Economics

Is There a Difference Between Red State/Blue State Families?

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The outcomes of “red states” and “blue states” are often used to demonstrate the superiority/inferiority of whichever political ideology. But the following report on state-by-state family structures in The New York Times demonstrates the importance of proper analysis:

In the blue-state model, Americans get more education and earn higher income — and more educated, higher-earning people tend to marry and stay married. In Minnesota, New Jersey, Massachusetts and Connecticut, at least 51 percent of teenagers are being raised by both biological parents, among the highest rates in the nation. (That figure excludes families in which the two parents are together without being married; such arrangements are still rare — and less likely to last than marriages.)

The lowest rates of two-parent families tend to be in states that don’t fit either model: red states with the lowest levels of education or blue states with only average levels of education.

The entire article is worth reading and is full of useful information and links on family structure and child outcomes. Check it out.

Global Inequality Is Falling: More Evidence

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The Economist reported on a new study that finds that the “Gini coefficient of global inequality fell from 69 in 2003 to 65 in 2013. And median income rose from about $1,000 to $2,000 in just ten years.” The economists and authors of the study estimate that it will continue to plummet to 61 by 2035. As for annual income, the abstract states, “The number of people earning between US$1,144 and US$3,252 per year in 2013 prices in purchasing power parity (PPP) terms will increase by around 500 million, with the largest gains in Sub-Saharan Africa and India; those earning between US$3,252 and US$8,874 per year in 2013 prices will increase by almost 1 billion, with the largest gains in India and Sub-Saharan Africa; and those earning more than US$8,874 per year will increase by 1.2 billion, with the largest gains in China and the advanced economies.”

I’ve written about global inequality here before. Nathaniel and I have even published on the subject. This is utterly fantastic news.

New Study: Inequality and Innovation Trade-Off

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Economist Stan Veuger has an article in U.S. News on the costs of redistribution. “Traditionally more common,” he writes, “but recently under sustained assault from the left, is the view that there are tough trade-offs to be made, and that while there may be a role for redistribution, it comes at a cost: It reduces innovation and growth. A new research paper…provides new theoretical and empirical support for this view.” He explains the theory:

The capitalists receive income from the firms they own that derives from their proprietary cutting-edge technology if they recently innovated or from generally available technology if it’s been a while since they or their parents did. The workers either receive wages or become capitalists themselves by innovating and replacing the incumbents. Mark-ups on products and services based on cutting-edge technology are higher than from generally available technology, so the more innovation there is, the more income goes to the capitalists. Of course, the more productive research and development there is, the more often new entrepreneurs join the capitalist class, and the higher social mobility is – unless barriers to entry keep entrepreneurs out. And if research and development is more productive, the economy grows faster, ultimately benefiting workers as well.

Now, what does the evidence show:

To measure innovation, they look at patents granted per capita, between 1975 and 2010, in all 50 states and D.C. When they relate that measure to year-by-year measures of the income share earned by the top 1 percent, they find what their model predicts: More innovative states are also more unequal. And that’s not just because the wealthy few file more patent applications. They exploit variation in innovation driven by whether states have members of Congress on Appropriations Committees and by innovation in other states that they interact with a lot to show that such quasi-experimental variation in innovativeness, not driven by the mere presence of wealth, also actually causes inequality. But only when we measure equality as the share of income that goes to the 1 percent – broader measures of inequality are not much affected; those appear to be the product solely of some of the other trends I mentioned before, like skill-biased technological change.

However, the trade-off is more social mobility:

Remember the social mobility stuff? Well that shows up in the data as well. Areas that innovate a lot show precisely the kind of Schumpeterian dynamics that make income inequality a lot more palatable to most observers who are not of the bitterly envious variety: There may be big gaps between rich and poor, but the poor today still have a reasonable shot at becoming rich tomorrow. And do you know what areas get a lot less of both innovation and mobility? Places with tons of lobbying activity, where the incumbents keep the innovators out. All in all this research suggests that some 20 percent of the increase in the share of income going to the top 1 percent since the mid-70s was caused by innovation alone. That may not sound like that much – but of course, we can’t just eliminate only the inequality we don’t like and keep the inequality that incentivized people to innovate.

This seems to fit with the Thomas Sowell quote above: there are no solutions, only trade-offs. This new study also fits with past research on cut-throat US capitalism vs. cuddly Nordic capitalism, top earners and skill-biased technological change, and Schumpeterian profits.

Do You Own Your Stuff?

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John Deere 8760 farm tractor with a folded farm tractor disc attached driving down a country road in Indiana.
John Deere 8760 farm tractor with a folded farm tractor disc attached driving down a country road in Indiana.

It’s been a while since I’ve written about a technology issue, but a recent article from Wired deserves widespread attention: We Can’t Let John Deere Destroy the Very Idea of Ownership. If you didn’t know that John Deere wasn’t out to destroy the concept of ownership, you’re not alone. But it’s actually not a very new argument. The idea is that you may be able to own physical property, but you can only license software. The trouble, of course, is that an awful lot of physical property does you absolutely no good without the software to run it, and so if you don’t own the software you don’t really own the physical property either. What good is a tractor you can’t turn on? Or a car that won’t drive? There’s a reason that the verb for utterly breaking a piece of hardware by destroying the software is “bricked” as in “to render an electrical gadget as useful as a brick.”

I encourage you to read the article to learn more: it’s mostly about the Digital Millennium Copyright Act and whether or not property owners will be guaranteed the right to modify, hack, repair, tinker, and customize their own devices. I’m also curious to hear from folks–especially law-folks–who might know a little bit more about this issue than I do. It’s not like ownership is actually always a trivial concept, and figuring out how to split the rights of consumers to their own property vs. the rights of companies to control their software is probably not going to be a no-brainer in all cases.

Still, the lengths to which John Deere, General Motors, and other corporations seem willing to go to seem like some weird hybrid of amusing and sinister.

Forthcoming ‘Markets Without Limits’: An Excerpt

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Presidential candidate Bernie Sanders recently made headlines when he stated in an interview, “You don’t necessarily need a choice of 23 underarm spray deodorants or of 18 different pairs of sneakers when children are hungry in this country.” Many have criticized the comment, while others have labeled it “one of the most substantive of the campaign so far.” Over at Bleeding-Heart Libertarians, philosopher Jason Brennan of Georgetown University responded to Sanders with an excerpt from the forthcoming book Markets Without Limits: Moral Virtues and Commercial Interests. I’m quite excited for this volume and those interested in economics and the morality of markets should be too. Here is a snippet:

Philosophers advocate that we do what economists say doesn’t work and avoid doing what economists say does work. On this point, [philosopher] Bas van der Vossen rebukes his colleagues:

As a profession, we are in an odd but unfortunate situation. Our best philosophers and theorists develop accounts of global justice that are disconnected from the best empirical insights about poverty and prosperity. Reading these theories, one might think that our best prospects for alleviating poverty around the world lie in policies of redistribution, foreign aid, reforms to the international system, new global institutions, and so on. And one might think that markets, property rights, and economic freedom are at best incidental, and more likely inimical, to the eradication of global poverty. Such ignorance, if not denial, of the empirical findings about development and growth is irresponsible.

We share van der Vossen’s concerns.

Mainstream development economics, in a nutshell, holds that the poverty is an institutional problem. More precisely, poverty is human being’s natural state. Poverty is normal and does not need to be explained, but wealth does. The main reason some nations are rich and others poor is not because some nations have better geography, better natural resources, or better genes. Rather, rich countries are rich because they have better institutions. Rich countries have institutions that incentivize growth and development. These institutions include strong private property rights, inclusive and honest governments, stable political regimes, a dependable and inclusive legal system characterized by the rule of law, open and competitive markets, and free international trade. Poor countries have institutions that fail to incentive growth and development, and often instead have institutions that encourage predation. These countries have weak recognition or active disregard of property rights, exclusive and dishonest governments, instable political regimes, undependable legal systems characterized by the capricious rule of men rather than the rule of law, and closed, rent seeking, crony capitalist markets, or few markets at all, and little international trade.

Check out the full excerpt and be sure to pre-order Brennan’s book. You can watch an interview with Brennan on his Why Not Capitalism? below:

The Great Gatsby Curve: A Brookings Conversation

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“Every so often,” announces the Brookings Institution, “an academic finding gets into the political bloodstream. A leading example is “The Great Gatsby Curve,” describing an inverse relationship between income inequality and intergenerational mobility. Born in 2011, the Curve has attracted plaudits and opprobrium in almost equal measure. Social Mobility Memos is taking a look at opinions from both sides of the argument.”

Thus far, there are posts by:

Check out the series.

Globalization Leads to Mass Human Flourishing

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That’s what Ronald Bailey argues in the June issue of Reason. What are his reasons? Globalization–which he defines as “the open exchange of goods”–produces:

  • Longer, Healthier Lives
  • Women’s Liberation
  • Less Child Labor
  • Faster Economic Growth
  • Higher Incomes
  • Less Poverty
  • More Trees
  • Peace
  • More Productive Workers
  • Better Job Prospects

Each section has a number of studies to bolster his claim. Check it out.

The Real Gap Between Worker and CEO Pay

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You’ve probably heard a lot about the growing gap between average worker pay and CEO pay. This seems like a legitimate concern, but I’ve had some questions about the data and the assumptions ever since I first started hearing the statistics. I would kind of expect, for example, that CEOs of larger companies would probably get paid more. So if you had two companies with 1,000 employees each and they merged and you ended up with one CEO of a company that had 2,000 employees, do you think he’d get a raise? So consolidation (which might be a bad thing for other reasons) might inflate the average worker to CEO salary ratio in ways that aren’t necessarily that bad.

In any case, the American Enterprise Institute[ref]A “center-right think tank.“[/ref] has a related critique of those figures. It turns out that most of them are based on a very small sample size (the WSJ looked at only 300 CEOs, the AP looked at only 337, and the AFL-CIO looked at 350). Not only are these samples small, but they’re also heavily skewed towards the biggest companies. And so, as the AEI points out, “Although these samples of 300-350 CEOs are representative of large, publicly-traded, multinational US companies, they certainly aren’t very representative of the average US company or the average US CEO.” Turns out, there are more than a quarter million CEOs in the country. Comparing average worker salary to the 350 or so from the biggest companies is like comparing average worker salary to the top 0.1% of CEO salaries.

If you do compare average worker salary to average CEO salary (which can be done, the data is available), then the gap drops from 331:1 to 3.8:1 and the apparent growth over the last 13 years disappears.

897 - Average Worker to CEO Pay

I think a realistic assessment of the statistics is important, but I’m not willing to go quite so far as the AEI: “We should applaud the richest 300-350 CEOs as a group of the most successful American business professionals.” I think there are real questions about whether CEO pay is really an accurate reflection of their contribution to the economy, and there are also serious questions about how compensation structure can create perverse incentives where high-paid executives take risky strategies that end up rewarding them when they win and penalizing the rest of us (via bailouts and economic downturns) when they lose. And do the top 0.1% of CEOs really need our applause? Aren’t their salaries enough?

 

 

In Which: People Respond to Incentives (and Patients Die) [RETRACTED]

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899 - Drugs

UPDATE: Commenter JohnM points out that the source for this story is a satirical website. I checked, and sure enough it even says “Earth’s Finest Medical Satire News Website” right at the top of the page.

896 - Satire

Obviously, I’m incredibly embarrassed. I put a lot of thought and effort into a story that is 100% fake. I’ve been tricked on the Internet before (who hasn’t?) but never so thoroughly. I was strongly tempted to delete this post and pretend it had never happened, but in the interests of transparency, I’ve decided to just add this note but otherwise leave it up in all its humiliating glory.

The discipline of economics has lost a lot of prestige since the start of the Great Recession, and there’s some validity to that.[ref]I’ve still got a particular ax to grind when it comes to dynamic stochastic general equilibrium models.[/ref] In addition, everyone writing about cognitive biases and irrational behavior likes to pound on economists for their assumption that humans are fundamentally rational agents. There’s even a snarky term for it: Homo economicus. Sneering at economists and their silly, unrealistic models of human behavior can be taken too far, however. The reality is that economists and their assumptions of human rationality actually do provide some pretty useful insights into human nature. Far and away the most useful of these can  be distilled into a simple mantra: people respond to incentives.

This is one of those things that seems obvious right up until you realize that it isn’t. Or, rather, that people (other than economists in particular) are really, really bad at keeping it in mind. Ergo, you get absolutely crazy ideas like paying doctors based on patient satisfaction. Now, if you’d asked an economist about that plan, they could have told you pretty quickly that it was a Bad Idea. But, since nobody bothered to ask an economist[ref]What do they know about human nature?[/ref], the study went right on ahead until someone looked at the preliminary data and realized that it had more than doubled patient mortality. Yes: this policy increased deaths by 238%. Oops.

Why? Because people respond to incentives. And so if you pay doctors for, in effect, how happy they make their patients than doctors will alter their behavior to make patients happier. Which, as it turns out, might not make them healthier. Or, you know, alive at all. Some examples:

The problem with linking reimbursement to patient satisfaction is completely flawed from the start.  Here’s an example.  A patient that weighs 340 pounds comes into your clinic.  We all know the healthiest intervention for this patient is weight loss.  However, if a doctor mentions weight loss to the patient and they get upset, guess what? Negative patient satisfaction survey, which could mean decreased reimbursement.  A doctor looking for increased reimbursement will possibly tell the patient that everything looks great and just keep doing what you are doing in eating those cheeseburgers.  Guess what, excellent patient satisfaction survey.

Here’s how non-economists react to this kind of thing. First, if you predict it ahead of time, they frown at you for your cynical, reductive view of human nature. Second, when it actually happens, they get frustrated with how callous and immoral people are. As a general rule, non-economists therefore tend to (1) vastly over-estimate the morality of human actors when confronted with perverse incentives and (2) attribute the consequences of perverse incentives to moral defects in certain classes of people. This explains Marxism’s ongoing popular appeal, by the way. It incorporates both the naive faith in centralized planning and communal ownership and also retroactive anger at the behavior of those at the top of the pyramid. The reality of the former (centralized planning and communal ownership) is that they don’t work. The reality of the latter (the evils of the capitalist class) is that rich people don’t become rich because their immorality lets them profit from exploitation. Rather, rich people tend to become exploitative because they are responding in predictable ways to their economic interests. In other words: people respond to incentives.

Now, don’t get me wrong. I’m not saying that incentives excuse bad behavior. I’m just saying that we should avoid conflating moral judgment (where the character of the individual means everything) with policy design (which is and ought to be one-size fits all). In terms of morality, you can get mad that people respond to incentives and wish they wouldn’t. You can even work hard to help people resist and behave in deliberate, rational, self-aware altruism. But please, please don’t design policy that depends on that! Because, as economists will tell you, people respond to incentives. And they’re very, very good at it.

Cherry picking healthy patients and avoiding sicker patients was clearly evident in the study.  “One physician told a dialysis patient that it was OK to skip a week of dialysis so that the patient could head down to Disneyland,” said an undercover internal medicine physician.

He had the patient fill out a glowing survey before leaving the clinic.  A week later when the patient returned with chest pain and peaked T waves, the physician forced his junior partner to see the patient, so that he could see teenager sports physicals.  For the physicals he just signed on the bottom line and had all patients in and out in 5 minutes.  He received glowing satisfaction surveys from parents due to the quickness of his exams, without ever laying a stethoscope on them.

You can sputter in rage about this kind of hypocritical profiteering all you want. I’m sure the designers of the study were angry as well as dismayed. But they still stopped the study. Better still? The should never have concocted such an absurd policy to test out in the first place. Here’s one more unintended consequence, by the way:

The study also showed an 858% increase in antibiotic prescriptions to patients with viral like symptoms in the survey group. Those patients developed more antibiotic resistant infections and C. diff than over the placebo group. ER physician, Dr. Rachel Kenners said, “If we don’t give antibiotics to patients who come to the ER for their runny nose and cough, than we are almost guaranteed a negative survey. To get paid and to keep our jobs, we have to prescribe antibiotics even though they aren’t warranted.”

 

Couple of final observations.

First, this particular study could have been improved vastly by changing the time at which patient satisfaction is measured. A lot of the problems were about short-run vs. long-term consequences. Tell somebody who is morbidly obese that everything is fine and they might be happy in the moment, but come back in a year and ask them then.

Second, I’m not saying that economists could have perfectly predicted the exact consequences of this policy. I do think that they would have been far more skeptical, but human beings are very innovative hackers. That’s part of our nature. And the doctors who actually lived in this system had a much greater incentive to figure out ways to game it than the scholars who came up with it. So, since people respond to incentives, you could hardly expect policy makers in general to be as clever at breaking the system as the people it will be applied to. But that itself is a lesson: be careful about trying to manipulate people with cleverly designed policies.

 

Secret to More Income or Marriage: Location

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Where you live affects both your income and your chance of getting married according to recent research by economist Raj Chetty and others at the Equality of Opportunity Project. Both studies were covered in a couple interactive articles in The New York Times. On location and income, the NYT reads,

Location matters – enormously. If you’re poor and live in the Dallas area, it’s better to be in Cooke County than in Kaufman County or Dallas County. Not only that, the younger you are when you move to Cooke, the better you will do on average. Children who move at earlier ages are less likely to become single parents, more likely to go to college and more likely to earn more. Every year a poor child spends in Cooke County adds about $210 to his or her annual household income at age 26, compared with a childhood spent in the average American county. Over the course of a full childhood, which is up to age 20 for the purposes of this analysis, the difference adds up to about $4,100, or 16 percent, more in average income as a young adult…These findings, particularly those that show how much each additional year matters, are from a new study by Raj Chetty and Nathaniel Hendren that has huge consequences on how we think about poverty and mobility in the United States. The pair, economists at Harvard, have long been known for their work on income mobility, but the latest findings go further. Now, the researchers are no longer confined to talking about which counties merely correlate well with income mobility; new data suggests some places actually cause it…“The broader lesson of our analysis,” Mr. Chetty and Mr. Hendren write, “is that social mobility should be tackled at a local level.”

You can actually check to see how your county stacks against others. Mine (Denton County, TX) is “about average in helping poor children up the income ladder. It ranks 1,171st out of 2,478 counties, better than about 47 percent of counties.”

But where you live doesn’t just affect income, but the odds of marriage:

The most striking geographical pattern on marriage, as with so many other issues today, is the partisan divide. Spending childhood nearly anywhere in blue America — especially liberal bastions like New York, San Francisco, Chicago, Boston and Washington — makes people about 10 percentage points less likely to marry relative to the rest of the country. And no place encourages marriage quite like the conservative Mountain West, especially the heavily Mormon areas of Utah, southern Idaho and parts of Colorado. These conclusions — based on an Upshot analysis of data compiled by a team of Harvard economists studying upward mobility, housing and tax policy — are not simply observations about correlation. The economists instead believe that they have identified a causal role that geography plays in people’s lives. The data, which covers more than five million people who moved as children in the 1980s and 1990s, suggests that children who move from, say, Idaho to Chicago really do become less likely to marry, even if the numbers can’t explain exactly why these patterns exist.

Political ideology isn’t the only thing that may encourage or discourage marriage. The Deep South encourages affluent children to marry, while discouraging low-income children of all races. Small towns (or low population density) also encourage marriage.

While this isn’t addressed in the articles, I’m curious if the influence on income and marriage are linked. Either way, Chetty’s work is very exciting. I’m watching him with growing interest.