Collateral Damages are Actually "Extra Savings"

My old article, "Bosses Don't Wear Bunny Slippers" is used in a number of business programs.

Never thought that it would turn out that "Deans Do Wear Bunny Slippers."  But it is true that colleges would be a lot cheaper without all those pesky faculty.

Lost Interest

Institutions, the Rise of Commerce and the Persistence of Laws: Interest Restrictions in Islam and Christianity

Jared Rubin
Economic Journal, forthcoming

Abstract: Why was economic development retarded in the Middle East relative to Western Europe, despite the Middle East being far ahead for centuries? A theoretical model inspired and substantiated by the history of interest restrictions suggests that this outcome emanates in part from the greater degree to which early Islamic political authorities derived legitimacy from religious authorities. This entailed a feedback mechanism in Europe in which the rise of commerce led to the relaxation of interest restrictions while also diminishing the Church’s ability to legitimise political authorities. These interactions did not occur in the Islamic world despite equally amenable economic conditions.

(Nod to Kevin Lewis, who never loses interest)

Econo-sophistry

In today's NYT, Bob Frank argues that since private markets compress pay differences relative to productivity differences, libertarians should accept government redistribution of wealth/income.

I am not sure there is one single sentence in this editorial that makes sense. Certainly not its imputing of actions and beliefs to "libertarians" or its ritualistic but content free invoking of "economic theory" or its claim of a stylized fact without any supporting evidence beyond one ridiculous example, or its bizarre equation of private pay practices with coercive government actions.

Here, I'll just concentrate on the bad economics.

Frank's example of where pay doesn't follow productivity is carpenters in a framing crew. He says:

The most productive carpenter in a framing crew, for example, might produce twice as much as his least productive colleague, but is rarely paid even 30 percent more.

This is pretty nuts in a number of dimensions.

First, where do these numbers come from? The weasel words "might" and "rarely" are there to cover his ass, but this is just made up out of whole cloth.

Second, a framing crew produces a framed house. It is team production. Marginal products are notoriously difficult to measure in this context and there is a lot of "economic theory" about this issue. It would be almost impossible to verify that one framer produced "twice as much" as another inside of a single crew.

Third, just widen the issue from carpenters on a framing crew to carpenters in general and his point totally fails. The least skilled work on framing crews. Higher skilled are the finish carpenters who do make a lot more money (easily more than twice as much). The highest skilled are artisans turning out custom furniture pieces and they in turn make a lot more money than do finish carpenters (again, easily more than twice as much).

I am not going to put quantitative numbers on these classes (with weasel words to give me an escape valve), but I am confident that, over the trade of carpentry in general, variations in earnings are extremely tied to variations in skill and these variations are quite large.

Frank then claims that the two highest paid workers in an enterprise rarely earn more than the three lowest paid.

Man, I guess CEO pay is really not an issue in this country after all.

Also in Frank's own industry, higher education, this is certainly not the case.

In econ departments and b-schools at least, the two highest paid full professors easily earn more than the three lowest paid assistants.

And of course, if you take the unit of observation to be the university, the gap between highest and lowest "employee" is very very large. OU's president makes over $250K and some staff make less than $25K.

There are a number of fields where pay is close to linearly related to productivity. Piecework jobs in factories and sales jobs on commission are two obvious examples.

Finally, there is a whole literature about the exact opposite case than the one Frank claims to be telling, where there is increasing returns to talent.

Writing, acting, making music, professional sports, and several other fields of endeavor all exhibit this trait.

A delightful piece

A delightful little article, on one man's travels among the strange and mysterious "Econ" tribe.

One of the chief priests, a "Dr. Romer," once appears to have worshipped different dieties, but now worships the god called "Porkulus." Angus had pointed this out at the time, of course, but it is worth remembering.

(Nod to the NCM)

Kevin Morrison, Duke Student

This Slate article gives major props to my man Kevin Morrison, Duke Phd and now asst prof at Cornell.

Everybody should study game theory. Or else get hammered by it.

Paul Samuelson: RIP

Paul Samuelson died today at the age of 94. He won the Nobel prize in Economics in 1970. He had a huge influence on the profession both as a researcher and as a textbook author. 

However, given current circumstances, I wonder if he would like to retract this quote:

“I don’t care who writes a nation’s laws — or crafts its advanced treatises — if I can write its economics textbooks”

Hey, Dude! You Are Losing a Dell (Plant)!

If you are from North Carolina, you recall all the hull, and the aballoo, about the mighty Dell plant in Winston-Salem.

Well, after sucking down enormous tax subsidies from the city, and cash subsidies, from the state, the plant is closing. It was only here four years, but it burned through tens of millions of taxpayer dollars.

I have to give my fellow Poli Sci prof., and state rep., Paul Luebke credit: He voted no from the outset. Paul and I agree on more than you might think, even though he is a liberal Dem. Or, maybe BECAUSE he is.

All the other "Will Lay Down For Money" prostitutes in the NC Legislature, including a whole lot of Repubs, voted yes.

Look, as I said repeatedly during the campaign: If a company will come here for money they will leave for money. We don't want Dell, or Google, to throw us crumbs. We want a business and tax environment such that the NEXT Dell, or Google, STARTS here in NC!

Industrial Organization

Question. Is this an illustration of economies of scale or of scope?

Heaven Knows, Anything Goes

In a very cool paper (ungated version here), Opp, Sonnenschein & Tombazos show that in the textbook Hecksher-Olin world (two goods, two factors of production, and two countries) it is possible to produce a "reverse Rybczynski" effect, simply by assuming that consumers in each country have a preference for the exportable good.

By "reverse Rybczynski", they mean a situation where increases in the supply of the factor of production used intensively in the production of a good produce a decline in the output of that good.

Or as they put it, "immizerizing factor growth".

After reading the piece I was left with two questions.

1. Is there any important proposition in Trade theory that can be proven in general?

2. What does this result mean for work based on the Rajan-Zingales index? Their classic piece and a host of follow up papers all assume that variations in output elasticities across industries are perfectly correlated with variations in input intensities across industries.

PK gets one right!!

When he says:

"So I’m actually reading Hyman Minsky’s magnum opus,... And I have to say that the Platonic ideal of Minsky is a lot better than the reality."

Mungowitz and I can attest to this from personal experience, but let's let PK elaborate:

"The rest is a long slog through turgid writing, Kaleckian income distribution theory (which I don’t think has anything to do with the fundamental point), and more."

Hyman P. had one of the best 15 minutes of wisdom ever, but that was pretty much it.

Top 20 List: Things Economists Say

Geoff Brennan and I spent twenty minutes in the beautiful Pavilion coffee shop here at Duke, thinking about what are the 20 aphorisms that most usefully capture economic wisdom.

The problem with aphorisms is that it takes considerable background to understand them, of course.

But here is our top 20 list. If there is more than one version, we try to give both. If there is an obvious source, we try to give that source. If there is a more general principle, we welcome "other sayings on...."

Starting with #20, and working our way up:

20. Economics is extremely useful, as a form of employment for economists. (Credit to JK Galbraith)

19. If all the world's economists were laid down end to end, around the earth, it would be hilarious. But they still would not reach a conclusion.

18. Give a man a fish, you feed him for a day. Teach a man to fish, and you feed him for a lifetime. (Other sayings on value of human capital.)

17. Do unto others as you would have them do unto you. (An unstable cooperative equilibrium, unless the PD is iterated indefinitely. Then, stable)

16. People want economy. And they'll pay any price to get it. (Credit to Lee Iococca, and kudos to all you Prius owners out there!)

15. Government economists have the same impact on the economy as National Weather Service meteoroligists have on the weather. And the economists and meteorologists are about as good at predicting what will happen tomorrow.

14. Don't put all your eggs in one basket. And if you have more than $100,000, don't put all your cash in one FDIC bank.

13. A stitch in time saves nine. (Other sayings on compound interest and present value)

12. Nothing ventured, nothing gained. (Other sayings that show that, in equilibrium, there is no economic profit on risk neutral investments)

11. There is more than one way to skin a cat. (Other sayings on advantages of competition for spurring innovation)

10. A rising tide lifts all boats. A falling tide smells really bad.

9. The State is the great fiction through which everybody endeavors to live at the expense of everybody else. (Credit to F. Bastiat)

8. In economics, things happen at the margin. The majority is always wrong. (Credit to JK Galbraith)

7. Incentives matter more than intentions

6. The best time to buy real estate is two years ago. The best time to buy a computer is two years in the future.

5. The first law of economics is, there isn't enough to do everything. The first law of politics is to repeal the first law of economics. (Credit to Thomas Sowell)

4. You can't eat your cake, and have it, too. (Other opportunity cost sayings)

3. Whatever is going to happen is happening now. The exception is
equity markets, where whatever is going to happen already happened, yesterday. (Credit to Sylvia Porter)

2. Bygones are bygones. No use crying over spilt milk. (Other sunk cost saysings)

And....a drum roll, please....The #1 best insight of economists, reduced to its most
simple form:

1. TANSTAAFL

Mr. Hazlitt....He right

Wow. Was Henry Hazlitt blessed with the gift of foresight? Nope. Just economic logic. This from 1946 (from KPC friend and ubermensch Mark Perry)

Government-guaranteed home mortgages, especially when a negligible down payment or no down payment whatever is required, inevitably mean more bad loans than otherwise. They force the general taxpayer to subsidize the bad risks and to defray the losses. They encourage people to “buy” houses that they cannot really afford. They tend eventually to bring about an oversupply of houses as compared with other things. They temporarily overstimulate building, raise the cost of building for everybody (including the buyers of the homes with the guaranteed mortgages), and may mislead the building industry into an eventually costly overexpansion. In brief, in they long run they do not increase overall national production but encourage malinvestment. (my emphasis)

~From Chapter VI "Credit Diverts Production" in Henry Hazlitt's "Economics in One Lesson," first published in 1946

(That would be 1946. 63 years ago. Not bad. Now go out and vote for those CDBG Down Payment Assistance Programs, you do gooders! You are harming the very people you seem to believe you are helping!)

And they all moved away on the Group W bench

Willem Buiter eviscerates the modeling assumptions of modern macroeconomics.

My favorite line:

"The irony of modelling liquidity by imposing money as a constraint on trade was lost on the profession."

The whole thing is well worth reading.