Thursday, August 17, 2017

The preference for partners of the same education has significantly increased for white individuals

See New results on assortative mating by education Tyler Cowen. It seems like well educated whites want partners that will share their values in developing the human capital of their children (like sending them to college). So you get more households with two high income earners and they try very hard to make sure their kids grow up to be well educated and marry someone else well educated (that they might meet in college).

"Partner Choice, Investment in Children, and the Marital College Premium, by Pierre-André Chiappori, Bernard Salanié and Yoram Weiss
We construct a model of household decision-making in which agents consume a private and a public good, interpreted as children’s welfare. Children’s utility depends on their human capital, which depends on the time their parents spend with them and on the parents’ human capital. We first show that as returns to human capital increase, couples at the top of the income distribution should spend more time with their children. This in turn should reinforce assortative matching, in a sense that we precisely define. We then embed the model into a transferable utility matching framework with random preferences, a la Choo and Siow (2006), which we estimate using US marriage data for individuals born between 1943 and 1972. We find that the preference for partners of the same education has significantly increased for white individuals, particularly for the highly educated. We find no evidence of such an increase for black individuals. Moreover, in line with theoretical predictions, we find that the “marital college-plus premium” has increased for women but not for men."
See also On Assortative Mating from Greg Mankiw.As mentioned above, we are getting these very high income households. When the government measures how equal or unequal the distribution of income is, it is often by household. So this process is increasing the difference in incomes between the poorest and richest households. The gini coefficient mentioned below goes from 0 to 1 and higher means less equal.

"A new working paper concludes:
"Data from the United States Census Bureau suggests there has been a rise in assortative mating....[I]f matching in 2005 between husbands and wives had been random, instead of the pattern observed in the data, then the Gini coefficient would have fallen from the observed 0.43 to 0.34, so that income inequality would be smaller""

Wednesday, August 16, 2017

Sad story: liberal newspaper columnist gets hate mail for suggesting that government regulations can have unwanted and unintended consequences

See Liberals should look to all tools to help the poor by Catherine Rampell. Excerpt:
"The “Fight for 15” campaign, seeking to raise the federal minimum wage to that amount, is an example of a pre-tax solution with potentially bad consequences. Post-tax solutions such as the earned income tax credit and health care subsidies deserve as much attention.

Extracting more money from evil,  exploitative capitalists has become a rallying cry for much of the grass-roots left. In the meantime, though, it’s largely ignoring other important policies for lifting Americans out of poverty.

In a recent column, I urged progressives to more seriously grapple with the cumulative effects of policies that make workers more expensive to hire. More than doubling the federal minimum wage to $15, for example, would risk pricing a lot of people out of work. Especially in low-cost-of-living areas such as Mississippi, where half of all jobs pay less than $14.22.

In other words, well-intended, feel-good policies can sometimes backfire, hurting the people you’re trying to help.

This humble suggestion generated a lot (like, a lot) of hate mail, along with a good follow-up question: What, then, should progressives who want to help the working poor devote their energy to?"
Rampell suggested that we use more of policies like the earned-income tax credit (EITC). Three very respected economists who generally advise Democrats, tend to agree with Rampell.

ALAN B. KRUEGER, who was once chair of the Council of Economic Advisors (CEA) under Obama, and is usually a supporter of the minimum wage, agrees with Rampell on $15 (at least back in 2015). See The Minimum Wage: How Much Is Too Much? Excerpts:
"Research suggests that a minimum wage set as high as $12 an hour will do more good than harm for low-wage workers, but a $15-an-hour national minimum wage would put us in uncharted waters, and risk undesirable and unintended consequences."

"But $15 an hour is beyond international experience, and could well be counterproductive. Although some high-wage cities and states could probably absorb a $15-an-hour minimum wage with little or no job loss, it is far from clear that the same could be said for every state, city and town in the United States."

"Although the plight of low-wage workers is a national tragedy, the push for a nationwide $15 minimum wage strikes me as a risk not worth taking, especially because other tools, such as the earned-income tax credit, can be used in combination with a higher minimum wage to improve the livelihoods of low-wage workers.

Economics is all about understanding trade-offs and risks. The trade-off is likely to become more severe, and the risk greater, if the minimum wage is set beyond the range studied in past research."
Alan Blinder is another economist who has advised Democrats. He served on President Bill Clinton's CEA. He is also skeptical of $15. See A Fairness Agenda for Winning Over Angry Voters. Excerpt (also from 2015):
"Raising the federal minimum wage would be an enormous help for wage earners at the bottom. (Many states and cities have done so already.) I’d favor going in stages to something like $10-$12 an hour, not to the $15 that is gaining traction on the left. Moving too high too quickly raises the specter of job losses."
Christina Romer, the first chair of the CEA under Obama, also expressed some skepticism about minimum wage laws. See The Business of the Minimum Wage. Excerpts (from 2013):
"One argument for a minimum wage is that there sometimes isn’t enough competition among employers. In our nation’s history, there have been company towns where one employer truly dominated the local economy. As a result, that employer could affect the going wage for the entire area. In such a situation, a minimum wage can not only make workers better off but can also lead to more efficient levels of production and employment.

But I suspect that few people, including economists, find this argument compelling today. Company towns are largely a thing of the past in this country; even Wal-Mart Stores, the nation’s largest employer, faces substantial competition for workers in most places. And many employers paying the minimum wage are small businesses that clearly face strong competition for workers."

"Some evidence suggests that employment doesn’t fall much because the higher minimum wage lowers labor turnover, which raises productivity and labor demand. But it’s possible that productivity also rises because the higher minimum attracts more efficient workers to the labor pool. If these new workers are typically more affluent — perhaps middle-income spouses or retirees — and end up taking some jobs held by poorer workers, a higher minimum could harm the truly disadvantaged.

Another reason that employment may not fall is that businesses pass along some of the cost of a higher minimum wage to consumers through higher prices. Often, the customers paying those prices — including some of the diners at McDonald’s and the shoppers at Walmart — have very low family incomes. Thus this price effect may harm the very people whom a minimum wage is supposed to help."

"the current tax system already subsidizes work by the poor via an earned-income tax credit. A low-income family with earned income gets a payment from the government that supplements its wages. This approach is very well targeted — the subsidy goes only to poor families — and could easily be made more generous."

"The economics of the minimum wage are complicated, and it’s far from obvious what an increase would accomplish."

"But we could do so much better if we were willing to spend some money. A more generous earned-income tax credit would provide more support for the working poor and would be pro-business at the same time." 

Tuesday, August 15, 2017

New Zealand sheep farmers turn to cattle as the world price of milk rises

See In the Land of Milk and Money, Dairy Boom Feeds Environmental Fears: New Zealand’s waterways are suffering environmental damage, coinciding with an expansion of the country’s dairy industry by Ben Collins of The Wall Street Journal.

Supply and demand curves shift for various reasons. On the supply side one shift factor is the price of another good the firm might make (if they can make more than one item). The world price of milk went up in recent years so farmers in New Zealand switched from sheep to cattle. That would shift the supply of milk to the right.

The demand increased for milk first, sending the price up. The demand increased or shifted to the right as incomes rose in China. So milk must be a normal good. Demand decreases for inferior goods, like Ramen noodles, when your income rises since you can afford better food.

Excerpts from the article:

"Rising incomes in the region, notably in China and India, have lifted millions into the middle class and driven up appetite for protein, including milk and other dairy products.

Global milk prices have surged as a result, prompting some New Zealand farmers to switch from sheep to dairy cattle. In the decade through 2016, the number of dairy cows rose by 28% to 6.6 million while the sheep flock shrank by 45% to 27.6 million, official data show."

But

"Cattle produce more waste than sheep, and some of it gets into rivers during heavy rain or over-irrigation of pastures.

The Tourism Export Council of New Zealand, a trade lobby, said it fears the country is “heading down a path where freshwater quality could lead to reputational damage to our ‘clean, green’ marketing promise we share with the world.”"

The article mentions that dairy is the country's No. 1 export while tourism is No. 2. "Seven out of 10 of New Zealand’s monitored rivers—mostly in lowland areas—are now potentially unsafe for swimmers, according to a government report this year on freshwater quality, which highlighted increased nitrogen levels and algal blooms."

If tourists can't swim in safe water, that industry is hurt. Another example of how life is full of trade offs: you can have more milk or more tourists, but not both.

"Under pressure from tourism operators and community groups, New Zealand’s government in February launched a program to make 90% of rivers safe for recreational swimming by 2040, through measures such as planting vegetation around rivers, new rules on fencing off pastures, and implementing stronger environmental guidelines for local authorities."

"Lawmakers are reluctant to criticize the dairy industry, which dominates many rural towns. Taxes paid by farmers help to pay for schools and hospitals, these lawmakers say, while booming dairy exports have helped New Zealand’s economic growth to outpace much of the developed world, including the U.S.

Nathan Guy, the minister for primary industries, said dairy farmers have voluntarily put up about 16,000 miles of fencing around rivers and lakes to prevent cattle from getting near, or in, waterways."

Sunday, August 13, 2017

Should you invest according to religious guidelines?

See Retirement Savings, the Muslim Way by Tome Verde in The NY Times.

Adam Smith's "invisible hand" suggests that if you follow your own self interest, you will promote the interests of society. But what if your self interest is constrained by your religious beliefs? Excerpts from the article:

"saving for retirement means steering clear of investments in companies and funds that trade in a host of forbidden goods and services, which are known as haram. The lengthy list includes alcohol, tobacco, pork products and media or entertainment considered immoral, such as pornography.

The rules can be tricky to navigate. Investments are banned in companies with too much debt as a percentage of their assets. Interest on loans (known as riba) is also haram, which rules out investing in conventional banking and insurance sectors. Investing in companies earning a minimal amount of interest, typically 5 percent or less, may be allowed, so long as the dividend income derived from that interest is donated to charity.

Equally problematic are many customary market gambits such as annuities and short-selling, which can be viewed as gambling, and thus are prohibited under Islamic law, or Shariah.

“The Islamic principles look to what you are doing with your capital, what types of businesses, assets and operations are you furthering,” said Umar Moghul, a New York-based lawyer specializing in Islamic finance.

Other important criteria, he said, are the terms and conditions of someone’s holdings, “since Shariah also speaks to procedure as well as to the substance of investment.”"

"“Because Islam tends not to distinguish between the temporal and the religious, there is a perennial desire among Muslims to live all aspects of their lives, including the financial, in a manner consistent with their faith,” observed Usman Hayat and Adeel Malik, the authors of a 2014 study of Islamic finance by the CFA Institute."

"independent organizations that help Muslims achieve these goals . . . continually and systematically review companies, bonds and mutual funds to ensure they are Shariah-compliant."

"The original Dow Jones Islamic Market Index was introduced in 1999 as the world’s first Shariah-compliant index. Today, the company’s portfolio of more than 15,000 indexes is among many offered by major financial firms."

"the indexes differ on what is compliant and what is not. Most regard the trade and manufacture of weapons as noncompliant, for example, yet S&P’s board of Islamic scholars takes a nuanced approach. The use of weapons can be permissible (self-defense) or nonpermissible (unprovoked violence), but the weapons themselves are neutral, so investing in their manufacture is sanctioned"

"sukuks offer a fixed rate of profit instead, thus avoiding forbidden riba."

"sukuks must be backed by some tangible asset"

"an Islamic E.T.F. exclusively tracks a benchmark index composed of Shariah-compliant companies."

"Muslim and non-Muslim investors alike have historically done well by parking retirement savings in the Islamic financial sector, particularly during volatile times."

 Related posts:

Data show that socially responsible investments can outperform the S&P 500 index

Is it a retailer’s job to keep shoppers from their vices? (or Adam Smith vs. CVS pharmacy)

Can You Find Virtue by Investing in Vice?

What if companies pledge to adhere to social and environmental accountability guidelines?

Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!) 

For a humorous view of this issue see

A Snickers a Day Keeps the Doctor Away: Why does CVS want to make my migraine cures hard to find? by Joseph C. Sternberg of the WSJ

Saturday, August 12, 2017

What Econ 101 Can Teach Us About Artificial Intelligence

Here's why advancing technology often leads to more jobs for humans, not fewer

By Greg Ip of The WSJ. Excerpt:

"The first chart you draw in Economics 101 is the downward-sloping demand curve. It shows that when the price of something drops, people consume more of it.

This elementary rule of economics is remarkably helpful in discussing the effects of technological change. As I wrote last week, when technology makes something cheaper, we consume more of it, often by finding new uses. This lesson repeats through history: When coal-fueled steam power became more efficient in the 1800s, demand for steam power and coal spread. When automated teller machines made it cheaper to operate bank branches in the 1980s, banks opened more branches.

My column cites spreadsheet programs like Lotus 1-2-3, whose arrival in the early 1980s made repetitive recalculation vastly simpler and faster. This reduced demand for bookkeepers but created more demand for people who could run numbers in new and interesting ways, such as accountants and management consultants.

In a recent article for the Harvard Business Review, Ajay Agrawal, Joshua Gans and Avi Goldfarb, economists at the University of Toronto who study artificial intelligence, say that in the 1990s, economists didn’t buy into the hype that the internet and the World Wide Web would upend everything:
“It wasn’t that we didn’t recognize that something changed. It was that we recognized that the old economics lens remained useful for looking at the changes taking place. The economics of the ‘New Economy’ could be described at a high level: Digital technology would cause a reduction in the cost of search and communication. This would lead to more search, more communication, and more activities that go together with search and communication. That’s essentially what happened.”
They apply that lesson to artificial intelligence and more specifically to machine learning, the use of powerful algorithms to make predictions from patterns in large quantities of data. Machine learning, they say, means many problems will be reframed as prediction problems. Autonomous driving no longer involves programming the car to respond in a certain way to a variety of controlled scenarios, but instead, to watch what humans actually do and then respond the same way.

How does this affect jobs? The authors says it depends on whether the technology competes with or complements what you do. Spreadsheets competed with what bookkeepers do (record keeping and calculation) and thus made them less valuable, but complemented what accountants and consultants do (analysis), and made them more valuable.

Mssrs. Agrawal, Gans and Goldfarb say that AI reduces the value of those who predict things for a living, such as whether a mark on an X-ray is a tumor, but it raises the value of those who use predictions to make judgments:
“When prediction is cheap, diagnosis will be more frequent and convenient, and thus we’ll detect many more early-stage, treatable conditions. This will mean more decisions will be made about medical treatment, which means greater demand for the application of ethics, and for emotional support, which are provided by humans.”
So AI will create winners and losers within and among industries and occupations. But what will the net effect be? More jobs or less, and for whom? This isn’t knowable, but history suggests that while a specific occupation or industry may suffer losses, the aggregate effects will be positive. The growth in accounting and analytical jobs since the early 1980s is much larger than the loss of bookkeeping jobs."

See also The Myth of Technological Unemployment: If the nightmare of technological unemployment were true, it would already have happened, repeatedly and massively by Deirdre McCloskey, one of the best economic historians in the world.

Friday, August 11, 2017

For better learning in college lectures, lay down the laptop and pick up a pen

By Susan M. Dynarski. She is a professor of economics at the University of Michigan.

I encourage my students to take notes with pen and paper (they get extra credit if they copy the notes they took it in class). I suggest that they read their notes carefully to make sure that they understand them before copying them and that they do this between every class meeting.

Excerpts: 
"Do computers help or hinder classroom learning in college? Step into any college lecture and you’ll find a sea of students with laptops and tablets open, typing as the professor speaks.
With their enhanced ability to transcribe content and look up concepts on the fly, are students learning more from lecture than they were in the days of paper and pen?

A growing body of evidence says “No.” When college students use computers or tablets during lecture, they learn less and earn worse grades. The evidence consists of a series of randomized trials, in both college classrooms and controlled laboratory settings.

Students who use laptops in class are likely different from those who don’t. They may be more easily distracted or less interested in the course material. Alternatively, they may be the most serious (or wealthiest) students who have invested in technology to support their learning.

Randomization assures us that, on average, the students using electronics in a study are comparable at baseline to those who do not. That means that any comparison we make of students at the end of the study is caused by the “treatment,” which in this case is laptop use.

In a series of laboratory experiments, researchers at Princeton and the University of California, Los Angeles had students watch a lecture, randomly assigning them either laptops or pen and paper for their note-taking.1 Understanding of the lecture, measured by a standardized test, was substantially worse for those who had used laptops.

When college students use computers or tablets during lecture, they learn less and earn worse grades.
Learning researchers hypothesize that, because students can type faster than they can write, a lecturer’s words flow straight from the students’ ears through  their typing fingers, without stopping in the brain for substantive processing. Students writing by hand, by contrast, have to process and condense the material if their pens are to keep up with the lecture. Indeed, in this experiment, the notes of the laptop users more closely resembled transcripts than summaries of the lectures.

Taking notes can serve two learning functions: the physical storage of content (ideally, for later review) and the cognitive encoding of that content. These lab experiments suggest that laptops improve storage, but undermine encoding. On net, those who use laptops do worse, with any benefit of better storage swamped by worse encoding."

Thursday, August 10, 2017

Moral hazard from Sicilian volunteers (volunteer firefighters)

From Tyler Cowen.

When economists use the term "moral hazard" they mean the fact that when people buy insurance, they might not be as careful as they were before. For example, if you don't have fire insurance for your house, you will be very careful not to create fire hazards. But once you buy insurance, you might not go to as much effort to make sure everything is safe. But that increases the chance that fires will happen.

In this case, the paying of the firefighters for how much they work is the moral hazard. They have an incentive to start fires.
"Fifteen volunteer firefighters have been arrested in Sicily on suspicion of starting wildfires and reporting non-existent blazes so they could earn €10 (£9) an hour for putting them out.
Police in Ragusa province, in the south of the Mediterranean island, said the fire department became suspicious when it emerged that the auxiliary brigade had responded to 120 incidents compared with just 40 tackled by other volunteer teams over the same period
The brigade commander, a refrigeration technician identified as DDV, was deemed dangerous enough to be held under house arrest, the Ansa news agency reported, because he was suspected off continuing to start fires after others had stopped.
Most of the remaining team members, whose private phone calls were recorded as part of the investigation, have since admitted calling the 115 emergency number or getting friends or relatives to do so.
Here is the full story."