Category Archives: Timothy Taylor is my Favorite Blogger

Changes in the distribution of net worth

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From an article in Bloomberg:

In 2007, half of families had a net worth of $139,700 or more and half fell below this level. By 2016, the midpoint dropped to $97,300 — a decline of $42,600. Families ranked in the top tenth of net worth have enjoyed a sizable gain since 2007: a $132,100 rise in net worth to reach almost $1.2 million.

As is common with reporting on these sorts of numbers, the writer makes it sound as if the families in each percentile grouping remained constant. In fact, the data do not tell us that families ranked in the top tenth of net worth in 2007 gained $132,100 on average. What they tell us is that the threshold for a family to be ranked in the top tenth rose by that amount. At the 50th percentile, the data tell us that the threshold for a family to be at that percentile dropped by $42,600. We cannot use these figures to say what happened to families that were at the 50th percentile in 2007.

I am not contesting the inference that the distribution of wealth became more concentrated. I am just asking for the wording to describe the precise meaning of the data rather than imposing a misinterpretation.

For more on the wealth survey, see Timothy Taylor.

Bobos and their children

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David Brooks writes,

The educated class has built an ever more intricate net to cradle us in and ease everyone else out. It’s not really the prices that ensure 80 percent of your co-shoppers at Whole Foods are, comfortingly, also college grads; it’s the cultural codes.

Status rules are partly about collusion, about attracting educated people to your circle, tightening the bonds between you and erecting shields against everybody else. We in the educated class have created barriers to mobility that are more devastating for being invisible. The rest of America can’t name them, can’t understand them. They just know they’re there.

And part of the cultural code is Progressivism.

Timothy Taylor writes,

In a society with a high degree of social and economic mobility, grandparents should not have much or any effect on the social and economic position that children attain as adults. Thus, on average you should expect your five grandchildren to be evenly distributed across the socioeconomic spectrum. More specifically, if the levels of income are ranked and then divided into five groups with equal numbers of people, or quintiles, or educational attainment is divided up into five quintiles, you should expect that one of your five grand children will end up in each of the five quintiles–from top to bottom.

Some grandparents in America would be delighted beyond words if they had a reasonable expectation of this outcome: that is, they would be thrilled if three of their five grandchildren were in the middle quintile or above. Other grandparents in America would be appalled by this outcome: that is, they would be dismayed and even horrified if three of their five grandchildren were in the middle quintile or below.

The upper-class Americans that Brooks labeled the Bobos behave as if they would be appalled to see their children or grandchildren experienced relative downward mobility.

An interesting question will be how well the Bobo signals correlate with skills going forward. As long as the correlation is high, the status equilibrium may be robust. If the correlation is low, then the status equilibrium may be more fragile.

Teleological political theory

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Timothy Taylor writes,

It can be hard for group with weak hierarchies to make decisions. Group members need to find a balance between making their own contributions in some areas but acquiescing to the group in others. To make this work, it takes a skilled political leadership with a combination of policy-related and hands-on managerial skills, together with group members who see themselves as acting in the context of a broader whole, not just as grandstanding individuals. The US political system seems lacking in these areas.

He is discussing Alan Blinder’s latest thoughts on political economy.

I think that Taylor (probably Blinder, also) starts with what I might call a teleological political theory. That is, the political process is trying to achieve some end. When you think of the desired end result as, say, the greater foodgood, then you wonder what sorts of individuals and reforms will best achieve that end.

An alternative perspective, which comes automatically to someone familiar with public choice theory or Austrian economics, is that markets and political processes produce outcomes on the basis of behavior. Behavior in turn is governed by incentives and cultural norms. Neither market processes nor political processes can be understood in teleological terms. You have to try to understand them as they are.

I think that the belief that we would have better political outcomes if we had “skilled political leadership with a combination of policy-related and hands-on managerial skills” is naive and dangerous.

The make-or-buy decision with respect to human capital

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From a National Academy of Sciences report:

As long-term employment becomes less common, new ways of providing for health care and pensions for all workers need to be considered that transcend their relationships with particular employers. For example, one option would be to institute portable pension plans administered by membership organizations dedicated to the well-being of their members.

Pointer from Timothy Taylor, who includes this quote from the report:

Many employers are increasingly viewing their relationship with employees as a short-term commitment rather than a lifelong investment. As Manpower Group CEO Jonas Prising recently put it, `Employers have gone from being builders of talent to consumers of work.’

Note, however, that this supposed decrease in the share of long-term relationships between employers and employees is not so evident in the data.

Still, I think that the trend is toward firms making more and more use of generic software. (I predicted this almost twenty years ago.) In fact, software-development specialists make more and more use of generic software.

Gary Becker developed the distinction between specific human capital, which is tied to a particular firm, and generic human capital, which can be used anywhere. The more that firms outsource non-core functions and make use of generic software the less they need to invest in specific human capital. Thus, they will tend to do less talent-building and act more like “consumers of work.”

Interesting Sociology

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From a Joint Economic Committee Report.

In the early 1970s, nearly seven in ten adults in America were still members of a church or synagogue. While fewer Americans attended religious service regularly, 50 to 57 percent did so at least once per month. Today, just 55 percent of adults are members of a church or synagogue, while just 42 to 44 percent attend religious service at least monthly.

…Between 1970 and the early 2010s, the share of families in large metropolitan areas who lived in middle-income neighborhoods declined from 65 percent to 40 percent. Over that same time period the share of families living in poor neighborhoods rose from 19 percent to 30 percent, and those living in affluent neighborhoods rose from 17 percent to 30 percent.

…Between 1974 and 2015, the share of adults that did any volunteering who reported volunteering for at least 100 hours increased from 28 percent to 34 percent.

Pointer from Timothy Taylor.

Interesting throughout. Some, but not all, of the findings relate to what I have called Narrower, Deeper, Older. That is, people are drifting away from the sort of lowest-common-denominator activities that require a modest commitment of time. Instead, people prefer narrower niche activities in which they become more deeply involved.

If you look at associational life in terms of the broader, shallower associations of 1960, our social capital is going down. But looking at it in terms of the narrower, deeper associations of today, the analysis is more complex.

Interfirm Inequality

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Timothy Taylor writes,

a rise in between-firm inequality suggests that the US and other leading economies are becoming a more economically segregated, in the sense that those with high pay and those with lower pay are becoming less likely to have the same employer. It means that the classic “American dream” success story, of someone being hired in the mailroom or as a secretary or janitor, and then getting promoted up the company ladder, is less likely to occur. Nowadays, those jobs in the mailroom or the secretarial pool or the janitorial work are more likely to involve working for an outside contractor. In that sense, some of the rungs on the bottom of the ladder of success have been sawed off.

My thoughts:

1. Perhaps there has been an increase in specialization and a decline in substitutability in labor. In the 1950s, there were a lot of good jobs around that anyone could be trained to do. Today, most of the good jobs require that you have a strong mix of training and credentials to get started. George Romney (Mitt’s father) rose through the ranks at a large automobile company. Today, his lack of formal training would make that impossible.

Note that if there has not been a decline in substitutability, then one is probably going to have a very difficult time explaining this “segregation” phenomenon using strictly economic analysis.

2. Perhaps the phenomenon can be explained in part by Tyler Cowen’s “matching” story. Even among people with equal levels of formal training, perhaps the strongest firms have gotten better at finding the workers with the greatest intangible strengths. Perhaps the ability to match in that way is what makes the strongest firms strong and what enables workers with great intangible strengths to get rewarded.

3. Perhaps what is needed and rewarded in today’s workplace is the ability to work adaptively in teams. That makes organizational culture a key determinant of success. A firm with a better organizational culture can maintain a large advantage over other firms. Such a firm can hire better workers and also reward them better.

4. Speaking of “culture matters,” I recommend Scott Sumner’s post on two Michigan cities.

The Case for Government Statistics

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Nicholas Eberstadt, Ryan Nunn, Diane Whitmore Schanzenbach, and Michael R. Strain write,

Objective, impartial data collection by federal statistical agencies is vital to informing decisions made by businesses, policy makers, and families. These measurements make it possible to have a productive discussion about the advantages and disadvantages of particular policies, and about the state of the economy. This document demonstrates a portion of the breadth and importance of government statistics to public policy and the economy.

Pointer from Timothy Taylor. who adds his endorsement.

Cynics who have read James Scott would mutter something about making the citizenry more “legible.”

So be it. I think that the private sector also benefits greatly from government statistics.

But are the data any good? Thomas Piketty, Emmanuel Saez, and Gabriel Zucman write,

Macroeconomics relies on national accounts data to study the growth of national income, while the study of inequality relies on individual or household income, survey, and tax data. Ideally all three sets of data should be consistent, but they are not. The total flow of income reported by households in survey or tax data adds up to barely 60% of the national income recorded in the national accounts, with this gap increasing over the past several decades.

Pointer from Mark Thoma.

The authors proceed to use this data to make dramatic pronouncements and to propose major policy changes. This is the sort of move that disturbs Russ Roberts and me. If you know that the data are too inconsistent to be allowed to speak for themselves, and you know that other methods of working with the data might yield very different results, why do you pretend to speak with the voice of divine revelation?

Jonathan Parker Discusses Financial Behavior

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In an interview format with Aaron Steelman. Pointer from Timothy Taylor. Interesting throughout. A few tidbits:

people don’t spend the money the week before it shows up — they spend it the week it shows up. And it seems like you’re going to have a lot of difficulty quantitatively fitting that little foresight into a life cycle model unless people are often literally liquidity constrained, absolutely at their debt limits.

…

What equilibrium supports high-fee mutual funds, index funds, and so on, and how does that change the flow of funds between the corporate and household sector and the pricing of risk?

a high propensity to consume correlates with low liquidity, which is useful for theorizing but also presents a little bit of a chicken-and-egg problem. Is it different preferences, objectives, or behavioral constraints that are causing both the low liquidity and the propensity to spend, or is it the low liquidity that is causing the lack of planning and high spending responses? So for many purposes, what I take my findings to mean is that the buffer-stock model is a quite reasonable model with one critical ingredient. The critical difference relative to the way I modeled households in the 2002 paper with Gourinchas is that I think there’s much more heterogeneity in preferences across households. While in that paper we looked at differences in preferences across occupation and industry, I think there’s just much more persistence in heterogeneity in behavior, consistent in the buffer-stock model with differences in impatience.

There is a significant portion of the population with above-median income and close to zero saving. I think it is hard to tell a story that explains that in terms of rational behavior. Remember, we are talking about a lot of people, not just a few random exceptions.

Household Services: I have a different take

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Timothy Taylor reports,

The value of household services was equal to about 37% of GDP in 1965, but is currently equal to about 23% of GDP.

Tyler Cowen implies that this is a bad thing.

I think of it this way.

“Household production” is inefficient. In the limit, if you produced everything you consume and consume nothing that you do not produce, then you will be at subsistence level–if you are lucky. Our standard of living depends entirely on specialization and trade.

If a surgeon mows her own lawn, it means either one of two things.

a) she likes to mow lawns, so this represents consumption; or

b) this is a market failure, and she would much rather get paid for doing another surgery and use that money to pay for lawn mowing and other things, but for some reason she cannot.

What the Commerce Department is doing is imputing a value to the time that people waste doing housework. All that tells us is the value is lost by not enabling those people to engage in specialization and trade instead of doing housework. It is a measure of market failure.

And of course this imputed (i.e., artificially made-up) value has gone down relative to GDP, because people (women, mostly) are spending less time on housework and more time engaged in specialization and trade. This means that there is less market failure nowadays than there was back then. We should be happy that the number is going down, and we should hope that it heads toward zero.

Economists, Empiricism, Humility, etc.

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Peter Dorman writes,

what passes for empiricism in economics at present is often deficient in an empiricist, self-critical spirit and methodology. At the same time, the debates over topics like the minimum wage, the effects of charter schools on educational outcomes and the like are on a vastly higher plane when they are about data sets and analytical assumptions than the certitude of my unquestioned beliefs against the certitude of yours. It’s also a cheap and not altogether forthcoming dodge to respond to econometric disputes with a flip “There is never a clean empirical test that ultimately settles these issues.” (Roberts) That’s a epistemology.

Pointer from Mark Thoma.

Adam Ozimek writes,

Calls for skepticism of empirical economists also need to be matched with “compared to what?” Often those arguing for more humility about empiricism aren’t actually embracing humility, but instead are making space for their own narratives that are no less humble. For example, Russ says he doesn’t know how many jobs NAFTA has created or destroyed because “thousands and thousands of jobs are created every month and it is very difficult, perhaps impossible to know which ones are related to NAFTA.” Certainly, humility with regard to this question is useful. But then at the end of that paragraph Russ tells us he believes “trade neither destroyed nor created jobs on net.” Zero is not the same as “I don’t know,” nor is it necessarily any more humble than some specific estimate with wide confidence intervals.

…Economists do disagree on whether the direct effect of immigrants on native wages is a small positive or small negative. But they agree it is small. It’s easy to take this conclusion for granted as somehow common sense. But the truth is that, in the absence of the empiricism, the claim that immigration has held back wages by 20% for everyone would be much harder to argue against.

Noah Smith adds,

Theories can be wrong, stylized facts can be illusions, and empirical studies can lack external validity. But where does casual intuition even come from? It comes from a mix of half-remembered theory, half-remembered stylized facts, received wisdom, personal anecdotal experience, and political ideology. In other words, it’s a combination of A) low-quality, adulterated versions of the other approaches, and B) motivated reasoning.

If we care about accurate predictions, motivated reasoning is our enemy. And why use low-quality, adulterated versions of theory and empirics when you can use the real things?

Pointers from Tyler Cowen, who adds

A lot of the bias in empirical methods comes simply from which questions are asked/answered.

I say “amen” to that. For example, in the health care policy debate, the empiricists at CBO are telling us how many people would “lose” their health insurance under the GOP proposal. If you want to, you can question the CBO’s empirical estimates (their forecasts for Obamacare were, in the words of Avik Roy, “way off”). But that is not where I think the debate should go.

Instead, I think we ought to be talking about the real meaning of “insurance” in the context of health care. I think we ought to talk about the pros and cons of individuals having less “coverage” and making their own decisions about medical procedures with high costs and low benefits vs. having more “coverage” but subject to restrictions placed on them by bureaucrats. I think we ought to be talking about the issue that Timothy Taylor raised the other day, namely, should we be spending less on medical services and more on other things that are conducive to better health. (Note that Taylor’s post is grounded in formal empiricism.)

Perhaps we ought to be listening to Dierdre McCloskey’s view that economics is a discipline that uses rhetoric. I think that Russ Roberts and I would complain about the pseudo-scientific rhetoric that gets used.

Noah Smith’s use of the rhetorical phrase “the real things” is an example of the sort of language that lacks humility. It implies that there is a great distance between casual observation combined with theoretical introspection on the one hand and formal empirical work on the other, with the implication that the latter dominates the former. I would say that in some cases it is the former that is unreliable and in other cases it is the latter.

I hope that we can all agree that a lack of humility consists of pretending to know something for certain when it is in fact doubtful. We can then argue about what sort of approaches to economics are conducive to humility or a lack thereof.

Again, I have a longer essay on this topic, but it will not appear until this summer.