De-skilling in the Labor Market

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Beaudry, Green, and Sand write,

the first object of this paper will be to document that the demand for cognitive tasks has actually been declining since 2000. Such a decline in demand has had, and continues to have, a direct impact on more skilled workers, but we go on to show that it has likely had a substantial impact on less skilled workers as well. In particular, we argue that in response to the demand reversal, high-skilled workers have moved down the occupational ladder and have begun to perform jobs traditionally performed by lower-skilled workers. This de-skilling process, in turn, results in high-skilled workers pushing low-skilled workers even further down the occupational ladder and, to some degree, out of the labor force all together. This process had been going on since 2000, but, as argued in earlier papers, the housing boom between 2003 and 2006 masked some of the effects which only become fully apparent after the financial crisis.

Pointer from Mark Thoma (with a couple of clicks in between).

If your main evidence for de-skilling is that people with college education are in jobs that you would not think require college degrees, then there might be another story. That is, credentials do not prove cognitive ability. In fact, we may have observed an increase in the proportion of people attending college who are not really college material and in the number of colleges producing graduates with only high-school level skills. These people would wind up in jobs not requiring great cognitive ability.

Investigating Thought Crimes

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This story says

ExxonMobil (XOM) is under investigation by New York’s top law enforcement officer about whether the global oil and gas giant lied to investors and the public about the risks and financial impact of climate change.

New York Attorney General Eric Schneiderman subpoenaed the Irving, Texas-based firm Wednesday night, seeking financial records, statements and other climate-change-related material dating back to 1977, according to a government official with direct knowledge of the matter. The official discussed the issue on condition of anonymity because the subpoena and other details of the investigation remain secret.

How can we stop this sort of behavior on the part of the NY Attorney General?

My suggestion: have the Texas Attorney General launch an investigation into alleged lying by a major New York firm. Goldman Sachs?

History of U.S. Financial Crises

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Jeffrey Rogers Hummel writes,

Once the Great Depression is thrown out as a statistical outlier, we observe no significant change in the frequency, duration, or magnitude of recessions between the period before and the period after that unique downturn. Given that the Great Depression witnessed the initiation of extensive government policies to alleviate depressions and that the Federal Reserve had been created fifteen years earlier explicitly to prevent such crises, this overall historical continuity with a single exception indicates that government intervention and central banking has done little, if anything, to dampen the business cycle.

The history of the Federal Reserve and of attempts to regulate the financial system and control the macroeconomy offers a fascinating study in the relationship of intentions to outcomes.

Suppose that you want to describe history assuming a strong correlation between intentions and outcomes. Then you want to say that:

(a) the creation of the Federal Reserve System helped to stabilize the financial system, since that was its intent.

(b) Franklin Roosevelt’s economic policies ended the Great Depression, since that was their intent

(c) the Fed’s response to the financial crisis prevented another Great Depression, since that was its intent.

However, as Hummel’s analysis shows, (a) appears to be false, although few economists seem to want to make a systematic study of it. (b) seems clearly false, as the data show that the economy was still in terrible shape until at least 1940. (c) is viewed by most economists as true, but it would not surprise me to see that opinion shift in the future.

Scott Alexander, Mental Underdevelopment, and the Three-Axis Model

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On this post,
he starts out with a digression that speaks to the issue of cultural intelligence.

if different cultures progress through developmental milestones at different rates or not at all, then these aren’t universal laws of child development but facts about what skills get learned slowly or quickly in different cultures. In this model, development is not a matter of certain innate abilities like walking “unfolding” at the right time, but about difficult mental operations that you either learn or you don’t depending on how hard the world is trying to cram them into your head.

Most of the post concerns his suggestions for what might constitute mental underdevelopment. I was struck by this one:

I’m not sure whether the Post genuinely believes the Democrats are pro-crime by inclination or are just arguing their policies will lead to more crime in a hyperbolic figurative way, but I’ve certainly seen sources further right make the “genuinely in favor of crime as a terminal value” argument. And this doesn’t seem too different from the leftist sources that say Republicans can’t really care about the lives of the unborn, they’re just “anti-woman” as a terminal value. Both proposals share this idea of not being able to understand that other people have different beliefs than you and that their actions proceed naturally from those beliefs. Instead of saying “I believe gun control would increase crime, but Democrats believe the opposite, and from their different perspective banning guns makes sense,” they say “I believe gun control would increase crime, Democrats must believe the same, and therefore their demands for gun control must come from sinister motives.”

The idea is that seeing an issue from someone else’ point of view requires advanced development. People whose mental development falls short of that will end up making false characterizations of others’ motives. Some thoughts:

1. By this standard, Paul Krugman appears to be mentally underdeveloped, even though he would score well on most measures of intelligence. The same would go for many people who like his writing.

2. Along the three-axis model, you can predict what will happen if people are mentally underdeveloped in this way. A conservative, who is focused on the civilization vs. barbarism axis, will see others as driven to destroy civilization (“Barack Obama’s goal is to destroy America.” “Libertarians are nihilists.”). A libertarian, who is focused on freedom vs. coercion, will see others as driven to destroy freedom (“Progressives want to run the economy.” “Conservatives want to run your personal life.” A progressive, who is focused on the oppressor-oppressed axis, will see others as driven to support oppression (“Conservatives are racist homophobes.” “Libertarians only want to justify the power structure.”)

3. See also David McRaney on the illusion of asymmetric insight, in which we think we understand others better than they understand themselves. Maybe getting past this illusion is a step in mental development.

4. When I worked at Freddie Mac, the senior management worked with some human resources consultants to develop a set of operating principles for improving teamwork among employees. The most interesting principle was “assume positive motivation.” That is, whenever some expresses a point of view that differs from yours, don’t assume that they are trying to cause problems for you or for the team. Think about what positive, reasonable goal they might be trying to achieve.

What is interesting about “assume positive motivation” is how much effort it takes to do it. If you don’t believe me, try to spend a week incorporating this operating principle in every in-person and on-line encounter you experience.

Null Hypothesis Deniers

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The IGM forum of economists asks their participants whether they agree with:

Comparing their students’ average gains on standardized tests over the school year makes it easier to predict which teachers — all else equal — are more likely to improve their student’s long-term life outcomes.

Nobody disagrees. Although I would have disagreed out of spite, the wording of the question makes it impossible to disagree. The question stipulates “all else equal” and uses the cautious “are more likely to improve.” So if I thought that, other things equal, there is a .0001 chance of a good teacher causing an improvement of .0001 standard deviations in their student’s [sic] long-term life outcomes, I should answer “agree.”

A more interesting way to phrase the question might have been, “Using students’ average gains on standardized tests over the school year to determine teacher retention and firing decisions can reliably lead to measurably important gains in long-term life outcomes.” The economists probably still would have committed the Type I error, but at least this wording gives the null hypothesis a fighting chance.

Larry Summers Finds an Anomaly

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He writes,

We find that in the vast majority of cases output never returns to previous trends. Indeed there appear to be more cases where recessions reduce the subsequent growth of output than where output returns to trend. In other words “super hysteresis” to use Larry Ball’s term is more frequent than “no hysteresis.”

Pointer from Mark Thoma.

In the AS-AD paradigm, AS and AD are independent equations. The long-run aggregate supply curve is what the economy departs from when it goes into recession and what it returns to when there is a recovery. What Summers and co-authors are finding is that the economy is more like Charlie and the MTA. It never returns to the previous long-run aggregate supply curve, and instead the aggregate supply curve appears to shift adversely in response to recessions.

Summers’ explanation for the anomaly might be that when people lose their jobs they lose some of their skills. However, another explanation that fits the data is that people who lose their jobs lose them because their skills were valuable only in patterns of specialization and trade that are no longer sustainable.

Summers points to this paper, where he and Antonio Fatas find a correlation between fiscal consolidations and downward revisions to potential GDP. I worry that both fiscal consolidation (trying to reduce unsustainable budget deficits) and downward revisions to potential GDP would be lagged responses to adverse “supply shocks” (or, in my preferred framework, an unusually large number of specialization and trade patterns becoming unsustainable).

Ecologists and Engineers

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Don Boudreaux writes,

When a biologist encounters in a living organism a physical or behavioral trait that is unusual or unfamiliar, and that does not contribute to survival in any way that is immediately obvious, the biologist’s professional instinct is to think hard about that trait in order to identify its likely genetic benefit to its possessor. The biologist, upon encountering such a trait, does not leap to the conclusion that he or she has encountered an instance of “nature failure.” The biologist, of course, recognizes that nature and natural selection are never perfect; sometimes living creatures are indeed saddled with traits that do indeed reduce their genes’ chances of survival. But this possibility of “nature failure” is not the competent biologist’s first go-to explanation whenever he or she cannot grasp the reason why natural selection might have created in the organism this unusual or unfamiliar trait.

In his new book, Foolproof, Greg Ip suggests that there are two types of economists: ecologists; and engineers.

An engineer thinks about how to design a machine. An ecologist thinks about how to understand and protect an evolving system.

In The Book of Arnold, I suggest that after the Second World War, the MIT economics department, fed by funding from the Department of Defense, promoted the engineering mindset. This mindset then took over the ecosystem of academic economics, which those of us with the ecological mindset struggle against.

Houses and Land

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Kevin Erdmann writes,

The real long term natural rate right now is about 2.5%. If you have tons of cash or you can run the gauntlet and get a mortgage, or if you are an institituional investor going through the difficult organizational process of buying up billions of dollars of rental homes, you get the preferred rate of 4% real returns.

Pointer from Tyler Cowen. Erdmann thinks that we have not built enough houses, so rents will be rising, so owning rental property is a great investment. My comments:

1. I would have thought so, too. I put a lot of money in REITs. It has not done well. I also invested a lot of money in firms that own/manage a lot of apartments. It did not do well. Maybe all that says is that I played in a segment of the market that is efficient, when the point is to try to exploit the inefficient segment.

2. If I understand his thinking, there are not enough buyers to bid house prices to their fair market value. So you can own an apartment building at a high rent/price ratio. But it seems to me that, at least in some markets, the price/rent ratio has gone up rather than down in the past few years.

3. I am not sure that I trust my intuition about housing markets. My friends and relatives tend to be located in Blue cities where regulation restricts supply. I do not have a good feel for less-regulated markets.

Which Phillips Curve?

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Robert Waldmann gives us what I think of as the textbook version.

With high unemployment and low expected inflation, many wage changes will be zero & stuck at the lower bound. higher constant not accelerating inflation relaxes this lower bound (which is that nominal wage changes can’t be negative). This causes higher employment (and lower real wages).

Pointer from Mark Thoma.

A week ago, I pointed out that the Alan Krueger version of the Phillips Curve tells the opposite story: real wages rise with employment.

Of course, as Waldmann points out, there are multiple labor markets. One can conceive of real wages rising on average but falling in other labor markets, with the latter generating the increase in employment.

I continue to say that in economics, we do not produce falsification. Instead, all of our theories must contend with empirical anomalies. We have to use judgment to decide when the anomalies are numerous enough and serious enough to warrant doing without the theory. I have reached that point with Keynesian macro.

However, I do believe that thinking in terms of multiple labor markets is going to put you ahead of the game relative to those who think in terms of homogeneous workers in the national GDP factory.

Intellect and Politics

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Chris Dillow writes,

I would rather have second-rate politicians who know they are duffers than ones who believe they are brilliant.

Nice line. Read the whole post. Pointer from Mark Thoma.

In The Secret of Our Success, Joseph Henrich argues that individual humans are not so very intelligent on our own. Instead, it is out collective culturally-acquired knowledge that is impressive. One implication that I draw from this is that we should not be looking for some superior intellect to run our lives. Our lives are better run by drawing on our collective wisdom.