Russ Roberts and Ed Glaeser on the secular decline in employment

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Strongly recommended. Glaeser says,

the changing nature of innovation has meant that there’s more of a complementarity between skilled workers and other skilled workers rather than between skilled workers and unskilled workers. And in some sense, I often say that sort of every non-employed American is a failure of entrepreneurial imagination. . .That’s one aspect. A second aspect is . . . between 1950 and 1992, the inter-county migration rate–meaning the share of Americans who moved across county borders in every year–was never less than 6%. . . since 2007, it has never been above 4%. . . .prior to 1960 people moved to higher income areas. So, the farmers moved to Detroit. They moved to Chicago. The Okies in the Great Depression moved to California. So, there’s this migration to high-income areas. We’ve seen much less of that over the last 30 years. Particularly for less-skilled Americans. There’s very little that’s directed toward high-income areas. And, one possible explanation for this is that this has to do with the restrictions that we’ve put on housing markets in these areas. That, yes, you could find work in Silicon Valley if you are a less-skilled person working in, you know, a variety of service industries; but you are going to have to pay for housing in that area. And, the overall deal doesn’t look particularly good when you are kind of happy sitting there at home in Kentucky. So, this migration has really shut down dramatically; and that’s a second change.

These comments elaborate on an essay that Glaeser wrote last year, which I linked to when it first came out.

Inter-generational mean reversion

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Tyler Cowen, among many others, is intrigued by a study by Raj Chetty and others showing downward mobility of black males.

My view, which I came to in the process of reading Gregory Clark’s study of long-term heritability of income, is that inter-generational income has a large heritable component and a large random component. Over several generations, the random component washes out. But for the difference across a single generation, the random component matters.

This model suggests that when someone’s income is far above (below) the heritable component, it will revert to the mean. Children will do worse than parents who have enjoyed a positive shock and they will do better than parents who have suffered a negative shock.

If the shocks to income were normally distributed, then mean reversion would not produce any systematic pattern of children falling below parents or rising above them. So you would not expect the Chetty result in that case.

But what if the random component is not normally distributed? Suppose that what you observe in one generation are a few really large shocks on the up side, with a lot of smaller negative shocks on the down side. The next generation will then have some apparent big losers and a lot of apparent small winners. Depending on how you sort the data (Chetty appears to be looking at measures of income based on rank rather than absolute level), Chetty’s result could be an artifact of the random component. It might be that if he were to measure incomes three or four generations apart, the apparent downward mobility would disappear.

William Galston on immigration, sovereignty, and populism

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He writes,

make peace with national sovereignty. Nations can put their interests first without threatening liberal democratic institutions and norms. Defenders of liberal democracy should acknowledge that controlling borders is a legitimate exercise of sovereignty, and that the appropriate number and type of immigrants is a legitimate subject for debate. Denouncing citizens concerned about immigration as bigots ameliorates neither the substance nor the politics of the problem. There’s nothing illiberal about the view that too many immigrants stress a country’s capacity to absorb them, so that a reduction or even a pause may be in order. No issue has done more than immigration to feed populism, and finding a sustainable compromise would drain much of the bile from today’s politics.

Galston is likely to be regarded by the left as a traitor, much as David Brooks is viewed as a traitor by the right. If so, then this reinforces my view that if we had a proportional-representation parliamentary system, the center-left and center-right parties would be collapsing.

Clarification: the null hypothesis

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A reader asked for this.

The term “null hypothesis” comes from statistics. The word “null” means “no effect” and the null hypothesis is that an intervention has no effect on the outcome. If you were testing the effectiveness of a drug, the null hypothesis would be that the drug works no better than a placebo. If you do a study and you do find that the drug works better than the placebo, and this is not likely just an accident, then you reject the null hypothesis.

I apply the term “null hypothesis” in the context of education. My observation is that most of the time when an intervention in education is evaluated rigorously, it has no effect compared to a control group, or the effect wears out over time, or the effect cannot be duplicate in repeated experiments or at large scale.

Russ Roberts on worker exploitation

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He writes,

When free-market types like myself hear about a worker who is made uncomfortable by inappropriate language or inappropriate physical contact on the job, our usual response is: quit. You don’t have to work for a crude, or worse — abusive boss. And of course, you are free to quit, and many do. But what is clear from the MeToo moment we’re in is that many people couldn’t quit. Or at least they felt they couldn’t. They stayed in abusive work relationships. Women privately shared information about who to stay away from and who not to be left alone with. But they often stayed on the job and endured humiliation, gross discomfort and sometimes, much worse.

It’s a long, sensitive, thought-provoking essay. The issue is whether workers are only treated well if employers are “nice,” either by choice or by government dictate, or whether the forces of competition are sufficient to protect workers. My thoughts:

1. Russ brings up sexual harassment in Hollywood, which indeed does look like exploitation. I do not see how this phenomenon would have developed if there weren’t a very high ratio of wannabe actresses to prominent film producers.

2. I think that as the economy becomes increasingly specialized, it becomes harder for competitive forces to work in employer-employee relationships. The specialized worker has fewer firms to choose from, and the firm needing specialized skills has fewer workers to choose from. This creates more scope for social norms and idiosyncratic negotiating skills to affect compensation levels.

3. The phenomenon that I talked about, consolidation, also is a factor. If my hypothesis is correct that differences in executive skill at overseeing and deploying software are driving consolidation, then I would expect the high-caliber management teams to attract the best workers, in part because they can afford to offer higher compensation. But the strong firms also have leverage, because workers want to affiliate with them for better long-term career development. Meanwhile, I would expect workers at firms with mediocre management to have no bargaining power, assuming that they do not meet the standards of the stellar firms. Poorly-managed firms are threatened with extinction, which gives their workers no scope for demanding more compensation.

4. Getting back to social norms, I hope that going forward women feel empowered to say no to harassers and to get help from HR departments or Boards of Directors in getting harassers removed. But I do not think that public shaming ought to be the weapon of first resort.

5. I am worried about what can be defined as harassment. Back in the 1950s, there was a presumption that “nice girls don’t.” A man had to be patient and seductive in order to get consent. With the sexual revolution, there no longer was a presumption that men had to be patient. But “seduction” minus patience is hard to distinguish from harassment. Some people, especially on college campuses, think that the solution is to make the process of obtaining consent formal to the point of being legalistic. I think we would be better off, in a lot of ways, if instead we could somehow get back to requiring patience.

Why consolidation?

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In my latest essay, More or Less Competitive?, I discuss the very important question of what accounts for the apparent consolidation within industries, with a few winners taking large market shares. I think that the role that software plays in the competitive environment is a big factor.

The strategic utilization of software becomes crucial when software is eating the world, as Marc Andreessen put it. Firms led by executives who quickly grasp the business implications of software and the Internet will win, and other firms will lose.

Read the whole thing (so far, not many people have).

Xprize for robotic telepresence avatar

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A press release announces,

Sponsored by ANA, Japan’s only 5-star airline, the winning team of the ANA Avatar XPRIZE will combine state-of-the-art technologies to demonstrate a robotic avatar that allows an untrained operator to complete a diverse series of tasks, from simple to complex, in a physical environment at least 100km away. Avatars must demonstrate the ability to execute tasks across a variety of real-world scenarios. In the future, avatar applications could help provide critical care and deploy immediate emergency response in natural disaster scenarios, stretching the boundaries of what is possible, and maximizing the impact of skill and knowledge-sharing.

Pointer from Peter Diamindis’ Abundance Insider email list, which I recommend.

I really like the robotic avatar idea.

Barriers to competition

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Commenter Handle writes,

That is, there is a kind of natural selection at work, and corporations – especially those in expensive developed countries – without some special insulation from upstart competition, or benefiting from barriers to entry, will not be able to stay strongly profitable, because some cheaper copycat abroad will be able to arbitrage and eat their lunch.

So, the survivors will all have a special something. A good and classic candidate for one of those special somethings is “positive economies of scale / scope” which includes matters related to “network effects.”

Another commenter writes,

In addition, we should consider the “social norms” multiplier effect on networks.

By this I mean, not doing things because of connections/compatibility (network effects) but doing things (buying particular products) because your community, peer group, etc. do. Or using a particular service out of habit (see amazon prime…)

Girard would say that we want things because our peers want them. The trick for the business offering X is to convince you that all of your peers really want X. Tesla has been successful at that among the tech crowd.

Also, I think that high-quality management is a source of competitive advantage. And that tends to promote concentration, because the firms that are less well managed fall by the wayside.

Carl Shapiro on anti-trust for tech

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The abstract says,

This article discusses how to move antitrust enforcement forward in a constructive manner during a time of widespread and growing concern over the political and economic power of large corporations in the United States. Three themes are emphasized. First, a body of economic evidence supports more vigorous merger enforcement in the United States. This can and should be done in a manner consistent with sound economic principles. Tighter merger control can be achieved by utilizing the existing legal presumption against highly concentrating mergers and by reinvigorating the potential competition doctrine to block mergers between firms that may well become important direct rivals in the foreseeable future. Second, close antitrust scrutiny is appropriate for today’s largest and most powerful firms, including those in the tech sector. However, the coherence and integrity of antitrust require that successful firms not be attacked simply because they obtain dominant positions. Proper antitrust enforcement regarding unilateral conduct by dominant firms should continue to focus on identifying specific conduct that harms customers or disrupts the competitive process, especially conduct that excludes pesky, disruptive rivals. Third, while antitrust enforcement has a vital role to play in keeping markets competitive, antitrust law and antitrust institutions are ill suited to directly address concerns associated with the political power of large corporations or other public policy goals such as income inequality or job creation. Campaign finance reform, tax policy, labor, education, and other policies are far better suited to address those critical public policy goals.

My emphasis. Pointer from Timothy Taylor.

I think that a lot of problems with the dominant firms in tech would go away if somebody were to come up with a subscription model that can displace the advertising model. With subscriptions, the interests of the consumer and the service provider are better aligned. Anti-trust is ill suited to fixing that.

Too much political identification

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Rebecca Newberger Goldstein writes,

I’m no fan of postmodernism, but I somehow doubt that this obscure academic ideology is responsible in any meaningful way for our post-truth woes. For one thing, the writings of postmodernists are so opaque and filled with jargon that I’ve often wondered whether the authors themselves have any idea what they’re trying to say. It’s hard to see how they could exert much influence outside of their own small coterie.

I would say instead that the downgrading of truth, both within the academy and without, shares a common cause—namely, the promotion of political ends above all else. We have lost the capacity to limit the reach of our ideologies and the identities that go with them. Perhaps modern life has so unsettled traditional identities that many of us have nothing better to fall back upon than the crude claims of politics. And it is certainly the case that new media bear some of the blame, with their unprecedented capacity to distort and heighten every point of ideological disagreement and to disseminate it far and wide.

My emphasis. I wish that politics would retreat. Instead, if we look at how businesses are feeling impelled to take stands on political issues, politics seems to be advancing.

Yuval Levin and I were speculating the other day that perhaps our society just wasn’t prepared to handle the media environment that has emerged. Maybe as we adjust and learn, the political tribalism will die down.