Category Archives: Economics

“Can welfare conditionality combat high school dropout?”

I have a new working paper out, joint work with Simen Markussen and Knut Røed. Simen has written provocatively about the paper in the today’s Dagens Næringsliv, which is also running a companion piece. These are only in Norwegian (and behind a paywall), however, so here is a brief summary in English:

We investigate what happens when Norwegian social insurance offices increase their use of conditions would-be welfare recipients need to satisfy in order to receive welfare. Using the staggered introduction of this program and based on double and triple difference models, we find that such conditionality reduces the number of young people that receive welfare, and more importantly, increases the high school graduation rate. For young people from disadvantaged backgrounds, we find substantial and precise effects, whereas we find no effects on youth from more resourceful backgrounds, as expected. A few years later, we find that those who were exposed to new regime have more education, earn more, and are more likely to be employed. Thus even though activating these people may cost something upfront, it pays off in the long run.

The newspaper has an interview with a guy who got on track and gets some work experience through this system. Here is the abstract of the research paper:

Based on administrative data, we analyze empirically the effects of stricter conditionality for social assistance receipt on welfare dependency and high school completion rates among Norwegian youths. Our evaluation strategy exploits a geographically differentiated implementation of conditionality. The causal effects are identified on the basis of larger-thanexpected within-municipality changes in outcomes that not only coincide with the local timing of conditionality implementation, but do so in a way that correlates with individual ex ante predicted probabilities of becoming a social assistance claimant. We find that stricter conditionality significantly reduces welfare claims and increases high school completion rates.

Advertisements

Basic income pilot in Finland, headed by top economist

Via MarginalRevolution’s assorted links and others, a short BBC article about a pilot project in Finland on universal, basic income. Economist Ohto Kanninen, coincidentally a fellow student of mine from graduate school, describes the project:

The prime minister has expressed support for a limited, geographical experiment. Participants would be selected from a variety of residential areas.

Mr Kanninen proposes testing the idea by paying 8,000 people from low income groups four different monthly amounts, perhaps from €400 to €700.

They also have the Prime Minister on board:

Prime Minister Juha Sipila has praised the idea. “For me, a basic income means simplifying the social security system,” he said.

This sounds really exciting, and I cannot wait to see the working paper.

 

The hedonic treadmill exists even for basic necessities

Does people’s life satisfaction adapt to material improvements? In a recent paper (gated), Galiani, Gertler and Undurraga find that it does, even in a case of very poor people receiving a really basic service (housing). In a large-scale experiment, some poor households in El Salvador, Mexico and Uruguay were randomly selected to receive a ready-made small house. Receiving such housing increased the share of households reporting to be “satsfied” or “very satisfied” with the quality of their life by around around 40 %, from 0.53 to 0.73, thus confirming that it was something these households really needed. What about the effect in the long term? Eight months later, more than half of the gain had disappeared, highly consistent with the hedonic treadmill hypothesis.

philosophiae doctor

Thursday May 28 I defended my Ph.D. thesis in economics at the EUI in Florence. As for most people, the defence marked the end of a journey through many ups and downs and unexpected turns. The most significant development for me, and one I was very happy with, was a switch from theory to empirics, in particular from conflict theory to applied (micro)econometrics.

The thesis itself consisted of three chapters – on television and cognitive development, terrorism and work effort, and voting habits in turnout. Three very different papers bound together by using modern empirical methods to discover causal effects.

The defence was a taxing, but also very useful experience. I was lucky to have a committee that had taken their job seriously, and that provided extensive and thorough comments that will lead to large improvements to the papers; papers which I look forward to blog about when I get them out as working papers. Perseus was the proper venue for finishing everything off.

Childhood predictors of adult outcomes

Two papers in The Economic Journal November 2014 deal with how childhood information may predict adult outcomes.

Frijters, Johnston and Shields consider the question Does Childhood Predict Adult Life Satisfaction? Using repeated surveys of people born in the UK in 1958, they are able to explain only 7 % of people’s adult life satisfaction with a very wide range of family and childhood variables. Interestingly, exploiting the panel dimension, they estimate that around 40 % of adult life satisfaction is a trait (i.e. fixed), so it is surprising that their first number is so low. It is as if type of childhood almost does not matter. Education and wages are predicted much better.

I do not know if information on time preferences would have helped, but Golsteyn, Grönqvist and Lindahl at least claim that Adolescent Time Preferences Predict Lifetime Outcomes in their article in the same issue. They find that Swedes who were future-oriented (had low discount rates) as children went on to obtain more education, better grades, higher incomes, and better health (obesity and mortality) as adults than their more impatient peers. The authors are admirably clear that they are not estimating causal effects.

Review: Intelligence: A Very Short Introduction

Since I am doing some work using intelligence test data, I wanted to read something introductory material on that topic. Enter Intelligence: A Very Short Introduction (2001) by Ian J. Deary. I found this a useful introduction to how psychologists/psychometricians have thought about these things. What I was really after was the foundational stuff in chapter 1, and that is what I will focus on here. (Though chapter 6 on the Flynn effect is also solid, and taught me that American SAT scores have been declining in the same period as IQ scores have been rising.)

Deary takes the test collection called Wechsler Adult Intelligence Scale III as a starting point. WAIS-III consists of 13 different tests, and strikingly,

“every single one of those 13 tests in the WAIS-III  has a positive correlation with every other one. People who are better at any one test tend to be better at all of the others. There are 78 correlations when we look at all the pairings among the 13 tests. Every single correlation is positive – a good score on one of the tests tends to bring with it a good score on the others. There are no tests unrelated to any other one, i.e. there are noe near-to-zero correlations. There are no tests that are negatively related with other ones. Even the lowest correlation between any two tests is still a modest 0.3 (between picture completion and digit span). […]

The first substantial fact, then, is that all of these different tests show positive associations – people good at one tend to be good at all of the others. […]

The second important fact is that some sub-groups of tests in the WAIS-III collection associate higher among themselves than with others. For example, the tests of vocabulary, information, similarities, and comprehension all have especially high associations with each other. So, although they relate quite strongly to every test in the WAIS-III collection, they form a little pool of tests that are especially highly related among themselves. The same thing occurs with digit span, arithmetic, and letter-number sequencing. They relate positively with all of the other tests in the collection, but they relate especially highly with each other (pp. 7-8).”

In the WAIS-II tests, there are four groups of tests that correlate particularly strongly (called “group factors”), labelled: Verbal comprehension, Perceptual organization, Working memory, and Processing speed, ref. the figure below (p. 3). Inline image 2

Positive correlations between the four group factors are high. This has often been taken to imply that the skills required to do well on each have some common source, which has traditionally been called g (“general factor”). Strictly speaking, the fact that the different test scores are positively correlated does not imply that they have something in common or that “g” corresponds to anything real. Deary is at one point fairly clear about this, writing: “The rectangles in Figure 1 are actual mental tests – the 13 sub-tests – that make up the Wechsler collection. The four circles that represent the ‘group factors’ and the circle that contains g are optimal ways of representing the statistical associations among the tests contained in the rectangles. The things in the circles, the specific/group factor abilities and ‘g’, do not equate to things in the human mind – they are not bits of the brain (p. 11).”

Though he muddles it somewhat when continuing with “The names we pencil into the circles are our common-sense guesses about what seems to be common to the sub-groups of tests that associate closely. The circles themselves emerged from the statistical procedures and the data, not from intuition about the tests’ similarities, but the labels we give the circles have to be decided by common sense (p.11),” and later much more by going on to treat ‘g’ as a valid stand-alone explanatory concept, and writing e.g. “We already know from Chapter 1 that there is general ability and there are […] specific types of mental ability (p. 85).”

Nevertheless, the book seems to be a good exposition of intelligence testing and how psychologists have viewed and continue to view the results of these tests.

 

 

Review: Capital in the 21st Century by Thomas Piketty

Now I have done my share to make Capital in the Twenty-First Century by Thomas Piketty a little less unread. Good timing, since he is visiting Oslo this week.

What I will write here will be the notes I took while reading the book, edited for clarity. It is well known now that the book is thick and contains very much information, Piketty explicitly wants to consider both big and small phenomena, both long and short term changes, hence disclaimer: There will inevitably be much that I will not have caught or write about, and there may also be things that I have misunderstood. But maybe these notes will be helpful for those who have themselves read parts of the book or know a little bit and are trying to understand more. Many others have written better proper reviews.

Conclusion: Much great empirics to learn from. Inequality is an important topic. Good figures. Good at using qualifications and caveats, necessary when writing such a broad book. Good that also tries to explain. Objections by others that the recent rise in inequality is caused by human capital, etc. are misguided. Fundamentals of and cause and effect relationships in theoretical framework should have been clearer, and objections often relevant. Recommended.

Part One: Income and capital
-Focus on US and France, to some extent Germany, Britain, and to a lesser extent Sweden.
-Convinced that inherited wealth will make a comeback.
-The capital/income ratio is defined as β = K/I. It is fine to call and think of capital as “wealth”. This ratio was quite high in the time around 1900 (about 7), meaning that there was a lot more wealth than income. This was a period with very high inequality, particularly in Europe. But with depressions and world wars, much capital was destroyed, thus β declined. In the post-war period, β has been rising again.
-The first fundamental law of capitalism: α=r x β. This is an accounting identity saying that capital’s share of income α equals the return on capital r times the capital/income ratio β. W
-The second law: β = s/g. s is saving. Also like an accounting identity. Supposed to hold asymptotically.
-Capital ownership is concentrated, so a high capital/income ratio is typically related to inequalty.
-Suggests competition between nations-> conservative revolution, Thatcher etc.
-Growth pessimist. Refers to his figures 2.2-2.5 as this largely determined but immediately afterwards when discussing inflation mentions that quality improvements and new products may mean that the growth rate really higher. In any case his growth pessimism is key since it means “wealth accumulated in the past will inevitably acquire disproportionate importance (p. 166).”
-Piketty emphasizes both that the capital/income ratio has increased and that inequality has increased since the world wars, and that r>g is a force for greater inequality, but he stresses repeatedly and clearly that r>g is not what is driving this recent rise in inequality. So people saying things like “Piketty is wrong because he claims that the rise in inequality is due to capital income while in truth it is due to a rise in wage inequality” (a group including notables such as Debraj Ray) simply cannot have read the book seriously. Indeed the point of a rise in wage inequality is treated at considerable length and referred to repeatedly. I have mentioned this before.
Part Two: The Dynamics of the Capital/Income Ratio
-On the other hand, his use of the “second law” β = s/g is a legitimate target for criticism, since he writes as if s and g are exogenous and independent variables determining the capital/income ratio, which is clearly not the case.
-The fundamental force for divergence: r > g. This has more bite than the “laws”. Piketty takes it as an empirical fact that the rate of return on capital, r, historically has been greater than economic growth g. In his view, the second half of the 20th century, in which the opposite was the case is an exception. Debraj Ray has forcefully attacked the emphasis on this inequality, pointing out that it is the saving propensities of the rich versus the poor that matters, not the form of their saving (here and here).
-Piketty refers to 19th century literature throughout, but he does so to show certain features of the economic environment: in the novels of that time there was no inflation; and the rate of return on capital was constant – capital and rent of ca 5% considered the same, and type of capital seen as unimportant (p 207).
-Most wealth privately held, tab 3.1.
-p 151 strange about “inevitably” about volume and price effects in housing.
-p 163 takes swipe at authors of wb reports regarding monetary value of hum cap.
-Volume effects, like savings, together with slow growth explaining most (though not all) of increase in private cap from 1970s. Ex of second law. Privatization also a cause, and increase in asset prices. Might one make the arg that privatization increased value? Higher value placed on the privately held capital.
-Rate of return depending on size of capital. I come back to this under Part three.
-p 220: “the novelty of this study…capital-labor split and the recent increase of capital’s share of national income in a broader historical context by focusing on the evolution of the capital/income ratio from the eighteenth century until now”.
-Acknowledges role of recent prod growth and diffusion of knowledge – have made it possible to avoid the apocalypse predicted by Marx (p. 234). But has not altered the deep structures of capital. Also sees “progressive taxes on income and inheritance (p. 278)” in the postwar period as reasons why rentiers have not come back.
Part three-the structure of inequality
-Destruction of war, bankruptcies in depression an policies like rent control reduced wealth inequality, allowed new start.
-France: large decrease in inequality since the Belle Époque, driven by income from capital (figs 8.1-2). Increase after WWII, due to both capital and labor, decrease from 1968, when minimum wage was increased faster than the average wage, then increase from 1982-83, when this policy was stopped. Overall, though, wage inequality stayed about the same, but increased at top end of the distribution since 1990’s.
-US: started the 20th century as more egalitarian than France and Europe, but has now overtaken them and become as unequal as France was at that time (fig 8.7). Decreased in prewar and WWII times, but has shot up sine the 70’s due to the rise of “supersalaries” going the top 1 percent income receivers (fig 8.8).
-The very rich still get most of their income from capital in both France and US. Figs 8.3-4 and 8.9-10.
9. Inequality of labor income
-Also consider other countries. Many of the same developments.
-Thinks we are not going away from society of rentiers, only going to another form. Agrees with Goldin and Katz that increased spending on education would be good, but considers the wage-according-to-skill-only-story, or the theory of marginal productivity, as incomplete, since “it fails to explain the diversity of the wage distributions we observe in different countries at different times (p. 308)”, sees it rather as holding in the long run. Also mentions the intrinsic value of health and education. In the US the minimum wage has gone in the opposite way as in France (fig 9.1). Minimum wage can be efficient if firms have monopoly power, this is its justification. Hard to see differences in objective measures if skill between top and almost top income earners; supermanagers emerged mostly in Anglo-Saxon countries, but not other developed countries. Social norms and acceptability. Difficult to explain observed pay differences by non-external variances-“pay for luck” present, and more so in countries with lower top marginal tax rate. Bargaining model-with lower marginal taxes, it paid for executives to bargain harder.
10. Inequality of capital ownership
-Is becoming increasingly concentrated.
-Wealth more concentrated. Data go longer back. Wealth inequality decreased substantially in the first half of the 20th century, some wealth going to “the patrimonial middle class”, the middle 40% of the wealth hierarchy. Decrease largely due to the shocks of 1914-45 and introduction of taxes on capital and capital income.
-Predicts that r will again rise above g, but says at the same time that this prediction rests on the assumption “that no significant political reaction will alter the course of capitalism and financial globalization over the course of the next two centuries (p. 358),” which is dubious “precisely because it’s inegalitarian consequences would be considerable and would probably not be tolerated indefinitely (p. 358).” This feels somewhat like overhedgning.
-Demographics also relevant. And international competition may drive capital taxes down.
11. Merit and inheritance in the long run
-Dynamics of inheritance
If r>g “the past tends to devour the future (p. 378)”
“Nearly all of the capital stock came from inheritance (p. 379)”. Drop after the war, but steady increasing (fig 11.1) in France. Can be seen as result of three u-shaped forces: capital/income ratio, mortality rate, wealth at death/average wealth. Shocks of 20th century relevant also here-destruction if what was to be inherited, and many died young. Even if people are paid according to merit, income inequality will turn into inheritance inequality. (Andrew Gelman has an old post related to this). Difference from before: wealth less concentrated, and income and wealth more correlated.
-The global dynamics of wealth
Similar patterns in some other countries as in France, but data difficulties in many countries, so uncertain. Also uncertainties about savings and consumption behaviors.
12. Global inequality of wealth in the twenty-first century
-Share of billionaires in the work is increasing (figs 12.1-2).
-Rate of return depending positively on wealth, ref Forbes rankings, table 12.1.
-University endowments, for which we have good data, also show high return and positive association between wealth and return (fig 12.2). Piketty believes this is due to “economies of scale in portfolio management (p. 450)”. Here the evidence does not seem so strong, and it is difficult to believe that capital owners would not run into diminishing returns at some point.

-Much entrepreneurial wealth on Forbes list, but probably more inherited. And entrepreneurs and their children in any case turn into rentiers. Comments on Gates and Slim on pp. 444-445 with footnote, (individual) merit not so straightforward. (Gates wrote a positive review nevertheless.)

Part four. Regulating capital in the 21st century
-I do not have so much to say about this one.
-The state more involved today than in the past. Taxes increased between 1910 and 1980, after that constant (fig 13.1). Social spending-construction of a “social state”. Mobility relatively low in the US, and “parents’ income has become an almost perfect predictor of university access (p. 485).” Argues for more public financing of universities.
Pay-as-you-go retirement systems connect generations and “makes for a virtuous and harmonious society (p. 488),” but face challenges when r becomes > g, which is the rate of return for these systems. Claims that the volatility of the return in capital was the reason for the introduction of paygo systems after WWII, when many people’s savings had been wiped out (p. 633n45), something I never learned about, and that this justification is still valid today. So how to deal with the challenges of r>g? Raising retirement age is one possibility, but we should be better at distinguishing between types of workers (intellectual occupations and others). Mentions possibility that share of intellectual workers will increase; and “One of the most important reforms the twenty-first century social state needs to make is to establish a unified retirement scheme based on individual accounts with equal rights for everyone, no matter how complex one’s career path.”-too many different rules and too much complexity. Sees the Swedish reforms of the 90’s as largely accomplishing this (p. 490n46).
13. Rethinking the progressive income tax
-Progressive taxes on income and inheritances new in the 20th century. Dismisses a direct tax on consumption quickly (p. 494), promising to come back to it (634n1), but hardly does (only briefly in 638n34). Rise of tax competition among countries, the tax system becoming regressive at the high end of the distribution. Sees this as threatening the common supper for taxation. US and Britain led the introduction of progressive taxes on income and inheritances, and had higher rates than France and Germany (figs 14.1-2). So high (marginal) rates that the purpose was not to raise revenue, but rather to limit such wealth. Rates substantially reduced since 80’s. Do not see effect on productivity, but believes the reduction increased the bargaining power of executives.
14. A global tax on capital
-The ideal tool, would “avoid an endless inegalitarian spiral (p. 515).” A useful utopia. Many challenges, but has some ideas about how Europe could implement it. The alternative is worse-capital control and protectionism, we already see some of this, in governments’ support of national champions. Hails redistribution in the US: Immigration is the mortar that holds the United States together, the stabilizing force that prevents accumulated capital the importance it has in Europe; it is also the force that makes the increasingly large inequalities of labor income in the United States politically and socially bearable. For a fair proportion of Americans in the bottom 50 percent of the income distribution, these inequalities are if secondary importance for the very simple reason that they were born in a less wealthy country and see themselves as being on an upward trajectory (p. 538).”
Other comments
-Wants economists to become more broad social scientists. Disses mathematical economists, then says that we cannot spend time on internal squabbles. I happen to agree w much of this, but it could maybe have been put differently.
-Footnotes contain large amounts of information, but are sometimes only dryly humorous or polemical:
621n57 taxi problem in the EU.
624n20 A&R on Gates and Slim. Also in text, but continues in the footnote.