Economics

The Future of Children: Marriage & Child Wellbeing Revisited

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Image result for future of childrenReaders of Difficult Run likely know that family structure and child well-being is a subject that I have spent quite a bit of time studying and reporting. It is this reason that I was excited to see this very subject revisited by the Princeton-Brookings collaboration The Future of Children in their October 2015 issue. According to the introduction article, this issue has a number of interesting points:

  • While many of marriage’s mechanisms “could be bolstered by public programs that substitute for parental resources—greater cash assistance, more generous health insurance, better housing, more help for caregivers, etc.—studies of child wellbeing that attempt to control for the indirect effects of these mechanisms typically find that a direct positive association remains between child wellbeing and marriage, strongly suggesting that marriage is more than the sum of these particular parts. Thus…the advantages of marriage for children are likely to be hard to replicate through policy interventions other than those that bolster marriage itself” (pg. 6).
  • “Cohabitation…is associated with several factors that have the potential to reduce children’s wellbeing, including lower levels of parental education and fewer legal protections. Most importantly, cohabitation is often a marker of family instability, which is strongly associated with poorer outcomes for children. Children born to cohabiting parents see their parents break up more often than do children born to married parents; in this way, being born into a cohabiting parent family sets the stage for later instability. On the other hand, stable cohabiting families with two biological parents seem to offer many of the same health, cognitive, and behavioral benefits that stable married biological parent families provide” (pg. 6).
  • Social science evidence indicates that “same-sex couples are as good at parenting as their different-sex counterparts. Any differences in the wellbeing of children raised in same-sex and different-sex families can be explained not by their parents’ gender composition but by the fact that children being raised by same-sex couples have, on average, experienced more family instability, because most children being raised by same-sex couples were born to heterosexual parents, one of whom is now in a same-sex relationship” (pg. 6-7).[ref]Which is actually something the controversial sociologist Mark Regnerus has stressed.[/ref]
  • “Race continues to be associated with economic disadvantage, and thus as economic factors have become more relevant to marriage and marital stability, the racial gap in marriage has grown” (pg. 7).
  • Causes of the retreat of marriage “include growing individualism and the waning of a family-oriented ethos, the rise of a “capstone” model of marriage, and the decline of civil society. The authors argue that these cultural and civic trends have been especially consequential for poor and working-class American families. Yet if we take into account cultural factors like adolescent attitudes toward single parenthood and the structure of the family in which they grew up, the authors find, the class divide in nonmarital childbearing among U.S. young women is reduced by about one-fifth” (pg. 7).

Check it out.

Angus Deaton: Nobel Prize in Economics

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Princeton economist Angus Deaton was awarded the Nobel Prize in economics earlier this week. “Deaton’s work,” reports Reason, “has focused on how to reconcile economic theory with economic data, specifically looking at various measures of well-being, health, inequality, consumption, and economic growth.” His book The Great Escape: Health, Wealth, and the Origins of Inequality is a nice summary of his work. Deaton’s work shows how crucial it is to compare models to reality. Furthermore, it is a nice reminder that the world in many respects is getting better.

Check out his lecture below.

Getting Rid of Borders

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New immigrants possess skills different from those of their hosts, and these differences enable workers in both groups to better exploit their special talents and leverage their comparative advantages. The effect is to improve the welfare of newcomers and natives alike. The immigrant who mows the lawn of the nuclear physicist indirectly helps to unlock the secrets of the universe.

So says economist Alex Tabarrok in a short piece in The Atlantic titled “The Case for Getting Rid of Borders–Completely.”[ref]Bryan Caplan made a similar case recently in TIME.[/ref] Better yet, he addresses what has become a buzzword among politicians: inequality. “Not every place in the world is equally well-suited to mass economic activity,” he writes. “Nature’s bounty is divided unevenly. Variations in wealth and income created by these differences are magnified by governments that suppress entrepreneurship and promote religious intolerance, gender discrimination, or other bigotry. Closed borders compound these injustices, cementing inequality into place and sentencing their victims to a life of penury.” And many want to keep it that way.

Those that supposedly care about inequality and poverty, but continue to hold protectionist and nationalist views, would do well to take Tabarrok’s words to heart.[ref]This includes politicians on both sides of the aisle.[/ref]

How Not to Reduce Inequality

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Double the taxes! Triple the taxes!

AEI’s James Pethokoukis has a blog post covering a recent Brookings study on the effects of “taxing the rich” on inequality. The study found that large increases to the top individual tax rate did little to reduce inequality, even when assuming explicit redistribution to the bottom 20 percent. Pethokoukis then draws attention to suggestions that have been made to reduce inequality:

Inequality researcher and best-selling author Thomas Piketty says “the main policy to reduce inequality is not progressive taxation, is not the minimum wage. It’s really education. It’s really investing in skills, investing in schools.” That would seem to reflect the idea, put forward by Steven Kaplan and Joshua Rauh, that technology and globalization have enabled the highly talented and educated individuals to manage or perform on a larger scale, “thus becoming more productive and higher paid.”

He continues to offer various, evidence-based reasons for rising inequality, including real-estate prices and better-paying firms.

Worth the read.

Sustainable Development Goals

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The UN recently had a meeting to unveil the Sustainable Development Goals. As The Economist reported,

Most of the SDGs’ predecessors, the Millennium Development Goals (MDGs), have been met, largely because of progress in China and India. But there were just eight of them, focused on cutting extreme poverty and improving health care and education, all clearly defined. By contrast there are 17 SDGs and a whopping 169 “associated targets”, covering world peace, the environment, gender equality and much, much more. Many are impossible to measure. They are “higgledy-piggledy”, agrees Lord (Mark) Malloch-Brown, who helped write their predecessors. A tighter focus and more precise definitions might have been wise. Even so, the SDGs are part of an important shift in thinking about development that is making it both more ambitious and more realistic.

What makes these new goals exciting is that they are attempting to sway “governments, private enterprise and civil society” into working “together to create open societies and open economies, end conflict and corruption, and enshrine the rule of law, free speech and property rights.” Furthermore, “the main reason there are so many is that they were set by consensus rather than written by a few specialists, mostly from rich countries. This lessens the feeling that rich men from “the north” are telling “the south” how to do better.” I’m inspired by this because “poor-country governments and rich-world aid lobbies have become less hostile in recent years to the idea that free markets and big business can help cut poverty. Multinationals were wary when the MDGs were unveiled, says Lord Malloch-Brown; now many are on board. And some rich-as-Croesus philanthropists, together with a bevy of market-friendly think-tanks, have started to monitor and measure the results of aid spending, and to search for ways to make it more effective.” In other words, governments and other institutions are worried about actually helping the poor rather than just feeling better about themselves by giving aid. The Economist concluded its report:

As the SDGs proliferate, donors are putting greater emphasis on measuring results and collecting data. They need data to be more disaggregated and to know where the poor are concentrated, as well as their ages, how they live and what sort of work they do. Advances in technology make this easier. Satellites can more precisely determine where forests are thinning, for example, or where crops are thriving or wilting. Among the SDG targets is one that calls for all births to be registered so that all children have legal identities, and their progress can be tracked…The MDGs were meant to create a social safety net; the SDGs to be fit for an age in which the standard of living in a big chunk of the developing world is creeping towards the levels of rich countries. The SDGs’ boosters, though admitting they will be harder to measure than the MDGs, let alone meet, hail them for going “beyond aid”.

Shkreli: Product of Capitalism or Red Tape?

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Martin Shkreli, hedge fund manager and founder of Turing Pharmaceuticals, has been described as the “most hated man in America” and an example of “everything that is wrong with capitalism” due to his company’s acquisition of the rights to the drug Daraprim and the jacking up of the price from $13.50 to $750 per pill. While incentives (a word typically associated with capitalist rhetoric) obviously played a role, it may not be due to the supposed exploitative underpinnings of capitalism and for-profit business. Blogger Will Wilkinson makes a number of important points over at the Niskanen Center on the perverse incentives created by regulation:

Bringing a copy of Daraprim to market would require filing an Abbreviated New Drug Approval with the FDA…The FDA is notoriously slow and the process is expensive…Shkreli was willing to pay such a huge sum because he could see that no Daraprim copies were in the regulatory pipeline, meaning that, for a time, he would have a monopoly and could reap monopoly profits by callously demanding exorbitant prices from patients who have no alternative to the drug. The scandal of Martin Shkreli’s profiteering tells us very little about capitalism, per se, but it does tell us a lot about the perverse market incentives that overzealous regulation can create.

Drawing on an argument made by economist Alex Tabarrok, Wilkinson points how difficult it is to get a generic drug approved in the U.S., noting that “it’s illegal to sell imported generic versions of the drug that have not been independently approved by the FDA. Some of these generic brands have been blessed by European countries with perfectly sane and safe drug approval processes, but the U.S. won’t recognize foreign vetting, and insists on wasting resources, time, and lives with redundant oversight…If “capitalism” is a system of competitive markets in which prices adjust with supply and demand, then it definitely wasn’t capitalism, in that sense, that led Shkreli to charge $750 for something that costs pocket change on a free market. The culprit is a regulation…that makes it illegal for Americans to buy well-tested, imported generics on the open market.”

Finally, he places growing inequality at the feet of rent-seeking:

In an important new essay in National Affairs, Steven Teles, a political scientist at Johns Hopkins, points out that a fair number of the top 1% of earners owe a sizable part of their incomes to regulatory barriers to entry. Doctors, dentists, and lawyers all profit from licensing schemes that limit competition. Car-dealerships are, more or less, politically-granted concessions protected from competition. Government contractors and consulting firms that specialize in regulatory compliance reap outsized gains from heavily politicized markets. “[R]ents are pervasive in the fields of finance, entertainment, and technology,” Teles observes...[I]f Teles is right, regulation-loving progressives will need to reconcile themselves to the fact that the economic inequality and injustice they deplore may be driven in no small measure by regulations they might otherwise favor. This suggests that fighting inequality requires more than taxing America’s Martin Shkrelis more heavily—though it may require that, too. Pushing for a more equitable economy also means pushing for reforms like ending the ban on the importation of prescription drugs that have been deemed safe by, say, Canada or Germany. Which is to say, well-targeted “deregulation” is the egalitarian’s friend.

Wilkinson concludes by stating that “Martin Shkreli’s brazen legal fleecing would be impossible in an unfettered market. He bought himself a monopoly made entirely of health-and-safety red tape.” And while outrage is warranted, “we ought to be outraged also because Shrkeli’s racket is a straightforward consequence of stupid over-regulation and symptomatic of the way badly fettered markets generate injustice.”

Inequality and Efficiency: Not Caring vs. Having the “Wrong” Values

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813 - Ultimatum Game

Slate has a write-up that is ostensibly about the mystery of rising income inequality in the United States (and the “tepid” response), but is in actual fact more interesting as a case study in how bias works.

The setup is simple: researchers conducted a variant of the venerable “ultimatum game:”

The ultimatum game is a game in economic experiments. The first player (the proposer) receives a sum of money and proposes how to divide the sum between himself and another player. The second player (the responder) chooses to either accept or reject this proposal. If the second player accepts, the money is split according to the proposal. If the second player rejects, neither player receives any money. The game is typically played only once so that reciprocation is not an issue.

The twist in this case was that the researchers adjusted the rules so that giving money away was more or less effective. In some games, if you gave $1 to the other player[ref]Economists always refer to the participants as “players” even though the “games” in game theory are really not games at all.[/ref], the player would only get $0.10. In other cases, if you gave $1 away, the other player received $10. By looking at how much money people gave away vs. how how effective it was, the game purported to measure how the players valued equality vs. efficiency.

Let’s make this plain (more plain than the Slate piece) with a simple example where there’s initially $10 at stake. A player who values equality is going to try to have both players end up with the same amount of money. In a situation where there is low efficiency, they would give away about $9.00 to give the other player $0.90 and would keep $1.00 for themselves. This achieves equality, but it also means that both players (combined) have less than $2.00. In a high-efficiency scenario, they will give away $1.00 and the other player will get $10.00, leaving $9.00 for the original player. This means that the total amount of money (combined) is $19.00.

Now let’s look at a high-efficiency player. When giving is very inefficient, the player might give away $1.00, leaving the other player with $0.10 and keep $9.00. Now the two players have $9.10 (combined) whereas in the equality scenario, both players (combined) had just $2.00. When giving is very efficient, the player might give away $9.00, leaving the other player with $90.00 while they keep just $1.00. Now they players together have $91.00, while in the equality scenario the two players together had just $19.00.

In other words: a bias towards efficiency meant that the size of the pie available to both players might grow by roughly 500%.

Is that actually what happened in the results? I have no idea. The Slate article was vague. But it was more than just vague, it set up a really strange and forced dichotomy that suggests players had to value equality or… nothing.

Second paragraph:

But our results suggest that, at least when it comes to attitudes toward inequality, Fitzgerald is right: Elite Americans are not just middle-class people with more money. They display distinctive attitudes on basic moral and political questions concerning economic justice. Simply put, the rich place a much lower value on equality than the rest. What’s more, this lack of concern about inequality among the elite is not a partisan matter. [emphasis added]

Notice how this is not described as a trade-off between efficiency and equality. Even though that’s pretty much the entire point of the experiment, the Slate article treats efficiency as a non-issue beneath consideration, as you can see once again in the penultimate paragraph:

Our results thus shine a revealing light on American politics and policy. They suggest that the policy response to rising economic inequality lags so far behind the preferences of ordinary Americans for the simple reason that the elites who make policy—regardless of political party—just don’t care much about equality. [emphasis added]

This is a major problem because efficiency is a serious practical consideration. One obvious reason for this is the idea of externalities. Consider early-adopters. By definition, an early-adopter has to be relatively affluent in order to invest time and money in bleeding-edge products that don’t necessarily work that well and are quite expensive. The benefit to the rest of us, of course, is that by paying for the over-price, unstable versions of products, early-adopters ensure that the rest of us can buy the cheaper, more stable versions. This sounds frivolous, but something like it applies to virtually every technology that defines our modern existence, from the Internet to penicillin.

My point is not that I know the right way to balance efficiency (the size of the pie) with equality (the relative slices of the pie). My point is just that: it’s a tradeoff we have to make. We’re not going to do a very good job of having a reasonable, civil discussion about that trade off if we can’t even admit that it exists. (Looking at you, Slate.)

Walmart as Hero: 10th Anniversary of Hurricane Katrina

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Today is the 10th anniversary of Hurricane Katrina‘s destructive collision with the Gulf Coast. “The surge and battering waves smashed into levees, which collapsed, causing extensive flooding throughout the New Orleans region. Ultimately, 80 percent of New Orleans and large portions of nearby parishes became flooded, and the floodwaters did not recede for weeks. The National Guard was called in to help with evacuations. Thousands sought refuge in the New Orleans Convention Center and the Superdome, which were overwhelmed. It was one of the largest displacements of a population since the Great Depression, according to the NOAA.” The federal government’s response became highly politicized due to its multiple day response and lack of preparation. What is often overlooked is the response from the private sector. A case in point is Walmart. Though often maligned as nothing more than a greedy corporation, the incentives and preparation of Walmart allowed it to respond quickly and effectively to the Katrina disaster. As we reflect on the lessons learned from that day 10 years ago, we should attempt to learn the right lessons. Economist Steven Horwitz provides some of those below.

The Costs of Health Insurance Coverage

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There’s an oft-expressed view that getting all those people covered could actually save the health system money. The argument goes something like this: Once people have insurance, they’ll go to the doctor instead of an expensive emergency room. Or: Prevention costs far less than a serious illness down the road.

…This argument for the cost savings from universal health coverage makes some intuitive sense, but it’s wrong. There’s strong evidence from a variety of sources that people who have health insurance spend more on medical care than people who don’t. It also turns out that almost all preventive health care costs more than it saves.

So begins an informative New York Times article by Margot Sanger-Katz. She points out that the actuaries in 2014 “estimated that health spending that year jumped by 5.5 percent, a bigger rise than the country had experienced in five years. That’s actually not a huge increase by historical standards…But it still marks the end of an era of record-low spending growth in the system.”[ref]The author is careful to note, “Those facts don’t mean that giving people health insurance is a waste of money, since those dollars spent may improve their health and financial security. But there are only a few situations in which giving someone more health care will actually end up saving money.” People of good faith can argue over whether the increased costs are worth it.[/ref] There were three main reasons for this increase:

  1. Aging of the population and the sickness that comes with age.
  2. “[T]he improving economy, which will enable more people to afford medical care — or the time off from work it might take to attend to their health needs.”
  3. Obamacare’s expansive coverage.

It’s the third point that Sanger-Katz spends the article explaining:

There’s evidence about the link between insurance status and health spending from many sources. A famous randomized study of health insurance, started in the 1970s by the RAND Corporation, was designed to answer this exact question. It found that the less expensive you made it for people to obtain medical care, the more of it they used. That follows the pattern for nearly every other good in the economy, including food, clothing and electronics. The cheaper they are for people, the more they are likely to buy.

That finding was echoed recently by researchers who conducted another randomized controlled trial — this one of uninsured low-income people in Oregon. Low-income Oregonians who wanted to sign up for the state’s Medicaid program were placed in a lottery. Only some got the insurance, but the researchers tracked both groups. In the first year, they found that the lottery entrants who were given Medicaid spent more on health care than those who remained uninsured.

This is virtually what Nathaniel laid out over two years ago in his comparison of health insurance to a hypothetical food insurance. This is because the situation is, as noted above, basic economics:

One of the reasons for the political popularity of price controls in general is that part of their costs are concealed…Price controls are therefore particularly appealing to those who do not think beyond stage one…Artificially lower prices, created by government order rather than by supply and demand, encourage more use of goods or services, while discouraging the production of those same goods and services. Increased consumption and reduced production means a shortage…Quality deterioration often accompanies reduced production…Quality declines because the incentives to maintaining quality are lessened by price control. Sellers in general maintain the quality of their products or services for fear of losing customers otherwise. But, when price controls create a…shortage-fear of losing customers is no longer a strong incentive.[ref]Thomas Sowell, Applied Economics: Thinking Beyond Stage One, Revised and Enlarged Edition (New York: Basic Books, 2009), 54-55.[/ref]

The Long-Term Effects of the Minimum Wage

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Here at Difficult Run, we just can’t get enough of the minimum wage. Yet, that seems to be because there is so much good stuff to post about it. The Economist, for example, has a recent article that looks at three different studies regarding the long-term effects of the minimum wage:

  • In the first Isaac Sorkin of the University of Michigan argues that firms may well substitute machines for people in response to minimum wages, but slowly…Mr Sorkin crunches the numbers, using a model of the American restaurant industry in which companies choose between employees and machines. He investigates the effect of a permanent (ie, inflation-linked) increase in the minimum wage and shows that the tiny short-run effects on employment normally seen are fully consistent with a long-run response over 100 times larger. The lack of evidence for a big impact on employment in the short term does not rule out a much larger long-term effect.

  • In a second paper, written with Daniel Aaronson of the Federal Reserve Bank of Chicago and Eric French of University College London, Mr Sorkin goes further, offering empirical evidence that higher minimum wages nudge firms away from people and towards machines. The authors look at the type of restaurants that close down and start up after a minimum-wage rise. An increase in the minimum wage seems to push some restaurants out of business. The eateries that replace them are more likely to be chains, which are more reliant on machines (and therefore offer fewer jobs) than the independent outlets they replace. This effect has not been picked up before because the restaurants which continue to operate do not change their employment levels, so the jobs total does not shift much in the short run.

  • The third cautionary paper is from Jonathan Meer of Texas A&M University and Jeremy West of the Massachusetts Institute of Technology…Their results suggest that a 10% increase in the minimum wage, made permanent by linking it to inflation, could cut job growth by 0.3 percentage points a year. Over a long period, this could amount to a very large difference indeed, though the authors stress that such long-run extrapolations are difficult given the limited experience of such permanent changes. Worryingly, the effects on jobs growth they see are concentrated among people under 25, and those without a degree. These are vulnerable groups who risk being locked out of the labour force for good.

Give them a read.