Category Archives: Timothy Taylor is my Favorite Blogger

Judging the Education Olympics

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Timothy Taylor writes,

The OECD has also published its own first tabulation of these results, with much additional discussion, in OECD Skills Outlook 2013: First Results from the Survey of Adult Skills. It note that only three countries have below-average scores in all of these domains: along with the United States, the other two are Ireland and Poland. In a fact sheet summarizing the US results, the OECD writes: “U.S. performance is weak in literacy, very poor in numeracy, but only slightly below average in problem solving in technology-rich environments.”

Taylor sees this as an indictment of the U.S. educational system. I am not confident that better teaching methods would have produced adults with more skills. However, I am pretty sure that we could have gotten the same mediocre results while spending a lot less money.

A Finance Practitioner’s Perspective

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John Hussman writes,

the past 13 years have chronicled the journey of valuations – from hypervaluation to levels that still exceed every pre-bubble precedent other than a few weeks in 1929. If by 2023, stock valuations complete this journey not by moving to undervaluation, but simply by touching pre-bubble norms, we estimate that the S&P 500 will have achieved a nominal total return of only about 2.6% annually between now and then.

He uses the Shiller P/E ratio as his measure of over- or under-valuation. Thanks to Timothy Taylor for the pointer.

What I found even more interesting was a paragraph later in Hussman’s essay.

On careful analysis, however, the clearest and most immediate event that ended the banking crisis was not monetary policy, but the abandonment of mark-to-market accounting by the Financial Accounting Standards Board on March 16, 2009, in response to Congressional pressure by the House Committee on Financial Services on March 12, 2009. The change to the accounting rule FAS 157 removed the risk of widespread bank insolvency by eliminating the need for banks to make their losses transparent. No mark-to-market losses, no need for added capital, no need for regulatory intervention, recievership, or even bailouts. Misattributing the recovery to monetary policy has contributed to a faith in its effectiveness that cannot even withstand scrutiny of the 2000-2002 and 2007-2009 recessions, and the accompanying market plunges. This faith is already wavering, but the loss of this faith will be one of the most painful aspects of the completion of the present market cycle.

And I cannot resist the subsequent paragraph:

The simple fact is that the belief in direct, reliable links between monetary policy and the economy – and even with the stock market – is contrary to the lessons from a century of history. Among the many things that are demonstrably not true – and can be demonstrated to be untrue even with simple scatterplots – are the notions that inflation and unemployment are negatively related over time (the actual correlation is close to zero and slightly positive), that higher inflation results in lower subsequent unemployment (the actual correlation is positive), that higher monetary growth results in subsequent employment gains (the correlation is almost exactly zero), and a wide range of similarly popular variants. Even “expectations augmented” variants turn out to be useless. Examining historical evidence would be a useful exercise for Econ 101 students, who gain an unrealistic sense of cause and effect as the result of studying diagrams instead of data.

The Forgotten Sixties

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Frank Diebold reports,

I am sad to report that Lawrence R. Klein has passed away. He was in many respects the father of modern econometrics and empirical macroeconomics; indeed his 1980 Nobel Prize citation was “for the creation of econometric models and their application to the analysis of economic fluctuations and economic policies.”

Pointer from Tyler Cowen.

In my macro book, I talk about the 1960s as The Little Moderation, in order to stress its similarity to the Great Moderation of 1986-2007. However, another term might The Forgotten Sixties. Some of what has been forgotten is the excitement that was generated by macroeconometrics. Economists who made significant contributions in this area were awarded several of the early Nobel Prizes–Frisch and Tinbergen (1969, the first year of the Nobel in economics), Koopmans (1975), and Klein (1980). Yet I will venture to guess that one cannot find a single graduate school syllabus today that mentions the work of those laureates.

The same holds for the leading policy makers of the era. Who under the age of 50 has heard of Walter Heller or Otto Eckstein? I assume that Alan Greenspan will be long remembered and will continue to receive credit for the presiding over The Great Moderation (his culpability for the financial crisis is still being assessed). During the Little Moderation, the Federal Reserve received no credit. The Fed Chairman was William McChesney Martin, who today is remembered only for the “punch bowl” metaphor, which he evidently borrowed.* In the 1960s, everybody attributed good economic performance to fiscal policy, not to the Fed.

The macroeconometricians and the Kennedy-Johnson economists were at the top of the economics profession in the 1960s. As the Great Stagflation gathered force in the 1970s, they lost all of their prestige. Hence, the Forgotten Sixties.

*In October of 1955, he said,

The Federal Reserve, as one writer put it, is in the position of the chaperone who has ordered the punch bowl removed just as the party was warming up.

Pointer from Timothy Taylor.

The Age-Earnings Profile

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It’s changing, as Timothy Taylor reports.

In 2012, the typical workers [did not] reach the median level of earnings until age 30–four years later than their counterparts in 1980. And in 2012, while wages still drop off when people reach their early 60s, the decline is not as rapid or as far.

He cites a study by Anthony P. Carnevale, Andrew R. Hanson, and Artem Gulish.

From a PSST perspective, it makes sense that as the economy grows more complex it takes more time for young people to arrive at their comparative advantage. But there are no doubt other things going on as well.

Retirement and Wealth

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Timothy Taylor points to some sobering news.

those in the 1980s were more likely to be ready for retirement than those in the 1990s; those in the 1990s were more likely to be ready for retirement than those in the 2000s; and those in 2010 were least likely of all to be ready for retirement.

I know many people in close to 60 years old, currently living upper-middle class lives, with less than $200,000 in non-housing savings. I do not think they have thought ahead very far. Some questions:

1. What does this mean for their lifestyles during retirement? Less expensive meals? Less expensive vacations? Less choice about where to live?

2. What does this mean for their level of dependence on government benefits?

3. What does this mean for the prospects of reducing Social Security or Medicare benefits?

The Fiscal Multiplier

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An IMF paper writes,

there is even stronger evidence than before that fiscal multipliers are larger when monetary policy is constrained by the zero lower bound (ZLB) on nominal interest rates, the financial sector is weak, or the economy is in a slump.

Reading further, it turns out that some of the “evidence” consists of simulations of macroeconometric models, which I personally do not find convincing. Also, I would have liked to see more discussion of the the “monetary offset” issue.

The main point of the paper is that although the pre-crisis conventional wisdom was that discretionary countercyclical fiscal policy was not necessary, the post-crisis conventional wisdom is that it is a good idea. What I suggest in the book that I am writing is that this is normal in macroeconomics. That is, the conventional wisdom at time t always seems to be that the conventional wisdom at time t-1 is wrong. Yet if you think about what this model implies for the conventional wisdom at time t as viewed in time t+1, it is quite subversive.

Thanks to Timothy Taylor for the pointer.

Better Measures of Poverty

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Timothy Taylor writes,

Meyer and Sullivan used consumption data, and again they set up the calculation so that the poverty rate for consumption data is the same as the poverty rate for income data as of 1980…By this measure, the poverty rate almost reaches zero percent in 2007, before the Great Recession.

He is referring to a paper by Bruce D. Meyer and James X. Sullivan. Since it comes from a Brookings conference, you can read comments by others at the end of the paper. The commenters did not shoot it down.

The main reason for using a consumption-based measure is that poor people tend to under-report much of their income, such as the value of government-provided benefits. In other words, even if you think that income is the right variable to use for measuring poverty, consumption might be the best available proxy for income.

If the substance of the paper is correct, and poverty is at low levels in the United States, then there is a case for reducing benefits in order to reduce the high marginal tax rate that deters low-income people from working.

However, my own opinion, driven by anecdotal observation rather than data, is that poverty in the U.S. is nowhere near zero. Perhaps if people with low incomes made really good decisions about how to spend their money, then poverty would be near zero. However, over the course of their lifetimes, many people make many bad decisions, and as a result they will spend a lot of time dealing with financial adversity. The moral and practical implications of this view of poverty are not as clearcut as either a progressive or a conservative would like.

The Next Policy Frontier: Improving Parenting?

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Richard V. Reeves, Isabel Sawhill, & Kimberly Howard write,

interventions in parenting are politically unpalatable. Conservatives are comfortable with the notion that parents and families matter, but too often simply blame the parents for whatever goes wrong. They resist the notion that government has a role in promoting good parenting. Judging is fine. Acting is not. Liberals have exactly the opposite problem. They have no qualms about deploying expensive public policies, but are wary of any suggestion that parents—especially poor and/or black parents—are in some way responsible for the constrained life chances of their children.

Later, they write,

Forty-five percent of mothers with less than a high-school degree, and 44 percent of single mothers, are ranked as being among the “weakest” quarter of parents. At the other end of the scale, higher levels of income, education, and family stability all predict stronger parenting. There are also sizable racial gaps in parenting scores. Our analysis suggests that the biggest gaps are not between the helicopter parents at the top and ordinary families in the middle, but between the middle and the bottom. Forty-eight percent of parents in the bottom income quintile rank among the weakest, compared to 16 percent of those in the middle, and 5 percent of the most affluent.

Still later,

In our new paper, we estimate the effects of HIPPY on longer-term outcomes of participants. The goal of the program, offered when children are age three to five, is to effectively train parents to be their child’s first teacher. Families receive biweekly home visits from a paraprofessional for 30 weeks out of the year, along with biweekly group meetings. Parents are also given books and toys. A high-quality evaluation of the program found significant improvements in reading and school readiness in first grade. Using a microsimulation model—the Social Genome Model—we predict that HIPPY participants are 3 percent more likely to graduate high school, and 6 percent less likely to become teen parents. These are modest effects, but positive ones, given the importance of the outcomes.

Of course, if the improvements in readiness in first grade fade out, or prove impossible to replicate in subsequent studies….

Overall, this is an essay that is modest in its claims, and I give the authors kudos for that.

Pointer from Timothy Taylor.

U.S. Teachers and Foreign Teachers

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About a new OECD study, Timothy Taylor writes,

The quick bottom line: the average U.S. teacher faces a similar student/teacher compared to the average for teachers in other countries, but the relative pay of US teachers compared to the average wage is lower than the similar ratio in many countries, and the number of hours worked by US teachers is higher than in other countries.

It is possible that this shows that U.S. teachers are underpaid. However, I would be interested in the ratio of non-teaching staff to teaching staff in the U.S. vs. elsewhere. When I looked into Montgomery County, Maryland a few years ago, it seemed that the ratio of students to classroom teachers was more than double the ratio of students to employees. Suppose that the ratio of non-teaching staff to teachers is much higher in the U.S., which is what I suspect is the case. Perhaps those non-teachers help make life easier for teachers, in which case perhaps our teachers are not underpaid. Or perhaps those non-teachers do not help (they may even add work).

In any case, if you raise salaries in U.S. public school education, a huge amount of that money will go for non-teaching staff. I think we ought to know more about what those non-teaching staff contribute before we throw more money at them.

Other random issues to toss into the mix:

1. In at least some non-U.S. countries, teachers come from a higher part of the IQ distribution. In theory, we could get more able teachers by paying more money, but we also might have to change the role of unions.

2. There is very little reliable evidence linking education inputs to outcomes.

I would prefer to see parents spending their own money on education. If they believe that paying for schools with high teacher salaries is a good idea, then we will arrive at an equilibrium with high teacher salaries. If not, then we won’t. I am comfortable with what emerges, especially considering (2).

The Decline of Marriage

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Julissa Cruz writes,

The proportion of women married was highest in 1950 at approximately 65%. Today, less than half (47%) of women 15 and over are married—-the lowest percentage since the turn of the century.

Pointer from Timothy Taylor.

Note also that Nick Schulz quietly published a short book on this topic. I have just started reading it.