Subway Externalities

Posted on March 17, 2015 by Arnold Kling

If the only way to support Manhattan densities is with the subway system, then you’ve got to figure out how to finance the subway system. And, you know, part of what we’ve learned is that the value of the subway system will show up to a large extent in the value of the land. So that you can’t just think about sending out, giving out a contract for somebody to build the subway system and try to finance it based on the fare revenue. What you’ve got to do is somehow internalize the increases in the value of the land induced by the kind of access that the subway can provide.

This in a Russ Roberts podcast. Russ has had other interesting guests the last few weeks, also.

The Flynn Effect Puzzle

Posted on March 17, 2015 by Arnold Kling

From a BBC article.

Richard Lynn notes that measures of infants’ mental development increased in the UK and US at rates correlated to the increasing IQs of slightly older children. It’s difficult to see how Flynn’s theories are enough to explain this. “Are infants thinking more scientifically today?” he asks rhetorically.

Pointer from Neerav Kingsland, who writes,

For gains in IQ, I wonder whether changes in the method of harnessing energy caused IQ gains (our brains adapted to the needs of the new economy), or whether gains in IQ led to the development of new ways of harnessing energy (we got smarter and invented new ways of doing things).

My guess is that, for the transition from farming to industry, it’s the former.

Or to put it another way: humans developed the IQ we needed.

In Sapiens, Yuval Noah Hariri argues that foragers need more intelligence than farmers. Foragers need to know much more about their environment, including information about many varieties of plants. Farmers just need to know a routine for raising a staple crop.

One can argue that ordinary workers in the early stages of the industrial revolution did not need to know much, either. More recently, the skill demands of jobs have gone up, so that we may be reverting to forager-level intelligence.

But what is the mechanism by which “humans developed the IQ we needed.” For foragers, the mechanism is Darwinian. If you cannot remember which plants are edible, you die without passing on your genes. By the same token, farming is dysgenic. It allows more intellectually weak people to survive.

But does that mean that we should seek a eugenic explanation for the Flynn effect? That is, for the past hundred years, has the trend within a given country been for the proportion of children born of less-intelligent parents to decline? Researchers, including Lynn, seem to prefer nurture-based explanation.

MIT Economics and Academic Prejudice

Posted on March 16, 2015 by Arnold Kling

The MIT economics department’s dominance was fading just as I entered grad school there. David Warsh, himself a long-time chronicler of the department, reviews a book edited by E. Roy Weintraub on the golden age of economics at the Institute.

A sixth factor, advanced by Weintraub in the Transformation volume, argues that the rise of MIT stemmed from its willingness to appoint Jewish economists to senior positions, starting with Samuelson himself. Anti-Semitism was common in American universities on the eve of World War II, and while most of the best universities had one Jew or even two on their faculties of arts and sciences, to demonstrate that they were free of prejudice, none showed any willingness to appoint significant numbers until the flood of European émigrés after World War I began to open their doors. MIT was able to recruit its charter faculty – Maurice Adelmam, Max Millikan, Walt Rostow, Paul Rosenstein-Rodin, Solow, Evsey Domar and Franco Modigliani were Jews – “not only because of Samuelson’s growing renown,” writes Weintraub, “…but because the department and university were remarkably open to the hiring of Jewish faculty at a time when such hiring was just beginning to be possible at Ivy League Universities,”

Pointer from Mark Thoma. My Swarthmore College professor Bernie Saffran emphasized the anti-Semitism factor also. Bernie’s version was that Harvard’s anti-semitism made Samuelson feel that he would be better off at MIT, and once he went to MIT he went about using Jews to build a superior department to pointedly punish Harvard. It took almost three decades (roughly from the end of World War II to the late 1970s) for Harvard to come back.

Economists generally view prejudice by a firm as unsustainable, because that firm will lose out to competitors. The lesson I take from the Harvard-MIT story is that in academia prejudice can persist for a while, with long-term detrimental effects. Consider that as you read stories about prejudice against conservatives.

Read Warsh’s entire article, which covers much more ground.

UPDATE: For more on the economics of discrimination, check out the links on David Henderson’s post.

The Null Hypothesis for Income and Wealth

Posted on March 16, 2015 by Arnold Kling

The abstract of a working paper by David Cesarini and others says,

We use administrative data on Swedish lottery players to estimate the causal impact of wealth on players’ own health and their children’s health and developmental outcomes. Our estimation sample is large, virtually free of attrition, and allows us to control for the factors ‒ such as the number of lottery tickets ‒ conditional on which the prizes were randomly assigned. In adults, we find no evidence that wealth impacts mortality or health care utilization, with the possible exception of a small reduction in the consumption of mental health drugs.

Our estimates allow us to rule out effects on 10-year mortality one sixth as large the cross-sectional gradient. In our intergenerational analyses, we find that wealth increases children’s health care utilization in the years following the lottery and may also reduce obesity risk. The effects on most other child outcomes, which include drug consumption, scholastic performance, and skills, can usually be bounded to a tight interval around zero. Overall, our findings suggest that correlations observed in affluent, developed countries between (i) wealth and health or (ii) parental income and children’s outcomes do not reflect a causal effect of wealth.

Pointer from James Pethokoukis.

Somebody should replicate this study in the United States. I would not be surprised if the effects on child outcomes were closely bounded to a tight interval around zero here, also.

This is the sort of evidence that I wish Robert Putnam would confront.

Harari on Money

Posted on March 15, 2015 by Arnold Kling

He writes,

Money. . .involved the creation of a new inter-subjective reality that exists solely in people’s shared imaginations.

money is the most universal and efficient system of mutual trust ever devised.

This is from his book Sapiens that I am currently reading.

I like to say that money is a consensual hallucination, using the phrase the William Gibson coined to describe cyberspace, a term that he also coined.

I want to push back against the materialist idea of money, in which its value is determined by the “quantity of money” in relation to other goods. Think of money as a protocol for exchanging goods, the way that TCP/IP is the basic Internet protocol for exchanging information between computers. The concept of a three percent increase in the supply of TCP/IP is nonsense.

What about the Fed? Think of the Fed as a big player in the repo market. It is a peer of Goldman Sachs.

What about hyperinflation? Think of that as the government needing to pay for its deficit spending through an enormous counterfeit operation, one that ultimately undermines the trust in money and wrecks the protocol for exchanging goods.

What I’m Reading

Posted on March 14, 2015 by Arnold Kling

Sapiens: A Brief History of Humankind, by Yuval Noah Harari. I think I mentioned this the other day. Harari argues that in prehistorical times humans were responsible for the extinction of many large species. I was reminded of this today when Tyler Cowen pointed to a piece on the relatively recent extinction of woolly mammoths on a large island. The story says,

Archaeological evidence suggests that humans reached Wrangel Island at roughly the same time the last mammoths vanished, but there’s no evidence yet to indicate that they ever hunted the mammoths. The more likely answer is climate change, which as a side effect might well have made it easier for humans to reach the island to serve as witnesses to the mammoths’ final days.

Harari points out that humans do not have to hunt creatures in order to cause their extinction. For example, humans could disrupt food sources.

I am only part way through the book. My ultimate evaluation may not be favorable.

News Reports Throw Caution to the Wind

Posted on March 13, 2015 by Arnold Kling

Many news reports about a new Department of Energy report echo the Boston Globe.

Wind power will be cheaper than electricity generated by natural gas within a decade, even without a federal tax incentive, according to a US Energy Department analysis.

Increasing wind energy to 35 percent of US electricity supplies by 2050 will cause national power prices to decline 2.2 percent and result in $400 billion in benefits related to reduced emissions of greenhouse gases. Wind energy provided 4.5 percent of US power supplies in 2013.

The report itself says,

The Study Scenario is a plausible outcome, representing what could come about through a variety of pathways, including aggressive wind cost reductions, high fossil fuel costs, federal or state policy support, high demand growth, or different combinations of these factors.

(emphasis in the original). If I am understanding this correctly, the authors took this 35 percent goal and conjured a scenario in which it might occur. Maybe we will have the “aggressive wind cost reductions, high fossil fuel costs” and so on, or maybe we will not.

I would add that I really object to a study that says that wind power will soon be cheap and ubiquitous. . .and that is why we need to make a long-term commitment to subsidize it. If wind power really does amount to 35 percent of total electricity generation, those subsidies will amount to real money. Moreover, if you really are confident that wind power is economical, then you would not be arguing for subsidies out into the indefinite future.

Provocative Sentences

Posted on March 12, 2015 by Arnold Kling

From Yuval Noah Harari, author of what is likely an interesting new book, Sapiens.

you should take into consideration the possibility that medicine in the 21st century will be elitist, and that you will see growing gaps because of that, biological gaps between rich and poor and between different countries. And you cannot just trust a process of trickling down to solve this problem.

There are fundamental reasons why we should take this very seriously, because generally speaking, when you look at the 20th century, it’s the era of the masses, mass politics, mass economics. Every human being has value, has political, economic, and military value, simply because he or she is a human being, and this goes back to the structures of the military and of the economy, where every human being is valuable as a soldier in the trenches and as a worker in the factory.

But in the 21st century, there is a good chance that most humans will lose, they are losing, their military and economic value. This is true for the military, it’s done, it’s over. The age of the masses is over.

Almost twenty years ago, I wrote essays, such as this one, on the differences between the industrial era and the post-industrial era. One of these differences is that in the industrial era everything was about “mass.” Mass production, mass consumption, mass warfare, etc. That is not so true now, and the social implications are large.

Question from a Reader (Health Care Costs and Wages)

Posted on March 12, 2015 by Arnold Kling

I feel as though I am constantly reading articles regarding the stagnant wages of American (and in particular middle class/poor) workers. However I have also seen numerous articles regarding massive annual growth rates in healthcare spending. It is my understanding that most Americans receive their healthcare through their employer (with the employer typically picking up the majority of of the costs). This creates something of a logical disconnect for me, so my question is this:
1. Do most statistics/reports of stagnant wages not take into account employer benefits such as healthcare (or employee 410k matching etc.)? Thereby painting a picture of stagnant wages when in actuality total compensation (wages + benefits) has not been stagnant?
2. Or do they take that into account, and non-benefit wage growth has actually been less than inflation, which taking into account an assumed high singe digit, low double digit growth rate in employee benefits, results in stagnant total wage/compensation?

There is a measure of wage growth that includes the cost of fringe benefits, such as health insurance. This is called compensation per hour. There is also a measure that does not include fringe benefits, which is just called wages. Because health care spending has soared, the “fringe” benefits can amount to quite a lot. Thus, the two measures have diverged, with compensation going up more than wages.

Suppose that my salary is $50,000 a year and the employer contributes $15,000 to my health insurance. The good news for me is that the health insurance benefits are not taxed. The bad news is that I might value the health insurance at much less than $15,000.

So do workers value health insurance at something like its dollar cost, or do they not? This becomes very interesting when you try to calculate a real wage, which is the nominal wage adjusted for price changes. If you look at wages excluding fringe benefits, then you are taking soaring health care costs out of the numerator. If you then use the Consumer Price Index to convert from a nominal wage to a real wage, you are including soaring health care costs in the denominator. That strikes me as an overly pessimistic way to calculate real wages.

If workers care about health care expenses, then you should look at their total compensation. If they do not care about health care expenses, then you should use a price index that just includes those goods and services that they do care about.

I have to say that when this issues is discussed in the press and in blogs, what you see is at best lacking in nuance and at worst a deliberate attempt to manipulate data to create a distorted point of view. I should add that if somebody insists on not including fringe benefits in their calculations, you might ask them why then one should consider employer-provided health insurance a good thing.

Timothy Taylor on Media Bias

Posted on March 11, 2015 by Arnold Kling