Month: January 2018

On November 2, 1983, President Ronald Reagan signed a law establishing a federal holiday for the birthday of Martin Luther King Jr., to be celebrated each year on the third Monday in January. As the legislation that passed Congress said: \”such holiday should serve as a time for Americans to reflect on the principles of racial equality and nonviolent social change espoused by Martin Luther King, Jr..\” Of course, the case for racial equality stands fundamentally upon principles of justice, not economics. But here are a few economics-related thoughts for the day from the archives:

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1) Inequalities of race and gender impose large economic costs on society as a whole, because one consequence of discrimination is that it hinders people in developing and using their talents. In \”Equal Opportunity and Economic Growth\” (August 20, 2012), I wrote:

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A half-century ago, white men dominated the high-skilled occupations in the U.S. economy, while women and minority groups were often barely seen. Unless one holds the antediluvian belief that, say, 95% of all the people who are well-suited to become doctors or lawyers are white men, this situation was an obvious misallocation of social talents. Thus, one might predict that as other groups had more equal opportunities to participate, it would provide a boost to economic growth. Pete Klenow reports the results of some calculations about these connections in \”The Allocation of Talent and U.S. Economic Growth,\” a Policy Brief for the Stanford Institute for Economic Policy Research.

Here\’s a table that illustrates some of the movement to greater equality of opportunity in the U.S. economy. White men are no longer 85% and more of the managers, doctors, and lawyers, as they were back in 1960. High skill occupation is defined in the table as \”lawyers, doctors, engineers, scientists, architects, mathematicians and executives/managers.\” The share of white men working in these fields is up by about one-fourth. But the share of white women working in these occupations has more than tripled; of black men, more than quadrupled; of black women, more than octupled.

Moreover, wage gaps for those working in the same occupations have diminished as well. \”Over the same time frame, wage gaps within occupations narrowed. Whereas working white women earned 58% less on average than white men in the same occupations in 1960, by 2008 they earned 26% less. Black men earned 38% less than white men in the typical occupation in 1960, but had closed the gap to 15% by 2008. For black women the gap fell from 88% in 1960 to 31% in 2008.\”

Much can be said about the causes behind these changes, but here, I want to focus on the effect on economic growth. For the purposes of developing a back-of-the-envelope estimate, Klenow builds up a model with some of these assumptions: \”Each person possesses general ability (common to
all occupations) and ability specific to each occupation (and independent across occupations). All groups (men, women, blacks, whites) have the same distribution of abilities. Each young person knows how much discrimination they would face in any occupation, and the resulting wage they would get in each occupation. When young, people choose an occupation and decide how
much to augment their natural ability by investing in human capital specific to their chosen
occupation.\”

With this framework, Klenow can then estimate how much of U.S. growth over the last 50 years or so can be traced to greater equality of opportunity, which encouraged many in women and minority groups who had the underlying ability to view it as worthwhile to make a greater investment in human capital.

\”How much of overall growth in income per worker between 1960 and 2008 in the U.S. can be explained by women and African Americans investing more in human capital and working more in high-skill occupations? Our answer is 15% to 20% … White men arguably lost around 5% of their earnings, as a result, because they moved into lower skilled occupations than they otherwise would have. But their losses were swamped by the income gains reaped by women and blacks.\”

At least to me, it is remarkable to consider that 1/6 or 1/5 of total U.S. growth in income per worker may be due to greater economic opportunity. In short, reducing discriminatory barriers isn\’t just about justice and fairness to individuals; it\’s also about a stronger U.S. economy that makes better use of the underlying talents of all its members.

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2) The black-white wage gap–and the share of the gap that is \”unexplained\”– is rising, not falling. Here\’s part of what I wrote about in \”Breaking Down the Black-White Wage Gap (September 6, 2017):

The theoretical case for patents is clear enough: if you want people and companies to have an incentive for investing money and time in seeking innovations, you need to offer them some assurance that others won\’t immediately copy any successful discoveries.  But with the power of patents comes the risk of gaming the patent system and of patents being granted when the proffered invention is either not new, or obvious, or both. Michael D. Frakes and Melissa F. Wasserman tackle these issues in \”Decreasing the Patent Office’s Incentives to Grant Invalid Patents\” (Hamilton Institute Policy Proposal 2017-17, December 2017). Also, Jay Shambaugh, Ryan Nunn, and Becca Portman offer some useful background information in \”Eleven Facts about Innovation and Patents\” (Hamilton Project, December 2017).

The Shambaugh, Nunn, and Portman paper offers a few background figures on patents that, as you look, at them, can raise your eyebrows a bit. The background here is that three main patent-granting agencies in the world–the US Patent Office and Trademark Office, the Japanese Patent Office, and the European Patent Office–are sometimes referred to as the Trilateral Patent Offices. The usual belief is that \”compared to the USPTO, the JPO and EPO are believed to apply stricter scrutiny to applications.\” Getting a patent from all three of these offices is called a \”triadic\” patent, and the number of triadic patents is sometimes used as a measure of quality. Now consider a couple of comparisons.

The number of patent applications in the US had more-or-less doubled since 2000. In that time, the number of patent applications in Japan has dropped by one-quarter, while the number in Europe has risen by about 50%. One possible interpretation of this pattern is that the US economy is the grip of a massive wave of innovation far outstripping Japan and Europe, which may foretell a productivity boom for the US economy. An alternative interpretation is that it\’s so much easier to apply for a patent in the US, and to have a patent granted, that the US Patent Office is attracting lots of low-quality and invalid patent applications, and some of those are sneaking through the system to receive actual patents.

Here\’s a figure that poses a similar question. This graph shows the share of GDP spent on research and development on the horizontal axis. The vertical axis is a measure of the number of \”high-quality\” patents, which in this figure refers to an innovation that is patented in at least two of the three Trilateral Patent Offices. The US level of R&D spending is a bit below that of Germany and Japan, but similar. However, when measured in terms of high-quality patents filed, the US lags well behind. Again, this could be the result that US firms aren\’t bothering to apply for European and Japanese protection for all their great patents. Or it could be a signal that the rise in US patents includes a greater of low-quality or even invalid patents than those in Japan and Europe.

Frakes and Wasserman lay out how the US Patent Office works in greater detail, in a way that for me sharpens these concerns. For example, they write (citations omitted):

\”There is an abundance of anecdotal evidence that patent examiners are given insufficient time to adequately review patent applications. On average, a U.S. patent examiner spends only 19 hours reviewing an application, including reading the application, searching for prior art, comparing the prior art with the application, and (in the case of a rejection) writing a rejection, responding to the patent applicant’s arguments, and often conducting an interview with the applicant’s attorney. Because patent applications are legally presumed to comply with the statutory patentability requirements when filed, the burden of proving unpatentability rests with the Agency. That is, a patent examiner who does not explicitly set forth reasons why the application fails to meet the patentability standards must then grant the patent.\” 

The US Patent Office is funded by the fees it collects, which fall into several categories, as Frakes and Wasserman explain:

\”The overwhelming majority of Patent Office costs are attributed to reviewing and examining applications. To help cover these expenses, the Agency charges examination fees to applicants. These fees fail to cover even half of the Agency’s examination costs, however. To make up for this deficiency, the Agency relies heavily on two additional fees that are collected only in the event that a patent is granted: (1) issuance fees, paid at the time a patent is granted; and (2) renewal fees, paid periodically over the lifetime of an issued patent as a condition of the patent remaining enforceable. Combined with examination fees, these fees account for nearly all of the Patent Office’s revenue. … In fiscal year 2016 the Patent Office estimated that the average cost of examining a patent application was about $4,200 . The examination fee that year was set at only $1,600 for large for-profit corporations; at $800 for individuals, small firms, nonprofit corporations, or other enterprises that qualify for small-entity status; and at $400 for individuals, small firms, nonprofit corporations, or other enterprises that qualify for micro-entity status.\”

\”Social Security eligibility begins at age 62, and approximately one third of Americans immediately claim at that age. We examine whether age 62 is associated with a discontinuous change in aggregate mortality, a key measure of population health. Using mortality data that covers the entire U.S. population and includes exact dates of birth and death, we document a robust two percent increase in male mortality immediately after age 62. The change in female mortality is smaller and imprecisely estimated. Additional analysis suggests that the increase in male mortality is connected to retirement from the labor force and associated lifestyle changes.\”

This is a technical research paper that will only be accessible to the initiate, but you can get a good flavor of the results from a couple of figures. A first figure shows the patterns of claiming Social Security. There are various rules about the age at which different kinds of benefits can be claimed. For example Social Security disability benefits can be claimed earlier, but access to what most people think of as the usual Social Security Benefits starts at 62. The figure shows the step-change or discontinuity in number of people retiring at 62, followed by a slower rise in claiming benefits and a smaller jump at age 65.  

The digital economy provides a number of services for which the marginal price (given an internet connection) is zero: games like Candy Crush, email, web searches, access to information and entertainment, and many more. Because users are not paying an additional price for using these services, this form of economic output doesn\’t seem to be captured by conventional economic statistics. Leonard Nakamura, Jon Samuels , and Rachel Soloveichik offer some ways of thinking about the question in in \”Measuring the `Free\’ Digital Economy within theGDP and Productivity Accounts, written for the Economic Statistics Centre of Excellence, an independent UK research center funded by Britain\’s Office of National Statistics (December 2017, ESCoE Discussion Paper 2017-3).

Essentially, they propose that the economic value of \”free\” content can be measured by the marketing and advertising revenue that it generates. In other words, you \”pay\” for \”free\” content not with money, but by selling a slice of your attention to advertising. Thus, their approach is a practical application of the saying: \”If you\’re not paying for it, you\’re the product.\” They write:

”Free” digital content is pervasive. Yet, unlike the majority of output produced by the private business sector, many facets of the digital economy (e.g., Google, Facebook, Candy Crush) are provided without a market transaction between the final user of the content and the producer of the content. … Furthermore, because these technologies are so pervasive and have induced large changes in consumer behavior and business practice, these open questions have evolved into arguments that the exclusion of these technologies from the national accounts leads to a significant downward bias in official estimates of growth and productivity.

The first contribution of this paper is to provide an argument that, yes, it is possible to measure many aspects of the ”free” digital economy via the lens of a production account. … To be clear at the outset, this approach does not provide a willingness to pay or welfare valuation of the “free” content. But this approach does provide an estimate of the value of the content that is consistent with national accounting estimates of production.

We model the provision of “free” content as a barter transaction. Consumers and businesses receive content in exchange for exposure to advertising or marketing. Our approach reduces to treating the provision of the ”free” digital content as payment in kind for viewership services produced by households and businesses. Put differently, the national accounts currently ignore the role of households in the production of advertising and marketing. In our methodology, households are active producers of viewership services that they barter for consumer entertainment. …

We focus on two types of ”free” content: advertising‐supported media and marketing‐supported information. Advertising‐supported media includes digital content like Google search, but also more traditional content like print media and broadcast television. Marketing‐supported information includes digital content like so‐called freemium games for smartphones or recipes from BettyCrocker.com, but also more traditional content like print newsletters and audiovisual marketing. Conceptually, the barter transaction between the producer and user of “free” information is nearly identical to that with advertising‐supported media. The main difference is that advertising viewership is almost exclusively ”purchased” by media companies from the general public and then resold to outside companies. In  contrast, the marketing viewership that is exchanged for “free” information is generally ”purchased” by nonmedia companies from potential customers and used in‐house.

Carbon capture and storage technology isn\’t likely to be the silver bullet that slays climate change  by itself. But it may well be a necessary and meaningful part of the package of policy responses. Akshat Rathi has written a series of readable articles for Quartz magazine (listed here) that give a useful sense of the state of the technology in this area, and its real-but-limited potential.

For example, in an overview article on December 4, 2017, \”Humanity’s fight against climate change is failing. One technology can change that,\” Rathi notes that before starting a year of research and writing on the topic, he was skeptical of carbon capture and storage could be cost-effective. However, he also notes that this technology may both be necessary and possible.

On the issue of necessity, Rathi writes: \”The foremost authority on the matter, the Intergovernmental Panel on Climate Change, has modeled hundreds of possible futures to find economically optimal paths to achieving these goals, which require the world to bring emissions down to zero by around 2060. In virtually every IPCC model, carbon capture is absolutely essential—no matter what else we do to mitigate climate change.\” (Rathi and David Yanovsky offer an interactive game to drive home this point here.)

On the issue of possibility, the evidence is scattered, and still more at the proof-of-concept stage than at a full-fledged and ongoing industry. But some of these fledgling projects are intriguing. For example, Rathi discusses an operation in Iceland (discussed in more detail in an earlier article) which issues geothermal heat to capture carbon dioxide and inject it underground in a location where it combines with minerals to form solid rock–an operation which is an overall net subtraction of carbon from the atmosphere. Rathi notes:

\”Since 2014, the plant has been extracting heat from underground, capturing the carbon dioxide released in the process, mixing it with water, and injecting it back down beneath the earth, about 700 meters (2,300 ft) deep. The carbon dioxide in the water reacts with the minerals at that depth to form rock, where it stays trapped. … In other words, Hellisheidi is now a zero-emissions plant that turns a greenhouse gas to stone. … Critics laughed at those pursuing a moonshot in “direct-air capture” only a decade ago. Now Climeworks is one of three startups—along with Carbon Engineering in Canada and Global Thermostat in the US—to have shown the technology is feasible. The Hellisheidi carbon-sucking machine is the second Climeworks has installed in 2017. If it continues to find the money, the startup hopes its installations will capture as much as 1% of annual global emissions by 2025, sequestering about 400 million metric tons of carbon dioxide per year.\”

In another article, Rathi discusses a plant which generates electricity from natural gas near Houston, in  \”A radical startup has invented the world’s first zero-emissions fossil-fuel power plant\” (December 5, 2017). The process involves using \”supercritical\” carbon dioxide, under high termperatures and pressures. He writes: 

\”In the end, the Allam cycle is only slightly more efficient than typical combined-cycle systems. But it has the major added benefit of capturing all potential carbon dioxide emissions essentially for free. … Beyond the greenhouse-gas effect, carbon dioxide has some fascinating properties. At high pressure and temperature, for instance, it enters a state of matter where it’s neither a gas nor a liquid but has properties of both. It’s called a “supercritical fluid.” If you’ve ever had decaf coffee, you’ve likely been an unwitting customer of supercritical carbon dioxide, which is often used to extract caffeine from coffee beans with minimal changes to the taste.\”

China, which leads the countries of the world in carbon emissions, has been experimenting with carbon capture and storage, without yet making a strong commitment to the technology, as Rathi explains here (and a 2015 report from the Asia Development Bank discusses here).

There are a variety of new projects and possible innovations either to capture carbon from emissions at lower cost, or to turn carbon dioxide into solids like soda ash, and other approaches. Carbon capture and storage isn\’t yet a proven large-scale technology, but it\’s a promising one.

For some previous posts on this topic, with links to various reports and articles, see:

• \”Carbon Capture and Storage: An Update\” (December 24, 2013)
• \”Carbon Capture and Storage: No Stone Unturned\” (July 7, 2016)

If private sellers wish to do so, they can require that payment be made in the form of credit cards or checks. They are not required to accept cash. The Federal Reserve crisply explains the law in this FAQ (last updated June 17, 2011):

Is it legal for a business in the United States to refuse cash as a form of payment?

Section 31 U.S.C. 5103, entitled \”Legal tender,\” states: \”United States coins and currency [including Federal reserve notes and circulating notes of Federal reserve banks and national banks] are legal tender for all debts, public charges, taxes, and dues.\”

This statute means that all United States money as identified above is a valid and legal offer of payment for debts when tendered to a creditor. There is, however, no Federal statute mandating that a private business, a person, or an organization must accept currency or coins as payment for goods or services. Private businesses are free to develop their own policies on whether to accept cash unless there is a state law which says otherwise.

The US Department of the Treasury has a very similar statement at its website.

There are, of course, a rising number of examples of sellers who do not accept cash: certain stores, parking garages, flight attendants on most airlines, and others. Other sellers may refuse to accept certain types of currency, like buses that won\’t take pennies for the fare, or stores that won\’t accept bills larger than a certain denomination.

My understanding is that no state enforces laws with actual teeth that require firms to take cash. (Massachusetts seems to have an unenforced law without penalties that retailers must accept cash.) It\’s not obvious that states should enact such laws, either. But as the use of cash fades in many contexts, it\’s worth remembering that not everyone has credit cards. For example, about one-quarter of all US families in the bottom 20% of the income distribution are \”unbanked,\” and for those without a bank account, having access to plastic-based spending power can be difficult or costly or both.

Consider a policy of giving every American $1,000. The argument made in support of the policy is that poor people need money to buy necessities. If you point out that helping poor people does not require writing a check to everyone, the response is to accuse you of being someone who opposes helping poor people.

The logical fallacy in this syllogism is obvious.

Premise A: A policy helps poor people.
Premise B: You oppose the policy.
Conclusion: You oppose helping poor people. 

Of course, it may be that what is actually opposed is not support for those in need, but the broader policy which promises benefits for everyone, and thus imposes much higher cost. One might also support an alternative way of helping the poor, which involves different incentives. In this sense, there are number of cases where invoking \”the poor\” or \”basic necessities\” is a ruse, designed to provide a smokescreen for policies that mainly seek to benefits the middle and upper class. Once you are alerted to the dynamic, examples are numerous.

A standard example arises when some items are exempted from state sales taxes. Here in my home state of Minnesota, a number of items are exempt from state sales tax: food,  clothing home heating fuels, prescription drugs, certain medical devices, and caskets and funeral urns. The usual reason given for these exemptions is that these are \”basic\” items. The list of basic necessities is disputable: for example, only three other states exempt clothing from sales tax. But more broadly, the poverty rate in Minnesota is below 10%. If the goal is to help the bottom 10-20% of the income distribution in affording \”basic\” items,, it is not sensible to exempt 100% of the population from sales tax on these items. It would be straightforward to collect the sales tax from everyone, and then rebate the money to the poor in some way. Or the poor could be issued a \”no sales tax\” ID card that would be given to cashiers when buying certain goods.

Another example on my personal list involves congestion tolls charged for travelling in certain lanes during peak commuting times. The Washington Post recently reported that just-established congestion toll lanes in northern Virginia were charging $34.50 on a certain day to travel 10 miles during the worst of the morning commute. The story quotes the concern that such tolls are \”going to introduce a real hardship for people on low wages or working in the nonprofit or public sector,\” along with arguments that congestion tolls needed to be capped. But of course, a price cap to make congestion fees \”affordable\” won\’t actually get rid of the congestion–and then no one will want to pay the fee, either. If the goal is to reduce transportation costs for people with low incomes, spending the congestion fees on subsidizing the mass transit that they use is going to likely to be a choice that helps more people in a more cost-effective manner.

Another example involves a recent proposal from the US Department of the Interior to raise the price of enter to 17 of the most popular national parks during their peak seasons.  This fee increase doesn\’t seem especially well thought-out: for example, the price for entry into these 17 parks during peak season would rise to $70 for a week of access, while the proposed fee for an annual pass to these same parks would be almost the same at $75, But those who go to national parks typically have above-average incomes, and what they spend on transportation, lodging, food, and gear is typically a lot more than the cost of entering the park. If the goal is to make national parks available and affordable to those with lower income levels, it would be fairly straightforward to set up a system where low-income people could receive vouchers. It would also be useful to provide additional low-cost mass transit and housing within the national parks. But low park entrance fees for everyone is not a cost-effective way of helping those with low incomes enjoy the parks.

Government programs that start out being aimed at the poor often find themselves expanding so that much of the assistance goes to other groups. A classic example is Community Development Block Grants, through which the federal government was going to provide funds to low-income communities. But unsurprisingly, the rules for allocating these funds include more than average income levels in a community, and a lot of the funds end up flowing to destinations and purposes that don\’t seem to fit the broader intention of the program. Steven Malanga makes the case for \”Let’s Kill the CDBG\” in the Autumn 2017 issue of City Journal. He writes:

\”These days, the CDBG hands out money for projects that have little to do with its poverty-combating mission. With an average annual family income of $67,000, well above the poverty line, Manchester, New Hampshire, is no one’s idea of a depressed community; but the city is spending $200,000 in block-grant money to fill an unused pool and convert it into a “splash pad.” Elgin, in suburban Illinois—with a poverty rate of just 8 percent—is sprucing up its parks with $740,000 in CDBG funds. Fast-growing Berkeley County in South Carolina is building a library and recreation complex, including a swimming pool and tennis courts, partly with block-grant money. In 2016, Monmouth County, New Jersey—average household income: $115,000—spent more than $110,000 in CDBG funds on enhancements to a publicly owned entertainment venue, the Count Basie Theater.\”

An April 2017 report from the Urban Institute hits similar notes in its review of the literature: \”For example, wealthy suburbs may have older housing stock and low population growth but are not especially needy. … Studies have found that the formulae’s abilities to match funding to need have diminished over time.\”

Examples of programs that claim to be supporting the poor, while actually designed to confer equal or greater benefits on the non-poor, can easily be multiplied. For example, I\’ve heard attempts to justify universal pre-K education because it might be helpful for low-income families. But subsidizing pre-K education for low-income families doesn\’t require subsidizing it for all. At the other end of the education spectrum, I\’ve heard attempts to justify free college education for all because some people can\’t afford the costs–but it\’s not necessary to make it free for everyone in order to help a subset of the population. I\’ve heard the tax deduction for mortgage interest defended as a way of encouraging homeownership, but  even leaving aside the issue that most homebuyers by definition are not poor, giving a boost to first-time homebuyers can be done in a lot of ways that don\’t involve allowing deductibility of mortgage interest for all. The minimum wage is often defended as a way of helping the poor, but about half of those receiving the minimum wage are not actually below the poverty line. Rather than advocating a plan that seeks to boost the incomes of high school workers from middle-class families, there are a variety of other ways of subsidizing wages for low-income workers.

 And of course, there are a number of international examples of this phenomenon as well, most prominently the many low-income countries that hold down prices or offer broad subsidies for basic necessities like fuel and food.

Many countries have had policies of keeping food prices low to  help the poor, but found that most of the benefits went to the nonpoor.  A 2014 story in the Economist noted: \”In Burkina Faso, Egypt and the Philippines less than 20% of spending on food subsidies goes to poor households. In the Middle East and North Africa only 35% of subsidies reach the poorest 40%, the IMF reckons.\” Similar patterns often emerge for fuel subsidies, which can cost about $1 trillion annually in developing countries. Again, helping the poor could be done through cash transfers, or some form of direct distribution, or through vouchers–pretty much any approach targeted more specifically at the poor will be more affect than universal (or nearly so) lower prices or subsidies.

I\’m often in favor of programs that transfer resources to the poor–and only to the poor. But it\’s worth being wary of the political dynamic which uses the poor as as stalking horse for policies and programs with rather different effects.

The Value of Measuring and Publicizing Poverty

Atkinson: [I]t’s one principle I work on: I won’t do something unless I actually see, firstly, that it’s something where I actually want to know the answer because I think it’s intellectually interesting but, secondly, that there is some potential way in which it’s feeding into what actually happens.

The European Social Indicators is a good example of that, because it came about because the European Union was, under Jacques Delors, becoming quite concerned about social dimensions and the fact that there was significant poverty in the European Union, which Delors did quite a lot to identify. There was movement, as it were, at the beginning of the 2000s to give it some more priority. And it turned out by coincidence or by chance that the Belgians had the presidency, and the Belgian Minister of Social Affairs was one of my former students. … Well, economists might well say, “Oh, it’s cheap talk.” We know that there are 125 million people in the European Union living in poverty, according to standard measures. But actually, it changed the climate of discussion because each country is peer-reviewed every year as to what their performance is according to indicators, and it is more than mildly embarrassing when, as in Germany at the moment, poverty is going up quite rapidly.

Restoring Official Measurements of Inequality in the United Kingdom, and Elsewhere

Atkinson: [C]learly, since about the early 1990s, I’ve been trying to get the government and other bodies to restore income distribution to being something that they actually publish data on. You have to remember, in this country—the UK—we dropped the income distribution statistics somewhere in the 1980s. After that, there were none.

Stern: We had a Royal Commission on the Distribution of Income and Wealth—

Atkinson: —which I was a member of, indeed. And we were sacked.

Stern: By Margaret Thatcher?

Atkinson: Yes, indeed. And after that, the income distribution statistics were stopped. The OECD [Organisation for Economic Co-operation and Development], for example, after putting their toe in the water in the 1970s, didn’t return to the subject for another 20 years. So the report that I did with Tim Smeeding and Lee Rainwater in 1995 for OECD (Atkinson et al. 1995) was the first time they’d had a publication on income distribution for 20 years.

On the importance of looking at deviations from pure general equilibrium thinking

Atkinson: I can remember the lecture given by Jacques Dreze, which you may have been at, which was called “the firm in general equilibrium theory.” He said, “How do you get the firm into general equilibrium theory? Well, you blow up a paper bag, and then you puncture it. … And so, you’ve let all the air out. The firm has no real existence.”

The Importance of Knowing How Economic Data is Generated

Atkinson: I think the other thing is that our understanding of data on the more macro side is much inferior to what it was. In the early days of national accounts, they were constructed by people who did macroeconomics, as well, people like Richard Stone, Paul Samuelson, James Meade, and so on.

Stern: The best of the best.

Atkinson: Exactly. They were doing work on constructing national accounts, so they knew perfectly well what they were using. Keynes, for example, knew how his younger colleagues were making up those numbers. I fear that, today, that’s one of the areas where people just don’t understand what they’re using, and the origin of the numbers should not just be a footnote point. … And I came across this when I wrote a review of how government output is measured, because the United States—still, as I understand it—measures government output according to the input. Some US economists say this is a general policy, but it is not; the European Union, and the UK as part of it, has been using an output-based measure for quite a long time. When we looked at this issue, we discovered that about half the difference in the recorded growth rates between the UK and the US was due to this difference in method.

On the problems of narrowness and publication pressure for young economists

Stern: Are we really helping create the all-around economist in a way that, perhaps, came more naturally earlier? 

Atkinson: One has to recognize there was this question, again, about change over time. When you and I were students, we could actually read the major journals—there were probably, at most, a dozen—and one could at least cast one’s eye down and see what was going on. They were all a lot less fat than they are today, too. So, I think one has to recognize the subject is partly the victim of its success. The profession is so much bigger, and there’s so much more research going on. But I think this has come at a cost. We have become too specialized, and people define themselves as being specialized economists, whereas I just think of myself as an economist. 

Now, if you meet people, they’ll say, “I’m a labor economist,” or, “I’m an IO [industrial organization] economist,” as if they belong to that tribe. I think that’s fine, but of course you then get seminars taking place on labor economics, which actually would’ve benefited enormously from the seminar on industrial organization that happened at the same time. And people just don’t talk to each other, and I think that’s a loss; at least all my cohorts had an appreciation of what was going on elsewhere. 

Stern: Is there something we could do? 

Atkinson: Well, I think it’s partly a question of training; that is, one needs to have more courses teaching people the appreciation of something rather than the identification of a thesis topic. But also I think the loss, in many places, of the general seminar is an example of an issue with the academic departments; when I was there, Harvard, to its credit, did have three general seminars a term, which were well attended. Probably 60 or 70 people, at least, would come to them. And the talks were, on the whole, at very appropriate levels. Of course, there are various forms of diffusion through media; they all serve this function. But I think it’s perhaps more an issue of persuading younger economists that this is something they ought to take more seriously than they do. …
Whenever I talk to a would-be graduate student, I say, “What is it you want to know?” I’m sure you do the same. Not having an answer to that question is a weakness, and, in some way, it’s partly due to the professionalization. People are doing economics as a profession rather than because they’re really interested in the answers. …

Well, I think the position of young economists is actually very difficult at the moment, at least as far as the academic sphere is concerned, because we’ve now moved to a pretty unforgiving judgement based on journal publication. This means they’re under great pressure, which is often very hard for them to satisfy in the sense that everyone is trying to publish in top journals. I think this pressure affects the choice of subject matter and the style of economics. It’s much easier to publish, I suspect, theoretical than applied economics in major journals; it is certainly easier to publish theory than applied economics concerned with countries other than the US. I think that young economists are being pressured into a very difficult situation where their academic careers are related to things that are often quite opposed to what they want to do. If you ask them what the question is that they want an answer to, many of them have a very good response: They’re doing economics because there is something they really want to find out, they’re really concerned about some particular issue, or they’ve read something that really inspired them and that they want to follow up. I often find it very difficult to advise them. My instinct is to say, “Follow your instincts,” but, on the other hand, they may never get jobs.

About 30% of undergraduate economics degrees given to US citizens and permanent residents go to women. Perhaps unsurprising, about 30% of the PhD degrees given to  US citizens and permanent residents go to women, too. A sizable literature has tried to spell out possible reasons for these patterns. Here, I will point out that the underrepresentation of females in economic starts before college, and can be seen in the number of students taking the AP economics examinations in  micro and macro.

The data below is from the AP Data–Archived Data 2016 (scroll down to the National and State Summary Reports, and then look just at the National Data for the US).

More male students take the AP economics exams than females, although overall, females take more AP exams than men. The scores of males are higher, and the number of males with a score of 4 or 5 on the exams is higher, too. I have no wish to overinterpret these numbers, but a couple of quick thoughts seem fair.

1) These differences suggest that among those high school students thinking about college, and thus taking AP exams, a greater number of males have an interest in economics than females. Moreover, a greater number of men have received positive feedback for that interest in economics–in terms of a high score.

2) To the extent that many students who arrive in college have at least a fuzzy idea of the areas in which they might wish to concentrate already in place, colleges that want to move toward more gender balance in their undergraduate economic enrollments will need to overcome some patterns that have already been set in high school. If the pipeline of women who major in economics isn\’t expanded substantially, it will be difficult for the number of women who earn PhD degrees in economics to expand substantially.

This blog is free in monetary terms. I don\’t pay a fee to an internet company; readers don\’t pay a fee to me.  The costs are mainly in terms of time: that is I spend time writing the blogs, and readers spend time looking them over. But while it\’s comforting and even partially true to think that this blog is a public service provided for my own devious reasons, the software is provided and the hosting is done by Google. Thus, I\’m working without a monetary return to draw your attention to Google, and you are providing your attention to Google.

All of which serves as a reminder of a saying that I\’ve seen repeated a number of times in various forms during last few years: \”If you\’re not paying for it, you\’re the product.\”  Fortunately, I didn\’t have to track down the origins of this quotation. because the Quote Investigator website already did it last summer.

The renaissance of this sentiment seems to trade back to a comment from the Metafilter website back in 2010: