Thursday, February 27, 2014

It is all downhill after 40

Click on graphic to enlarge.

Tuesday, February 25, 2014

Gauging Mobility

I agree with the main point of Paul Krugman's latest blog post: When thinking about the welfare of a typical person in society, income inequality is more important than mobility. But this sentence struck me as more wrong than right:
"the most important factor in whether you can become rich is whether you chose the right parents: Most people are going to end up with socioeconomic status close to where they started."
According to a recent study of mobility (see Figure 1), the correlation between parent's income rank and children's income rank is about 0.3. That means that if you are in the 99th percentile (the much-talked-about 1 percent), your best guess is that your child will be at the 65th percentile.

To me, that seems like a lot of regression toward the mean. This is why financially successful parents often have strong bequest motives. They are smoothing consumption across generations.

Addendum: Here is the key Figure 1:

Sunday, February 23, 2014

Superstars and Niche Products

Robert Frank has a great article in today's NY Times about how technology is changing the return to talent. I think he is focused on a key issue.  A lot of the longer-term trends we see in the economy are driven mostly by changes in technology, of which economists have only a rudimentary understanding.

Bob's story of Alfred Marshall and the piano industry is particularly noteworthy and, I am embarrassed to say, new to me.

Addendum: In the article, Bob mentions his sons' music group.  For those interested, here it is:

Saturday, February 22, 2014

The Draft

University of Chicago's Allen Sanderson discusses the economics and political economy of conscription.

As for my view: I find it hard to imagine that I would ever endorse the reinstatement of the draft, not so much for economic reasons, but out of respect for individual liberty.

Tuesday, February 18, 2014

CBO on a Minimum-Wage Hike

From a new report:
Once fully implemented in the second half of 2016, the $10.10 option would reduce total employment by about 500,000 workers....The increased earnings for low-wage workers resulting from the higher minimum wage would total $31 billion, by CBO’s estimate. However, those earnings would not go only to low-income families, because many low-wage workers are not members of low-income families. Just 19 percent of the $31 billion would accrue to families with earnings below the poverty threshold, whereas 29 percent would accrue to families earning more than three times the poverty threshold.

Monday, February 17, 2014

CEOs are paid for performance

In response to my recent article, some commentators (like this one) are prone to say, "Sure, actors, authors, and athletes deserve their good fortune, because they get paid well only if they produce, but hefty CEO pay is unfair because it is not based on performance."  Before you are tempted to make that argument, please make yourself familiar with the facts by reading this paper:

Executive Compensation and Corporate Governance in the U.S.: Perceptions, Facts and Challenges
Steven N. Kaplan


In this paper, I consider the evidence for three common perceptions of U.S. public company CEO pay and corporate governance: (1) CEOs are overpaid and their pay keeps increasing; (2) CEOs are not paid for their performance; and (3) boards do not penalize CEOs for poor performance. While average CEO pay increased substantially through the 1990s, it has declined since then. CEO pay levels relative to other highly paid groups today are comparable to their average levels in the early 1990s although they remain above their long-term historical average. The ratio of large-company CEO pay to firm market value is roughly similar to its level in the late-1970s and lower than its pre-1960s levels. These patterns suggest that similar forces, likely technology and scale, have played a meaningful role in driving CEO pay and the pay of others with top incomes. With regard to performance, CEOs are paid for performance and penalized for poor performance. Finally, boards do monitor CEOs. The rate of CEO turnover has increased in the 2000s compared to the 1980s and 1990s, and is significantly tied to poor stock performance. While corporate governance failures and pay outliers as well as the very high average pay levels relative to the typical household undoubtedly have contributed to the common perceptions, a meaningful part of CEO pay appears to be market determined and boards do appear to monitor their CEOs. Consistent with that, top executive pay policies at over 98% of S&P 500 and Russell 3000 companies received majority shareholder support in the Dodd-Frank mandated Say-On-Pay votes in 2011.

Sunday, February 16, 2014

On the Iron Men of Wall Street

Commenting on my recent column, Paul Krugman wonders if I somehow missed the financial crisis of the past few years.  He seems to think the crisis proves that the titans of Wall Street earn much more than the value of their contributions. 

I will be the first to admit that measuring the social value of the financial sector is hard.  But let me offer a few observations:

1. In thinking about the social value of the workers in the financial system, it is as important to keep in mind long-run growth as well as short-run fluctuations.  Financial intermediation plays a key role in growth.  And a case can be made that for human welfare, growth swamps fluctuations.  (Robert Lucas most famously made this argument.)

2. It is too facile to blame the financial crisis entirely on Wall Street.  In the recent edition of my favorite intermediate macro textbook, there is a case study of who bears responsibility for the crisis.  It concludes there is no single culprit but lots of blame to spread around. (See page 580 of Chapter 20.)

3. It would be a mistake to think that the rich had it easy during this crisis.  According to the Saez-Piketty data, during the downturn from 2007 to 2009, average income fell 17 percent, but the incomes of the top 1 percent fell 36 percent.  Wall Street titans at the center of the crisis such as Dick Fuld and Hank Greenberg reportedly lost 90 percent of their net worth.  To be sure, they started off at a much higher base than most people, but let's not pretend the bankers got off scot-free.

On Stanley Fischer

Saturday, February 15, 2014

Defending the One Percent (Again)

Click here to read my column in Sunday's NY Times.  I expect this one will generate more than its share of irate letters.

Friday, February 14, 2014

Obamacare versus Romneycare

One of the themes that we have all heard over the past few years is that President Obama's healthcare reform is merely bringing the kind of changes Massachusetts had under Governor Romney to the nation. If that were really true, you would think that these national reforms would have minimal impact on the state of Massachusetts. Well, here is a story from today's Boston Globe:
About 50,000 health insurance applications, many filed by low-income Massachusetts residents, have yet to be processed by the state’s troubled insurance marketplace, officials disclosed Thursday, and it may take months to get all these people enrolled in subsidized plans. 
For several months, residents have been encouraged to file old-fashioned paper applications because the state’s insurance website has been hobbled by error messages and has crashed frequently since it was revamped in October to comply with the more complex requirements of the federal health care law. 
Frustration with the broken Massachusetts Health Connector website and the paperwork backlog was evident Thursday, when Jean Yang, the agency’s executive director, wept as she told the Connector board how demoralized her staff is.

Happy Valentine's Day

Tuesday, February 11, 2014

If Obamacare reduces labor supply, will it raise wages?

In a couple of recent articles written by smart economists, I have read the following claim: CBO says the incentives in the Affordable Care Act will reduce labor supply. If it does, then real wages will increase.

That sounds like reasonable, textbook economics. But I don't think it is true. The problem is that the logic is entirely partial equilibrium. It is holding everything else constant. But that is surely not right in the long run. Lower labor supply means lower income, which means lower saving, which means lower investment, which means a lower capital stock, which means lower productivity, which means lower labor demand.

Perhaps the easiest way to think about this issue is in the context of a Solow growth model. In the Solow model, the steady-state real wage is a function of technology, the saving rate, and the population growth rate. If labor supply per person suddenly falls by, say, 2 percent and stays there, the real wage will rise initally, but it will eventually return to its former level. Steady-state income per person falls by the full 2 percent.

One effect that might occur is a change in the composition of labor income. If the Act reduces labor supply primarily among the low-skilled, while not having that effect among the highly-skilled, then we might get a change in the relative wages of skilled and unskilled. But an overall increase in real wages seems unlikely.

Monday, February 10, 2014

The Economics of Downton Abbey

Wednesday, February 05, 2014

Solow vs Mankiw on the One Percent

Readers of this blog will be familiar with my recent article Defending the One Percent.  In the new released issue of JEP, you can read a letter by Bob Solow commenting on the article as well as my response.

Sentence of the Day

CBO estimates that the ACA [Affordable Care Act] will reduce the total number of hours worked, on net, by about 1.5 percent to 2.0 percent during the period from 2017 to 2024, almost entirely because workers will choose to supply less labor—given the new taxes and other incentives they will face and the financial benefits some will receive.
Implicit in this estimate are elasticities that measure how much people respond to incentives.  My sense is that CBO is typically conservative when it come to gauging these incentives effects.  So I would take their estimate of the impact on hours worked as a lower bound. The actual figure may be higher.

Addendum: Here is a column I wrote about these incentive effects five years ago.

Tuesday, February 04, 2014

Econ Summer Camp

Grad students with an interest in the history of economic thought should click here.

Saturday, February 01, 2014

Humility-based Libertarianism

On the suggestion of Bryan Caplan, I just read In Praise of Passivity by philosopher Michael Huemer. A lot in the article makes sense to me.  As a social scientist, I think there is much we don't know about how the world works, and that intellectual humility goes a long way to explaining my skepticism about many governmental interventions into private behavior.  In any event, I also recommend the article.