Category Archives: Four Forces Watch

Brad DeLong on the Public Sector vs. the Private Sector

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He writes,

Now we know that as bad as market failures can be, government failures can be worse. We badly need new effective institutional forms. But the decreasing salience of “Smithian” commodities in the twenty-first century means that rational governance would expect the private-market sphere to shrink relative to the public.

Pointer from Tyler Cowen.

I think of Brad DeLong as a Jekyll-Hyde character. The bad Brad DeLong snarks and snarls. The good Brad DeLong is insightful. This post is the good Brad DeLong. Read the whole thing. I am only commenting on part of it now. I would like to comment more on his discussion of the risk premium, but I think I need to see a longer, less hurried version of it.

In the quoted passage, his point is that as the share of the economy that produces stuff decreases and the share that provides health care, education, and information increases, we will see more informational asymmetries and externalities. This might mean that we need an expansion of existing government. However, when I think of “new institutional forms,” I think of the organizations of civil society and entrepreneurs.

Recall that Tyler and Alex see informational asymmetry being conquered by the Internet and entrepreneurs who make use of it. Recall also my comments on reputation systems as regulators.

Recall also my catch-phrase: Markets fail. Use markets.

Four Forces Watch: Poor Children Have Smaller Brains

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The Washington Post did not put this story on page one.

>New research that shows poor children have smaller brains than affluent children has deepened the national debate about ways to narrow the achievement gap.

Most of the story goes with the assumption poverty causes smaller brain size. But amazingly enough, the story also includes this alternative interpretation:

But James Thompson, a psychologist at University College London, has a third theory.

“People who have less ability and marry people with less ability have children who, on balance, on average, have less ability,” he said. Thompson noted that there is a genetic component to intelligence that Noble and Sowell failed to consider.

“It makes my jaw drop that we’ve known for years intelligence is inheritable and scientists are beginning to track down exactly how it happens,” Thompson said. “The well-known genetic hypothesis has not even had a chance to enter the door in this discussion.”

The story also quotes Charles Murray.

“I would be astonished if children’s brain size were NOT correlated with parental income. How could it be otherwise?”

The politically correct presumption would be that the brain size of poor children can be increased using some government programs. Can we verify that by comparing brain sizes of identical children raised apart? Or by comparing brain sizes of children randomly chosen for pre-school programs with children from a control group?

Murray has more commentary here, including a historical scientific controversy over whether there even exists a relationship between brain size and intelligence among humans.

The Case for Taxing College Endowments

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Jorge Klor de Alva and Mark Schneider make the argument.

many of the richest universities in the country–sitting on hundreds of millions, if not billions, of dollars in tax exempt endowments, and garnering tens of millions of dollars of tax deductible gifts every year–receive government subsidies through current tax laws that dwarf anything received by public colleges and universities, institutions that educate the majority of the nation’s low- and middle-class students. For example, we estimate that in 2013, Princeton University’s tax-exempt status generated more than $100,000 per full-time equivalent student in taxpayer subsidies, compared to around $12,000 per student at Rutgers
University (the state flagship)

However, the flaw is not that rich educational institutions benefit more than other educational institutions from tax exemptions. The flaw is that our tax system has designated certain institutions as morally superior to others because they claim non-profit status.

The essay that I wrote on this topic is one of my favorites.

Other tax issues might be moot if instead of taxing income or profits we shifted to a tax on the consumption of goods and services. Such a tax system would place profit-seeking firms and nonprofits on an equal footing. It would continue to exempt donations from tax, but it would equally exempt other forms of saving and investment.

Another Thiel Theme: Short Globalization

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In his conversation with Tyler Cowen, this theme was not as pervasive as contrarianism, but I found it more interesting and more provocative. Thiel’s view is that globalization has peaked. Therefore, companies and cities that are tied closely to globalization will decline relative to companies and cities that are less outward looking. So Texas will do better than Virginia, because Texas is focused on its own domestic production, while Virginia’s strength (I would say this only about Northern Virginia, by the way) is its military and diplomatic connections overseas.

Think about the notion “globalization has peaked” from a PSST perspective. Economic activity consists of patterns of sustainable specialization and trade. Globalization means that new patterns are being created across countries more rapidly than within countries. What would drive that differential, and what would slow it down?

Think of the benefit of a new pattern coming from comparative advantage and specialization. The cost is the fixed cost of setting up the pattern. Compared with setting up a local pattern, setting up an international pattern will tend to have higher fixed cost but with a larger subsequent benefit.

One possibility is that the cost of setting international patterns fell as China and India allowed their economic institutions to conform more readily to U.S. standards. However, over time, as China and India climb their way into the middle class, international comparative advantage is being reduced. There was an infamous paper by Samuelson that envisioned such a scenario. (It was perhaps his last academic publication, and it was not well received, because he seemed to disparage free trade.)

Another possibility is that the “low-hanging fruit” of reasonably low fixed cost international setups has been picked. Manufacturing and call centers can be moved offshore at moderate cost. With the New Commanding Heights industries of education and health care, it is much more difficult.

Another possibility is that globalization has not peaked.

Regulation as a Fifth Force

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Scott Sumner writes,

Building restrictions are increasing rental income as a share of national income. Intellectual property rights are barriers to entry that tend to create a winner-take-all situation (although other factors like network effects also play a role.) And other types of regulations (financial, human resources, etc.) are especially burdensome for small firms, and this favors the growth of inequality-intensive large firms.

Megan McArdle writes,

Homeowners in low-density neighborhoods will fight like tigers to preserve what they have. We’ve given them the legal tools to frequently win that fight — and if you try to take those tools away, they’ll fight that, too.

In the Four Forces story, gentrification is driven by the New Commanding Heights and bifurcated family patterns. Universities and hospitals replace manufacturing firms as the leading enterprises in cities. They hire marshmallow-test winners, some of whom want to live near where they work. Other marshmallow-test winners, looking to marshmallow-test-winner mates, also move into cities. These gentrifiers like restaurants and trendy shops, but otherwise they want to try to re-create suburban living, with low-density housing and easy biking.

A Dissenting View on Bifurcating Families

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Nicole Sussner Rodgers writes,

according to a recent analysis of new census data on family structure, education and income from the Council on Contemporary Families (CCF). It found that financial security helps children more than does any particular family structure. Marriage is not a panacea for poverty: There are almost as many poor or near-poor children in two-parent families as there are in single-parent ones.

I believe that the analysis to which she refers is by Shannon Cavanagh. If you can find anything analytical in the piece, let me know. The last paragraph says,

Financial security, even more than household composition, shapes children’s everyday experiences in ways that contribute to growing inequality. Between the mid-1970s and the mid-2000s, the difference between what the richest 20 percent and the poorest 20 percent of parents spent on enrichment activities for their children nearly tripled (Duncan & Murnane, 2014). Today, a 20 percentage point difference in participation in extracurricular sports exists for children in families at or above 200 percent (42.5 percent) compared to those children in poverty (22.5 percent). The difference between children of two married parents and children with a single parent is only 10 percentage points (Hofferth, 2015). Although having a second parent in the household may be important, having financial resources may be even more important, and having a second parent by no means guarantees such resources.

I think that merely saying that “there are poor children in two-parent households, too” is not really the best strategy. I think that the long-term outcomes for children of two-parent households are demonstrably better than those for children of single-parent households. Robert Putnam is as forthcoming on that as anyone.

Instead, if you want to question the conservative advocacy of traditional families as a solution for poverty, I think you have at least two good arguments to make.

1. Correlation is not causation. That is, the greater presence of bad outcomes for children of single-parent households does not necessarily reflect a causal role for family structure. Of course, my suggestion that the correlation may be genetic is not exactly the sort of argument the left would like to use.

2. We know how to alleviate poverty by providing cash and other benefits. We do not know how to fix families.

But

My Talk on the Four Forces and Inspiration to Quality Comments

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First, the inspiration part.

Organizers say it will almost certainly be the first paper at the prestigious Brookings Papers on Economic Activity that was commissioned based on a blog comment. It is also a rare honor for a graduate student to present a sole-authored paper there; a quick scan of Brookings records shows a similar appearance by the now-renowned economist Jeffrey Sachs when he was a doctoral student in 1979.

“It’s made Matt famous,” said Tyler Cowen, the George Mason University economist who runs the Marginal Revolution blog, and who elevated Rognlie’s comment into a standalone post on his site. “It was brilliantly reasoned and right on target. And very elegant.”

More links here. Even more from Timothy Taylor.

Note that it should inspire high-quality comments, not quantity or snark.

The topic is inequality, which leads to a summary of my talk.

In 1965, the St. Louis Cardinals played their home games in Sportsman’s Park (aka Busch Stadium I). The most expensive seat in the ballpark, a box seat, cost $3.50. A blue-collar worker, who earned about $2 an hour at the time, could treat a family of four to a game in these most expensive seats for less than one day’s pay.

These days, the Cards play at the new stadium, Busch Stadium III. A typical blue-collar worker makes something like $20 an hour The cheapest seat in the stadium still costs less than an hour’s pay. But the most expensive seats cost somewhere north of $800. It would take a month for a blue collar worker to earn enough to treat a family of four to the best seats in the ballpark.

In fact, most seats at the new ballpark are out of reach of blue-collar workers. Why is this? Are the new owners more greedy than Augie Busch, who gave tickets away cheap because he was a nice guy? I think not.

The new owners charge high prices for most seats because nowadays they can. In 1965, the top third and the bottom third of the earnings distribution were not that far apart, so that if you charged prices way above what a blue-collar worker could afford, you would have had mostly empty seats. Today, the top third provide a cadre of highly affluent customers.

In 1965, if you were in the top third and went to a baseball game, chances are that there were people sitting nearby from the bottom third Today, the top third and the bottom third are not sitting in the same part of the ballpark.

I think that the explanation for this comes from the four forces.

1. The New Commanding Heights, which means that over the past 100 years more of the increase in total wealth has been spent on education and health care than on manufactured goods. This trend has become most noticeable in the last thirty years. It means that earnings are no longer split between corporate shareholders and a nearly-homogeneous work force. They are split between high-skilled professionals and low-skilled support staff.

2. Bifurcated marriage patterns. Fifty years ago, one often found a marriage between someone who originated in the top third of the distribution and someone who originated in the bottom third. Since the 1960s, that has become rare. That creates the Coming Apart phenomenon documented by Charles Murray and re-documented by Robert Putnam.

3. Factor-price equalization exacerbates the competitive pressure on low-skilled workers.

4. Moore’s Law means that when computers are able to do a task as well as humans, they soon surpass humans.

Policy interventions to try to stop these four forces or reverse their effects are likely to be futile. The future will be some combination of the Diamond Age scenario (everyone’s basic needs satisfied, with an upper class of Vickys enjoying handmade luxury goods) and a Beyond Therapy scenario, with everyone enhanced by genetic engineering, implants, and drugs.

Megan McArdle on Bifurcated Family Patterns

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She writes,

Could this be genetic? you ask. People who have impulse-control problems might be more likely to divorce and pass those traits on to their kids. Partially, sure. But two evidence points argue against genetic determinism. First, similar, although less severe, patterns show up in the case of kids who lose one parent, which is mostly not going to be due to homicide. And second, if this is genetic, how come it has changed over time? Have we all gotten genetically less able to stay out of jail or sustain a long-term marriage?

We know that children of single-parent households have worse outcomes than children of two-parent households. To simplify, let us say that there are favorable family patterns and unfavorable family patterns.

First question: how much of this is causal?

It could be that an inability to do well on the marshmallow test causes you to be less likely to raise children in a favorable family pattern and also more likely to pass on to your children genes that cause them to be unable to do well on the marshmallow test. That is how genetics could account for the relationship between family patterns and child outcomes.

Megan asks, what has changed over time? It could be two things. First, nowadays it may be that you have to be much better at the marshmallow test to sustain a favorable family pattern. Second, it may that we have gone through two or three generations of increasingly assortive mating.

Until 1965, a man who was in the top third on the marshmallow test might very well have been married to a woman in the bottom third, and conversely. For one thing, the top third and the bottom third were not that far apart. For another, the signals of being able to do well on the marshmallow test were not as clear (college education was too rare to be a reliable signal, particularly among women). Finally, men and women cared more about separate respective roles (breadwinner and homemaker) than about common abilities in the marshmallow test.

But in the 1960s that began to change. So you get one generation of assortive mating, and for the children of these marriages the difference between the top third and the bottom third on the marshmallow test starts to widen. Then they grow up, engage in assortive mating, have children, and difference widens once more. And so on.

But suppose we assume that there is a strong causal relationship between bad family patterns and bad outcomes. That leads to our

Second question: what can policy makers do to improve family patterns?

If anti-poverty programs are the solution, then why has the problem been getting worse? The Center on Budget and Policy Priorities (pointer from Mark Thoma) will tell you that anti-poverty programs are working to keep people out of poverty. So why are we not seeing more family stability? (Ross Douthat makes related points. Pointer from Tyler Cowen.)

Of course, there is a hypothesis, going back to Moynihan’s analysis, that anti-poverty programs are the problem, rather than the solution, because on the margin they reduce incentives to marry. I am skeptical about that, but as you know I am all for replacing current means-tested programs with a universal benefit that has a low implicit marginal tax rate. The idea is to reduce the adverse incentives that presently exist.

Megan, like Charles Murray, would like to see elites proclaim the benefits of good family patterns. I am skeptical of that, also.

My guess is that family patterns are not amenable to public policy interventions.

Trade, Employment and Wages

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Derek M. Scissors writes,

If trade deficits have caused job loss for decades, millions of jobs on some counts, we should see a clear and sustained relationship between trade and unemployment. We don’t.

Right away, I can think of two reasons not to find a relationship.

1. As with many macroeconomic variables, there is causal density. Many factors affect the trade balance, and many factors affect unemployment. In standard international macro, anything that strengthens domestic demand will cause employment to rise along with the trade deficit.

2. Deviations from full employment are temporary (they last for several years, but not forever), at least according to many economic theories. In the long run, the primary effect of globalization should be on the wage rates of various workers, not on the employment rates. And indeed a recent paper by Ebenstein and others claims to find such effects

The new Robert Putnam Book

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I got it as soon as it was released and finished it in a few hours.

I like his top third/bottom third way to approach inequality. Of the four forces, he emphasizes what I have been calling demographic disparity and what he calls, more descriptively, bifurcated family patterns; he mentions, using different terms, factor-price equalization and Moore’s Law, but does little with them. Nothing on the New Commanding Heights.

He is inexcusably shabby toward Charles Murray. He does not say he owes a debt to Murray. He does not summarize Coming Apart. He just gives it one brief, dismissive footnote.

Putnam plays very fast and loose with correlation and causality. At one point, he even admits this.

He never once mentions genetics as a factor in inequality. This biases the analysis much more in favor of policy remedies than is reasonable.

Overall, I came away with some new data points, but no new insights, and some anger and frustration with the flaws.

Some of the data and some of the analysis goes against his lefty readers’ biases, although he makes it easy for them to stumble over these truths, pick themselves up, and move on as if nothing happened. (Churchill’s phrase)