible job losses among older low-skilled adults, a reasonable estimate based on the evidence is that current minimum wages have directly reduced the number of jobs nationally by about 100,000 to 200,000, relative to the period just before the Great Recession. This is a small drop in aggregate employment that should be weighed against increased earnings for still-employed workers because of higher minimum wages.

The second brief looks at the minimum wage’s effectiveness in reducing poverty and inequality. There are a couple complications:

One complication is research pointing to employment declines from minimum wage increases (see Neumark 2015), which means raising wages for some people must be weighed against potential job losses for others. In this case, whether a higher minimum wage on net helps poor and low-income families depends on the specific pattern of employment effects for different family types.

A second complication is that mandating higher wages for low-wage workers does not necessarily do a good job of delivering benefits to poor families. Of course, worker wages in low-income families are lower on average than in higher-income families. Nevertheless, the relationship between being a low-wage worker and being in a low-income family is fairly weak, for three reasons. First, 57% of poor families with heads of household ages 18–64 have no workers, based on 2014 data from the Current Population Survey (CPS). Second, some workers are poor not because of low wages but because of low hours; for example, CPS data show 46% of poor workers have hourly wages above $10.10, and 36% have hourly wages above $12. And third, many low-wage workers, such as teens, are not in poor families (Lundstrom forthcoming).

Considering these factors, simple calculations suggest that a sizable share of the benefits from raising the minimum wage would not go to poor families.

Both briefs are worth reading. Check them out. For me, it all goes back to what Thomas Sowell says: “There are no solutions; there are only trade-offs.”[ref]Sowell, The Vision of the Anointed: Self-Congratulation as a Basis for Social Policy (New York: Basic Books, 1995), 142.[/ref]

Other People’s Money: Millennials and Socialism

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Friedman

There’s been one underlying basic fallacy in this whole set of social security and welfare measures, and that is the fallacy – this is at the bottom of it – the fallacy that it is feasible and possible to do good with other people’s money. That view has two flaws. If I want to do good with other people’s money, I first have to take it away from them. That means that the welfare state philosophy of doing good with other people’s money, at it’s very bottom, is a philosophy of violence and coercion. It’s against freedom, because I have to use force to get the money. In the second place, very few people spend other people’s money as carefully as they spend their own. – Milton Friedman

 

A recent article in The Washington Post looks at the love affair between Millennials, Bernie Sanders, and the polarizing term “socialism.” The Cato Institute’s Emily Ekins explains,

Millennials are the only age group in America in which a majority views socialism favorably. A national Reason-Rupe survey found that 53 percent of Americans under 30 have a favorable view of socialism compared with less than a third of those over 30. Moreover, Gallup has found that an astounding 69 percent of millennials say they’d be willing to vote for a “socialist” candidate for president — among their parents’ generation, only a third would do so. Indeed, national polls and exit polls reveal about 70 to 80 percent of young Democrats are casting their ballots for presidential candidate Bernie Sanders, who calls himself a “democratic socialist.”

Ekins makes a couple of important observations:

  • “[M]illennials tend to reject the actual definition of socialism…”[ref]Italics mine.[/ref]
  • Countries like “Denmark aren’t socialist states (as the Danish prime minster has taken great pains to emphasize)…” In fact, Denmark “outranks the United States on a number of economic freedom measures such as less business regulation and lower corporate tax rates…”[ref]Will Wilkinson relies on the high amount of economic freedom in some of the Nordic countries to make a libertarian case for Bernie Sanders.[/ref]

But the real question is whether or not this youthful infatuation with socialistic policies will last. Ekins provides reasons to think not:

There is some evidence that this generation’s views on activist government will stick. However, there is more reason to expect that support for their Scandinavian version of socialism may wither as they age, make more money and pay more in taxes. The expanded social welfare state Sanders thinks the United States should adopt requires everyday people to pay considerably more in taxes. Yet millennials become averse to social welfare spending if they foot the bill. As they reach the threshold of earning $40,000 to $60,000 a year, the majority of millennials come to oppose income redistribution, including raising taxes to increase financial assistance to the poor. Similarly, a Reason-Rupe poll found that while millennials still on their parents’ health-insurance policies supported the idea of paying higher premiums to help cover the uninsured (57 percent), support flipped among millennials paying for their own health insurance with 59 percent opposed to higher premiums. When tax rates are not explicit, millennials say they’d prefer larger government offering more services (54 percent) to smaller government offering fewer services (43 percent). However when larger government offering more services is described as requiring high taxes, support flips and 57 percent of millennials opt for smaller government with fewer services and low taxes, while 41 percent prefer large government.

If previous generations are any indication (“both baby boomers and Gen Xers grew more skeptical of government over time”), the Millennial approval of big government may dwindle when they start having to pay for the programs they advocate. But an even greater takeaway–in connection with the notion that the world is getting better–is that “college students today are not debating whether we should adopt the Soviet or Maoist command-and-control regimes that devastated economies and killed millions. Instead, the debate today is about whether the social welfare model in Scandinavia (which is essentially a “beta-test,” because it hasn’t been around long) is sustainable and transferable.” In other words, “in the 20th-century battle between free enterprise and socialism, free enterprise already won.”

Are All the Income Gains Going to the Top One Percent?

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A new report by the Manhattan Institute’s Scott Winship looks at the claims regarding “the rich getting richer” and the top 1% making most of the gains since the Great Recession. Winship’s main findings include:

  • An accurate accounting of who is gaining and losing in the U.S. economy requires a broad view across an entire business cycle: while the richest households tend to gain the most during economic expansions, this is partly because they also lose the most during recessions.
  • In the current, ongoing, business cycle, real incomes declined between 2007 and 2014; the top 1 percent experienced nearly half of that total decline.
  • From 1979 to 2007, 38 percent of income growth went to the bottom 90 percent of households, amounting to a 35 percent increase ($17,000) in its average income.

Check it out. An excerpt can be found here.

The Inequality of Spending

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Over at The New Republic, a pair of economists report,

In a just-released study, we provide the first picture of actual U.S. inequality. We account for inequality in labor earnings and wealth, as Thomas Piketty and many others do. And we get to the bottom line: what does inequality in spending look like after accounting for government taxes and benefits? Our findings dramatically alter the standard view of inequality and inform the debate on whether and how best to reduce it. Our study focuses on lifetime spending inequality because economic well being depends not just on what we spend this minute, hour, week or even year. It depends on what we can expect to spend through the rest of our lives.[ref]Similar studies have been done in their measurement of poverty.[/ref]

The results?

First, spending inequality—what we should really care about—is far smaller than wealth inequality. This is true no matter the age cohort you consider. Take 40-49 year-olds. Those in the top 1 percent of our resource distribution have 18.9 of net wealth but account for only 9.2 percent of the spending. In contrast, the 20 percent at the bottom (the lowest quintile) have only 2.1 percent of all wealth but 6.9 percent of total spending. This means that the poorest are able to spend far more than their wealth would imply—though still miles away from the 20 percent they would spend were spending fully equalized.

The authors conclude,

The facts revealed in our study should change views. Inequality, properly measured, is extremely high, but is far lower than generally believed. The reason is that our fiscal system, properly measured, is highly progressive. And, via our high marginal taxes, we are providing significant incentives to Americans to work less and earn less than they might otherwise. Finally, traditional static measures of inequality, fiscal progressivity and work disincentives that a) focus on immediate incomes and net taxes rather than lifetime spending and lifetime net taxes and b) lump the old together with the young create highly distorted pictures of all three issues.

Check it out.

The Populist Trade Problem

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A recent article in Vox outlines the problem of anti-trade populism:

Bernie Sanders sells himself as a champion of the little guy. But talk to economists and development experts, and you hear something different: Sanders’s policies on trade would hurt the very poorest people on Earth. A lot.

Here is the basic issue. Sanders has, correctly, recognized that freer trade with countries like China has hurt a subset of American workers (while benefiting others). As a result, he opposes most efforts to open American markets to more international competition, and promises to roll back a number of previous trade agreements the US had made.

There’s one big problem, according to development economists I spoke to: Free trade is one of the best tools we have for fighting extreme poverty.[ref]See my SquareTwo article written with Nathaniel for some of the evidence of this claim.[/ref] If Sanders wins, and is serious about implementing his agenda, he will impoverish millions of already-poor people in China and Central America.

What’s worse is that the actual ways Sanders might roll back these agreements could lead to serious reprisals from the affected countries. The nightmare scenario, experts say, is a global slide toward protectionism, wherein China and other countries take cues from the US and impose their own retaliatory tariffs. That would devastate economies in the developing world, dooming many more millions to a lifetime of crushing poverty.

The piece demonstrates how trade has benefited the global poor, while recognizing it may negatively impact some American jobs (though the benefits of increased purchasing power through cheaper goods may outweigh the costs). However, Sanders is not the only candidate with backward policies when it comes to trade. Donald Trump, according to The New York Times, “is bringing mercantilism back. The New York billionaire is challenging the last 200 years of economic orthodoxy that trade among nations is good, and that more is better. He is well on his way to becoming the first Republican nominee in nearly a century who has called for higher tariffs, or import taxes, as a broad defense against low-cost imports.” These positions show why Trump and Sanders are far more conservative[ref]In fact, some recent research in political psychology “suggests that the personality characteristics that make someone culturally conservative will often tend to promote left-wing economic views, favoring redistributive economic intervention by the government.” This is likely due to the protectionist nature of left-wing economics.[/ref] and far more alike[ref]This includes some of their views on immigration.[/ref] than some would care to admit. This is perhaps why some political scientists are recognizing Trump supporters as populists: a label usually reserved for Sanders supporters. “Trump supporters share anti-elitism with only one other group: Sanders’s voters,” write one pair of political scientists in The Washington Post. “But where Trump is a populist, we would argue that Sanders is not. Despite the fact that Sanders often gets called a populist, his voters do not conform to the populist stereotype. They generally trust experts and do not identify strongly as Americans.” This may be true of Sanders supporters in some cases, but when it comes to economics, they reject the expertise and consensus of economists and embrace U.S.-centric protectionist policies.

From Gregory Mankiw’s Principles of Economics, 7th ed. (pg. 32).

A socialist Democrat and a Republican businessman drawing from the same economic playbook. I’m sure most didn’t see that one coming.

 

Why Growth Matters: An Interview with Jagdish Bhagwati

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This is part of the DR Book Collection.

Yesterday, a friend’s Facebook wall was blowing up with debates over the merits of libertarianism. One commenter wrote, “Libertarians should spend time in India or Pakistan to see what weak, ineffective government ultimately accomplishes.” My response was, “Just finished this yesterday.” I linked him to Why Growth Matters: How Economic Growth in India Reduced Poverty and the Lessons for Other Developing Countries by Columbia economists Jagdish Bhagwati and Arvind Panagariya. The book explains how the Indian pro-market reforms of the early 1990s have led to economic growth and consequently reduced poverty. Of course, the book does not argue in favor of a stateless utopia (there are a number of things listed in the book for the Indian government to do). But it does demonstrate how powerful and positive a force liberalization can be in the lives of the most destitute.

Definitely for those interested in developmental economics.

 

Equal Marriage Partners, Unequal Households

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The Don Drapers of the world used to marry their secretaries. Now they marry fellow executives, who could very well earn more than they do. With more marriages of equals, reflecting deep changes in American families and society at large, the country is becoming more segregated by class.

This is how The New York Times opens an insightful article on the topic of assortative mating. The rise in assortative mating (or class segregation: take your pick) is the changing “nature of marriage itself…It used to be about the division of labor: Men sought homemakers, and women sought breadwinners. But as women’s roles changed, marriage became more about companionship, according to research by two University of Michigan economists, Betsey Stevenson and Justin Wolfers (who also contributes to The Upshot). Now, people marry others they enjoy spending time with, and that tends to be people like themselves…Another reason people are finding mates like themselves is that they are marrying later, so they know more about their partners’ prospects and increasingly meet at work. People were least likely to marry those with similar educational backgrounds around the 1950s…when people married very young.” This is an international trend, with “40 percent of couples in which both partners work…belong[ing] to the same or neighboring income bracket, up from 33 percent two decades ago, according to 2011 data from the Organization for Economic Cooperation and Development, which includes 34 countries. Two-thirds have the same level of education.” The article concludes,

Researchers say the rise in assortative mating is closely linked to income inequality. The two have increased in tandem, Dr. Schwartz, the sociologist from the University of Wisconsin, said: “People who are married tend to be more advantaged, and on top of that, more advantaged people are marrying people like themselves, so those people tend to be doubly advantaged.”

The effects could become more pronounced in future generations. Studies tell us that parents’ income and education have an enormous effect on children’s opportunities and achievements — and children today are more likely to grow up in homes in which parents are more similar than different.

I’ve written about assortative mating before. It is becoming more and more apparent that this is a major player in the class divisions over the last several decades.