Hangover from the Austrians

: "Some libertarians extol the Austrian theory, not because they have really thought that theory through, but because they feel the need for some prestigious alternative to the perceived statist implications of Keynesianism. And some people probably are attracted to Austrianism because they imagine that it devalues the intellectual pretensions of economics professors. But moderates and liberals are not immune to the theory's seductive charms--especially when it gives them a chance to lecture others on their failings."

(Via .)

Stanford Business Magazine August 2007

Stanford Business Magazine August 2007: "Susan Athey Awarded John Bates Clark Medal
by Joshua Gans
Susan Athey, a 1995 graduate of the Business School’s doctoral program in economics and currently a professor at Harvard, became the first woman to be honored with the very prestigious John Bates Clark Medal in April. The medal, which is one of economics’ oldest awards (60 years as compared to 40 years for the Nobel Memorial Prize), is given every two years to the best economist under 40 in the United States. It is one of economics’ most prestigious awards and a predictor of future Nobel glory. (At Stanford Ken Arrow, Michael Spence, and David Kreps are all past recipients.) While insiders already knew that Susan’s work was outstanding, the award tells outsiders (either to the field or to academia) of the news."

(Via .)

Does Inequality Cause "Tangible Harm"?

Does Inequality Cause "Tangible Harm"?: "The Economist's blog Free Exchange argues that increases in income inequality have not caused a corresponding increases in unhappiness and asks that egalitarians defend the proposition that inequality is harmful. Chris Dillow answers the challenge:

The tangible harm of inequality, by Chris Dillow: The Economist's blog asks egalitarians to point to some 'tangible harm' from income inequality.

In some senses, the question is silly. To see why, imagine a slave society in which the slaves are reasonably content. It would be hard to point to a tangible harm, but something would be wrong.

This just shows that the 'tangible harm' criterion is psychologically, economically and philosophically naive. Psychologically so, beecause people adapt to their circumstances, so 'losers' don't feel too bad. Economically, because a gain foregone should count as much as a tangible cost; in a slave society no-one can see that freedom creates prosperity better than slavery, but this fact should surely count in our judgment. And philosophically, because inequality matters for more than consequentialist reasons. Justice matters too.
Anyhow, let's address the question. Aside from the ill-health which the Economist mentions - as if death were not tangible enough - I'd cite five other possible harms:

1. Crime. Basic economics says the relatively poor commit more crime than the relatively rich. This is because their opportunities to make money honestly are more limited, and the cost of being imprisonment - foregone earnings - is lower. Empirical work corroborates this. Is it really a coincidence that unequal countries (south America) have more crime than egalitarian ones (Japan, Korea, Scandinavia).

2. Lower social mobility. Societies with higher income inequality have lower social mobility. Politics in the US and the national media in the UK are now largely hereditary occupations. Many of you might think this unhealthy.

3. Slower growth. There are some reasons to think inequality can retard growth, say, by reducing social capital and therefore investment, or by creating credit constraints that prevent potential entrepreneurs.

4. Bad customer service and job dissatisfaction. The inequalities that matter are not merely of income, but of power. Some people have it, some don't. And in companies, these inequalities breed slovenliness and inefficiency. Cloke and Goldsmith put it thus:

Through years of experience, employees learn that it is safer to suppress their innate capacity to solve problems and wait instead for commands from above. They lose their initiative and ability to see how things can be improved. They learn not to care and to accept things as they are. They justify making mistakes and are allowed to be irresponsible and pass the blame to others for their mistakes. They become mindlessly obedient, fatalistic, intransigent and hostile.

5. Inner-city blight. Another consequence of inequalities in power is that poor areas become bad areas, with urban decay, poor schools and crime, because the poor lack the power to get the state to provide proper policing and schools.
So, there are almost certainly tangible harms from inequality. The more awkward question for egalitarians is: would there be more harm done by reducing inequality?

There is also Robert Frank's argument about positional goods:

The conventional wisdom has long been that a growing gap between the rich and the middle class is a bad thing. But that view is now under challenge. Some revisionists, respected economists among them, argue that inequality doesn't really matter so long as no one ends up with less in absolute terms. Using income levels to measure the well-being of individual families, these inequality optimists argue that since the rich now have much more money than before and the middle class doesn't have less, society as a whole must be better off.

Yet 'having more income' and 'being better off' do not have exactly the same meaning. I will argue that changes in spending patterns prompted by recent changes in the distributions of income and wealth have imposed not only important psychological costs on middle-income families but also a variety of more tangible economic costs. . . ."

(Via Economist's View.)

The Dismal Science, Dismally Taught - New York Times

The Dismal Science, Dismally Taught - New York Times: "Studies have shown that when students are tested about their knowledge of basic economic principles six months after completing an introductory economics course, they score no better, on average, than those who never took the course.

In other sectors of the economy, such dismal performance might provoke malpractice suits. But in the university system, students and their parents put up with this situation year after year.

Why aren’t introductory economics courses more effective? One possibility is that professors try to teach their students far too much. The typical course bombards students with hundreds of concepts, many of them embedded in complex equations and graphs. The mathematical formalism that has become the hallmark of economic research has yielded deep insights. But it does not seem to have helped introductory students learn basic economic principles."

(Via .)

Today Is a Great Day in Finance!

Today Is a Great Day in Finance!: "Today is a great day in finance! That is, it is a great intellectual day for those of us who are friends of and committed to the intellectual project of Shleifer and Vishny, for today one of their theories is made flesh, and stomps about Wall Street like Godzilla:

Andrei Shleifer and Robert W. Vishny (1997), 'The Limits of Arbitrage,' Journal of Finance, 52:1, pp. 35-55. Abstract: Textbook arbitrage in financial markets requires no capital and entails no risk. In reality, almost all arbitrage requires capital, and is typically risky. Moreover, professional arbitrage is conducted by a relatively small number of highly specialized investors using other people's capital. Such professional arbitrage has a number of interesting implications for security pricing, including the possibility that arbitrage becomes ineffective in extreme circumstances, when prices diverge far from fundamental values. The model also suggests where anomalies in financial markets are likely to appear, and why arbitrage fails to eliminate them...

Yes, today we have reached the limits to arbitrage: most of the people who spend their lives trying to buy low and sell high using other people's money and leverage have given up extending their positions (and so pushing prices back toward normal-time fundamentals), and are hunkered down simply hoping to survive the next month."

(Via Brad DeLong's Blog.)

Edward Glaeser: Where Edwards Is Right

Edward Glaeser: Where Edwards Is Right Commentary,  nysun.com: Last week in the New York Times, David Brooks compared the anti-poverty programs of Barack Obama and John Edwards. Senator Obama's plan focuses on making impoverished places more successful with funding for public transportation and community centers while Mr. Edwards wants to give housing vouchers directly to a million people. ... Should the government focus on fixing poor places or should it provide poor people with the resources to leave those communities?

Mr. Obama's poverty proposal includes some person-based policies, like expanding the Earned Income Tax Credit, but he also is awfully fond of place-based strategies, like Community Development Block Grants and a 'promise neighborhoods' program, which uses national resources to develop 20 impoverished areas. Mr. Edwards is a bigger fan of person-based strategies like housing vouchers and temporary jobs. I am no supporter of Mr. Edwards, but he is right to focus more on helping poor people than poor places.

Mr. Brooks, however, disagrees. He claims that vouchers are ineffective and lauds Mr. Obama's 'more developed view of social capital.' I think that means that Mr. Brooks likes the Harlem Children's Zone that is the model for Mr. Obama's 'promise neighborhoods' program. I like HCZ too, but its success says as much about the government's ability to build communities as Google's success says about the government's ability to develop Internet search engines.

The Harlem Children's Zone is an entrepreneurial nonprofit that receives most of its money from private donors. Saying that the federal government is going to fight poverty by developing its own HCZs is like saying that the government is going to increase GDP growth by starting its own Microsofts.

If we want to understand what future federal place-based policies will look like, we should turn our eyes from private nonprofits to past governmental forays into place-making like urban renewal and the Model Cities program. The track record of these place-based programs gives us plenty of reason to be skeptical about this approach.  ...

The Great Lakes were once a great place to make cars and now they aren't. Federal aid for the Motor City can't change that. ...[B]y subsidizing impoverished areas the government essentially is bribing people to live in economically unproductive areas. Even when these policies do make a place more attractive, it isn't obvious that the poor will benefit. ... Building strong communities is critically important for poor children, but lumbering federal bureaucracies are not particularly good at building strong communities.

Mr. Brooks' view of place-based aid is too rosy and his view of vouchers is too negative. ... [V]ouchers ... look better than most federal place-based projects. At least, the bulk of the money actually will go to poor people, not to politically connected banks and builders.

We should focus on helping people not places, although we can continue to use some place-based tools, like schools, to help poor children. Better schools and safer neighborhoods are the most important things we can give to poor children, which is neither an easy task nor exclusively a Democratic Party agenda. ..."

(Via Economist's View.)

A Taxonomy of Economists

A Taxonomy of Economists: "Dani Rodrik breaks down the two types of economists:

I call them 'first-best economists' and 'second-best economists.' Here is my guide to them.

You can tell what kind of an economist someone is by the nature of the response s/he offers when confronted with a policy issue. The gut instinct of the members of the first group is to apply a simple supply-demand framework to the question at hand. In this world, every tax has an economic deadweight loss, every restriction on individual behavior reduces the size of the economic pie, distribution and efficiency can be neatly separated, market failures are presumed non-existent unless proved otherwise (and to be addressed only by the appropriate Pigovian tax or subsidy), people are rational and forward-looking to the first order of approximation, demand curves always slope down (and supply curves up), and general-equilibrium interactions do not overturn partial-equilibrium logic. The First Fundamental Theorem of Welfare Economics is proof that unfettered markets work best. No matter how technical, complex, and full of surprises these economists' own research might be, their take on the issues of the day are driven by a straightforward, almost knee-jerk logic.

Those in the second group are inclined to see all kinds of complications, which make the textbook answers inappropriate. In their world, the economy is full of market imperfections (going well beyond environmental spillovers), distribution and efficiency cannot be neatly separated, people do not always behave rationally and they over-discount the future, some otherwise undesirable policy interventions can generate positive outcomes, and general-equilibrium complications render partial-equilibrium reasoning suspect. The First Fundamental Theorem of Welfare Economics is proof, in view of its long list of prerequisites, that market outcome can be improved by well-designed interventions. Since they have given up on the textbook model, members of this group have an almost-infinite variety of 'models' to choose from as they think of public-policy issues.
That's a useful taxonomy, actually, and it cuts across ideological lines. Rodrik identifies not only libertarians like Greg Mankiw, but left-of-center types like Brad DeLong, as first-best economists. Folks like Paul Krugman, Joe Stiglitz, and the EPI-types are second-best economists. So far as dabblers go, most of my libertarian friends are first-best types. Im a second-best types. And this isn't surprising. As Rodrik puts it, 'these disagreements are often grounded not in economics per se, but in strongly held prior views about the world in which we live in.' Of course, we all think our views are grounded in economics and evidence, but which evidence you find most compelling, and which assumptions you're willing to make (can consumers be rational and wise health care purchasers), matter greatly."

(Via Ezra Klein.)

Cramer begs Fed Reserve Chairman to cut interest rates (video)

Cramer begs Fed Reserve Chairman to cut interest rates (video): "Xeni Jardin: I've been a fan of Jim Cramer for many years, and I've seldom seen him flip out as epically and fantastically as he does in this clip.
On CNBC's Mad Money Friday, he screamed at Federal Reserve Chairman Ben Bernanke to slash interest rates, to help the stock market. Video Link. The money quote: 'No, we HAVE Armageddon.'

Also, is it just me, or does he look pretty awesome at 62? (* in fact he's not, it's a running joke on the show). But the lame-ass bobblehead is utterly unconvincing. (thanks, Kent!)"

(Via Boing Boing.)

Chart of presidential candidate's positions

Chart of presidential candidate's positions: "Chart of presidential candidate's positions
Mark Frauenfelder: Based on this chart that shows the issue positions of 18 presidential candidates, I don't like any of them. My dream candidate would be Ron Paul and Dennis Kucinich's love child.

(Via

Boing Boing.)

Tax These People

Tax These People: "These Silicon Valley millionaires seem to me to be a perfect example of why we need more progressive taxation.  It's not that they're unsympathetic characters -- they work very hard, and they seem like perfectly nice people.  The trouble is that they're a case study in how the marginal utility of money diminishes, especially when there's nothing left to pursue but positional goods:

‘Everyone around here looks at the people above them,’ said Gary Kremen, the 43-year-old founder of Match.com, a popular online dating service. ‘It’s just like Wall Street, where there are all these financial guys worth $7 million wondering what’s so special about them when there are all these guys worth in the hundreds of millions of dollars.'

...Silicon Valley offers an unusual twist on keeping up with the Joneses. The venture capitalist two doors down might own a Cessna Citation X private jet. The father of your 8-year-old’s best friend, who has not worked for two years, drives a bright yellow Ferrari.

Apart from one woman who fulfilled a childhood dream by having a swimming pool in her backyard, there don't seem to be many people who are using their wealth to satisfy deeply felt personal desires. 

Laffer curve fans won't be happy with this article either.  The people that the article describes are working 60-hour weeks and coming in on weekends despite their high tax rates.  And the occasionally-mentioned people who had opted out of the Silicon Valley rat race didn't do it because they realized that high tax rates meant that their work was insufficiently remunerative.  They left because they'd made enough money to ensure a high standard of living for the rest of their lives.

If the central idea behind the Laffer curve is that high tax rates decrease revenue by discouraging work, it's possible that there are cases in the article that bend the curve backwards.  If part of the reason why the Gage family left for a wonderful house in Oregon with their $3 million was that they'd made enough money to live as they wanted to, we have a case that bends the curve backwards.  If people are planning to make a fixed amount of money after which they can move away and live comfortably for the rest of their lives, higher tax revenues actually encourage work.  They make you work a longer time to accumulate the millions you need to live comfortably.  And as you work longer at higher tax rates, you pour more money into the federal coffers. 

"

(Via Ezra Klein.)

‘Falling Behind: How Rising Inequality Harms the Middle Class’ - New York Times

Robert Frank from his new book:

‘Falling Behind: How Rising Inequality Harms the Middle Class’ - New York Times: "[C]hoose between two worlds that are identical in every respect except one. The first choice is between World A, in which you will live in a 4,000-square-foot house and others will live in 6,000-square-foot houses; and World B, in which you will live in a 3,000-square-foot house and others in 2,000-square-foot houses. Once you choose, your position on the local housing scale will persist.

According to the standard neoclassical economic model of choice, which holds that utility depends on the absolute amount of consumption, the uniquely correct choice is World A. For if absolute house size is all that matters, A is indeed a better world for all, since everyone has a larger house there than the largest house in World B. The important thing, though, is to focus on how you would feel in the two worlds."

(Via .)

News Room Home

News Room Home: "Sunnyvale, Calif. -- August 2, 2007 --A new economic study issued today by Dr. Michael A. Williams, Director, ERS Group, found that Intel has extracted monopoly profits from microprocessor sales of more than $60 billion in the period 1996-2006. Dr. Williams’ analysis explains why pro-competitive justifications for Intel’s monopoly profits are implausible.

Williams also found that consumers and computer manufacturers could gain over $80 billion over the next decade if the microprocessor market were open to competition. The analysis noted that consumers would save at least $61 billion over the period, with computer manufacturers projected to save another $20 billion, enabling them to increase their investment in R&D; create improved products and greater product variety; and provide additional innovation benefits to computer buyers around the world.
"

(Via .)

The Voters Speak: Baaa! - New York Times

The Voters Speak: Baaa! - New York Times: "Churchill was right about democracy being the worst form of government, except for all the others that have been tried. Yet we should be able to respond to evidence of democracy’s failings with something more than Churchillian resignation. So why not address the problem in our education system, by teaching basic economics and statistics in high schools?"

(Via .)

Peter Diamond on Behavioral Economics

Peter Diamond on Behavioral Economics: "MD: Regarding behavioral economics, what persuaded you that this is important? Is it the evidence from psychological experiments?

PD: There are two separate pieces to this. One piece is, do you think the psychological evidence is credible as a basis for thinking that people behave in ways that are missing in a standard model. The second question you ask is what makes you think that it's important to economics. Some of these you don't even need the experience to say: yes this is okay. Thaler's piece on the Price of a Bottle of Beer is a classic. Two guys are on the beach, one guy says to the other, I'm going to get myself a beer. Do you want me to bring one for you? Second guy says, Yes please. First guys asks, What is the maximum you are willing to pay for the bottle of beer? If it's higher than that I won't bring it. There are two scenarios—scenario 1 is the place to go for the bottle of beer is a bar in the hotel that's near the beach. Scenario 2 is the grocery store that has some beer in it. When you ask people how much they're willing to pay, people expect to pay more and they give answers that reflect that, so you get very different answers in these two scenarios and it can't be that they're both actually measuring what beer is really worth to you on the beach that day."

(Via Economist's View.)