Friedman and Samuelson

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I think of Specialization and Trade as an attempt to redirect economics away from the path that it followed after the second World War. This recently produced the following train of thought.

Who has been the most influential economist since 1945? I am inclined to go with Paul Samuelson, and that is implicit in the book. But some people might have said Milton Friedman. In neither case, do I think that the influence on academic economists was good. [somewhat related: Tyler Cowen’s simple theory of recent intellectual history, which he apparently still propounds]

With the public, their impact differed. Friedman argued that people should admire markets and be wary of government. Samuelson said it the other way around. Those of us who agree with Friedman approve of Friedman’s influence. Those who agree with Samuelson disapprove of Friedman’s influence.

Back to academic economists. I think that both Friedman and Samuelson were guilty of promoting economic methods that involved imitating hard science (at least as they thought of science as being practiced). Instead, in my book I argue that economic analysis can yield frameworks of interpretation, but economic hypotheses are not verifiable the way that they are in chemistry or physics.

In macroeconomics, Friedman enjoyed influence starting in the 1970s, because the Solow-Samuelson Phillips Curve broke down and Friedman’s alternative view that emphasized monetary policy seemed to work better. However, my view is that both monetarism and Keynesianism are misleading as interpretive frameworks.

In fact, what started out as monetarism ultimately degenerated into deity-worship of the Fed chairman. First it was Paul Volcker, who slew the dragon of inflation. Then it was Alan Greenspan, the Maestro of the Great Moderation. Until in hindsight he became the Randian ideologue, who turned the banks loose to create a financial crisis. The crisis came on Ben Bernanke’s watch, and he is deified as the man who saved us from another Great Depression.

I think that the effect of each of those three on the economy is vastly over-rated. Instead, I think that financial markets and the economy in general simply took the course that they took, and story-tellers wrongly attribute the outcomes to the policies of the Fed at the time.

Testing for Housing Discrimination

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Commenting on an article by Sun Jung Oh and John Yinger, Timothy Taylor writes,

Overall, the findings from the 2012 study find ongoing discrimination against blacks in rental and sales markets for housing. For Hispanics, there appears to be discrimination in rental markets, but not in sales markets…

However, the extent of housing discrimination in 2012 has diminished from previous national-level studies.

What was most interesting to me was the method of testing for discrimination, which involved sending pairs of auditors of different races with otherwise identical characteristics to ask real estate agents for help finding apartments or homes. It would be interesting to see such a method applied to mortgage lending, rather than trying to make inferences from observed data.

Lunch Costs

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Abha Bhattarai writes in the WaPo:

An increasing number of Americans are ditching $10 sandwiches and $12 salads in favor of food from home, according to new data from the research firm NPD Group. Lunch traffic is slowing at restaurants around the country, with weekday lunch visits down 7 percent compared to a year ago, the steepest decline since the beginning of the recession, data show.

I found the article interesting, although I think you should take the statistical reporting with a grain of salt, pardon the pun.

I am not part of the dining-out culture, but I do not spend much time on food preparation.. Apart from a few fruits and vegetables, I tend to go with prepared foods from the store.

In general, I expect people to increase their consumption of food prepared by others. In a world of specialization and trade, the costliest lunch of all is the one that you spend a lot of time making yourself.

Child Care and Subsidized Demand

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Luke P. Rodgers writes,

Child care tax credits are intended to relieve the financial burden of child care expenses for working families, yet the benefit incidence may fall on child care providers if they increase prices in response to credit generosity. Using policy-induced variation in the Child and Dependent Care Credit and multiple datasets in both difference-in-difference and instrumental variable frameworks, I find evidence of substantial pass-through: between $0.73 – $0.90 of every dollar is passed through to providers in the form of higher prices and wages. Robustness checks confirm the pattern that the bulk of credits are crowded out by increased prices. Furthermore, the relative inelasticity of child care suppliers implies that increased non-refundable credit generosity may have the unintended effect of making child care less affordable for low-income families, though the magnitude of this conclusion is tempered by heterogeneous pass-through rates.

Pointer from James Pethokoukis.

I am surprised by the claim that supply is relatively inelastic. I wonder if that is true in the long run and, if so, why. Again, I do not think of the child care industry as politically powerful, so even though this perfectly illustrates my view that the public-choice outcome is subsidized demand and restricted supply, I want to be cautious about this one.

Once Again, Subsidize Demand and Restrict Supply

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John Cochrane writes,

Both Mr. Trump and Mrs. Clinton want to lower the cost and, presumably, increase the amount of child care. A quick economics quiz: What is the policy change that would have the greatest such effect?

I hope you answered: legal immigration of child care workers! And remove the large number of restrictions on providing child care.

In Specialization and Trade, I claim that public policy ends up subsidizing demand and restricting supply, which is almost always incoherent from the standpoint of traditional public goods. Usually, it is the suppliers of the good or service who push for such policies. However, the child care industry does not, as far as I know, have a formidable lobbying presence. Thus, I am inclined to bet that child care subsidies will not get very far in Congress.

Intellectual Yet Idiot

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Nassim Nicholas Taleb coins that phrase, writing

What we have been seeing worldwide, from India to the UK to the US, is the rebellion against the inner circle of no-skin-in-the-game policymaking “clerks” and journalists-insiders, that class of paternalistic semi-intellectual experts with some Ivy league, Oxford-Cambridge, or similar label-driven education who are telling the rest of us 1) what to do, 2) what to eat, 3) how to speak, 4) how to think… and 5) who to vote for.

I have had a couple of people compare my Specialization and Trade to Taleb’s work. For what it is worth, my thoughts on the similarities.

1. We both believe that highly-educated experts over-estimate what they know.

2. We both doubt the ability of “science” to understand the human world, including the economy.

3. We both think that statistical analysis as commonly practiced is unreliable.

4. We are both outsiders relative to academia at present.

I think that Taleb is a much more colorful writer. I tend to be more risk-averse, both in terms of substance and style.

Self-driving Cars and Car Ownership

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Joshua Gans writes,

It seems that the sharing economy was a transitional state from private ownership to corporate ownership. The point is that if the technology that allows sharing is good enough, the incentive to own a car — even to rent it out — goes down. And it goes down potentially all the way to zero.

Here is how I look at it:

1. What you want is car rides on demand. A few years ago, you needed to own a car in order to get that, because taxis can take a long time to show up and they are expensive.

2. If Uber and Lyft are reliable and affordable, then you do not need to own a car. The drivers own the cars. But in theory Uber and Lyft could own the cars–if they want to put up with the hassle of figuring out how to make sure drivers do not abuse the vehicles.

3. If autonomous vehicles are possible, then Uber and Lyft do not have to worry about what the driver might do to abuse the car, so it makes sense for the corporation to own the cars.

Status Games

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Tyler Cowen writes,

In essence, (some) media is insulting your own personal status rankings all the time. You might even say the media is insulting you. Indeed that is why other people enjoy those media sources, because they take pleasure in your status, and the status of your allies, being lowered. It’s like they get to throw a media pie in your face.

With material goods, we can play a positive-sum game. With status goods, the game is zero-sum. In a footrace, someone finishes first, someone finishes second, and so on. If I move up, someone else must move down.

Political power tends to act like a positional good.

Explaining Preferences for Redistribution

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The paper is called Crowding Out Culture: Scandinavians and Americans Agree on Social Welfare in the Face of Deservingness Cues, by Danish researchers Lene Aaroe and Michael Bang Petersen.

Suppose that you survey people’s opinions about redistribution without saying anything about whether welfare recipients are not working because they are unwilling or because they are unable. Then Danes are more favorable to redistribution than Americans. However, if the people surveyed are given information that indicates whether or not the welfare recipients are unwilling to work or unable to work, average opinion among Americans and Danes is indistinguishable. This suggests that Americans do not have (relative to Danes) a cultural aversion to redistribution. Instead, they are more likely to believe that welfare recipients are unwilling to work rather than unable to work.

Pointer from Leda Cosmides in her presentation at this panel, which I again strongly recommend–the video is now up at the link.

Larry Summers Should Read This

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Edward L. Glaeser writes,

While infrastructure investment is often needed when cities or regions are already expanding, too often it goes to declining areas that don’t require it and winds up having little long-term economic benefit. As for fighting recessions, which require rapid response, it’s dauntingly hard in today’s regulatory environment to get infrastructure projects under way quickly and wisely. Centralized federal tax funding of these projects makes inefficiencies and waste even likelier, as Washington, driven by political calculations, gives the green light to bridges to nowhere, ill-considered high-speed rail projects, and other boondoggles. America needs an infrastructure renaissance, but we won’t get it by the federal government simply writing big checks. A far better model would be for infrastructure to be managed by independent but focused local public and private entities and funded primarily by user fees, not federal tax dollars.

Alex Tabarrok calls the entire article excellent.

UPDATE: Although John Cochrane agrees with Glaeser, but he is more charitable to Summers than I would be.