Wednesday, May 28, 2014

why does the price of gas fluctuate so much?

For prices, you always look at demand, supply, and market structure. Demand for gas doesn't fluctuate much-- and the fluctuations are relatively easy to anticipate. One interesting application: when an economy is trying to recover, energy prices tend to rise a bit as demand increases. But overall, not much here.

Supply of gas doesn't fluctuate much in terms of technology. (It improves over time, but doesn't really fluctuate.) Costs can certainly move, particularly with the price of oil (including exchange rates and the "strength of the dollar").

Market structure is more interesting than at first glance. If markets are competitive, then price is "forced" to mirror costs, more or less. And one would think that the market for gas is competitive. But at the refinery level, it's less than competitive; they're aren't all that many refiners in each region (and transaction/transport costs are significant).

On top of that, government regulations result in "boutique fuels"-- where the EPA requires certain additives for Louisville-area gas vs. Indy gas vs. "normal" gas, etc. So, our gas tends to be more expensive to produce than non-boutique fuels. And depending on how many areas of the region need Louisville's boutique fuel, the market for "our gas", at the refinery level, may be *far* less than competitive. To the extent that a market is less competitive, sellers may be able to increase price for a time, until other sellers bid that away with lower prices.

So, the two primary candidates are supply and the impact of govt regs (and their connection to costs and market structure). My guess/intuition is that both play a significant part. And generally, I'd recommend buying gas when you're outside of a city.

Tuesday, May 27, 2014

review of Cowen's "Average Is Over"

Tyler Cowen's Average Is Over has not received a ton of attention. (Here's the only substantive review I've seen.) But it's an important look at the role of technological advance for the job market and recent concerns about income inequality-- and the (prospective) future.

If one is concerned about the future in terms of economy and "inequality", I can easily recommend two recent, easy-to-read books: Cowen's and the even-more-important Coming Apart by Charles Murray. (If one wants to extend their reading-- and read with a more critical eye-- I'd recommend The Spirit Level and from the looks of it, Piketty's recent famous/infamous book.)

Cowen briefly engages Murray's book, in talking about migration and marriage patterns among the college educated (171-173, 249). But beyond the direct references, there is enough overlap to make the books both complements and rivals in part. And like Murray, Cowen's book is broad-ranging, arguing that the current/future economy will have a big impact on jobs, education, marriage and family, quality of life and how we negotiate life (p. 4).

From an economist, it's not surprising to read about the role of machines and technology on labor markets-- or the impact of globalization. Combining the two, Cowen distinguishes between relatively stagnant vs. dynamic sectors of the economy. (As examples, he notes that an iPhone is more powerful than the most powerful computer of 30 years ago, while air travel is only marginally faster than 1970 [4-5].)

Economists talk about three different forms of tech advance: new products, improved products, and the same products at lower cost/price. But Cowen opens by describing the ways in which technology has changed less obvious things in "the economy"-- from dating and chess to cars and journalism.  And he takes a particular delight in describing the game-theoretic aspects of deception vs. detection in everything from police work to dating and website reviews.

In chapter 2, Cowen turns to labor markets and earnings-- with a focus on IT skills and, more important/precisely, IT literacy. "The ability to mix technical knowledge with solving real-world problems is the key, not sheer, number-crunching or programming for its own sake." (21b) There are "dramatic gains in the personal and professional lives of people who interpret machine feedback" well (73) Moreover, partnerships with machines will become more important: "How expert does the human have to be?...She has to be good at understanding and correcting the computer's mistakes, which is a very different skill." (88, 151-154). Pointing to medicine, he asks who/what "is the most frequently consulted doctor in the US today?" Google. (89) 

In chapter 3, he describes four stages of the process at hand (48): machines add little; experts start to exploit machines; broad, minimum expertise is valuable; and humans are not needed as much for the tasks that remain.

Cowen points to the process of "creative destruction" and the ROI for higher skills: "high wages or capital gains to talented and inventive workers. and pretty low returns on ordinary labor and ordinary savings." (20). He notes that the middle class has been bolstered in recent years, largely by protected, government, service-sector jobs (176-177)-- whether they are all that productive or not (38). He argues that most of the job loss from freer trade has already occurred. And he observes that none of this is not simply an American phenomenon (40). For example, he believes that China has the most to lose from the shifts that remain.

One of the questions that emerges is timeliness: how much of our recent labor market woes are a function of the trends noted by Cowen vs. a function of macroeconomic troubles, manifesting at least for now, to a large extent, in a way that parallels Cowen's story? The displaced mid-level workers are both the last ones you'd hire back-- and the ones most vulnerable to Cowen's claims about market dynamics. (In this sense, the book subtitle's reference to "the Great Stagnation" invites provocative and perhaps ironic comparisons to "the Great Recession".)

Along the same lines, Cowen notes the trend towards increased "disability" and lower labor-force participation for able-bodied males (51-53, 57). From another angle, are there suddenly more "zero-marginal product" workers as a function of the macroeconomy or the adjustments in the economy exacerbated by a lack of skills and work ethic?

Obviously, all of this should impact high school and post-secondary education (90-93)-- at least, what's covered. In chapter 10 and following his "optimistic" view on technology, he sees a wider-sweeping role for technology in higher education, through MOOC's and the like. (I think the wide sweep will be greater where large lectures are predominate-- and limited by the lack of self-discipline required for students to be successful in that learning format.) Likewise, Cowen sees marketing as "seminal" (22) and management as "a role of growing importance" in the new economy (22; 28-30). He discusses the increasing importance of honesty/morality or "conscientiousness" (30-32) to firms-- and thus, the importance of hiring (36).

Finally, a critique: In chapter 9, Cowen tells a relatively simple story to explain constant wages over the last 40 years. He fails to emphasize that wages are a simplistic and misleading proxy for standards of living-- both because they ignore other forms of compensation (most notably, fringe benefits) and improved purchasing power and product quality. Moreover, he largely dismisses trade/competition and immigration as primary factors-- and argues that most productivity gains have come through "outsourcing" (165-166), an intractable fact of life (169).

review of Wilkinson & Pickett's "The Spirit Level"

Wilkinson and Pickett's book, The Spirit Level is a favorite of my friend/colleague, Sam Sloss. I wouldn't have heard about the book without his repeated reference to it. (One of the problems is that the title doesn't prompt its potential audience to think of its primary topic: income inequality!) I enjoyed the book, so I'm thankful to Sam for pointing it out to me. In a word, the book is helpful in its primary task, but not-so-helpful in an assortment of other ways.

In this, WP is probably similar to Piketty's recent famous/infamous book. As such, if you're interested in the general topic-- and want to jump into some reading-- I'd start with two more-helpful, less-statistical, and easier-to-read books: Tyler Cowen's Average Is Over and especially Charles Murray's Coming Apart. (Interestingly, Piketty and Cowen are both economists; Murray and WP seem to be like sociologists in their approach.)

WP are quite helpful in laying out certain income inequality data (as far as their chosen data go)-- as well as data on a wide (awesome!) array of correlated social problems/issues. They reference at least some of the relevant theories and some of the relevant literature. (On the latter, I don't know enough to say for sure, but would infer that they're selective in a biased sense-- from the areas I do know well.) Then, they combine this mixture with some just-so stories, resulting in inferences somewhere between solid ground and an odd narrative that fits various aspects of their worldview.

Most of the time, WP are noticeably and appropriately reticent in making policy prescriptions (contra Piketty). At the end of the day, their data do not imply much about how to achieve their ends. Sometimes, they deviate a bit and get themselves into contradictory positions. And unfortunately, they are not more forceful in insisting on humility among their readers-- and so, careless proponents of their work could easily end up being less reticent than would be wise.

1.) Income inequality measured
"There are lots of ways of measuring income inequality and they are all so closely related to each other that it doesn't usually make much difference which you use." (p. 17) WP then refer to the choice of quintiles and deciles for an income measurement and Gini coefficients. Among *those* choices, they're correct; it doesn't matter much, particularly for a longitudinal study. But there are other key variables/questions which aren't even raised here: Are we looking at individual or household or family measures of income? Is income pre- or post-tax? Is income pre- or post-transfer? (They touch on these three, very briefly, on p. 243-- largely to dismiss them.) More broadly, what constitutes "income" in these measures? What about the impact of cost-of-living on unweighted measures of income? What about the impact of hours worked? (They have a brief mention of the aggregates on p. 228, but do not discuss work differences between income classes.) What about much-more-equal measures of consumption (vs. "income")? (UPDATE: For new, terrific research on this question, check this out.) And so on. The immense failure to discuss this could be-- by itself-- sufficient to reject their work out-of-hand as naïve or biased. But let's assume the best and move along...

WP focus on averages and aggregate measures. It would be interesting to know how much the numbers (and their implications) would change with significant changes in the "super-rich"-- e.g., if one were to triple or halve the number and dollars of those in the top .1%. My guess is that the numbers would barely move. Later, they take some shots at CEO pay (250), but unless this is extraneous, they're assuming that CEO pay is a significant contributor to the underlying problem (such as it is). This seems remarkably fanciful. In any case, it'd be nice to see them play with this, at least through simulations, since it is a significant part of their narrative.

WP discuss social mobility/dynamics as their final applied topic (in chapter 12). In part, this is reasonable: it's arguably the most important consideration, so why not save it for last? On the other hand, it's curious to wait so long, because it is so important-- AND so important to the foundational topic of (true vs. measured) income inequality. More troubling, they only discuss a narrow slice of a complex/mixed literature on income/class mobility-- and a slice that favors their worldview. Again, this is a lack of scholarship or an unfortunate bias. (The reference to Jargowsky on geographical mobility was impressive and balanced; I wrote a journal article / book review on his research awhile back.)

For a discussion of all of the above and more, check out this set of articles from AEI.

WP are quite careful at times in avoiding the common conflation of income inequality with poverty. Even so-- and perhaps even more worrisome given their apparent efforts to avoid this problem-- they still occasionally stumble. (E.g., see: p. 195's "most deprived neighborhoods"; p. 264's "denying adequate incomes".)

On the flip side, their passing references to the problems of poverty underline another point-- that poverty is as pressing or moreso than income inequality per se. But they rarely seem to recognize this-- even implying that poverty should be considered in strictly relative terms (15), rather than strictly absolute or the more moderate position that poverty is both relative and absolute.

Many on the Left really do care about absolute poverty. (Some are more concerned about income inequality-- out of envy and here, from concerns about its impact on society.) But the Left also prefers static analysis of simple statistics, given a lack of empirical or theoretical rigor-- or because it fits their penchant for emotional appeals. This approach works reasonably well for income inequality. But it works very poorly for the poverty rate. In a word, a reliance on the poverty rate would indicate a massive failure for the War on Poverty. Although the poverty rate is deeply flawed-- and masks many of the problems of the poor-- the Left has wedded itself to stats like this and the limited/flawed analysis that follows. So, it makes more sense for them to talk about inequality than poverty per se.

2.) Social implications
This is probably the most impressive and useful section of the book: chapters 4-12 on community life, mental health and drug use, health, obesity, and life expectancy, education, teen births, crime and punishment, and social mobility. WP present a series of simple correlations, mostly longitudinal. The approach is wide-ranging and impressive. (They even make connections to Frans de Waal and research on chimps and bonobos [204]!)

Arguably, their most powerful point is that income inequality correlates with a number of troubling social indicators-- for both the poor AND the rich! It's one thing to say that inequality (or poverty) hurts the poor. But it's much more provocative to say that it even impacts the wealthy.

Even so, WP ignore or too easily dismiss the potential influence of many other factors: religious belief and practice, family structure and stability, globalization and other economic factors, etc. They spend a lot of time on Robert Putnam's "social capital" (54-56, 79, 140), but don't give it much (any?) weight as a causal factor.

In this, it is odd to see WP be so selective "sociologically", focusing almost exclusively on income inequality. They seem oddly passionate about looking for "a common underlying cause" (186b)-- and casting income inequality in that role-- as if a single cause would likely explain something so complex.

Implicitly, they hold genetics and culture constant-- a weird position for those enamored by science and into sociology. (They try to dismiss the former with a quick sentence on p. 185: "This must be rejected because it is simply an expression of racial prejudice." Reject scientific investigation of the topic or you're a bigot?! Huh? They extend the discussion briefly, to acknowledge that race correlates *strongly* for the results within the U.S., but walk away after that.) Beyond the wisdom of this approach, in trying to describe complex realities, the result must be a lot of just-so stories to make the data fit the simple analysis.

WP also ignore the challenges of large-scale *federal* policies, given poverty, existing inequality, and all sorts of diversity. (This is the case, even with longitudinal data, but even more important when one is looking at times-series data.) In a word, one would expect federal policy to be more beneficial with smaller and more homogeneous populations-- and more damaging as population and diversity increase.

In Coming Apart, Charles Murray provides a very useful complement to WP's discussion. Like WP (44), but in far-greater depth, Murray discusses the role of "sorting" by class and education in marriage-- on measured income inequality. Like WP (164), but again in far-greater detail, Murray describes the cultural barriers increasingly implied by class differences. Like WP (ch. 9 and p. 137-138), Murray talks about family structure and stability-- but in a more comprehensive and coherent manner. (For example, WP argue, at great length, that fathers and family structure matter-- and there's more to life than material goods. But then, apparently conflicted and contrary to the bulk of the available research, they argue that it seems "possible to safeguard children against most of the adverse effects of being brought up by lone parents" [187].)

3.) Policy RX's
Even assuming away the above concerns, now what? In most cases, WP are noticeably and appropriately reticent in making policy prescriptions (contra Piketty). Other times, they are mysteriously optimistic: "There are good reasons to feel confident that we can create a society in which the real quality of far higher." (241) At the end of the day, their data do not have much to say about how to achieve the implied and desired ends. So, reticence is the wise approach.

WP are correct in pointing to the limits of economic growth-- at least on average, in developed countries (5). This is a point made nicely in Charles Murray's indispensable, generalist, public policy book, In Pursuit of Happiness and Good Government. Murray uses Maslow's Hierarchy to note that material needs are the first but not the only policy goal. And in developed countries, material needs have been-- and can easily be met.

That said, this is only true for averages/aggregates. As always, too much excitement about groups will overlook the impact on individuals. And we see this misplaced excitement in their admiration for a "steady-state economy" (220). Yes, if you're in good shape, then the status quo will work quite nicely! This is the sort of thing one often hears from elites in developed countries about those in less-developed countries: don't use your resources, cut down your forests, burn your fuel, etc.-- so we can help humanity. Isn't it great when rich people tell poor people not to use their resources?

At times, WP deviate a bit and get themselves into contradictory positions. Early on, they trot out items from the usual laundry list of policy prescriptions: housing, health care, work/life balance, child support payments, and the "provision of high-quality early childhood education" (112). (As an aside, they seem blissfully unaware of the U.S. government's expensive and largely-failed attempts to do the latter through Head Start.) But later, they argue that "Attempts to deal with health and social problems through the provision of specialized services have proven expensive and, at best, only partially effective." (238) Then, as examples, they cite a *wide* range of such efforts-- police, medical care, social work, drug rehab, obesity-- concluding that they're often "a form of window-dressing, a display of good intentions" (238). They leave unanswered or even unasked-- to determine how other government action could be better motivated, informed, and executed.

WP point to the potential value and positive impact of community-- and by extension, some aspects of public policy. But one should not (easily) extrapolate from what works in a small, homogeneous population-- to what will not work nearly as well with a large, heterogeneous population. (See: p. 208-209 for the most interesting discussion.)  

Among the many reasons cited by economists in the academic literature (193)-- for growing income inequality and struggles for some in the middle class over the last 40 years-- WP focus on Paul Krugman (!), "the Nobel Prize winning economist"-- even though he has no particular expertise in this narrow arena. (You gotta love that ever-so-popular fallacy-of-authority in trotting out Krugman!) He "argues that" inequality has been driven by reduced unions, a lower real minimum wage, and changes in taxes and benefits (even while his fans typically focus on pre-tax/transfer measures of income inequality). WP conclude by constructing a strawman: "changes in income distribution are almost never attributable simply to market forces influencing wage rates"-- to move to the claim that the key is "something much more like the changes in institutions, norms and the use of political power which Krugman describes in the U.S." (243). Nice try.

A few miscellaneous policy notes:
1.) Unions get some play, but without any explanation of how private-sector unions can rebound in an increasingly-competitive, globalized economy (245). 
2.) Without any apparent sense of irony, they cite NH and VT as examples of low/high tax burdens-- with the same results and presumably-similar cultures/populations (246). 
3.) The long discussion of non-profits (252ff) is somewhere between interesting and naïve. (I don't know enough to say where it fits on that spectrum. In any case, it's difficult to imagine how we would get to that world, practically.)
4.) They critique CEO pay on occasion (e.g., 250). But interestingly, they use Robert Reich to write their foreword-- and he provides a useful corrective (xi) on what turns out to be a complicated theoretical issue with a mixed bag of empirical results. (Punchline for the former: it's not the most competitive market, but its flaws are often exaggerated. Punchline for the latter: it's really difficult to measure well-- and even so, you can find results all over the board.)
5.) They have a weird focus on AGW throughout (but especially in chapter 15)-- at least in their efforts to connect it to the thesis of their book. When authors go that far afield, it raises alarm bells about objectivity and worldview. (That said, they have an innovative/impressive reference to "tradeable carbon quotas [222]-- the sort of approach that would usually be bothersome to those concerned with AGW.)
6.) They have an odd claim about public school spending-- not overall spending or spending inequality, but public spending as a percentage of total spending as the key variable (161). On what theoretical basis would one choose that variable?! That's the sort of thing that springs from data-miners or ideology-- neither is a good sign.
7.) They want to avoid "concentrating power in the hands of the State" (255), but they say nothing about doing that in the context of health care or, more important here, K-12 education. (The easiest way to help inequality: fix the jacked-up K-12 education system by reducing "the power in the hands of the State" and empowering those in lower classes!)
8.) Here is the same sort of analysis applied to weight inequality and to higher education.  

reviews and thoughts on Piketty's Capital in the 21st Century

I don't have any plans to read Thomas Piketty's famous/infamous book. It's 700 pages long and I've just read another book on a similar topic that was dear to a friend/colleague of mine. I have read a bunch of reviews on the book-- and those have ratified by sense of the book, that it is not worth my time. 

Here's what I know: By all appearances, the book is on a topic that is over-rated in both its consequences and purported causes-- and it relies on a basic approach that is vastly over-sold (the measurements of income inequality and wealth inequality are somewhere between suspect and narrowly/conveniently-cited). If you want an ok data book on the narrow topic, check out my review of Wilkinson and Pickett. If you're interested in the broader topic, I would recommend Tyler Cowen's Average is Over or especially, Charles Murray's Coming Apart.  

Since I have not read the book, of course, I cannot strongly recommend reading it-- or not reading it. (Ahh, that reminds me of a funny story about my brother and Dietrich Bonhoeffer's The Cost of Discipleship!) So, why blog on it? What do I have to add? A few comments here and there-- but mostly, I want to provide a one-stop-shop blog-post for those who want all of these reviews in one place. (If I find more useful reviews, I may post updates. Here's an excellent summary review from Jonah Goldberg of what I have below-- and more.)

1.) Concerns about his data:
a.) Piketty follows the well-worn path of many on the Left-- in using certain (convenient?) inequality numbers out of ignorance or bias. Here's Abby McCloskey: "Piketty examines pretax, pretransfer incomes over the past several decades, a time during which the US has massively expanded its transfer programs...When assessing incomes in the US on a post-tax, post-transfer basis, income inequality is much less severe than the levels identified by Piketty. When assessing inequality on the basis of consumption, it is even less pronounced. However, Piketty does not examine consumption inequality. By focusing on only part of the overall story, capitalism appears to be unstable, whereas the political process has produced fairly stable consumption shares through expanded transfers." UPDATE: For an update on terrific data in this regard, see: this.)

b.) Beyond the general over-reach of these statistics, there are questions about whether Piketty fudged his data (see: here and here-- vs. here for a critique of the Giles' piece).

c.) Then there's Piketty's apparent ignorance of the impact of 1980s tax reform on earned, measured, and reported income. The reduction in the top marginal tax rate from 70% to 50% to 28% dramatically increased the after-tax share that owners of taxable capital income could keep (2.4 times higher!). From Martin Feldstein: This "provided a strong incentive to shift assets from low-yielding, tax-exempt investments like municipal bonds to higher yielding taxable investments." Beyond that, the tax reduction greatly encouraged 1.) more work; 2.) more income to be paid as taxable salaries (vs. fringe benefits and deferred compensation); and 3.) reduced the use of deductions and exclusions ("tax avoidance"-- or its illegal cousin, "tax evasion"). The 1986 tax reform also repealed the General Utilities doctrine, a provision that had encouraged high-income individuals to run their business and professional activities as Subchapter C corporations, which were taxed at a lower rate than their personal income. (This "did not appear in the income-tax data that Mr. Piketty studied.") The punchline: "The tax data therefore signaled an increase in measured income inequality even though there was no change in real inequality." I don't know the literature to go that far, but I can tell you that Piketty's data doesn't take him where he thinks/wants.

d.) Apparently, Piketty uses "great literature" to great effect. Unfortunately, his reading of literature is selective. Check out this awesome piece by Salim Furth. Furth cites "One Thousand and One Nights", "Little Women" and "Around the World in 80 Days" to make his point, before concluding: "The writers of the past are equally valuable for illuminating the astounding progress of economic growth in the past two hundred years, a fact Piketty acknowledges but to which he devotes little ink...He reports most statistics as percentages of national income. But when per-person national income was doubling every generation, it was surely a more noticeable phenomenon than a few percentage points of national wealth more or less in the portfolios of the top centile."

e.) Stan Veuger also has some fun with history and pop culture-- following Piketty in referencing "The Titanic" to make a similar point about Piketty's selective literary bias and the fact that he (largely or completely?!) ignores income mobility: Piketty "takes the total wealth of the richest people in 1987, compares it to the richest people today, and finds that they have gotten richer, at an annual rate of almost 7 percent net of inflation...He compares people in 1987 who were rich at the time to an almost entirely different group today. In Piketty’s world, of course, the super wealthy only become more super wealthy because the returns on capital are super high and they rule the universe, so you would expect this group not to change much. In the actual world we live in, things are very different. To show you this, I decided to use the same source Piketty uses: the Forbes ranking." Veuger finds almost complete turnover in the Top 10 (except for WalMart) and calculates that their wealth increased by 0.5% per year-- not exactly "the 7% propagated by Piketty". Punchline: "If it weren’t for Wal-Mart, the wealthiest people in the world would actually have lost about half of their wealth in the last 25 years. That doesn’t sound like patrimonial capitalism to me, and it goes to show how deeply misleading arguments can be that are developed while one is blinded by fury over false accusations of necklace theft."

f.) Various observations from Guy Sorman: 1.) As above, "Piketty’s statistics are superficially impressive, but they can’t be taken at face value. His gross income figures, for instance, exclude redistribution and social programs. The inequality figures he cites would be much less striking if he computed them—as is commonly done—based on net income after redistribution. Not doing so seriously distorts economic conditions." 2.) "Piketty seems unwilling to concede that income alone, however calculated, does not account for all social reality: we all benefit from progress in multiple areas—health, transportation, consumer technologies—regardless of income." 3.) Piketty "writes that the current divergence was initiated by the policies of Ronald Reagan and Margaret Thatcher, who 'scrapped taxes on the wealthy.' The inadequacy of his framework is powerfully illustrated by the example of France, where the gap between the so-called 99% and the 1% became wider under a socialist government during the 1980s...This contradiction between ideological judgments and objective data is the book’s fundamental flaw. The emergence of a super-wealthy minority has likely occurred for different reasons in different countries. For instance, the new oligarchies in Russia, Nigeria, or China can’t be explained as a consequence of the free market...entrepreneurs like Bill Gates or large hedge fund managers operate in a worldwide market, gaining unprecedented profits. Their riches may be considered excessive or unfair—but that would be a moral judgment, not an economic one."

g.) Fun with the same sort of approach to the data-- from Stephen Moore and Richard Vedder-- at the state level... 

h.) A good summary piece on many of these points-- and some others. For a really nice discussion of all of the above (and more), check out this set of articles from AEI.

2.) A range of specific theoretical concerns:
a.) Piketty implicitly assumes that people live forever. Feldstein: "But they don't. Individuals save during their working years and spend most of their accumulated assets during retirement. They pass on some of their wealth to the next generation. But the cumulative effect of such bequests is diluted by the combination of existing estate taxes and the number of children and grandchildren who share the bequests. The result is that total wealth grows over time roughly in proportion to total income."

b.) Beyond the fact that wealth inequality is a largely useless measure, Piketty is schizophrenic about whether accumulating/spending wealth is a good or bad thing. Andrew Biggs: "Pretty much every economics textbook will tell you that r is greater than g, but none of the textbook models take from this that the capital stock will rise endlessly relative to the economy. Most of them hold that it stays pretty constant, and the historical evidence supports that view. The reason is that accumulated wealth is usually spent...But what if people don’t spend down their savings? That seems to be Piketty’s assumption, at least for the very rich: they build more and more wealth which they don’t spend, and that wealth generates capital income, which they also don’t spend, and so on. If that happens, then the capital-output ratio does keep rising. But this also means that Piketty’s rich-get-ever-richer projection can happen only if the rich don’t live like rich people, that is, that they don’t spend their wealth or the income generated by their wealth. All those savings just sit there making the economy more productive and, in the process, raising wages for the proletariat while the top 1% don’t actually consume any of the returns on those savings. Piketty’s scenario is close to Charles Murray’s desire that the rich live a little less ostentatiously...In other words, for Piketty’s prediction to come about you need a top 1% that doesn’t live like the top 1%." Building on that, something from Anthony de Jasay...

c.) Piketty (and Krugman) are mysteriously selective in their concerns about the Laffer Curve's recognition that incentives matter in macroeconomics and tax rates.

d.) Likewise, Allan Carlson argues that Piketty has "ghosts in his attic"-- Polanyi, Schumpeter, and most interestingly, Chesterton and Belloc (in ways that should be provocative to conservatives and libertarians).

e.) From AEI's Kevin Hassett (h/t: Abby McCloskey): "Piketty’s argument rests on the assumption that the elasticity of substitution between capital and labor is greater than 1, which is to say that capital and labor can be easily substituted...[But] the elasticities in the economics literature are much lower than Piketty needs to support his story, and even these estimates are high because they exclude [housing] from the analysis, something Piketty includes. In plain English: if you cannot make a hamburger with a building, then capital and labor cannot easily be substituted for each other, and the collapse of capitalism that Piketty predicts does not occur...Indeed, if housing is excluded, the sharp increase in capital is almost eliminated..." (See also: George Priest at AEI and Garett Jones at Reason.) UPDATE: This work by Rognlie has been a recent smash.) 

f.) Piketty largely ignores the importance of information in markets and the role of entrepreneurs. Don Boudreaux: "The entire tenor of Piketty’s volume suggests that he thinks capital reproduces itself, both from the perspective of its individual owners and from the perspective of society at large. The creativity and fortitude of entrepreneurs, the skillful risk-taking by investors and the insight and effort of managers are all strangely absent throughout Piketty’s performance. These very fonts of modern prosperity are at best assumed to play uninterestingly routine and unseen roles backstage. Onstage, capital—the stuff that is in fact created and skillfully steered by flesh-and-blood entrepreneurs, investors and managers—appears to grow spontaneously, without human involvement."

g.) Lawrence Summers' review of Piketty is quite helpful. Alex Adrianson quotes him in part, noting Summers' critique of Piketty: that he a.) "misreads the literature by conflating gross and net returns to capital"; b.) ignores owner-occupied housing; and c.) ignores income mobility. R.R. Reno notes that "Technology and globalization significantly shift the competitive advantages for certain kind of talent, labor, and expertise...Globalization has put vastly more resources at the finger-tips of the so-called creative class." He cites an example given by Summers in support: “Think about the contrast between George Eastman, who pioneered fundamental innovations in photography, and Steve Jobs. Jobs has an immediate global market, and the immediate capacity to implement his innovations at very low cost, so he was able to capture a far larger share of their value than Eastman. Correspondingly, while Eastman’s innovations and their dissemination through the Eastman Kodak Co provided a foundation for a prosperous middle class in Rochester for generations, no comparable impact has been created by Job’s innovations."(In another essay in FT, Reno compares Piketty to Paul Ehrlich's The Population Bomb-- both of which argues that "the past devours the future". This view is interesting for people who are big fans of govt deficit spending.)

g.) Various observations from Guy Sorman: Piketty "attacks economists for 'relying too much on mathematical models and not understanding the deep structures of capital and inequality.' He thus ignores the fact that economists whom he dislikes have identified the actual factors of growth—such as property rights and the rule of law—based on empirical observation." Piketty never asks if "billionaires, through philanthropy or by financing new economic activity, might spread their wealth more effectively than the government does by confiscating it. Philanthropy is non-existent in France, and it goes entirely unexplored by Piketty."

h.) Update (June 2015): A terrific review by Casey Mulligan in The Independent Review...

3.) On the normative side of things...
Kevin Vallier, a political philosopher, reviews the normative claims made by Piketty-- in an introduction to a five-part blog post-- and then, so far, in part 2. For what it's worth, he thinks the book "is better than most of its critics think and worse than most its supporters think."

Vallier wants to subject its "normative critical scrutiny: noting that few reviews "have addressed his normative claims, and fewer still have said anything in much detail." He assumes "for the sake of argument, that all of his theoretical and empirical claims hold" and is "interested only in the following question: supposing that Piketty is right about the nature of capitalism, what are the normative implications?"

Vallier concludes that they are "far less clear than Piketty thinks. If you want to draw normative conclusions from Capital then you will have to significantly reconstruct his arguments...Piketty is probably right that income and wealth inequality have been increasing in developed countries over the past several decades, he is probably wrong that this is explained best by r greater than g...and he is very likely wrong to think that capitalism is normatively defective in the ways he describes and that a global wealth tax is a normatively acceptable solution."

In Part 2, Vallier discusses what seem to be key points for Piketty: that wealth inequality will lead to social instability and that a progressive, global capital tax will reduce wealth inequality and increase stability. Vallier agrees with Piketty that a margin of wealth or income inequality exists that would be unstable. But Vallier concludes "I don’t think we have any good reason to think we’re in danger of instability-generating levels of wealth inequality any time soon. Most people don’t really care that, say, Bill Gates is wealthy. They largely care about the wealth levels of their next door neighbors. I’m sure if Bill Gates owned three-quarters of the globe that people would care, but why think we’re anywhere near that level? Piketty owes us an argument."

Vallier argues that absolute well-being also matters-- a point ignored by Piketty. (Revolution is more likely if people are starving vs. comfortable, whatever the amount of inequality. Here is a Piketty-like analysis applied to weight inequality.) And he notes that it is difficult/impossible to know the specific margin (probabilistically, what is the magic number or range?) This reminds me of the concerns about the federal debt: one can say that it's not morally justified on various grounds. But practically, no one knows if we're near the cliff. The best we can say, confidently, is that we're driving toward the cliff quickly. A related question is whether we would reach that cliff soon. (If not, it doesn't make sense to embrace the RX soon). And Vallier questions whether the global tax is ethical and especially, whether it would work in practice. Apparently, none of these vital questions is addressed in the book.

4.) On policy...
Vallier notes that Piketty's pronouncements and prophecies are vague (smart move), whereas his policy prescriptions are quite aggressive and lacking humility. (This pairing is the opposite of the Wilkinson and Pickett book!) Here's Clive Crook on the same theme: "There's a persistent tension between the limits of the data he presents and the grandiosity of the conclusions he draws. At times this borders on schizophrenia. In introducing each set of data, he's all caution and modesty, as he should be, because measurement problems arise at every stage. Almost in the next paragraph, he states a conclusion that goes beyond what the data would support even if it were unimpeachable."

The funny thing is that I share many of Piketty's concerns about income inequality-- or more particularly, poverty. But there is the reality of that state; the varied causes for the effect; and ethical and practical solutions to the problem

One more review essay from FT

Wednesday, May 21, 2014

Gabriel Kolko, RIP...

On the occasion of Dr. Gabriel Kolko's recent death and Reason's eulogy of his work (which includes a letter from him, baldly stating that he was a socialist), I came to my blog looking for my posts on Kolko-- and to my surprise, I have only made reference to him once! The key omission: I forgot to blog on this essay from two years ago!

It should be on the blog, so here goes...

Happy Centennial to the 1912 “Bull Moose Progressive Party”. This short-lived political party[1] had its most notable connection to Teddy Roosevelt—a former president who was its standard bearer and claimed to be “as fit as a bull moose.” Beyond surviving an assassination attempt[2], Teddy had the best showing for a “third-party” presidential candidate: he is the only candidate to out-poll a Democrat or Republican since the Civil War.[3] (UPDATE: This was not the best wording. Perot "out-polled" Clinton and Bush throughout June 1992. It would be clearer to say that Roosevelt is the only 3rd-party candidate to "out-poll" a Dem or GOP candidate in November, at the ballot box!)

The most popular political use of the term “progressive” is for the “Progressive Era”—a period of significant policy changes from the 1890s into the first part of the 20th century. “Progressive” policy interests ranged widely—from purifying water to child labor laws, from meat inspection to laws promoting eugenics[4], from the income tax to anti-trust legislation. This movement embraced modernization, seeking “progress” through science and “scientific” approaches to policy. But it was also a response to modernization, in its opposition to the power of large corporations and corruption in American politics.[5]

Today, “progressivism” is a related political movement that has extended beyond the Progressive Era. Adherents embrace a mishmash of social, political, environmental and economic reforms—from environmentalism to social justice, from civil rights to “gay” rights, from feminism to electoral reform. The term is usually self-applied by those who are relatively liberal within the Democratic party—or are so principled, that they are “to the left” of Democrats on issues of importance.[6]

In a broader sense, “Progressives” are reform-minded—wanting society to “progress”—more than belonging to a particular part of the political spectrum or working on behalf of a special interest group. And their title implies that they are not interested in “conservatism”—in the sense of conserving or preserving a corrupt and harmful status quo in economics and politics.

Different Types of Progressives
Progressives have consistently pursued a more significant role for government, particularly at the federal level. But as with conservatives, liberals, and libertarians, there are different types of Progressives.[7] Let me divide them into four categories.

First, many of the original Progressives saw natural market power as inevitable and even desirable—when large-scale production is efficient. But they wanted government to regulate those producers, so the resulting monopoly power was not easily abused. This was the impetus behind the Progressive Era’s anti-trust laws on mergers, market concentration, and monopoly power. It is also behind the objective pursuit of stronger labor unions—to counter the perceived or real power of individual employers. (Labor unions, as a cartel among labor suppliers, can easily be pursued subjectively out of greed and narrow self-interests.)  Likewise, Progressive Era labor market reforms—e.g., the eight-hour work day and improved safety conditions in factories—stem from this mindset.

Second, Progressives often want government to step into a perceived void, creating something valuable which they see as under-provided by the market. The provision of public, compulsory K-12 education was one prominent example.[8] In the late-19th century, we also transitioned from effective but limited private charity—to government efforts which tried to replicate that success on a larger scale. The Progressive Era also had the largest government-funded conservation projects in U.S. history (e.g., national parks)—and environmentalism continues to be important to many Progressives.

Third, progressivism often implies “paternalistic” policy—the idea that progress might entail the use of government force to help people make good decisions and avoid bad decisions. Prohibition against alcohol is an infamous example. Since alcohol damaged drinkers, families, and society, it limited our ability to “progress” and should be heavily regulated.

One of the most famous examples of Progressive Era legislation—“child labor” law—serves all of the above. These laws were designed to prevent children from being exploited by business; provided them the opportunity to attend school; and implicitly questioned the decisions of some parents.

In all of the above, Progressives have been relatively optimistic about government activism. They want to regulate or produce economic activity, shaping policy to reach social goals. In this, they assume a relatively benevolent and knowledgeable government—at least when it’s under their influence. Not surprisingly, then, progressivism can extend into “statism”—an overarching belief that government activism is typically ethical and effective.[9]

Another strain of progressivism can temper this faith. Many Progressives focus on undesirable market outcomes as unnatural artifacts of business acting in concert with government. They are relatively cynical about government—at least in the context of “crony capitalism”, where powerful interest groups work with politicians and bureaucrats to benefit themselves at the expense of society. The obvious remedy is to reduce these uses of government. But more imaginative activists have pursued substantive electoral (voting) reforms, so the will of the people and the social good will be more easily achieved through the political process.

In all of the above, education is near the top of any Progressive agenda. They reason that a successful democracy requires a good education for its leaders and the general public. Along the same lines, an educated and benevolent public would lead to energetic grass-roots movements, as people would call for reforms against special interests and corrupt governance.

So, Progressives are motivated by a high view of populism, local governance and direct democracy—at least in theory. The average citizen should have more control over his government—thus, the call to elect judges and to promote voter initiatives such as referenda and recall. If so, the government should be more responsive to the direct voice of the people. The power of machine politicians and political bosses would be weakened. And journalists (“muckrakers”) would be helpful in unveiling economic privilege, political corruption and social injustice.

But those who would exercise democracy must have decent knowledge and be driven by the general welfare. This leads to a Catch-22. How do you achieve such reforms when people are not (yet) smart enough to help you reach those goals? The only option is to give power to a knowledgeable and (it is hoped) benevolent elite in the meantime—often, bureaucrats at the state and federal levels of government. But this militates, at least in the short-term with the quest for democracy, by giving power to the non-elected and the non-local. Centralized decision-making by trained experts and reduced power for local wards might make government more effective. But it would also make it more distant and isolated—and more prone to abuses of power.

Kolko’s The Triumph of Conservatism
This brings us to Gabriel Kolko’s seminal 1963 book, The Triumph of Conservatism: A Reinterpretation of American History, 1900-1916.[10] Kolko is a “New Left” socialist historian who argued in this book that business leaders, rather than “reformers”, were the chief catalysts behind the Progressive Era’s regulation of business. Instead of a “progressive” era, it “was really an era of conservatism…a conservative triumph” (2). In sum, “It is business control over politics rather than political regulation of the economy that is the significant phenomenon of the Progressive Era.” (3)

This assumes that businesses are willing and able to influence policy. It turns out that both are common. The incentive to influence policy is universal: it is always in the best interests of suppliers to restrict competition from current or potential rivals. In some cases, the desire for federal regulation in the Progressive Era also came from a desire to escape burdensome state regulation. But generally, the idea was to limit entry—or to indirectly hinder competitors, by imposing costs on them. The benefits are obvious; if the costs are modest, then we can expect self-interested political activity.

The ability to influence policy is clear from theory and in practice. One of the most powerful observations of Public Choice economics is that political activity typically features concentrated benefits and subtle costs. Even though the costs are larger in aggregate, they are smaller per person—and this subtlety makes their occurrence likely, especially in a democracy. Voters are “rationally ignorant and apathetic”—and will tolerate small-per-person costs, if they even notice them. Interest groups will passionately pursue such laws and engage in mutually beneficial trade with politicians and bureaucrats.

One of the supposed reasons for government activism in the Progressive Era was the enormous market power of corporations. But Kolko argues that “Despite the large number of mergers, and the growth in the absolute size of many corporations, the dominant tendency in the American economy at the beginning of [the 20th] century was toward growing competition. [And] competition was unacceptable…It was not the existence of monopoly that caused the federal government to intervene in the economy, but the lack of it.” (4, 5)

Potential competitors always face natural (economic) and artificial (political) barriers. If the barriers are large enough, entry into the industry is limited; producers can earn above-average rates of return; and with the subsequent monopoly power, consumers may be vulnerable to higher prices, lower quality, less choice, etc. With then-impressive advances in communication and transportation, declining transaction costs made most markets more and more competitive. Even important emerging industries—such as oil and steel—had more competition than is usually assumed.

Even with competition, mergers can create trouble. But Kolko provides the data to argue that “the merger movement declined sharply after 1901…[and] was largely restricted to a minority of the dominant American industries.” (18-19) Manufacturing firms increased by 29% from 1899-1909. (26) Manufacturing mergers earned no more than an average rate-of-return from 1903-1910. (27) And so on. He concludes: “Mergers were not particularly formidable and successful, and surely were incapable of exerting control over competitors within their own industries. (28)

Another measure is the (limited) extent to which anti-trust laws were actually applied. They are vastly over-rated in their historical importance. Teddy Roosevelt’s historical reputation with anti-trust stems from his activity in an early case. But overall, his activity was light and intermittent—with three antitrust suits in 1902, two in 1903, and one in 1904. (74) In a word, in this arena, Teddy talked loudly but carried a small stick.

Another bedrock of microeconomic theory is that firms want to charge higher prices and exercise monopoly power. One common mechanism is the cartel, where sellers collude to restrict quantity—to increase price and thus, profit. The problem is that insiders have an incentive to cheat on the collusive agreement and outsiders have a tremendous incentive to enter a highly profitable industry. (This is one of many areas where “greed” works to promote efficient and equitable market outcomes!) As such, Kolko documents failed attempts to form voluntary cartels in many key industries—steel, oil, automotives, agricultural machinery, phones, copper, meat packing, and life insurance. There were strong incentives to collude, but without government assistance, there was not enough ability to keep cartels together.

The upshot? Business frequently turned to government to achieve its goals. Kolko argues “It was not a coincidence that the results of progressivism were precisely what many major business interests desired.” (280) “If business did not always obtain its legislative ends in the precise shape it wanted them, its goals and means were nonetheless clear. In the long run, key business leaders realized, they had no vested interest in a chaotic industry and economy in which not only their profits but their very existence might be challenged.” (6)

Today, we see the same principles play out—from the rampant practice of crony capitalism to particular regulations in tobacco, alcohol and health insurance. In tobacco and alcohol, suppliers are more than happy to have restrictions on their ability to advertise. They don’t have to spend money, battling over market share. And the limits on advertising make it much more difficult for new competitors to emerge. This is a wonderful collusive arrangement they could never maintain on their own. In health insurance, ObamaCare drives up the demand for health insurance, while insurance mandates require more services to be covered and regulations make it difficult for insurers to compete across state lines.

Kolko observes that “Important business interests could always be found in the forefront of agitation for such regulation, and the fact that well-intentioned reformers often worked with them—indeed, were often indispensable to them—does not change the reality that federal economic regulation was generally designed by the regulated interest to meet its own end, and not those of the public…” (59)[11] In a word, government—then and now—is far busier enhancing monopoly power, than reducing or regulating it.

One final example: Kolko devotes a section to the most famous reform of the Progressive Era—regulation of the meat packing industry (98-108). He cites the conventional narrative which centers on the importance of Upton Sinclair’s 1904 newspaper articles and his subsequent novel, The Jungle. “The meat inspection law of 1906 was perhaps the crowning example of the reform spirit and movement during the Roosevelt presidency, [but] the full story reveals much of the true nature of progressivism.” (98) As Kolko notes, the movement for federal meat inspection began 20 years earlier, “initiated as much by the large meat packers themselves as by anyone. The most important catalyst…was the European export market and not, as has usually been supposed, the moralistic urgings of reformers.” (98) The law was a clever way to meet European import standards and to retaliate against European import restrictions on American meat (98-99). But the regulations did not impact domestic non-exporters, so the dominant industry players wanted the same costs imposed on their competitors (100-102).[12] Even Sinclair noted that the regulations came at the request of the packers, with their avid support and for their benefit (103).

All of this is completely consistent with concepts from Public Choice economics—that interest groups and politicians will often act in concert, to the detriment of the general public. In fact, both will use good-sounding ideas to conserve and protect their markets at the expense of consumers and potential competitors. “Progressivism” and the Progressive Era are no exceptions.[13]

[1] The Progressive Party largely dissipated after 1912. Two other candidates ran for President under the Progressive label: Wisconsin Senator Robert LaFollette in 1924 and former vice-president Henry Wallace in 1948.
[2] The bullet was slowed by the steel case for his eyeglasses and a single-folded copy of his 50-page campaign speech.
[3] H. Ross Perot led the polls during the summer of 1992 against Bush I and Clinton, but faded down the stretch and finished third with 19% of the vote.
[4] The history of eugenics had an important centennial five years ago—and it involves Indiana! See:
[5] Although relatively fond of government in their own way, Progressives were distinct from Socialists—as evidenced by Eugene Debs’ 6% of the popular vote in the 1912 election.
[6] Putting it another way, these are generally the people who are not embarrassed to be called “liberals” and are willing to voice critiques of both major political parties.
[8] Today, the existence of K-12 public education (with its arbitrary compulsory requirements) and a commitment to statism are far more important than its quality, as evidenced by the apathy or even opposition of “Progressives” to serious reform efforts.
[9] This points to the potential for idolatry toward the State. “New Left” historian Gabriel Kolko roots this observation in history, describing blindness in the Progressive Era as unsurprising after the fact and “an understandable reaction” to then-dominant Social Darwinism: “for if the state could be said to be the highest form of cooperative human evolution, or a divine institution, then its actions could only be legitimized and declared good.” (Gabriel Kolko, The Triumph of Conservatism: A Reinterpretation of American History, 1900-1916; Free Press: New York, 1977; p. 214)
[10] Gabriel Kolko, The Triumph of Conservatism, Free Press: New York, 1977.
[11] Kolko (78) cites a WSJ op-ed from 1904 which expected antagonism from railroads, but instead saw their support, for regulation.
[12] Kolko (107) notes that Sinclair’s primary concern was the plight of workers, not the standards of meat. And he quotes Sinclair in his sad assessment of his own impact: “I am supposed to have helped clean up the yards and improve the country’s meat supply—though this is mostly delusion. But nobody even pretends to believe that I improved the condition of the stockyard workers.”
[13] Kolko notes that historians have had difficulty explaining why Progressivism faded. His explanation is that the goals of interest groups had been reached—and then were extended by World War I’s economic policies. By the 1920’s, the goals of progressivism had been codified into law. “Progressivism did not die in the 1920s, but became a part of the basic fabric of American society.” (286-287)