Tyler Cowen says we’ve lost our mojo, but maybe it is just welfare?

by philg

The Complacent Class: The Self-Defeating Quest for the American Dream by Tyler Cowen describes some of the same behavior as The Redistribution Recession, but explains these behavioral changes as a massive cultural shift rather than as simple responses to changed incentives. Could this be an example of the fundamental attribution error? First, let’s look at what Cowen says…

These days Americans are less likely to switch jobs, less likely to move around the country, and, on a given day, less likely to go outside the house at all. For instance, the interstate migration rate has fallen 51 percent below its 1948 to 1971 average and has been falling steadily since the mid-1980s. There has been a decline in the number of start-ups, as a percentage of business activity, since the 1990s.

Economists see migration as a kind of investment. You give up something in the short run, namely the home, job, friends, and conveniences, in the hope of achieving something different and better somewhere else.

In the latter half of the nineteenth century, the residents of the United States were more geographically mobile than even those of Great Britain, which at the time was considered a very mobile society due to its political unification and relatively free labor markets. Cross-country moves were made by almost two-thirds of American men older than thirty years, whereas only a quarter of British men did the same.

Or, if we look at the rate of moving between counties within a state, it fell 31 percent. The rate of moving within a county fell 38 percent. Those are pretty steep drops for a country that has not changed its fundamental economic or political systems.

[I wish that an editor had removed every occurrence of the qualifier “pretty” from this book!]

For the most part, this decline in mobility is not fundamentally about changing demographics. Long-distance moves have declined considerably for all age groups, for homeowners and renters, and also for dual-income couples, so neither aging nor the difficulty of relocating a two-earner couple explain America’s recent lack of motion, even if those factors are driving the behavior of some specific individuals.

African Americans today have become especially immobile, and to an unprecedented degree. If we look at data on the last generation, 76 percent of African American mothers gave birth in the same state that their mothers did, whereas for white women that same figure was 65 percent, circa 2010. Using the Panel Study of Income Dynamics, the best database of its kind, it is possible to trace a subset of 4,800 African American families from a cohort born between 1952 and 1982. If we consider the progression from youth to adulthood, 69 percent of that cohort remained in the same county, 82 percent remained in the same state, and 90 percent remained in the same region of the country. A generation earlier, the comparable numbers were 50, 65, and 74 percent, all lower. Adjusting for income, homeownership, and other demographic characteristics does not fundamentally eliminate this mobility gap. African Americans have gone from being an especially mobile group to an especially rooted one.

the two groups whose job mobility has dropped the most are the young workers and the less-educated workers, and thus those groups are more vulnerable and more exposed to the likelihood of a protracted spell of unemployment. Men have lost more job mobility than women have, and that too has hurt their labor market performance, especially in response to the Great Recession. Switching jobs is often one of the best ways to get a promotion or a wage boost, and if people are less likely to switch jobs, it will be that much harder for them to get ahead. Lower geographic mobility and lower or stagnant income mobility are two sides of the same broader problem, namely, excess stasis in general, at a fundamental cultural level.23 And here is a striking way to think about some of the underlying cultural shifts, given that mobility is often down the most for the less-skilled workers. In such a setting, poverty and low incomes have flipped from being reasons to move to reasons not to move, a fundamental change from earlier American attitudes. The older notion of moving to a city, by train or bus, and staying in a flophouse, or with relatives, until one finds a decent job is harder to pull off these days.

Maybe we shouldn’t be admitting male immigrants and should be trying to perfect a technology so that mostly female babies are born:

America is creating start-ups at lower rates each decade, and a smaller percentage of those start-ups is rising to prominence, as we see in more detail in chapter 4. We’re not even managing peaceful disruptions, much less violent ones, at our earlier rates. The big losers from a lot of these trends are the unskilled men, including those with the less peaceful or more violent inclinations. The contemporary world, for all of its virtues—indeed because of those virtues—is not very well built for some chunk of males. Current service jobs, coddled class time and homework-intensive schooling, a “feminized” culture allergic to many forms of conflict, postfeminist gender relations, and egalitarian semicosmopolitanism just don’t sit well with many men, most of all those who have no real chance of joining the privileged class. Whether or not it is politically correct to admit it, I believe a lot of men have tendencies toward the brutish, but in today’s America, those tendencies are suppressed.

Female median wages have been rising pretty consistently, along with female education, but the male median wage, at least as it is measured and adjusted for inflation, was higher back in 1969 than it is today.

A lot of men did better psychologically and maybe also economically in a world where America had a greater number of tough manufacturing jobs. These men thrived under brutish conditions, including a military draft to crack some of their heads into line. Those problems of permitting and also constraining masculinity are too-often forgotten, and our neglect of those issues will help ensure that today’s complacency cannot last.

Maybe it is because we’ve all found our dream jobs?

One big reason for the decline in residential moving stems from a decline in job switching. If people are less likely to change jobs, they are also, for obvious reasons, less likely to move. And if we look at job reallocation rates—a rough measure of turnover in the labor market—they have fallen more than a quarter since 1990.

To give this some concrete numbers, in 1998, 44 percent of workers had five or more years on the job, but as of 2014, this number had increased to 51 percent. The percentage of workers with less than one year on the job had fallen from 28 to 21 percent.

But Mexicans still move…

Americans are outsourcing their mobility and capacity for economic adjustment. When there is mobility in the American labor market, it comes disproportionately from Mexicans and Mexican Americans. When a negative economic shock hits some city or region in the United States, the natural response is for some labor to leave that region and move elsewhere. Of course, not everyone needs to abandon the area, but some people should want to move on. Yet, if most Americans are less mobile than before, who is going to pick up and leave? More and more we see that mobility coming from Mexicans living in America, especially those who are relatively recent arrivals. Mexican-born Mexicans are less likely to have strong regional roots in America, and furthermore a nationwide network of Mexicans—often from the same state or region of Mexico—can help with relocation.

Our money doesn’t take chances anymore either…

The Federal Reserve Bank of Richmond has estimated that 61 percent of all private-sector financial liabilities are guaranteed by the federal government, either explicitly or implicitly. As recently as 1999, this figure was below 50 percent.

To look at one simple measure of both social and economic stasis, the rate at which business start-ups are forming has been declining since the 1980s. By one estimate, start-ups were 12 to 13 percent of the firms in the economy in the 1980s, but today they are only about 7 to 8 percent. That’s right; for all the talk about Silicon Valley, we are less a start-up nation than before. By the way, this overall decline in start-up frequency is true for virtually every sector and every American city, and that includes San Francisco and even the legendary tech sector. In absolute terms, the number of new tech firms (younger than five years) peaked just after 2000, and in percentage terms, new firms in the tech sector have been declining since the 1980s.

Not only are there fewer start-ups, but a smaller percentage of them are succeeding. That means young firms are a smaller part of the overall market and so American corporations are increasing in average age, just as the American people are. In the late 1980s, 18.9 percent of the employment in the American economy was at firms five years or younger. This average had fallen to 13.5 percent right before the Great Recession; in numerical terms, that is a 29 percent decline over only seventeen years, a significant and rapid drop. New firms are also down as a share of total firms and also as a share of job creation, again since the 1980s.

Time for analysis.

Cowen is a smart person so I will assume that all of his data are correct.

The tendency to stay put seems to be strongest among those with low income. But these are exactly the people who qualify for subsidized (or free) public housing, food stamps, and Medicaid or subsidized Obamacare insurance. They might get heating oil assistance or TANF-style cash payments (see Massachusetts bureaucracy gets 1 in 13 households to come in and beg). There might be a 10-year waiting list for public housing in the desired destination city. Until then, the person who had been living in a great apartment might receive nothing. Why would a person want to invest 10+ years in getting reestablished on all of these disparate state-administered welfare programs?

Cowen compares mobility before and after 1971 and says that there was a big reduction especially in the 1980s. As it happens, the 1970s were when most states adopted no-fault divorce and the percentage of children being reared by two biological parents plummeted (as noted in this chapter, from 73 percent of kids in 1960 to 46 percent today). Why might this be significant? Consider first child support and alimony. Millions of Americans collect money under court orders (see “Litigation, Alimony, and Child Support in the U.S. Economy” for the scale). They might be concerned that if they move away from the court system that put them into the check-of-the-month club it will be harder to collect or reduced in the new state’s court system gains jurisdiction. The parent who wins a custody lawsuit may yet need permission of a judge to move out of state with the kids (see “Relocation and Venue Litigation”). The biological parent who loses a custody lawsuit can move, but it may mean never seeing the former children again. The new partner of a divorced American may be similarly discouraged from moving. It is a lot easier for an intact family of four to pick up and move to the other coast than it is for someone who is an every-other-weekend parent, the stepparent of a child with a 50/50 schedule, and vicariously collecting child support.

What about corporate welfare? If you’re a small company no state is going to build you a free factory and pay your workers for a couple of years in exchange for you agreeing to set up shop. Thus the existence of corporate welfare should discourage startup formation and reduce the chance that a new company will be successful.

Regulation can be a disguised form of corporate welfare. It might hurt big companies but it will kill small ones that might have been competitors. Hiring a full-time person to read and understand regulations is a more bearable cost when spread over a 1,000-person company compared to a 25-person company.

Why haven’t Mexicans been affected? If they’re not citizens or Green Card holders their access to welfare programs is limited and their only alternative is to move to where the jobs are. Mexicans and Mexican-Americans are less likely than white Americans to sue each other for divorce (chart).

Readers: What do you think? Research psychologists say that Americans are uniquely prone to the fundamental attribution error. Can we not explain most of the above as a rational intelligent response to a changed environment?

More: read The Complacent Class: The Self-Defeating Quest for the American Dream

17 thoughts on “Tyler Cowen says we’ve lost our mojo, but maybe it is just welfare?”

  2. On the “women are doing so much better than boys” refrain, How much of that is just that we shovel ever more massive amounts of tax money into education and healthcare? These fields are disproportionately staffed with women.

  3. With the general increase in the country’s wealth since WWII, people aren’t as hungry (in the non-physical sense) and so they don’t move around as much. Large parts of the economy which used to be dominated by small business are now dominated by big companies (Walmarts) or are saturated (McDonalds). No doubt the expansion of the “welfare state” plays a role, but most of the studies I’ve seen indicate that its effect on behavior is too small for it to be a driving force. The reality is that large scale trends like these result from the summation of many different factors and cross factors.

  4. It’s not really surprising that immigrants would tend to move more. They’re movers! Also: could it be that the slowdown in movement is caused by the lack of exciting opportunity? In 1948, the Western U.S. was pretty darn empty by today’s standards, with Hollywood, aerospace, and a lot of other jobs drawing people out. With a few exceptions (like Silicon Valley or the recent fracking boom), there really aren’t stories of places with tons of work to be done. (And I suspect that a lot of the work that people would have once moved for is getting done by immigrants)

  5. I do not think Tyler Cowen is unaware of (as they say) basic Econ 101, that is, of the fact that each individual’s choices are “simple responses to changed incentives”

    However, it might be also useful to describe what is happening on the level of a society – perhaps we’ll learn something new! Why are the individual incentives changed? Why do Americans prefer now to spend a lot of resources (compared to, e.g. 50 years ago) on individual and corporate welfare? We need to name this phenomenon and search for the explanation of it.

    “A massive cultural shift” is a reasonable macro explanation for the micro conditions described above. It’s not the only possible one, and not necessarily the most correct one, but it’s a start.

  6. Yeah, I was thinking the same thing. Where exactly is one supposed to move *to* in today’s America? The two industries that did get newly exciting recently were tech and fracking. Loads of people up and moved to the bay area or the Bakken.

    Generally speaking people have no particular reason to move. You’re in a first, second, or third tier city. Your job opportunities will be in a similar sort of city in a similar mature industry. You’ll move to earn the same and net the same.

  7. bobbybobbob: “Generally speaking people have no particular reason to move.”

    Cowen suggests that in the past, people could and would move to get a better job.

    … poverty and low incomes have flipped from being reasons to move to reasons not to move, a fundamental change from earlier American attitudes. The older notion of moving to a city, by train or bus, and staying in a flophouse, or with relatives, until one finds a decent job is harder to pull off these days.

    I looked around and found an interesting exchange between Noah Smith and Cowen. Smith suggests that the explanation may be fear:

    Putting aside timing, I want to keep focusing on whether it’s really complacency that we’re dealing with. In his book “The Great Risk Shift,” Jacob Hacker showed several ways that our society has transferred risk from organizations to individuals. Nowadays, getting sick can be financially ruinous. Pensions have been replaced by 401(k)s. Corporations have little sense of loyalty to their employees, so everyone knows they could be laid off at any time. Americans have also been encouraged to take out huge amounts of personal debt, especially student loans and mortgages, which means that any income drop can kill their credit rating. Is it any wonder that Americans are afraid to quit their jobs, move to new cities, and start businesses? And is it right to call that fear “complacency”?

    A subsequent exchange about what to do:

    Smith: Good point about the behavioral biases. The reason I ask about the connection between wealth and complacency is that it seems like one response to your book might be, “Let’s force people to be less complacent by depriving them economically.” Deprive people of health-care benefits, food stamps, child-care subsidies, etc., and their complacency might indeed go down, as desperation drove them to do things like crowdfund their own cancer treatment. But to me, that seems to defeat the point of creating a wealthy society in the first place, hardly worth it just to combat some behavioral biases. What do you think about libertarian “solutions” to the complacency problem?

    Cowen: Most libertarian solutions to complacency problems take the form of deregulation, and I favor those for most though not all sectors of the economy. I do, however, believe in a social safety net, and cutting that in the wrong ways, as opposed to rooting out waste, might make individuals more risk-averse.

  8. Philip, regarding your theory that maybe the increase in divorce has reduced mobility: looking at Canadian data, it seems that divorce increases mobility. That is, it’s common for people to move after their marriage breaks down. The data also shows mobility decreasing between 1991 and 2006 in Canada; Canadian social programs have gotten weaker rather than stronger over this period.

  9. Thanks for the data on mobility versus married/single/divorced/widowed. I’m not sure that it is directly comparable to the U.S., though. For one thing, the profitability of children is essentially the same in all of the English-speaking provinces due to the use of a federal/national child support formula (see http://www.realworlddivorce.com/Canada ). So there is no situation in which someone would be at risk of losing 90 percent of child support profits by moving a few miles (kilometers?) over a state line (see http://www.realworlddivorce.com/California versus http://www.realworlddivorce.com/Nevada for example; or http://www.realworlddivorce.com/Minnesota and neighboring Wisconsin).

    Nor is the U.S. directly comparable to the U.S.! How is that possible? The laws regarding relocating children vary hugely from state to state. Generally, however lawyers told us that there was a trend against allowing the winner parent to move with the cash-yielding kids. So the choice for the winner parent is “stay in the same state and the checks keep coming” or “move, but give up the kids to the loser parent and, maybe, start sending checks to the loser.” In the old days the winner parent was virtually guaranteed the option of moving to, e.g., take a new job or marry a new spouse.

  10. “bobbybobbob March 27, 2017 @ 3:37 pm
    2
    On the “women are doing so much better than boys” refrain, How much of that is just that we shovel ever more massive amounts of tax money into education and healthcare? These fields are disproportionately staffed with women.”

    Not quite right…Ever more massive amounts are being pumped into military, which is male dominated. Our defense budget is more than next 3 countries combined.

  12. I do want to point out that you’ve only noted one of the two major changes in household structure during the ’75-’95 period, the increase in divorce. The other change, which is much larger in an economic sense and (I believe) more relevant to the situation, is the rise of two-earner households.

    The period in question matches fairly well to the period in which married women joined the workforce in large number. When a family goes from a one-income household to a two-income household, mobility is dramatically reduced. If one person can find a job that pays (say) $3/hr better in another state, moving is almost a no-brainer. But if that person is married to someone who earns (say) $20/hr, suddenly they have to factor in the chances that their spouse can find an equivalent job in the new area, in a reasonable amount of time. Getting $3/hr more only to have the spouse drop from $20/hr to $10/hr is a major loss.

    The more complex financial situations of multi-income families are too rarely noted as an inhibiting factor for mobility, even as they’re an enhancing factor for entrepreneurship (spousal income & benefits provide a safety cushion during the founding of any new venture).

  13. Erik, that’s a really good point. Anecdotally, back in the mid-1990s my employer tried to relocate our entire office from Edmonton to Vancouver. There were a number of employees who cited exactly that reason (a spouse having to find a new job) as a major factor in deciding not to relocate. In the end the relocation was cancelled.

    Elizabeth Warren and Amelia Tyagi discuss the shift to dual-income households in The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke (2003), based on a study of bankruptcy data. It’s an interesting argument: their theory is that middle-class families have been bidding up the prices of houses near good schools. In order to increase their bid, families have been raising their household income by having both parents work. But it’s a collective action problem: everyone else does the same thing, and all that happens is that everyone has larger mortgages, and greater risk of a significant drop in household income (if you have a 10% chance of losing your job in one year, the two of you have roughly a 20% chance of either of you losing your job).

  14. If this is indeed the case then this cause should generate several things we should be able to observe.

    1. The US is not very dynamic when it comes to intergenerational class. If your parents are lower middle class, then you are very likely to also be lower middle class. Ditto for rich, poor, upper etc. So what about the classes of people who sit above the income point where they can qualify for most or all welfare programs?
    1.1 I would say we should see a lot more mobility. After all, the lower classes are being less mobile because welfare offers low risk income. They would leave risks on the table (a risk being moving to a new place where you may or may not find a better lifestyle). Since those above that point are not likely to find themselves qualifying for welfare, they will likely become more mobile as those unexploited opportunities call to them.

    2. States offer different types of welfare benefits. I would expect mobility between them. For example, a state with skimpy Medicaid but more available food stamps or heating oil benefits would appeal to someone who is generally healthy but poor. Likewise a sick and poor person would find a more generous Medicaid state to be a plus.

    3. Bill Clinton’s Welfare reform put a lifetime cap on cash assistance essentially ending what more people think of as welfare. Even though other programs continue to exist, this is a very important aspect of welfare policy in the US. Your hypothesis then should yield some spike of mobility after that reform went into effect. Even if it was not sufficient to counter the overall decline in mobility, certainly some set of people suddenly finding a reliable program gone would then revert to mobility to try to find a decent job to support themselves.

    I think you should also consider the fact that when higher income people sneeze, lower income people get the flu. A recession that blunts bonuses a the top becomes layoffs in the middle and evictions and bankruptcies a the bottom. A change in dynamic that lowers the incentives and rewards for mobility (except maybe in the upper top) is probably going to be felt more dramatically at the bottom than middle or upper middle. As the bottom also uses more welfare programs, you’ll see a correlation that can be easily confused for a causation.

  15. Also I would note that the ACA’s subsidies do not seem to clearly create an environment of non-mobility. For those with a lower income, there are many aspects to mobility that would be problems to those higher on the chain that are not for them. For example, renting rather than owning means it is less of a hassle to move to a new place. Many lower paid jobs can be done anywhere while some higher paid jobs are very tied into your immediate network making it harder to just move.

    For someone who isn’t paid as much, the ACA subsidies seem to open the possibility that considering a job offer that does not include health coverage no longer needs to be a deal breaker, nor does starting a business and going through a long startup period where there’s no money for benefits need to be a deal breaker. Wouldn’t this be an incentive towards more rather than less mobility?

  16. A final issue: Disability.

    Disability comes in two flavors. SSI for those who haven’t worked enough to earn credits for regular social security disability and SSD. SSI is about $800/mo for the rest of your life but there’s almost no ability to work or have income beyond that. SSD can be almost double that plus you can work partially (earning about $1100 a month before your lifetime benefits are in jeopardy). In addition, once you get disability you also get Medicare after a two year wait, regardless of age.

    So here’s a mobility problem. Once you are on disability, you can go anywhere you want plus you have limited ability to take some low end work without having to worry about having health benefits to go with them. This type of welfare would mean that you should see a lot of mobility since moving to a lower cost of living area effectively means an increase in you lifestyle. It isn’t like people on fixed incomes are afraid to relocate, Florida and Arizona are practically built on retirement communities full of former workers from the north. Younger people who have been approved for disability should be equally eager to be mobile.

    Once you back out disability, there isn’t a lot of welfare left to account for a lack of mobility. Food stamps, home heat assistance, Medicare or ACA subsidies are nice but living on them alone is hard, probably impossible. Housing usually means waiting years on waiting lists.

  17. Moving requires money. If in 2016, 63% of Americans have less than $500 (!) saved how will they move to another place unless the new employer pays for the move?

    In fourty years, I have moved from South America to Florida, then to Vermont, then to Boston, then to St Louis (which I changed homes 3 times because of unsafe neighborhoods), then to Austria, and now in Germany.

    At this point I am quite tired of moving. I would be happy to collect my welfare check now.

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