Uncategorized - Conversable Economist

April 7, 2014 conversableeconomist

Long-Term Unemployment and Older Workers

The plague of long-run unemployment is one of the worst consequences of the aftermath of the Great Recession, as I have noted here, here, and here. David Neumark and Patrick Button present evidence that this burden is shouldered primarily by older workers in \”Age Discrimination and the Great Recession,\” discussed in the Economic Letter of the Federal Reserve Bank of San Francisco for April 7, 2014.

One way to measure long-run unemployment is to look at the average length of time that an unemployed worker is out of a job. From 1990 up to the start of the Great Depression, men and women aged 55 and over tended to be out of work longer than unemployed workers in the 25-54 age bracket, but the difference typically wasn\’t very large. But after the Great Recession, the duration of unemployment rose to over 20 weeks for those in the 25-54 age bracket, but to about 35 weeks for the unemployed in the 55 and over age bracket.

Of course, discrimination by age is illegal in the United States under the Age Discrimination
in Employment Act originally passed in 1967 and then amended and strengthened several times since then. However, states are allowed, if they wish, to enact age discrimination rules that are stronger than the federal standard. For example, the federal law only applied to employers with 20 or more employees, but 34 states have set lower size minimums. Similarly, federal age discrimination law only allows for \”liquidated damages,\” which means wage losses that actually occurred, while 29 states also allow for compensatory or punitive damages.

Thus, Neumark and Button can ask the question: Do states with stronger laws against age discrimination see less of a rise in the length of unemployment for workers over age 55? Perhaps surprisingly, they find that in states with the possibility of higher liability, the length of unemployment for men over 55 goes up! They write:

\”Thus, we find no evidence that stronger age discrimination protections helped older male workers weather the Great Recession better than younger male workers. In fact, some evidence indicates that stronger state age discrimination protections may have made things relatively worse for older male workers. For women, the evidence is more mixed. On one hand, some evidence suggests that stronger age discrimination protections were associated with relatively smaller increases in the unemployment durations of older women during the Great Recession. On the other hand, in the period after the Great Recession, states with stronger age discrimination protections had larger declines in the hiring rate of older women.\”

Here the evidence stops, and the attempts at interpretation begin. Here are some \”conjectures\” from Neumark and Button:

An event like the Great Recession disrupts the labor market so severely that sorting out which effects are due to age discrimination and which to worsening business conditions becomes very difficult. These complications may make it hard to demonstrate age discrimination, reducing the likelihood that the legal system can intervene effectively and fairly.
States with stronger age discrimination laws impose constraints on employers. Thus, there could be what might be described as a pent-up demand for age discrimination in these states. A sharp downturn gives employers cover to engage in age discrimination.
During and after the Great Recession, business conditions and the need for labor may have been so uncertain that employers became especially wary of hiring older workers. They may have feared that if they had to lay off older workers, they would face wrongful termination claims based on age. Such claims could be more likely or more costly in states with stronger age discrimination laws.

It\’s not clear what policies would best address the additional burden of longer-term unemployment on older workers. The situation is a reminder that when laws are passed which make it more costly to fire or to lay off workers, such laws are also by definition a disincentive to hire that category of workers in the first place. It\’s often tricky to prove age discrimination in the case where workers are fired, but it\’s even more difficult to prove such an employment discrimination case related to an unwillingness to hire older workers. After all, if a firm announces that it is hiring lots of entry-level workers, or workers at salaries typically paid to those who are 30 years old, rather than hiring lots of workers at the wages typically paid to those who are 55 or 60 years old, such a policy will make it harder for older workers to get a job but may not fit the legal definition of discrimination.

April 5, 2014 conversableeconomist

Robber Baron Etymology

As an article in the Economist explained a few weeks back, \”In the Middle Ages the Rhine was Europe’s most important commercial waterway. Like many modern highways, it was a toll route. Toll points were meant to be approved by the Holy Roman Emperor, but local landowners often charged river traffic for passing through. These “robber barons”, as they became known, were a serious impediment to trade, and imperial forces had to take costly punitive action to remove them.\”

This reference sent me off, wandering the web, to figure when the \”robber baron\” terminology crossed over to refer to American businessmen who took advantage of their monopoly position to accumulate extraordinary personal wealth. The shift seems to have happened in the 1870s.

The Oxford English Dictionary cites the first usage for this meaning of \”robber baron\” in 1874, in the Congressional testimony of W.C. Flagg, president of the Illinois State Farmers\’ Association, before the Report of the Select Committee on Transportation — Routes to the Seaboard, which is magically available on-line. Here\’s Flagg, orating on the subject of robber barons who owned railroads:

\”England and America, you see, teach us the same lesson. Combination between rival [railroad] lines has destroyed competition, except that occasional \”cutting of rates\” makes fearful fluctuations, in which a few shippers gain, but for which the general public must sooner or later pay. Our railways, practically, that is, are regulated not by competition, but by combination; by due of the parties in interest, and not by both. There-by you, the citizens of a democratic-republican country, are enabled to know how cruel, relentless, and unscrupulous a thing is arbitrary power in the hands of a few. Regulation by combination means that the railroad managers are feudal lords, and that you are their serfs. It means that every car-load of grain, or other produce of your fields and shops, that passes over the New York Central shall pay heavy toll for right of transit to Vanderbilt, the robber baron of our modern feudalism, who dominates that way. Regulation by combination means that yon, the large manufacturer or shipper or consignee at this point, shall truckle to railway officials for special favors, and skulk and avoid the \” farmers\’ movement,\” when yon believe it to be right, for fear you will compromise your pecuniary interest. It means that you, the farmer, shall be compelled to sell your corn below the cost of production, or that the consumer of the Atlantic seaboard shall pay too much for his bread. It means despotism — paralyzing enterprise, rewarding subservience, suborning legislators, corrupting society, and trampling on the rights of the citizen.\”

However, the Wikipedia entry on \”robber baron\” sent me to a slightly earlier source, an August 1870 article in the Atlantic Monthly titled \”Hardhack on the Sensational in Literature and Life,\” which is also magically available on-line, where the author writes:

\”Now what is one of the most frightful characteristics of our present mode of doing business? Is it not the building up of great fortunes out of colossal robberies? And the thing is done by a series of sensational addresses to the cupidity of the cheated. High interest notoriously goes with low security; but we have, sir, in this country, a class of rogues who may be called the aristocracy of rascaldom, and who get rich by dazzling and astonishing others into the hope of getting rich. They are the contrivers of enterprises which propose to develop the wealth of the country, but which commonly turn out to be little more than schemes to transfer wealth already realized from the pockets of the honest into those of the knavish. They are the financial footpads who lure simple people into stock corners, and then proceed to plunder them. They make money so rapidly, so easily, and in such a splendid sensational way, that they corrupt more persons by their example than they ruin by their knaveries. As compared with common rogues, they appear like Alexander or Caesar as compared with common thieves and cutthroats. As their wealth increases, our moral indignation at their method of acquiring it diminishes, and at last they steal so much that we come to look on their fortunes as conquests rather than burglaries. Indeed, their operations on Change vie
with those of military commanders in the field, and are recorded with similar admiring minuteness of detail. They are the great sensations of the world of trade, and have, therefore, more influence on the imaginations of young men just starting in business than the dull chronicles of the great movements of legitimate commerce. Now, sir, take the universal American desire to get rich, and combine it with the rapid, rascally way of getting rich now in vogue, and you will find you are breeding up a race of trading sharks and wolves, which will eventually devour us all. Honesty will go altogether out of fashion, and respectability be associated with defect of intellect. Why, the old
robber barons of the Middle Ages, who plundered sword in hand and lance in rest, were more honest than this new aristocracy of swindling millionnaires. Do you object that I am getting into a passion? Why, sir, I have purchased dearly enough the right to rail. Didn\’t I put my modest competence into copper? And to recover my losses in copper, didn\’t I go madly into petroleum? And didn\’t the small sum which petroleum was considerate enough to leave me disappear in that last little turn in Erie?\”

What\’s interesting about this earlier quotation is that the reference to robber barons is still referring to the usage in the Middle Ages–and comparing them to \”swindling millionaires\” proffering get-rich schemes. At least judging by this example, the \”robber baron\” terminology was being compared with the businessmen of the time, but it wasn\’t yet being applied to monopolists.

I haven\’t tried to make a study of this, but the terminology of \”The Robber Barons\” was surely well-entrenched by the time Matthew Josephson wrote his 1934 book by that title, looking back at the second half of the 19th century. But the term didn\’t seem equally applicable to, say, Henry Ford or Thomas Watson as it did to Cornelius Vanderbilt and J.P. Morgan. I don\’t think I\’ve ever heard \”robber baron\” serious applied to, say, Bill Gates or Warren Buffett.

April 4, 2014 conversableeconomist

Latin America: Modest Progress on Inequality

When thinking about the national economies of Latin America, I have a tendency to think of past problems and controversies: the hyperinflations and debt defaults of the 1980s; the arguments over whether and how to follow a \”Washington consensus\” of market-oriented reforms in the 1990s; and the history of being the highest-inequality region in the world. But as one looks back over the last 25 years, what stands out is not so much the country-by-country issues and problems, but the economic progress the region has made. Did you know that according to World Bank data, Brazil already ranked in 2012 as the 9th-largest economy in the world and Mexico as 10th, putting those two countries just ahead of Italy, Canada, and South Korea. Some progress is happening with regard to poverty and inequality in the region, too.

The World Bank has published a report called \”Social Gains in the Balance: A Fiscal Policy Challenge for Latin America & the Caribbean.\” To set the stage, here\’s the progress against poverty in the Latin American region in the last decade or so. The share of \”extreme poor,\” classified as those living on less than $2.50 per day, fell by half since 2000. The share of \”moderate poor\” living on $2.50 to $4 per day also fell sharply. The share of those \”vulnerable\” to falling back into poverty at $4 to $10 in consumption per day stayed about the same. But bit increase was the \”middle class,\” which refers to those living on between $10 and $50 per day. Indeed, of these four groups, the \”middle class\” is likely to become the largest in the next few years.

The World Bank has a simple measure of whether economic prosperity is being \”shared.\” It compares the growth rate of income for the bottom 40% of the income distribution to the overall average. That measure helps to explain why inequality in Latin America has declined since 2000–although that reduction in inequality has stagnated in the last few years.

The reduction in inequality and gains in shared opportunity are quite real. For example, here\’s a graph showing various measures of progress in Brazil.

So far, most of the reduction in inequality in Latin America has come from economic growth. As the World Bank also estimates: \”About 68 percent of poverty reduction between 2003 and 2012 was driven by economic growth, with the remaining 32 percent arising from decline in inequality.\” Moreover, given that shared economic growth was also reducing inequality, only a portion of the decline in inequality is due to government redistribution.

Some of the decline in inequality is being pushed by government fiscal policies, especially in the form of in-kind transfers where more money is spent on education and health care for the poor. \”Between

2000 and 2011, social spending as a share of GDP rose from 11.7 to 14.5 percent, with public spending on education rising from 3.9 to five percent, capital expenditures from 3.5 to 4.5 percent, and health spending from three to nearly four percent across the 18 countries tracked by the Economic Commission for Latin America and the Caribbean. . . .To support the higher spending, the region increased tax collection from 16 to 20 percent of GDP between 2000 and 2010.\”

However, despite these modest steps, the amount of redistribution in Latin America remains small by the standards of high-income countries. The light blue squares show the distribution of income in various countries, as measured by the Gini coefficient (a measure discussed in yesterday\’s post). Notics the in terms of pre-tax, pre-transfer income, the nations of Latin America have relatively high inequality–but not remarkably so. However, the governments of Latin America still do so relatively little to reduce inequality, and so their after-tax, after-transfer level of inequality is well above that of the high-income countries.

The severe degree of inequality in Latin America over the decades has meant that it was underinvesting in the education and health of a large proportion of its population.

April 3, 2014August 6, 2024 conversableeconomist

What’s a Gini Coefficient?

When you look up economic statistics about inequality, you often see it measured with a Gini coefficient. But where does the Gini coefficient come from, how is it calculated, and intuitively what does it mean? Here are some thoughts.

The most straightforward way to think about the Gini coefficient is to start with a different but related tool for measuring inequality, a figure called a Lorenz curve. The Lorenz curve was developed by an American statistician and economist named Max Lorenz when he was a graduate student at the University of Wisconsin. His article on the the topic “Methods of Measuring the Concentration of Wealth,” appeared in Publications of the American Statistical Association , Vol. 9, No. 70 (Jun., 1905), pp. 209-219. The Congressional Budget Office presented a nice tight description of a Lorenz curve in a 2011 report:

“The cumulative percentage of income can be plotted against the cumulative percentage of the population, producing a so-called Lorenz curve (see the figure). The more even the income distribution is, the closer to a 45-degree line the Lorenz curve is. At one extreme, if each income group had the same income, then the cumulative income share would equal the cumulative population share, and the Lorenz curve would follow the 45-degree line, known as the line of equality. At the other extreme, if the highest income group earned all the income, the Lorenz curve would be flat across the vast majority of the income range,following the bottom edge of the figure, and then jump to the top of the figure at the very right-hand edge.

“Lorenz curves for actual income distributions fall between those two hypothetical extremes. Typically, they intersect the diagonal line only at the very first and last points. Between those points, the curves are bow-shaped below the 45-degree line. The Lorenz curve of market income falls to the right and below the curve for after-tax income, reflecting its greater inequality. Both curves fall to the right and below the line of equality, reflecting the inequality in both market income and after-tax income.\”

The Gini coefficient is calculated as an area taken from the Lorenz curve. The Gini coefficient was developed by an Italian statistician (and noted fascist thinker) Corrado Gini in a 1912 paper written in Italian (and to my knowledge not freely available on the web). The intuition is straightforward (although the mathematical formula will look a little messier). On a Lorenz curve, greater equality means that the line based on actual data is closer to the 45-degree line that shows a perfectly equal distribution. Greater inequality means that the line based on actual data will be more “bowed” away from the 45-degree line. The Gini coefficient is based on the area between the 45-degree line and the actual data line. As the CBO writes in its 2011 report:

“The Gini index is equal to twice the area between the 45-degree line and the Lorenz curve. Once again, the extreme cases of complete equality and complete inequality bound the measure. At one extreme, if income was evenly distributed and the Lorenz curve followed the 45-degree line, there would be no area between the curve and the line, so the Gini index would be zero. At the other extreme, if all income was in the highest income group, the area between the line and the curve would be equal to the entire area under the line, and the Gini index would equal one. The Gini index for [U.S.] after-tax income in 2007 was 0.489—about halfway between those two extremes.\”

To put it another way, the Lorenz curve plots the full range of data on the distribution of income. The Gini coefficient boils down that full range of data to a single number, which is why it\’s useful for comparisons. But because the Gini boils down the overall distribution of income to a single number, it also loses some detail. For example, if the Gini coefficient has risen, is this because the share going to the top 20% went up, or the top 10%, top 1%, or top 0.1%? You can see these kinds of differences on a Lorenz curve, if you know what you\’re looking for, but the Gini alone doesn\’t tell you which is true.

So that’s the graphical meaning of the Gini coefficient. But what is the intuitive meaning? I posted last weak about an intriguing “Chartbook of Economic Inequality,” written by Tony Atkinson and Salvatore Morelli. In their overview of why they use the statistics they use, they write:

“The [income] distribution is summarised in a single summary statistic, typically the Gini coefficient, which is not our preferred statistic but that most commonly published by statistical agencies. The explanation of the coefficient given by most agencies takes the form of geometry, but we prefer to describe it in terms of the mean difference. A Gini coefficient of G per cent means that, if we take any 2 households from the population at random, the expected difference is 2G per cent of the mean. So that a rise in the Gini coefficient from 30 to 40 per cent implies that the expected difference has gone up from 60 to 80 per cent of the mean.\”

Atkinson and Morelli add another way to interpret the Gini coefficient:

Another useful way of thinking, suggested by Amartya Sen, is in terms of “distributionally adjusted” national income, which with the Gini coefficient is (100-G) per cent of national income. So that a rise in the Gini coefficient from 30 to 40 per cent is equivalent to reducing national income by 14 per cent (1/7).\”

Note: This post in part recycles some explanations of the Gini that appeared previously in this blog several years ago, but it seemed useful to put the discussion all in one place.

April 2, 2014 conversableeconomist

Venture Capital: Looking for the Big Ones

With the venture capital industry, you always hear about the big successes. But what about the failures? Thus, I give credit to Bessemer Venture Partners, a company with claim to being the oldest US venture capital firm with more than a century of experience, for publishing an \”anti-portfolio\” webpage–that is, the firms that they passed on which turned out to be big successes. Here are some samples:

Apple: \”BVP had the opportunity to invest in pre-IPO secondary stock in Apple at a $60M valuation. BVP\’s Neill Brownstein called it \”outrageously expensive.\”
eBay: \”Stamps? Coins? Comic books? You\’ve GOT to be kidding,\” thought Cowan. \”No-brainer pass.\”
FedEx: \”Incredibly, BVP passed on Federal Express seven times.\”
Google: \”Cowan’s college friend rented her garage to Sergey and Larry for their first year. In 1999 and 2000 she tried to introduce Cowan to “these two really smart Stanford students writing a search engine”. Students? A new search engine? In the most important moment ever for Bessemer’s anti-portfolio, Cowan asked her, “How can I get out of this house without going anywhere near your garage?”

Part of the lesson here, of course, is that picking successes is really hard, even for highly successful venture capitalists. A typical rule-of-thumb is even after the venture capitalist chooses investments with all due diligence, about one in ten are highly successful. Here\’s some industry data on the distribution of costs and returns from Adams Street Partners, another well-known venture capital firm. The blue bars show the proportion of total costs for venture capital firms and the red lines show the proportion of total realized value. Thus, the first to bars illustrate that about 45% of the investments of venture capital firms, by value, pay back less than half of what was invested, and in total represent only a couple of percentage points of the total value of the firm. Indeed, many of these investments end up being worth nothing at all. At the other end, about 10% of venture capital investments by cost end up providing a return that is more than 5 times the original investment, and these lead to about 60% of the ultimate value of the firm.

If you want a quick overview of the U.S. venture capital industry, the 2013 NVCA Yearbook is a useful starting point. Here\’s a figure showing the total capital under management by venture capital funds. Perhaps not unexpectedly, the total rose sharply during the dot-com boom in the late 1990s, then flattens out in the early 2000s, and drops with the Great Recession. However, it still remains much higher than, say, the early or mid-1990s.

And here\’s a figure showing the new commitments of venture capital each year. Again, the pattern is a huge increase in the late 1990s, a drop-off in new capital in the early 2000s, but then a level of new commitments in the last few years that seems permanently higher than the early and mid-1990s.

Venture capital is obviously a relatively small part of the enormous US financial sector. For research and development projects that need to be very large in size right away, or where the commercial prospects are uncertain and distant, venture capital is unlikely to be a useful funding mechanism.

But for new possible ventures of the financially appropriate size, where it\’s possible to start small and scale up with success,venture capital does some things extremely well. It sets up a structure where everyone expects that failures will be common and expected–both the failures of choosing an investment that fails and the failure to spot a profitable investment in the first place. Because failure is expected and common, successful venture capital firms have to become good at cutting off the financing to companies that aren\’t developing as hoped. Big companies and organizations–including large banks and the government–often have a very hard time with the notion that they will invest in a high proportion of outright failures. Big organizations also typically have a hard time with the notion that it\’s foolish to throw good money after bad, and that if a project or company isn\’t going well, it should just be stopped so that resources can be allocated elsewhere. Thus, venture capital offers an alternative structure for funding projects that have on average a high failure rate, but with a possibility of being great successes–which is what makes the smallish venture capital sector a key part of the U.S. financial ecosystem.

April 1, 2014 conversableeconomist

Air Pollution: World\’s Biggest Health Hazard

The World Health Organization has just released estimates that 7 million people around the world died from air pollution in 2012, which is about one in eight of all deaths in the world that year, and \”confirms that air pollution is now the world’s largest single environmental health risk.\” Most of the deaths are from heart disease, stroke, lung cancer, and for children, acute lower respiratory infections. A fact sheet titled \”Burden of disease from Household Air Pollution for 2012\” offers some details by region.

Perhaps surprisingly, more than half of the deaths from air pollution are from household air pollution (HAP), typically from low-income people who use solid fuels to cook indoors. Most of these deaths occur in poor areas of southeast Asia, the western Pacific, and Africa.

An accompanying feature story from WHO, called \”Clean household energy can save people’s lives,\” offers some detail about cooking indoors in India:

\”Many women do not realize that the smoke emitted from the traditional clay or brick stoves called chulhas is putting their and their family members’ lives in danger. The solid fuels they use in these ovens include a mix of wood, coal, crop residue and cow-dung. Their smoke contains many dangerous pollutants such as fine particulate matter and carbon monoxide.

“Having an open fire in your kitchen is like burning 400 cigarettes an hour,” says Dr Kirk Smith, a Professor of Global Environmental Health from the University of California at Berkeley, who began to measure the air pollution exposure from cooking over open biomass cook stoves already in the 1970s. “Unfortunately, we have not made a lot of progress in the past decades and household air pollution is still the largest single health risk factor for Indian women and girls.”

An estimated 700 million people in India still rely on solid fuels and traditional cook stoves for domestic cooking despite their negative impact on peoples’ health. This figure has remained relatively constant over the last three decades despite efforts to improve access to cleaner energy sources such as gas and electricity also in rural areas.\”

The remaining 3.7 premature deaths caused by air pollution are from ambient air pollution–that is, in the outdoor air. Again, in terms of absolute numbers, most of these deaths occur in the western Pacific and south-east Asia regions, where both air pollution levels and populations are especially high. However, it\’s worth noting that even in the high-income parts of the Americas, referring mainly to the United States and Canada, there are an estimated 94,000 deaths per year from outdoor air pollution.

Here\’s an earlier post that discusses research on \”Costs of Air Pollution in the U.S.\” And here\’s some discussion of the costs of soot and methane, two elements of air pollution that both have immediate health costs and also are potential contributors to increasing the risks of disruptive climate change.

I wouldn\’t mind it if some of the political and policy energy focused on how climate change can affect us all in a few decades was refocused on how current air pollutants are killing millions of people per year right now.

March 31, 2014December 27, 2023 conversableeconomist

Does Economics Make You a Bad Person?

Economic reasoning often begins with a presumption that people act in a self-interested manner. And so there’s been a string of small-scale research over over time about whether studying economics makes people more likely to act in a selfish manner. Adam Grant offers a nice short overview of this research (with links to underlying papers!) for Psychology Today last October, in “Does Studying Economics Breed Greed?”

The especially tough question in this research is how to distinguish between several possibilities: 1) Maybe studying economics changes the extent to which people act selfishly; 2) Maybe studying economics makes people more willing to admit that they might act selfishly, or makes them act more selfishly in small-scale classroom game interactions, but doesn’t actually change their real-world behavior; or 3) Maybe people who are more likely to act in their own self-interest, or more likely to admit that they act in their own self-interest, are drawn to economics in the first place.

I won’t try to summarize the literature here, especially because Grant already offers such a nice overview, but here are a few samples. A 2012 study by Andrew L. Molinsky, Adam M. Grant, and Joshua D. Margolis in the journal Organizational Behavior and Human Decision Processes (v. 119, pp. 27-37) considers “The bedside manner of homo economicus: How and why priming an economic schema reduces compassion.” Here\’s how Grant describes the study:

“In one experiment, Andy Molinsky, Joshua Margolis, and I recruited presidents, CEOs, partners, VPs, directors, and managers who supervised an average of 140 employees. We randomly assigned them to unscramble 30 sentences, with either neutral phrases like [green tree was a] or economic words like [continues economy growing our]. Then, the executives wrote letters conveying bad news to an employee who was transferred to an undesirable city and disciplining a highly competent employee for being late to meetings because she lacked a car. Independent coders rated their letters for compassion.
Executives who unscrambled sentences with economic words expressed significantly less compassion. There were two factors at play: empathy and unprofessionalism. After thinking about economics, executives felt less empathy—and even when they did empathize, they worried that expressing concern and offering help would be inappropriate.”

Of course, a skeptic might object that even if the \”priming\” with economics terms changes the amount of compassion expressed in a \”bad news\” letter, the executives would still deliver the bad news when they felt it was necessary.

In a 2011 study published in Academy of Management Learning & Education, Long Wang, Deepak Malhotra, and J. Keith Murnighan carry out various experiments on the topic of “Economics Education and Greed.” (10 (4): 643–660). For example, several of their experiments are online surveys in which people in various ways revealed their attitudes about greed. Those who majored in economics, or who read a snippet of economics before answering, were less likely to express attitudes that strongly condemned greed. Of course, a skeptic might point out that such surveys show what people say, but not necessarily what they feel or how they act.

Some of the early studies about how the study of economics might affect its students were published in the Journal of Economic Perspectives (where I’ve worked as the Managing Editor since the start of the journal in 1987). For example, in the Spring 1993 issue, Robert H. Frank, Thomas Gilovich,

and Dennis T. Regan ask “Does Studying Economics Inhibit Cooperation?” They present a variety of evidence that raises cause for concern. For example, they present data that economists in academia are more likely to give zero to charity than others. They report the results of surveys in which students are asked what would happen if they were working for a company that paid for nine computers, but accidentally received ten. Do they expect the error would be reported back to the seller, and would they personally report the error? Those who have taken an economics class are less likely to say that the error would be reported, or that they would report it, than students in an astronomy class.

Again, a skeptic might point out that even if economists are less likely to give to charity, this pattern may have been established well before they entered economics. And maybe the economics class is just causing students to be more realistic about whether errors would be reported and more honest in reporting what they would really do, compared with those in other classes.

In a study in the Winter 1996 issue of JEP that Grant doesn’t mention in his brief Psychology Today overview, Anthony M. Yezer, Robert S. Goldfarb, and Paul J. Poppen discussed “Does Studying Economics Discourage Cooperation? Watch What We Do, Not What We Say or How We Play,” They carried out a “dropped letter” experiment, in which a letter was left behind in various classrooms around the George Washington University campus, some economics classrooms and some not. The letter was addressed and stamped, but unsealed and with no return address. Inside there was $10 in cash, and a brief note saying that the money was being sent to repay a loan. In their experiment, over half of the letters that were dropped in economics classrooms were mailed in with the cash, compared with less than a third of the letters dropped in noneconomics classrooms. They also argue that substantial parts of the economics curriculum are about mutual benefits from trade, both between individuals and across national borders, and in that sense economics may encourage students to see economic interactions as friendly to decentralized cooperation, rather than as just an arena for clashes of unfettered selfishness.In a similar spirit, I sometimes argue that many students enter an economics class seeing the world and the economy as fundamentally a zero-sum game, where anyone who benefits must do so at the expense of someone else. Learning about how division of labor and voluntary exchange at least has the possibility of being a positive-sum win-win game makes them more likely to consider the possibility of benefiting both themselves and others. Maybe there are some unreconstructed business schools which do teach that “greed is good.” But all the economics curricula with which I’m familiar is painstaking about explaining the situations and conditions in which the interactions of self-interested parties is likely to lead to positive outcomes like free choice and efficiency, and also the situations and conditions in which it can lead to pollution, unemployment, inequality, and poverty.

My own sense is everyone plays many roles and wears many hats. A surgeon who cuts into people all day would never dream of getting into a knife fight on the way home. An athlete who competes ferociously all week goes to church and volunteers to help handicapped children during off hours. A parent fights grimly over the appropriate annual marketing plan, and then goes home and hugs their children and takes dinner over to the neighbors who just had a baby. Some economic behaviors certainly shouldn’t be generalized to the rest of life, and i\’s possible to set up situations with questionnaires and little classroom experiments where the boundaries can become blurred. But there’s not much reason to believe that Darwinian biologists practice survival of the fittest in their spare time, nor that sociologists give up on personal responsibility because everything is society’s fault, nor that lawyers go home and argue over fine print with their families.

It’s worth remembering that Adam Smith, the intellectual godfather of economics, reflected on selfishness and economics at the start of his first great work, The Moral Sentiments, published in 1759. The opening words of the book are: “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.” And later in the same chapter: “And hence it is, that to feel much for others and little for ourselves, that to restrain our selfish, and to indulge our benevolent affections, constitutes the perfection of human nature; and can alone produce among mankind that harmony of sentiments and passions in which consists their whole grace and propriety.” Smith saw no contradiction in thinking about people as containing both selfishness and “benevolent affections,” and most people, even economists, seek a comfortable balance between the two depending on the situation and context.

March 28, 2014 conversableeconomist

Warren Buffett on Index Funds for the Non-Professional Investor

Each year the legendary investor Warren Buffett writes an annual letter to the shareholders of Berkshire Hathaway. If you want a quick overview of the thinking behind how Buffett has achieved returns averaging 19.7% annually from 1965 to 2013, while the S&P 500 (with reinvested dividends) has clocked in at 9.8% annually over this time, this is a good starting point. Oddly enough, this year\’s letter to shareholders includes a section on \”Some Thoughts about Investing\” in which Buffett recommends that ordinary stock market investors should look into the merits of no-load mutual funds, like those run by Vanguard. Indeed, in his will, Buffett instructs that the trustee for the money he is leaving to his wife invest those funds in a no-load index fund. Buffett writes:

\”When Charlie and I buy stocks – which we think of as small portions of businesses – our analysis is very similar to that which we use in buying entire businesses. We first have to decide whether we can sensibly estimate an earnings range for five years out, or more. If the answer is yes, we will buy the stock (or business) if it sells at a reasonable price in relation to the bottom boundary of our estimate. If, however, we lack the ability to estimate future earnings – which is usually the case – we simply move on to other prospects. In the 54 years we have worked together, we have never foregone an attractive purchase because of the macro or political environment, or the views of other people. In fact, these subjects never come up when we make decisions. It’s vital, however, that we recognize the perimeter of our “circle of competence” and stay well inside of it. …

Most investors, of course, have not made the study of business prospects a priority in their lives. If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power.

I have good news for these non-professionals: The typical investor doesn’t need this skill. In aggregate, American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts). In the 20th Century, the Dow Jones Industrials index advanced from 66 to 11,497, paying a rising stream of dividends to boot. The 21st Century will witness further gains, almost certain to be substantial. The goal of the non-professional should not be to pick winners – neither he nor his “helpers” can do that – but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.

That’s the “what” of investing for the non-professional. The “when” is also important. The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance and then become disillusioned when paper losses occur. (Remember the late Barton Biggs’ observation: “A bull market is like sex. It feels best just before it ends.”) The antidote to that kind of mistiming is for an investor to accumulate shares over a long period and never to sell when the news is bad and stocks are well off their highs. Following those rules, the “know-nothing” investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results. Indeed, the unsophisticated investor who is realistic about his shortcomings is likely to obtain better long-term results than the knowledgeable professional who is blind to even a single weakness.

If “investors” frenetically bought and sold farmland to each other, neither the yields nor prices of their crops would be increased. The only consequence of such behavior would be decreases in the overall earnings realized by the farm-owning population because of the substantial costs it would incur as it sought advice and switched properties. Nevertheless, both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm.

My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the ten years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers

Here\’s a discussion on this blog about \”Behavioral Investors and the Dumb Money Effect,\” concerning the folly of individual investors trying to time market swings. And here\’s a discussion drawing on the work of Burton Malkiel about how difficult it is for the average investor to beat the market, a mathematical fact which remains true even when the average investor is an active financial manager being paid fees by customers.

March 27, 2014 conversableeconomist

An Inequality Chartbook: Long-Run Patterns in 25 Countries

Tony Atkinson and Salvatore Morelli have combine to produce an intriguing \”Chartbook of Economic Inequality.\” The main feature of the chartbook is a set of figures showing long-run trends in inequality as measured by a variety of statistics for 25 different countries, with all the statistics appearing on a single chart for each country. The charts appears in two forms: there\’s a colorful online version, and then a black-and-white version that can be printed out from a PDF file.

The 25 countries are partly determined by the availability of long-run (meaning a good chunk of the 20th century) data. Along with the United States, the other countries are Argentina, Brazil, Australia, Canada, Finland, France, Germany, Iceland, India, Indonesia, Italy, Japan, Malaysia, Mauritius, Netherlands, New Zealand, Norway, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland, and the United Kingdom. The figure for each country is also followed by a few bulletpoints that highlight some main trends. Detailed sources for the data are also provided.

Any single economic statistic is a one-dimensional slice of reality. When you put a lot of economic statistics together, and let your eye move from one to another, you develop a better overall perspective. As one example, here\’s the chart for the United States. But if you have an interest in these topics, I encourage you to surf the countries of the Chartbook.

Among the key takeaways from this figure: U.S. inequality follows a U-shaped pattern, with a number of measures of inequality falling in the 1930s and 1940s, and then rising since the 1970s. For example,
\”the top decile of earnings has risen from 150 per cent of median in 1950 to 244 per cent in 2012.\” The table also suggests some puzzles. For example, the share of total wealth held by the top 1%, based on estate data, doesn\’t seem to have risen in the last few decades along with inequality of incomes. The dispersion of earnings as measured by the top decile starts rising in the 1950s, but the overall inequality of earnings doesn\’t seem to start rising until the 1970s–presumably because during the 1950s and 1960s, there was declining inequality at the bottom of the income distribution, as seen in the falling poverty rate, to offset rising dispersion of incomes at the top.

Hat tip: I was alerted to the \”Chartbook\” by a post from Larry Willmore at his \”Thought du Jour\” blog.

March 26, 2014 conversableeconomist

Who Sings Homework Blues?

I have three children between grades 6 and 10, and I view homework as a plague upon the land. Family time is tight. The hours between dinner and bedtime are few. Weekends are often full of activities. It can feel as if homework overshadows and steals any available down-time and flexibility. That said, I have to admit that the evidence about actual amounts of homework tends to suggest that it\’s not a problem for most families or students. Instead, my suspicion is that too much homework is a problem for one group and too little homework may be the problem for another group. There\’s a nice summary of the evidence on \”Homework in America\” by Tom Loveless in Chapter 2 of the 2014 Brown Center Report on American Education:How Well Are American Students Learning?\”

As Loveless points out, controversies over \”too much homework\” have been going on for a long time.

\”In 1900, Edward Bok, editor of the Ladies Home Journal, published an impassioned article, “A National Crime at the Feet of Parents,” accusing homework of destroying American youth. . . .Bok argued that study at home interfered with children’s natural inclination towards play and free movement, threatened children’s physical and mental health, and usurped the right of parents to decide activities in the home. The Journal was an influential magazine, especially with parents. An anti-homework campaign burst forth that grew into a national crusade. School districts across the land passed restrictions on homework, culminating in a 1901 statewide prohibition of homework in California for any student under the age of 15 . . .\”

Among more recent examples in the last 10-15 years, Loveless points to cover stories on the \”too much homework\” theme in TIME, Newsweek, and People, the documentary movie Race to Nowhere, and a September 2013 story in the Atlantic, \”My Daughter\’s Homework is Killing Me.\” But of course, it\’s an old saying among social scientists that the plural of anecdote is not data. The systematic data suggests that the homework burden is not a widespread or growing problem.

For example, one of the standard national surveys is the National Assessment of Educational Progress (NAEP). Here are their results from surveying students about how much homework they had the night before. As you can see, there is a small share of students who report more than 2 hours of homework per night, but that share doesn\’t seem to be growing over time. And among 17 year-olds, 27% had no homework assigned the night before the survey.

Of course, one might wonder about just how this survey was carried out, but Loveless runs through a number of other surveys of parents and students that reach similar results. As one more example, here\’s a survey of college freshmen–thus only a sample of those who went on to college–about how much homework they had done as high school seniors. About two-thirds report have done less than 6 hours per week, which of course averages less than an hour per day.

So how do the homework-haters, like me, chew and swallow this evidence?

The evidence is very clear that most students don\’t have too much homework. But it certainly leaves open the possibility that some high school and even middle-school students, perhaps 10-15%, average more than 2 hours of homework each night. My guess is that a lot of these students are also active in school activities: clubs, sports, plays. By the time you add their regular school day, they are in effect committed to one activity or another for about 12 hours out of every day, which doesn\’t leave a lot of time for eating, commuting, sleeping, and anything else.

For example, an article by Mollie Galloway, Jerusha Conner, and Denise Pope late last year in the Journal of Experimental Education looks at \”Nonacademic Effects of Homework in Privileged, High-Performing High Schools\” (81:4, pp. 490-510, 2013). (I don\’t think the article is freely available on-line, but readers may have access through a library subscription.) The survey looked at 4,317 student in 10 high-performing high schools in California. These students averaged more than three hours of homework per night. Here\’s as sampling of comments from these students:

\”There’s never a time to rest. There’s always something more you should be doing. If I go to bed before 1:30 I feel like I’m slacking off, or just screwing myself over for an even later night later in the week . . . There’s never a break. Never.\”
“[I have] way too much homework! I cannot focus on sports and family if I have 4 hours of homework like I normally do.”
“[I have an] overload of activities in a day. School till 3, football till 6:30, Advanced Jazz Band till 8:30, Homework till 12 (or later) then all over again. It is hard to imagine that such intensive schedules could be sustainable for very long.”

In some cases, it feels to me as if parents want the school to push their children to achieve, and schools are responding with a blizzard of homework, while students are caught in the middle. The obvious answer here is for parents to push back, hard, at the individual schools where this happens.

But at the other end of the academic achievement scale, America\’s difficulties with low graduation rates in many high schools, and the need to raise academic achievement across the board for social mobility, active citizenship, and economic growth, suggests that many students are not getting sufficient homework–which is to say that many are getting none at all, or none that they ever do.

Finally, I\’ll add that the way in which a school day interacts with the modern family is part of the issue here. Fewer households with children have a stay-at-home parent waiting with milk-and-cookies at 2:30 or 3. Children get signed up for afternoon activities in part to provide coverage through the work-day of the parents. By the time the parents and children get home, everyone has had a long day already. At that point in the day, starting at 7 or 8, even a moderate amount of homework feels like a heavy load, and 2 hours or more can feel crushing.

Personally, I\’d love to see schools experiment with a schedule where most of the the children would be there from 8-5. (Parents who want to pick their children up at 2:30 or 3 could do so.) But when the child came home at 5, they would be typically be done with homework for the day. Optional activities like sports or music could still be in the evenings, as desired. Or I\’d like to see schools experiment with a rule that all homework is due Wednesday, Thursday, and Friday, but under no circumstances ever due on Monday or Tuesday, thus trying to save the weekend. I know family life will always be busy, and I wouldn\’t have it any other way. But the ebb and flow of even moderate levels of homework across multiple students isn\’t just a student burden. It takes a toll on families, too.