Right in the Short Run

the 5 best models of drug  (incl. alcohol) consumption?

Steve Levitt writes a reply to Noam Scheiber’s hit piece on Levitt and other eminent Economists. It is a great read, here is an excerpt:

It seems to me that Scheiber is tied up in knots to the point that he no longer knows what he believes. He seems to instinctively like clever research, but feels such guilt about it that he is compelled to denounce it. The incredibly important point that he misses is that often being clever is the way one cracks an important problem. He can denigrate the questions I have made progress on tackling, but it seems to me that understanding how crime responds to punishment, why crime fell in the 1990s, why Blacks are lagging Whites so badly educationally and economically, whether firms profit maximize, whether campaign spending affects election outcomes, and whether elected officials follow the will of the electorate are pretty reasonable topics for an economist to study. Sure, my approach to each of these was different than what everyone else was doing, but the questions I have asked have (usually) had both serious policy questions and economic issues at their heart, and I delivered some answers when others were not.

Joshua Angrist also responds:

Second, in his rush to tar some up-and-comers with the “cute-o-nomics” brush, Scheiber misses a central feature of the clean-identification research agenda, best explained by example.  One of the enduring scientific and policy questions in Labor economics is the sensitivity of hours worked to changes in pay (this matters for tax policy, for example).  The best evidence labor economists have on the relation between wages and hours worked comes from a small experiment (by Ernst Fehr and Lorenz Goette) involving the wages of bicycle messengers in Switzerland.  The second best comes from a study of stadium vendors by Gerald Oettinger.  Who cares about the riders of Veloblitz or snack sellers at Camden Yards?  We care because economics is predicated on the notion that a few simple principles explain behavior in many settings.  These studies produce results that are convincing and may well be general, though, as always in science, it will take replication to know for sure.

…was written by Chiaki Moriguchi and Emmanuel Saez. It’s referring to Japan:

Second, using income composition data, we show that the dramatic fall in income concentration at the top was primarily due to the collapse of capital income during WWII. Evidence from estate tax statistics confirms the drastic decline in top wealth holdings during and immediately after WWII. We argue that the transformation of the institutional structure under the postwar occupational reforms, such as the abolishment of primogeniture, the establishment of progressive tax, and the changes in corporate governance and union structure, prevented the re-concentration of income. Importantly, such redistributive government policies, which likely hindered the “natural” process of capital accumulation, were accompanied by one of the most impressive and sustained economic growths in modern history.

This paper (“The Evolution of Income Concentration in Japan, 1886-2002: Evidence from Income Tax Statistics”) is part of a larger series spearheaded by Emmanuel Saez and his buddy Thomas Piketty; they utilize tax microdata to estimate the share of income accruing to the very, very, very rich in a bunch of countries. The fine granularity of the tax data gives them a good look at the situation of the top 1%, .1%, and even .01% of earners. And surprise surprise, the income shares of these percentiles have behaved pretty differently between Japan and the US!

This would seem to suggest that skill-biased technological change has not been driving the increase in inequality in the U.S. — not when it’s the top .1%  who are capturing the money. The interesting thing about the behavior about Japan’s income concentration is that it hasn’t increased despite some very large changes in the country’s labor markets. For example, union density has decline dramatically over the past few decades, and a much greater share of the labor force is employed part time or on short contracts. Still, the ultra-rich in Japan are not capturing much more of national income.

Earlier this year Andrew Gelman and co. came up with a new argument solving the voting paradox, based on social preferences (the paradox of voting: if you are rational, you will realize that the probability of affecting the outcome of a vote is negligible, while the costs are often considerable. Yet still people vote regularly).

Social preference is basically the idea that individuals incorporate other people’s utility into their considerations.

Gelman argues that if individuals take into consideration the impact of a vote’s outcome on other individual’s in society, as well as themselves, voting may indeed be rational.

A recent experimental paper by Fisman, Kariv and Markovits shows that some people do indeed have social preferences.

Voters, congratulations.

For all the crap Steve Levitt gets about his abortion paper due to coding errors and what not, I feel bad for him on this count.  Kiki Pop-Eleches did similar work in Romania, utilizing a “natural experiment” in which the Romanian dictator Nicolae Ceausescu banned abortion in 1966.  In any event, he finds that:

The restrictive policy disproportionately affected disadvantaged women and created telltale signs of the “unwantedness” effect - a rise in infant mortality and criminal behavior later in life.

The paper can be found here.  Essentially, Kiki found similar results.  People seem to forget this when smashing Levitt. Sure, a few coding mistakes were made, and that certainly isn’t a good thing.  But that certainly does not take away from the ingenuity of his original paper, which seems to be corroborated by other independent studies such as Kiki’s.

Tyler Cowen once more clarifying our goals in life, if you want tenure, just cite yourself.

David Laibson mentioned how if you give people randomly assigned health care, and then give them the options to change two weeks later, they tend not to.  Sendhil Mullainathan mentioned how health care providers systematically recommend the same plan no matter what medical history the caller (a senior citizen) had and no matter what cocktail of medicines (s)he was on.  Thoughts?

Yes, says Alex Tabarrok:

Here’s one idea which has got me thinking. In the debate over the economics of global warming the correct discount rate to apply to future generations is a key variable with those arguing that we should do something now, implicitly (and explicitly) arguing for a low discount rate. But if we count future generations highly we ought also to be in favor of reforming social security. Investing social security in the stock market “royally screws” current retirees but increasings the savings rate which will be benefit future generations. Thus, a low discount rate ought to weigh in favor of doing something about global warming and investing social security funds in the stock market. Not many people come out consistent on these grounds (I think Brad DeLong is one of the few.) I know, I don’t but Landsburg has got me thinking.

This is an interesting way to look at things. Some responses:

1. We should choose the reform that, on the margin, provides the most intergenerational benefit. Where global warming falls in this regard, I do not know, but Social Security is clearly swamped by Medicare in its long run shortfall.
2. Social Security reform only benefits current and future Americans, while fighting global warming benefits everyone.
3. There is, as Martin Weitzman calls it, a “left tail that carries most of the weight of expected marginal utility” to global warming outcomes in the absence of reform. We don’t know just how bad a world without global warming reforms will be in a century, but it could be very bad indeed. The distribution of marginal utility from an unreformed Social Security system is very tight and not particularly negative.
4. As for shirking on promises made to current Social Security recipients by investing cash that was destined for them into the stock market, then paying it out to future generations: doing so would royally screw anyone who was counting on Social Security for retirement. Future generations would not forget this sudden change, and would have to discount their SS payments by the likelihood of being screwed out of them — if it happened once it can happen again! This dynamic effect could swamp the benefit of screwing the current generation.

I believe reason 3 is why Tabarrok thinks Brad Delong is consistent. Check out Delong’s post, in which he reviews Martin Weitzman’s article.

I do not know a lot about labor economics, but I have been playing around with this idea for quite sometime now. Can we raise the minimum wage (or institute a minimum wage) and still see an uptake (or a non-decrease) in labor? Well, the standard response seems to be “yes” via a monopsony model, which is great, but not the viewpoint I was going for.

The vantage point I wanted to consider was a little more general. What if the industry is not monopsonistic? My idea stemmed from a discussion in which Steven Levitt was explaining his research about how most firms may not be profit maximizing though this seems to be a common assumption in economics.

The reason we say that increases in wage correspond to a decline in labor uptake and a substitution towards capital is because we assume profit maximization on the part of firms. Essentially, if data (such as Card’s research) points to the fact that labor does not decrease despite these increases in wages, then the change in slope of the hyperplane did not affect its tangency point! This means that capital and labor are perfect complements since the the only way a hyperplane can still be tangent to an isoquant manifold after changing slope is if it has met the manifold at a cusp/kink. Of course, perfect complementarity between capital and labor is probably not the case. What else can be the explanation?

Well, if firms weren’t profit maximizing in the first place, then certainly this could be explained. Differential changes in wage rates would not correspond to substitution away from labor since the firm would not even be at the tangency condition in the first place! Consider a situation in which firms only seek to profit “satisfice” as opposed to maximize. Threshold satisficing could mean that firms don’t respond to increases in wages by firing en masse. (This isn’t to say that one can make large increases in wage rate and still have the firms employing everybody.)

Ultimately, my discussion here is a general comment that when we institute policies based on assumptions such as profit maximization, some of the results may be contingent on that fact. These are not general results, but are rather specific implications of our particular assumptions. Remove those assumptions (perhaps they do not actually happen in real life) and many policy implications may change. Of course, the framework I have discussed makes no claim to understanding how firms decide to target profits … we can discuss further theories about that

Any thoughts on these?