Category Archives: income distribution-wealth-poverty

Guaranteed Income With Red Tape

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A commenter points me to this guaranteed income (GI) proposal.

With my preferred version of GI, the state requires welfare recipients to work for the private sector (not govt. jobs or non-profits), but allows everyone in program to “Choose Their Boss.” They are not required to take the highest paying jobs on offer.

There are many pitfalls here. Somebody could create a “job” that allows you to work from home and do nothing, as a way of enabling people to collect benefits. Somebody who now employs low-skilled workers at a market-competitive wage could use the GI program to replace those workers with below-market-wage workers.

My problem is not that the author is unaware of such pitfalls. He clearly is worried about them, and so his proposal includes a long list of regulations, many of which strike me as very costly to enforce. The package does not appeal to me.

Aspen Summit on Inequality and Opportunity

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The video is here. Pointer from Mark Thoma.

I cannot comment on the video, since I have not watched it yet. I was just amused by the concept of a conference in Aspen on inequality. Heaven forbid that they should hold their discussion in Ferguson, Missouri, or rural Ohio.

I’ve been to Aspen only once, also for a conference. I came away thinking that the best economic opportunity there is for a gigolo. I have never seen such a concentration of wealth, attractive, unattached older women.

Questions for Garett Jones

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After a quick reading of Hive Mind. The core issue is what he calls the paradox of IQ. That is, among individuals, the correlation between IQ and income is modest. However, among nations, the correlation between average IQ and average income is strong.

How does your high IQ raise my income? Think of four possible explanations for this paradox.

1. Statistical artifact.
2. Proximity effect–I earn more income by living close to people with high IQ’s.
3. Cultural effect–people with high IQ’s transmit good cultural traits to me.
4. Political effect–having people with high IQ in my jurisdiction leads to me enjoying better government.

Can we rule out statistical artifact? Put it this way. Suppose we chose 1000 people at random. Then we create 50 groups of them. Group 1 has the 20 lowest IQ scores. Group 2 had the next 20 lowest IQ scores, etc. Then we run a regression of group average income on group average IQ for this sample of 50 groups. My prediction is that the correlation would be much higher than you would get if you just took the original sample of 1000 and did a correlation of IQ and income. I think that this is because grouped data will filter out noise well. Perhaps the stronger correlation among national averages is just a result of using (crudely) grouped data.

Can we sort out between proximity effects, cultural effects, and political effects? Perhaps a natural experiment involving people from different cultures living moving to different jurisdictions, or people living close to one another but having different cultures?

The most parsimonious proximity effect could be capital per worker. Assume that people tend to invest close to home (Jones calls this the Feldstein-Horioka effect when it applies across countries). Then if high-IQ people invest more wisely, then I will have better capital to work with if I live close to high-IQ people. Or if high-IQ people invest more (because, as Jones points out, they are more patient), then I will have more capital to work with if I live close to high-IQ people. How well does capital per worker serve as a channel for transmitting someone else’s IQ to my income?

Another proximity effect would be strong complementarity in team production (what Jones, following Kremer, calls the O-Ring effect). If the value of my output depends on the value of others in a team, then I will be better off living close to people with high IQ’s.

What happens when you divide the U.S. into fifty states and put teach state into the database with other countries? My guess is that Mississippi will look really good on average income relative to average IQ when you compare it with Denmark. If so, is that because of high capital per worker in Mississippi? A higher trust culture? Or better overall governance than Denmark?

Null Hypothesis Watch

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David Autor and co-authors write,

Although family disadvantage is strongly correlated with schools and neighborhood quality, the SES gradient in the sibling gender gap is almost as large within schools and neighborhoods as it is between them.

Read the whole paper, which focuses on the question of why males from low-income families do poorly–even more poorly than females from low-income families. I view the quoted sentence as throwing some cold water on Raj Chetty’s view that neighborhoods make a big difference.

Solution Disconnected from Problem

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From a WSJ profile of Raj Chetty.

High-mobility metro areas have a combination of greater economic and racial integration, better schools and a smaller fraction of single-parent families than lower-mobility areas. Integration is lagging in Atlanta, he said. “The strongest predictors of upward mobility are measures of family structure,” Mr. Chetty said.

His proposal: move poor children to high-mobility communities and remove the impediments to mobility in poor-performing neighborhoods. He now is working with the Obama administration on ways to encourage landlords in higher-opportunity neighborhoods to take in poor families by paying landlords more or guaranteeing rent payment.

Pointer from Tyler Cowen.

The problem is family structure. The solution is engineering the spatial/income distribution of households. The connection is not there for me.

And if the problem is a need to improve teacher quality, then the solution is not for economists to run regressions on test scores. The solution is to put the power in the hands of people who care about quality and are close to the situation (i.e., parents), not in the hands of teachers’ unions.

Heterogeneity of Firms and Workers, Scarcity of Management Talent

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Jason Furman and Peter Orszag write,

Longstanding evidence (e.g. Krueger and Summers 1988) has documented substantial inter-industry differentials in pay—a mid-level analyst may have the same marginal product wherever he or she works but is paid more at a high-return company than at a low-return company. Newer evidence (Barth et al. 2014 and Song et al. 2015) suggests that much of the rise in earnings inequality represents the increased dispersion of earnings between firms rather than within firms. This is consistent with the combination of a rising dispersion of returns at the firm level and the inter-industry pay differential model, as well as with the notion that firms are wage setters rather than wage takers in a less-than-perfectly-competitive marketplace.

Pointer from Tyler Cowen.

I bristle at the phrase “same marginal product.” Modern workers are not widget-makers, and their value inside an organization is not visible to people outside the organization. Indeed, even within the organization, the value contributed by individual workers cannot be calculated with any precision.

I know someone, call him A, who works in information technology at a firm in a buggy-whip industry. One of his friends, call him B, just took a job at Google. Assume, probably correctly, that the difference between their two compensation packages is a lot wider than the difference in their skills. Some possibilities:

1. This is a disequilibrium situation. Information technology workers currently produce more value at Google than in the buggy-whip industry. In equilibrium, A will move out of the buggy-whip industry and go to work for Google.

2. This is an “efficiency-wage” equilibrium, in which Google pays B slightly more than B’s opportunity cost. This enables Google to be highly selective in who it hires and also to give B an incentive to provide top performance.

I am inclined toward (2). But in either case, the value of B’s work is high relative to B’s wage, which raises the question of why Google does not hire more engineers. Perhaps the value of the next engineer would be lower, because of management limitations at Google.

I think that the key factor here is that the collective management talent assembled at Google is scarce. It generates more value that the collective management talent at the firm in the buggy-whip industry.

What I am suggesting is that the value of a firm depends a great deal on collective management talent. This includes the skills of individual key executives as well as the team chemistry among them.

One of the challenges of maintaining a high-functioning management team is that the “tournament” to get to the top can become corrupt. That is, managers can start to get ahead by undermining other managers rather than by exercising better judgment. As this sort of corruption becomes widespread, a firm can rapidly deteriorate. For me, this is one of the most interesting phenomena in the sociology of organizations.

Income Causes Conscientiousness?

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The WaPo reports,

Not only did the extra income appear to lower the instance of behavioral and emotional disorders among the children, but, perhaps even more important, it also boosted two key personality traits that tend to go hand in hand with long-term positive life outcomes.

The first is conscientiousness. People who lack it tend to lie, break rules and have trouble paying attention. The second is agreeableness, which leads to a comfort around people and aptness for teamwork. And both are strongly correlated with various forms of later life success and happiness.

Look, I hope this is true. Just keep in mind that any study that found that instead money made no difference would never be written up and published.

A Short Read

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I was sent a review copy of On Inequality, by Harry G. Frankfurt. On p. 11, he writes,

a preoccupation with the condition of others interferes with the most basic task on which a person’s intelligent selection of monetary goals for himself most decisively depends.

I imagine that an egalitarian could respond: yes, I need to focus on calculating what it is that I need to be happy. However, I also need to be concerned that others are taking more than they deserve. High levels of inequality are a symptom that some people are taking more than they deserve. They are defectors in that sense, and it is important that the rest of us punish defectors and reward cooperators, who are people who take only what they deserve.

In other words, I do not think that the book will persuade anyone who does not already agree.

Life Expectancy and Income

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Timothy Taylor writes,

the reasons for this growing gap in life expectancy by income are not altogether clear. Some explanations clearly aren’t supported by facts. For example, although overall levels of tobacco use are down, the decline seems to have happened in much the same way across income levels, and thus can’t explain the life expectancy factors. Obesity levels are up over time, but they seem to be up more among those with higher incomes, so that pattern doesn’t explain a growing gap in life expectancy by income, either. One hypothesis recognizes that there is a correlation between education and health, and also between education and income, so perhaps factors related to education and health have become more important over time. For example, perhaps those with higher incomes are better at managing chronic diseases like high blood pressure or diabetes. But again, this is an open question. Other possible explanations are looking at how the nature of jobs and job stress may have changed over time for jobs of different income levels, or whether greater inequality in a society may create stresses that affect health.

Before you comment, note carefully the methods used to assess life expectancy.

My own view is that the distribution of conscientiousness has become more unequal over time, and this has implications for both income and life expectancy.

For a view the conscientiousness is the endogenous variable (rather than exogenous, as I think of it), see Elliot Berkman. Pointer from Mark Thoma. He has another post on a piece saying that educational inequality has widened. Again, I have the same diagnosis–that the distribution of ability has widened.

Study Not Needed

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Ray Fisman and Daniel Markovits write,

We measured attitudes toward equality by asking hundreds of Americans to distribute a pot of money between themselves and an anonymous other person. Our subjects weren’t making hypothetical choices in responding to the survey—their decisions affected how much real money they would get when the experiment ended.

Pointer from Tyler Cowen. I added the emphasis on “themselves.” That is very different from what redistribution means in political terms. There, it means redistributing other people’s money.

The authors seem to suggest that we should be surprised that rich progressives are reluctant to redistribute their own money. I do not think we needed an experiment to show this. I think we already know from their behavior that rich liberals are averse to redistributing their own money. I believe that surveys have shown that instead conservatives and people lower down the income ladder give larger shares of their income to charity.

Political support for redistribution is costless, especially compared with actually giving away some of your wealth.