Pro-bailout, anti-geek, greedy, not fearful

Warren Buffet (interview with Charlie Rose). Please watch the whole thing; Mr. Buffet is a character.

Speaking of transparent updating, how should I update my views of the likelihood of success of the bailout based on this endorsement by Buffet? He has a good track record and he’s obviously more knowledgeable than me on these subjects, but he will also gain personally from a bailout. He’s not making a completely objective assessment of the bailout, so to what extent do I ignore what he’s saying? Should people update their beliefs at all based on non-objective opinions (which is, like, all opinions)?

PS – Mr. Buffet also touches on his views of taxes that were such an issue a couple months ago (starting at about 45 minutes).

PPS – Mr. Buffet says eve he is not big enough to make some of the deals that need to be done. So the government isn’t addressing market failure… its just the only player that’s big enough.

Why oh why can’t we get a better left academic blogosphere?

I hope I live to see the day that statements like this:

And of course, the poor have done much worse. Household incomes for the bottom quintile have barely moved for decades.

are openly mocked as hopelessly economically illiterate.

“The Poor” (or “The Bottom Quintile”) ain’t nobody ((Wouldn’t it be funny if we talked like this about other transient attributes of people? “The College Town Dwellers” saw decreased incomes over the last couple of decades. “The Sneezers” saw increased tissue use inequality.)) is the obvious rejoinder so feel free to insert such a reply right ***here***. Or ***here***. Add exclamation points if necessary. And make sure to reference the Marxist Fallacy.

Economists usually have a deep appreciation for dynamics in society; intertemporal investment decisions, inflation expectations, growth dynamics and all that. Why is it when it comes to income distribution we slip back into this clunky static framework? As I pointed out earlier this summer, even within the stuffy confines of “income quantiles” thinking, expectations of moving between quantiles, of so-called income mobility, implies agents are ok with increasing income inequality as long as everyone’s incomes are at least weakly increasing (aka “non-zero sum increases in inequality”).

Of course, that result relies on the assumption that people only care about their own level of consumption. Things get sticky if people care about relative consumption. The problem is there just isn’t compelling evidence of such “inequality aversion”. In lab experiments (eg. 1, 2, 3 pdfs), agents do show social preferences, preferences over the consumption level of other agents, but those preferences are expressed as preferences for efficiency (i.e. maximize total consumption) or a preference to maximize the minimum consumption level in the “society” ((In the case of these lab experiments, society is just the other agents in the experiment.)).

If social preferences are for efficiency, then the result still holds because everyone’s expected incomes increase with non-zero sum increases in inequality. Increases in everyone’s incomes satisfy a preference for efficiency by definition. Furthermore, even if social preferences come in the form of maximizing the consumption of the worse off, then the result holds due to the fact that even the bottom quantile’s income is at least stagnant by assumption. This is a key assumption and its reasonable given it conforms to recent experience.

Now, when people are surveyed, they say they don’t like inequality (e.g. this pdf). Besides the usual litany of problems with survey data, a major defect of these studies is that you can’t tell if these stated preferences reflect inequality aversion or maximin preferences or preferences for efficiency. Its next to impossible to ask a nuanced enough question to get at these distinctions and still expect survey respondents to understand what your asking. These distinctions matter a great deal for policy, of course. As mentioned above, social preferences for efficiency and maximin don’t call for redistribution in the face of increasing non-zero sum inequality. Annoyingly, these distinctions are ignored by the survey researchers who interpret their results as measures of inequality aversion and then make the attendant policy recommendations.

Results from the lab have their own litany of problems, but on net they’re a more reliable because they measure the thing we actually care about. Surveys tell us that people have social preferences, but lab experiments tell us people don’t have strong aversion to inequality.

UPDATE: Notsneaky is provoking me in the comments: “I have no basis except my intuition for this claim, but its my blog and I’ll speculate if I want to: quantile based income statistics are normatively biased against more dynamic economies. What do I mean by more dynamic economy? Dynamic economies are those that give more opportunities for individuals to reinvent themselves via schooling, relocation or just through norms that allow people to make dramatic changes in their careers. Personally, I think dynamic economies are better. Anyway, why do I think those economies are normatively biased against by quantile thinking? Dynamic economies will have more individuals that have temporarily low (or zero) incomes and so they’ll have lower incomes in the bottom quantiles.

So we have this funny situation where dynamic economies (good) will be confused for unequal economies (bad). Now, I’m not sure if the American economy is unequal or dynamic, but I am sure that everyone assumes the statistics about “The Poor” are bad.”

Living on The Rock

On this day in 1938, Orwell was in Gibraltar and wrote:

Standard of living apparently not very low, no barefooted adults and few children. Fruit and vegetables cheap, wine and tobacco evidently untaxed or taxed very little (English cigarettes 3/- a hundred, Spanish 10d. a hundred), silk very cheap. No English sugar or matches, all Belgian. Cows’ milk 6d. a pint.

Jeez. In that one paragraph he beat Krugman to the “love of varieties” thing by about 40 years and he beat Broada and Romalis to the “price deflate using the basket of goods actually bought” thing by 70 years.

I like my redistribution with a side of toast

How do you like your redistribution? Prof. Kenworthy thinks there should be policy that would make more equal growth rates among people at the expense of potentially reducing those growth rates across the board.

“Why would anyone want such a policy?” I asked at his blog to which the deafening sound of crickets was the only reply. So maybe I’ll try it here:

But suppose we grant the professor his conclusion, suppose everyone is getting richer but the rich much more so. Is this really a problem? Does it make sense to enact policy (e.g. higher taxes on the rich) that makes more equal growth rates of incomes across income classes but runs the risk of reducing everyone’s income growth rates? What model of human behavior justifies this policy trade off?

Maybe an example will help. Suppose under current policy, my neighbor’s income increases by 25% every year and mine only goes up 10% per year. Now suppose there was a policy that would decrease my growth rate to 5% a year and his to 10% a year. The new policy would make growth rates more equal, but reduce everyone’s growth rates. Should I support that policy? Why?

Would anyone support this policy? Does your answer change if instead of neighbors we’re talking about adjoining cities? states? countries?

Is this just Haidt’s liberal’s fairness running amuck? If so, shouldn’t we mock it like we mocked those silly conservatives’ disgust at gays and empowered women?

Tax data vs survey data

Prof. Delong links to Brad Setser who a couple months ago was lamenting over this chart:

Notice the negative growth numbers for the bottom 90th percentile.

The data are from Piketty and Saez. Curiously, these authors don’t analyze the income shares of the bottom 90th percentile. They say this is because before 1945 most people were exempt from filing tax returns except top earners. But I suspect they think these data are a bad measure of bottom 90th percentile even after that because in the working paper, the published paper, the comment and the “summary for the broader public” the shares of the bottom 90th percentile are never reported. In any case, this means whoever at the WSJ that created the chart extrapolated from Piketty and Saez’s data on top income shares and didn’t take the data directly from them.

Tax data have a number of problems, all addressed in their paper. There’s evasion, exemptions, and income shifting. Also, because most taxes are filed by family instead of by individual, tax data can only be used to look at family incomes. This means some of the trends will be the result of demographic changes (i.e. families differentially getting smaller in each income percentile).

But Piketty and Saez use tax data, instead of survey data (e.g. Census), to analyze top income shares because given there’s no random sample, the top of the top have a proper representation in the data set. In a random survey, its unlikely you’ll end up surveying one of the 14,836 families that make up the top 0.01% earners. They’re using the right data for the job, but the job isn’t to analyze shares of the bottom.

That’s why we have survey data. And I happen to have survey data, the 2000 Census and the 2006 CPS, sitting on my desktop. By my figuring, wages of the bottom 90th percentile went up by 5% between those years.

So, we should fight over what data is better, but its at least important to know that survey data gives a different answer than tax records. Its a bit premature to conclude, as Setser did, “Most Americans didn’t benefit from the expansion of the past few years.” That said, a 5% increase is meager over 6 years. I won’t be throwing any parties.

Women avert your eyes: Fun with math

I just counted the number of men and women grad students in the Berkeley Math department. Not being able to gender non-European names, I count 120 men and 25 women. That’s a 1 to 5 ratio.

According to the graph here, if IQs in that department are at or above 175 IQ (assuming IQ is a good proxy for math ability or at least the difference between the male and female distributions of math ability is similar to the difference in distribution of IQ), then variation in math ability can explain the underrepresentedness ((Get your prefix here! Suffix here! Get your hot, fresh -fixes!)) of women in that department.

Well, according to the Berkeley math admissions page, applicants score above the 80th percentile in the math subject test. Assuming this test is only taken by math majors and that the average attendee is smarter than the average applicant, we can assume Berkeley math grad students are probably in the 90th percentile of math grad students (another way to get this percentile would be to assume all the top students go to Berkeley, its the top math program, and estimate the total number of math grad students… but I’m too lazy).

Ok. So, using the distribution of GRE scores on this page (pdf) and using this table to convert GRE to IQ, this means the average IQ at Berkeley Math is 146.92. Rounding to significant digits, this would suggest Berkeley students are 2 standard deviations too dumb to justify the gender imbalance.

Damn sexists… or there’s more problems with this exercise than I can name.

In other words…

Theorem: With constant, positive income mobility such that any income group can transition to any other income group with positive probability, a non-zero sum increase in income inequality results in an increase in expected lifetime incomes.

Proof: Expected lifetime income is the expectation of income in each income group over a constant distribution of transition probabilities. The non-zero sum increase means some groups get richer while others stagnate or get richer, but to a lesser extent. So increasing one of the summands increases the sum. QED.

Corollary: If utility is monotone in expected lifetime income (or present value of income or present consumption with access to capital markets) and at least weak gains in income are experienced in every income group, income inequality doesn’t matter; mobility does.

I’ve ignored discounting which I think is what plays a part in the politics of redistribution. Suppose I expect to transition to the very richest income category sometime late in my life. If I discount the future enough, I won’t be able to wait to become rich and I may call for redistribution today.

Inequality and mobility

Kenworthy has stopped making sense. Thoma and Talking Heads fans rejoice.

Kenworthy’s argument is that growing income inequality is bad IF intragenerational income mobility hasn’t increased too. He shows charts showing mobility hasn’t increased and then… presto… badness.

This is wrong. Totally wrong.

Suppose last year there was two possible incomes, 50% of people earn $0 and the rest earn $1. Suppose this year the possible earnings are $0 and $10 (OMG a rise in inequality!). Some proportion n of the people earning $0 last year now make $10 and some people that were earning $1 now are earning $0. Same sort of thing happens next year… inequality grows even higher so that the top earners make $100, the lowest $0 and people move between groups

Given Kenworthy’s endorsement of Friedman’s views of inequality, I assume he agrees the best measure of income inequality is inequality of lifetime earnings. So if I was earning $0 last year decade, I could expect to earn n * $10 this year decade and 2*n* (1 – n) * $100 next year decade. At n=40%, which is about the parametrization that fits the data, this would be $52 for my expected lifetime earnings.

Now here’s the point: with a constant n, i.e. a constant fraction of people moving into the high income group, increases in inequality translate to increases in my expected lifetime income. To see this, just add zeros to the high income this year decade and next and then do the math.

How could that be a bad thing?

Over… stim… ulation…

Eliezer Yudkowsky is talking about one of my favorite ideas on this blog… morality as preference! and in the form of Socratic dialog no less!

Subhan: “I suggest that when the pie-requester says to you, ‘It is right for me to get some pie’, this asserts that you want the pie-requester to get a slice.”

Obert: “Why should I need to be told what I want?”

Subhan: “You take a needlessly restrictive view of wanting, Obert; I am not setting out to reduce humans to creatures of animal instinct. Your wants include those desires you label ‘moral values’, such as wanting the hungry to be fed -”

Obert: “And you see no distinction between my desire to feed the hungry, and my desire to eat all the delicious pie myself?”

Subhan: “No! They are both desires – backed by different emotions, perhaps, but both desires. To continue, the pie-requester hopes that you have a desire to feed the hungry, and so says, ‘It is right that I should get a slice of this pie’, to remind you of your own desire. We do not automatically know all the consequences of our own wants; we are not logically omniscient.”

Here’s the second part where EY says his own views don’t fit either interlocutor’s so in particular he doesn’t believe morals are merely preferences. I await, with bated breath, part three!

And then — and then! — we have Prof. Delong going after the “Walmart reduced prices of things poor people buy relative to things rich people buy and so in real terms inequality didn’t much increase in the last decade” crowd (aka Broda and Romalis). And he does so not in his usual “I’m a social democrat following marching orders” mode but in his “damn good economist” mode.

When Broda and Romalis assert that trade is causing the prices of tradeable necessities to fall rapidly, they are either (a) breaking the H-O framework in some way, or (b) implicitly asserting that capital is the scarce factor in the United States and thus the factor of production whose returns are reduced by globalization.

He then provides this theoretical paper which I take to be validation of my own dissertation topic and the Invisible College giving me a pass on my virtual oral exam.

The basic idea is that Stolper-Samualson is broken if you consider people share in the ownership of factors of production… there doesn’t have to be losers from trade if there’s extensive enough sharing of ownership. Where have you heard that before, I wonder.

To be fair

Herbert was talking about young men with poor education (i.e. high school or less). So here you go:

There’s a definite decrease in wages of this group. Here’s unemployment of the same group:

UPDATE: This group of people has been about 1/3 to 1/5 of a percent 3-5% of the total population through this period with a maximum in the late 70’s and early 80’s. Also, this group includes college freshman, a group that has seen substantial growth as a percent of the total population since 1960.