Research Continues on the Stupidity Rays Emanating from the American Enterprise Institute...

Only Shrillblog can deal properly with American Enterprise Institute economist Kevin Hassett's declaration that the Russian economy is outperforming America's--because, you see, dictatorships like Vladimir Putin's "are not hamstrung by the preferences of voters for, say, a pervasive welfare state."

Research continues on just what kind of rays emanate from 1150 17th Street that make dumb people dumber, and smart people dumb. The latest volunteers were the brilliant Kevin Murphy and Gary Becker, who were strapped into a test capsule that was sent in a close flyby by the AEI. This is what emerged:

The Upside of Income Inequality: This brings us to our punch line. Should an increase in earnings inequality due primarily to higher rates of return on education and other skills be considered a favorable rather than an unfavorable development? We think so. Higher rates of return on capital are a sign of greater productivity in the economy, and that inference is fully applica­ble to human capital as well as to physical capital. The initial impact of higher returns to human capital is wider inequality in earnings (the same as the initial effect of higher returns on physical capital), but that impact becomes more muted and may be reversed over time as young men and women invest more in their human capital.

We conclude that the forces raising earnings inequality in the United States are beneficial to the extent that they reflect higher returns to investments in education and other human capital...

In their normal state, Kevin and Gary would say that there are two possible causes of rapid growth in skills and education premiums: demand and supply. If it is demand--if technological progress accelerates so that it outstrips the previously-expected growth path, and if education and skills are strongly complementary with technology (as we believe them to be), the education and skills premiums would increase as the productivity of the American economy grew rapidly. This would be good news.

If it is supply--if for some reason the share of Americans receiving educations and gaining skills falls below previously-expected trends, and no longer keeps pace with the normal advance of technology, then the education and skills premiums would increase as the productivity of the American economy grew less rapidly than had been expected. This would be bad news.

We can, Murphy and Becker would say, tell the difference. If the rise in inequality over the past generation is due to good news, we would expect the share of Americans going to college to advance faster than previous historical trends and we would expect overall economy-wide productivity growth over the past generation to have been faster than usual. If the rise in inequality over the past generation is due to bad news, we would expect the share of Americans going to college to fall short of normal trends, and we would expect economy-wide productivity growth to have been slower than normal.

And guess what? over the past generation--even taking into account the very good decade since 1996--productivity growth has been slow, and the share of Americans going to college has not risen rapidly. On the quantity-of-education side, the news is not good:

[W]hy haven’t more high school graduates gone on to a college education when the benefits are so apparent? Why don’t more of those who go to college finish a four-year degree? (Only about half do so.) And why has the proportion of American youth who drop out of high school, especially African-American and Hispanic males, remained fairly constant? The answers to these and related questions lie partly in the breakdown of the American family, and the resulting low skill levels acquired by many children in elementary and secondary school—-particularly individuals from broken households.... Most high school dropouts certainly appear to be seriously deficient in the noncognitive skills that would enable them to take advantage of the higher rates of return to education and other human capital...

And yet this passage is followed by the conclusion:

For many, the solution to an increase in inequality is to make the tax structure more progressive—-raise taxes on high-income households and reduce taxes on low-income households.... A more sensible policy is to... encourage more human capital investment. Attempts to raise taxes and impose other penalties on the higher earnings that come from greater skills could greatly reduce the productivity of the world’s leading economy by dis­couraging investments in its most productive and precious form of capital—-human capital.

Becker and Murphy thus argue, in the space of three paragraphs, that (a) increases in the net return to education caused by spreading inequality generated by rising pretax wage differentials won't lead to increases in educational attainment, but (b) decreases in the net return to education caused by reducing inequality through progressive taxation will lead to decreases in educational attainment.

All are urged to remain far from 1150 17th Street until the mechanism of these effects is better understood.

Comments

[John Emerson]

Brad, Becker is a Nobelist highly respected in the field. His book about the family, in my opinion, was ludicrous and snarkily nasty. This piece is, from a political point of view, nasty too, and you don't seem to think it's valid either.

So what authority does economics have? Economists make proud scientific claims, but when I go to a physicist or any other scientist for information I don't normally have to worry about being misled. But with economists I do.

I've ended up concluding that economists are most like lawyers -- powerful, highly skilled advocates whom I can't afford.

[alphie]

Ya gotta wonder what the market value is for Becker's pseudoscientific twaddle.

If it doesn't help convince the masses to keep voting against their own self interest, how does it help the new aristocracy?

Or is Becker like the hooker in Hitchhiker's Guide that got paid to tell rich people it's okay to be rich?

[Robert Waldmann]

Becker is smart but he is a fanatic. Trotsky was smart too, but managed to say stupid things without approaching the AEI. Murphy is a genius but he worships Becker.

I am sure that he can down a model in which claims a) and b) are reconciled. It would be based on the idea that unmeasured human capital accumulation beyond the norm for an BA has increased (that is the data don't fit the story so lets say that the data are too crude). It is always possible to draw any desired policy recommendation from an economic model with rational optimizing agents (I choose the policy recommendations and then write the model and I just admitted it in public). Economic theory is only restrained by the limits to the intellectual flexibility of the theorist. Kevin Murphy has a roughly infinite IQ and, therefore, he is roughly worthless as an economic theorist.

Kevin Murphy is too smart for his arguments to count. If Copernicus had had to debate Murphy we would still think the Sun orbits the Earth

[Slocum]

"(a) increases in the return to education caused by spreading inequality in pretax wages won't lead to increases in educational attainment, but (b) decreases in the return to education caused by reducing inequality in after-tax wages will lead to decreases in educational attainment."

That's one way to spin it, I suppose. Another would be something like -- Even with the incentive of strong returns to education, other factors (poor K-12 schools, social problems) are blocking increase in educational attainment. What we should be doing, therefore, is to work to eliminate those roadblocks. What we absolutely should not do, though, is to reduce the incentives by reducing the after-tax return to higher education.

[Jay Livingston]

1. The increase in inequality seems to be concentrated in the top 5% (or less). Is the education (or however else one measures human capital) of these people so much greater than that of the next 5% or 20%?

2. Strange coincidence: just a couple of days ago, David Brooks's NY Times op-ed piece was "A Human Capital Agenda."

[anne]

Robert Waldmann:

"It is always possible to draw any desired policy recommendation from an economic model with rational optimizing agents (I choose the policy recommendations and then write the model and I just admitted it in public). Economic theory is only restrained by the limits to the intellectual flexibility of the theorist."

Notice carefully what it means to mask a philosophical base in developing both a social-economic model and policy to follow logically from the model. A subtle and powerful criticism....

[Matt]

A better measure is the shape of the inequality. If the income distribution remains balanced and normal, then having it broad or narrow is immaterial for efficiency. Efficiency is the key measure and will be optimum if the curve is balanced properly.

A narrow PID distribution indicates a specialized economy.

We are back to the bubble argument, which, I guess, says that we cannot obtain increased efficiency without unbalancing the PID.

I doubt it. We are most likely to improve efficiency by making smaller adjustments over time, doing it without the bubble on some part of the PID curve.

[RW]

The biologist, Ruth Hubbard, once wrote "[E]very theory is a self-fulfilling prophecy that orders experience into the framework it provides" and that helps make some sense of the world Becker and Murphy describe but frankly attempts at rationalization by very intelligent people more usually remind me of Whitehead's, "Every philosophy is tinged with the colouring of some secret imaginative background, which never emerges explicitly into its train of reasoning."

[Nick Schulz]

Does anyone have a good response to Slocum and ionides?

[d-slam]

This thread is yet another sign that Economics has erred terribly in turning away from thinking seriously about (and teaching) economic methodology, in thinking about the difference between honest work and dishonest work. Every other social science has methodology as a required course (in some cases it is the only required course). In most economics graduate programs the course is not even *offered*.

When a practicing economist (I hope I have not mischaracterized Robert) can ruefully write: "It is always possible to draw any desired policy recommendation from an economic model with rational optimizing agents (I choose the policy recommendations and then write the model and I just admitted it in public). Economic theory is only restrained by the limits to the intellectual flexibility of the theorist."

... then we know that Economics is a discipline/profession in crisis - a crisis of credibility and a crisis of integrity.

[ionides]

"(a) increases in the return to education caused by spreading inequality in pretax wages won't lead to increases in educational attainment, but (b) decreases in the return to education caused by reducing inequality in after-tax wages will lead to decreases in educational attainment."

Why is this supposed to be contradictory? It merely says that after-tax wages affect behavior and pre-tax wages don't.