Pie Fight

Unions, by Ezra

Ezra Klein is putting up a lot of posts on unions of late, partly in response to dear old Tyler Cowen.

Daddy got mad mad dollah

What does it mean to be so rich that it's almost literally impossible to spend your wealth faster than the interest accrues on it? Via Ezra:

They're just not like you and me -- they're so very much richer:

Mr. Ellison’s net worth last year was around $16 billion. And it will probably be much bigger when the list comes out in a few weeks. With $16 billion and a 10 percent rate of return, Mr. Ellison would need to spend more than $30 million a week simply to keep from accumulating more money than he already has, to say nothing of trying to spend down the $16 billion itself.

He spent something like $100 million on his Japanese-style mansion in Woodside, Calif., making it among the more expensive private residences ever built. But that is only about three weeks worth of the interest he earns on his wealth. And a house doesn’t actually spend down his net worth because it is an asset that can be resold. At least part of the $100 million is just a different way of saving.

Mr. Ellison would have to spend that $30 million a week — $183,000 an hour — on things that can’t be resold, like parties or meals, just to avoid increasing his wealth.

This article has some fairly shocking information. For instance, and here I quote Ezra quoting the author:

"only 4 percent of the richest Americans said that providing an inheritance ranked in their top five reasons for saving." Weirder yet, "the data shows that elderly super-rich people who do not have children save just as much as the ones who do."

So why do the super-rich hoard their wealth? Status, power and greed, basically.

Some economists have dived into the question, and their hypotheses basically boil down to greed. "[The superrich] get something different from having money — clout, power, the ability to dominate an industry. Or perhaps these are just competitive people who care about their position compared with other people on the list." Maybe so. Or maybe this is just humankind's innate loss aversion -- our tendency to irrationally avoid loss even more than we court gain -- at work.

Can you imagine how much good all that money could do? And how much better off countries would be if people with this much money didn't spend so much time fighting for lower taxes?

Postrel

Here NYT "Economic Scene" columns look good.

Galbraith Freidman Overdrive

With Milton Freidman and JK Galbraith both dying in the same week, there's lots of good econ larnin' to do. Here's some links:

Via Ezra, Rick Perlstein writes, "Milton Friedman's life is exactly what those of us interested in turning around American need to be studying.... His ideas brought misery to millions. All the more reason that his absolute determination to spread those ideas should inspire our efforts to turn back that misery."

A critical eulogy of Friedman.

Ezra says McArdle doesn't understand enough economics to understand Galbraith, and that's why she sneers at him.

At Yglesias, Friedman's confusion over Kennedy's most famous words.

LGM on Marty, but not the loveable butcher one.

Dismal, yes. Scientific? Erm.

A very good post from LB about the weak theoretical underpinnings of economics.

To get back around to economics, it appears obvious to me that a solid theoretical underpinning for economics would have to come from psychology; the relationship between economics and psychology is precisely analogous to the relationship between chemistry and physics, in that the first is the study of aggregated behavior (in a particular context) of elements whose behavior is described by the second. And this is a problem for those claiming that important new knowlege is likely to come out of manipulation of mathematical models in economics, because psychology isn't currently in a state where it can provide the sort of solid predictions about human behavior that would be necessary to support those models. In factual situation X, if you ask an academic psychologist "What will person Y do?" the honest answer will be "Beats me, could do Z, could do something else, depends." But economic theory depends on claims that "In situation X (prices go down) people generally will do Z (buy more)," even though those claims aren't dependent on any solid theory of human behavior.

I don't mean by this to denigrate economics more than it deserves. Price falls, demand rises is a pretty good rule of thumb. But it's only a rule of thumb, because its theoretical support is only as good as our understanding of human psychology, which is itself not in a state that's capable of making reliable predictions about behavior. And so predictions based on 'economic theory' are only useful where they're strongly supported by actual, real world data. Arguments such as the the claim that raising the minimum wage must increase unemployment make no sense: where economic theory comes in conflict with the data, you have to remember that economic theory is only as robust as the understanding of human psychology that underlies it, and that understanding is, itself, not robust at all.

On a related topic, Hilzoy on raising the minimum wage.

The work/leisure tradeoff in Europe and America

Ezra Klein decides that since Europe (that monolithic entity) represents one side of the work hours/quality of life debate and the US represents the other side, the ideal compromise state lies in the middle. He's usually quite clever and evidence-based on this sort of thing, but today's analysis seems rather simplistic.

The Century Foundation engages the work/leisure tradeoff:

Between 1970 and 2000, GDP per person rose by 64% in the United States and by 60% in France. In America, this came about because productivity per worker rose by 38% and hours worked per worker rose by 26%. In France, it came about because productivity rose by 83% while hours worked fell by 23%.

I'm actually rather surprised by the paltry vacation time allotted to US workers. Were I a Democratic strategist, I'd make a guarantee of at least two weeks paid and two weeks unpaid vacation time a major policy plank. Given the rate of geographical dispersion, where I, say, live in DC, and my family in Southern California, simply keeping up family ties can easily consume two weeks of vacation a year. On top of that, it would be nice if people got actual, you know, vacations. 

As a more general commentary on all this, I think Europe and America both have it half right. Our focus on competition and tolerance of risk are critical to a healthy economy. Their comprehension of the need for security and the importance of leisure are key for a good society.

Neoclassical indoctrination of our student robots

Here's a good article from someone who spent a term in an introductory economics course at U Chicago. Contrary to poor old Horowitz, the indoctrination seemed to be from the right rather than the left.

Polls routinely show that economists and the general public have widely divergent views on the economy, but among the well-educated that gap is far narrower. A 2001 study ... showed that those with college degrees are more likely to subscribe to the views of neoclassical economists than the general public...

Ezra comments on how economics is taught, and how the  "non-ideological", faux objective ideology  behind it can

There's a nonpartisan, empiricist aesthetic that offers the theories a sense of certainty they don't possess. I've known many kids to enter Econ 101 and come out merrily explaining why the minimum wage is a travesty, only to get through a few upper-division courses and turn on a dime. But since the vast majority of folks who take any economics will only take it once, the vastly simplified, misleadingly clean concepts of the introductory courses, offered with an assuredness the theories' don't deserve, stands. And thus a market worship, driven by the belief that theoretical efficiency has been proven to translate into actual equity, permeates.

It's massively destructive, not least because it's not true -- not even in economics, where the elegant models of the lower levels give way to all manner of caveats and market failures up the ladder. My friend sat in on a grad level course yesterday. The topic? Externalities. Only grad students, apparently, can be trusted to hear that the world isn't quite so simple as Econ 101 predicts. As for the rest of us? Too dangerous. It's a pedagogical decision with a heavy ideological effect, and it deserves more examination than it's received. Chris's article is a crisply written, deeply necessary response. Your must-read of the day.

Galbraith

Ezra on Galbraith

On the bright side, the three do seem to understand -- and this is a particularly wrenching realization for Rubin -- that Galbraith's ideas are absolutely critical in the current moment. I'm often stung by how much everything I write is simply vintage Galbraith, defrosted and mad-libbed for the current era ("Name of president here"). Take countervailing powers: Galbraith argued that capitalism's natural tendency is towards aggregation. The neoclassical concept of many different competitors all battling it out was, he thought, naive. The realities of mergers, acquisitions, and predatory practices would leave industries with a small number of very large players, most of whom would be tacitly cooperating for reasons of profit or survival.

The only way to restore balance, Galbraith argued, was other behemoths. So massive retailers would compete with massive producers (there's evidence of this happening, as Gillette joins Procter & Gamble, in part to better bargain with Wal-Mart), and both had to handle massive unions and activist government. The tension between producers and retailers would safeguard a good economy, and the power of government and unions would ensure a good society.

The extrapolations aren't hard. Unions are basically dead, the government is currently gripped by a corporatist ideology that leads them not to stay out of the economy, but to use their influence to augment corporate power, and no one who reads me will miss the resonance with Wal-Mart's virtual monopsony. I'm not one who goes in much for the conservative adoration of their philosophers and intellectual forebears, but I think the left is deeply impoverished by its essential abandonment of Galbraith's insights. For those who want to do better, you can get a rich and broad overview by reading Richard Parker's recent biography of Galbraith, this compilation of Galbraith's best writings, American Capitalism, or The Affluent Society. And that's just where you should start.

Priorities and prerogatives

If economic growth is your nation's sole goal, you're going to get more economic growth. If you've got other priorities you want to add into the mix, growth might suffer a bit. How did the American public get themselves in such a place that they so firmly believe that if the latter happens, the sky's going to fall down and kill Baby Jesus?

Matthew Yglesias:

The issue, always, is what kind of tradeoffs people think we're making, or could make, and what are the merits of those tradeoffs.

To take an example, at least part of the reason France is poorer than the United States is that the French policy environment is designed in a variety of ways (workweek limitations, vacation mandates, etc.) to encourage people to spend less time working and more time engaged in leisure than is the American policy environment. France could generate more GDP by shifting policies to encourage people to spend more time doing paid, market workand less time doing other stuff.

[...]

Interestingly, I think technological advancements are, in many ways, further muddying the waters here. Most peoples' blogs, I would say, count firmly as hobbies, things they do just for their own amusement. Other blogs -- Josh Marshall's or Andrew Sullivan's, say -- are definitively professional activities, work done as the primary means of earning a living. Lots of others (including this one) are somewhere in the middle -- they have some monetary value and some value as loss-leaders for other paid work while also still having a lot of aspects of a pure hobby endeavor.

One aspect of the internet, however, is that it makes it much easier than it was in the past to gain an audience for your hobbies since the distribution costs and necessary capital investment are tiny. So you have lots of blogs that are pretty definitively hobby endeavors from the writer's point-of-view but are still read by non-trivial numbers of people. A site with 500 readers a day isn't going to earn any money, but 500 people isn't nothing, and the site clearly has some kind of value to those 500 people. And if you have thousands -- tens of thousands -- of sites operating on those terms, well, then, there's a lot of activity happening whose value isn't really being captured by financial exchanges.

And one could say the same of YouTube gambits like the Tony Blair video I linked to earlier. Or public Flickr pages. And, of course, there's open source software. As it happens, relatively few people use OpenOffice or NeoOffice instead of the Microsoft juggernaut, but they're honestly just as good. One could imagine a situation in which a few large institutions dump Microsoft, adopt the open source alternatives, and it leads to a tipping point that destroys the economic viability of non-trivial portions of the closed-source software market. Something like that would register in the macroeconomic indicators in a pretty odd way even though the value would, in some sense, still be there.

Marx's badly discredited theory of value seems to me to have some relevance in that sort of thing. A copy of OpenOffice has basically no exchange value but does have considerable use value. Maybe. Or maybe that's the wrong way to think about it.

One way or another, though, it's long been known that our main economic statistics -- including, most prominently, GDP -- have flaws as metrics. We use them, though, because they work pretty well and because nobody's devised superior alternatives. There's no guarantee, however, that the extent to which things like GDP, the CPI, and other main indicators are imperfect metrics will stay constant over time. Technology and society change, and things that used to be good satisficing tools could become quite bad ones.

The aptly named Laffer Curve

Via Ezra, the Laffer Curve has been put to the test and found rather lacking.