Wednesday, December 23, 2015

Although the postwar era was indeed inaugurated by a huge contraction in government spending that was made possible by the Allied victory, the end of deficit spending did not send the United States into a deep depression

See Economic Recovery: Lessons from the Post-World War II Period by Cecil Bohanon, for Mercatus He is a professor of economics at Ball State University. Excerpts:
"The standard thinking of the day was that the United States would sink into a deep depression at the war’s end. Paul Samuelson, a future Nobel Prize winner, wrote in 1943 that upon cessation of hostilities and demobilization “some ten million men will be thrown on the labor market.”[3] He warned that unless wartime controls were extended there would be “the greatest period of unemployment and industrial dislocation which any economy has ever faced.”[4] Another future Nobel laureate, Gunnar Myrdal, predicted that postwar economic turmoil would be so severe that it would generate an “epidemic of violence.”[5]

This, of course, reflects a world view that sees aggregate demand as the prime driver of the economy. If government stops employing soldiers and armament factory workers, for example, their incomes evaporate and spending will decline. This will further depress consumption spending and private investment spending, sending the economy into a downward spiral of epic proportions. But nothing of the sort actually happened after World War II.

In 1944, government spending at all levels accounted for 55 percent of gross domestic product (GDP). By 1947, government spending had dropped 75 percent in real terms, or from 55 percent of GDP to just over 16 percent of GDP.[6] Over roughly the same period, federal tax revenues fell by only around 11 percent.[7] Yet this “destimulation” did not result in a collapse of consumption spending or private investment. Real consumption rose by 22 percent between 1944 and 1947, and spending on durable goods more than doubled in real terms. Gross private investment rose by 223 percent in real terms, with a whopping six-fold real increase in residential- housing expenditures.[8]

The private economy boomed as the government sector stopped buying munitions and hiring soldiers. Factories that had once made bombs now made toasters, and toaster sales were rising. On paper, measured GDP did drop after the war: It was 13 percent lower in 1947 than in 1944. But this was a GDP accounting quirk, not an indication of a stalled private economy or of economic hardship. A prewar appliance factory converted to munitions production, when sold to the government for $10 million in 1944, added $10 million to measured GDP. The same factory converted back to civilian production might make a million toasters in 1947 that sold for $8 million—adding only $8 million to GDP. Americans surely saw the necessity for making bombs in 1944, but just as surely are better off when those resources are used to make toasters. More to the point, growth in private spending continued unabated despite a bean-counting decline in GDP."

"between 1944 and 1947 private spending grew rapidly as public spending cratered. There was a massive, swift, and beneficial switch from a wartime economy to peacetime prosperity; resources flowed quickly and efficiently from public uses to private ones.

Just as important, the double-digit unemployment rates that had bedeviled the prewar economy did not return. Between mid-1945 and mid-1947, over 20 million people were released from the armed forces and related employment, but nonmilitary-related civilian employment rose by 16 million. This was described by President Truman as the “swiftest and most gigantic change-over that any nation has made from war to peace.”[9] The unemployment rate rose from 1.9 percent to just 3.9 percent. As economist Robert Higgs points out, “It was no miracle to herd 12 million men into the armed forces and attract millions of men and women to work in munitions plants during the war. The real miracle was to reallocate a third of the total labor force to serving private consumers and investors in just two years.”[10]"

"Although the GI Bill surely had a positive effect in the 1950s on the educational level of U.S. workers, the bill played a very minor role in keeping the immediate postwar unemployment rate low. At its height, in the fall of 1946, the bill only took about 8 percent of former GIs to college campuses and out of the workforce."

"In the years under discussion, however, no new government program was facilitating this transition; indeed, it was the end of government direction of the economy that facilitated the postwar boom in private employment."

"When the war ended, however, the command economy was dismantled. By the end of 1946, direct government allocation of resources—by edict, price controls, and rationing schemes—was essentially eliminated.[15] Tax rates were cut as well, although they remained high by contemporary standards. By any measure, the economy became less subject to government direction. Despite the pessimism of professional economists, resources that previously would have been directed to the production of war goods quickly found their way to other uses. The business community did not share the economists’ despair. A poll of business executives in 1944 and 1945 revealed that only 8.5 percent of them thought the prospects for their company had worsened in the postwar period. A contemporary chronicler noted that in 1945-1946 businesses “had a large and growing volume of unfilled orders for peacetime products.”[16] In fact, the elimination of wartime economic controls coincided with one of the largest periods of economic growth in U.S. history."

Paul Krugman & "The Big Short"

From Don Boudreaux.
"Barron’s Gene Epstein sent the following letter to the New York Times.  I share it here with Gene’s kind permission.
To the Editor:
In his column on the film, “The Big Short” (“‘The Big Short,’ Housing Bubbles and Retold Lies,” Dec. 18), Paul Krugman declares that the housing bubble “was largely inflated via opaque financial schemes that in many cases amounted to outright fraud.”
This causal analysis is directly contradicted by an alternative view previously expressed in the New York Times: that the housing bubble was largely inflated by policies of the Federal Reserve.
“To fight this recession,” wrote a New York Times columnist on Aug. 2, 2002, “the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”
In a blog on that column posted on June 17, 2009, this same columnist observed: “What I said was that the only way the Fed could get traction would be if it could inflate a housing bubble. And that’s just what happened.”
The columnist who wrote those words: Paul Krugman
Gene Epstein
Economics & Books Editor

Tuesday, December 22, 2015

The Effects of Minimum Wages on Employment

David Neumark writing in the Federal Reserve Bank of San Francisco FRBSF Economic Letter. David Neumark is Chancellor’s Professor of Economics and Director of the Center for Economics & Public Policy at the University of California, Irvine, and a visiting scholar at the Federal Reserve Bank of San Francisco. Excerpts:
"Some recent studies even suggest overall employment could be harmed."

"a higher minimum wage will lead employers to hire fewer low-skilled workers and more high-skilled workers. This “labor-labor” substitution may not show up as job losses unless researchers focus on the least-skilled workers"

"“monopsony” models...models may be less applicable to labor markets for unskilled workers most affected by the minimum wage; these markets typically have many similar employers in close proximity to each other"

"Newer research used data from an increasing number of states raising their minimum wages above the federal minimum. The across-state variation allowed comparisons of changes in youth employment between states that did and did not raise their minimum wage."

"An extensive survey by Neumark and Wascher (2007) concluded that nearly two-thirds of the more than 100 newer minimum wage studies, and 85% of the most convincing ones, found consistent evidence of job loss effects on low-skilled workers."

"meta-analyses do not assign more weight to the most compelling evidence. Indeed, they often downweight less precise estimates, even though the lower precision may be attributable to more compelling research strategies that ask more of the data."

"limiting comparisons to geographically proximate areas generates misleading evidence of no job loss effects from minimum wages. Pointing to evidence that minimum wages tend to be raised when labor markets are tight, this research suggests that, among nearby states that are similar in other respects, minimum wage increases are more likely to be associated with positive shocks, obscuring the actual negative effects of minimum wages. Using better methods to pick appropriate comparison states, this research finds negative elasticities in the range of −0.1 to −0.2 for teenagers"

"Other analyses that try to choose valid geographic comparisons estimate employment responses from as low as zero to as high as −0.50"

"Some new strategies in recent studies have also found generally stronger evidence of job loss for low-skilled workers. For example, Clemens and Wither (2014) compare job changes within states between workers who received federal minimum wage increases because of lower state minimums and others whose wages were low but not low enough to be directly affected. Meer and West (2015) found longer-term dynamic effects of minimum wages on job growth; they suggest these longer-term effects arise because new firms are more able to choose labor-saving technology after a minimum wage increase than existing firms whose capital was “baked in.”"

"Recent exceptions that find no employment effects typically use a particular version of estimation methods with close geographic controls that may obscure job losses. Recent research using a wider variety of methods to address the problem of comparison states tends to confirm earlier findings of job loss."

"the most credible conclusion is a higher minimum wage results in some job loss for the least-skilled workers"

"minimum wages were roughly 20.6% higher in 2014 than in 2007, compared with a 16.5% increase in average hourly earnings over the same period. Thus, between the federal increases in 2007–09 and recent state increases, the minimum wage has grown only slightly faster than average wages in the economy—around 4.1% over the entire seven-year period."

"Using a −0.1 elasticity and applying it only to teenagers implies that higher minimum wages have reduced employment opportunities by about 18,600 jobs. An elasticity of −0.2 doubles this number to around 37,300. If we instead use the larger 16–24 age group and apply the smaller elasticity to reflect that a smaller share of this group is affected, the crude estimate of missing jobs rises to about 75,600."

"Thus, allowing for the possibility of larger job loss effects, based on other studies, and possible job losses among older low-skilled adults, a reasonable estimate based on the evidence is that current minimum wages have directly reduced the number of jobs nationally by about 100,000 to 200,000, relative to the period just before the Great Recession."

Senator Sanders and the Average Workweek

By Chelsea German of Cato.
"Senator Bernie Sanders recently tweeted the following. 

Fortunately, the gruelingly long workweek described by Sanders is not the norm. In fact, leisure time has been on the rise. In 1950, an average U.S. worker worked 1,984 hours a year, or about 38 hours a week. In 2015, an average American worker worked 1,767 hours, or about 34 hours a week.

That means that the average U.S. worker had 217 more hours for leisure or other pursuits in 2015 than in 1950. That is about 9 days of extra time.

The 50-hour workweek described by Sanders is more common in China, where the average worker worked 2,432 hours in 2015, or around 47 hours a week. Compare other countries using’s interactive dataset."

“UN climate change goal? We’re there now” – John Christy

By Marlo Lewis, Jr. of CEI.
"Every month John Christy and Roy Spencer of the University of Alabama, Huntsville, report global temperature data from their satellite monitoring program, known as the UAH record in the scientific literature.
Their just published year-end report features the decadal trends in Global, Northern Hemisphere, Southern Hemisphere, and Tropical temperatures over the 37-year satellite record.

So here’s some very good news for the holiday season. The global climate system, all on its own with no help from the Paris Climate Treaty, is on track to meet the treaty’s goal of avoiding 2°C of warming above pre-industrial temperatures.

From the UAH press release:

“The average temperature of Earth’s atmosphere has warmed just over four-tenths of a degree Celsius (almost three-fourths of a degree Fahrenheit) during the past 37 years, with the greatest warming over the Arctic Ocean and Australia, said Dr. John Christy, director of the Earth System Science Center at the University of Alabama in Huntsville. Microwave sounding units on board NOAA and NASA satellites completed 37 complete years of collecting temperature data in November, giving us nearly global coverage of climate change during that time.

“If that trend was to continue for another 63 years, the composite warming for the globe would be 1.1°C (about 2 degrees Fahrenheit) for the century, Christy said. That would put the average global temperature change over 100 years well under the 2.0°C (3.6 degrees F) goal set recently at the climate change summit in Paris.”"

Monday, December 21, 2015

Wealth isn’t so highly concentrated if you take into account Medicare and Social Security benefits

See The Uncounted Trillions in the Inequality Debate by Martin Feldstein, WSJ. Excerpts:
"The Federal Reserve recently estimated total household net worth in the U.S. to be about $80 trillion, including real estate and financial assets. And data from the Fed’s Survey of Consumer Finances imply that the top 10% of households by net worth hold about 75%—or $60 trillion—of this total. The bottom 90% of households therefore have a net worth of about $20 trillion.

These data seem to show a country whose wealth is highly concentrated. But the true picture is hardly as stark as critics of inequality claim, because it leaves out the large amount of wealth held in the form of future retirement benefits from Social Security and Medicare. Moreover, the public’s traditional financial wealth is depressed because the current entitlement programs lower people’s real incomes and deny them the higher returns available through investment-based retirement savings like IRAs or 401(k)s."

"Social Security “wealth”—the present actuarial value of the future benefits that current workers and retirees are projected to receive—is $59 trillion. Excluding the top 10% of households reduces the amount to about $50 trillion."

"However, to qualify for those benefits, current workers must pay future payroll taxes with a present actuarial value of about $25 trillion. So you have to subtract these taxes from the $50 trillion, leaving a net Social Security “wealth” of $25 trillion for the bottom 90% of households. Adding this to the $20 trillion of their conventionally measured net worth, and these households have total wealth of $45 trillion.

Yet this figure leaves out the very large transfers that retirees receive from Medicare and Medicaid. Government actuaries don’t estimate the amount of “wealth” implied by these two programs."

"over the next decade total Social Security retiree benefits will be $10.2 trillion, while the benefits for Medicare will be $9.0 trillion and those for Medicaid will be $4.6 trillion"

"the benefits for these two government health programs exceed the amount Social Security will pay out to retirees in cash.

But unlike Social Security, receiving government health benefits does not depend on current workers continuing to pay taxes. This suggests that the net “Medicare and Medicaid wealth” implied by current law is probably about as large as these households’ “gross Social Security wealth” of $50 trillion.
So what is the grand total? Add the $50 trillion for Medicare and Medicaid wealth to the $25 trillion for net Social Security wealth and the $20 trillion in conventionally measured net worth, and the lower 90% of households have more than $95 trillion that should be reckoned as wealth. This is substantially more than the $60 trillion in conventional net worth of the top 10%. And this $95 trillion doesn’t count the value of unemployment benefits, veterans benefits"

"the implicit real rate of return on those payroll taxes will be less than 3%. That is substantially less than the 5.5% real return earned historically by contributions over a working life to an individual IRA or 401(k) plan invested in a balanced combination of stocks and high-quality bonds."

Scalia Was Right About Race Preferences

The debate about these college-admissions policies is too focused on their legality, not their efficacy

By Jason L. Riley, WSJ. Mr. Riley, a Manhattan Institute senior fellow and Journal contributor, is the author of Please Stop Helping Us: How Liberals Make It Harder for Blacks to Succeed.Excerpts:
"We live in a political environment where the intent of a policy aimed at helping minorities is all that matters; questioning the policy’s actual effectiveness is tantamount to racism."

"Justice Scalia is right to question the assumption that racial favoritism in college admissions has been a boon for blacks."

"such concerns have been voiced by conservative and liberal scholars alike and are as old as the policies themselves, which date to the late 1960s."

"Nearly 50 years ago, Clyde Summers, a professor at Yale Law School and longtime critic of labor-union discrimination against blacks, explained how preferential admissions policies at elite law schools like his own damaged the educational prospects for black students not only at Yale but also at less-selective schools. When a top-tier school like Duke lowered the admissions criteria for a minority student who met the normal admissions standards for a second-tier school like North Carolina, he noted, the latter institution was left with a smaller pool of qualified applicants and forced to begin admitting students who would be a better fit for a third-tier school, and so on.

“In sum,” wrote Summers (who died in 2010), “the policy of preferential admission has a pervasive shifting effect, causing large numbers of minority students to attend law schools whose normal admission standards they do not meet, instead of attending other law schools whose normal standards they do meet.”"

"An analysis of black students at the Massachusetts Institute of Technology in the mid-1980s found that they had scored in the top 10% nationally on the math portion of the SAT but in the bottom 10% among their classmates at MIT. As a result, black students were dropping out at much higher rates, and those who didn’t leave typically received lower grades than their white and Asian classmates."

"After racial preferences were banned in the University of California system in 1996, black enrollment at higher-ranked UCLA and Berkeley fell, but black academic outcomes improved. Mr. Sander and Mr. Taylor have demonstrated empirically that as more minority students attended schools where they weren’t at a preparation disadvantage relative to their classmates, grades rose along with graduation rates. That isn’t surprising. Historically black colleges and universities, which are less selective than the top-tier schools, produce about 40% of blacks with undergraduate degrees in math and science, despite accounting for only around 20% of black enrollment."

"Thomas Sowell, a longtime critic of racial double standards, predicted in his 1990 book, “Preferential Policies,” that they would be “educationally disastrous” for blacks and increase racial tensions and resentment on college campuses. Reviewing the book in the New York Times, liberal scholar Andrew Hacker of Queens College sounded a lot like Justice Scalia. “I agree,” he wrote, “that some of the minority students being recruited by high-powered colleges would be better served at schools like my own, where they could proceed at a pace more in tune with their preparation.”"

Sunday, December 20, 2015

Congress Gambles with the Future of D.C.’s School Choice Program

By Jason Bedrick of Cato.

"And yet conspicuously absent from the awful omnibus was one of the few programs that Congress has the constitutional authority to enact and actually benefits low-income students living in Washington, D.C.: the Opportunity Scholarship Program (OSP). In a sharp editorial yesterday, Wall Street Journal excoriated Congressional GOP leadership: 
The omnibus funds the program for fiscal year 2016 but fails to reauthorize it. This means that 20 years after the program was first debated, 10 years after it started, four years after Mr. Boehner revived it after President Obama had killed it, and a few months after the House passed a bill to reauthorize it, we’ll have to fight the battle all over again.
Worse, no one will explain how Nancy Pelosi prevailed despite Republican majorities in both houses.
Done right, the OSP could have saved money while improving student outcomes. Despite spending nearly $30,000 per pupil in recent years, D.C.’s district schools are consistently ranked among the worst in the nation. By contrast, the OSP’s vouchers are less than $9,000 on average and a random-assignment study found that OSP students were 21 percentage points more likely to graduate from high school than the control group. Had Congress allowed the funding to follow the child rather than funding the OSP and district schools out of two separate funds, as they do now, the OSP could have saved more than $20,000 per pupil while still producing better outcomes. And that doesn’t even count the significant savings from the increased graduation rate that researchers Patrick Wolf and Michael McShane calculated:
Because a high-school diploma makes an individual less likely to commit crimes, it therefore decreases both the costs incurred by victims of crimes and those borne by the public in administering the justice system. Coupled with the increased tax revenue made on the increased income, this yields an extra benefit for society of over $87,000 per high-school graduate.
Multiplying the number of additional graduates by the value of a high-school diploma yields a total benefit of over $183 million. Over the time of our study, the OSP cost taxpayers $70 million, so dividing the benefits by the cost yields an overall benefit-to-cost ratio of 2.62, or $2.62 for every dollar that was spent.
The omnibus spending bill is a terrible way to do business, and it would be better if the OSP could stand on its own (and even better if Congress transformed it from a voucher into an education savings account)."

It is not at all clear that our social system discriminates in favor of promotion in the marketplace

From Don Boudreaux.
"from pages 174-175 of the reprint of Harold Demsetz’s brilliant review of John Kenneth Galbraith’s The New Industrial State; this review – entitled “The Technostructure, Forty-Six Years Later” – originally appeared in the March 1968 issue of the Yale Law Journal, and is reprinted in volume II of the 1989 collection of some of Demsetz’s most important articles, Efficiency, Competition, and Policy:
The formation of wants is a complex process.  No doubt wants are modified by Madison Avenue.  They also are modified by Washington, by university faculties, and by churches.  And it is not at all clear to this reviewer that Madison Avenue has the advantage when it comes to false claims and exaggeration.
The Administration in Washington is immune to legal attack for promotional distortions when it asserts that this program or that tax measure is indispensable to the welfare, security, and progress of this country.  And academic freedom protects large numbers of professorial promoters in the nation’s educational institutions; how often in the classroom have we asserted or heard asserted,without any evidence and with precious little thought, that this theory and these positions yield those public policies which in turn will surely improve the lot of the common man.
Imagine business firms and peddlers promoting an elixir guaranteed to exorcise the devil and to give to its user eternal life.  The FTC surely would tar and feather the poor fellows, even if they truly believed in their product; the FTC undoubtedly would be joined, perhaps blessed, in this crusade by the various churches throughout the land, who, protected by the laws of the land, promote their own formulas for salvation at least once each week.
No, it is not at all clear that our social system discriminates in favor of promotion in the marketplace."

Some demographic trends that might explain the stagnation and decline in US household income

From Mark Perry.
"The two charts above [I put them below-CM] show some interesting patterns in several data series over time and provide some possible demographic explanations for the stagnation and decline in real median US household income since around the year 2000. Here are some observations and comments:



1. The top chart above shows that the decline in real median household income in the US from the peak of $57,843 in 1999 to $53,627 last year (in 2014 dollars, data here in Table H-12) was accompanied by a gradual increase in the share of US households with no earners, which increased from less than 20% in 1999 to 24% in 2014. A regression analysis over the 1999-2014 period shows that every one percent increase in the share of US households with no earners is associated with a decrease in median annual household income of slightly more than $1,200. (Note: The R-squared of that regression was 89.3% and the t-statistic for the independent variable was -10.83.) Over that same period, the share of US households with two or more earners declined from slightly more than 45% in 1999 to 39.2% in 2014, which is another demographic factor that could explain the decline in median household income over the last decade.

2. What would explain the fact that the share of US households with no earners has steadily risen over the last 15 years to an all-time high of 24% last year? The bottom chart above provides one explanation: the rising share of the US adult population represented by: a) retired workers and b) disabled workers. According to Social Security Administration data, the number of retired workers plus the number of disabled workers remained stable at about an 18% share of the US adult population (18 years and over) between 1993 and about 2000 before gradually rising to an all-time high of 21.3% by 2014.

For example, in the ten-year period between 2004 and 2014, the number of retired workers increased by 27% (from 33 million to nearly 42 million) and the number of disabled workers increased by 37.5% (from 7.95 million to nearly 11 million). Because the adult population increased by less than 11% during that decade, the share of the US adult population represented by retired and disabled workers increased from 18.3% to 21.3% between 2004 and 2014 and was by far the largest increase over any previous 10-year period in the SSI data back to 1970. As can be seen in the bottom chart above, the rise in the share of retired and disabled workers over the last decade accompanied the decline in US median household income over that period. A regression analysis shows that every 1% increase in the share of the US adult population represented by retired and disabled workers is associated with a $1,200 decline in median household income.

Bottom Line: Perhaps the stagnation and decline in US household income that gets so much media and political attention isn’t necessarily the result of the usual negative factors that get cited so frequently: stagnating wages, reduced economic and employment opportunities for the average, middle-class American, the increased share of rising income or wealth going to the top X%, the hollowing out of the middle class, the claims that the middle class is shrinking/losing ground/disappearing/declining, etc. Rather, perhaps there’s a less-nefarious, demographic-driven reason that household incomes have been stagnating/declining in recent years — the increase in the share of US households with no earners, which is largely driven by the aging US population and the increasing number of retired workers, and to a lesser extent by the increasing number and share of disabled workers. Finally, there’s been nearly a six percentage point decline in the share of US households with two or more earners since 1999, which could be another demographic change that has contributed to a decline in median household income.

With some of the significant changes outlined above in important demographic factors that have taken place over the last decade or so: an increase in the share of US households with no earners, a decrease in the share of US households with two or more earners, an increase in the number and share of US adults who are retired or disabled, and a gradual decline in the average household size (from 2.67 to 2.54 over the last 20 years), along with the devastating effects of the Great Recession on the US economy and household incomes, it maybe would actually be a surprise if there hadn’t been a decline in median household income in recent years."

Saturday, December 19, 2015

How Colleges Make Racial Disparities Worse

Affirmative action sets up unprepared students for failure. Yet schools ignore this ‘mismatch’ evidence

By Richard Sander, WSJ. Excerpts:
"The mismatch theory is not about race. It is about admissions preferences, full stop. Mismatch can affect students who receive preferential admission based on athletic prowess, low socioeconomic status, or alumni parents. An important finding of mismatch research is that when one controls for the effect of admissions preferences, racial differences in college performance largely disappear. Far from stigmatizing minorities, mismatch places the responsibility for otherwise hard-to-explain racial gaps not on the students, but on the administrators who put them in classrooms above their qualifications.

The size of the preferential treatment is all-important. Mismatch problems almost always result from very large preferences—ones that give applicants the equivalent of, say, a 200-point SAT boost. Some studies that claim to provide evidence against mismatch turn out to involve small preferences, perhaps the equivalent of a 50-point SAT boost. My own view is that relatively small preferences (based, for example, on socioeconomic disadvantage) are often a good thing. Giving a slight benefit of the doubt to ambitious students trying to rise out of poverty, and placing them with peers who are slightly better prepared, can push them to greater achievement.

Much of the controversy about mismatch arises because scholars or pundits talk past one another. After sidestepping the noise, there is a surprising level of consensus in the literature. There are now five unrebutted peer-reviewed studies—for instance, one by Frederick Smyth and John McArdle, published in 2004 by Research in Higher Education—concluding that aspiring scientists who receive large admissions preferences drop off the STEM track at up to twice the usual rate. A study by three labor economists, to be published next year in the American Economic Review, finds that large preferences substantially depressed the rate at which minorities achieved science degrees at the University of California before racial preferences were banned in 1996.

Law schools are another case: I estimate that only one in three African-Americans entering law school graduates and passes the bar on the first try, compared with two in three whites. All four of the peer-reviewed articles on the subject—such as Doug Williams’s 2013 study in the Journal of Empirical Legal Studies—find strong evidence that mismatch helps explain this gap. None of the critics of law-school mismatch have managed to publish their rebuttals in a peer-reviewed journal, and their claims have not stood up well to scrutiny.

When we turn to “second-order” effects, such as whether a student granted preferences ultimately graduates, the evidence of mismatch is weaker. This is partly because Ivy League schools now have graduation rates of close to 100%, so a mismatched student who struggles at Brown or Yale, perhaps switching out of a difficult curriculum and ending with mediocre grades, will still almost certainly wind up with a degree."

"Scholars who find evidence of mismatch almost always phrase their findings cautiously and do not claim to have “proven” that preferences are invariably harmful. Defenders of affirmative action, on the other hand, almost universally claim that mismatch never exists."

"The Big Short" dwells mistakenly on an asset class that represented just 2% of bank assets and whose role in the global crisis has been grossly distorted

See ‘Big Short,’ Big Hooey Forget mortgages. A change of accounting rules could have avoided the crisis by Holman W. Jenkins, Jr. of the WSJ. Excerpt:
"Widely lauded for many virtues, especially comedic, the film nevertheless dwells mistakenly on an asset class that represented just 2% of bank assets and whose role in the global crisis has been grossly distorted. These highly rated securities were manufactured out of lower-rated, or subprime, mortgages. They got their triple-A rating because bond insurers and lower-rated security holders agreed to absorb the first losses. And, of course, even so, defaulted mortgages don’t become worthless—they default to the value of the repossessed house.

So how “toxic” were these securities? Well after the worst of the meltdown, Washington’s own Financial Crisis Inquiry Commission noted that “most of the triple-A tranches . . . have avoided actual losses in cash flow through 2010 and may avoid significant realized losses going forward.”

"Or as this column pointed out at the very start of the subprime crisis in 2007, the “fluctuations in the S&P 500 wipe out as much wealth every ho-hum day.”

The “big shorts” paid millions to Goldman Sachs and others to concoct convoluted contracts that let them bet against these securities, and to find banks to take the opposing, or “long,” bet. (The irony being that, in this way, the movie heroes actually supported the manufacture of more subprime housing loans.) If they had really seen what was coming, our heroes would have saved themselves a lot of trouble and expense and simply shorted the big banks and the entire stock market—a bet that any day trader can make from the comfort of his bathrobe.

Far from being the lonely seers their fans imagine, the big shorts benefited from seeing the words “housing bubble” 425 times in The Wall Street Journal and the New York Times in the seven years leading to the crash. In 2004, the FBI warned of an “epidemic” of mortgage fraud.

Even John Paulson, the biggest short of all, according to later court testimony by a top deputy, didn’t foresee Armageddon, only that the “housing market had appreciated excessively and that housing prices would stabilize or flatten out or decline.”

The truth is a lot more interesting. The global crisis was a manufactured event—manufactured out of radical uncertainty about how government would treat the biggest banks, 2% of whose assets consisted of suddenly illiquid but not worthless mortgage securities. That may seem a mouthful, but Vince Reinhart, who had just retired as a top Fed official, stated matters plainly when he said the whole game had become “predicting government intentions.” 

What’s more, this colossal snafu was telegraphed a long way off. Treasury Secretary Hank Paulson, in late 2007, had tried to round up private funding for a Super SIV (structured investment vehicle) to relieve banks of these securities and any accounting markdowns. Had he succeeded, or had the government simply waived its own rules to let banks hold these securities on their books at non-firesale values, the crisis would have been avoided.

Understand what we’re saying: The government saw early on how its regulatory machinery had become a trap for itself and the banks but couldn’t act fast enough, coherently enough, and apolitically enough to forestall unintended consequences. Yet at another level, as we’ve pointed out many times, confidence actually held up pretty well. Whatever the uncertain outcome for bank shareholders and wholesale creditors, the public showed strong faith that Washington, having learned from the 1930s, would uphold the solvency of the banking system for depositors."

Friday, December 18, 2015

Yes, America’s middle class has been disappearing….into higher income groups

From Mark Perry.
"Scott Shackford wrote on the Reason blog recently that “The Middle Class Is Shrinking! Because They’re Getting Rich!” and referred to the bottom chart above that was featured in the Pew Research Center’s recent report titled “The American Middle Class is Losing Ground.” However, as the title of Scott Shackford’s blog post suggests, the share of middle class households is getting smaller for a good reason — it’s because they’ve moved up to higher income groups. Specifically, according to Shackford:
It is true that Pew’s analysis shows that the number of households that fit within their categorization of middle class has shrunk by 11 percentage points since 1971 [from 61% to 50%]. It is true that the proportion of households that are classified as lower class has increased from 25% to 29%. But it is also true that the proportion of households that are classified as upper class has increased from 14% to 21%.
That is to say, part of the reason that the middle class is disappearing is that they are succeeding and jumping to the next bracket. And a greater number of them are moving up than moving down. Be wary of the assumption that the drop in the middle class is a sign of a crisis.
Referring to the Pew Research Center report, Warren Meyer pointed out recently on The Coyote Blog (“Are We Really Going to Sell Socialism in This Country Based on the Fact that the Middle Class is Getting Rich?“) that “2/3 of the [middle-class] losses were because they moved to ‘rich.'” That is, of the 11 percentage point loss in the share of middle-class households between 1971 and 2015, 7 percentage points represent the middle-class households who moved up to one of the two highest-income groups, which represents 7/11, or 64% of the shrinkage of middle-class households.

I’ve written before about how, Yes, the middle class has been disappearing… but disappearing into higher income groups as Scott Shackford reports, see my most recent CD post here. Here’s an update of some of the analysis in that post using more recent Census Bureau data on household income.
The top chart above paints a picture of an America with rising incomes for many American households and lots of upward income mobility since 1967, using recently updated Census Bureau data through 2014 available here. In 1967, nearly six of every ten (58.2%) US households earned $50,000 per year or less (in 2014 dollars), about one in three (33.7%) earned $50,000 to $100,000 and fewer than one in twelve households (8.1%) earned $100,000 or more. By last year, fewer than half of US households (46.8%) earned less than $50,000 per year, 28.5% earned $50,000 to $100,000, and most remarkably about one in four (24.7%) American households now earn $100,000 or more. For those three income categories, the biggest change was the 16.6 percentage point increase in the highest income category of $100,000 or more over the last 47 years (from an 8.1% to 24.7% share), which reflected an 11.4 percentage point decrease in the share of US households in the lower-income category ($50,000 income or less) from a 58.2% share to 46.8%, and a 5.2 percentage point decrease in share of households earning $50,000 to $100,000 per year (from 33.7% to 28.5%).

Stated differently, the share of American households earning $100,000 or more per year (in 2014 dollars) increased more than three-fold from 8.1% in 1967 to 24.7% in 2014. If the 8.1% share of households in 1967 earning $100,000 or more hadn’t increased over time to 24.7%, there would only be about 10 million US households today (out of 123.2 million) earning $100,000 or more, instead of the actual number of more than 30 million American households in that high income category. Thanks to America’s economic dynamism, upward mobility and rising incomes, there are now 20+ million more American households earning annual incomes of +$100,000 annually today (30.4 million) than there would be if the 8.1% share of high-income households that prevailed in 1967 hadn’t changed (only 10 million households).

And think about it for a moment and let it sink in — there are now more than 30 million US households with annual incomes of $100,000 or more. And the share of American households with that level of high income has increased by more than three times since 1967! And then compare that picture of a prosperous America to the narratives we hear all the time that the American middle class is: losing ground, falling behind financially, disappearing, stagnating, no longer a majority, fill in the blank ___________.

Bottom Line: I think Warren Meyer’s 10-word summary about the shrinking middle-class says it best and most concisely of all: 2/3 of the losses are because they moved to “rich.”"

Women are out-earning men in corporate finance

"Women may be badly outnumbered in the top ranks of corporate America, but at least they aren't underpaid.

Compensation for female chief financial officers at S&P 500 companies last year outpaced that of their male counterparts, according to an analysis by executive compensation firm Equilar and the Associated Press. It follows a similar trend seen with female CEOs in recent years.

The median pay for female CFOs last year rose nearly 11 percent to $3.32 million. Male CFO pay rose 7 percent, to $3.3 million. This follows several years of steady gains for both sexes."

"To calculate pay, Equilar adds salary, bonus, perks, stock awards, stock option awards and other pay components. To determine what stock and option awards are worth, Equilar uses the value of an award on the day it is granted, as shown in a company's proxy statement.

The high median pay for female CFOs is partly a result of sample size — there were only 60 female CFOs at the S&P 500 companies that qualified for inclusion in the study during the last fiscal year, compared with 437 men, according to Equilar.

It is also a factor in female CEO pay. Median CEO pay for women was $15.9 million last year, according to an analysis done earlier this year by Equilar and the AP, compared with $10.4 million for male CEOs. There were just 17 female CEOs, however.

The small group of women in these important roles tended to be focused at the largest companies, where pay is higher. Crist said that he expects more women to take on CFO duties in years ahead but the pay range will broaden as more women join smaller companies.

He notes that women have historically been underrepresented in finance overall. That is changing, and helping fuel this shift at the top. Younger women are getting better opportunities at entry levels and these lead to better opportunities down the line."

Thursday, December 17, 2015

Ideas and Action: A Rules-Based Deal for the IMF

From John Taylor.
"Several months ago in Congressional testimony, in a Wall Street Journal article, in meetings with public officials, and in a post on Economics One, I suggested the idea that “There is room for a deal” on an important IMF reform that had been internationally pending for years, explaining that:

“Treasury wants Congress to raise the U.S. contribution to the IMF, but Congress is reluctant to do so with no framework limiting IMF lending. If Treasury agreed to restore the framework, then Congress could provide the support. This deal would be a first step in putting America in the lead again on international monetary reform.”

I am pleased to say that such a deal has been struck: The Treasury and the Administration agreed to remove their objection to restoring the IMF’s framework for limiting large lending, and Congress included support for the reform in the budget bill, which will likely become law in the next few days.  Rob Kahn and Ted Truman explain the details.

The IMF’s exceptional access framework limiting loans was a set of rules first put into place in 2002 and 2003, and was followed by a halt to financial crises emanating from emerging market countries which had been raging before then.  Unfortunately these rules were broken in 2010 when the IMF made a large loan to Greece which eventually led to a bailout of many private creditors.  Until this week, the U.S. Treasury had objected to restoring the rules arguing the case that discretion was needed rather than rules. With the IMF management, staff and other countries in favor of restoration, the shift in the U.S position is all that is needed to usher in the needed changes.

The move back toward rules-based policy and the overall reform at the IMF call for celebration, especially when coupled with the first move toward normalization at the Fed yesterday.  Of course there is a long way to go—especially in establishing long-term commitment—but first steps are essential."

European OECD countries that don’t have a minimum wage have an average unemployment rate about half the average jobless rate of European OECD countries that do

See Some minimum wage updates by Mark Perry.
"Updates: a) Germany has been added to the chart above in response to some comments that questioned its exclusion. As of January 1, 2015 Germany now has a federal minimum wage, which is why I didn’t include it before. However, since the jobless rate data are for 2014 when Germany did not have a minimum wage, I have now included it in the table.

b) Note that many European countries without a federal minimum do have union contracts for some workers that establish minimum wages for certain workers in certain industries. But not ALL workers are covered by those contracts. For example, in Italy about 80% of workers’ wages are established by union agreements, while 20% of workers are not covered by union contract, and would therefore not be protected by a federal minimum wage. The workers least likely to be covered by a union contract would be younger workers, which might explain why the average youth jobless rate in European OECD countries without a federal minimum wage (15.8%) is so much lower than countries with a federal minimum wage (29.5%).

c) Larry Reed’s original article cited an analysis by economist Steve Hanke who concluded that:
In the 21 EU countries where there are minimum wage laws, 27.7% of the youth demographic was unemployed in 2012. This is considerably higher than the youth unemployment rate in the seven EU countries without minimum wage laws – 19.5% in 2012.


The Evidence Is Piling Up That Higher Minimum Wages Kill Jobs

President Obama says there is ‘no solid evidence.’ Yes there is—lots of it.

By David Neumark, in the WSJ. Mr. Neumark is an economics professor and director of the Center for Economics and Public Policy at the University of California, Irvine. Excerpts:
"Economists have written scores of papers on the topic dating back 100 years, and the vast majority of these studies point to job losses for the least-skilled. They are based on fundamental economic reasoning—that when you raise the price of something, in this case labor, less of it will be demanded, or in this case hired.

Among the many studies supporting this conclusion is one completed earlier this year by Texas A&M’s Jonathan Meer and MIT’s Jeremy West, which reaffirmed that “the minimum wage reduces job growth over a period of several years” and that “industries that tend to have a higher concentration of low-wage jobs show more deleterious effects on job growth from higher minimum wages.”

The broader research confirms this. An extensive survey of decades of minimum-wage research, published by William Wascher of the Federal Reserve Board and me in a 2008 book titled “Minimum Wages,” generally found a 1% or 2% reduction for teenage or very low-skill employment for each 10% minimum-wage increase.

That has long been the view of most economists, although there are some outliers. In 1994 two Princeton economists, David Card (now at Berkeley) and Alan Krueger, published a study of changes in employment in fast-food restaurants in New Jersey and Pennsylvania after the minimum wage went up in New Jersey. The study not only failed to find employment losses in New Jersey, it reported sharp employment gains. The study has been widely cited by proponents of a higher minimum wage, even though further scrutiny showed that it was flawed. My work with William Wascher showed that the survey data collected were so inaccurate that they badly skewed the study’s findings.

More recently, a 2010 study by Arindrajit Dube of the University of Massachusetts-Amherst, T. William Lester of the University of North Carolina at Chapel Hill, and Michael Reich of the University of California, Berkeley, found “no detectable employment losses from the kind of minimum wage increases we have seen in the United States.”

This study and others by the same research team, all of whom support a higher minimum wage, strongly contest the conclusion that minimum wages reduce low-skill employment. The problem, they say, is that state policy makers raise minimum wages in periods that happen to coincide with other negative shocks to low-skill labor markets like, for instance, an economic downturn.

They argue that the only way to accurately discover whether minimum wages cause job losses is by limiting control groups to bordering states and counties because they’re most likely to have experienced similar economic conditions. This approach led to estimates of job losses from minimum wages that are effectively zero.

But as Ian Salas of Johns Hopkins, William Wascher and I pointed out in a 2014 paper, there are serious problems with the research designs and control groups of the Dube et al. study. When we let the data determine the appropriate control states, rather than just assuming—as Dube et al. do—that the bordering states are the best controls, it leads to lower teen employment. A new study by David Powell of Rand, taking the same approach but with more elegant solutions to some of the statistical challenges, yields similar results.

Another recent study by Shanshan Liu and Thomas Hyclak of Lehigh University, and Krishna Regmi of Georgia College & State University most directly mimics the Dube et al. approach. But crucially it only uses as control areas parts of states that are classified by the Bureau of Economic Analysis as subject to the same economic shocks as the areas where minimum wages have increased. The resulting estimates point to job loss for the least-skilled workers studied, as do a number of other recent studies that address the Dube et al. criticisms."

Tuesday, December 15, 2015

Faster approval times should lead to drug innovation and saved lives

See The FDA and Magical Thinking by by Alex Tabarrok.
"Vox had a piece yesterday on the Cruz-Lee proposal to make it easier for U.S. patients to access drugs and devices already approved in other developed countries. The Vox piece had some howlers. Most notably this:
“There’s no evidence the FDA blocks innovation or makes innovation harder or makes it more costly,” said Kesselheim.
Frankly, that would be laughable were it not coming from a professor of medicine at Harvard Medical School. It costs well over a billion dollars to get the average new drug approved and much of that cost comes from FDA required clinical trials. Longer and larger clinical trials mean that the drugs that are eventually approved are safer. But longer trials also mean that good drugs are delayed. And the more expensive it is to produce new drugs the fewer new drugs will be produced. In short, longer and larger trials mean drug delay and drug loss.

We live in a world of tradeoffs. Let’s debate the tradeoffs. But let’s not engage in magical thinking where there are no tradeoffs and “no evidence” that the FDA makes drug development more costly.
A more subtle error was committed by the author who writes:
But it’s not clear that this legislation can solve the biggest problem here — the lack of promising treatments in the pipeline. In other words, a faster approval process can’t fix a dearth of innovation from labs themselves.
Many factors go into drug development that are outside the FDA’s purview. Nevertheless, faster drug approval can and does increase innovation. Approving drugs more quickly is equivalent to a decrease in the costs of research and development. Time is money. Reducing the cost of development increases the incentive to develop new drugs.

The Prescription Drug User Fee Act, for example, reduced drug approval times by about 10 months. Philipson et al. calculate that:
…the more rapid access of drugs on the market enabled by PDUFA saved the equivalent of 140,000 to 310,000 life years.
(PDUFA does not appear to have materially affected safety but Philipson et al. calculate that even under a worst case scenario the benefits of PDUFDA far exceeded the costs).

Moreover, Vernon et al. find that the reduction in approval time from PDUFA increased new drug development:
Controlling for other factors such as pharmaceutical profitability and cash flows, we estimate that a 10% decrease (increase) in FDA approval times leads to an increase (decrease) in R&D spending from between 1.4% and 2.0%. Combining this estimate with recent research on the link between PDUFA and FDA approval times…we calculate PDUFA may have incentivized an additional $10.8 billion to $15.4 billion in pharmaceutical R&D. Recent economic research has shown that the social rate of return on pharmaceutical R&D is very high; therefore, the social benefits of PDUFA (over and above the benefits of more rapid consumer access) are likely to be substantial.
Finally, return to the issue of reciprocity. Many of the critics of reciprocity respond with simple appeals to nationalism. We are the best! Rah, rah, rah! But if the critics were German or French they would argue that the EMA is superior to the FDA. Indeed, when I raise the issue of reciprocity with Europeans they respond in exactly the same way as Americans. How could anyone suggest that the EMA automatically approve drugs approved by the FDA! The horror.

The argument for reciprocity, however, isn’t that the FDA is uniquely bad or always worse than the EMA or vice-versa. The argument is that it’s wasteful to duplicate the lengthy approval process and that both agencies sometimes make mistakes. As a result, it’s simple common sense to let Americans avail themselves of drugs and devices approved in other developed countries."

The Waste in Washington Never Stops

By Doug Bandow of Cato.
"Sen. Jeff Flake (R-Ariz.) follows retired Tom Coburn in reporting on the ludicrous waste of taxpayer dollars in Washington with “Wastebook 2015: The Farce Awakens.” Alas, the waste never sleeps, despite the supposed austerity that we hear so much about. 
For instance, the National Institutes of Health spent about $10 million on studies of monkeys on treadmills. The results are to help “address physiological responses of exercise in a marmoset model.”
The Agency for International Development dropped $2.1 million on tourism promotion for Lebanon. Last May the State Department issued a travel advisory urging Americans to avoid this neighbor of Syria “because of ongoing safety and security concerns.”

The National Institutes of Health used $5 million to convince “hipsters” to stop smoking. Parties were organized for and payments were made to persuade Hipsters to quit tobacco.

The National Science Foundation provided $5 million to figure out how long a “koozie” would keep a beer cold. Researchers instructed drinkers not to wipe off condensation drops, which would warm the drink.

The National Institute of Drug Abuse spent almost $1 million to learn that pizza may be as addictive as crack cocaine. At least to college students. Perhaps the Obama administration plans a War on Pizza?

The Department of Agriculture (known as USDA) devoted $119 million in 2015 to underwrite the tobacco industry. Whose prime product the government is paying Hipsters not to use.

NSF provided $276,194 to figure out the impact of physical attraction on dating. Spoiler alert: physical attractiveness helps.

The Department of Defense, with nothing else in the world to do, is spending $2 million to develop music-playing robots. Both trumpet and jazz.

USDA provided $79,000 for a “Broadway and Brunch” party in Redlands, California to promote local farmers. Guests got to sing their favorite show tunes.

NSF shows up again with $2.6 million to promote the use of art for science. Like mimicking moisture vaporizers from the first Star Wars movie.

NSF dropped nearly a million dollars to study how online dating affects relationships. It does.
SBA provided $8500 to Circus Mojo, a Kentucky traveling circus, to travel. The players joined the governor on a trade mission to Canada.

USDA offered a $55,000 grant to study the potential of commercial reindeer herding in Alaska. Industry officials say the biggest problem in meeting existing demand has been department regulations governing what it labels “game meat.”

The Federal Emergency Management Agency paid $180,000 to elevate a beachfront cottage five feet. After spending $40,000 a few years before to raise the building three feet.

NSF spent $2.6 million studying why tweets are retweeted. It helps to be a celebrity and write well.
NSF dropped nearly a million bucks to study fighting by mantis shrimp. Size didn’t always determine the winner.

The Department of State spent $35,000 on a grant to promote cartooning in India. Which, the Department admitted, already has “a rich history of cartooning.”

NSF gave $185,000 to help New York’s Ithaca College host a “Back to the Future Day.” It featured action figures on hoverboards.

USDA devoted nearly a million dollars to Vermont Law School’s “How to Use a Lawyer” guide. The law school called it “vital work.”

NASA provided $3 million for a mock trip to Mars filmed in Hawaii. Conclusion: personality conflicts arise in when people are stuck together for an extended time.

USDA spent $5 million on the “Ultimate Tailgating Package” for fans attending a University of Nebraska football game. No one ever accused Cornhusker fans of not knowing how to tailgate.
On the waste goes. Money for a robot lobby greeter, fat detector, sexist anti-drunk driving campaign, “ethanol blender pumps,” piƱata appreciation, “Boat to Plate” app for fish eaters, reader recommendations for library patrons, and more.

For most of us, as I point out in American Spectator, “the loss of a few thousand or million dollars matters. But obviously not in the nation’s capital. It’s time for voters to change that.”

Minimum wage hikes cause exit of labor-intensive restaurants and entry of capital-intensive ones

See Industry Dynamics and the Minimum Wage: A Putty-Clay Approach by Daniel Aaronson, Eric French, and Isaac Sorkin. Author affiliations are Federal Reserve Bank of Chicago, UCL and IFS, and the Federal Reserve Bank of Chicago and the  University  of  Michigan. Here are the abstract and conclusions:
"We document three new findings about the industry-level response to minimum wage hikes.   First,  restaurant  exit  and  entry  both  rise  following  a  hike.   Second,  the  rise  in entry and exit is concentrated in chains.  Third, there is no change in employment among continuing restaurants.  We develop a model of industry dynamics based on putty-clay technology  and  show  that  it  is  consistent  with  these  findings.   In  the  model,  continuing  restaurants  cannot  change employment,  and  thus  industry-level  adjustment  occurs through exit of labor-intensive restaurants and entry of capital-intensive ones.  We show these three findings are inconsistent with other models of industry dynamics."

"We present new evidence on the effect of minimum wage hikes on establishment entry, exit, and employment among employers of low-wage labor.  We show that small net employment changes in the restaurant industry may hide a significant amount of establishment churning that arises in response to a minimum wage hike.  To capture these dynamics, we develop a putty-clay model with endogenous entry and exit.  The key feature of the putty-clay model is that,  after entry,  technology and input mix is fixed for the life of the restaurant.  After minimum wage hikes, inflexible incumbents are replaced by potential entrants who can optimize on input mix.  Thus, the model is capable of predicting both restaurant entry and exit in response to a minimum wage hike.

Furthermore, we show that the putty-clay model generates employment and output price responses to minimum wage hikes that are consistent with those reported in the literature. In particular, putty-clay yields sluggish employment responses to minimum wage hikes, with a short-run disemployment effect of around -0.1 that grows to -0.4 in the long-run.   Similarly, the model predicts that restaurant prices are immediately and fully passed onto consumers in the form of higher prices, again consistent with the literature.
Other  models,  such  as  those  that  incorporate  adjustment  costs,  can  reconcile  some  of these facts but not others, especially the simultaneous rise of exit and entry.    As such, we believe putty-clay models could be potentially useful for understanding the response to other labor market policies, including taxes, hiring subsidies, and ring costs and we view our paper as a novel contribution in that we provide micro level evidence on the empirical relevance of putty-clay in an important policy setting."

Monday, December 14, 2015

The American middle class is doing better than you think

James Pethokoukis of CEI.
"Pundits looking for easy, gift-wrapped explanations for the Age of Trump just got an early Christmas present.

A new blockbuster Pew Research report finds the American middle class is no longer the “nation’s economic majority.” There are now as many of us in the economic tiers above and below the middle. Plus, more national income, 49 percent, now goes to the upper class than goes to the middle class, at 43 percent. Back in 1970, 62 percent went to the middles, 29 percent to the uppers.

The conclusion is obvious, right? Goodbye to the American Dream of broadly shared prosperity. Bon voyage to our open and accepting civil society. And after decades of punishing economic decline, everyday Americans are finally letting out a primal scream through The Donald and his toxic anti-immigrant politics.

But maybe the “death of the middle class” conclusion isn’t obvious at all. And perhaps there is more to the Donald Trump phenomenon. Yes, the modern left instinctively sees such studies as further confirmation that inequality is the nation’s premier economic challenge. Much of the media agrees. The rich are gobbling up more and more of the economy’s bounty, leaving less for everyone else. Case closed.
The Pew results are more complex and nuanced than that, however. One reason the middle class — say, three-person households making between $42,000 to $126,000 annually — share is declining is that the upper class is expanding. Back in 1971, 14 percent of households were upper class, and 61 percent were middle class. Today it’s 21 percent upper, 50 percent middle.

What’s more, as Pew notes, “Households in all income tiers experienced gains in income from 1970 to 2014.” It’s not that the rich got richer, and the poor poorer. It’s more that some got richer faster than others. The median income of upper-income households rose 47 percent versus 34 percent for middle incomers and 28 percent for the lower-income households.
Finally, the study’s authors note that some scholars dispute the income measures in the report. Pew uses data from the Census Bureau, which critics contend too narrowly measures income and uses the wrong measure of inflation. A recent survey of top economists found 70 percent agreed that Census data “substantially understate” middle-class progress. Indeed, Brookings scholar Gary Burtless doubts the median household is worse off since 2000, another claim Pew makes, although gains have slowed.
That’s a key point. Inequality between 1 percent and 99 percent is actually lower today than it was was in 2000, with ups and downs in between. More dramatic is the downshift in economic growth. The U.S. economy has expanded only half as fast in the 15 years since 2000 as in the 15 years before that. Wage growth during this recovery is only half as fast as during the 1990s. And more than six years into the expansion, nearly two-thirds of Americans think the nation is on the wrong track. Those are recession numbers; by comparison, the average household doesn’t seem so badly off.

Now, none of this is to downplay the particular economic strain on lower-income Americans, especially those without a college degree. There is evidence that real wages for male workers without college degrees have been stagnant or falling for decades. And those are Trump’s biggest supporters.

But the billionaire is competitive even among the better educated. When growth goes away or even recedes a bit, bad things happen to the American psyche. Now combine that with fears college is becoming more necessary and more unaffordable in a time of expanding automation. The emergence of Trump or some populist like him seems inevitable.
Of course folks on the right shouldn’t dismiss concerns about America becoming a two-tiered society. And at some point the income gap probably does undermine our national cohesiveness, the feeling that “we’re all in it together.” For now, though, the greater challenge is boosting economic growth and American productivity to lift living standards more quickly. At the post-2000 growth rate, the economy doubles every 42 years. At its postwar average, it was every 21 years. More stagnation, means more anxiety, more dissatisfaction, and the Age of Trump continues."

7 Ways the Department of Education Made College Worse

Liberals opposed its creation, and they were right

By Richard Vedder at FEE. Excerpt:
"Would the US be better off today if the department had not been created? A review of the pre- and post-Department developments in higher education shows why I favor eliminating the Department — at least regarding authority over universities.

The 30 years between 1950 and 1980 were the Golden Age of American higher education. The proportion of adult Americans with college degrees nearly tripled, going from 6 to 17 percent. Enrollments quintupled, going from 2.3 to 12.1 million.

By the end of the period, the number of doctorates awarded in engineering had quintupled and over 40 percent of Nobel Prizes were going to individuals associated with American universities.
This was the era in which higher education went from serving the elite and mostly well-to-do to serving many individuals from modest economic circumstance. State government support for higher education rose dramatically — spending per student rose roughly 70 percent after inflation.

During this period, however, the federal role was quite modest. The GI Bill had increased higher education participation, but the loan programs authorized under the 1965 Higher Education Act were comparatively small until the very end of the period when loan eligibility was extended to large numbers of comparatively affluent Americans.

In 1978, the year before the Department’s creation, only one million student loans were made totaling under $2 billion — less than 5 percent the current level of lending even allowing for inflation.
College costs remained remarkably stable. Tuition fees typically rose only about one percent a year, adjusting for inflation. At the same time, high economic growth (real GDP was rising nearly four percent annually) led to incomes rising even faster, so in most years the tuition to income ratio fell.
In other words, college was becoming a smaller financial burden for families.

Compare the Golden Age to the post-Department of Education era (1980 to 2015). While college attainment has continued to grow, in percentage terms the growth has slowed. But that is not all. Let me briefly enumerate seven other unfortunate trends.

First, of course, education costs have soared. Tuition fees rose more than three percent a year in inflation-adjusted terms, far faster than people’s incomes. As new research from the New York Federal Reserve Bank demonstrates, rising federal student financial aid programs are the primary factor in this phenomenon.

If tuition fees had risen as fast after 1978 as in the four decades before, they would be about one-half the level they are today, and the student debt crisis would not have occurred. Presidential candidates would not be talking about “free” tuition.

Second, if anything, college has become more elitist and less accessible to low income students. The proportion of recent graduates who are from the bottom quartile of the income distribution has declined since 1970 or 1980. The qualitative gap between the rich highly selective private schools and state universities has widened — fewer state schools make it near the top in the US News rankings, for example.

Third, there has been a shocking decline in academic standards. Grade inflation is rampant. The seminal study Academically Adrift by Richard Arum and Josipa Roksa shows that very little improvement in critical reasoning skills occurs in college. Adult literacy is falling amongst college graduates. Large proportions of college graduates do not even know in which half-century the Civil War occurred. Ideological conformity is increasingly valued over free expression and empirical inquiry. The Department of Education does nothing to reverse those trends. It doesn’t even acknowledge them.

Fourth, accreditation of colleges, overseen by the Department of Education, is expensive and ineffective. Few schools are ever sanctioned, much less closed for shoddy performance. The system discourages innovation and new entries — it is anticompetitive. Conflicts of interest are rampant. The binary evaluation system (you either are accredited, or you are not) provides no useful information to consumers.

Fifth, the federal aid programs and “college for all” propaganda promoted by the Department have led to a large proportion (probably over 40 percent) of recent graduates being underemployed, working in jobs traditionally done by high school graduates.

Arum and Roksa observe in their follow-up book Aspiring Adults Adrift that two years after graduation nearly one-fourth of graduates are still living with their parents. More college graduates work in low paying retail trade jobs than are Americans serving in our Armed Forces.

Sixth, the Department is guilty of regulatory excesses and bureaucratic blunders. For example, the Office for Civil Rights (OCR) imposes a “preponderance of evidence” standard on colleges in sexual assault cases that violates American ideals regarding due process and fair treatment of accused. Twenty-eight members of the law faculty at Harvard, among others, have bitterly complained about that, but the OCR continues its crusade.

Also, the form required of applicants for federal student aid (FAFSA) is byzantine in its complexity — the 2006 Spellings Commission criticized it severely — but nothing important has been done about it.

Seventh, the one arguably useful function of the Department is to provide information to consumers and taxpayers about college performance. Yet Department bureaucrats have done very little to give useful information on student learning, post-graduate success, consumer satisfaction, et cetera.
Years after promising it, the Department has finally developed a College Scorecard, which is  potentially valuable, but marred because it excludes a number of politically incorrect colleges such as Hillsdale — ones that refuse to participate in federal aid programs or collect data on racial characteristics of students.

Summing up, the Department of Education has had, so far as I can see, no positive impact on higher education and has either caused or ignored numerous negative effects. Thus it is a tragedy that the skeptics about creating it did not prevail back in 1979."

Sunday, December 13, 2015

The Role of Market Forces in Protecting Against Phishing

From Don Boudreaux. Excerpts:
"In his review of George Akerlof’s and Robert Shiller’s Phishing for Phools, Peter Klein – a student of Oliver Williamson – suggests that
George Akerlof could walk down the hall and speak to his UC Berkeley colleague and fellow Nobel Laureate Oliver Williamson for a better understanding of how markets work. Williamson, of course, is famous for explaining how market actors protect themselves against opportunistic behavior from other market actors through contracts, joint ownership of assets, reputation, exchange of “hostages,” and similar practices. It is markets, not government, that enable cooperation and joint production in the face of information and incentive problems.
Peter’s suggestion is wise. Phishing for Phools contains virtually no recognition of the many ways that market institutions arise to protect people from the consequences of information inadequacies and asymmetries.  Akerlof and Shiller are correct, as I agreed in this earlier post, that entrepreneurs will seek to profit off of consumers’ inadequate knowledge.  But Akerlof and Shiller are incorrect to end their analysis with entrepreneurs exploiting consumers’ informational (and psychological) deficiencies; Akerlof and Shiller are incorrect to describe this exploitation as a “phishing equilibrium.”  It’s not an equilibrium because some entrepreneurs’ successful phishing of consumers for phools – or even the prospect of consumers being phished for phools – creates profitable opportunities for other entrepreneurs to help consumers avoid being phished for phools.

Take the department store.  One of its functions is to screen for, and to warrant, the quality of the merchandise that it offers to consumers.  Its buyers specialize in sorting unacceptable-quality from acceptable-quality merchandise and, thereby, ensuring that the store carries only the latter.  Department stores that succeed in supplying this quality-assurance service have the value of their name brands tied closely to their continuing success at assuring the minimum level of merchandise-quality that their customers come to expect from them.

This quality-assurance function is performed by department stores as a profit-seeking maneuver – one that helps to protect consumers from being “phished for phools.”  Yet I recall nowhere in Phishing for Phools this function of the department store being mentioned.

More broadly, brand names themselves serve to ensure quality for consumers who find it too costly directly to observe pre-purchase the quality of the goods and services that they are considering for purchase.  The value of the brand name – “McDonald’s”, “Green Giant”, “BB&T”, “Honda”, “Krups”, “Liz Claiborne”, “Hilton”, “Chateau Lafite Rothschild”, “” – depends upon the owner of the brand name continuing to supply the minimum quality that has come to be expected from goods and services sold under that brand name.  The self-interest of the owners of brand names generally impels them to continue to supply the minimum expected quality of their goods or services."

"Ironically, many of the market institutions that serve to assure product quality – that serve to protect consumers from being phished for phools – are institutions much derided by most of the people who likely find Akerlof’s and Shiller’s book to be an accurate and sobering description of market realities.  Such people do not understand brand names, and so they assume that brand names are a devious way of duping consumers rather than a market institution that protects consumers.  Ditto for such people’s assessment of advertising and of large-scale retailing by department stores and supermarkets."

The Paris Treaty will do very little to rein in temperature reductions

See We Have A Climate Treaty--But At What Cost? by Bjorn Lomborg in Forbes. Excerpts:
"The Paris Treaty promises to keep temperature rises below 2°C. However, the actual promises made here will do almost nothing to achieve that. It is widely accepted that to keep temperature rises below 2°C, we have to reduce CO₂ emissions by 6,000Gt.

The UNFCCC estimates that if every country makes every single promised Paris Treaty carbon cut between 2016 and 2030 to the fullest extent possible and there is no carbon leakage, CO₂ emissions will be cut by 56 Gt by 2030.

The math is simple: in an implausibly optimistic best-case scenario, Paris leaves 99% of the problem in place."

"Using the best individual and collectively peer-reviewed economic models, the total cost of Paris – through slower GDP growth from higher energy costs – will reach $1-2 trillion every year from 2030."

"Until there is a breakthrough that makes green energy competitive on its own merits, massive carbon cuts are extremely unlikely to happen.

Claims that carbon cuts will be free or even generate economic growth don’t stack up given today’s technology. Every economic model shows real costs. If not, we wouldn’t need the Paris treaty: every nation would stampede to voluntarily cut CO₂ and get rich.

The agreement to spend $100bn on climate aid is a poor way to help the developing world. Their citizens clearly say, this is their lowest policy priority and climate aid provided by handing out solar panels has meager benefits compared with the many better, cheaper ways to help, like investing in immunization, girls’ education, and family planning."

Saturday, December 12, 2015

The Solution to Congestion

By Randal O'Toole of Cato.
"It is distressing, at least to economists, how many problems could be solved by adopting basic free-market principles, yet those solutions are ignored or stridently opposed by the very people who would benefit from them. California’s drought is one of those: California actually has plenty of water, it is just poorly priced.

An even more pervasive problem is traffic congestion, which (according to the Texas Transportation Institute) wasted more than 3 billion gallons of fuel and nearly 7 billion hours of people’s time for a total cost of $160 billion in 2014. Brookings economist Anthony Downs wrote a whole book about congestion that concluded there was no solution to the problem–except, he noted almost parenthetically, congestion pricing which Downs decided was politically impossible. Of course, that’s a self-fulfilling prophecy because if no one argues for something because it’s impossible, it will truly be impossible.

Fortunately, more people are beginning to argue for congestion pricing. A November 27 report from an economic group in Canada called the Ecofiscal Commission argues that “pricing traffic congestion is critical to beating it.”

An even more recent report, released on December 8 by the Royal Academy of Engineering, makes a similar argument for roads in Britain. The report compares a wide variety of programs, including transit improvements, smart roads, and urban redevelopment, and concludes that road pricing offers the greatest value for the money and has no net cost to taxpayers.

One reason congestion pricing doesn’t happen is that many people see it as an attempt to force people off the roads and out of their cars. So it is disappointing that neither of these reports notes the critical finding of my Cato policy analysis on congestion pricing, which is that road pricing actually increases the capacity of roads to move people and vehicles during busy times of the day.

As the paper shows, a freeway lane can move up to 2,000 vehicles per hour at 55 miles per hour, but when traffic slows because of congestion, throughput can fall below 1,000 vehicles per hour. By preventing such traffic slowdowns, road pricing can paradoxically double road capacities during rush hour, thus giving everyone more options to get where they want to go without delay, not less.
Another obstacle to congestion pricing is that people don’t trust government. Optimally, highway managers would set prices just high enough to keep traffic flowing and use net revenues to pay for more congestion relief, not boondoggles elsewhere. Some of the most efficiently constructed tollways in the world follow these principles.

Unfortunately, other systems have not followed these principles, giving tollroads everywhere a black eye. One of the worst is the Dulles Toll Road, which was built by the state of Virginia in 1984 and worked well for many years. Then the state gave it to the Metropolitan Washington Airport Authority, which more than quadrupled tolls so it could use the surplus to subsidize the Silver Line boondoggle.
Yet one bad toll road is not an argument against congestion pricing, any more than the failure of A&P is an argument against all supermarkets. Congestion pricing is the best and may be the only way to end the fuel, time, and dollars wasted in traffic, and free-market advocates should support such pricing to solve local traffic problems."