Michael Bloomberg exacerbates income inequality with donation to Hopkins for financial aid

“Michael Bloomberg: Why I’m Giving $1.8 Billion for College Financial Aid” (nytimes):

Let’s eliminate money problems from the admissions equation for qualified students.

America is at its best when we reward people based on the quality of their work, not the size of their pocketbook. Denying students entry to a college based on their ability to pay undermines equal opportunity. It perpetuates intergenerational poverty. And it strikes at the heart of the American dream: the idea that every person, from every community, has the chance to rise based on merit.

… I am donating an additional $1.8 billion to Hopkins that will be used for financial aid for qualified low- and middle-income students.

Here’s a simple idea I bet most Americans agree with: No qualified high school student should ever be barred entrance to a college based on his or her family’s bank account. Yet it happens all the time.

Let’s ignore the obvious solution for the Hopkins administrators: raise headline tuition prices by $1.8 billion over the next 10 years, charge families exactly what they were being charged before, but say that “financial aid” has been increased by $1.8 billion. (See “Credit Supply and the Rise in College Tuition: Evidence from the Expansion in Federal Student Aid Programs”, a 2015 paper from the New York Fed; 60 percent of subsidized student loans were captured by increased tuition rates and provided no relief to the purported beneficiaries.)

Suppose that the Bloomberg program works as advertised and therefore that lower income families will actually pay $1.8 billion less over the forthcoming years.

Won’t this exacerbate the inequality that Bloomberg himself was decrying as recently as May 2018 (see “Inaction on inequality could lead to uprising”)? People born fortunate (high academic potential in an economy that rewards cognitive skills) will now go to college for free instead of taking out loans and paying them back from their high earnings. So they will pull yet farther ahead of Americans with low academic ability.

Instead of the rich-in-genetics person with an IQ of 140 paying back student loans that enabled attendance at an elite university, the rich-in-genetics person will now get to use a full 50-60 percent of income (assume 40-50 percent total tax rate in California, New York, and other typical destinations for elite Americans) on consumption and retirement savings. The smart Hopkins grad who came from a lower-income family will essentially get a gift from Michael Bloomberg of luxury clothing and automobiles that will make median-IQ, median-income Americans sick with envy.

In “Protests against Charles Murray inadvertently prove the points he made in The Bell Curve?” I asked “If you like to fret about inequality, the sidelining of less-than-brilliant workers in favor of robots, etc., why wouldn’t you love Charles Murray?”

See also “The Bell Curve revisited,” my 2004 post on the book. Excerpts:

The Bell Curve starts out by talking about how we live in an era where people get sorted by cognitive ability into socioeconomic classes. In 14th century England if you were a peasant with a high IQ or a noble with a low IQ it didn’t affect your life, reproductive potential, or income very much. In our more meritocratic and vastly more sophisticated economy a smart kid from a lower middle class might make it to the top of a big company (cf. Jack Welch, who paid himself $680 million as CEO of GE) or at least into a $300,000/year job as a radiologist. For the authors of the Bell Curve the increasing disparity in income in the U.S. is primarly due to the fact that employees with high IQs are worth a lot more than employees with low IQs. They note that we have an incredibly complex legal system and criminal justice system. So you’d expect people with poor cognitive ability to fail to figure out what is a crime, which crimes are actually likely to be punished, etc., and end up in jail. (A Google search brought up a report on juvenile justice in North Carolina; the average offender had an IQ of 79.) If they stay out of jail through dumb (literally) luck, there is no way that they are ever going to be able to start a small business; the legal and administrative hoops through which one must jump in order to employ even one other person are impenetrable obstacles to those with below-average intelligence.

… For us oldsters, one unexpected piece of cheerful news from this book is that younger Americans are getting genetically dumber every year. Even if you ignore the racial and immigrant angles of the book that created so much controversy back in 1994 it is hard to argue with the authors’ assertion that smart women tend to choose higher education and careers rather than cranking out lots of babies. …  Our population is predicted to reach 450 million or so [by 2050], i.e., the same as India had back when we were kids and our mothers told us about this starving and overpopulated country. An individual person’s labor in India has negligible economic value … It would seem that no enterprise would need an old guy’s skills in a country of 450 million; why bother when there are so many energetic young people around? And how would we be able to afford a house or apartment if there are 450 million smart young people out there earning big bucks and putting pressure on real estate prices? But if the book is right most of those young people will be dumb as bricks.

Whenever anyone talks about “financial aid,” I love to respond with “United Airlines gives more than 95 percent of customers financial aid since the official maximum ticket price is much higher than the typical price paid. Economists call charging each customer according to his or her ability to pay price discrimination, but it sounds better if you say ‘we’re giving these poor souls financial aid.'” (Note that price discrimination is possible
only in markets dominated by monopolies or oligopolies. McDonald’s can’t do this because Burger King is right across the street.)

Readers: Is it logically inconsistent for Michael Bloomberg to say that he wants to reduce income inequality and then give $1.8 billion to reduce college expenses for those Americans who are best set up to earn high incomes after graduation?

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With a cap on Ubers they will mostly hang out in the richest neighborhoods?

In “New York restrictions on Uber will increase inequality?” I wondered about how the profits from this new government regulation would be distributed.

Now I’m wondering about the cars themselves. Taxis were capped in NYC for decades (leading to the $1 million medallion price). The result was that taxis were plentiful in rich parts of Manhattan and scarce in poorer and outlying neighborhoods. I wonder if the same thing will happen with Ubers now that they’re capped. Manhattan and hipster Brooklyn will be packed with Ubers while folks who live elsewhere… can walk.

Readers: Does the above make sense?

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American’s gender wage gap and low GDP growth can be partially explained by no-fault divorce laws?

Hillary Clinton seems to be riding all the way to the White House on a platform of female victimhood, at the center of which is data showing that American women, on average, earn less than American men. (Though in our transgender age, it is unclear if this distinction is meaningful. How do we know that “men” who responded to a wage survey in 2015 continue to identify as men?)

In a previous posting I questioned whether W-2 earnings was the right way to look at the economics of gender equality. If Americans who identify as “female” can spend and/or consume more than Americans who identify as “male,” then wouldn’t we say that women were actually doing better than men economically?

Alessandra Voena, a professor at the University of Chicago, took a deeper look at this and wrote up her results in “Divorce laws and the economic behavior of married couples.” Here are some excerpts:

Household survey data from the United States shows that the introduction of unilateral divorce in states that imposed an equal division of property is associated with higher household savings and lower female employment rates among couples that are already married.

During the 1970s and 1980s, divorce laws were rewritten around the United States. Until then, mutual consent—the consent of both spouses—was often a requirement and upon divorce, property was assigned to the spouse who held the formal title to it; usually, this was the husband.

Then, profound state-level reforms brought about the so-called “unilateral divorce revolution.” Most couples now entered a legal system in which either spouse could obtain a divorce without the consent of the other and also keep a fraction of the marital assets, often close to fifty percent.

… forty percent of married couples and about one-third of all people over their lifetimes are divorced.

… a property division regime change that favors one spouse can improve her position inside the marriage, particularly if she can obtain divorce without the other partner’s consent.

… in such states [providing no-fault divorce plus 50/50 property division], women who were already married became less likely to work, by approximately 5 percentage points. By analyzing additional time use surveys between 1965 and 1993, I find that the decrease in the labor supply of women was associated with an increase in the amount of leisure time they enjoyed.

In states with equal division of property, the law favors women at the time of divorce. When the equal division of property grants them more resources in the event of divorce than they are receiving in the marriage, unilateral divorce means that they can use the threat of divorce in their favor while remaining married, thereby increasing their leisure.

As was the conclusion of the economics research behind The Redistribution Recession, it seems that Americans respond eagerly to any system that permits spending/consumption without working.

When a substantial percentage of women can spend without working, either because they use the threat of divorce to enjoy a life of leisure while married or because they use the machinery of divorce litigation to collect property, alimony, and child support, that is going to widen the gender earnings gap. Consider Jessica Kosow, whose successful litigation after a four-year marriage is described in this chapter on Massachusetts family law. She receives roughly 3.2X what her average Ivy League classmates earn. Suppose that she gets bored sitting at home and takes a $15/hour job at a non-profit organization to supplement her $250,000/year after-tax divorce and child support revenues. Now she is exacerbating the gender gap statistics due to earning far less from wages than her male University of Pennsylvania classmates. The same would be true for any woman who is collecting a share of the earnings of a current or former spouse. She can have comparatively high spending power while choosing a job that pays less but is either more convenient or more enjoyable. “Convenience” and “fun” are not well captured in statistical studies of wages. Finally, consider that most states’ family law encourages women who are successful alimony plaintiffs to withdraw from the workforce (if they earn money their “need” for alimony is reduced and their payments may be reduced). Not every state routinely provides lifetime alimony, however. If a woman returns to the workforce after decades of leisure she won’t command as high a wage as man with a multi-decade track record of work experience.

(A professor at the American Economics Association convention offered a simpler, but consistent with Professor Voena’s results, response to the gender earnings gap: “Why would you work 9-5 if you could get paid for having sex or having children?”)

Professor Voena’s CV reveals an Italian background, a country that conforms to Civil Law (see the sections on family law in Denmark, Germany, and Switzerland for how this is different from our Common Law system). It may be this background that leads her to suggest “cheap and enforceable prenuptial agreements” as a change to the family law systems in most U.S. states. According to the litigators that we interviewed for Real World Divorce, however, prenuptial agreements in the U.S. can never be either cheap or enforceable with certainty. Quite a few couples spend more than $100,000 in legal fees simply arguing over the validity or meaning of a prenuptial agreement that itself may have cost $10,000+ to draft. In a Civil Law jurisdiction the drafting cost could be $0 (check a box on a form at the time of marriage) and the litigation cost would also be $0 (since it is a state-provided agreement). [Note that a motivated plaintiff can still litigate the validity of a German prenuptial agreement by obtaining venue in a Common Law country. See Nicolas Granatino’s attempt to get extra cash out of Katrin Radmacher by challenging a German prenup in a London court. He ultimately failed (Guardian), but it ran up a spectacular legal bill for Ms. Radmacher and he still earned a lot more from having sex with a rich woman than he could have from waged labor (the lawyers also kept earning; the litigation continued in 2011, five years after the couple separated). Mr. Granatino’s behavior is also consistent with what Professor Voena found among American women. Mr. Granatino had a high-paying presumably not-very-fun job at JP Morgan. Once he had a high-income spouse and the possibility of a high-revenue divorce lawsuit, he quit to amuse himself in graduate school.]

Given that it is the public versus a $50 billion industry it seems safe to assume that the U.S. family law system won’t change substantially. Thus we can expect the “wage gap” to be an evergreen issue for politicians such as Hillary Clinton and also, when we combine family law with the other ways that Americans can get money without working, we can expect continued sluggish growth in GDP-per-capita.

Related:

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Could talking to high school students constantly about sex encourage them to have sex?

What if you put a big barrel of condoms in a high school and put a sign on it saying “You can use these while you are having sex?” Would that encourage the 14-18-year-olds to have sex? The previous folks who looked into this question, typically with small samples, said “no.” The paper “Fighting AIDS, Changing Teen Pregnancy? The Incidental Fertility Effects of School Condom Distribution Programs” (Buckles and Hungerman; presented at American Economics Association 2015) looked a little more carefully. The researchers pulled birth certificates from the counties with free condom distribution in schools. They looked at births to women aged 15-19 compared to births to women aged 20-24 (the control group that presumably wouldn’t have had access to high schools) and found that births to the 15-19-year-olds increased by about 10 percent after the condom barrels went in. (Responding to an audience question, they said that they didn’t have any data on abortions so they couldn’t say how many extra pregnancies resulted from the free distribution programs. They noted that accurate data on abortion prevalence from surveys is difficult to obtain because people lie.)

Incidentally, the researchers noted that the American Academy of Pediatrics recently came out with a recommendation that condoms be distributed in schools. Thus people who get paid to provide health care to children support a policy that results in a larger customer base.

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Two big questions for economists today

After spending a weekend with 11,000 economists at the American Economics Association 2015 meeting, here’s my perception of the Big Picture…

The two most important questions on which economists disagree are the following:

  • Can higher education make a person more productive at his or her ultimate job?
  • How much of a society’s resources should be put into reducing CO2 emissions?

Why is the economic value of higher education so important to establish? An assumption driving much of the debate regarding inequality is that a worker with a college degree is more productive and therefore will, in a properly functioning market economy, receive a higher wage than a worker without a college degree. Those who propose radical action to address inequality note that an increasing prevalence of college degree holders has not resulted in an increase in inequality. From this they infer that capital is stealing from labor, specifically by not paying workers for the increase in their marginal productivity as predicted by Econ 101. A possibility that the Big Thinkers don’t seem to consider is “Maybe colleges aren’t teaching anything of value to employers?”

This blind spot is curious because there is a fair amount of evidence that many American college graduates learned little during their four-year sojourn. The book Academically Adrift, for example, cites data from a Collegiate Learning Assessment test showing that many students don’t improve much from freshman to senior year. Studies on students who were admitted to elite schools, such as Harvard, but elected not to attend have found that there was little difference in lifetime income attributable to actually attending the elite schools (though being qualified for admission had a lot of value). There were some interesting additions to this literature at the conference.

Despite the evidence that people who weren’t academically inclined prior to college get little benefit from college and simultaneously suffer four years of lost income, Big Thinker-driven public policy has resulted in a trough being filled with federal tax dollars and a large group of non-selective colleges feeding from that trough. For-profit online schools, such as University of Phoenix, have been particularly aggressive feeders, with roughly 75 percent of their revenue coming from this federal source. “An Experimental Study of the Value of Postsecondary Credentials in the Labor Market” (Deming et al) sent out 10,492 fake resumes to employers on an “online job board” (presumably monster.com) and found that, for jobs that did not explicitly require a college degree, there was little increase in the chance of being contacted by virtue of having a college degree. In other words, the public and private investment in college might well be worthless for these entry-level positions. For jobs that did require a degree, an online degree was about 22 percent less attractive to employers than a “non-selective” bricks and mortar school, e.g., Cal State. For jobs that required a license that itself entails an exam, such as practical nurse or pharmacy technician, employers didn’t seem to care about anything other than whether or not the applicant was licensed. (This suggests that if colleges stopped grading their own students, as proposed in my “Universities and Economic Growth” article, and every college graduate took a comprehensive exam, employers might see a lot of value in those graduates who had scored well on a neutrally graded exam.) An author of the paper summarized by noting that the lowest level of employer interest was in resumes of graduates of the most rapidly growing and most expensive sector of higher education.

Academic attitudes toward business were on display in this session. Karl Marx had sympathy for the employer, constantly at risk from competition and incorrect estimates of demand. Today’s economists have mostly rejected Marx and apparently have abandoned this sympathy. Nobody raised any questions about whether it was ethical to waste employers’ time with 10,000+ fake resumes. When the authors presented their conclusion that there was no difference in employer interest correlated with sex or race, the audience was flummoxed. As racism and sexism were assumed to be high priorities for America’s employers, how to account for this result? Nobody was willing to ask “Could it be that these employers just want to make money and don’t care whether they make money with black male workers, white female workers, or any combination?”

Justine Hastings, of Brown University, presented “Earnings, Incentives and Student Loan Design: The Case of Chile.” It seems that Chile did what the U.S. did, i.e., offered a lot of student loans for higher education. Their program was more intelligently designed, however, in that they didn’t allow universities to raise tuition in response to this new source of funds. Schools ended up with more students, but not more money per student as has been prevalent in the U.S. Nonetheless, the default rate has been high, especially for graduates of non-selective schools and especially for those who majored in humanities and arts. Unlike Americans, Chileans don’t like to keep flushing cash down the toilet, so now they are experimenting with adjusting the maximum loan amount according to the expected return to getting a particular degree (in Chile you don’t apply to “University of Santiago” you apply for a specific major). It turns out that when students see that the government won’t lend them the maximum for a particular degree program they get the message and try to switch into a degree that will result in higher post-graduate earnings. This is especially true for “low SES” students. SES? Due to the rejection of Marx, mainstream economists apparently can’t talk about class so they refer to “Socioeconomic status“. Hastings has a separate paper “The Labor Market Returns to Colleges and Majors: Evidence from Chile” with the discouraging result that attending a lower quality college and majoring in poetry will not set the country’s employers on fire and, in fact, many people would have higher lifetime earnings if they refrained from attending college.

Amanda Pallais of Harvard presented “Leveling Up: Early Results from a Randomized Evaluation of Post-Secondary Aid”, a paper on the Susan Thompson Buffett Foundation scholarship for lower income Nebraskans who have a high-school GPA of at least 2.5 and maintain a college GPA of at least 2.0. It turns out that people who are going to attend college and graduate will do so even without this grant and people who were marginally attached to academic will become only slightly more attached. The cost of keeping one student in college for an additional semester is $40,000 of foundation funds.

Gregory Clark, in my opinion the best of the Big Thinker economists out there, pointed out that when looking at the cost and benefit of programs to get more people into college, the correct approach is to focus on that last person who, without the program, would not have attended college but with the program will. If the objective of the program is to spur economic growth or reduce inequality, the question must be “How much more attractive will that person on the margin be to employers once graduated? (And how likely is that person on the margin to graduate.)”

Economists generally seem to divide into two camps on the question of mass higher education. Some economists believe that good college students are born, not made. If you weren’t born with a talent for math and studying college can’t help you. Others believe that you can send almost anyone to college and they’ll come out with more “human capital” that employers will pay for. My personal view is that traditional American K-12 and college are reasonable matches for some people, e.g., those who love to sit still and do what a teacher tells them to do. The remainder, however, should not be regarded as discards. They could probably learn the same material if it were presented in a different way. (This view is partly informed by research finding that lectures are extremely ineffective for student learning and they are the cornerstone of K-12 and universities, partly by my experience teaching lab courses and seeing how quickly all kinds of people can learn to program, and partly by experience as a flight instructor where I have had no difficulty teaching qualitative physics to people from all walks of life.)

To sum up, the question of education is critical to the question of whether we should consider the kinds of drastic changes to tax policy that are proposed by Piketty and followers. If K-12 and college are making ever-better American workers then capitalists are using their class power to steal from the working class (potential exception: globalization has made a lot more workers available, thus reducing the market-clearing wage). If on the other hand we are to believe the test scores, the problem is simply that engineers keep designing better machines (capital) while our education system turns out workers no better than those of 30 years ago (but at a vastly higher cost in dollars and time).

Turning our attention to the question of climate change… Energy expenditures are about 8 percent of U.S. GDP. (Compare to 8.4 percent for finance (WSJ), which means that we pay as much to banks than to run our cars, heat and cool our houses, smelt aluminum, and spin our hard drives!) If we do something big in energy it will mean cutting back in other areas, e.g., shoveling out money to universities.

The talk that I was most drawn to was by Juliet Schor, a Boston-based economist who has addressed the question of “Why do Americans work so many hours?” in popular books, starting with The Overworked American: The Unexpected Decline of Leisure (1993). She noted that the 1990 standard of living was roughly double that of 1950. Why wouldn’t Americans all work half-time instead of enslaving themselves to buy more stuff? (amazon.com hadn’t even launched at the time!) Schor’s work starts from the presumptions that there are declining marginal happiness returns to earning more while extra leisure time makes people happier. She also implicitly relies on my theory that buying expensive organic locally produced food accelerates environmental damage (due to higher spending). Now that the planet is melting, says Schor, what better time to consider a coordinated reduction in hours so that our economy stops growing and therefore our contribution to global warming is reduced. We’ll all be happier. [sidenote: From Schor’s talk, I learned that Maslow’s hierarchy of needs, a required subject for FAA certificated flight instructors, has been discredited by academics.] Schor proposed a $1.2 trillion annual carbon tax on American industry to be distributed per capita to the American people. This would, she noted, have a salutatory effect on income inequality as well.

For each paper there was supposed to be a “discussant” that provided a critique. Schor, however, got a cheerleader in the form of Frank Ackerman, who teaches in the MIT Department of Urban Studies. He said that it is obvious that we need an immediate massive carbon tax and said that there is a 6:1 ratio in per capita carbon emissions among U.S. states (California: good; Texas: bad; this government chart shows that, excluding a couple of barely populated outliers, states actually fall into a pretty narrow range and nearly all of the variation is due to industry, not consumers). Germany overall emits only half the carbon per capita that we do, according to Ackerman. Why haven’t Americans taken drastic action? Ackerman says that it is because a majority of Americans are (1) stupid (anti-science/Tea Party), (2) racist (oppose CO2 action because action is supposed by Barack Obama, whom they identify as black), (3) stupid (because they see an opinion advertisement from Exxon and don’t recognize the likely bias).

I asked “Do these people you posit all have to be stupid and racist? Isn’t it possible that Americans are simply selfish and like their SUVs, McMansions, etc.? Or that they recognize that this is going to be a big government project and they are skeptical because a lot

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American Economic Association Meeting in Boston

Bostonians:

The American Economic Association is holding its annual meeting in Boston, January 3-5, 2015. The event is very reasonably priced for non-members and is packed with interesting speakers. One of the good things about economics is that many papers are understandable by anyone with a good high school math background.

Saturday, January 3

Saturday at 0800 is going to be an exciting time. Gregory Mankiw, the Harvard professor who sometimes steps out into the popular realm (example New York Times article) leads “A Discussion of Thomas Piketty’s Capital in the 21st Century.” (Note that a 10:15 paper, by two Swedish economists looking at “socio-economic mobility across three generations in Sweden in the period 1813-2010” found that, for earnings, there was “no association at all between grandfathers and grandsons” (so Piketty is wrong about dynastic accumulation), but for social status/class there was a “clear association” (leading to genteel poor?).) Simultaneously in the Hynes Center, Room 201, Maya Rossin-Slater and Miriam Wust present “Parental Responses to Child Support Obligations: Causal Evidence from Administrative Data” (full text). This is important because child support systems are designed under the presumption that parents’ behavior won’t be affected by writing child support checks to the person who sued them and/or that paying $50,000 per year to a plaintiff will improve the quality of parenting delivered every other weekend (embedded in a larger system of custody and divorce law that assumes people won’t follow economic incentives that are held out). Here’s how we summarized the paper in our forthcoming book:

[the authors] found that what a mother might have gained financially from child support, the child lost in terms of reduced contact with and effort from the father: “mothers, who have substantial say in custody decisions [in Denmark], have the opposite incentive to refuse to share custody and instead receive the higher payment [for child support, compared to shared custody]. … fathers may treat financial transfers as substitutes for other forms of non-pecuniary investments and contact with children, which would also lead to a negative relationship between child support obligations and father-child co-residence.” The economists found that “an increase in the father’s obligation may lead to less attachment to his existing children and more time available to invest in new offspring.” (See the “Divorce Litigation” chapter for our interviewees’ perspective on how the main opposed interests in a divorce lawsuit are the plaintiff parent and the children, not the plaintiff and adult defendant.) The researchers also found that fathers who were ordered to pay more child support were more likely to have new children, thus diluting the time and energy available to prior children, and that fathers who were ordered to pay more child support reduced their working hours due to “market distortions generated by the ‘tax-like’ nature of child support mandates.” Mothers who received more child support cash for existing children were motivated to have additional children, either with or without a live-in partner: “mothers receiving higher child support payments for current children may expect higher transfers for future children if they separate again.” Note that this research was done with data from Denmark, where child support is tax-deductible and capped at $8,000 per year. The effects that they observed would presumably be larger in the U.S. where child support payments are not tax-deductible and can be $25-100,000 per year.

The authors also question an additional building-block assumption of the U.S. child support system. The government assumes that a typical woman who has custody of a child and cannot meet all of her own expenses from child support revenue will, rather than work, turn to the various taxpayer-funded welfare programs offered to women with children. Thus a dollar of child support extracted from a custody lawsuit loser is a tax dollar of welfare saved. Rossin-Slater and Wust say that it isn’t so simple: “Our results suggest that although child support mandates may shift some of the cost of single-mother household support from welfare programs to the non-custodial fathers, they also pass part of this cost on to other government programs such as disability insurance and early retirement.” (i.e., fathers in Denmark will retire or declare themselves disabled in order to cut their child support obligation from $8,000 per year back to the “basic/minimum” $2,000 per year)

If you’re a shareholder in a public company that underperforms the S&P 500 and want to know why most of what would have been your dividend money nonetheless goes to an apparently mediocre CEO, there is a “CEO Incentives and Compensation” session at 10:15 am.

Many sessions seem to be aimed at trying to understand the Collapse of 2008 and predict the next one. Also at 10:15 am on Saturday is a session looking into why the ratings agencies turned out to be worthless. “Did Government Regulations Lower Credit Rating Quality?” by Behr, Kisgen, and Taillard, concludes that “defaults and other negative credit events are more likely for firms given the same rating if the rating was assigned after the [1974] SEC action compared to before. … the market power derived from the SEC led to ratings inflation.” Did Jack Nicholson’s sponsorship of a child in About Schmidt (awesome movie, though very different from the novel; disclosure: my cousin Harry produced it) make a difference? At 10:15 session “Developing Hope: The Impact of International Child Sponsorship on Self-Esteem and Aspirations” says “yes” (on average). History buffs will skip all of these 10:15 sessions and head to the Boston Marriott Copley for a session on “The Economy of Ancient Israel.” The “dismal science” does not shy away from looking at war. At 10:15 session on “conflict and development” includes a paper by David Yanagizawa-Drott that villages that suffered the most violence in the Rwandan genocide had the highest living standards six years later: “These results are consistent with the Malthusian hypothesis that mass killings can raise living standards by reducing the population size and redistributing productive assets from the deceased to the remaining population.” At “Health Insurance Reform” session confirms the world’s most stuffed-with-cash health care system is not going to suffer any lean years due to government tweaks. A “Competitive Bidding in Medicare” paper concludes that there is little actual competition among America’s health insurers. A session on “The Minimum Wage, Family Income and Poverty” reveals that economists have no idea whether or not a higher minimum wage reduces poverty.

Are those crazy Super Bowl ad rates justified? A paper in a 12:30 pm Digital Media Economics session concludes “yes” by looking at movie ticket sales (for movies advertised during the Super Bowl) in the cities in which Super Bowl teams are based and therefore in which more fans are watching. Why is the U.S. a more tolerant society today than it was in the 1970s? A paper by Berggren and Nilsson in the 12:30 “Economic Freedom and Minority Groups” session suggests that it might be due to the deregulation started by Gerald Ford and the tax rate reductions started by Ronald Reagan: “We suggest, as one explanation, that a greater scope for voluntary transactions and private usage of incomes and wealth creates more meetings that increase understanding for people different than oneself – or at least for the value of letting people different than oneself have their say.”

At 2:30 there is a session on “Explaining the Energy Paradox.” Why do Americans buy fuel-inefficient cars and houses? Why has no American residential developer carved out a niche in German-style double-wall houses that can be heated or cooled for almost nothing? Why did the Federal Weatherization Assistance Program not work? (“overly optimistic engineering estimates of returns to the energy efficiency investments,” say the economists; translation: Americans are stupid). “Investor Behavior,” at the same time, explores the 2012 8X increase in the value of shares of DI Corp. “because the company’s chairman and CEO is [South Korean rapper] PSY‘s father.” (translation: investors worldwide are stupid; related: MIT Gangnum Style) A 2:30 session on “Redistributive Taxation” includes “Income Inequality Influences Perceptions of Legitimate Income Differences” by Harvard’s Kris-Stella Trump. She finds that people think the system under which they live is a good one: “When income differences are (perceived to be) high, the public thinks of larger income inequality as legitimate.” She calls this “system justification motivation.” [We found this to be true when interviewing divorce litigators in different states. Generally a litigator in State X thought that State X’s system was fair and just and so did a litigator in State Y, despite the fact that State’s X and Y had completely different outcomes for the same fact patterns.] Larry Summers talks about “Secular Stagnation” in a 2:30 pm session as well. “Do Vehicle Crash Tests Save Lives? Impacts on Market Decisions and Accident Mortality” by Damien Sheehan-Connor of Wesleyan says that Americans bought safer cars in response to Insurance Institute for Highway Safety tests and manufacturers designed safer cars in response to the testing (translation: Americans are not stupid). Why do venture capital firms underperform the S&P 500? Three Harvard researchers in “The Cost of Friendship” ” find that venture capitalists who share the same ethnic, educational, or career background are more likely to syndicate with each other. This homophily reduces the probability of investment success, and the detrimental effect is most prominent for early-stage investments..” Why do hedge funds underperform the S&P 500? “Recovering Managerial Risk Taking from Daily Hedge Fund Returns: Incentives at Work?” by Kolokolova and Mattes finds that “During earlier months of a year, poorly performing funds reduce their risk. The risk reduction is stronger for funds with higher management fees, shorter notice period prior to redemption, and recently deteriorating performance, which is consistent with a managerial aversion to early fund liquidation and loss of future management fees. Towards the end of a year, poorly performing funds gamble for resurrections by increasing risk.” Why does money invested in private equity (even with geniuses such as Mitt Romney at the helm!) tend to underperform the S&P 500? Korteweg and Sorensen say that “Based on past performance alone, an investor needs to observe an excessive number of funds to identify the PE firms with top-quartile expected returns, implying low investable persistence.”

The 2:30 slot includes a “Puerto Rico and Cuba” session that would no doubt be enlivened by a panel discussion about the recent political changes. The papers already scheduled show that Puerto Rico’s government policies starting around 1940 have led to the county becoming impoverished from an income point of view: “After seven decades of government sponsored development efforts, a benign macro environment compared to the rest of Latin America, and massive transfers from the mainland, GNI per capita remains at Uruguayan or Argentinian levels.” On the other hand, presumably due to federal welfare programs, consumption per capita is quite high: “Puerto Rico has succeeded in ensuring a standard of living for its citizens largely divorced from the productivity of its workers.” For actual divorce issues, there is a 2:30 pm “Structural Models of Family Interactions” session that looks at “Welfare Effects of Divorce Legalization” in Chile and “Deadbeat Dads” (trying to answer the question of why women would get pregnant with low-wage fathers). “Unemployment Insurance and Disability Insurance in the Great Recession” calls into question the assumption that Americans go on SSDI when their unemployment insurance runs out: “Only 28% of SSDI awardees had any labor force attachment in the prior calendar year, and of those only 4% received UI income.”

Is it all about the Benjamins? A 2:30 session “Well-Being: Measurement and Policies” suggest that maybe we can move “Beyond GDP”. Weina Zhou’s study of Chinese youths “sent down” for hard manual labor actually ended up doing better as 40-55-year-old adults and “these findings are robust against a variety of family backgrounds.” (time to plant some daffodil bulbs!) A “Cycling to School” paper finds that giving girls bicycles was “much more cost effective at increasing girls’ secondary school enrollment [in India] than comparable conditional cash transfer

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Can we predict economic growth by looking at our enemies/competitors?

The number of science and engineering students in the United States peaked in the early 1990s.  Despite substantial population growth and a big influx of foreign students, our country is producing fewer scientists and engineers.  Why is this a problem?  Economic growth comes from technological innovation.  A lot of wealth can be skimmed off by managers, lawyers, etc. (e.g., Carly Fiorina, the CEO of HP, majored in medieval history as an undergrad) but the wealth is created to begin with by engineers and scientists.


Why don’t Americans want to study engineering and science?  Look at today’s newspaper.  Chances are that you’ll find stories about Shiite clerics, Islamic fundamentalism, illiterate warring tribes in Third World nations, government bureaucrats directing American forces in benighted corners of the globe, etc.  These might inspire young readers to study medieval history, Islam circa 680 AD (when the Shiites began hating the Sunnis and vice versa), and law or government.  But when our enemies are essentially pre-industrial it is tough to see how engineering and science could be central to American society’s needs.


It was not always so.  Consider World War II, one of the fastest periods of technological innovation.  Our enemies were the Japanese and Germans, who were sophisticated enough to, during WWII, develop novel communications codes (inspired the development of electronic computers), state-of-the-art airplanes (inspired the development of RADAR), state-of-the-art submarines (inspired the development of SONAR, the mapping of the seafloor, and the consequent discovery of mid-ocean ridges and therefore plate tectonics and continental drift), nuclear weapons, rockets, guidance systems, etc.


After the war our enemy was Russia and her enormous pool of mathematicians, scientists, and engineers.  The Russians kept us on our toes with things like their early lead in the exploration of Space.


After the Cold War we didn’t have enemies anymore (or perhaps it would be more accurate to say that we didn’t realize that anyone hated us).  The focus changed to economic competition against the Japanese and Europeans.  If you want to build cars that are as good as Honda’s you need to hire some pretty clever engineers.


Ever since September 11th we as a nation have been focussed on our Muslim enemies.  They don’t invent the jet engine, like the Germans did; they buy Chinese-made copies of the Russian AK-47.  They don’t build cars better than Detroit; they use Saudi oil money to buy Toyota pickup trucks.  They don’t invent new military tactics (hijacking commercial airline flights was a specialty of Yasser Arafat’s PLO 30+ years ago).


At some level it makes sense to focus on our enemies.  After all, our friends aren’t trying to kill us.  Furthermore the population trends imply that in the long run our friends are going to fade into demographic insignificance–the groups that are most enthusiastic about killing  us have among the world’s highest rates of population growth:  nearly 5 percent per year for the Palestinians, 3.27 percent for the Saudis; a friendly country such as Japan grows 0.15 percent per year.  Perhaps if we all study these folks carefully enough somehow we can predict when and where the next attack will come.


On the other hand, our military superiority is derived from economic growth.  If our economy stagnates because our heads are stuck in the 7th Century AD, so will our military power.  By contrast, if we had sufficient economic growth and technological innovation we could, for example, develop and deploy the army of robotic infantry of which a physicist friend dreams.  His robots would be shaped like centaurs with the body and four legs of a horse and a human-like head and arms.  The robot would have a Gatling gun in its chest.  Iraqis would presumably find something to do with their time other than looting if an infantry robot were standing in front of every building in Baghdad.


Putting military conflict aside, a focus on extracting oil from Arab countries takes resources away from the purely technical challenges of producing clean and renewable energy.  With sufficiently improved engineering we could run our society on wind, solar, tidal, and geothermal power.  (If we really wanted to have a go at a tough engineering problem we could try making nuclear power work.)  I.e., the only reason that our politicians have to spend so much time appeasing Muslim dictators is that our technology is insufficiently advanced.  The point of this blog entry is that there is some circularity here.  Our focus on the Muslim world, the most technologically backward portion of the globe, slows down technological development in the West and in Asia, thus forcing the modern societies to continue focusing on the Muslim world…


A new pet theory:  it is human nature that we can only “Give 110 percent” and the reference is the amount of achievement being put forth by our perceived enemies or competitors.  Until we shift our focus away from troubles in the Islamic world the U.S. economy will be stuck in the mud.


[Note that this blog entry does not presuppose that there is anything inherently superior in the Western way of life or Modernity itself.  It is quite possible that an illiterate Afghani with 10 kids is happier than a divorced childless MIT Aero/Astro PhD.]

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