Brad DeLong

The Symmetry Argument for Cooperation in One-Shot Prisoner's Dilemma

A commenter writes:

http://delong.typepad.com/sdj/2007/02/tom_slee_tells_.html: The claims made by Axelrod in favor of tit-for-tat are wildly overblown, and frequently just plain wrong. Anatol Rapoport cannot really be blamed for his sloppiness, although he did (re)invent the Symmetry Fallacy that purports to demonstrate that it is rational to co-operate in the one-shot Prisoners' Dilemma. A good place to read a game theorist's reaction to all of this is in Ken Binmore's "Playing Fair: Game Theory and the Social Contract I," Chapter 3, (MIT Press, 1994).

The Symmetry Argument is not the Symmetry Fallacy. I think that it's remarkably deep and subtle, raising many of the issues that arise in Newcomb's Problem.

To review the one-shot Prisoner's Dilemma game. A and B play a one-shot game. Each has two strategies: C(ooperate) and D(efect). A and B are identical. Each is a self-interested being, caring only about his or her own payoffs--they are neither altruistic nor envious. Each is a logical being, understanding the structure of the game and capable of following the strategic logic to its conclusion. The payoffs to this one-shot game are as follows:

---

Basic Prisoner's Dilemma

	B Cooperates	B Defects
A Cooperates	(2,2)	(-5,3)
A Defects	(3,-5)	(-4,-4)

---

Here is the traditional argument for the traditional dominant-strategy equilibrium:

A thinks: "Whatever B does, I am better off doing strategy D. Moreover, whatever I do, B is better off doing strategy D. It would be best for us both if we both did strategy C. But I cannot afford to do C--I would do better doing D, and B knows I would do better doing D. For both of us, strategy D strictly dominates. So I would have to conclude that B was insane or irrational to expect B to do strategy C--and even if B does, I am still better off doing D than C." B thinks the same.

Here is the Symmetry Argument for doing strategy C:

A thinks:

B is identical to me. I am a logical thinker. B is therefore a logical thinker, who will think the same thoughts I think. There are, however random elements--what B had for breakfast, for example--that may lead B to choose a different strategy than me. Let's model those random elements by a random variable b drawn uniformly from [0, 1]. And let's model the logical, systematic part of B's deliberations by having B choose a number p, so that B chooses strategy C if b < p and chooses strategy D otherwise.

What number p will the logical part of B choose?

Well, the best model I have of the logical part of B is what number p I have chosen. Viewing myself as an agent whose logical thought is identical to that of B, what number p will I choose? Let me calculate my expected return as a function of p. It is:

2p² - 2p(1-p) - 4(1-p)²

This is maximized for p = 1. So I should choose p = 1--should always cooperate--and expect a payoff of 2.

Should I take the problem one step further? Should I reason that since B is choosing p = 1, I should choose to defect, and thus get an expected return of 3? Ah. But if I choose to defect, I am choosing my own p = 0, and my forecast of B's choice of p changes as well, and my expected return is not 2 but -4.

A has to confront two truths. On the one hand, A's payoff is greater by one if A chooses to defect rather than to cooperate. On the other hand, if A plays the dominant strategy of "defect" then A's expectation of their payoff drops by 6. +1 or -6? The issue of which truth to act on is, I think, the same issue we find in Newcomb's Problem.

I am a dominant-strategy guy. If you find the Symmetry Argument convincing--well, Grasshopper, you have once again failed to snatch the pebble from my hand. But I feel the force of the other side: If you find the Symmetry Argument an obvious fallacy--well, Grasshopper, you have once again failed to snatch the pebble from my hand.

If you set up as an axiom of rationality that a rational, logical agent must always choose to play a dominant over a dominated strategy--well, Grasshopper, you have begged the question, and you have to answer the next order question: why you think that your rational, logical agents are smart?

Applied Utilitarianism: The Price of Oranges in Berkeley

The big frost that devastated the California citrus crop was two weeks ago, yet prices did not jump immediately. Only recently have the prices of boxes of small EZ-peel oranges at Trader Joe's risen, from $4.99 to $7.99 a box.

This tells us that such oranges are not storable--if they were, Trader Joe's would have kept them in the back until now, and so made an extra $3 a box. This also tells us that the memory of eating oranges is not storable either--it it were, consumers would have gorged themselves on oranges as soon as they realized they were going to be scarce this winter, and so saved themselves an extra $3 a box.

What other goods can you think of that are "nondurable," in the sense of neither being storable by producers or sufficiently memorable to consumers? What goods are "durable" in either of these senses.

Note to Self: Talk to Dan Sumner

Brink Lindsey says that I should talk to U.C. Davis's Dan Sumner to learn about the long-run collapse of Newt Gingrich's constructive "Freedom to Farm" initiative...

ARE Department Website: Daniel A. Sumner is the Frank H. Buck, Jr., Professor in the Department of Agricultural and Resource Economics at the University of California, Davis and the Director of the University of California, Agricultural Issues Center. He participates in research, teaching, and directs an outreach program related to public issues facing agriculture. He has published broadly in academic journals, books, and industry outlets. His research and writing focuses particularly on the consequences of farm and trade policy on agriculture and the economy.

In 1995, he was honored by the American Agricultural Economics Association for his agricultural policy contributions. In 1996 he and co-authors won the AAEA award for Quality of Research Contribution, and his book series related to national farm policy reform was awarded an Honorable Mention for Quality of Communication.

Prior to beginning his current position in January 1993, Sumner was the Assistant Secretary for Economics at the United States Department of Agriculture where he was involved in policy formulation and analysis on the whole range of topics facing agriculture and rural America -- from food and farm programs to trade, resources, and rural development. In his role as supervisor of Agriculture's economics and statistics agencies, Sumner was also responsible for data collection, outlook and economic research.

From 1978 to 1992 Sumner was a Professor in the Division of Economics and Business at North Carolina State University. He spent much of the period after 1986 on leave for government service in Washington, D.C. During 1987-88 he was a Senior Economist at the President's Council of Economic Advisers and was Deputy Assistant Secretary at the USDA from 1990-92.

Sumner was raised on a fruit farm in Suisun Valley, California and was active in 4-H and FFA activities as a youth. He received a bachelors degree in agricultural management from California Polytechnic State University in San Luis Obispo in 1971, a masters degree from Michigan State in 1973, and a Ph.D. in economics from the University of Chicago in 1978.

Value Chains

Lance Knobel writes:

: I went to an interesting unconference on talent today at Electronic Arts. I was involved in a discussion on "the big pipe": the need to reform the US education system so the country can have the talent necessary to thrive in the coming decades. One point we agreed on was the need for companies both to understand and lobby about the importance of education.

An executive from Starbucks made the excellent point that CEOs have a limited bandwidth for issues. For many, healthcare looms far larger than education. After all, she said, Starbucks spends more annually on employee healthcare than on purchasing coffee

The Minimum Wage and the EITC

From the Archives: The Minimum Wage and the EITC:

The Minimum Wage and the EITC: Archive Entry From Brad DeLong's Webjournal: I like the EITC. Come the Day of Wrath, my best pleading will be the role I played in 1993 in the Clinton administration in expanding the EITC.

But the EITC is a program that uses the IRS to write lots of relatively small checks to tens of millions of relatively poor people who satisfy picky eligibility rules. This is not the IRS's comparative advantage. The IRS's comparative advantage is using random terror to elicit voluntary compliance with the tax code on the part of relatively rich people. The EITC is a good program, but it a costly program to administer, and it is administered imperfectly to say the least.

The minimum wage, on the other hand, is nearly self-enforcing: its administrative costs are nearly nil, for workers (legal workers, at least) have a very strong incentive to drop a dime on bosses who violate it. From a government-administrative and error-rate perspective, it's a very cost-effective program.

The right solution, of course, is balance: use the minimum wage as one part of your program of boosting the incomes of the working poor (being well aware of its likely disemployment effects of the wage floor and of its sending lots of money to the wrong households), and use the EITC as the other part (being well aware of its administrative complexities and errors and the disemployment effects of the phase-out range). Try not to push either one to the point where its drawbacks grow large. Balance things at the margin.

Keynes: Wage Flexibility and Full Employment

The General Theory of Employment, Interest and Money, by John Maynard Keynes:

From Chapter 19: Changes in Money-Wages: Thus the reduction in money-wages will have no lasting tendency to increase employment except by virtue of its repercussions either on the propensity to consume for the community as a whole, or on the schedule of marginal efficiencies of capital, or on the rate of interest. There is no method of analysing the effect of a reduction in money-wages, except by following up its possible effects on these three factors.

The most important repercussions on these factors are likely, in practice, to be the following:

(1) A reduction of money-wages will somewhat reduce prices. It will, therefore, involve some redistribution of real income (a) from wage-earners to other factors entering into marginal prime cost whose remuneration has not been reduced, and (b) from entrepreneurs to rentiers to whom a certain income fixed in terms of money has been guaranteed.

What will be the effect of this redistribution on the propensity to consume for the community as a whole? The transfer from wage-earners to other factors is likely to diminish the propensity to consume. The effect of the transfer from entrepreneurs to rentiers is more open to doubt. But if rentiers represent on the whole the richer section of the community and those whose standard of life is least flexible, then the effect of this also will be unfavourable. What the net result will be on a balance of considerations, we can only guess. Probably it is more likely to be adverse than favourable.

(2) If we are dealing with an unclosed system, and the reduction of money-wages is a reduction relatively to money-wages abroad when both are reduced to a common unit, it is evident that the change will be favourable to investment, since it will tend to increase the balance of trade. This assumes, of course, that the advantage is not offset by a change in tariffs, quotas, etc. The greater strength of the traditional belief in the efficacy of a reduction in money-wages as a means of increasing employment in Great Britain, as compared with the United States, is probably attributable to the latter being, comparatively with ourselves, a closed system.

(3) In the case of an unclosed system, a reduction of money-wages, though it increases the favourable balance of trade, is likely to worsen the terms of trade. Thus there will be a reduction in real incomes, except in the case of the newly employed, which may tend to increase the propensity to consume.

(4) If the reduction of money-wages is expected to be a reduction relatively to money-wages in the future, the change will be favourable to investment, because as we have seen above, it will increase the marginal efficiency of capital; whilst for the same reason it may be favourable to consumption. If, on the other hand, the reduction leads to the expectation, or even to the serious possibility, of a further wage-reduction in prospect, it will have precisely the opposite effect. For it will diminish the marginal efficiency of capital and will lead to the postponement both of investment and of consumption.

(5) The reduction in the wages-bill, accompanied by some reduction in prices and in money-incomes generally, will diminish the need for cash for income and business purposes; and it will therefore reduce pro tanto the schedule of liquidity-preference for the community as a whole. Cet. par. this will reduce the rate of interest and thus prove favourable to investment. In this case, however, the effect of expectation concerning the future will be of an opposite tendency to those just considered under (4). For, if wages and prices are expected to rise again later on, the favourable reaction will be much less pronounced in the case of long-term loans than in that of short-term loans. If, moreover, the reduction in wages disturbs political confidence by causing popular discontent, the increase in Liquidity preference due to this cause may more than offset the release of cash from the active circulation.

(6) Since a special reduction of money-wages is always advantageous to an individual entrepreneur or industry, a general reduction (though its actual effects are different) may also produce an optimistic tone in the minds of entrepreneurs, which may break through a vicious circle of unduly pessimistic estimates of the marginal efficiency of capital and set things moving again on a more normal basis of expectation. On the other hand, if the workers make the same mistake as their employers about the effects of a general reduction, labour troubles may offset this favourable factor; apart from which, since there is, as a rule, no means of securing a simultaneous and equal reduction of money-wages in all industries, it is in the interest of all workers to resist a reduction in their own particular case. In fact, a movement by employers to revise money-wage bargains downward will be much more strongly resisted than a gradual and automatic lowering of real wages as a result of rising prices.

(7) On the other hand, the depressing influence on entrepreneurs of their greater burden of debt may partly offset any cheerful reactions from the reduction of wages. Indeed if the fall of wages and prices goes far, the embarrassment of those entrepreneurs who are heavily indebted may soon reach the point of insolvency, %u2014 with severely adverse effects on investment. Moreover the effect of the lower price-level on the real burden of the National Debt and hence on taxation is likely to prove very adverse to business confidence.

This is not a complete catalogue of all the possible reactions of wage reductions in the complex real world. But the above cover, I think, those which are usually the most important.

If, therefore, we restrict our argument to the case of a closed system, and assume that there is nothing to be hoped, but if anything the contrary, from the repercussions of the new distribution of real incomes on the community's propensity to spend, it follows that we must base any hopes of favourable results to employment from a reduction in money-wages mainly on an improvement in investment due either to an increased marginal efficiency of capital under (4) or a decreased rate of interest under (5). Let us consider these two possibilities in further detail.

The contingency, which is favourable to an increase in the marginal efficiency of capital, is that in which money-wages are believed to have touched bottom, so that further changes are expected to be in the upward direction. The most unfavourable contingency is that in which money-wages are slowly sagging downwards and each reduction in wages serves to diminish confidence in the prospective maintenance of wages. When we enter on a period of weakening effective demand, a sudden large reduction of money-wages to a level so low that no one believes in its indefinite continuance would be the event most favourable to a strengthening of effective demand. But this could only be accomplished by administrative decree and is scarcely practical politics under a system of free wage-bargaining. On the other hand, it would be much better that wages should be rigidly fixed and deemed incapable of material changes, than that depressions should be accompanied by a gradual downward tendency of money-wages, a further moderate wage reduction being expected to signalise each increase of, say, 1 per cent. in the amount of unemployment. For example, the effect of an expectation that wages are going to sag by, say, 2 per cent. in the coming year will be roughly equivalent to the effect of a rise of 2 per cent. in the amount of interest payable for the same period. The same observations apply mutatis mutandis to the case of a boom.

It follows that with the actual practices and institutions of the contemporary world it is more expedient to aim at a rigid money-wage policy than at a flexible policy responding by easy stages to changes in the amount of unemployment; -- so far, that is to say, as the marginal efficiency of capital is concerned. But is this conclusion upset when we turn to the rate of interest?

It is, therefore, on the effect of a falling wage- and price-level on the demand for money that those who believe in the self-adjusting quality of the economic system must rest the weight of their argument; though I am not aware that they have done so. If the quantity of money is itself a function of the wage- and price-level, there is indeed, nothing to hope in this direction. But if the quantity of money is virtually fixed, it is evident that its quantity in terms of wage-units can be indefinitely increased by a sufficient reduction in money-wages; and that its quantity in proportion to incomes generally can be largely increased, the limit to this increase depending on the proportion of wage-cost to marginal prime cost and on the response of other elements of marginal prime cost to the falling wage-unit.

We can, therefore, theoretically at least, produce precisely the same effects on the rate of interest by reducing wages, whilst leaving the quantity of money unchanged, that we can produce by increasing the quantity of money whilst leaving the level of wages unchanged. It follows that wage reductions, as a method of securing full employment, are also subject to the same limitations as the method of increasing the quantity of money. The same reasons as those mentioned above, which limit the efficacy of increases in the quantity of money as a means of increasing investment to the optimum figure, apply mutatis mutandis to wage reductions. Just as a moderate increase in the quantity of money may exert an inadequate influence over the long-term rate of interest, whilst an immoderate increase may offset its other advantages by its disturbing effect on confidence; so a moderate reduction in money-wages may prove inadequate, whilst an immoderate reduction might shatter confidence even if it were practicable.

There is, therefore, no ground for the belief that a flexible wage policy is capable of maintaining a state of continuous full employment; -- any more than for the belief than an open-market monetary policy is capable, unaided, of achieving this result. The economic system cannot be made self-adjusting along these lines.

If, indeed, labour were always in a position to take action (and were to do so), whenever there was less than full employment, to reduce its money demands by concerted action to whatever point was required to make money so abundant relatively to the wage-unit that the rate of interest would fall to a level compatible with full employment, we should, in effect, have monetary management by the Trade Unions, aimed at full employment, instead of by the banking system. Nevertheless while a flexible wage policy and a flexible money policy come, analytically, to the same thing, inasmuch as they are alternative means of changing the quantity of money in terms of wage-units, in other respects there is, of course, a world of difference between them. Let me briefly recall to the reader's mind the three outstanding considerations.

(i) Except in a socialised community where wage-policy is settled by decree, there is no means of securing uniform wage reductions for every class of labour. The result can only be brought about by a series of gradual, irregular changes, justifiable on no criterion of social justice or economic expediency, and probably completed only after wasteful and disastrous struggles, where those in the weakest bargaining position will suffer relatively to the rest. A change in the quantity of money, on the other hand, is already within the power of most governments by open-market policy or analogous measures. Having regard to human nature and our institutions, it can only be a foolish person who would prefer a flexible wage policy to a flexible money policy, unless he can point to advantages from the former which are not obtainable from the latter. Moreover, other things being equal, a method which it is comparatively easy to apply should be deemed preferable to a method which is probably so difficult as to be impracticable.

(ii) If money-wages are inflexible, such changes in prices as occur (i.e. apart from "administered" or monopoly prices which are determined by other considerations besides marginal cost) will mainly correspond to the diminishing marginal productivity of the existing equipment as the output from it is increased. Thus the greatest practicable fairness will be maintained between labour and the factors whose remuneration is contractually fixed in terms of money, in particular the rentier class and persons with fixed salaries on the permanent establishment of a firm, an institution or the State. If important classes are to have their remuneration fixed in terms of money in any case, social justice and social expediency are best served if the remunerations of all factors are somewhat inflexible in terms of money. Having regard to the large groups of incomes which are comparatively inflexible in terms of money, it can only be an unjust person who would prefer a flexible wage policy to a flexible money policy, unless he can point to advantages from the former which are not obtainable from the latter.

(iii) The method of increasing the quantity of money in terms of wage-units by decreasing the wage-unit increases proportionately the burden of debt; whereas the method of producing the same result by increasing the quantity of money whilst leaving the wage unit unchanged has the opposite effect. Having regard to the excessive burden of many types of debt, it can only be an inexperienced person who would prefer the former.

(iv) If a sagging rate of interest has to be brought about by a sagging wage-level, there is, for the reasons given above, a double drag on the marginal efficiency of capital and a double reason for putting off investment and thus postponing recovery...

Risk, Uncertainty and Irreversibility, Decision Theory, and Global Warming

Alex Tabarrok protests that you should not do expensive and irreversible things before you know what is going on. I think that there is an important distinction to be drawn in decision theory between (a) risk on the one hand, and (b) the interaction of uncertainty and irreversibility on the other.

In general, briefly: As a baseline, you should start out thinking that you should do what it would be best to do if your central-case forecast were to come true. And then:

1. Relative to that baseline, you should do more of things that reduce risks: a prudent portfolio should have some gold or silver in it (not much!) to guard against the potential inflationary collapse of fiat money systems and other political risks.
2. Relative to that baseline, you should do less of things that increase risk: invest less in risky enterprises, and dump less carbon dioxide and methane into the atmosphere.
3. You should delay doing expensive and irreversible things until you are confident that they are needed.
4. You should prevent processes that could cause irreversible or incredibly-expensive-to-repair damage until you are confident that their effects will be harmless.

The first two principles are the appropriate ones for dealing with risk. The last two principles are appropriate for dealing with the interaction of uncertainty and irreversibility.

Thus if congress were on the verge of banning open-carbon-cycle power generation and vehicle operation in 2010, I would think that that was a bad idea because of principle 3. But congress isn't. The uttermost limit of political feasibility over the next decade is a fifty-cents-a-gallon-equivalent tax on carbon emissions. And that seems well-covered by principle 2.

Here's Alex:

Marginal Revolution: Uncertainty is the Friend of Delay: Regarding global warming and what to do about it, Brad DeLong approvingly paraphrases Tyler, "uncertainty is not the friend of doing nothing." Bearing in mind the obvious dangers of contradicting both Brad and Tyler let me counter with "uncertainty is the friend of delay."... Suppose... that we are uncertain... there is a strong argument for delay. The argument comes from option pricing theory applied to real options. A potential decision is like an option, making the decision is like exercising the option. Uncertainty raises the value of any option which means that the more uncertainty the more we should hold on to the option, i.e. not exercise or delay our decision....

Applying the theory to global warming isn't easy because our decisions involve many options and exit costs; but if we think that our knowledge of the extent, cost, cause and solutions to global warming are increasing at a faster rate than the danger of global warming then delay of any major decision is a rational policy at the present time.

And Tyler Cowen rebuts:

I see the difference between us as such: you write: "making the decision is like exercising the option...". But many costly decisions increase option value. Such decisions include more R&D, more savings, a compensation fund, investment in greater economic flexibility and response capabilities, and so on. Anything we do counts as a "decision," so we cannot postpone decisions per se. We can and should postpone relatively irrevocable decisions, and under that heading "consumption" is a prime candidate. The correct implication of your argument is that when uncertainty increases, we should (under some specific conditions outlined in my post) consume less, which is close to my point of view...

Victor argues:

I agree on the difficulty in applying option theory to global warming policy. There’s a myriad options with varying cost/lead-time trade-offs. The uncertainties are considerable, have many dimensions, and the flow of information to resolve them is stochastic. But option theory doesn’t always argue for delay. If your doctor said there was a chance you had a flesh-eating bacterial infection that would take several days for the tests to resolve, would you delay or accept treatment? It’s a no-brainer if the treatment was just taking a bottle of antibiotics, but if your arm is turning red immediate hospitalization for intravenous antibiotics might be the optimum strategy. Acting now can preserve options going forward. At a simple level for communication, an insurance framing of the problem works better for me.

Moving to Opportunity Twelve Years Later

The excellent Jon Hilsenrath and Rafael Gerena-Morales have an article http://online.wsj.com/article/SB116727318376761110-email.html about the Clinton-era "Moving to Opportunity" pilot program. And, coincidentally, a correspondent asks me this evening if it is indeed the case that high relative poverty among African-Americans today is principally due to residential segregation, and whether residential segregation is in turn principally due to African-Americans' preference to live near other African-Americans.

There are certainly other powerful causes of residential segregation. You can see some of them at work in this gem from the 1994 Wall Street Journal about "Moving to Opportunity" that I have filed away:

"Clinton's Wrecking Ball for the Suburbs": By James Bovard: 4 August 1994: Pamela Price was delighted when she found she could use her new government housing voucher to move into a luxurious apartment complex with a heated swimming pool, four spas, six tennis courts and two air-conditioned racquetball courts.... Ms. Price is the beneficiary of a federal housing policy called "income integration" -- which consists largely of moving welfare recipients into affluent neighborhoods, theoretically to improve their prospects of leading safe and productive lives. But these Section 8 vouchers from the Department of Housing and Urban Development end up sowing chaos in suburban neighborhoods, rewarding dependence on the state and alienating middle class Americans who end up paying for recipients to live in apartments that they themselves could not afford. Amazingly, Congress is on the verge of passing a $60 billion housing act that will greatly expand this program....

At Manhattan Plaza in New York City, Section 8 pays for apartments with wood parquet floors and on-premise swimming, racquet and tennis facilities.... Section 8 certificates were used to entitle welfare families to move into an apartment complex in Silver Spring, Md., that includes a heated pool with water jets, microwave ovens and "deluxe modern kitchens with convenient breakfast bars."... HUD raised Section 8 subsidy levels in Plano, Texas, to $684 for a two-bedroom and $900 for a three-bedroom apartment.... [T]he median rent in Plano, Texas, is only $586 a month....

The unfairness of this hasn't gone unnoticed... outraged private citizens.... Nevertheless, Housing Secretary Henry Cisneros is expanding the Section 8 program.... The flood of former public housing residents has turned parts of some nearby towns into a "Section 8 corridor." Officials in Pacesetter, Ill., claimed that "a sudden influx into the neighborhood of subsidized families about six years ago turned a borderline neighborhood into a slum."...

[P]ublic controversies over misbehaving Section 8 recipients have exploded.... [C]rime and declining property values caused by Section 8 clients have become a major political issue.... the irresponsibility of a privileged class of renters... Trouble-making public-housing residents will not be transformed into angels simply by moving them into different neighborhoods...

The "Moving to Opportunity" pilot program was never expanded. Let me give the mike to Jon Hilsenrath and Rafael Gerena-Morales:

How Much Does A Neighborhood Affect the Poor?: JON E. HILSENRATH and RAFAEL GERENA-MORALES: December 28, 2006: The Moving to Opportunity program, started in 1994, was a mix of liberal and conservative policy: hatched by Republican Jack Kemp and implemented by the Clinton administration. But later that year, in Baltimore -- one of the five cities participating -- suburbanites rebelled against the idea that poor families from troubled environments would be flocking to their neighborhoods. Plans to move additional families were canceled...

And the results from follow-ups are that the effects of "Moving to Opportunity" were mixed--good for girls, bad for boys:

How Much Does A Neighborhood Affect the Poor?: JON E. HILSENRATH and RAFAEL GERENA-MORALES: December 28, 2006: Can a family escape poverty by getting out of the neighborhood where it takes root?... About two million families currently use "Section 8" vouchers that allow them to move with subsidized rent.... Beginning in 1994, the federal government offered a lottery for housing vouchers to families in five major cities. Families were randomly assigned to different groups. One group received vouchers to be used specifically to subsidize rents in neighborhoods where poverty was low. About 860 families eventually moved. Another group, of 1,440 families, wasn't offered vouchers and, initially at least, stayed in high-poverty neighborhoods. Researchers have since tracked and compared the fortunes of the two groups.

The program, called Moving to Opportunity, was administered by HUD.... Earnings of families who relocated to low-poverty areas averaged just $9,376 in 2001, a half-decade after they moved. That's just 3% higher than the $9,108 earned by those in the control group, a statistically insignificant difference.... In a 2002 survey of 3,521 adults in the program -- most of them women -- 18.5% of people who moved to low-poverty neighborhoods suffered bouts of major depression, significantly lower than the 26.3% who felt depressed in the control group....

Among nearly 800 teenage girls, 83% of those who relocated to low-poverty neighborhoods had either graduated from high school or were still in school five years after the move, compared with 71% in the control group. Alcohol use was lower. Arrest rates were lower. And mental-health measures improved. Away from the violence of the ghetto, girls seemed to flourish.

Teenage boys didn't. School participation deteriorated and property-crime rates, mental distress, and smoking all increased among those who moved with the vouchers, compared with teenage boys in families who didn't move. For property crime, there were 58 arrests for every 100 boys who moved to low-poverty neighborhoods, compared with 22 arrests for every 100 boys in the control group.... [R]esearchers expected they would respond well to safer, more-affluent environments. Instead, many seemed to feel isolated in the new places, or harassed by police, and they acted out. "It seems like the boys were less able to make social connections to their new areas," says Jeffrey Kling, a Brookings Institution economist who designed many of the Moving to Opportunity studies and interviewed participants...

The Stern Review on Global Climate Change Once Again

Bill Nordhaus has placed his critique of the Stern Review on Global Climate Change (on the internet at http://www.hm-treasury.gov.uk/independent_reviews/stern_review_economics_climate_change/sternreview_index.cfm) in yellow covers: it is now NBER working paper 12741 at http://papers.nber.org/papers/w12741.pdf (available for free at http://nordhaus.econ.yale.edu/SternReviewD2.pdf). Nordhaus is extremely smart, extremely hard-working, extremely knowledgeable on this issue, and plays it straight. Nevertheless, I find myself dissatisfied.

I am not dissatisfied with where Nordhaus gets: I believe that he is right in assessing that Stern's conclusions depend on assumptions about what we today owe the future that are not obvious, that are at least debatable, and that I do not think I share.

I am dissatisfied with how Nordhaus gets there.

Specifically, the hackles on my back rise when Nordhaus writes:

Suppose that scientists discover that that a wrinkle in the climatic system will cause damages equal to 0.01 percent of output starting in 2200 and continuing at that rate thereafter. How large a one-time investment would be justified today to remove the wrinkle starting after two centuries? The answer is that a payment of 15 percent of world consumption today (approximately $7 trillion) would pass the Review’s cost-benefit test. This seems completely absurd. The bizarre result arises because the value of the future consumption stream is so high with near-zero discounting that we would trade off a large fraction of today’s income to increase a far-future income stream by a very tiny fraction. This bizarre implication reminds us of Koopmans’s warning quoted above to proceed cautiously.... The large damages from global warming reflect large and speculative damages in the far-distant future; the impacts now, as in today, are small; and, as I will suggest below, the 20 percent cut in consumption from global-warming might be reduced by an order of magnitude if alternative assumptions about discounting are used...

The only thing I agree with is the final lines: our conclusions about the steps we should take immediately to deal with global climate change would be reduced by an order of magnitude if alternative (and perhaps, I think, better) assumptions about discounting are used. But the rest:

My first problem is with the framing, which Nordhaus uses to generate phrases like: "bizarre result," "completely absurd," and "bizarre implication." A more neutral way of framing the issue would be to say that the Stern Review estimates that each $1 we invest today in reducing the impact of global warming will improve the state of things in 2200 by $36 (adjusted for inflation) then. Is that a good investment for us to make on behalf of our great-great-grandchildren? Perhaps, perhaps not. 2200 is far away. But a 36-to-1 payoff is a big one. On the other hand, people in 2200 will probably be richer and have better technologies than we do; that is a reason to think that efficiency should not be considered separately from issues of distribution, for we don't usually ask the poor (i.e., us now) to pay to improve the condition of the rich (i.e., them in the future).

The question of whether we today should, or are morally obligated to, make the 36-to-1 two-century investments that the Stern Review is debatable. It is worth doing if we have a hurdle rate for such investments of less than 1.8% per year or so. I think our hurdle rate should probably be bigger than that, but I am not sure. I am, however, sure that Stern's position that we should be making such high-payoff long-term investments is neither "completely absurd," "a bizarre result," nor "a bizarre implication."

My second problem is with Nordhaus's rhetorical attempt to shrink the magnitude of the potential problem by talking about the "large and speculative damages in the far-distant future." The implicit economics underlying this rhetoric is that because investing in controlling global warming is a risky and uncertain proposition the appropriate hurdle rate to apply is greater than the hurdle rate on safe investments like long-term inflation-indexed government bonds. But this economics is simply wrong. As Tyler Cowen puts it, uncertainty is not the friend of doing nothing. Investments in controlling global warming are not risk-increasing but risk-reducing ones: they are more like buying insurance than like speculating on unproven technologies. The appropriate hurdle rate is thus lower, not higher, than that for sure things.

And this leads to my third problem with Nordhaus: his claim that:

The Review’s unambiguous conclusions about the need for extreme immediate action will not survive the substitution of discounting assumptions that are consistent with today’s market place...

I don't see that at all. The 20-year inflation-indexed U.S. government bond interest rate is currently 2.1% per year. That is today's marketplace. The appropriate discount rate to be used for long-term risk-reducing "insurance" investments is less than the risk-free rate, and seems plausibly less than 1.8%. I don't buy the assumption that our judgments should be ruled by the prevailing configuration of financial market prices--I am not confident that the market is without failure along this dimension. But Nordhaus apparently does. And as best as I can see the discounting assumptions in today's marketplace are entirely consistent with the conclusions of the Stern Review.

John Quiggin has an excellent discussion of all these issues and more at: http://johnquiggin.com/wp-content/uploads/2006/12/sternreviewed06121.pdf.

And my not-completely-informed views about the economics of controlling global warming are:

---

What Do We Owe Our Great Grandchildren?

What do we owe our great-great-great grandchildren? What actions are we obligated to do now in order to diminish the risks to our descendants and our planet from the increasing likelihood of significant global warming and its associated climate change?

Everybody--well, almost everybody: ExxonMobil, U.S. Vice President Richard Cheney, and their paid-for servants and deluded acolytes are exceptions or pretend to be exceptions--understands that when human burn hydrocarbons carbon dioxide goes up into the atmosphere, where it acts like a giant blanket, absorbing infrared radiation coming up from below and warming the earth.

Everybody understands that we really do not know how much global warming a given amount of extra carbon dioxide produces. We have models, we have forecasts, we have projections, but global warming might be a much smaller and might be a much larger problem than the central-case projections of climate models suggest. Everybody--well, almost everybody: ExxonMobil, U.S. Vice President Richard Cheney, and their paid-for servants and deluded acolytes are exceptions or pretend to be exceptions--understands that here uncertainty is not our friend, and certainly not an excuse for inaction. Uncertainty about its effects should lead us to do more to guard against global climate change than if we knew global warming would proceed exactly as the central-case projections forecast.

Everybody--well, almost everybody: ExxonMobil, U.S. Vice President Richard Cheney, et cetera, et cetera--understands that the world's governments, non-profit institutions, and energy companies ought to be spending a much bigger fortune than they currently are on research: research into technologies that generate power without adding carbon dioxide to the atmosphere, research into technologies that such carbon out of the atmosphere into forests or oceans, research into technologies that cool the earth by reflecting more of the sunlight that lands on us.

Everybody--well, almost everybody: U.S. Vice President Richard Cheney, et cetera, et cetera--understands that the burden of dealing with global climate change over the next two generations should be carried by the rich countries of the world. They got to take an easy carbon emissions-intensive path to industrialization and riches. It looks like China, India, and company will not be able to take such an easy path, and it would be unfair to penalize them for the loss of the easy hydro-carbon burning road.

Everybody--well, almost everybody, et cetera, et cetera--understands that now is the time to build the international institutions that will manage our reactions to global climate change over the next several centuries. Now is not the time to disrupt these institutions, or to prevent their creation.

What there is real dispute about is what else we should be doing right now and in the next decade. We economists like to think of things in terms of prices. And when we economists see something going wrong in the sense of having destructive side-effects, we like to tax it. Taxing it makes the individuals who are undertaking actions feel in their wallets the destruction they are causing elsewhere. Maybe the action is still worth doing, and maybe not. Imposing a tax--imposing the right tax--on those who are, say, driving low-mileage SUVs is a way of harnessing the collective intelligence of humanity to deciding in which case the bad side-effects are a reason to stop. But it has to be the right tax.

An SUV going ten miles in the city and burning a gallon of gasoline pumps about 3 kilograms--6.5 pounds--of carbon in the form of carbon dioxide into the atmosphere. Should the extra tax on this--and on all carbon emissions--appropriate for global warming be on the order of five cents a gallon, fifty cents a gallon, or a dollar fifty a gallon? Our views will change as we learn more, but at the moment whether the tax should be five or fifty cents a gallon hinges on a question of moral philosophy: how much do we believe that we owe our distant descendents?

Australian economist John Quiggin has a very illuminating discussion on his website http://johnquiggin.com/wp-content/uploads/2006/12/sternreviewed06121.pdf. The Stern Review on Global Climate Change (on the internet at http://www.hm-treasury.gov.uk/independent_reviews/stern_review_economics_climate_change/sternreview_index.cfm) which comes down more on the side of fifty cents a gallon, immediately, does so because they project that spending today to reduce carbon emissions is a very good investment for the future. If the world grows in per capita income at about 2% per year, a marginal expenditure of roughly $70 today in cutting carbon emissions would be worth it if it were to enrich the world of 2100 by about an extra $500 of year-2006 purchasing power, once all the damages to the world economy and environment from global warming, costs of adjustment, and so on are taken into account. This looks like a very good deal to Nick Stern and his team.

On the other hand, critics point out that the world today is poor: average GDP per capita at purchasing power parity today is roughly $7000. We expect improvements in and the spread of technology to make the world of 2100, at a 2% per year growth rate much richer than the world of today: $50,000 per capita of year-2006 purchasing power. We today can use the marginal $70 per capita, critics say, much more than the richer people of 2100 will need the $500 they would gain from not having to suffer from the effects of global climate change.

What critics don't often say is that the same logic applies to the world today. The U.S., Japan, and Western Europe today have average incomes of roughly $40,000 per capita. The poorer half of the world's population today have incomes of less than $6,000 per capita. I believe that the same logic which says that we today need our $70 more than the people of 2100 need an extra $500 also tells us that we ought to tax the world's rich in the OECD more and more to fund world development as long as each extra $500 in first-world taxes generates even as little as $70 in extra poor-periphery incomes. If we in the world's rich now are stingy toward the (likely to be much richer) future and want to leave them our environmental mess to deal with, we should be lavish toward our poor brothers and sisters today. If we today are stingy toward our poor brothers and sisters now, we should be lavish toward our descendents.

If you protest that distributional considerations militate against our spending a lot today to reduce global warming risks to the future, you had better be enthusiastic about massive programs to reduce current U.S. and global inequality. At least, that is what you had better be if your positions are based on some moral principle--rather than on the principle that what we have, we hold, and nobody is going to pry it from our hands.

Price as a Signal of Quality?

Sometimes a high price is just a high price:

BoingBoing: Chocolate-obsessed blogger's exposé on costly candy, Noka: BB reader Egg Syntax says,

Noka makes obscenely expensive chocolate ($2080/lb in small doses). This superb exposé from a very, very serious chocolate geek reveals that they buy widely-available chocolate and remold it at up to a 6,956% markup. Excellent reading and a good reminder that price is often not proportional to quality.

Link to "What's Noka Worth?" on dallasfood.org.

I can't speak to the veracity of the claims in this exhaustive (10! part!) investigative series, but I couldn't stop reading it. I don't even care much about the subject in general -- I hardly eat sweets at all, myself -- but the scientific references and geeky specificity made this a riveting read. It's more about economics and the psychology of luxury goods than chocolate alone...

Paramus, NJ

Tyler Cowen directs us to Paramus, NJ:

In This Town, Even a Mall Rat Can Get Rattled - New York Times By KEN BELSON: It is fitting that the first store drivers heading south on Route 17 see as they enter town is a Stop & Shop. After all, Paramus is one of the nation's strongest shopping magnets, generating roughly $5 billion a year in retail sales.... [F]ew places rival the sheer concentration of stores in this otherwise unremarkable suburb 18 miles northwest of Times Square. In an already densely populated state, Paramus has more parking spots than people. Four major malls and dozens of smaller shopping centers are packed into 10 square miles.... The town has 27,000 residents, and about 2,700 stores. There is a Saks Fifth Avenue and a Sears; at least two dozen chains, including Borders, Old Navy and Macy's, have more than one outlet within Paramuss boundaries.

It is a Faustian bargain that brings 200,000 cars a day into town during December, turning the roads into virtual parking lots, but also keeps property tax rates in Paramus relatively low -- $1.55 per $100 of assessed value, compared with $3.88 in Maywood, the next town over. And there is no sign of letup: two of the four malls are spending $100 million each to spruce themselves up, big-box stores are sprouting where strip malls and bygone department stores once sat, and traffic seems to get worse each year....

Residents have groaned about the traffic for years, but largely put up with it because of how much money visitors spent in the town's stores. They also won reprieves on Sundays, when the town prohibits sales of practically everything, making Paramus a virtual ghost town...

The fact that Paramus grows even with Sunday closures is, I think, the most fascinating thing in the article>

Competition for American Producers from High-Cost First-World Labor

Toyota Rising:

Toyota Could Become World's No. 1 Car Maker in 2007 - WSJ.com: By YOSHIO TAKAHASHI and ANDREW MORSE December 22, 2006 12:12 p.m. NAGOYA, Japan -- Toyota Motor Corp. said Friday it aims to produce 9.42 million vehicles next year, a level that will likely vault it past struggling U.S. auto giant General Motors Corp. as the world's top car maker.

Toyota's new production targets represent a 4% increase from the 9.04 million vehicles the Nagoya-based company expects to produce in 2006. Indicative of Toyota's increasing reliance on foreign markets: Overseas production will jump 8% to 4.27 million vehicles, while domestic production will rise just 1% to 5.15 million vehicles.

GM, which hasn't released a forecast for next year's production, expects to build 9.18 million vehicles in 2006, up from the 9.11 million vehicles it produced in 2005.

Though widely expected, Toyota's official production plans highlight the diverging fortunes of the world's two truly global car companies. Toyota has ramped up production in North America, Asia and other parts of the world to take advantage of surging demand for its fuel-efficient passenger cars, such as the Camry and the hybrid Prius. It plans to open new plants in China, Thailand and Russia to meet demand for its cars.

Meanwhile, GM is in the midst of a painful restructuring after racking up a $10 billion loss last year. The Detroit-based company has already posted $3 billion in losses this year as sales of big sport-utility vehicles and trucks falter amid persistently high oil prices. The company plans to shutter more factories as part of its restructuring.

Jared Bernstein Writes in on Alan Reynolds

Hoisted from comments:

Grasping Reality with Every Limb: Brad DeLong's Semi-Daily Journal: Intellectual Garbage Collection: The Unreliability of Alan Reynolds: The problem with Reynold's critique is that he latches on to a few correct points about the limitations of the IRS SOI data, then he:

• ignores the work others have done to correct these problems;
• way overstates the bias from these problems;
• ignores other data that do not suffer from these problems; *having ignored all the inconvenient evidence to the contrary, misleadingly concludes there's no inequality problem.

He's not nuts. Some changes in inequality as measured by the IRS SOI data (the main source for Pik&Saez) are induced by income shifting due to tax changes. But while that can explain a spike in one year to the next, it doesn't explain longer trends in income concentration found in that and every other data set we have.

Also, analysts at IRS have worked hard to try to deal with some of these shortcomings. Take a look at this paper--the figures and tables clearly show an increase in inequality since 1988 income measures that correct for some of the inconsistencies.

http://www.irs.gov/pub/irs-soi/06asapetska.pdf

I won't belabor the CBO points others have made, other than to say that these data go the furthest towards addresses all the concerns raised by Reynolds. Sorry if these tables don't align correctly--I just pasted them in from excel.

They show real household income changes, since 1988. 2000 was an economic peak and the year before the bursting financial bubble took a big bite out of high incomes (large capital losses), so you see more inequality if you stop there. But I've include the latest CBO year too--02-03--to show that the old pattern is returning.

Pretax        1988-2000  1988-2003  2002-2003
Bottom fifth     15.6%      9.6%      -1.3%
Mid fifth        11.2%      7.5%      -0.4%
Top fifth        35.3%     19.0%       2.3%
Top 1%           68.4%     25.1%       5.9%


Posttax       1988-2000  1988-2003  2002-2003
Bottom fifth     17.7%     13.7%      -1.4%
Mid fifth        12.9%     13.1%       0.7%
Top fifth        30.9%     20.0%       3.9%
Top 1%           60.4%     22.1%       8.2%

Source: CBO

You simply can't write about this stuff in good faith and leave all this information out, unless you're trying to push an agenda that's dependent on misleading.

Gordon's Notes Rents a Car

The struggle over price discrimination continues:

Gordon's Notes: Car rental: enter gold number, price jumps $200: The 'arms race' of modern pricing continues apace. I priced a personal 5 day van rental twice on Travelocity - once with no loyalty number added and again with the loyalty number.The price of loyalty, was a $200 increase. Yes, I would pay Avis for the joy of being a loyal customer.

To their credit Travelocity listed Avis twice after I entered my registration number, once at the disloyal price and again at the inflated loyal price.These days it is increasingly foolish to do any price negotiation directly with a travel related vendor.

Intellectual Garbage Collection: The Unreliability of Alan Reynolds

A correspondent asks why she should presume that Alan Reynolds is wrong when he claims that statistics showing rising inequality are cynically and fraudulently manipulated--that, as Reynolds writes in the extremely bad and low-quality intellectual neighborhood that is the Wall Street Journal editorial page:

Senator-elect Jim Webb recently complained on this page of an "ever-widening divide" in America, claiming "the top 1% now takes in an astounding 16% of national income, up from 8% in 1980." Those same figures have been repeatedly echoed in all major newspapers, including this one. Yet the statement is clearly false.... The top 1% of tax returns accounted for 10.6% of personal income in 2004. But that number too is problematic. The architects of these estimates, Thomas Piketty of École Normale Supérieure in Paris and Emmanuel Saez of the University of California at Berkeley...

The incessantly repeated claim that income inequality has widened dramatically over the past 20 years is founded entirely on [Piketty and Saez's] seriously flawed and greatly misunderstood estimates of the top 1%'s alleged share of something-or-other. The politically correct yet factually incorrect claim... fill[s] a psychological rather than logical need. Some economists [i.e., Thomas Piketty and Emmanuel Saez] seem ready and willing to supply whatever is demanded. And there is an endless political demand for those able to fabricate problems...

The first reason is that Alan Reynolds is playing intellectual three-card monte. He opens his op-ed by attacking Senator-elect Webb's belief that income inequality has risen steeply since 1980, but in the body of the op-ed--as he writes to economist Mark Thoma's Economist's View--"[I said that] there is no clear evidence of a sustained and significant increase in inequality since 1988.... I very carefully did not say there was no such evidence about 1981-87..." That is sufficient reason right there.

However, there are more reasons. We have experience with Alan Reynolds. The last time I noticed Alan Reynolds on inequality was last March, when he wrote:

The Top 10 Percent, Again: [T]he eternal ambition of Robin Hood economics is to steal money from those who earned it and "redistribute" it to those with more political clout. When in pursuit of such a worthy cause, it appears quite respectable to torture innocent statistics. Those deploying statistics in this campaign take special care to select their favorites. Washington Post columnist Steven Pearlstein.... "in 1979, the top 10 percent of households earned 33 percent of all pretax income. By 2003, their share had climbed to 44 percent. The shares of everyone else declined." Where did [Pearlstein's] numbers come from? They certainly didn't come from the Census Bureau.... Pearlstein's statistics obviously didn't come from the CBO... [which] estimates that in 1979 the top 10 percent of households earned 39.3 percent of all pretax income. By 2003, their share had dropped to 38.3 percent (or 33.7 percent after taxes).... It is easy to see why the CBO is not Pearlstein's favorite source of income statistics...

At the time Reynolds's claim that CBO showed no rise in household income inequality since 1979 surprised me, because I had read a report by the careful Isaac Shapiro and Joel Friedman of CBPP on the CBO study which said something very different:

New CBO Data Indicate Growth in Long-Term Income Inequality Continues, 1/29/06: CBO issues the most comprehensive data available on changes in incomes and taxes for different income groups.... The new CBO report highlights the degree to which income gains have become increasingly concentrated at the top of the income scale over the past two and a half decades.... The top one percent of the population received 12.2 percent of national after-tax income in 2003, up from its already-large 7.5 percent share in 1979...

Sure enough, Reynolds is wrong. CBO estimated that for all households the income of the top tenth in 2003 was 37.2%, compared to 30.5% in 1979. Reynolds's 39.3% and 38.3% came not from "Table 1: All Households", but instead from Table 3, "Elderly Households".

As Paul Krugman wrote at the time, defending Pearlstein:

: [F]or [Pearlstein's] pains, he was smeared by someone at the Cato Institute who needs help -- technical help. Hint to Alan Reynolds: check which table you're looking at before claiming that Congressional Budget Office data refute a statement you don't like...

Emmanuel Saez's office is seven doors north of mine on the west corridor of Evans Hall. He is an extremely thoughtful, intelligent, careful, and fair-minded economist, trying his very best to tell it straight. He deserves much better than to be smeared by people who are not careful--who get their tables mixed up--and are not fair-minded--i.e., "I very carefully did not say there was no such evidence about 1981-87."

---

UPDATE: More "Unreliability":

Back in 1992, in an article, "The Rich, the Right, and the Facts" for the American Prospect http://www.prospect.org/print/V3/11/krugman-p.html, Paul Krugman tangled with Alan Reynolds's earlier incarnation--the one in which he said that claims that the top 1% share of wealth and income had risen over 1983-1989 "can't really be taken seriously." Quite a difference from today, when Reynolds writes:

[I said that] there is no clear evidence of a sustained and significant increase in inequality since 1988.... I very carefully did not say there was no such evidence about 1981-87...

Here is Paul:

The Unofficial Paul Krugman Web Page: Wealth is typically much more concentrated than income.... [B]ecause wealth is so concentrated, it is difficult to measure accurately from sample surveys: a random survey of a few hundred or even a few thousand people will contain only a handful of really wealthy people.

Nonetheless, researchers at the Federal Reserve Board have tried to use sophisticated sampling procedures to deal with this problem.... In March, 1992 they released a working paper that showed a sharp increase in the concentration of wealth even since 1983, with the share of the top 1 percent of families rising from 31 to 37 percent....

When the Federal Reserve wealth study came out, it was immediately attacked by Alan Reynolds in the Wall Street Journal.... Reynolds's main argument was that the study, based on a survey of 3,000 families, could not be reliable about the top 1 percent, since thirty families is too small a sample. This was an interesting reaction, since the Fed study carefully explains that they used a two-stage procedure... [with] over 400 families in the top 1 percent. In fact, the study is written in the form of a working paper on statistical methodology, and the issue of sample size is raised immediately. One can only conclude that Reynolds did not bother to read the study before attacking it....

The wealth dispute was a minor part of the distribution controversy, but it was revealing about the desperation, unscrupulousness, and sheer lack of competence of today's conservatives...

---

And Paul is right. Here is Reynolds:

"Who Gained in the 1980s? Everybody" By Alan Reynolds. 1,344 words. 7 May 1992. The Wall Street Journal. PAGE A14. English (Copyright (c) 1992, Dow Jones & Co., Inc.): Jerry Brown was incensed that "the top 1% have more wealth than the bottom 90%."... The source of Gov. Brown's remark was a New York Times story, loosely based on a Federal Reserve survey. This front-page story claimed the wealthiest 1% had 37% of all net worth in 1989, up from 31% in 1983.... Estimates of the share of wealth owned by the top 1% can't really be taken seriously. After all, 1% means just 31 families among the 3,143 sampled. Some years ago, the late Warren Brookes uncovered that a similar Fed survey had been grossly distorted by an error involving a single individual. This time, perhaps the survey stumbled upon Donald Trump, Leona Helmsley or Mike Milken (in which case a newer survey might already look a bit different)...

Don't Believe It, Matt! Income Inequality Did Rise! A Lot!

Matthew Yglesias falls into a trap. He makes the mistake of crediting an empirical claim--in this case Alan Reynolds's claim--on the editorial page of the Wall Street Journal. The claim is that there is:

http://online.wsj.com/article/SB116607104815649971.html?mod=googlenews_wsj no clear trend toward increased inequality after 1988 in the distribution of disposable income, consumption, wages or wealth. The incessantly repeated claim that income inequality has widened dramatically over the past 20 years is founded entirely on [Piketty and Saez's] seriously flawed and greatly misunderstood estimates of the top 1%'s alleged share of something-or-other. The politically correct yet factually incorrect claim that the top 1% earns 16% of personal income appears to fill a psychological rather than logical need. Some economists seem ready and willing to supply whatever is demanded. And there is an endless political demand for those able to fabricate problems for which higher taxes are, of course, the preferred solution. In Washington higher taxes are always the solution; only the problems change.

Matthew writes:

Matthew Yglesias / proudly eponymous since 2002: Alan Reynolds' argument that we've been mis-measuring inequality by using flawed tax return data.... [T]his seems like an important project and I'll be eager to read the lengthier, non-op-ed form of his argument along with, one hopes, commentary on it from people better-equipped than I to evaluate the work...

Matthew thus forgets the two rules of reading the editorial page of the Wall Street Journal:

1. When you feel tempted to credit a surprising empirical claim found on the editorial page of the Wall Street Journal, your first step should be to lie down until that feeling goes away.
2. When you are tempted to believe that something on the editorial page of the Wall Street Journal brings new information to the party and sheds new light on the facts, don't.

One thing you can't learn from Reynolds's op-ed is that, back in their original paper that they wrote six years ago and published in 2003 http://elsa.berkeley.edu/~saez/pikettyqje.pdf, Thomas Piketty and Emmanuel Saez thoughtfully considered many of the claims made by Alan Reynolds. Here is some of what they wrote back then:

[W]e build new homogeneous series on top shares of pretax income and wages in the United States... based primarily on tax returns data published annually by the Internal Revenue Service... as well as on the large micro-files of tax returns released by the IRS since 1960.... We argue that both the downturn and the upturn of top wage shares seem too sudden to be accounted for by technical change alone. Our series suggest that other factors, such as changes in labor market institutions, fiscal policy, or more generally social norms regarding pay inequality may have played important roles in the determination of the wage structure. Although our proposed interpretation for the observed trends seems plausible to us, we stress that we cannot prove that progressive taxation and social norms have indeed played the role we attribute to them. In our view, the primary contribution of this paper is to provide new series on income and wage inequality.

One additional motivation for constructing long series is to be able to separate the trends in inequality that are the consequence of real economic change from those that are due to fiscal manipulation. The issue of fiscal manipulation has recently received much attention. Studies analyzing the effects of the Tax Reform Act of 1986 (TRA86) have emphasized that a large part of the response observable in tax returns was due to income shifting between the corporate sector and the individual sector [Slemrod 1996; Gordon and Slemrod 2000]. We do not deny that fiscal manipulation can have substantial short-run effects, but we argue that most long-run inequality trends are the consequence of real economic change, and that a short-run perspective might lead to attribute improperly some of these trends to fiscal manipulation....

[...]

[T]he evidence suggests that the twentieth century decline in inequality took place in a very specific and brief time interval. Such an abrupt decline cannot easily be reconciled with a Kuznets-type process. The smooth increase in inequality in the last three decades is more consistent with slow underlying changes in the demand and supply of factors, even though it should be noted that a significant part of the gain is concentrated in 1987 and 1988 just after the Tax Reform Act of 1986 which sharply cut the top marginal income tax rates (we will return to this issue)....

[...]

Our long-term series place the TRA86 episode in a longer term perspective. Feenberg and Poterba [1993, 2000], looking at the top 0.5 percent income shares series ending in 1992 (respectively, 1995), argued that the surge after TRA86 appeared permanent. However, completing the series up to 1998 shows that the significant increase in the top marginal tax rate, from 31 to 39.6 percent, enacted in 1993 on did not prevent top shares from increasing sharply. From that perspective, looking at Figures II and III, the average increase in top shares from 1985 to 1994 is not significantly higher than the increase from 1994 to 1998 or from 1978 to 1984. As a result, it is possible to argue that TRA86 produced no permanent surge in top income shares, but only a transitory blip. The analysis of top wage shares in Section IV will reinforce this interpretation. In any case, the pattern of top income shares cannot be explained fully by the pattern of top income tax rates....

[...]

From 1970 to 1984 the top 1 percent share increased steadily from 5 percent to 7.5 percent (Figure IX). From 1986 to 1988 the top shares of wage earners increased sharply, especially at the very top (for example, the top 1 percent share jumps from 7.5 percent to 9.5 percent). This sharp increase was documented by Feenberg and Poterba [1993] and is certainly attributable at least in part to fiscal manipulation following the large top marginal tax rate cuts of the Tax Reform Act of 1986 (see the discussion in Section III above). However, from 1988 to 1994, top wage shares stay on average constant, but increase very sharply from 1994 to 1998 (the top 1 percent wage share increases from 9 percent to 11 percent). While everybody acknowledges that tax reforms can have large short-term effects on reported incomes due to retiming, there is a controversial debate on whether changing tax rates can have permanent effects on the level of reported incomes. Looking at long-time series up to 1998 casts doubts on the supplyside interpretation that tax cuts can have lasting effects on reported wages.

Part of the recent increase in top wages is due to the development of stock options that are reported as wages and salaries on tax returns when they are exercised. Stock options are compensation for labor services, but the fact that they are exercised in a lumpy way may introduce some upward bias in our annual shares at the very top (top 0.1 percent and above). To cast additional light on this issue and on the timing of the top wage surge, we look at CEO compensation from 1970 to 1999 using the annual surveys published by Forbes magazine since 1971. These dataprovide the levels and composition of compensation for CEOs in the 800 largest publicly traded U. S. corporations.... Consistent with the evolution of top wage shares, average CEO compensation has increased much faster than average wage since the early 1970s. Therefore, the increase in pay gap between top executives and the average worker cannot be attributed solely to the tax episodes of the 1980s....

[...]

Similarly, the huge increase in top wage shares since the 1970s cannot be the sole consequence of technical change. First, the increase is very large and concentrated among the highest income earners. The fractiles P90–95 and P95–99 experienced a much smaller increase than the very top shares since the 1970s. Second, such a large change in top wage shares has not taken place in most European countries which experienced the same technical change as the United States. For example, Piketty [2001a, 2001b] documents no change in top wage shares in the last decades in France. DiNardo, Fortin, and Lemieux [1996] argue that changes in institutions such as the minimum wage and unionization account for a large part of the increase in U. S.... Changing social norms regarding inequality and the acceptability of very high wages might partly explain the rise in U. S. top wage shares observed since the 1970s...

Economist's View: An Interview With David Card

Mark Thoma sends us to An Interview With David Card. Definitely, definitely worth reading.

Thinking About the Minimum Wage

Macroblog provides an excellent reading list on: Modern Labor Economics And The Minimum Wage

Macro-International-Growth Lunch: Wed Dec 6 2006: U.C. Berkeley Department of Economics: Banerjee, Duflo, and Munshi (2003) "The (Mis)allocation of Capital"

Macro-International-Growth Lunch: Wed Dec 6 2006: U.C. Berkeley Department of Economics

Notes on Abhijit V. Banerjee, Esther Duflo, and Kaivan Munshi (2003) "The (Mis)allocation of Capital," Journal of the European Economic Association 1(2–3), 484–494 http://www.mitpressjournals.org/doi/pdf/10.1162/154247603322391125?cookieSet=1

How economists use the neoclassical benchmark:

• At Chicago: Assume that the economy is at the neoclassical benchmark, and demonstrate that whatever exists is, in some subtle sense, constrained Pareto-optimal efficient--except where ham-handed government intervention has caused messes.
• At Berkeley: Investigate the deviation from the neoclassical benchmark that can be caused by one single but significant market failure, demonstrate that this deviation matches up to some important feature of the real world, and demontrate that a clever, subtle, and strategic government intervention can move us to a situation that is constrained Pareto-optimal.

Banerjee, Duflo, and Munshi set out to hunt down this neoclassical benchmark, and show that the real world is so far from it that the benchmark's utility as a base of operations--in either the Chicago or the Berkeley sense--is... severely limited.

Their claim: capital markets in India simply don't work. Firms employing less than 50 people where the marginal product of capital is on the order of 100% per year can't get additional financing to exploit these opportunities.

---

And now to the paper: Abhijit V. Banerjee, Esther Duflo, and Kaivan Munshi (2003) "The (Mis)allocation of Capital.: Journal of the European Economic Association 1(2–3), 484–494 http://www.mitpressjournals.org/doi/pdf/10.1162/154247603322391125?cookieSet=1

Simple implications of the theory of credit markets:

• A firm is credit constrained if the marginal product of capital in the firm is higher than the rate of interest that firm is paying on its marginal rupee of borrowing.
• If a firm that is not credit constrained is offered some extra credit at a rate below what it is paying on the market, then the best way to make use of the new loan must be to pay down the firm’s current market borrowing, rather than to invest more.
• By contrast, a firm that is credit constrained will always expand its investment to some extent.
• For unconstrained firms, growth in revenue should be slower than the growth in subsidized credit.
• If we do not see a gap in these growth rates, the firm must be credit constrained.

Priority sector rules in India:

• All banks in India are required to lend at least 40 percent of their net credit to the “priority sector,” which includes small scale industry (SSI), at an interest rate that is required to be no more than 4 percent above their prime lending rate.
• In January, 1998, the limit on total investment in plants and machinery for a firm to be eligible for inclusion in the small scale industry category was raised from Rs. 6.5 million to Rs. 30 million. [Rs. 1 = $0.02; GDP/capita = Rs. 40,000 per year]

Data obtained from one of the better-performing Indian public sector banks:

• From the loan folders maintained by the bank.
• Data on profit, sales, credit lines and utilization, and interest rates.
• 253 firms (including 93 newly eligible firms
• Including 175 firms for which we have data from 1997 to 1999.
• We can allow small firms and big firms to have different rates of growth
• The rate of growth to differ from year to year
• We assume that there would have been no differential changes in the rate of growth of small and large firms in 1998, absent the change in the priority sector regulation.

The change had an impact:

• Credit limits granted to firms below Rs. 6.5 million in plant in machinery (henceforth, small firms) grew by 11.1 percent during 1997
• Credit limits granted to firms between Rs. 6.5 million and Rs. 30 million (henceforth, big firms) grew by 5.4 percent.
• In 1998, after the change in rules, small firms had 7.6 percent growth while the big firms had 11.3 percent growth.
• By 1999 new equilibrium.

Table 1: http://delong.typepad.com/images/20061206_misallocation_image003.png

Results

• Bank credit as the outcome for the firms where there was a change in credit limit: The coefficient of the interaction BIG-POST is 0.24, with a standard error of 0.09.
• Whether or not a file is brought out for a change in limit has nothing to do with the needs of the firm, but the internal dynamics of the bank.
• This additional credit in turn led to an increase in sales. The coefficient of the interaction BIG-POST in the sales equation, in the sample where the limit was increased, is 0.21, with a standard error of 0.09 [column (5)].
• By contrast, in the sample where there was no increase in limit, the interaction BIG-POST is close to zero (0.05) and insignificant [column (8)].
• The effect on profit is even bigger than that on sales: 0.75, with a standard error of 0.38.
• The IV estimate of the impact of bank credit on profit is 2.7. This is substantially greater than 1, which suggests that the technology has a strong fixed cost component. We can use this estimate to get a sense of the average increase in profit (net of interest) caused by every rupee in loan. An increase of Rs. 1,000 in the loan corresponds to a 1.04 percent increase. Using the coefficient of loans on profits, an increase of Rs. 1,000 in lending therefore causes a 2.7 percent increase in profit. At the mean profit (which is Rs. 37,000), this would correspond to an increase in profit (net of interest) of Rs. 999. Consistent with firms being credit constrained, this suggests a gap between the marginal product of capital and the interest rate of about 100 percent.
• This data does not tell us anything about the efficiency of allocation of capital across firms—it remains possible that capital does have the same marginal product in all its uses.

Tirupur is a smallish town in Southern India which dominates the Indian knitted garment industry:

• Through a good part of the 1990s the industry in Tirupur was growing at 50 percent or more.
• The industry was traditionally dominated by a single local caste group, the Gounders.
• Our basic strategy is to compare the investment behavior of Outsiders with that of the Gounders.
• Gounders are a small, wealthy, agriculturist community from the area around Tirupur who have moved into the local knitted garment industry over the last three decades because there is not much scope for more investment in agriculture. They have virtually no industrial presence outside Tirupur. Going into local knitted garment business, or helping a family member or friend get set up in the business, is therefore one of the best ways to use their considerable wealth.
• Outsiders have few strong ties in Tirupur, being from hundreds and even thousands of miles away. Moreover, they are from communities that have many alternative opportunities for investing their money. We would expect the Outsiders not to have the kind of capital access enjoyed by the Gounders.

Data: A survey of 147 exporters in 1995:

• Gounders own about twice as much capital and maintain capital-production and capital-export ratios 1.5 to 2.5 times as high as the Outsiders
• Columns (2) and (3) tell us that Gounders start with a higher capital-output ratio, and maintain that advantage at every level of experience.
• Do Gounders simply simply make better use of capital? The data on exports and production clearly rejects the possibility that the Gounders are more productive in general.
• Outsiders start out producing and exporting less but grow faster and overtake the Gounders by the time they have been in business about five years. Average output for Outsiders who have six years or more of experience is significantly higher than that of the Gounders.

Table 2: http://delong.typepad.com/images/20061206_misallocation_image006.png

Conclusion

• Capital markets in India are very far from the neoclassical ideal.
• The gap between the marginal product of capital and the market interest rate seems to be at least 70 percentage points.
• The gap between the marginal product of capital and the rate paid to savers is even larger.
• Investors who on average are less productive may invest as much as three times more than their more productive counterparts.
• All this is not necessarily surprising given that the legal system is slow, inefficient and sometimes corrupt, and defaulters usually get off lightly.
• But it does raise questions about the usefulness of the neoclassicalbenchmark.

Annals of Low-Quality Sociometry

People who are too eager to believe that Black-White test score gaps are immutable and permanent, episode MMCCLXXIV:

The Washington Monthly: CLICK THE LINK....Here is a complete post from Andrew Sullivan last night:

The Black-White Test Score Gap: It isn't going away. Charles Murray and James Flynn debate why here.

Really?

The fact that Charles Murray thinks the gap isn't going away is hardly news, but does James Flynn agree? That would be dispiriting indeed.

But there's no need to give up hope. Here's what Flynn really said:

We analyzed data from nine standardization samples for four major tests of cognitive ability. These data suggest that Blacks gained 4 to 7 IQ points on non-Hispanic Whites between 1972 and 2002. Gains have been fairly uniform across the entire range of Black cognitive ability.

That sure doesn't sound like "it isn't going away" to me. Murray and Flynn aren't debating "why," they're debating "whether." And Flynn has the better of the argument.

What To Do

Stefan Geens discovers the Pony Principle:

He applies it to Roger Altman and Alan Blinder, who he says labor in vain.

I agree that Altman and Blinder labor in vain, but I join them. They have good ideas.

Pessimism of the intellect, optimism of the will!

RGE - Altman and Blinder: Can't we all just get along?: Writing in the WSJ today, Roger Altman and Alan Blinder engage in admirable but wishful thinking about what Congress could do to repair the US economy in the next few years.

They propose a bipartisan effort to raise the minimum wage, boost the Earned Income Tax Credit, move towards universal health insurance, fix social security, reduce the US' dependence on oil and gas, provide better education and training, and also bring back pay-as-you-go financing.

Would you like a pony with that?

We fully realize that only a few of these policies can be promulgated right now. But a year hence, the policy window will have closed tight and the (presidential) political window will be wide open. So time is short. After watching the recent election results, we'd hate to be an empty-handed politician facing the voters in 2008.

Here's what's more likely to happen, unfortunately: Free trade will suffer, dismantled by populist politicians who think international trade is a mercantilist proposition. And the political window may already be closing, as the race for the White House starts earlier than ever.

---

The Economic Front - WSJ.com: [I]n recent decades the fruits of economic growth have not been widely shared, and we Americans have been growing apart. Notably, the middle class has fallen much further behind the rich; and recently, real wages have lagged behind productivity while profits have soared.... The problem is both deep-seated and longstanding... there is no magic bullet.... But a few obvious steps would help.

For starters, the Democrats have pledged to raise the federal minimum wage, which is now at its lowest (relative to other wages or prices) in a half-century. Making the Earned Income Tax Credit more generous would also help.

Beyond that, our government needs to repair and thicken the badly tattered safety net for the middle class. Tens of millions of Americans live in fear that a major health problem could reduce them to penury.... Health insurance poses complex problems that will not be solved easily or cheaply. But it is well past time that we started moving judiciously toward universal health insurance. Covering all children is a sensible first step.

Retirement security is another worry of the non-rich majority.... Fixing Social Security is not that difficult with a little bipartisanship and a dose of goodwill -- two more things the voters want. That said, all realistic solutions involve moderating benefit growth and/or raising more revenue.... The federal budget deficit, the negative personal saving rate, and our massive borrowing from abroad are all evidence that America is focused too much on the present and not enough on the future. We need a multidimensional investment strategy to change that orientation.

Two of the top priorities should be equipping our work force to cope better with the rapidly globalizing economy, and reducing our dependence on oil and gas. The first requires more and better education and training. The second requires a greater commitment to research on alternative energy technologies, plus serious conservation measures by consumers and industry....

[M]aking hard choices is what grown-ups do, and the voters were telling the politicians to grow up.

The federal budget deficit is a concrete example.... With the baby boom generation about to retire, the budget should be in surplus. But instead, we face cumulative 10-year deficits of $3.5 trillion -- and worse after that. You can blame this sorry state of affairs on either excessive tax-cutting or on profligate spending -- take your pick. It's more accurate to blame both, because fiscal discipline has utterly broken down.... Speaker-elect Nancy Pelosi has promised to restore pay-as-you-go financing -- a bipartisan set of budget rules that were originally adopted under the first President Bush, but then brushed aside under his son. Unfortunately, when paygo went, so did any pretense of fiscal discipline. A coincidence? We think not. The new Congress should bring back paygo immediately.

SONY Drives for PS3 Market Share at Launch

SONY spends a fortune to launch the PS3:

Paul Kedrosky's Infectious Greed: Tearing Down the PS3: Losing Money on Every Sale, etc.: iSuppli has out its teardown of the PS3, and it contains some fascinating factoids:

• Sony is losing an astounding $306.85 to $241.35 in manufacturing and component costs per PS3, depending on the configuration
• Cell processor costs are a rock-bottom $85
• In the entire history of iSuppli's teardowns it has only seen three semiconductors with 1,200 or more pins; the PS3 alone has three such chips

The size of the loss per unit is, my recollection, the largest in the history of the gaming industry. It is a fairly remarkable demonstration of how the industry has changed, especially when you consider that the PS3 is delivering supercomputer levels of performance.

Richard Posner Debates Milton Friedman

A thing that, as George Shultz likes to remark, everybody likes to do when he is not there to answer--and, alas, he will never answer again.

Judge Posner writes:

The Becker-Posner Blog: Milton Friedman--Posner's Comment: Perhaps his most important general contribution to economic policy was the simple, but when he first propounded it largely ignored or rejected, point that people have a better sense of their interests than third parties, including government officials, do. Friedman argued this point with reference to a host of issues, including the choice between a volunteer and a conscript army. With conscription, government officials determine the most productive use of an individual: should he be a soldier, or a worker in an essential industry, or a student, and if a soldier should he be an infantryman, a medic, etc.? In a volunteer army, in contrast, the determination is made by the individual--he chooses whether to be a soldier or not, and (within limits) if he decides to be a soldier what branch, specialty, etc., to work in. A volunteer army should provide a better matching of person to job than conscription, and in addition should create a more efficient balance between labor and capital inputs into military activity by pricing labor at its civilian opportunity costs.

But this is in general rather than in every case. The smaller the armed forces and the less risk of death or serious injury in military service, the more efficient a volunteer army is relative to a conscript one. These conditions are not satisfied in a general war in which a significant fraction of the young adult population is needed for the proper conduct of the war and the risk of death or serious injury is substantial--the situation in World War II. For then the government's heavy demand for military labor, coupled with the high cost of military service to soldiers at significant risk, would drive the market wage rate for such service through the roof. Very heavy taxes would be required to defray the expense of a volunteer army in these circumstances and those taxes would have misallocative effects that might well exceed the misallocative effects of conscription.

I mention this example because I find slightly off-putting what I sensed to be a dogmatic streak in Milton Friedman. I think his belief in the superior efficiency of free markets to government as a means of resource allocation, though fruitful and largely correct, was embraced by him as an article of faith and not merely as a hypothesis. I think he considered it almost a personal affront that the Scandinavian nations, particularly Sweden, could achieve and maintain very high levels of economic output despite very high rates of taxation, an enormous public sector, and extensive wealth redistribution resulting in much greater economic equality than in the United States. I don't think his analytic apparatus could explain such an anomaly.

I also think that Friedman, again more as a matter of faith than of science, exaggerated the correlation between economic and political freedom. A country can be highly productive though it has an authoritarian political system, as in China, or democratic and impoverished, as was true for the first half century or so of India's democracy and remains true to a considerable extent, since India remains extremely poor though it has a large and thriving middle class--an expanding island in the sea of misery. What is true is that commercial values are in tension with aristocratic and militaristic values that support authoritarian government, and also that as people become economically independent they are less subservient, and so less willing to submit to control by politicians; and also that they become more concerned with the protection of property rights, which authoritarian government threatens. But Friedman seemed to share Friedrich Hayek's extreme and inaccurate view that socialism of the sort that Britain embraced under the old Labour Party was incompatible with democracy, and I don't think that there is a good theoretical or empirical basis for that view. The Road to Serfdom flunks the test of accuracy of prediction!

I imagine that without the element of faith that I have been stressing, Friedman might have lacked the moral courage to propound his libertarian views in the chilly intellectual and political climate in which he first advanced them. So it should probably be reckoned on balance a good thing, though not to my personal taste. His advocacy of school vouchers, the volunteer army (in the era in which he advocated it--which we are still in), and the negative income tax demonstrates the fruitfulness of his master micreconomic insight that, in general, people know better than government how to manage their lives. But perhaps not always...

Let me channel Uncle Milton on one point: replacing a volunteer army with conscription does not get around the "very heavy taxes" with their enormous "misallocative effects" needed to man a wartime army. It simply loads those taxes onto a small group: young adult men (and these days women). It leaves the rest of us scot-free. But it is a redistribution away from the draftees--not an improvement in efficiency.

As to Posner's other points--Friedman's faith in markets, Sweden as a personal affront to Friedman, Friedman's excessive confidence that economic freedom would bring political freedom with it, and the falsification by reality of the main argument of The Road to Surfdom--I think they are very good ones.

Economic History Seminar November 13, 2006: William Sundstrom

He comes up from Santa Clara to talk about:

William Sundstrom (2006), "The Geography of Wage Discrimination in the Pre-Civil Rights South" (San Jose: Santa Clara University).

Abstract: Before the civil rights movement of the 1960s, the pay gap between African-American and white workers in the south was large overall and quite variable across locations. Using 1940 census data, I estimate the white-black earnings gap for men across separate county groups called "state economic areas," adjusting for individual differences in schooling and experience. I show that the gap was significantly greater where blacks were a larger proportion of the workforce, plantation institutions were more prevalent, more of the population was urban, and white voters exhibited more segregationist preferences. These results are consistent with descriptive evidence that discrimination in southern labor markets operated through discrimination in job assignments, which prevented black workers from acquiring skills on the job and also depressed wages through a crowding effect.

"The 'lynching' variable doesn't do much in the regressions, and isn't correlated with much of anything except general poverty..."

Economic Outlook

Glenn Rudebusch at the SF Fed thinks that we have dodged a bullet: that the decline in housing investment will not send the economy into a recession:

Economist's View: FRBSF: Economic Outlook:

• On balance, any spillover from the housing slowdown to the rest of the economy appears to have been offset by four important factors that are supporting growth. The first of these factors is the solid growth in employment, with associated increases in labor income. The solid pace of hiring this year raises questions about whether recent flagging GDP growth reflects a transitory lull rather than a substantial slowdown. The second factor supporting growth is the recent drop in energy prices. The third factor is the recent increases in equity markets, which bolster household wealth. And, finally, as the fourth factor, borrowing costs--especially conventional fixed mortgage rates--continue to be relatively low.
• A crucial question facing policymakers is how soon will core inflation return to a more comfortable level. One reason for cautious optimism is that inflation expectations appear to remain contained, as various indicators of these expectations are in the same range that has prevailed over the past two years. Therefore, this year's surge in price inflation has not changed the market's view about where inflation will eventually be returned to by the Fed.

• In contrast, the upside risk to the inflation outlook from labor market pressures appears to have been growing. As the FOMC noted in its October 25 statement: "the high level of resource utilization has the potential to sustain inflation pressures." Since then, the labor market continues to tighten, and the unemployment rate fell to 4.4 percent in October, the lowest level since May 2001.

David Wessel Writes About CEO Pay

David Wessel on CEO pay:

Capital - WSJ.com: It is obvious that the bigger the company, the more the CEO gets paid. That fact has inspired more than a few big acquisitions. An old rule of thumb holds that for every 10% increase in a company's size, the CEO's pay goes up 3%. But that doesn't explain recent patterns.

Messrs. Gabaix and Landier, squash partners who majored in mathematics at the École Normale Supérieure in Paris, realized that it isn't only how big a company is that matters; it is how big other companies are. It is about keeping up with the corporate Joneses.

And how much did U.S. companies grow in the past 25 years as CEO pay rose sixfold? Measured by stock-market capitalization, the value of all their shares, the companies grew sixfold, the pair discovered. "If all companies increase in size," Mr. Landier says, "the amount people are willing to pay for the same talent goes up."... CEOs aren't better than they were a quarter century ago, and there isn't much difference among them. But being a little bit better CEO than your competitor is worth a lot of money, just as it is to superstars in opera or baseball....

If Messrs. Gabaix and Landier are right, tweaking corporate-governance rules won't restrain CEO pay. "Firms with bad corporate governance pay the CEO more, but it's a really small effect -- only about 10% on average," Mr. Gabaix says....

Perhaps. But Harvard labor economist Lawrence Katz points out that the Gabaix-Landier model suggests that if the No. 15 company has a deviously clever CEO who finds a new way to engorge himself (think backdating, again), then the impact of that behavior will be magnified as it spreads to CEOs of even bigger companies.

And if they are right, then CEO pay hasn't much to do with motivating CEOs to work harder, and there is little economic harm to be done by taxing them more heavily.

"CEOs are paid what they're worth to their companies, and their high pay reflects the extraordinary value of their talent," Gregory Mankiw, another Harvard economist and a former adviser to President Bush, wrote on his blog after a Gabaix seminar. "But the supply of talent is inelastic" -- that is, paying more wouldn't produce more Jack Welches -- "and the allocation of talent would not be affected if everyone faced high tax rates." (Messrs. Gabaix and Landier shudder at this suggestion.)...

The market cap of U.S. companies rose mightily from the 1940s through the 1970s, yet CEO compensation didn't soar much faster than the typical worker's pay. What changed? Frank Levy, an MIT economist, has a hunch: "Coming out of World War II, and the Great Depression before that, a lot of people were very afraid of extensive labor unrest. The whole framework of collective bargaining, a decent minimum wage, high marginal tax rates, etc., were all designed to head that off."

For a while, fear topped greed. But fear of unions and of government restraints on the market forces Messrs. Gabaix and Landier describe faded around 1980. Greed took over.

Why Is Apple Still Alive?

With 5% of the operating system market share, Apple should be dead--overwhelmed by Microsoft's resources. But it isn't:

Technology News: Commentary: Under IBM's Hood, Oracle's Linux Move, Apple's Vista Surprise: [B]ased on the chatter I'm seeing it appears very likely that Apple is preparing a little surprise for Microsoft at MacWorld which happens at the same time as the Consumer Electronics Show in January. While Microsoft and partners will be talking about Vista in advance of the launch of that product at CES, Apple, along with Intel, will be launching Apple's version of the Media Center with iTV and Leopard. That's right -- Leopard. It looks like this puppy is nearly ready if I'm reading the signs right -- and Apple is clearly setting up for something big.

Now Intel's part goes beyond the chip and appears to contain elements of Viiv, if not all of that platform. Viiv is actually kind of cool, it's just that Intel has not been able to explain effectively what it is and, as a result, the market hasn't been particularly excited about it on Windows. However, Apple knows how to sell and with a problem where the technology is good but the marketing's not, Apple has the skills to make a huge contribution.

Recall how Apple took the MP3 player market by storm by simply looking at what was out there and figuring out how to do it right. Microsoft's Media Center isn't fully cooked, even with Vista, something that Intel actually created Viiv to fix. Now, it appears, the two of them are collaborating to do the Media Center right, and if they hit the target as well as they did with the iPod, which is likely, they could actually have a second massive success on their hands.

So, if you are into technology, particularly if you are into Apple, you'll want to hang around MacWorld in January for the Apple pre-Vista surprise party! Oops. You didn't hear that here...

Greg Mankiw: For Higher Gas Taxes

Greg Mankiw goes on the offensive against the the letters the Wall Street Journal editorial page chooses to publish:

Greg Mankiw's Blog: Alternatives to the Pigou Club: Today's Wall Street Journal prints various letters in response to my oped on gas taxes.... [L]et me try to spell out more generally the alternatives from which we must choose.... [Y]ou most likely fit into one of these... categories.

1. You deny the existence of these externalities [from pollution from auto emissions] as a type of market failure. Perhaps you think you live in a Coasian fantasy world where people bargain without transaction costs to reach efficient allocations. (Note: I am not suggesting that Coase himself thought we lived in such a world--he considered it only a useful thought experiment.)
2. You recognize the externalities but you don't think the government should try to respond to them. You are such a believer in small government that you are willing to live with inferior economic outcomes, such as pollution and congestion.
3. You recognize the externalities, think the government should try to correct them, but think the current low taxes we put on gasoline are sufficient. In this case, you have weighed and rejected the evidence, such as that of Parry and Small, that higher Pigovian would be optimal. (Parry and Small calculate an optimal tax of $1.01 for the United States in today's dollars. After my proposed phase-in of a $1 hike, the U.S. tax would be $1.40. Assuming 10 years of 3 percent inflation, the tax in real terms would approach almost exactly what Parry and Small recommend. By the way, the published version of Parry and Small was in the American Economic Review, September 2005.)
4. You recognize the externalities but think the government should try to correct the market failure through regulations (such as CAFE standards) or through market-based solutions that do not raise government revenue (such as cap-and-trade systems). Perhaps you are concerned that government would waste the extra revenue on useless government programs.

Let me respond to group 4, because my guess is that this is the largest group of antipigovians.

The reason I am less concerned that the extra revenue will be spent is that it already has been spent. The federal government has promised benefits to the elderly far in excess of what it can pay. At some point the nation will have to reckon with the looming fiscal gap. The most likely political compromise will involve higher tax revenue. We should, therefore, be ready to increase revenue in a way that does the least damage--or, better yet, the most good. If not Pigovian taxes, then other taxes will be increased.

An optimistic libertarian might hope that we can deal with the looming fiscal gap without raising the ratio of taxes to GDP above its current level. I wish I could believe that this were possible. In a previous oped, I advocated increasing, slowly but substantially, the age of eligibility for Social Security and Medicare. But even if we could scale back government spending in such a radical way, Pigovian taxes would not lose their appeal. Let's use the extra revenue from Pigovian taxes to reduce distortionary taxes, such as income taxes. Politically unrealistic, you say? Surely, if a future government were so libertarian as to manage a radical reduction in entitlement promises to the elderly, it would have no trouble delivering equally radical cuts in income taxes. In fact, the tax cuts would be the easy part of the package....

Let me try to put the issue in terms of a flow chart.

Question: Do you believe consumption of gasoline is free of negative externalities leading to market inefficiency? If YES, you are part of group 1. If NO, continue.

Question: Do you believe that public policy should ignore these externalities? If YES, you are part of group 2. If NO, continue.

Question: Do you believe the current tax on gasoline sufficiently internalizes the negative externalities? If YES, you are part of group 3. If NO, continue.

Question: Do you believe the best remedy for the remaining externalities is a regulatory system rather than a higher tax? If YES, you are part of group 4. If NO, you are a member of the Pigou Club.

I think most most muembers of Group 4 believe that Greg Mankiw's Pigovian taxes on gasoline and other carbon emissions would be a good thing, but don't think that we can get there easily in today's political climate--especially with a Republican Party that doesn't care about balancing the budget at all but has a large fundamentalist wing opposed to all tax increases that might stabilize our fiscal situation and avoid running big risks of future disasters. CAFE is not a way of avoiding "taxing"--it's a way of getting the auto companies to collect the tax (and rebate the revenue to purchasers of fuel-efficient cars). It's an inefficient policy with little pollution-reduction bang for its excess-burden buck, but it is one that Mankiw's political masters might accept--you see, it isn't called a "tax." The same holds for tradeable permit schemes.

Most members of Group 4, I think, aren't opposed to taxing gasoline in a Pigovian way. What they are is opposed to calling the tax a tax, because they believe Republican politicians need a way to save face.

---

The Wall Street Journal editorial editors' choice of letters is pathetic: two from lobbyists (one of whom falsely and shamelessly claims to be a "policy wonk") who they decide deserve to run free ads, one dork from Carmel denying that demand for gasoline is not price-sensitive at all, one dork from Fort Worth calling Greg Mankiw(!!!) a socialist, and one confused person from Atlanta who doesn't seem to understand that Mankiw's gasoline tax is pro-growth (when growth is properly measured, that is):

October 26, 2006;PageA19

Higher Gas Taxes Will Never Make Americans Abandon Their Cars Missing from N. Gregory Mankiw's interesting proposal to raise the federal gasoline tax by $1 over the next 10 years ("Raise the Gas Tax," editorial page, Oct. 20) is any context or explanation of why the tax is collected in the first place. It generates dedicated revenue for the Highway Trust Fund that is used solely for transportation programs. The federal gas tax finances almost 45% of all public investments in road improvements each year.

Prof. Mankiw says boosting the gas tax would get people out of their cars and force them to live closer to where they work, thereby reducing road congestion. Yet there is no evidence to suggest this would happen based on the most current Census Bureau data. More than 80% of commuters drive to work alone. That trend will continue in the future.

To much fanfare, the U.S. population officially reached 300 million Oct. 17, and is expected to reach 400 million by 2043. America's highways, bridges and transit systems are now crumbling because of years of under-investment by all levels of government. Between now and 2043, based on current trends, highway capacity will grow only 9%, but traffic levels will swell by 135% to more than seven trillion vehicle miles traveled annually. The average motorist can expect to spend 160 hours stuck in traffic delays, or the equivalent of four weeks each year. It's a recipe for a gridlocked nation, absent any new highway and transit investment that adds major new capacity.

Providing and maintaining the transportation infrastructure is a core function of government. Let's increase the federal gasoline tax, but let's make sure it's used for its intended purpose -- maintaining and improving the highway and public transit systems so crucial to America's mobility, national security, economic strength and global competitiveness.

Matthew J. Jeanneret
Senior Vice President
Communications & Marketing
American Road & Transportation Builders Association
Washington

Whew! That was dizzying. Tax-cuts convert to the left of me, raise the gas tax to the right! Keep this up and I will need to start wearing a switchable eye patch to prevent vertigo. As regards the gas tax, did Prof. Mankiw see less traffic during the recent price run-up at the pumps? Concerning high fuel taxes in Europe, he would have plenty of time in traffic there to read The Guardian or Le Figaro. On the subject of efficiency, I can hardly wait to watch the Fed spend that tax windfall.

Charles Dusenbury
Carmel, Calif.

Count me in as a policy wonk who thinks Prof. Mankiw's self-described "wacky" idea of raising the gas tax is one that should stay on the dusty shelf of economic theory and not in the practical world of public policy. Giving politicians more gas tax revenues is like giving your car keys and a bottle of gin to a teenager.

Over the past 25 years, governments at all levels have collected twice as much in gas taxes ($1.34 trillion in today's dollars) as the domestic oil companies have earned collectively in profits ($643 billion). In only three of those years (1980, 1981 and 1982) did industry profits exceed government's annual tax take. Add on corporate income tax payments and government's total tax take from the industry rises to $2.2 trillion in today's dollars. Not only has this made no dent in the federal deficit, but it has given Washington the means to fund such boondoggles as the Bridge to Nowhere.

Moreover, our great national experiment of trying to use tax policy to dampen consumption is now the textbook definition of the law of unintended consequences. According to the Congressional Research Service, the 1980 windfall profits tax depressed the domestic production and extraction industry and furthered our dependence on foreign sources of oil. The French have some of the highest gas taxes in Europe yet remain 100% dependent on foreign oil.

As I'm sure Prof. Mankiw teaches his students, taxes should simply be a means of funding government programs, not a tool for advancing social, political or economic agendas.

Scott A. Hodge
President
Tax Foundation
Washington

Whenever I read an article or listen to someone crow about raising the gas tax, I am reminded of how far removed some people are from the rest of us who have to work for a living. Every point in Prof. Mankiw's commentary boils down to improperly using the tax code to force a certain behavior and enact social change, all in a quest to show us poor folks who have to drive to work, to the store or to pick up the kids that we're just not in line with the professor's progressive thinking. If being in traffic makes Prof. Mankiw wish the rest of us would drive less, reading socialist diatribes like his makes me wish people like him would write less.

Kevin C. Carpenter
Fort Worth, Texas

Prof. Mankiw suggests that federal taxes on gas should be raised to levels of half that of Britain in order to, among other reasons, grow the economy. While his logic of shifting the tax code's focus from punishing productivity to encouraging consumption is right-headed, I must point out that the U.K. is a country in which both consumption and productivity are taxed at high rates, to the detriment of the economy. It is no stretch of the imagination to see Congress imposing the same misguided policies in the U.S. Instead, the entire focus of our tax code should be shifted from punishing productivity to encouraging consumption. Ultimately, Congress and the people would be playing for the same team.

Simon Arpiarian
Atlanta

Post-Managerial Capitalism?

Mark Thoma sends us to a good piece by Robert Samuelson:

Economist's View: The Rise and Fall of the Managerial Class: Robert Samuelson on the rise and fall of the managerial class:

The Next Capitalism, by Robert Samuelson, Newsweek: When he died in 1848, John Jacob Astor was America's richest man, leaving a fortune of $20 million that had been earned mainly from real estate and fur trading. Despite his riches, Astor's business was mainly a one-man show. He employed only a handful of workers, most of them clerks. This was typical of his time, when the farmer, the craftsman, the small partnership and the independent merchant ruled the economy. Only 50 years later, almost everything had changed. Giant industrial enterprises -- making steel, producing oil, refining sugar and much more -- had come to dominate.

The rise of big business is one of the seminal events in American history, and if you want to think about it intelligently, you consult historian Alfred D. Chandler Jr., its pre-eminent chronicler. ...

Until Chandler, the emergence of big business was all about titans. The Rockefellers, Carnegies and Fords were either "robber barons'' whose greed and ruthlessness allowed them to smother competitors and establish monopolistic empires. Or they were "captains of industry'' whose genius and ambition laid the industrial foundations for modern prosperity. But ... Chandler ... uncovered a more subtle story. New technologies (the railroad, telegraph and steam power) favored the creation of massive businesses that needed -- and, in turn, gave rise to -- superstructures of professional managers: engineers, accountants and supervisors.

It began with railroads. In 1830, getting from New York to Chicago took three weeks. By 1857, the trip was three days (and we think the Internet is a big deal). From 1850 to 1900, track mileage went from 9,000 to 200,000. But railroads required a vast administrative apparatus to ensure the maintenance of "locomotives, rolling stock, and track'' -- not to mention scheduling trains, billing and construction...

Elsewhere, the story was similar. ... No matter how efficient a plant might be, it would be hugely wasteful if raw materials did not arrive on time or if the output couldn't be quickly distributed and sold. Managers were essential; so were statistical controls. Coordination and organization mattered. Companies that surmounted these problems succeeded. ... The rise of big business involved more than tycoons. Its central feature was actually the creation of professional managers. ...

The trouble now is that the defining characteristics of Chandler's successful firms have changed. ... We can ... identify many of the forces reshaping business: new technologies, globalization and modern finance... But the very multitude of trends and pressures is precisely the problem. No one has yet synthesized them and given them larger meaning.

Just as John Jacob Astor defined a distinct stage of capitalism, we may now be at the end of what Chandler perceptively called "managerial capitalism.'' Managers, of course, won't disappear. But the new opportunities and pressures on them and their companies may have altered the way the system operates. ... Asked about how the corporation might evolve, [Chandler] confesses ignorance: "All I know is that the ... Internet is transforming the world.'' To fill that void, someone must do for capitalism's next stage what Chandler did for the last...

And Mark Thoma comments:

Though it's mentioned, I don't think this pays enough attention to the role of information technology in reducing the need for middle management and white collar workers. Much of what these workers did in the past to track financial information, manage inventory and raw materials, plan distribution and sales strategies, and so on can now be done with a few mouse clicks on a computer or, alternatively, digitally outsourced for cheaper processing elsewhere.

This is not fundamentally different from any other sort of productivity shock, workers get displaced by new technology regularly, except that in recent years there are more white collars in the mix of workers affected by the technological innovation, a trend that may continue as information technology continues to advance. The question is where these displaced workers (or those who would have replaced them in future years) end up after the transition. Will these workers be able to transform their skills and move up to higher paying occupations or at least maintain their current income, or will the displaced current and future workers mostly move down to lower skill, lower paying jobs?

Given the outcome so far, we need to devote more attention to finding policies that can help workers receive a larger share of the productivity gains as we move to an increasingly information-based, geographically fractured, low-skill abundant, highly specialized, and highly competitive global economy. I'm not sure what fancy name to give "the next capitalism" or if it really needs one, but if growing inequality continues to be one of its main features, calling it "the new gilded age" as many do already might just stick.

Yunus wins Nobel Peace Prize for Grameen Bank

Felix Salmon on Muhammad Yunus and the Grameen Bank:

RGE - Yunus wins Nobel Peace Prize for Grameen Bank: An economist wins a (kinda, sorta) Nobel Prize every year, but this year is special, with Muhammad Yunus winning an honest-to-goodness Nobel Prize -- the Peace Prize. Tyler Cowen has a world of wonderful links, including to Yunus's Wikipedia entry and to some excellent research on the subject of microfinance.... My own none-too-well-informed take on microfinance is that Grameen did spectacularly well but that other institutions trying to follow its lead have not always followed suit; and that... the real problem is not raising capital but rather finding people who are both willing and qualified to go out into remote rural areas on a more or less permanent basis to set up these institutions. But there's no doubt that microfinance, when done right, is a classic win-win proposition.... An astonishing achievement.

Is the Profit Share Still Rising?

Dean Baker suspects (hopes?) that the swing to higher profits and away from wages has reached its end:

Beat the Press: Profits, Wages, and the Business Cycle: Today's NYT has a column reporting on the redistribution from wages to profits that has taken place in most wealthy countries over the last quarter century. While the piece is useful in calling attention to an important trend, it is somewhat sloppy because it fails to adjust for cyclical effects.

This is important because profits shares do follow well defined cyclical patterns: rising in a business cycle upturn, typically peaking before the actual peak of the cycle, and then falling sharply in the downturn. In the U.S. context, we see a substantial rise in the profit share from 2000 to 2005, which the column presents as the continuation of the trend of the last quarter century. However, the 2005 profit share was still slightly lower than the profit share in 1997, the profit peak of the last cycle, as explained in a short paper CEPR published last week.

Whether or not the profit peak of the current cycle exceeds the 1997 peak remains to be seen. My guess is that it won't, as the collapsing housing market will reveal much bad debt on the books of those hugely profitable financial firms, but the jury is still out on this one.

Housing and Transportation Costs

There is rarely such a thing as a free lunch:

Relocating to Cheaper Housing May Not Help Low-Wage Families - WSJ.com: By JAMES R. HAGERTY> Moving to an area with lower housing costs often doesn't pay off for low-income Americans... transportation costs in places with cheaper housing are often so high that they wipe out the savings from lower rent or mortgage payments. Such places tend to be farther from employers or short on public transportation, which makes commuting costlier.

The study found that housing and transportation costs combined eat up an average of 57% of annual income for "working" families, which the study defines as those with incomes of $20,000 to $50,000 a year. The combined costs ranged from 54% of income in Pittsburgh to 63% in San Francisco; in 25 of the 28 metro areas, the combined total was within three percentage points of the 57% average.

The findings contradict the common notion that many people would be better off financially if they moved from areas with high housing costs, such as California, to states like Texas or Georgia, where housing is much cheaper. The median house price in San Diego, at $613,000, is four times that of Dallas. But the study found that working families in San Diego spend 59% of their income on housing and transportation, only slightly more than the 57% they spend in Dallas. Families in Dallas spent just 26% of their income on housing, compared with 31% in San Diego, but the Dallas families spent more on transport.

The study also found that moving to an inexpensive outer suburb, but continuing to work near a city center, often backfires. Typically, a move that adds more than about 12 miles to a one-way commute will result in a rise in transport costs that outweighs the savings on housing, the researchers found...

Economic History Seminar: The Limits of Equality: Lessons from the Israeli Kibbutz

Ran Abramitsky (Stanford), "The Limits of Equality: Lessons from the Israeli Kibbutz."

If one draws a distinction between "social democracy" and "socialism," it is sobering to think that--outside the hereditary monarchies of North Korea and Cuba--the sole institutional remnants of classic European socialism circa 1900 are the Israeli kibbutzes, which still comprise 2.5 percent of Israel's population.

Risk-sharing, monitoring, adverse selection, moral hazard, and ideological commitment.

Raise the Gasoline Tax?

Daniel Gross writes about suddenly-ungagged Republican economists and the gasoline tax:

Raise the Gasoline Tax? Funny, It Doesn't Sound Republican - New York Times: FOR nearly two decades, Alan Greenspan owned the biggest megaphone... dispensed advice on matters economic -- interest rates, budget and tax policies, entitlements, the stock market, the best kind of mortgage -- people listened. As a rule, Mr. Greenspan... adhered closely to Republican orthodoxy on taxes: the lower the better. Mr. Greenspan was hardly a proponent of raising taxes on energy to encourage conservation, a policy prescription generally associated with the politicians and economists of the left.

Until now. In late September... a question was posed as to whether he'D like to see an increase in the federal gasoline tax, which has stood at 18.4 cents a gallon since 1993. "Yes, I would," Mr. Greenspan responded.... "That's the way to get consumption down. It's a national security issue."

Mr. Greenspan isn't the only Republican-aligned economist to have discovered, or rediscovered, a fondness for higher energy taxes since leaving government service. N. Gregory Mankiw... favored a higher gas tax before going to Washington, and has been banging the drum loudly for it since he left. On his blog, Mr. Mankiw has formed the Pigou Club, named for Arthur C. Pigou, the British economist.... The roster of what Mr. Mankiw calls "economists and pundits with the good sense to have publicly advocated higher Pigovian taxes, such as gasoline taxes or carbon taxes," includes... Paul Krugman... Al Gore... Gary S. Becker....

Andrew A. Samwick, [former] chief economist on the Council of Economic Advisers... is a member in good standing. So is Martin S. Feldstein.... The government, Mr. Feldstein said, should essentially ration gas by distributing tradable gas rights that entitle people to use gasoline....

What gives? Clearly, consensus among economists... that the nation would be better off, geopolitically and economically, if Americans used less gasoline. "Given the role that imported oil plays today, you can't continue to be a responsible economist and not talk about ways to reduce that dependence," Mr. Samwick said. "If you are concerned about the external consequences of imported oil, then you should raise the cost of it."... [A] growing unity among economists across the political spectrum on the deleterious effects of global warming. "The U.S. has reasonable arguments for not signing the Kyoto treaty, but we need to propose some other measure that will help reduce emissions," said Kenneth Rogoff....

But as much as Republican-leaning economists like Messrs. Greenspan, Mankiw and Samwick may think that it's a good idea, the Republican politicians who control the levers of power in Washington think that it's an awfully bad one.... The last increase in the federal gas tax was enacted as part of the so-called deficit reduction act of 1993, a package of spending cuts and tax hikes that didn't receive a single Republican vote in Congress. And because President Bush and his top political advisers are known to be adamantly opposed to any increase in the gas tax, economic advisers haven't pushed it much. "We didn't have policy discussions about raising the gas tax," Mr. Samwick recalls of his time in the White House.

THIS highlights a professional hazard faced by academic economists who serve in presidential administrations. They must act as team players who value the overall success of the administration -- even if they don't agree with all of its policies. As a result, economists must often stow some of their policy ideas in an intellectual coat check at the White House gates, where they can be reclaimed upon return to private life...

Treasury Secretary Paul O'Neill and EPA head Christine Todd Whitman were for an increase in the gas tax back at the start of 2001, when they thought they were in charge of global warming policy. They could have used some backup then--and Bush could have used some reminding in 2002, 2003, 2004 and 2005 that O'Neill and Todd Whitman were right. And I have never understood why George W. Bush and his Texas, Oklahoma, and Louisiana friends aren't in favor of a tax on imported oil, which is a huge money maker for their interests.

Benefit/Cost

Mark Thoma likes OSHA:

Economist's View: I Like OSHA: Today, I got a phone call from the dentist saying that they had somehow managed to get phosphoric acid (37%) into my son's eye. Once I got there, it was painful to even watch. The acid is used to clean and rough up a teeth prior to fillings or other procedures.

It looks like he will be fine - there was an eyewash station in the office and he rushed to it and rinsed the eye right away. According to the eye doctor we saw later, that made a big difference.

So, thank you OSHA for making them put the eye wash station in the office. The dentist had never used it before, nor had she heard of any other dentist ever using one, and it may not have been there otherwise.

Airbus Delays New Jumbo Jet a Second Time

Has Airbus's nationally-balanced structure made it more difficult to manage?

Airbus Delays New Jumbo Jet a Second Time - New York Times: By NICOLA CLARK, International Herald Tribune

The first deliveries of Airbus's troubled A380 super jumbo jet were delayed again today, this time by as much as another year, pushing the program off by a full two years.

European Aeronautic Defense and Space, the parent company of Airbus, confirmed the delays and warned that persistent assembly-line problems would shave earnings over the next four years by 4.8 billion euros -- more than double the amount forecast in June.

And for the first time since the latest problems surfaced three months ago, Emirates, the largest customer for the A380 plane, signaled publicly that it might cancel a portion of its multibillion-dollar order from Airbus.

The EADS board also said that it would investigate the conduct of individual managers at EADS, the European alliance of the governments of France, Germany and Spain that controls Airbus. EADS said it would also examine the actions of managers at Airbus itself during the period preceding the announcement in June of the first A380 delays. It said it was reserving the right to pursue legal action against managers.

"Shareholders have lost billions of dollars," the EADS chief executive, Tom Enders, said. "This is very serious. We are not excluding anything."

In separate statements, EADS and Airbus said that just one A380 would be delivered next year, to Singapore Airlines in October, down from nine that had been promised in June. Thirteen planes will be delivered in 2008 and 25 in 2009, while 45 planes will be delivered in 2010, the companies said...

Eddie Lazear Should Do Better than This...

Daniel Gross is annoyed:

Daniel Gross: October 01, 2006 - October 07, 2006 Archives: NOMINALLY SILLY: Allan Hubbard, director of the National Economic Council, and Edward Lazear, chairman of the president's Council of Economic Advisers, take to the op-ed page of the Wall Street Journal as part of an effort to convince Americans their wages haven't been falling--and that if they haven't, it's not the administration's fault, anyway. From Hubbard, one expects such junk. But Lazear, a respected academic economist, now shows signs of succumbing to the same tendency that struck his respected-academic-economist predecessors Gregory Mankiw and Glenn Hubbard: retailing intellectual garbage in an effort to make their boss look better....

Finally, there's this one: if you just ignore inflation, or the cost of the things whose cost has been rising, everything is hunky-dory.

Recently, nominal wages of production workers have also grown considerably. At an annualized rate, nominal wage growth has been about 4% so far this year, faster than at this point in the last economic expansion. Nominal wages are now growing faster than the past couple of years and are growing at about the same rate as they were in the late 1990s.

The difference between this economic expansion and the last expansion is that higher-than-expected energy prices have consumed much of this strong nominal wage growth. Inflation-adjusted wage growth without the increase in energy prices is similar to past economic expansions. The issue here is energy prices, not wage growth. Workers' paychecks are going up, but they have had to use much of that increase for energy purchases like gasoline.

The recent news on energy prices is good for workers. Nationwide gasoline prices have fallen by about 65 cents per gallon since early August and market data suggest that inflation will fall below the levels of the past few months. This decline, coupled with the nominal growth rates that we see in both compensation and wages, means that workers should enjoy more real earnings in the months ahead.

This last bit is the most pernicious and intellectually dishonest one. What's the point in comparing nominal wage growth in an economy where inflation is growing at 3.8 percent (i.e. today's) to nominal wage growth in an economy where inflation was growing at 2 percent or less? Do people pay their bills and mortgages with nominal dollars or with real ones? I'm wondering if you asked Hubbard and Lazear whether, they'd prefer (a) having a 4 percent nominal raise in a year when inflation rose 3.8 percent; or (b) having a 3.6 percent nominal raise in a year when inflation rose 1.6 percent; they'd choose (a) as being equivalent or better. But that's precisely what they're asking their readers to do.

Making School Choice Work?

School choice:

Marginal Revolution: Making school choice work: Here is a new policy paper by Caroline Hoxby, written for a New Zealand context. It is an admirable brief summary of the U.S. evidence on school choice, almost like a response to Ezra Klein.... Her conclusions are that successful school choice requires:

1. Supply flexibility, which means that schools should have the ability to open where there is demand for them, expand with increased demand and contract with reduced demand.
2. Money should follow students, which means that funding policies must be designed so that schools that are in demand have the funds to expand and those that are not in demand lose funds and must contract; and
3. Independent management of schools, which means that schools must be free to innovate in a range of areas, including pedagogy, teacher pay, budget allocation, and the way the school is organised.

Hoxby stresses that these conditions are rarely found together.

Schools and--in the past--hospitals were rarely for-profit organizations. Yet nobody has ever told me why...

I'm Sorry I'll Miss This

I'll be watching the sixteen-year-old run cross-country. But this looks to be a really great seminar:

Econ 291: Department Seminar: Wednesday September 27: 4-6 PM, Evans 608-7:

David Card, Raj Chetty, and Andrea Weber (2006), "Does Cash-in-Hand Matter?: New Evidence from the Labor Market"

Abstract: This paper provides new evidence on the effects of cash-in-hand on household behavior. Using sharp discontinuities in eligibility for severance pay and extended unemployment benefits in Austria, combined with data on over one-half million job losers, we reach three main findings:

1. A lump-sum severance payment equal to two months of wages lowers the rate of new job finding by 8-12% on average.
2. An extension of the potential duration of UI benefits from 20 weeks to 30 weeks lowers job-finding rates in the first 20 weeks by 6-10%.
3. The increases in the duration of job search induced by both programs have no effect on job match quality, as measured by wages or the duration of the next job.

We use a job search model to show how these estimates can distinguish between commonly-used models of household behavior, and develop a metric that can be used to calibrate such models to match our empirical findings. Our empirical findings are inconsistent with a simple permanent-income model as well as rule-of-thumb models with a myopic agent. The results favor a model where agents are forward-looking yet have limited ability to smooth consumption.

Thoma on Varian on Galbraith and Hale

Mark Thoma reads Hal Varian who reads Galbraith and Hale:

Economist's View: Hal Varian on Inequality: The Right Place at the Right Time: Hal Varian examines of the driving forces behind changes in inequality in the late 1990s:

It is widely recognized that income inequality increased in the 1990s, but nobody knows quite why. Despite the lack of hard evidence, there are plenty of theories.... Two University of Texas researchers, James K. Galbraith and Travis Hale, added an interesting twist to this debate in a paper, "Income Distribution and the Information Technology Bubble."

According to Mr. Galbraith and Mr. Hale, much of the increase in income inequality in the late 1990s resulted from large income changes in just a handful of locations around the country... areas that were heavily involved in the information technology boom....

Santa Clara, San Mateo, San Francisco (all associated with Silicon Valley) and King County, Wash. (home of Microsoft).... If the per capita income in just these four counties had grown at the same rate as the average in the United States, income inequality across counties would have changed little in the late 1990s. In other words, only four counties drove most of the change across the 3,100 counties.

The findings by Mr. Galbraith and Mr. Hale offer something to all sides in the debate. Perhaps options grants and initial public stock offerings had a lot to do with income inequality. Changing compensation patterns for technology-related skills could also be significant. But the biggest point that I take away is a simple one: there's no substitute for being in the right place at the right time.

Marginal Notes on Pierre-Olivier Gourinchas's Presentation of Golosov, Tsyviniski, and Werning

Golosov, Tsyvinski, and Werning, "New Dynamic Public Finance: A User's Guide"

• This is a very useful paper.
• Emmanuel Saez is even more of a genius than I had thought.
  • The Mirrlees (1971) don't-tax-the-richest result is a very local result

• The Mirrlees optimal-tax formula trades off three consierations:

  • Desired redistribution--social marginal weights...
  • Higher taxes lead to substitution effects away from effort somewhat counterbalanced by income effects towards effort. Hicksian elasticities are what matter.
  • The shape of the income distribution--weighing the distortion caused by the marginal rate at income level y against the concentration of income above y from which you raise revenue

• Golosov, Tsyviniski, and Werning

  • Two periods
  • Unobservable skill shocks
  • Aggregate shocks as well
  • Government observes earnings but not skills
• Distortions
  • Consumption-labor wedge at t=1
  • Consumption-labor wedge at t=2
  • The intertemporal wedge
• No aggregate uncertainty, no skill shocks, then...
  • Perfect smoothing over time--i.e., no taxes on capital income
  • Labor tax wedge that solves static Mirrlees problem
• With skill shocks...
  • Planner wants to encourage effort in period 2 by those who get positive skill shocks--which means it would want to find some way to reduce their savings, which means there will be taxes on capital in period 2...
  • Time consistency problems...
  • Double deviations; once you deviate from the optimal labor supply, you may well want to deviate from the optimal savings plan as well...

It is very nice to have, thanks to Golosov, Tsyviniski, Werning, and company, a model that says that you want to tax capital because you don't want the highly-skilled and productive programmers of Google retiring in their 30s because they are wealth-satiated...

The Baltimore Public School System

Matthew Yglesias uses his addiction to "The Wire" in a constructive way: He argues that there can be no equality of opportunity for the next generation if there is not substantial equality of result in this one:

Matthew Yglesias / proudly eponymous since 2002: Achievement Gap: At last, ceaseless Wire-blogging leads to an actual policy issue as Zachary Norris recalls his days in the Baltimore City school system: "I had no formal teaching experience and no real qualifications other than a college degree and a strong desire to 'close the achievement gap.' I joined the Teach For America program and ended up teaching in Baltimore for three years. The experience was humbling."

But what would it mean -- what could it mean -- to close the achievement gap between high- and low-SES students in American schools? For a whole variety of reasons, this just doesn't seem like it's going to be possible. At the outer limit, more prosperous parents are always going to be able to re-open the gap by investing even more resources in their kids' education. An education and child development arms race to the top might not be a bad thing, but it wouldn't close any socioeconomic gaps. To do that, you actually need to tackle inequality itself. In the context of a reasonably egalitarian society, a well-functioning school system shouldn't exhibit massive achievement gaps, but in the context of a wildly inegalitarian one there's no way the school system can singlehandedly set everything back to zero. See also super-intern Conor Clarke's thought on the latest homework "debate."

But in Greg Mankiw's view, even in today's neo-Gilded Age America it is harder for more-prosperous parents to keep the gap eroding than it looks.

Greg Mankiw's Blog: Rich Dad, Poor Dad: Yesterday's Washington Post contained a story about the intergenerational transmission of inequality....

The likelihood that a child born into a poor family will make it into the top five percent is just one percent, according to "Understanding Mobility in America," a study by economist Tom Hertz from American University. By contrast, a child born rich had a 22 percent chance of being rich as an adult, he said. "In other words, the chances of getting rich are about 20 times higher if you are born rich than if you are born in a low-income family," he told an audience at the Center for American Progress, a liberal think-tank sponsoring the work.H

e also found the United States had one of the lowest levels of inter-generational mobility in the wealthy world, on a par with Britain but way behind most of Europe."Consider a rich and poor family in the United States and a similar pair of families in Denmark, and ask how much of the difference in the parents' incomes would be transmitted, on average, to their grandchildren," Hertz said."In the United States this would be 22 percent; in Denmark it would be two percent," he said....

The last number on the U.S. economy (22 percent) is consistent with other things I have seen, but one can just as easily put the point in a different light: How much does income inequality persist from generation to generation? After two generations, 78 percent of the benefit of being born into a wealthy family has dissipated. I think many people would find this to be a surprisingly small degree of persistence...

Economists for Raising the Minimum Wage

Via MaxSpeak:

MaxSpeak, You Listen!: REAL ECONOMISTS FOR RAISING THE MINIMUM WAGE: [Here's something for all the smug market fetishists who think stick figures are a worldly philosophy. -- mbs]

Dear Colleague:

Due to congressional inaction and lack of support from the current administration, the federal minimum wage has not been increased since September 1, 1997, nine years ago. Since that time, the value of the last increase has been completely eroded by inflation.

We believe that a modest increase in the federal minimum wage is long overdue...

When Crooked Timber Attacks!

Here I am, with 73 zillion things to do today (not including trashing CJR Daily for economic illiterate journamalism), and what does Henry Farrell do?

He gets Cambridge University Press to send me a free copy of Sheri Burman (2006), The Primacy of Politics: Social Democracy and the Making of Europe's Twentieth Century (Cambridge: Cambridge University Press: 0521521106).

Evil. Pure evil.

The Stakes in the Inequality Debate

Matthew Yglesias cites Paul Krugman:

Matthew Yglesias / proudly eponymous since 2002: What Matters: This debate's been roiling over at the Prospect and I waded in with a take roughly along these lines, but I think Krugman really nails it:

Consider this: The United States economy is far richer and more productive than it was a generation ago. Statistics on economic growth aside, think of all the technological advances that have made workers more productive over the past generation. In 1973, there were no personal computers, let alone the Internet. Even fax machines were rare, expensive items, and there were no bar-code scanners at checkout counters. Freight containerization was still uncommon. The list goes on and on.

Yet in spite of all this technological progress, which has allowed the average American worker to produce much more, we're not sure whether there was any rise in the typical worker's pay. Only those at the upper end of the income distribution saw clear gains -- gains that were enormous for the lucky few at the very top.

That's why the debate over whether the middle class is a bit better off or a bit worse off now than a generation ago misses the point. What we should be debating is why technological and economic progress has done so little for most Americans, and what changes in government policies would spread the benefits of progress more widely. An effort to shore up middle-class health insurance, paid for by a rollback of recent tax cuts for the wealthiest Americans -- something like the plan proposed by John Kerry two years ago, but more ambitious -- would be a good place to start.

The thing of it is is that in order to articulate the point properly, Democrats are going to need to re-learn the word "inequality," something that seems to have vanished from their vocabulary in the late 80s or early 90s.

Job Security and Insecurity

Daniel Gross writes:

Behind That Sense of Job Insecurity - New York Times: DANIEL GROSS: [T]he United States economy -- a giant job-churning machine -- each quarter destroys nearly 7 percent of existing jobs and creates a roughly equivalent percentage. Even for those at the top rungs of the labor ladder, job stability isn%'t what it used to be....

Steven J. Davis.... As they have become more entrenched in the work force, women have seen their average job tenure rise, to 3.8 years in 2004 from 3.1 years in 1983. In the same period, the figure declined for men -- particularly for those ages 45 to 54, whose average tenure in 2004 was 9.67 years, down from 12.8 years in 1983. Job tenure has declined "among both blue-collar and white-collar male workers.... White-collar jobs, which were historically dominated by college-educated men, are no longer quite as secure as they were a generation ago."

So what accounts for the public concern over job instability? Professor Davis notes that job stability at publicly held companies -- large, brand-name businesses like Intel that make news when they restructure -- has decreased markedly. "But such companies only account for about one-third of all business employment," he said....

"It was and still is the case that roughly a quarter of jobs end within a year," said Professor Neumark.... "But that doesn't mean you won't eventually find an employer with whom you'll have a long-term attachment," said Professor Stevens, who has been at U.C. Davis for three years, her third job since receiving her Ph.D. in 1995.

In my view, it looks like the difference is that you could find a long-tenure private-sector job a generation ago if you wanted one. Now it is much harder to find one.

How Much Are Americans Saving for Retirement?

The keen-eyed Arnold Kling is skeptical of the claim that $63,000 1992 dollars is more than the "optimal" median life-cycle savings for an American in his or her 50s in 1992:

EconLog, Saving for Retirement, Arnold Kling: Library of Economics and Liberty: John Karl Scholz, Ananth Seshardi, and Surachai Khiatrakun write,

We find that over 80 percent of HRS households [a sample of households aged 51-62 in 1992] have accumulated more wealth than their optimal targets. These targets indicate the amounts of private saving households should have acquired at the time we observe them in the data, given their life cycle planning problem and social security and defined-benefit pension expectations and realizations. For those not meeting their targets, the magnitudes of the deficits are typically small.

This sounds like wonderful news, for it suggests that Americans are saving plenty for their retirements. But the median net worth in the data is $102,600, which does not impress me. The median "optimal" net worth as calculated by the authors is $63,116, which impresses me even less. Maybe there is a good case to be made that $63,116 is plenty of savings for the median household in their fifties...

Fourteen years of inflation and real income growth since 1992 means that $63000 then bears the same relation to GDP per worker that $110,000 does today. Consider that that median household has (blowing everything up by nominal income worker growth since 1992) has the equivalent of today's $188,000 in Social Security wealth and $66,000 in defined-benefit pension wealth. It's really not $63,000 that Arnold Kling should be thinking of as the SSK target: it's $364,000.

And the median American household in its fifties is not that rich, not living that well, and should be rapidly building its assets for retirement. My instinct is to share Arnold's skepticism about SSK's results. But I am not at all sure my instincts are correct here.

And the mean "optimal" numbers? As best as I can see, they are about $79K of defined-benefit pension wealth, $179K of Social Security wealth, and $280K of other wealth--a total accumulation for the mean household in its 50s of $538K in today's (2006) dollars at today's (2006) income levels.

Jason Furman on the American Standard of Living

Jason Furman on American earnings and inequality:

American Prospect Online - ViewWeb: Walk and Chew Gum at the Same Time. by Jason Furman: Damn Matthew Yglesias. Somehow he hacked into my computer and stole my argument on the Rose-Mishel debate -- before I had even written it. Damn he's good. As Matt points out, the debate over what has occurred in the last 30 years is largely irrelevant to the policy prescriptions and political strategies we adopt to ensure that America becomes an even better place over the next thirty years.

But the facts are not entirely irrelevant.... I would much rather we all... spend our time figuring out what to do about rising inequality. But... Rose is right, people are substantially better off than they were 30 years ago.... [T]oday's workers are earning more than their counterparts did 30 years ago.

Ignore the statistics for a second and use your common sense. Remember when even upper-middle class families worried about staying on a long distance call for too long? When flying was an expensive luxury? When only a minority of the population had central air conditioning, dishwashers, and color televisions? When no one had DVD players, iPods, or digital cameras? And when most Americans owned a car that broke down frequently, guzzled fuel, spewed foul smelling pollution, and didn't have any of the now virtually standard items like air conditioning or tape/CD players?...

A long life -- it's four years longer today than it was in 1975. A college education -- 38 percent of young adults are enrolled today, compared to 26 percent back in 1975. A home -- also more common today than in 1975....

Some of the wage statistics that Mishel tosses around suffer from a number of limitations, virtually all of which bias the picture in the same way. The biggest one is that wages... are reported after the cost of increasingly generous and technologically advanced health insurance is factored out.... Health isn't the only problem with the wage data; other benefits have grown as well -- in addition to the fact that the wage comparisons rest on a measure of inflation that is almost universally believed to be biased and ignore the influx of immigrants who weren't in the data back in the 1970s.

But if you are capable of walking and chewing gum at the same time, then read Mishel to learn about the large rise in inequality and the large disconnect between productivity growth and compensation for the typical worker.... [O]ur economic system does a decent job of delivering strong productivity growth... even when inequality widens, the majority of Americans are still doing better.... But I also want more Americans to share in those gains, and thus support investments in education, progressive savings incentives, and more generous tax credits to make work pay -- especially for childless workers who have been left behind by our increasingly child-centric tax system....

[I]f we're not happy with the way our society distributes the gains from our economy -- and I personally wouldn't be happy with the state of things even if someone [were to] convince me that inequality was actually decreasing -- then the final part of a solution is a more progressive fiscal system....

A good politician -- think Bill Clinton -- can talk optimistically about America's successes but also constructively about overcoming our probelems and challenges. Surely even us lesser mortals can aspire to do the same.

Larry Katz Weighs in on What Should Be Done About Inequality

Ezra Klein:

TAPPED: LAWRENCE KATZ SPEAKS. One last thing on yesterday's David Brooks column. My friend Reihan Salam wondered why I was so dismissive of the piece, and he was right to. In short, I've done a lot of reading into the economic literature on inequality and never, ever come across what Brooks was saying. Moreover, I'd read a fair amount of Lawrence Katz's work on inequality and it also failed to support Brooks' thesis. Something seemed wildly awry.

So I employed the top secret journalistic technique of picking up the damn phone (or PUDP, in TAP office parlance), and gave Katz a call. His answers confirmed my suspicions. Before he even talked about the column, he e-mailed to say that "I obviously don't have anything to do with the 'spin' [Brooks] gives the material and certainly nothing to do with the numbers he cites in the first half of his column." And when I got him on the phone, he repudiated nearly every aspect of the piece. "There are," he said, "clear market forces that have to do with the demand for talented individuals, but the current period is not that different from the past for that type of thing. In the past, however, we've done a very good job expanding access to education to keep up with growth, providing bargaining power to those left behind, and using government policy to help them. What's changed in the last twenty years is that we've eroded those ameliorating institutions."

In other words, Brooks used Katz as a good example of "the second and much more persuasive school of thought on inequality" that rejects the decline in unions, increases in CEO pay, loss of wages, and all the other standard critiques of the left. The only problem? Katz is not that sort of economist. He mentioned the importance of unions four or five times during our ten minute talk, and kept returning to the idea that the demand for new skills is nothing new and nothing specific to America -- what's different is its translation into rampant inequality. He is also a former Clinton administration economist, and so the distortion of his views gave a bipartisan imprimatur to Brooks' remarks, allowing Brooks to place a wedge between the good "Clinton" Democrats and the bad, populist liberals.

I can't speak of intentions; I don't know if Brooks misunderstood Katz -- who, like me, he spoke to -- or distorted him, or just wrote unclearly. But the opinions in that column are not those of Katz. Even the part Brooks directly attributes -- the primacy of "skills," or so-called skills-based technial change -- is misleading. As Katz told me (and as others, like Emmanuel Saez, have pointed out), "Those market forces aren't new, and other countries have had them without the inequality we've had." In other words, France has computers and customer service too, and they've not seen the startling increase in inequality that we have.

So what does Katz think we should do? "Talented Americans aren't going to stop working if their tax rate is 42 percent," he told me. "So I would scale back cuts at the top end and use the revenue to expand the EITC to increase its generosity and its reach -- it should be doing more for young singles. We should clearly have a National Labor Relations Board that's more open-minded, so it's easier to unionize...And over the long run we need to do things to provide health care to a larger group, offer training and wage insurance to people who lose jobs, and create greater educational opportunities [throughout society]." So there you have it, Lawrence Katz wants unions, health care, more expansive wage subsidies, and a more progressive tax code. The question, I guess, is whether Brooks really does agree with him.

Mickey Kaus Is Right!

Mickey Kaus's claims that high numbers for "Brokeback Mountain" in Plano, TX did not tell us that Texans in general were broadminded because Plano was an oasis of liberal yuppiedom find strong support from... Wal-Mart!

WSJ.com - To Boost Sales, Wal-Mart Drops One-Size-Fits-All Approach: Thinking Local To Boost Sales, Wal-Mart Drops One-Size-Fits-All Approach World's Largest Retailer Will Target Six Groups in U.S.; Changing Product Mix Guns Out, Home-Fitness In. By ANN ZIMMERMAN. September 7, 2006; Page A1: To appeal to affluent shoppers in Plano, Texas, Wal-Mart staffed the new store there with consumer-electronics specialists called "know-it-alls." And it geared the sporting-goods section toward children, on the theory that well-heeled adults tend to buy their tennis and golf gear at country clubs, not discount stores....

Enter Mr. Castro-Wright. The 51-year-old native of Ecuador had conducted a test run of his localization theories during his stint running Wal-Mart's Mexican division from 2000 to 2005, first as chief operating officer, then as chief executive. Wal-Mart's Mexican stores had six different formats before he arrived. Mr. Castro-Wright refined their merchandise mix to better target different income levels.... While the Mexican localization was based purely on shoppers' incomes, Mr. Castro-Wright concluded the U.S. was a more complex market and segmentation would involve ethnicity and lifestyle as well....

The Plano store has about 3,000 different items -- or about 3% of the total -- targeting the well-heeled. It has twice the number of organic products and a wine section with 1,000 bottles, at prices ranging from $4 to $500. Wal-Mart removed the gun department and expanded the home-fitness equipment area. "I normally do not shop at Wal-Mart, but I really like this store, because it is much nicer than the typical Wal-Mart," said Charlotte Ackley, an employee-benefits specialist, on a recent visit to the Plano store. "It is clean, has a good selection of wines, and the service is fast"...

Yes, in Plano, TX, it is a selling point that the local Wal-Mart has "a good selection of wines."

Game to Mickey Kaus!

Now--for the set--does Mickey Kaus read past the jump in the Wall Street Journal news pages? Does he read Wall Street Journal stories about retail at all--even if they are on page A1? Does he read page A1 at all?

How long will it take Mickey Kaus to discover this strong support for his Plano hypothesis? And how will he discover it?

Place your bets ladies and gentlemen...

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UPDATE: It's Friday morning. Not only does Mickey Kaus not read far enough in the *Journal* to discover that the yuppie-friendly Plano, TX Wal-Mart has no guns-and-ammo section, has "a good selection of wines" at prices ranging up to $500 a bottle, and "has geared the sporting-goods section toward children, on the theory that well-heeled adults tend to buy their tennis and golf gear at country clubs"; nobody who emails Kaus reads that far into the *Journal* either.

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UPDATE II: It's Friday afternoon. Not only does Mickey Kaus not read far into the *Journal*; not only does nobody who emails Kaus read far into the *Journal*; but nobody who emails anybody who emails Kaus reads far into the *Journal*. This is depressing.