Archive for the ‘economics’ Category
When I argue that we have too much college, people quickly fall on the well established fact that college graduates make a lot more than non-college graduates. But you don’t need to be an education skeptic to ask a sensible question: what’s the variance? Are some people not making the college premium? How many? Well, turns out that a firm has been calculating the rate of return for college and it varies a huge amount. There are folks who don’t make it back. Some college graduates are making a *negative* rate of return. From the economist:
A report by PayScale, a research firm, tries to measure the returns on higher education in America (see article). They vary enormously. A graduate in computer science from Stanford can expect to make $1.7m more over 20 years than someone who never went to college, after the cost of that education is taken into account. A degree in humanities and English at Florida International University leaves you $132,000 worse off. Arts degrees (broadly defined) at 12% of the colleges in the study offered negative returns; 30% offered worse financial rewards than putting the cash in 20-year Treasury bills.
None of this matters if you are rich and studying fine art to enhance your appreciation of the family Rembrandts. But most 18-year-olds in America go to college to get a good job. That is why the country’s students have racked up $1.1 trillion of debt—more than America’s credit-card debts. For most students college is still a wise investment, but for many it is not. Some 15% of student debtors default within three years; a startling 115,000 graduates work as caretakers.
In other words, before we rush more people into the college, we have to make it cheaper, much cheaper. And we shouldn’t facilitate degrees that massively bad consequences for your economic life chances.
One of the more serious anti-immigration arguments is that immigration is correlated with welfare state expansion. The argument hinges on a normative evaluation of social services, but, at the least, it is a coherent argument. The issue then is empirical evidence – does immigration actually precede welfare state expansion? An op-ed in the Investor’s Business Daily summarizes research that claims that there simply isn’t any association. Written by Alex Nowratesh and Zachary Gouchenour:
.. we show that, historically, immigrants and their descendants have not increased the size of individual welfare benefits or welfare budgets and are unlikely to do so going forward. The amount of welfare benefits is unaffected by the foreign origin or diversity of the population.
Since 1970, no pattern can be seen between the size of benefits a family of three gets under welfare programs like Temporary Aid for Needy Families (TANF) and the level of immigration or ethnic and racial diversity.
We compared individual states because they largely decide the benefit levels for many welfare programs, and states’ levels of ethnic diversity vary tremendously along racial, ethnic and immigrant lines. For instance, in 2010 only 1.2% of West Virginia’s population was foreign-born while 27% of California’s was.
Furthermore, the amount of TANF benefits also varied by states with similar demographics. For instance, in 2010 a California family of three received $694 a month in TANF benefits. But in Texas, an identical family received only $260. The size of the Hispanic population in each state is the same: 39%.
For every California with many immigrants, considerably diverse, and a vast welfare state, there is a Florida or a Texas with similar demographics but a smaller welfare state.
In other words, there is no actual link between welfare state generosity and a state’s immigration population. So, basically economic research shows small or no effects on wages and this research shows no effect on political outcomes. The arguments against immigration are extremely flimsy.
What do the Cooper Union and the University of California have in common? They both promised no tuition and have abandoned that. This leads to an interesting idea about higher education. My hypothesis is that free tuition is an “unstable equilibrium.” Once you get it going, it can be sustainable, since people exert great pressure to keep it that way. But once you charge tuition, it’s impossible to go back. For the University of California, it was the freedom to charge a “registration fee.” Originally meant to cover bureaucratic costs, it very quickly became de facto tuition. It was even litigated and the courts openly admitted it was de facto tuition but needed. The same for the Cooper Union, which is now just another private school with a hefty tuition, after nearly a century of being tuition free.
In a world where college is a certification for the labor market, and entry is restricted, you invite monopoly pricing by producers. In that world, any excuse you can provide that allows you to start charging tuition is the first step in extracting huge amounts of money from students and parents. And that is very hard to resist.
Shamus and I have a long standing debate over the 2002 Dale/Krueger paper and whether it really does show that elite college premia are due to ability bias (e.g., kids who go to Harvard make more money because they are smarter/better connected/whatever, not because Harvard gives them any particular human capital). Via Econlog, I discovered thet D&K have a working paper, which bolsters this claim with newer analysis. From the abstract:
We find that the return to college selectivity is sizeable for both cohorts in regression models that control for variables commonly observed by researchers, such as student high school GPA and SAT scores. However, when we adjust for unobserved student ability by controlling for the average SAT score of the colleges that students applied to, our estimates of the return to college selectivity fall substantially and are generally indistinguishable from zero. There were notable exceptions for certain subgroups. For black and Hispanic students and for students who come from less-educated families (in terms of their parents’ education), the estimates of the return to college selectivity remain large, even in models that adjust for unobserved student characteristics.
In other words, if going to Harvard causes you to get more income, the income associated with going to Harvard should remain unexplained when we control for sensible individual covariates. In the data, when you include data on school you applied to, which indicates how ambitious you are, the Harvard effect goes away, except for low-SES students.
Bottom line: Elite college attendance is a marker of ambition. That’s important to know, but shouldn’t be conflated with a human capital effect, except for populations which don’t have wealth or social connections.
To me, learning about a scholar’s intellectual trajectory and philosophy is helpful for understanding the impetus for particular schools of thought. One of the pivotal moments for me during my grad school days was hearing Neil Fligstein‘s candid perspective about having to advocate for one’s research question, methods, and claims. In fact, he compared being an academic with being the creature from Alien(s). That’s right, we’re not the flame-toting Lt. Ripley and the heroic but ill-fated Nostromo crew; we’re more like the chest-bursters who have to keep coming back, no matter how many times we get (spoilers ahead! cover your eyes, young’uns) burnt, ejected from the airlock into outer space, frozen, etc.
With that imagery in mind, have a look at Fligstein’s discussion of his most recent works. Fligstein talks in an interview with McGill student Nicole Denier about how he decided upon a PhD in sociology (hint: a foray with social movements), where he sees the field headed, and his agenda for
grand general theory.
ND: …what do you think are the challenges for sociology to overcome in the next few years?
NF: What I have found most frustrating about sociology is that it is so Balkanized. One of the most depressing things about sociology is when I look at the American Sociological Association and see that there are forty-four sections, which could be reduced to about six. It tends to create these Balkanized theory groups (for lack of a better term) that are engaged in a discourse with ten other people. From a graduate student’s point of view, that’s the hardest thing to face in the field—how fragmented it is. The problem is that there just aren’t that many people. There are only about 15,000 sociologists in North America, I think. It was bad when I was a graduate student twenty-five years ago, it’s much worse now. It’s very frustrating for people and it’s hard to overcome. One of the things I like about the construction of something called economic sociology is that for the first time in 30 years there is a synthetic field – not a field which wants to break the field into smaller and smaller parts—but a field that wants to say that politics and law and economic processes and organizations and social movements are all part of the same thing. So to me, this is what this economic sociology thing is all about. It is more synthetic than breaking it into a smaller piece.
ND: Similarly, your field theory has the possibility to span a number of areas. You’re not so optimistic about it overcoming the differences between the institutionalisms in economics, political science, and sociology. But do you think it can bridge the gaps within sociology?
NF: I’m an optimistic person. I hope that it becomes more synthetic. People have moved so far from (I’ll use a dirty word) a general theory of society or a theory of society that it’s not in their vocabulary any more. It was so discredited so long ago that you’re a bad person if you even have that thought. It’s a big taboo in sociology to say that, you know, there really is a general theory of society. Again, you get off stage with people and you talk to them and a lot of people think there is a general theory of society….[snip!!!]…. Sociologists tend toward understanding action in groups, yet we don’t even think about it most of the time. Field theory is about that: how groups of people and groups of groups do these kinds of interactions and watch other people and reference other people and take positions, a very generic level of social process. I figure a lot of people are ready to hear that message in sociology. Hopefully, it will go a little further beyond where it is right now.
In the spring, I wrote a series of posts about Joel Mokyr’s The Enlightened Economy, which argues that industrialization was precipitated by cultural change in the UK. This final (?) post on Mokyr’s book extracts some of Mokyr’s observations about education and contrasts them with a popular theory of the education/growth link.
First, what are some standard stories of the education/growth correlation?
- By-product: The by-product thesis says that you first get growth, due to technical or institutional change, then people are wealthy enough to invest in education.
- Average worker productivity: The standard story in the media (and among social scientists) is that education increases the average productivity of workers, which lead to growth. Education is an across the board “upgrade” in the economy.
What is the alternative? Well, Mokyr’s history suggests an alternative:
- Elite reformation: Education mainly changes elites in two important ways that lead to economic growth. First, education shows innovators (the technical elite) the idea of translating abstract knowledge into concrete application. It also provides a common stock of knowledge (e.g., we all know chemistry or law). Second, education of political elites might make them more tolerant of wealth accumulation by innovators. Science and engineering are no longer threats to be punished through force or tax.
This Mokyrian theory is motivated by the observation that the UK saw massive economic growth with an almost illiterate population. Mokyr’s (implicit) elite reformation theory has a number of attractive features. It doesn’t require a massive re-education of the population before growth in the historical record. Second, it provides a concrete mechanism linking cultural change to institutional change (ie., the ideas get broadcast in educational institutions that elites tend to hang out at, like Oxbridge in the UK). Third, it explains why having an educated technical elite is not enough for growth, which explains why some nations with strong technical elites but misguided political elites remain mired in poverty (e.g., India). Finally, elite reformation theory doesn’t require you to explain why it is that sending the masses to trigonometry class – which they will promptly forget – makes them more productive.
There’s a recent study by researchers at Northwestern showing that part time instructors do better than tenured full timers. A few clips from an Inside Higher Ed piece addressing the issue:
A major new study has found that new students at Northwestern University learn more when their instructors are adjuncts than when they are tenure-track professors.
The study — released this morning by the National Bureau of Economic Research (abstract available here) — found that the gains are greatest for the students with the weakest academic preparation. And the study found that the gains extended across a wide range of disciplines. The authors of the study suggest that by looking at measures of student learning, and not just course or program completion, their work may provide a significant advance in understanding the impact of non-tenure-track instructors.
There’s a recent NPR story that features the research of a friend of mine, Marit Rehavi of UBC. She has co-authored a paper, with MIT’s Erin Johnson, on the topic of c-sections. The authors compare c-section frequencies of health professionals (MD moms) vs. everyone else. The finding?
… physicians are almost 10 percent less likely to receive a C-section, with only a quarter of this effect attributable to differential sorting of patients to hospitals or obstetricians. Financial incentives have a large effect on C-section probabilities for non-physicians, but physician-patients are relatively unaffected. Physicians also have better health outcomes, suggesting overuse of C-sections adversely impacts patient health.
In other words, people who have better knowledge (MD moms) have fewer procedures and better health outcomes. The policy implications are clear – the c-section rate is too damn high!
Off-list, Howard Aldrich penned Brayden and me a heartfelt lament about the one-sided exchange between sociology and economics. He described a recently published article in which an economist urges fellow economists to conduct research on how organizational identity motivates workers to work hard because (surprise!) monetary incentives aren’t sufficient.
With Aldrich’s permission (but without naming the offending article and author), I am excerpting his thoughts here:
“What is heartbreaking is that there’s no sign in this article that the author has any clue that sociology and management & organization theory have been concerned with such questions for decades, or that there is a rich and robust literature on organizational culture, social identity, and so forth. Although the author mentions the social psychology of identity at one point (Ed. Note: plus 2 mentions of March and Simon’s work as “seminal”), all but a handful of the 60+ references are to the literature in economics.
Several years ago, I had a similar experience when I read a special issue of an entrepreneurship journal that was devoted to entrepreneurial teams. It contained an economist’s algorithmically driven analysis of why and how entrepreneurial teams should form. Plenty of other economists were cited, but he seemed clueless to the fact that, five years previously, a couple of sociologists (namely, Martin Ruef and me, together with a business administration scholar) had written an empirical paper, based on a nationally representative sample, addressing precisely some of the idle speculation he’d written up in his paper. I was so irritated that I called up the special issue editor, who apologized profusely but offered no explanation.
So, for economics, all that matters is what other economists have done. I’m sure this simplifies the literature search process, but one can imagine that some insights might be sparked if economists were occasionally to dip into the literature of other fields. For example, what came to mind immediately upon reading the first article was Bill Ouchi‘s rather famous – - at least to me – - book from 1981, Theory Z, which was one of the first books to ride the wave of the “organizational culture” phenomena in organization and management studies.”
In a follow-up email, Aldrich opined the desire for economists either to share or return home:
“I just want them to either go back to their own village or else begin engaging in a more fair exchange….The problem is that I doubt very much whether we can ever create a truly equitable exchange with economists – - I’ve seen the same pattern for years, and indeed Chick Perrow actually talked about something like “invasion of the body snatchers” in talking about when economists came into our field.”*
Since economists are supposedly prone to practicing what they preach, could it be that the discipline of economics is ill-suited to contributing to a knowledge commons?
This is a guest post by Graham Peterson. He has just finished up his master’s degree in economics at UIC and will begin the PhD program in sociology at the University of Chicago. He is interested in economic sociology
and extended blog comments.
It’s a shame sociology took its final-swoop quantitative turn just about the same time economics reissued its permissions to do comparative history and started publishing discourse studies in its mainstream journals. It’s as if estranged siblings would be forever doomed to blow past one another and reissue each other’s mistakes. Politics.
The turn for sociology was of course both theoretical and empirical, but that damned dissertation in 2021 really sealed it: Foundations of Sociological Analysis (Paul Samuelson glowed proud from his grave). It was as if sociologists had been waiting for someone to come along and resolve all the definitional issues in theory and compose an axiomatic graph-theoretic derivation of sociological principles. Now all the theorists do is applied combinatorics on graphs. Useless.
The usual advice about art and investing is “don’t bother.” Buy it because you love it, but don’t expect a decent return. Well, that’s not exactly true. There are at least two ways to consistently make money from art, but neither is easy:
- The Vogel Strategy: Named after the Vogels, who spent their lives collecting art on a postman’s salary, the idea is simple – immerse yourself in art and buy up lots of cheap stuff. But you can’t buy any old art. You go to the cultural center, hang out with impoverished artists, and buy cheap.
- The fussy value buyer: As discussed in a recent Art Market Monitor article, art investment funds do actually manage a decent rate of return. The way they do it is to avoid the fancy auctions and look for somewhat undervalued works by artists that are already on track to having good historical reputations. For example, if Bacon is already famous, go for his lesser known buddy Frank Auerbach. Good work, but probably under-appreciated.
The tricky part with the Vogel strategy is that you need to invest in a lot of stuff, much of it goofy. Most people don’t have the patience or taste needed to spot how today’s bizarre avant-garde might be featured in tommorrow’s history book. The trick with the Moneyball strategy is that you go for people who are relatively cheap, but still expensive in absolute terms. You need a lot of capital to even contemplate this strategy. Also, you need to be confident and ignore the hype that often surrounds “hot artists.” That is hard to do for many investors.
One of the problems of graduate education in many fields is that the requirements for the dissertation are vague. Another issue is that the dissertation is a book length treatment, even in fields where articles are standard. This leads students spend years writing overly long documents that have little value. For that reason, I encourage all my students to use the “three essays” format as the default. It’s simple, it works, and they’ll get done. If they have a good reason for deviating, then we can talk about it. But most folks should really stick to “three essays.”
There is now more systematic research showing that this advice is correct. A recent AER paper authored by Wendy Stock and John Siegfried shows that economists who use the “three essays” format do better in terms of academic job placement and subsequent publication. The abstract says it all:
Dissertations in economics have changed dramatically over the past forty years, from primarily treatise-length books to sets of essays on related topics. We document trends in essay-style dissertations across several metrics, using data on dissertation format, PhD program characteristics, demographics, job market outcomes, and early career research productivity for two large samples of US PhDs graduating in 1996-1997 or 2001-2002. Students at higher ranked PhD programs, citizens outside the United States, and microeconomics students have been at the forefront of this trend. Economics PhD graduates who take jobs as academics are more likely to have written essay-style dissertations, while those who take government jobs are more likely to have written a treatise. Finally, most of the evidence suggests that essay-style dissertations enhance economists’ early career research productivity.
My take home message? We should drop the pretense of the sprawling dissertation. All departments should require or strongly encourage the three essay format as the default. If the student wants something else, they need to make the argument.
Hat tip to our evil twin, Organizations and Markets.
Last week, we had a discussion about academia and social mobility. Is it the case that low SES individuals are well served by a career in academia? My response is no. Graduate education is highly uncertain. Even if you get the degree there’s a good chance that you might be adjuncting. You might have to get work outside of academia that does not require doctoral education. I suggested that if we are really concerned about inequality, we’d suggest that people more seriously consider career paths that have high rewards and low risk, like engineering or health.
Then, Krippendorf wrote a comment that made me seriously question my claim. I quote the entire comment:
For Hispanic men, Hispanic women, and African American women, the estimated lifetime earnings of a PhD are greater than the estimated lifetime earnings of professional degree holder. The much-touted professional-to-PhD earnings drop is limited to whites, Asian Americans, and African American men. See here: http://www.census.gov/prod/2011pubs/acs-14.pdf, Table A2
If — and, taking Rory and others’ points, it’s a big if — the goal is to increase the earnings potential of students of color, using group averages as your sole predictor, it still doesn’t make sense to discourage all students of color from getting a PhD.
That being said, I completely agree that the solution isn’t admitting additional PhD students. (And, at my university, students of color are not “add-ons:” they count against the department’s allocation of both slots and funding packages, just like any other student.)
I agree with much in this comment. Group averages are not to be used strictly in all cases. I am also glad that Krippendorf and I agree that we shouldn’t be expanding graduate enrollments. But the core of Krippendorf’s comment made me think: is it really true that black MDs make *less* than black PhDs? If you look at the linked census report,* that is the case (see Table 2-C, for example). So what gives?
I suspect it has to do with the definition of “professional degree.” My hypothesis is that Blacks and Hispanics PhD make more than professionals because Blacks and Hispanics are less likely to be in high paying professions (e.g., MDs) and more likely to be in low paid professions (e.g.,social work a profession). The report does not list what counts as a “profession,” so it’s hard to say.
There is circumstantial evidence for my interpretation. For example, a 2009 article in Health Affairs estimates physician income by ethnic group. Not surprisingly, even Black and Latino MD’s make a bit more than the average for all professors. For example, the *average* Black male family practitioner makes about $159k a year. Hispanics actually earn *more* than their White counterparts on the average. We can also look at engineering. Not much research, but one study by NACME shows that engineering salaries for Black bachelor degree holders in their 30s is about $73k – which is a little above the average for all professor ranks combined in sociology. If you look at life time earnings, even Black engineering BA holders do better than Black PhD because they don’t have to spend a decade getting the degree, paying extra tuition, and loading up on debt.
Bottom line: There’s something fishy in that Census report and other evidence shows professions, at least STEM/health, are a better path for mobility for minorities.
* One of the authors is a former student, so I claim credit for all excellence in the report.
Article of interest from Rationality and Society:
- Mark Pingle and Tigran Melkonyan on “To believe or not believe…or not decide: A decision-theoretic model of agnosticism“
- David Pate on “Concealing to reveal: The informational role of Islamic dress“
- Douglas Savitski on “Is plea bargaining a rational choice? Plea bargaining as an engine of racial stratification and overcrowding in the United States prison system“
- Anthony Paik and Vernon Woodley on Symbols and investments as signals: Courtship behaviors in adolescent sexual relationships
- Louis Corriveau Game Theory and the Kula
Check it out.
Yesterday, I discussed Joel Mokyr’s book on Britain’s industrialization and I focused on the finding that industrialization happened with a work force that was not formally educated. Today, I’ll focus on another of Mokyr’s observations – Britain was taxed a whole bunch before, during, and after industrialization.
Mokyr raises this point to argue that it wasn’t low taxes that made industrialization possible, but ideas. I wish to raise another point. Economic development can exist within a wide range of tax regimes. Mokyr makes a persuasive point that Britain wasn’t low tax in the 1700s. There were all kinds of tariffs and other forms of taxation. Mokyr does point out that taxation was indirect and that seems to be the cruz of the matter, at least in his eyes.
That seems consistent with modern political economy. Sure, at extremely high tax rates, e.g., socialist economies, you can crush economic growth. But you get a lot of growth at intermediate rates. When you add up American taxes, you get about a 54% tax rate. Same with Europe. Bottom line? There is definitely a point of too much taxation, where people just stop working, but if the taxes are indirect and hidden, people won’t notice for quite a while and they’ll just keep on working.
I’ve recently finished Joel Mokyr’s The Englightened Economy, an economic history of Britain during the industrial revolution. The book is an exhaustive argument about the role of Enlightenment ideas on economic development. I won’t go into detail here, but I’ll summarize it by merely saying that the book is a thorough review of the literature on Britain through the eyes of economists and historians.
Today, I want to make a comment on an observation of Mokyr. In his review of research in higher education during British industrialization, he notes the following:
- Higher education was very rare
- Innovators and industrial leaders were mostly uneducated
- Individuals with elite education (e.g., Oxbridge) were fairly rare among the ranks of the industrial leadership
Mokyr raises this point in service of the argument that Britain’s economic expansion can’t be attributed to rising quality of education since most people were not well educated until well after the industrial revolution. My point: This is somewhat analogous to economic expansion today. Leading Silicon Valley firms aren’t always, or even usually built, from people who have advanced degrees. I can think of only one such major firm (Google). Microsoft, Facebook, and Apple were founded by college drop outs, albeit elite drop outs. Groupon was founded by a policy school grad school drop out (not computer science). Twitter’s founder was a computer geek in high school but went to un-glamorous Missouri Tech, then later went to NYU, not known as a computer science hub.
The conclusion: You need an educated work force to carry out ideas, but the leadership doesn’t need a lot of education. Rapid economic expansion seems to hinge on having a mix of smart people who get their “training” from a wide variety of sources, not just college. Colleges are more about educating the masses who compose the rest of the organization.
Last week, Teppo commented “The Org: The Underlying Logic of the Office,” a book by CBS prof Ray Fisman and editor/writer Tim Sullivan that brings organization theory to a popular audience. This week, I’ll add a few of my own comments to the discussion. Later, Ray and Tim will be contributing to the blog.
In summary, The Org brings to the educated reader an argument about why organizations are important and how they work. It’s about coordination and routinization. Modern life simply requires big tasks that can’t efficiently be done with managers, bosses, and CEOs. It’s the sort of book that you might give someone who is just starting to think about why the social world is the way it is.
The book covers a lot of basic territory in a crisp and easy to grasp way. The book gives great examples of principal agent problems, superstar markets, and the problems of vertical integration. The examples range from the for-profit world, to the military, to churches.
In particular, I enjoyed the chapter on innovation. The issue is that innovation and organization are at odds with each other. Organizations thrive because they can exploit scale and produce the same product over and over. That requires people to obey. In contrast, innovation requires that people diverge from established routine. Rather than give in to a feel good approach to innovation, Fisman and Sullivan sensible point out that the tension between organization and innovation is natural and that it will be solved in different ways. They give good examples that show the range of solutions. McDonald’s demands conformity from franchisees and innovates in a lab, while Lockheed Martin famously created a separate entity that encourage wildly creative innovation Yes, that is old school contingency theory, but it remains a good insight.
A few nit picks. Rhetorically, I wish the book had been a little more cognizant of the interdisciplinary nature of organization studies. The book begins with the typical “an economist looks at …” discussion that is in vogue in the post-Levitt era of popular economics writing. But the book itself covers a lot of great material from managerial economics, business school scholarship, sociology, history, and even concludes with a quote with the old man himself, Max Weber. Also, I wish the book had said a little more in the conclusion about the social consequences of management. The world we have today is shaped by management philosophy and management itself has given rise to a new class of people. That deserves some discussion. But overall, these are quibbles, though. The book’s a winner and I’m sure it’ll start appearing in organization studies syllabi.
In the past, I have argued that it is erroneous to assume that all people must go to college. Some people don’t have the academic or emotional capacity for higher education. Many don’t learn much when they do go to college. Still others spend years getting degrees as a labor market signal. Individually rational, but not efficient. College is definitely good for *some* people, but not everyone.
Now, Paul Campos, a Colorado law prof, gives a succinct economic argument against the over-investment in college. I quote at length from his discussion of legal education:
A few months ago, I wondered if it would be better for people to pay a tax bill instead of an income tax. In that scheme, the state tallies up the cost of gov’t and divides by the size of the population. Call that number your “tax bill.” You discount for poverty and surcharge for wealth.
Two points. First, Tax Historian, a commenter, thought that I was arguing that each person get an individualized bill. E.g., if I drove more, I might pay more taxes for roads. That is not what I suggested and I agree it would be impractical. Rather, my suggestion is simple. At the end of each year, the state looks at its expenditures and divides by the population size. So if the federal budget was $300,000,000,000 (33o billion) and our population was 300,000,000, then each person pays $100. The rich might pay a multiple to account for lower income people who can’t pay at all or pay the full price.
Second, I was a little surprised by the hostility in the comments. Here’s the intuition so you can see where I am coming from. Currently, most tax schemes just assume that the state vacuums up a certain chunk of your income, or transactions, or assets. If you believe that the state just owns part of you, or that you just owe a chunk of your wealth to someone else, then sales taxes or income taxes or value added taxes seem normal.
However, if you start with the assumption that government provides services that can’t be provided privately, then it doesn’t follow that the state just owns, say 30% of your income or 8% of your transactions. Instead, you should first (a) figure out what you need and then (b) force people to pay up. That’s the logic of assessments in homeowner associations, for example. Let’s put it this way with an example. How do we shop for food? (a) We just give the grocer 10% of our income and hope he give us enough food or (b) We ask the grocer how much it costs and then pay the market value. There’s a good case to be made for the second option.
In response to Kieran and Ezra’s posts, Shreeharsh Kelkar of MIT’s Program in History, Anthropology and STS wrote a lengthy post about the nature of performativity arguments. A representative clip:
To put in yet another way, the difference between constructivists and realists is over the issue of prediction, and in particular over the issue of long-term prediction. Short-term predictions are possible for both the realist and the constructivist. But long-term predictions, say, about housing prices or computer prices 50 years from now, will be more difficult for constructivists to make than realists. It is difficult only because even objective factors that determine prices can be changed by long-term cultural work; and this cultural work is impossible to predict. The more confident you are about prediction, you shift to the realism side of the spectrum. The less confident about prediction you are, will make you more of a constructivist.
And this explains, finally, some of the arguments that have been happening in the Orgtheory comment threads. Would you like your regulator to be a realist or a constructivist? Realists argue that even the existence of regulators is premised on realism; for if there were no objective factors constraining social facts (like prices) then how would one even begin to regulate something in the first place? I would disagree. I think it depends on the time-frame that the regulator is supposed to regulate. A regulator who is thinking about the future 50 years from now is simply deceiving himself or herself. For a regulator who is thinking 5 or 10 years down the line: it simply doesn’t matter whether he is a realist or a constructivist.
Check it out.
In public policy, we often make the argument that a service should be subsidized if it is important but somehow doesn’t generate enough money to be produced by the market. However, sports seems to fly in the face of that intuition. Sports is a heavily subsidized leisure activity even though it clearly has a viable market. For example, colleges subsidize sports teams, cable tv subsidizes sports channels, and cities subsidize stadiums. National governments will even subsidize large events, like the Olympics or FIFA events. And in many cases, the money is never recouped. Why?
A few possible answers:
- Sports legitimize organizations.
- The average voter is a sports nut.
- Public choice: administrators approve sports because it helps them, though not other people.
Other explanations? I am not anti-sports, but as a billion dollar industry, it seems as if sports doesn’t need any additional help. sports subsidies seem deeply misguided.
I teach a course on organizations, work and the economy for undergraduates. It is aimed at lower division students. I want to do one or two lectures on “fincialization,” the growth of jobs in finance, the shift in wealth, and so forth. Alternatively, one could teach a lecture or two on the topic of “the 1%.”
My issue is that there don’t seem to be many good essays on this topic aimed at undergraduates. I want an essay that is nuts and bolts, not a think piece. Something like a meaty Contexts piece with some strong charts and graphs on income inequality in the age of financialization.
A few days ago, Steve Levitt wrote a post on the Freakonomics blog that caught many people by surprise. On December 10, 2012, Levitt posted the following on Freakonomics:
In academia, it is seen as an honor when someone wants to reprint one of your published papers in an edited volume of collected papers. It is really an honor if someone wants to take the time to translate it into another language.
Roland Fryer and I feel so honored.
Back in 2004, Roland and I published a piece in the journal Education Next describing our research on racial test-score gaps. That paper was recently translated into ghetto English. The new version is here. It is a must-read (although very, very NSFW). Usually something gets lost in the translation, but I would say in this case it is an improvement.
If you click on the link, you see a version of their paper that uses profanity and street slang. Many readers will probably find the translation offensive, as do the commenters on the Freakonomics blog. It’s very disappointing to see such an accomplished scholar lower himself by using crass and racially charged language.
A few days ago, I asked if readers believed in school effects. The poll suggested that most orgtheory respondents do believe that schooling makes a difference. In the comments, many people asked: what counts as a school effect? joshtk76 noted that different features of schools seem to have different effects on students.
Ok, let’s sort this out. First, in the sociology and education literature on schools, there is a statistical definition of a “school effect.” It simply means that if we assign a variable for a type of school (e.g., public vs. private) or specific school (Indiana University), then there will be an effect on the dependent variable of choice (e.g., income or learning measurement). A lot of classic studies in sociology and economics then play the game of making the effects go away. For example, Coleman’s study used family background to make school effects disappear. Card and Krueger try to measure student aptitude to make college specific effects disappear. Often, school specific effects are reduced or go away entirely. The flavor of many studies are like that – add family, or cognitive ability, or whatever and school effects diminish.
Now, as the commenters note, there is still some ambiguity. There is stuff that is school specific that is not “school,” such as your friends at school. Luckily, the literature does give some guidance. For example, we do know that there are teacher effects. There seem some teachers who are really good at teaching. If a school has good teachers, then students will learn more. On social capital, the evidence is mixed. If you read Muow’s work on networks and jobs, the evidence is mixed, which suggests that social capital from schools doesn’t have that big of an impact.
If the evidence is so mixed, I wouldn’t put a whole lot on school effects unless there is a strong reason otherwise. For example, elite occupations (e.g. academia) seem to revolve around certain elite schools. Another example: very low SES students, the one group where we consistently find school effects. So when thinking about school effects, your presumption should be “not much, but I am willing to consider the evidence for specific groups of people.”
One of the most puzzling things about public policy is the insistence on tax rates. For example, there was constant debate over Mitt Romney’s tax rate. Did he pay more or less of annual income in taxes than the average American? Probably less, but I find the whole discussion odd because nobody has told me the “correct” tax rate. What, exactly, should Mitt Romney pay? What should anyone pay? What’s the magic number? No one told me.
The underlying point is that the federal and state governments are not funded in the same way we fund other things. Normally, we demand certain items, like food or housing, and then we are handed a bill. In contrast public services are funded mainly through income taxes. The state garners a portion of your income which goes into a pool of funds, and the legislature decides how to spend it.
I am wondering if there is a serious argument to be made for replacing the income tax with a tax bill system. In other words, the legislature decides what is to be spent for the year and Americans each get a bill for their portion of the services. The benefits of a “tax bill” system would be:
- Transparency – People would actually understand their tax obligation. “We spent $14 trillion and I owe 1/300 millionth of that.”
- Simplicity – Instead of having all kinds of differing tax rates for different types of income, you would get one bill.
- A focus on services, not guessing the “right” rate for people of various income levels (rich or poor).
- Easy to make progressive – The tax bill would be weighted by income. The very poor would have their bill marked down to zero. To compensate, wealthier citizens would have a “multiplier.” People, say, in the top 1% might have to pay for five additional people at the bottom.
- No surprises – folks who come into money or assets wouldn’t be socked with little known tax laws such as the alternative minimum tax or estate taxes
- Equality between capital and labor – currently, investments get a huge discount. That would be done away with.
- Caps on tax – In exchange for explicitly subsidizing low income people, the wealthy would have a cap on their income tax. Once you have paid your share and helped out some folks at the bottom, you are done paying your taxes for the year.
The tax bill method still has some problems. For example, to figure out your discount or multiplier, you would probably need a system for allowable deductions and gains/losses, and that would almost certainly be subject some arcane regulations. Despite that problem, the tax bill system is worth discussing because it shifts the discussion from “you owe X% of your income” to “these are the services that you consume.” I’d be interested in knowing if economists or policy wonks have ever studied such a system.
A couple of times a year, a student walks into my office with the following story:
Thanks for meeting with me, Professor Rojas. I need some graduate school advice. I’m majoring in economics [or soc] with a minor in math [or computer science]. But I’ve also taken some sociology [economics] courses as well. My issue is that I’m drawn to sociology – and I love social theory class – but I feel more pressure to do economics graduate school. What do you think?
First, I give the “don’t go to graduate school speech.” I want to make sure that they understand that graduate school is a serious choice. I try to scare them away. I also insist that they buy my book, which is the best generic advice they can get on graduate school. Then, if they still want to do it, I say the following about the econ/soc choice:
Economics and sociology are wonderful fields but they are very different. Sociology is a rich, highly diverse field. It is very eclectic and inherently interdisciplinary. Economics is, currently, a field that has many applications but a relatively narrow toolbox. The field is now a sort of engineering, where success is measured by mathematical problem solving.
There are also very different professional rewards. Sociology is intellectually flexible, but adheres to the arts and sciences model of graduate education. It will take you about 7 years and you’ll make a modest income. The upside is that sociology isn’t as bad as other arts and sciences in that you can work in sociology, political science, anthropology, business, public health, social work or education, depending on your specialty.
Economics is more like a well functioning professional program. A short time to degree, with a number of highly paid options upon graduation. If you are worried about math, don’t be. They only admit folks with strong math skills and many economics programs have “math camp.” With a few exceptions, like Chicago, weeding is rare compared to most arts and science doctoral programs. Also, once you get past the first year, you can choose a low math specialty. The fancy math is for professors aiming for top 20 programs and who compete for top journal space.
Ultimately, I tell students to choose the field where they feel they can make the best impact. If you are magnetically drawn to social theory, don’t sign up for a lifetime of welfare theorems. On the other hand, if you are on the margin, the fast time to degree and the high pay-off are hard to argue with.
If you look at the list of department chairs here at Indiana, you’ll notice that the first few were chairs of “economics and sociology.” I thought the old combined economics and sociology department at Indiana was some historical accident. That is, until I read The Emergence of Sociology from Political Economy in the United States: 1890 to 1940 by Cristobal Young. The article, published in the Journal of the History of the Behavioral Sciences, makes a few simple points:
- Economics came first and sociology was added to existing programs. Solo sociology programs, like Chicago, were in the distinct minority.
- Most sociology programs were part of economics programs until the 1920s.
- There was still much collaboration between sociology and economics until the 1940s.
- Once economic institutionalism finally faded, ties between disciplines faded.
- The separation really started when sociologists started their separate meetings.
What to make of this history? A few thoughts: 1. Heterodox economists should just give up on mainstream economists and hang out with sociologists. 2. There was some sort of hybrid disciplinary action going on that got truncated in the 1940s. It probably happened on both sides. Mathematical formalism made strides in economics, while structuralism appeared in sociology at the same time. These formalizations probably created needless rifts between disciplines. It might be worth seeing if that multi-disciplinary history can be reconstructed.
Others continually on the short list include Yale University’s Robert Shiller. The father of behavioral finance — a celebrated 1981 paper by Mr. Shiller struck an early blow against efficient markets hypothesis — he also sounded warnings on both the dot-com bubble and the housing bubble.
Also mentioned in previous polls: University of Chicago Booth School of Business behaviorist Richard Thaler; Harvard macroeconomist Robert Barro; and University of Chicago econometrician Lars Hansen.
Thomson Reuters has another method of coming up with Nobel predictions, based on how often an economist’s papers are cited and how “high impact” those papers are. The Thomson Reuters picks are: MIT‘s Stephen A. Ross for his arbitrage pricing theory; Nuffield College‘s Sir Anthony B. Atkinson and Princeton University‘s Angus S. Deaton for research on incomes and outcomes; and Mr. Shiller of Yale.
But there are plenty of other economists who could get the nod. Among them: Jean Tirole, of France’s Industrial Economics Institute, who’s an expert on the workings of “two-sided markets,” where different parties participation is contingent on the participation of other parties (think Google advertisers and Google users). And Yale’s William Nordhaus, best known for his work on environmental economics.
High status economists are encouraged to comment.*
* But don’t write a dumb comment about how the economics prize isn’t a real Nobel, or how economics isn’t a science, or how people didn’t predict some economic crisis. That was really cool to say, like, ten years ago.
About two weeks ago, there was an interesting post at Econlog about the relative importance of civil rights for libertarians. The issue is that libertarians often hype other issues, like taxes, more than civil rights. Not too much discussion about discrimination, Jim Crow, and so forth. A blogger from the pro-immigration website Open Borders asked how often libertarians argued against, for example, segregation.
I think the commenters (myself included) got it right when we said “some, but not much.” In other words, from time to time, libertarian intellectuals did talk about the evils of segregation. Usually, the issue is couched in terms of the use of state power to prohibit blacks from holding property and practicing certain occupations, like the law. Sometimes it was a commentary on what was good and bad in the Black freedom movement. There is the occasional talk of opposing colonialism. But overall, it was not an overwhelming response.
The relatively weak answer to Black oppression is puzzling. Opposing Jim Crow was a no brainer from the libertarian point of view. Blacks had been slaves, which is the antithesis of personal freedom. Then, after Reconstruction, they had been subjected to humiliating and painful legal regulations in addition to extensive personal violence. While libertarians may disagree with liberals about the remedy for state violence and segregation, you would think that they would have been marching arm and arm with liberals in the 1960s.
But that didn’t happen. Black repression takes a back burner on the libertarian shopping list. But why? I think it has to do with the sociology of elite libertarians. Read the rest of this entry »