Larry Summers on Piketty

Posted on by

Mark Thoma seems to have provided the first pointer, although others surely will follow.

Summers’ review is the most complete evisceration of Piketty’s economics that has been published to date. But Summers suggests that we sniff the rose, never mind the manure that lies underneath. He writes,

Even in terms of income ratios, the gaps that have opened up between, say, the top .1 percent and the remainder of the top 10 percent are far larger than those that have opened up between the top 10 percent and average income earners. Even if none of Piketty’s theories stands up, the establishment of this fact has transformed political discourse and is a Nobel Prize-worthy contribution.

This is reminiscent of Brad DeLong. It strikes me as intellectual charity driven by ideological sympathy. I encourage everyone reading this blog to do the opposite. Reserve your most charitable interpretations for those whose views disturb you, and adopt the most critical-thinking posture toward those whose views please you.

The bulk of Summers’ review consists of just this sort of critical thinking. Summers writes,

Piketty argues that the economic literature supports his assumption that returns diminish slowly (in technical parlance, that the elasticity of substitution is greater than 1), and so capital’s share rises with capital accumulation. But I think he misreads the literature by conflating gross and net returns to capital. It is plausible that as the capital stock grows, the increment of output produced declines slowly, but there can be no question that depreciation increases proportionally. And it is the return net of depreciation that is relevant for capital accumulation. I know of no study suggesting that measuring output in net terms, the elasticity of substitution is greater than 1, and I know of quite a few suggesting the contrary.

I have not seen this point about the confusion of gross and net return made by anyone else. By DeLong’s standards, that means we should dismiss Summers’ argument. But to my eye, it seems like a powerful criticism. [UPDATE: Oops! A commenter points out that Matt Rognlie had made the exact point about gross and net return.]

Remember the scandal over the Reinhart-Rogoff spreadsheet? This strikes me as considerably worse.

Summers also writes,

Rather than attributing the rising share of profits to the inexorable process of wealth accumulation, most economists would attribute both it and rising inequality to the working out of various forces associated with globalization and technological change.

As in the Smithian theory of inequality.

Rethinking Accreditation

Posted on by

According to Lindsey Burke of Heritage,

Under DeSantis’ proposal, which mirrors the HERO Act introduced in the Senate earlier this year by Sen. Mike Lee, R-Utah, states would be able to empower any entity—universities, businesses, non-profit institutions, etc.—to credential individual courses. South Carolina, for instance, could allow Boeing to credential aeronautical engineering courses, and Texas could enable Texas Instruments to credential mathematics courses.

I imagine that the sticking point here is eligibility for financial aid, including student loans. If you have Federal money that you only want to go toward accredited courses, then the Federal government would seem to have a legitimate claim that it needs to control accreditation.

If the Federal accreditation process is captured by rent-seekers, I am not sure I see why states would not be captured, also. So I am inclined to look for a different solution to the problem.

The public policy rationale for accreditation is that we want government education subsidies to be spent on the merit good of education. The current accreditation policy is neither necessary nor sufficient for that. Today, an accredited university that funnels student activity fees into support for drunken bacchanals is supposedly providing the merit good of education, while a non-accredited course that helps someone get a job is not.

Today, we impose a nearly impossible burden of proof on alternative forms of education. I would propose changing the system to impose the burden of proof on those who would deny that funds are going toward a merit good. In other words, let students spend their education subsidies (or flexdollars) on any form of education they deem valid. If a student chooses a low-quality course, the one who is hurt the most is the student. If the student makes a ridiculous choice (like spending the money on drunken bacchanals and calling that “education”), then the student and the supplier of the improper service can both be prosecuted and fined. Maybe even some currently accredited institutions headed by passive college administrators could be prosecuted and fined.

My Least Favorite Macroeconomic Statistic

Posted on by

John Cochrane writes,

Philadelphia Fed President Charles Plosser made this nice graph, showing how reduced views of potential GDP are closing the gap, not rises in actual GDP.

Obviously, it would help to go to his post and look at the graph. But potential GDP is perhaps my least favorite economic statistic. Keep in mind that potential GDP refers to real GDP, not nominal GDP.

How to define potential GDP? I think then when you come down to it, the definition is “what GDP would be if there were no shortfall of aggregate demand.” So I think that in order to buy into potential GDP, you have to be really committed to the AS-AD paradigm.

How is potential GDP arrived at? I think that the process involves taking a graph of the history of GDP and fitting trend lines in between the peaks, perhaps with some smoothing thrown in. Since we never know what the next peak of GDP will be, we pretty much never have a good idea of potential GDP in real time, only in retrospect.

When I think in terms of PSST, there is no analogue to potential GDP. Patterns of specialization and trade are always breaking and re-forming. When patterns break, unless the break is caused by war, disaster, or government policy, it is probably the economy’s way of freeing up resources that otherwise would remain misallocated. When new patterns form, it is only a good thing if the patterns are sustainable for a decent interval of time.

SNEP and the EITC

Posted on by

Reihan Salam writes,

In theory, the EITC is a simple program. But in practice — and in particular from the vantage point of recipients — it’s opaque and complex. It’s almost surprising how much recipients did know about how their behavior related to the refund.

Salam’s piece has many useful links for what I am calling the Setting National Economic Priorities project. One of the project’s ideas is to introduce a standard “fade-out” rate of 20 percent for all means-tested programs in the safety net. A next step might be to consolidate all such programs into a single “flexdollar” benefit program, which I have described in previous posts.

My priors, which I think are supported by the research cited by Salam, is that trying to use a program like the EITC for social engineering is a mug’s game. I think that the flexdollar idea is a reasonable compromise between offering a pure cash benefit and trying to do fine-grained social engineering.

Good Sentences

Posted on by

From Ashok Rao.

Is the mind-blowing wealth of 30,000 Americans absurd? Sure. But it would be difficult to say, as the video suggests, these elite are beneficiaries of any inequality other than owning the right capital at the right time. (Indeed it is capital gains in the stock market that drive the income of this group).

Pointer from Tyler Cowen.

I strongly recommend Rao’s entire post. Later, he writes.

Sure the bottom 95% are doing a little worse and the top 5% a little better today, but the changes are nothing near the drastic increase in income inequality in the same time period. This suggests policy has changed favoring high income over low income in a much clearer fashion than high wealth over low wealth. This isn’t surprising given that much of the richest 0.01% are executives and bankers, not heirs to mounds of wealth. After all, it is the group of affluent-but-not-rich people for whom we subsidize housing (indeed more than we do food for the poor!) It is for the doctors we protect the medical market. It is for the middling executives and partners at law firms nobody has heard of we decrease taxes on those earning more than $200k. It is for the top 15(- top 2)% of Americans who couldn’t afford frequent flights to Florida without Spirit or Southwest we refuse to tax carbon emissions from airplanes the way they should be!

Public Health and Conscientiousness

Posted on by

Timothy Taylor writes,

Personal habits and public policies regarding cleanliness changed so much in the 19th and into the early 20th century that historians sometimes write of a “sanitation revolution,” which led to dramatic improvements in public health. It’s time to ramp up a “chronic disease revolution,” which would include the health care system but also reach beyond it. Modern information technology, and the coming arrival of the “Internet-of-things” will open up new possibilities here. A pillbox could be wired into the Internet, and if it isn’t opened at the appropriate times during the day, the person would receive a text or email, and then a phone call, and then maybe a personal visit of reminder. It’s now possible for a home machine to take a small blood sample from a diabetic, analyze that sample, and send in the results. Information technology makes it much easier to have interactive systems that offer reminders about diet or exercise. The benefits from improved management of chronic conditions is potentially very large.

Taylor is calling for an increase in conscientiousness, with the aid of technology. The late Gary Becker was fond of saying that young people behave as if they expect that in their lifetimes medications will be able to undo the adverse impact of overeating–and they are probably right. So Becker was arguing that technology may allow people to do away with conscientiousness.

Immigration and Skills

Posted on by

Reihan Salam writes,

While only 6 percent of working-age native-born Americans do not have a high school diploma, the share of working-age immigrants without a high school diploma is over 25 percent. And though immigrants represent 16 percent of the U.S. workforce, they represent 44 percent of workers without a high school diploma.

Salam clearly sees it as a mistake that the U.S. encourages more low-skill immigration than high-skill immigration. However, this is not as obviously correct as it appears. One interesting question is how much the U.S. raises the productivity of low-skilled workers when they cross the border. If the answer is “a lot,” then the case for restricting low-skilled immigration is not particularly strong.

From the conservative point of view, the dire scenario is one in which low-skilled immigrants and their families ultimately consume more in government services than they produce. The libertarian answer would be “more immigration, less social welfare spending,” neither of which seem like popular policy positions at the moment.

The Passivity of the Progressive College Administrator

Posted on by

In a long article about controversies about rape at Swarthmore College, Simon van Zuylen-Wood writes,

The second central remnant of the school’s Quaker legacy — the “peaceful resolution of conflicts” — resides not in the student body, but in the administration. “From the very smallest scale to the largest scale, the college does have a long history of finding a way through that won’t leave half the people in any room feeling like they lost,” says Swarthmore history professor Tim Burke. “It means, for one, we tend to defer difficult decisions.”

My remarks.

1. I do not think that the Quaker tradition has anything to do with it. The passivity of college administrators is everywhere. They are passive when it comes to alcohol abuse. (I wish I had saved the email sent to parents by the President of Muhlenberg several years ago, with its helpless hand-wringing over the fact that more than a dozen students had been hospitalized with alcohol poisoning during the first semester. I wrote back saying that I could make a few suggestions to the admission office that would probably suffice to solve the problem.) They are passive when it comes to students exercising a heckler’s veto of speakers. They are passive when it comes to anti-semitism.

2. The article made me wonder how there came to be an overlap between “casual sex about which I felt ambivalent” and “rape.” It seems to me that one ought to be able to draw a reasonably clear line between the two.

3. Colleges seem to want to be separate jurisdictions in which ordinary laws do not apply. They do not want their students to be arrested and prosecuted for vandalism, violations of drug laws, or rape. Instead, they prefer their own judicial processes.

4. How does this issue play out along the three axes? Suppose that along the oppressor-oppressed axis you think women are oppressed with regard to sex. In that case, it might seem reasonable to believe that women are entitled to casual sex and also to later claim that casual sex about which they felt ambivalent was rape. Along the freedom vs. coercion axis, I think you would support colleges that want to apply their own laws and judicial processes, and let students and parents choose colleges knowing what the rules are.

But it turns out that my views on the issue are more along the civilization vs. barbarism axis.

–I think that what is missing from college is the concept of punishment. I think you have to decide whether students are adults or children, and punish accordingly. If you treat students as adults, then you put them through the legal system. If you treat them as children, then you limit their privileges.

–If students are exempt from adult law enforcement, then colleges should reinstate what used to be called “parietal rules.” No sex, no drinking, no drugs. On the other hand, if students are adults, then they ought to face adult consequences.

–If I were a school administrator, I would put students into the “adult” category, and I would tell students and parents to expect that treatment. I would only have a campus judicial process for academic issues, not for issues involving alcohol or sex. That means allowing local police to patrol campus and enforce laws. If drunk students are arrested for disorderly conduct and vandalism, so be it. If students face the same risk of drug prosecution that someone faces off campus, so be it. If they can be charged with rape and convicted in court, so be it. I certainly would not discourage victims from pressing charges. On that note, Heather MacDonald writes,

But the main reason “survivors” don’t demand to bring their cases to criminal court is that they know that what they have experienced is something far more complex and compromised than criminal sexual assault, almost invariably involving mixed signals, ambiguity, and a large degree of voluntary behavior on their part.

That is certainly the impression that I took away from the Swarthmore article. If I were an administrator, I would not try to set up the college as the official arbiter of such cases.

–When a sexual advance becomes too persistent or aggressive, I would encourage the victim to be very assertive, to the point of screaming “rape” rather than giving in. You are entitled to your body and your personal space, and that deserves priority over protecting the other person’s feelings.

–Colleges go out of their way to make condoms available (e.g., resident assistants must keep them in a candy jar for students to be able to access) and to ensure that students know how to use them. I would say do the same thing with rape whistles.

UPDATE: Megan McArdle has similar thoughts:

If students are adults, and the college is not supposed to be in charge of their sex lives, then the correct place to adjudicate sexual crimes is in the courts, not the campus judiciary system.

Should Private School Parents Get a Tax Break?

Posted on by

Andrew Samwick says yes. He argues that by reducing the cost of public schools,

sending children to private schools generates what economists call a “positive externality.”

His proposal:

…allow a federal (and possibly state) tax deduction for parents who send their children to private schools, in the amount of the per pupil expenditure in their local public schools.

I can imagine a few objections from supporters of public schools. They might argue that taking your child out of public school creates a negative externality, because public schools are presumed to be better for society. Also, they might argue that because a lot of the cost of public schools is fixed cost rather than variable cost, the average per pupil expenditure overstates the marginal savings from having one less student in the public school system.

Wading into Probability and Race

Posted on by

I am still only partly through Nicholas Wade’s A Troubled Inheritance, and I am dealing with what I think is a Bayes’ Theorem issue.

For Wade, a race (as in European or African) is a cluster of genes that go together in a sense that is probabilistic rather than absolute. You can identify a person’s race with high probability, based on DNA analysis. Apparently, the cluster of genes involved is large–over 100 different alleles. (I may not have this right. I never took a bio course.)

Suppose that there are 100 alleles of interest, each of which can be “heads” or “tails” (did I mention that I never took bio?). In Europeans, each one has a 55 percent chance of being heads. In Africans, each one has a 50 percent chance of being heads. If you observe a person in which only 40 of the alleles are heads, you can be very confident that this person is an African. There will be 14 times as many Africans as Europeans with 40 or fewer “heads.”

But once you have confidently identified an African, and you want to predict whether the African has heads or tails on a particularly allele, it is still a 50-50 guess. Or, I suppose you could say that in this particular instance, knowing that 40 of the alleles are heads, it is a 40-60 guess.

My point is that you can have a very high probability that someone is an African, conditional on a bunch of genetic characteristics. But at the same time, you can have a not-so-high probability that someone has a particular genetic characteristic, given that someone is an African. (For some characteristics, notably dark skin color, the probability that the African has that characteristic is very high. But the same need not be true for other characteristics.)

The really loaded issues in race have to do with the probability of having a characteristic given that you belong to a race. So far, Wade has not told me anything that indicates that we know much about this. Instead, he tells me we know a sort of reciprocal probability, which is the probability of belonging to a race given that you have a particular set of genetic characteristics. If you know Bayes’ theorem, you know that the one conditional probability need not be close to its reciprocal. I think that the hypothetical result given above makes one wary that there is a Bayesian sort of problem lurking in this book. Bear in mind that I am only part of the way through.

UPDATE: Wade apparently is out as NYT science writer. The reasons have not been disclosed, but I doubt that Bayes’ Theorem was a factor.

UPDATE 2: Commenters point out that Wade has been a former science editor at the NYT for quite some time, so perhaps the story of him being out is a misinterpretation.