Bob Hall on Labor Force Participation Trends

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With Nicolas Petrosky-Nadaeu, he writes (scroll down at the link for the paper),

In the bottom 10 percent of households by household income, 33 percent of individuals participated in the labor market in 1998-1999. By 2011-2013 this proportion was 44 percent. At the other end of the household income distribution, the rate of labor market participation fell from 81 to 76 percent. The largest decline was for individuals living in households in the third quartile of the household income distribution, where the participation rate fell from 74 percent to 68 percent.

Pointer from Tyler Cowen.

Usually, I would have possible explanations handy. In this case, I am so stumped that I am willing to offer the possibility that their statistics are not accurate.

UPDATE: Possibly relevant:

According to a recent Pew report, the percentage of mothers who stay at home with their children (a statistic that includes non-working single mothers) fell from 49% in the late 1960s to a low of 23% in 1999, but then rose to 29% by 2012.

The Omniscient Voyeur

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Bryan Caplan writes,

In the GSS, males report an average of 14.19, women an average of 4.76.* If you mean the median, then males report a median of 3, woman a median of 2.

In my statistics course, I use this as a classic example of biased statistics. Here is why I suspect bias.

Suppose that the number of men is M and the number of women is W. Suppose that an omniscient voyeur can count all of the heterosexual relationships. Call this number n. Then the average number of sex partners for men is n/M. For women, it is n/W. Assuming that W and M are about the same, then the omniscient voyeur will know that the averages are about the same. So if the reported averages are different, then the reported averages are biased statistics.

What I am Reading

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1. Michael Shermer, The Moral Arc. I am only a few pages in, and he already has cited Bill Dickens and Bryan Caplan, among others.

2. Jeffrey Friedman and Wladimir Kraus, Engineering the Financial Crisis. This is a re-read for me. They share with me the view that risk-based capital rules contributed heavily to the crisis. They make a very subtle point, though. They do not believe that bankers went all-out to maximize the effective leverage of their banks. Thus, the authors reject the moral hazard arguments of deposit insurance and too-big-to-fail.

The way I would put their argument is this. Suppose that bank managers were, for whatever reason, actually quite concerned about risk exposure. They thought, even if incorrectly, that the value of keeping their franchises intact and avoiding trouble was very important. Even so, with the risk weights that regulators placed on different assets, the effective rate of return on mortgage securities was much higher than that on other asset classes, including low-risk mortgage loans. Thus, the risk-based capital rules, along with the lenient ratings by rating agencies of mortgage securities, served to steer capital into high-risk mortgage loans and thereby into feeding the housing bubble.

In making their argument that the crisis was in my terminology a cognitive failure rather than a moral failure, the authors point out that if bankers had merely wanted to maximize their exploitation of implicit and explicit guarantees, they could have acted differently. They could have held higher-risk, higher-return tranches of mortgage securities. They could have held less capital (before the crisis, major banks tended to have leverage ratios well below regulatory limits).

Heritability of g

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Plomin and Deary write,

(i) The heritability of intelligence increases from about 20% in infancy to perhaps 80% in later adulthood. (ii) Intelligence captures genetic effects on diverse cognitive and learning abilities, which correlate phenotypically about 0.30 on average but correlate genetically about 0.60 or higher. (iii) Assortative mating is greater for intelligence (spouse correlations ~0.40) than for other behavioural traits such as personality and psychopathology (~0.10) or physical traits such as height and weight (~0.20). Assortative mating pumps additive genetic variance into the population every generation, contributing to the high narrow heritability (additive genetic variance) of intelligence.

Pointer from Kyle Griffin. Read the whole thing. The authors’ discussion of Genome-wide Complex Trait Analysis, a new method of examining genetic influence, was new to me. Deary is the author of Intelligence: A Very Short Introduction, which doubles as an excellent introduction to statistical methods in research.

In my appearance in St. Louis in six weeks, I will be talking about the forces that cause stratification of earnings to accelerate. One of those factors is assortative mating based on g.

Taleb, Evolution, and GMOs

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The podcast with Russ Roberts is here.

Taleb’s point is that “science” cannot prove that GMO’s are safe. We know that when organisms evolve using a trial-and-error process of gradual tweaking, that process is safe. But direct intervention to create GMO’s is not the same process.

Taleb says.

The big risk is what can happen when you have two things going together–which is, what happens, Soviet style, is a combination of monopoly of some plants over others, that it’s too large a system; and of course creation of other species that will themselves also be too powerful and then you may kill the GMOs or one may kill the other and you may have huge imbalances in nature. And these imbalances in nature can produce large deviations.

I think I get Taleb’s point. But it strikes me that to cause catastrophic harm, a GMO has to be both weird enough to cause unprecedented things to happen but not so weird that it fails to function as a living organism. That may be an impossible combination.

Apparently, Gregory Clark is Not Most Economists

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Gillian B. White writes,

According to the Fed study, about 60 percent of black children whose parents had income that fell into the top 50 percent of the distribution saw their own income fall into the bottom half during adulthood. This type of downward slide was common for only 36 percent of white children.

…Still, most economists lack a clear, definitive explanation for why, after reaching the middle class, many black American families quickly lose that status as their children fall behind.

Pointer from Mark Thoma.

Obviously, she did not read my review of Gregory Clark’s latest book.

Clark suggests that this may reflect that the underlying mean for these ethnic groups may differ, and the higher propensity of middle-income blacks and Hispanics to have their children’s income fall to the bottom third might be due to regression toward a lower mean.

Suppose that you have two populations of men with different height-producing genetic characteristics. The mean height in group A is 5 feet, 9 inches, and the mean height in group B is 5 feet, 7 inches. There is substantial variation within each group.

Now, out of the current generation of men, you select men from each group who happen to be 5 feet, 8 inches. Track the height of their sons. It seems reasonable to predict that, starting with men who are 5 feet 8 inches, the sons of men from group A are likely to be taller than the sons of men from group B. This does not result from social prejudice against men from group B. It is the result of laws of probability.

Arrow’s Impossible-to-Understand Theorem

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Tyler Cowen writes,

Can one economist in forty properly define the “independence of irrelevant alternatives” axiom behind the Arrow Impossibility Theorem

That one I think I understand. What I do not understand is the “nondictatorship” axiom. Does it mean that ex ante no one is given the privilege of selecting for the group? Or does it mean ex post that no one’s preferences are perfectly satisfied? My impression, which may be wrong, is that it is the latter, in which case I think that nondictatorship is a misleading term for it. [UPDATE: commenters point out that I am wrong, and that it is an ex ante assumption]

As an undergraduate, I spent a lot of time trying to understand the Arrow Impossibility Theorem. I was much more fluent with it then than I am now, and yet I never thought that I had it. I think that every attempt to explain it in simple terms is wrong.

I agree with Tyler that much of modern finance is not well understood. The Portfolio Separation Theorem is very important, and yet few can explain it. My attempt is here.

One of my long-standing complaints is that nobody is sure whether aggregate demand slopes up or down. In undergraduate macro, it slopes down. In graduate macro, with inflation on the vertical axis, it slopes up (although in graduate macro nobody draws it–they just write down equations.)

Fiscally Responsible Italy

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Lawrence Kotlikoff writes,

As for Italy, its fiscal gap of negative 2.3 percent is the lowest of any of the 24 included countries. Indeed, Italy can spend almost €180 billion more and still be able to meet all its expenditure obligations. The source of Italy’s long-term fiscal solvency is its two major pension reforms that have dramatically reduced its pension obligations. In addition, Italy has strong control of its health care spending.

Pointer from Greg Mankiw.

This is why accrual accounting would be an improvement. Under the present system, politicians have an incentive to run up their debts in the form of obligations in pensions systems. By not using this trick, Italy managed to be fiscally responsible.

The Tea Party, McBoehner, and ObamaCare

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Tyler Cowen has referred a couple of times to a book by Philip Klein on Republican politics and health care reform. I am not a political analyst, but here is my impression:

1. The most important Republican divide is between the Tea Party and McBoehner. The Tea Party wants policies to change, and McBoehner want most of all to be Senate Majority Leader and House Speaker, respectively.

2. The Tea Party wants to overturn Obama’s policies on immigration and health care. McBoehner wants to loosen environmental regulations and tweak Dodd-Frank, because that is what their friends in business are telling them are priority issues.

3. I think that a conservative consensus on health care reform is there to be formed, but McBoehner are not the ones to form it. I think that the Tea Party is likely to be shafted both on immigration and on health care reform. That might make them a bit ornery during primary season in 2016.

The FARMS Indicator

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Alex Tabarrok writes,

Eligibility for free and reduced-price lunches, however, depends on eligibility rules and not just income levels let alone poverty rates.

He is criticizing the sensationalist statistics that “half of public school children are in poverty,” when eligibility for free and reduced meals is not quite the same thing.

Still, I think that the percentage of FARMS students is a very useful indicator. For example, a couple of times I have downloaded data on standardized test scores for various Maryland school districts. The scores and the FARMS percentages line up very closely. In contrast, there is almost zero correlation between school spending and test scores. As far as spending goes, the null hypothesis holds.

The interesting question, then, is whether the FARMS proportion is rising because of changes in eligibility rules or because of changes in the demographics of the public school population. I suspect is is the latter, and I suspect that it is a leading indicator of worse outcomes, such as performance on stand in terms of standardized tests and high school graduation rates (provided that schools do not reduce the requirements for graduation).