Thursday, December 1, 2011

Future Stenographers of the Rich and Famous

The Harvard Crimson:

"For example, an excellent argument could be made that the millions of Americans who took on mortgages beyond their means are equally responsible as a group for the financial meltdown."

So much for comforting the afflicted and afflicting the comfortable.

Unfortunately, The Michigan Daily not exactly taking advantage of its "editorial freedom" either.

Friday, November 18, 2011

How To Offend a Microeconomist

Interview with Daniel Hamermesh:

Here is one of the questions I wanted to ask you, with regards to Heilbroner’s book. With the economics profession, in the aftermath of the financial crisis, being somewhat in disrepute…

Stop! Stop, stop, stop. The economics profession is not in disrepute. Macroeconomics is in disrepute. The micro stuff that people like myself and most of us do has contributed tremendously and continues to contribute. Our thoughts have had enormous influence. It just happens that macroeconomics, firstly, has been done terribly and, secondly, in terms of academic macroeconomics, these guys are absolutely useless, most of them. Ask your brother-in-law. I’m sure he thinks, as do 90% of us, that most of what the macro guys do in academia is just worthless rubbish. Worthless, useless, uninteresting rubbish, catering to a very few people in their own little cliques.

Thursday, November 17, 2011

The Science Behind OGI

How Elite Firms Hire: The Inside Story

"Objective" News Stories

Even the most casual observers of the media realize the entire concept of an "objective" news story is bunk. Reporters don't practice objectivity; they practice neutrality. Side A says X, Side B says Y, and we leave it to you to decide. This creates the illusion of arguments with equal merit when any "objective" person could conclude one is clearly stronger than the other.

An equally pernicious distortion of the news lurks behind the scenes--reporters and editors have tremendous power to shift the public narrative in the subtle ways they can frame a story. Although reporters will often cling to their Journalism 101 ethics manuals and disclaim all responsibility for their stories when they're writing "just the facts", one shouldn't overlook how they can easily express a particular view without taking any explicit views in a story at all.

Here's an example. City council passes an ordinance banning residents from wearing green pants on Mondays. Local newspaper has the resources to write only one story about it. Among the potential angles are:

Story 1: Just-the-facts story on tickets given to people wearing green pants.

Story 2: Just-the-facts story on people the reporter personally found violating the law by wearing green pants.

Story 3: Just-the-facts story about police giving tickets to some people wearing green pants but not others (essentially a combination of stories 1 and 2).

Story 4: Story about the merits of the green pants law, quoting the mayor saying the green pants are a blight on society, and a concerned citizen worried about his free speech rights being abridged, even though not one person other than the mayor supports the law.

Story 5: Story about the merits of the green pants law, quoting the mayor saying blue pants are blight on society, and nine concerned citizens worried about free speech rights being abridge, because not one person other than the mayor supports the law.

Story 6: Story about how the mayor's third cousin runs the biggest blue pants factory in town.

Story 7: Story about how the mayor was emotionally wounded as a child because of the Monday in elementary school when he was harassed because his parents sent him in green pants.

Most people would agree that (with the exception of perhaps Story 5) all of these would meet the classic definition of "objective" reporting. But isn't it also quite clear that decision to publish a story on this law (or none, or 12) makes a pretty big statement, and how the newspaper frames it makes an even bigger one? The idea that just writing an descriptive story somehow divorces the newspaper from taking a view is absurd.

Do I think most journalists are knowingly skew stories toward their own policy preferences? In most cases, no*. But even if they're making story choices based solely on what they believe is "newsworthy" it will endorse a particular worldview (even if the reporter doesn't realize he's doing it). Implicit stories in stories like 1 and 2 is the reporter's disapproval of the conduct the law punishes; implicit in stories like 3 is the reporter's belief that the police are acting improperly (even though journalists could write this about almost any law, because 100% enforcement is rare). Even within the stories themselves tone could matter--A reporter could portray the mayor in Story 7 as megalomaniac bent on destroying people's rights, or as a sympathetic character still recovering from a traumatic incident.

This isn't to say the descriptive stories are all bad. Certainly there is a role for reporters that expose the facts in any given situation so that other people can form opinions on them. But it also suggests reporters need to take more care in how they frame their stories. And also be more honest with readers about how they do it.

* Trust me, most reporters aren't thinking hard enough to do that.

Tuesday, November 15, 2011


But in a sense the James Murdochs of the world are more common than we might think. In fact the most popular way to find a job is through family and friends. That holds true for all of us, but it is immensely more likely for the kids of the very rich. Look at this picture from a research paper that a colleague and I published in the Journal of Labor Economics (available here if you really want all the details).

The bottom line is that about 40% of us have at some point worked for exactly the same firm that at some point also employed our fathers. But if dad’s earnings put him in the top 25% these chances are above average, they start taking off if dad was in the top 5%, and reach the stratosphere for top earners. Almost 7 out of 10 sons of top earning dads had a job with his employer.

Monday, November 14, 2011

The Dude

Why'd Michigan push this guy out? I like what he has to say. Although I'm guessing this isn't a popular view at Board of Regents meetings.

“College football and men’s basketball has drifted so far away from the educational purpose of the university,” James Duderstadt, a former president of the University of Michigan, told me recently. “They exploit young people and prevent them from getting a legitimate college education. They place the athlete’s health at enormous risk, which becomes apparent later in life. We are supposed to be developing human potential, not making money on their backs. Football strikes at the core values of a university.”

Sunday, November 13, 2011

Tradeoffs and Criminal Law

Early in the term, the Supreme Court has already heard arguments in two cases related to issues of great importance in criminal law: the use of eyewitness testimony and the use GPS without a warrant. Evaluating these issues individually, the answers, from a policy perspective at least, seem pretty simple. If eyewitness testimony isn't reliable we shouldn't use it; and our privacy interests should trump such 1984-style investigations by the police*. But once we start evaluating these positions as companions, it reveals in an interesting tension.

The more we learn about eyewitness testimony, the less reliable we find it. Indeed, Prof. Garrett's study of the first 250 wrongfully-convicted people exonerated with DNA evidence found that 190 of 250 cases involved faulted eyewitness testimony. Not surprisingly, pressure against using it has increased--the New Jersey Supreme Court, for instance, just mandated a number of procedural safeguards it will now require when its used in criminal trials.

If we start discounting the value of eyewitness testimony, though, we have no reason not apply similar scrutiny to other forms of evidence. And once we do that, we'll probably find out much of it is also unreliable. The could easily dismantle the entire facade of the litigation process.

Without the use of traditional forms of evidence, police will push for the ability to use technology that lets them access quite reliable forms of it. They can, for instance, monitor e-mails or use a GPS to track our every move. But clearly this raises privacy concerns.

Taken to its conclusion, then, this puts the legal system in a rather perilous position. If we want privacy, we lose reliability. If we want reliability, we lose privacy. And if we want reliability and privacy, we lose a functioning legal system.**

* I suppose one could have a reasonable debate about this point, but I'd imagine most liberals would err on the side of protecting privacy. Even if the justices don't necessarily agree the Constitution protects against these police actions, they all seemed troubled by the idea of extended periods of round-the-clock surveillance by GPS.
** Again, this sort of depends on your view underlying views of a legal system. This would essentially prevent the government from every depriving citizens of rights at the cost of losing its ability to protect the rights of citizens from being deprived by other citizens.


Tyler Cowen in this morning's NYT: The problem isn't that we have poor people, it's that people aren't poor enough. All we need to do is increase inequality to get people working a bit harder.

In the future, complaints about income inequality are likely to grow and conservatives and libertarians won’t have all the answers. Nonetheless, higher income inequality will increase the appeal of traditional mores — of discipline and hard work — because they bolster one’s chances of advancing economically. That means more people and especially more parents will yearn for a tough, pro-discipline and pro-wealth cultural revolution. And so they should.

Monday, November 7, 2011

Deeply Disturbing

First this happened. Then she wrote this, which shares a number of similarities with this. Troubling development.

Sunday, November 6, 2011

The Destruction of the Free Market

Thanks to government intervention, we have a tremendous distortion of the free market that impacts us everyday. This invidious government policy encourages centralized planning instead of market-based pricing. It lets gigantic entities roam the country breaching contracts and committing torts, while ex ante capping their liability.

This policy, if it wasn't clear, is the government's decision to allow people to form corporations. Certainly seems like one of the greatest "restraints" of free markets I can think of. Funny, though,  that when conservatives scream about how government regulations destroy markets, they often fail to mention this one government intervention they're most certainly fond of.

The vast majority of people, of course, realize that this policy makes some sense. Corporations, for instance, do encourage central planning--firms don't allocate goods to internal departments based on price--but they also lower transactions costs by limiting the need to sign a contract for everything (Imagine if you had to sign a contract every time you wanted to print at your law firm). Most people would agree the trade-off is worth it.

One would hope, then, that rather than viewing any given policy proposal under the heuristic that any government regulation is per se bad, we could evaluate each individually on its merits. Especially given that many, if not most, "regulations" endorsed by liberals are designed to facilitate more efficient markets (for instance, by making people pay for their externalities). But, big surprise, politicians captured by forces attempting to prevent the freedom of markets have filled the public with dumbed-down rhetoric about the evils of government that have prevented any more nuanced debate from emerging. And the other side has, unfortunately, done almost nothing about it.

If anyone has ideas, I'm all ears.

Saturday, November 5, 2011

The Price of Admission

Greg Mankiw--the man responsible for indoctrin...I mean teaching all the malleable young minds that go to school "in Cambridge"--today argued that Paul Krugman is wrong for for attributing rising inequality to the "growing influence of oligarchs" as opposed to education:

But it may be better to think of the return to education as stochastic. Education not only increases the average income a person will earn, but it also changes the entire distribution of possible life outcomes. It does not guarantee that a person will end up in the top 1 percent, but it increases the likelihood. I have not seen any data on this, but I am willing to bet that the top 1 percent are more educated than the average American; while their education did not ensure their economic success, it played a role.

Let me give you a couple examples. I am comfortably in the top 1 percent. I believe that Paul, with his Princeton professorship, regular Times column, speaking fees, and moderately successful textbook, is there as well. I suspect (although cannot prove) that if he and I had stopped our educations after finishing high school, we would not have been anywhere near where we are in the income distribution. If that is correct, might it be better to think of education as the key rather than focusing on the growing influence of oligarchs?

I am inclined to think that education is important here in part because the large increase in the share of the top 1 percent from the 1970s to the present occurred together with the increase in the rate of return to education during this period documented by labor economists. It is possible, of course, that the the two phenomena just happened to occur simultaneously. But the timing suggests that the two trends--the increasing value of education and the rising share of the top 1 percent--may be related.

This explanation strikes me as a bit too cursory (shocking for an Ec 101 professor, I know). Yes, education probably explains a lot of this. But a better question might be why education has become more important.

Increasingly, people in control of large institutions--corporations, Congress, etc.--have exploited agency and collective action problems to extract greater and greater benefits for themselves at the expense of society. And, like any good monopolists, they've tried to erect barriers of entry to protect those rents--the price of admission to the club.

To work at an investment bank, it helps to go to a good college. To go to a good college, it helps to go to a good high school. To go to a good high school, it helps to go to a K-8 school. To go to a good K-8 school, it helps to go to a good preschool. To go to a good preschool, it helps to go to a good OB/GYN. And so on. Even as each of these institutions has tried to democratize their student body--Mankiw certainly teaches a more diverse group of students than he would have 50 years ago--the elites actively try to frustrate these processes by raising the bar for admission (see, e.g., unpaid internships, SAT prep course, summer vacations spent teaching poor Eskimos how to play cello).

Essentially, then, education has become a more palatable way for the elites to practice their exclusionary policies than the old days, when they used people's last names and religion. They wrap this in the guise of "meritocracy"--even though it's certainly a lot easier to demonstrate your "merit" when your parents are rich. Sure, it's fine if some commoners benefit along the way by being good test-takers--as long as it doesn't come at the expense of the elite's own kids. All the better for them, really, because the presence of some non-elites serves as proof it's a "meritocracy" (or, less cynically, convinces the elites that the system really is fair).

Plus, as the rich compete for a limited number elite educational opportunities for their kids, it pushes the cost of tuition up. For those that can't afford it, that means loans. Stuck with debt, students are forced to take high-paying jobs working for the elite (buying out the potential competition), who can now convince them they truly deserve the six figure salary they're receiving. After all, they "earned" it, just like the elites themselves.

So Mankiw is probably right to point out the correlation between the rise of education and the rise of inequality. But I think he has causation wrong. Education hasn't become more important because it's become intrinsically more valuable, but because the oligarchs have made it so.

Thursday, November 3, 2011

Justice Stevens on the "Value" of an MBA

From his excellent new book:

These distributors seemed to share certain qualities that set them apart from the senior executives of the major companies with which they did business. They were hard workers who devoted long hours to their businesses. A friendly outlook on life rather than punctilious adherence to rules of etiquette enabled them to get along well with their employees, their customers, and members of the general public. I don’t remember any who had a college education, but they were uniformly intelligent—more so, in my judgment, than most executives in the corporate world who had earned graduate degrees in business administration.

The Invisible Hand

I wonder how many Econ 101 profs have actually read the book:

Without going on with details, what’s being played out for the last 30 years is actually a kind of a nightmare that was anticipated by the classical economists. If you take an Adam Smith, and bother to read Wealth of Nations, you see that he considered the possibility that the merchants and manufacturers in England might decide to do their business abroad, invest abroad and import from abroad. He said they would profit but England would be harmed. He went on to say that the merchants and manufacturers would prefer to operate in their own country, what’s sometimes called a “home bias.” So, as if by an invisible hand, England would be saved the ravage of what’s called “neoliberal globalization.”

That’s a pretty hard passage to miss. In his classic Wealth of Nations, that’s the only occurrence of the phrase “invisible hand.” Maybe England would be saved from neoliberal globalization by an invisible hand. The other great classical economist David Ricardo recognized the same thing and hoped it wouldn’t happen. Kind of a sentimental hope. It didn’t happen for a long time, but it’s happening now. Over the last 30 years that’s exactly what’s underway. For the general population -- the 99 percent in the imagery of the Occupy movement --it’s really harsh and it could get worse. This could be a period of irreversible decline. For the 1 percent, or furthermore 1/10th of 1 percent, it’s just fine. They’re at the top, richer and more powerful than ever in controlling the political system and disregarding the public, and if it can continue, then sure why not? This is just what Smith and Ricardo warned about.

Wednesday, November 2, 2011

How Do the Even Have a Functioning Society?

The second-highest paid person in Finland made a mere $4.96 million last year (A lawyer!). I'm shocked the country still exists with executives making such paltry sums. Why haven't all its brilliant leaders departed for a country that will reward their "talent" with at least the 10-digit salaries they're entitled to?

Monday, October 31, 2011

Never Thought I'd Say This

Troubling times that try men's souls can bring even enemies together as allies.

I'm struggling to ty...p...e...but but but but....I agree with Megan McArdle.

Ick. I feel like I need to take a shower while listening to Paul Krugman columns on tape and making plans to move to Massachusetts to vote for Elizabeth Warren.

Sunday, October 30, 2011

Monday, October 24, 2011

Glad I Can't Afford to Go to These Dinners Anyway

Thanks to Wall Street's version of Teen Beat, footage emerged of Blackrock co-founder Stephen Schwarzman's stand-up routine that had some in the financial media abuzz last week. I'll save you the time: hack jokes, horrible delivery. Anyone care to explain why exactly the media loves watching the rich and powerful read other people's jokes so much (see also WHCA Dinner)?

Thursday, October 20, 2011

Limits of Law and Social Norms

Two in one day!

Even as a gosh-durn liberul, I recognize there are limits to what the law (or government) can accomplish. Because of the difficulties of writing and enforcing laws, there will always be some gap between what the legal system accomplishes and the socially optimal policy. One area where this is relatively clear, for instance, is executive compensation.

Scholars have studied the issue for decades and have yet to devise an efficient way to properly regulate the behavior of corporate executives within their firms. Collective-action problems and agency costs are well known. Solutions are more elusive.

Given the failure of internal corporate governance mechanisms, the government could take a more draconian approach, but I'm not sure how helpful this would be. You can set an executive compensation cap, but then people will classify themselves as non-executives. You can cap non-executive pay, but then people will call themselves consultants. And so on. That's not to say we shouldn't try to stop them from doing it by restructuring our legal system. But we should also recognize that there will always be an imperfect match between what is legal and what is good/moral/fair (whatever term you want to use).

Social norms, though, can fill a gap the law can't. They narrow the difference between people's actions and what we think is socially beneficial. Occupy Wall Street may never get any legislation passed, but they will make people think about these issues. Most people want to be liked--maybe shame will overcome their otherwise innate desire for greed. Perhaps executives will one day realize it's somewhat inappropriate to extract more and more for their own benefit while completely abdicating your responsibility to shareholders, employees, and society. Or, more generally, that just because no law stops you from doing something doesn't mean you should do it.

And maybe this can apply more broadly. Most "white-collar" criminals work within the system. They get lawyers to help them push their actions to the brink of the law. They get lobbyists to help them move the brink even further. It's difficult to make it illegal for them to change the law for their benefit, but perhaps it's possible to make it socially illegitimate (and perhaps economically harmful to them) to do so.

Understanding Externalities

Ed. Note: Been a long time. Keep telling myself I want to blog more. We'll see if it actually happens (probably not). Had a short post to dash out, though.

As I read it, populists movements on both the right and left oppose Wall Street bailouts. They recognize that these banks benefit from an implicit government subsidy while taxpayers bear the burden when the banks fail. They stand in philosophical opposition to these sorts of policies.

Yet populist movements on the right reject arguments for greater environmental regulations in other industries. They, apparently, don't recognize-or care-that these companies benefit from the ability to externalize the environmental costs of production. They find the mere act of government intervention repugnant.

How exactly does one square these views? Tighter regulations of bailouts prevent externalities that would hurt taxpayers' pocketbooks. Tighter environmental regulations prevent externalities that would hurt citizens' health. Both companies profit because they don't internalize the cost to society of their actions. Why does the right find one so more offensive than the other?

One could posit a mere opposition to government action*, or government in general (That is, government is actively bailing out banks and actively implementing environmental regulations). But the underlying opposition to bank bailouts does not appear to be any concern about the government action, but rather the impact it has on citizens. If that's the logic, how does it not also apply to environmental regulations?

*Somewhat of a simplistic view anyway, because you could also view it as a government action to decide not to act.

Wednesday, January 5, 2011

Should It Pay to Be On Top?

Although we don't know who Michigan's next coach will be, we do know that whoever it is will likely get paid well--David Brandon has already stated that a program of Michigan's stature needs to pay its coaches more than just a "middle of the pack" salary. And, even more certain, he will most definitely get paid more than his coordinators. What I've been wondering for a while, though, is whether this it-pay-to-be-king strategy really makes sense.

Most people are aware of the Peter Principle. That is, "in a hierarchy every employee tends to rise to their level of incompetence." In the business world, this might mean the best salesman gets promoted to be the sales manager; in the sports world, it means the best coordinator often gets to be head coach. And, just like the skills  necessary to make someone a great salesman don't necessarily make them a great sales manager, the skills necessary to make someone a great coordinator don't necessarily make them a great head coach.

But rather than try to discourage coordinators from seeking the promotion that will expose their weaknesses, athletic departments actively encourage it--are there any schools where the coordinators gets paid more than the head coach? What if, instead of spending money on a top head coach, schools spent most of their money on their coordinators? Then, that brilliant offensive mind can worry about the offense, rather than the defense and glad-handing alums. (The lower-paid head coach could resolve any disputes between the coordinators and handle any administrative duties.)

Certainly, this plan isn't perfect. People care about more than just money--no doubt egos could get in the way. But with the proper mix of personalities, it could be a more efficient way of organizing a coaching staff**.

Although it might sounds far-fetched, the plan isn't without any precedent--in some ways, this is how most professional sports teams work. Sure, the head coach gets paid more than his assistants--but he gets paid a lot less than most of the players he coaches, who are, in effect, his "employees"*. There are many things that don't transfer between the college and pro games, but I'm not convinced this isn't one of them.

* Likewise, the coach also probably gets paid more than the GM, who technically is his boss.
** And, perhaps a business.