Huh?

Woot. Paul Krugman started a blog. This gives one the opportunity to ask “Huh?” to various silly comments by the future Nobel prize winner on a regular basis…

For previous installments in this series, see (x and y => z) does not contradict (!x => z), Insurance Companies aren’t profit mazimizing, Instapundit moment, and Meaningless words from Paul Krugman.

In his inaugural post, he shows this diagram ((It shows the percent of income going to top 10% income earners)), a diagram I’ve been staring at a lot lately:
Inequality

And says:

The middle-class society I grew up in didn’t evolve gradually or automatically. It was created, in a remarkably short period of time, by FDR and the New Deal. As the chart shows, income inequality declined drastically from the late 1930s to the mid 1940s, with the rich losing ground while working Americans saw unprecedented gains.

Here it comes…

Ready…

Huh?

The “Great Compression,” aka a precipitous drop in income inequality, happened in 1941 (not through the 30’s and mid 40’s). What else happened in that year? What do you suppose financed that happening? What did the National War Labor Board do, I wonder.

UC Davis Econ in the News

(… of the blog coverage variety …)

Will Wilkinson writes about Prof. Clark‘s good book:

This a profoundly insightful work sure to raise ire and inspire further progress. Key claim: labor quality is the difference between rich and poor. Depressing claim: Sub-Saharan Africa has largely Malthusian conditions, so success in increasing health and life-spans has decreased the average material standard of living below hunter-gatherer levels. Biggest disappointment: seems evasive on the question of the cause of variations in labor quality. Why not culture?

I should be careful critiquing Prof. Clark’s work, he’s grading my Growth Field exam next week, but I have similar questions about his work.

The professor does a great job of carving out the negative space of whatever topic he’s writing about. In his papers, he tells his readers what can’t explain the phenomenon. He leaves us hanging, though, on what can explain it.

For example, take cotton mills in the 19th century. Many of the countries to develop early, did so via the textile industry. So the mills are important for understanding why some countries are rich today and some aren’t. Why was productivity in Indian cotton mills so much lower than in England in the 19th century (jstor link)? Clark demonstrates it wasn’t because of differences in schooling or the skill of managers or differences in technology or anything else you can think of. What caused the productivity differences then?

Dunno and Clark doesn’t provide the answer either. He does defend himself, though:

These lessons from the mills will undoubtedly seem to some as merely destructive of conventional wisdom on underdevelopment without suggesting any replacement. Nevertheless, identifying the effects of the local environment or culture on the labor force as the source of the poor performance of textile mills in low-wage countries is a significant advance in understanding development. For if we can isolate one factor as supremely important, no matter how poorly we comprehend that factor at present, we are in a much better position to direct future research on economic growth.

The next FED chairman… me

Ben Bernanke agrees with me when I said, “Let’s make trade free, but figure out ways to ease the transition to the new, better world.”

The better approach to mitigating the disruptive effects of trade is to adopt policies and programs aimed at easing the transition of displaced workers into new jobs and increasing the adaptability and skills of the labor force more generally.

(h/t macroblog)

Gains of trade

Sometime, long ago, I got the religion that free trade is good. It seems so obvious that freeing people to trade at will must make them better off. If it didn’t, they wouldn’t trade. Right?

I don’t know if I should be more bothered by the fact that I just *believe* this economic dogma without knowing precisely why its true or that some of the best economists can’t agree on why its true (or if its true at all).

It seems to me the argument is over how fast it takes economies to shift from one equilibrium to another*. Proponents of free trade are saying “in the long run and under ideal conditions, trade makes everyone better off” and opponents are saying “the day after trade is made free, some people are made worse off.” If this is a good characterization of the debate, then it seems the policy implication is pretty clear. Let’s make trade free, but figure out ways to ease the transition to the new, better world.

UPDATE: Tyler Cowen weighs in.

UPDATE 2: macroblog talks theory vs. reality.

*Saying factors are not mobile is equivalent to saying the transaction costs for moving factors are really high. A legal trade barrier doesn’t make it physically impossible to move factors, for example, it just means its really expensive to do so (because if you do so and are caught they call you a smuggler and you suffer punishment or, worse, opprobrium). Adjustment costs add interesting dynamics to models, but if they change the welfare implications of a model I don’t see why the policy isn’t to just remove the the adjustment costs. In other words, if Rodrik is right about Heckscher-Ohlin being a better model than Ricardo, why not remove the barriers that are making capital immobile (e.g. remove trade barriers, increase access to capital markets, etc)? If the observed dynamics can only be replicated by adding transaction costs to our models (e.g. immobile capital, CIA restrictions in money models, etc), shouldn’t the policy be to remove those frictions? Go ahead, start lecturing me about second best policies, but you have to explain why we’re in the second best world to begin with.

OMG!!! Inequality is rising, big time! I’m outraged!!!

Round up the rich and rally the firing squad; inequality is on the rise!*

  • The income share of the top 1% went up by 20% over the last 20 years!
  • The average wage is almost 3 times the median!!
  • The income share of the bottom 50% went down by a quarter!!!

Seriously, what are we going to do?!?! Call the President! Write your Senator! Storm your Congressman’s office!!!

*These statistics are for baseball