Part in our continuing series… Screaming at the INTERNET!

One of the main reasons out-of-wedlock births have skyrocketed in recent decades is because it has become so difficult for poor and poorly educated young men to earn enough to support a family.

Bob Herbert

I don’t see why diminishing economic opportunities mean we can’t “wag our fingers” at dudes that don’t support their kids. I suspect a family has much less ability to support itself when fathers are absent, whether or not the father has bad economic prospects.

Besides economic prospects for high school educated folks haven’t declined since 1960 when out of wedlock births were uncommon. They’ve stagnated ((Wage data from IPUMS, a rocking site, via this rocking tool. CPI data from Measuring Worth)).

Its hard to make the case that a variable that’s not changing is “the main reason” for large changes in another variable.

Marxist Fallacy

Thanks to Rodrik’s literary style (as quoted in the previous post), we can skip right over the technical issues… What does Stolper-Samuelson tell us if owners of factors own diversified portfolios of those factors?

Let me set this up a little:
Its the Marxist Fallacy to assume people can be neatly divided into classes. Marxist talk about the proletariat and the bourgeoisie; economists talk about high and low skill workers. Both commit the Marxist Fallacy.

For Marx, exploitation by bosses of workers drove wage differences and he ignored the fact that most people, while being someone’s underling, are someone else’s boss. The facts he didn’t confront are that the customer is always right (and we’re all customers) and that there’s very few leaf nodes in social graphs. Also, most people know the statistics on the percentage of Americans that own stocks; Marx’ narrative of capital against labor doesn’t make sense.

For economists, skill, measured by years of schooling, determines wage differences. The more skilled you are — i.e. the more hours you spend in the classroom — the more productive you’ll be on the job and thus the higher you’ll be paid. Economists ignore other types of skill.

With a change in trade or some other economic innovation, the Marxist Fallacy leads to an interpretation of the Stolper-Samuelson theorem like this:

The theorem does not identify who exactly will lose out. The loser in question could be the wealthiest group in the land. But if the good in question is highly intensive in unskilled labor, there is a strong presumption that it is unskilled workers who will be worse off.

Rodrik is conflating the supply of unskilled labor inputs and the suppliers of those inputs. There may be less demand in the U.S. for unskilled labor inputs, but that doesn’t necessarily mean there’s a reduction in the demand for the suppliers of that labor. A person may “own” both skill and unskilled factors, but only provide one to the labor market. This seems strange in the context of the binary skilled/unskilled framework, but in a more realistic multi-dimensional framework, this seems more tenable. For example, suppose skills can be decomposed into communication skills and tool-using skills. Trade may make demand for the latter decrease but the demand for the former increase, but the same person may have both types of skill. Who is hurt by trade in this case?

Given the special nature of labor supply ((its constrained by the 24-hour day and its lumpy… but I don’t think a spelled out theory would need to use these features of labor)), disentangling input supply and their suppliers is important. If before trade, tools-wielding was higher paid than communicating, then the person with both skills would supply only the first. After trade, when relative factor prices change and communication skills get higher paid, that person will change his or her supply. What’s the overall impact on the wage structure?

I don’t think Stolper-Samuelson gives us an answer.

Economics as She Is Spoke

Here is the proof. Take the good whose price falls with respect to all other goods’ prices in the economy. The percent change in that good’s price must be a weighted average of the percent change in the prices of its inputs. This means that there must be at least one input or factor whose price falls by more (in percentage terms) than the output price. The owner of this particular factor must be worse off then in relation not only to that good’s price, but in relation to all other prices as well.

Dani Rodrik ((Once someone did the math to confirm this intuition, do the rest of us have to be burdened with the Greek letters?))


This is not why people are opposed to free trade:

When factories move abroad, however, the shift is perceived to be due to poorer labour conditions, laxer environmental standards, and lower wages in the competing nation. This seems akin to breaking the rules, and is the source of anti-trade passion on the issue.

The Economist

The reason people don’t get up in arms about technological advances even though they do with trade-induced changes in labor demand is because technological advances are usually diffuse in time and space. Computers, for example, impacted almost every job in the economy. Today over 60% of workers use one on the job. The invention of computers and their subsequent diffusion in the economy put people like my Mom, a file clerk at a doctors office in the 80’s, “out of work” ((She wasn’t laid off or anything, she just got a job across the street and the doctor’s office didn’t have to hire a replacement.)) and it also reduced the demand for jobs like book keepers and secretaries. These changes didn’t happen suddenly and some sectors of the economy are still reorganizing work around computers.

Removing a trade barrier, on the other hand, has almost immediate, concentrated effect. Reducing steel tariffs results in the next orders of steel being to suppliers over seas. Steel workers lose their jobs and they do so all at once when the factory goes idle.

Why should people care about sudden and concentrated disruptions in the demand for labor, but not diffuse ones? Its easy to come up with psychological just-so stories (e.g. people just don’t like sudden shocks or they’re unable to discern more gradual changes). Just like their evolutionary psychology cousins, these stories are ultimately unsatisfying. You can explain any behavior by appealing to preferences.

The economic explanation is this: there is some time cost to bitching ((this is a technical term)). Bitching is unproductive and it takes resources. If there was no cost to bitching, that’s all people would do. There’s a possibility, though, if one bitches, they’ll get attention (in the form of political coddling of one form or other). So if a labor demand shift is short and severe, the costs of bitching are out-weighed by its expected benefits.

Notice I didn’t have to appeal to collective action.

The Economist’s psychological explanation is a little different; people care about “fairness.” This seems even more unlikely to be driving the opposition to trade than the just-so psychology cited above. Its not clear why some demand shifts would be unfair and some fair except if one appeals to just-so-ness. In any case, people may care about “fairness” (even though this hasn’t been experimentally proven), but in explaining economic phenomenon we should exhaust pure economic explanations before we resort to psychological ones.

What do egalitarians care about?

I dunno, but if its “capabilities” or equality of opportunity then tracking income inequality between various income percentiles is the wrong measure to concern themselves with.

Income is a flow. Its tenuous. Its dynamic. It does not determine the size of your budget set; it does not determine your capabilities or opportunities.

If you doubt this, talk to Dell about the new computer I just bought on credit ((I know, I know… Cash flows are very irregular for grad students and I got a good price on the computer with zero interest)). Talk to the Bank where I took out my student loans.

If you care about the size of budget sets, then you care about lifetime income (and access to the credit market, but I don’t think this is a problem in the U.S.). This is because if someone has earning potential (let’s say they’re a college student or they’re just starting their career) then lenders will loan them money, even if they have low income today, because the lenders know their earnings, and thus their ability to pay the lenders back, will increase over their lifetime.

Is current income at least a good measure for lifetime income? Nope. Early in careers, there’s little correlation between current earnings and total lifetime earnings ((see this paper for a nice discussion of the issues involved in measuring lifetime income. They use some really, very cool Swedish data to estimate the relationship between current income and lifetime income.)). This picture shows the ratio between current and permanent income (annualized):

So, why do egalitarians seems to care so much about (current) income inequality dynamics?

The power of corporations

Recently I ran regressions of wages and labor force composition on the density of Walmarts in States. Walmart — the largest private employer in the U.S. with sales of over $350B or about 3% of GDP — has had zero effect on wages and labor force composition in aggregate. This was much to my disappointment because zero results don’t get published.

This (non-)result suggests that the largest corporation on the planet has little effect on the macro economy. How does one square this fact with the narrative of the omnipotently evil multinational corporation? Does it make sense to compare GDPs to sales (or profits) of corporations? If not, what is a good way to compare the power of corporations to the power of nations?

Opinions on inequality

I really enjoy Lane Kenworthy’s blog. He writes mostly on inequality and he tilts a little too towards advocacy for my tastes, but he always brings a lot of data to the discussion.

He posted on international opinions of inequality the other day. People say they prefer a normal distribution of income rather than one that has overall more income, but skewed towards the rich.

He suggests this means that people care more about inequality than efficiency. The problem is that people may have a some sense of diminishing returns to income in their minds when they answer these questions. There may be more income overall, but some lower income groups have lower incomes in the skewed distribution (see the forth and fifth rows in distribution E). If those groups suffer more from there losses than the rich gain, then preferences for efficiency would suggest the normal distribution over the higher-income skewed distribution.

A more careful study of social preferences — answering the question, do people care about efficiency or inequality (or reciprocity)? — is Rabin’s Understanding Social Preferences with Simple Tests (pdf) ((There’s about a billion citations to this paper at Google scholar, too. Go crazy, but be sure to report back.)). Virtues: doesn’t use survey data and it is careful to identify particular social preferences. Vices: relatively small sample size and only American and Spanish college students.

UPDATE: I got the interpretation of the diagrams a little goofed up in this post. The intuition remains the same though. My misinterpretation is evidence of measurement error inherent in surveys like these, so I’ll refrain from editing.

Sentence of Enduring Value

That point is that the principles of social interaction are the primary subject of moral evaluation, not the patterns [those interactions create] themselves.

Will the Lesser

My thing is talk of those patterns seem to pull hair triggers on normativity on both sides of the issue. Distribution should be a positive and descriptive aspect of social science just like the measurement of GDP and theory that explains its levels or the courting rituals of Amazonian tribespeople and the theories that explain them ((I dunno… I’m trying to throw the other social sciences a bone)).

Why isn’t the gini index, as an indicator of dynamics in the economy, as widely reported as GDP? If there were two economies with the same GDP, the one with changes in the gini would be more interesting.

Yes, I just made a normative claim about positivity.

more Economic Geography

Recessions spread geographically.

This picture of the effects of the 1985 drop in oil prices is interesting. The light green states in 1985 are oil producing States put into recession by the change in oil price. The sub-national recession spreads out from those States but never becomes national.
1985 oil price drop

Looking at recessions geographically is interesting because it reframes the issue of business cycles as one of distribution rather than efficiency. A reduction in the price of oil was great on average, but crappy for those live just west of the Mississippi.

The great contribution of RBC models was to repair efficiency in cycling economies. Meanwhile, the new Keynesians try to undo this result, but images like the one above suggest economists should spend more time on the distributional aspects of business cycles.

Notice, this is an invitation to discuss distributional issues without the usual normative baggage. Its just a fact that various supply shocks induces recessions in some places and booms in others.