The Ambrosini Critique

Some folks at Princeton have found, using panel data from England, that each additional inch in height is associated with 1.5-1.8% more wage income. Their suggested mechanism is having wealthy parents that feed their kids right and make sure they get more and better education leads to taller and better paid kids.

Its strange to me that to test the hypothesis that having wealthy parents leads to better economic outcomes, e.g. income, education, etc — a list of dependent variables that gets longer as Economics’ empire expands — these researchers had to use height data as a proxy for parental income. Economic historians often use height as a health, and thus an income, proxy because its very hard to find direct measures of wealth and income. This is an ok proxy because its plausible in the Malthusian period most variation in height was caused by variation in nutrition and its plausible that most of that variation was due to differences in wealth. In the modern context, most variation in height is due to genetic factors (I think… razib?) and I’m guessing most variation in nutrition are due to social factors (of which income group is one of many). Height, then, is a terrible proxy for parental income in the modern period.

For a modern test of this hypothesis, getting direct measures of parental income has to be a least as easy as getting height data. Why not directly test their hypothesis? At most, these guys have found evidence that doesn’t contradict their hypothesis. But random noise doesn’t contradict it either. Which is to say they haven’t moved me far from my priors.

Historians are bold with their findings, often telling a story of a long causal chain using a single correlation or two. I don’t mind it when they do this because they’re not working with much and not to mention, from my experience, it makes them colorful folk. Labor economists don’t and shouldn’t have this luxury.

(h/t economist)

From Japan 2008

This one needs a caption: There was a sign describing this construction project as building a fish spawning pathway. As you can see, they’re tearing out the old fish spawning pathway to build this new one. I should mention that the government agency that funds such projects had its prefecture headquarters across the street from the construction.

We were in Japan for 21 days and I’d say, besides the usual “Japanese” stuff, the thing that struck me most was the number and size of infrastructure projects, e.g. bridges, dams, railroads, etc.

We got lost driving in the middle of nowhere one day on a one lane road winding through the mountains. In 30 or so kilometers we drove through two or three villages with a total population of at most 100. Along that route there were three major infrastructure projects — realigning the road, erosion control, a new bridge — that must of had budgets in the tens of millions.

In other news, the Japanese government just approved a $132,000,000,000 stimulus package.

After making pretty easy work of Krugman, Waldman argues, “there’s a trade-off between microlevel diversification and macro-efficiency.” He then concludes:

If we want to maintain a well-diversified aggregate portfolio, it may be necessary to restrict the degree to which the portfolio of firms and individuals can be diversified. This implies forcing individuals to bear more risk than they would otherwise choose, in order to reduce systemic risk. We might be better off by letting individuals shed risk via some form of social insurance while forcing investment choices to be sharp, than by encouraging people to blur the information they present in their portfolio choices in order to diversify and hedge.

I’m reading Xiaokai Yang’s textbook on inframarginal analysis. The preface is great and would be worth the trek down to the library. One of the distinctions he makes between management science and economics is business folks care about individual trade-offs and optimal individual choice while economists care about aggregate trade-offs. I agree, of course, but in my experience we spend too much on the former in the economics classroom.

Clearly. My salary doesn’t depend on not understanding Keynes and the wonders of fiscal policy. I choose to think this is just a really complex issue and only Nobel Laureates (or some Nobel Laureates) can understand it.

In Krugman’s book, he tells the story of the Capitol Hill babysitting co-op. Co-op members can do three things with their time: babysit others’ children and build up their savings of the IOU coupons they earned, spend coupons and go out for the evening, or sit at home with the kids.

Also, they can borrow coupons, paying interest in the form of more coupons paid back than borrowed, from the co-op authority. This allows the authority to cool off an over-babysat economy by increasing the number coupons that would have to be paid back by those that borrowed them. This means babysitting today is worth less than babysitting in the future so people are more likely to have their kids babysat today. Likewise, a depressed, underproducing economy could be encouraged by decreasing the number of coupons that borrowers would have to pay back.

A liquidity trap comes when the co-op authority reduces the “interest rate” such that one coupon borrowed is paid back with one coupon but the economy is still depressed.

The solution is inflation. Make the coupons people are holding worth less over time so they become less likely to horde them. Penalize liquidity preference.

Thus have inflationary monetary policy.

But then Krugman has another thus. Thus, he says, have the government produce large amounts of deficit spending.

I don’t get it — maybe I need to be on someone else’s payroll or win a Nobel prize. Yes I know about Keynesian crosses, but the government’s borrowed money, besides the usual crowding out by its effects on interest rates, has to be paid back. In anticipation for when those debts come due, people save more today so they can pay those future taxes; they horde babysitting coupons. In that case, we’re back to where we started. The reason for hording has changed, but the hording remains.

But forget Keynes and hocus pocus theory. The data are pretty inconclusive about fiscal stimulus¹. Although, Krugman might argue the papers Mankiw cites look at the wrong data, i.e. they look at the U.S. in non-depression times.

I don’t think appeals to the precautionary principle get us anywhere. Yeah, fiscal stimulus might help, but it might hurt too. Creating frictions in the labor market (by increasing unemployed workers’ reservation wages, thus increasing the time it takes them to find jobs) and otherwise slowing down the adjustment of factors of production (by subsidizing dying industries or funding make-work programs) in a time when adjustment is necessary will only prolong the pain.

1. My nomination for best footnote of the year is the third one in the Mountford paper Mankiw cites. One finding of that paper is that consumption doesn’t change much, and so neither does welfare, when there are increases in government spending even if its deficit spending. The footnote says this can be true because of increasing returns, the interaction of sticky prices with “non-Ricardian” agents or with imperfect intersectoral capital mobility. [↩]