The Payoff of Higher Education at the Urban Institute, 2/24/2014

A couple things - Stephanie Cellini was my cost-benefit analysis professor at George Washington University. I have worked with Lauren Eyster in the past at Urban on job training evaluations and apprenticeship programs. She is an awesome researcher and a good example of what I value so much about the people at the Urban Institute. Also, Jared Bernstein has real gravitas. I'd never seen him in person before. He's very smart which is why he is respected in the world of policy research, but it's also obvious why he has succeeded in public life too.

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Nancy Folbre on local minimum wage policies

Brad DeLong is apparently trying to break my blog, by linking to a bunch of recent minimum wage posts on here. He is far too generous in saying that I have "delved deeply" into the literature. I have spent some time on the side of everything else trying to get my head around it, though, and of course I've yammered a lot. Perhaps that will do.

One of the things that some people mistakenly assume is that I'm a big fan of the federal minimum wage because I find the literature orbiting around the Dube, Lester, and Reich (2010) paper compelling. That's not entirely true. I've said in the past that I don't lose sleep over the federal minimum wage because of this research, but I cannot be enthusiastic about it either because I am concerned about the diversity of local labor markets and the prospect that average treatment effects obscure positive effects in some markets and negative effects in others where the minimum wage is far more binding (Dube has done some work I believe on variation in local effects but I have not "delved deeply" into that yet).

My answer has been an answer that I often turn to: federalism and diverse local responses. Obviously the federal minimum wage is not the only game in town anyway, and we should expect state and local electorates to be more responsive to local labor market conditions that may warrant a lower, or even a higher minimum wage than the federal minimum wage.

This finally brings me to the estimable Nancy Folbre (Ooh! speaking of "new acquisitions" in my previous post, I also recently got a copy of Folbre's book "Valuing Children: Rethinking the Economics of the Family"). She has a post up on the success of these local efforts to raise minimum wages and even institute living wages. Folbre summarizes the findings in two recent books of interest: What Works for Workers?, from the Russell Sage Foundation, and When Mandates Work, from the University of California Press.

New Acquisition

Frustrating week. My laptop died (hopefully non-backed up data - which is not most of it anyway - should be fine... figuring that out today) right when we're looking at getting new siding for the house, and big purchases stress me out. Usually I am not the type to shop to relieve stress (particularly when the stress is over big purchases!), but the one single exception is if I am in the neighborhood of Second Story Books in Dupont Circle.

And in fact, the Urban Institute is a couple blocks south of said wonderful used bookstore, and I happened to be at the Urban Institute for a great talk on the returns to post-secondary education.

So of course it was only natural that I picked up a 1952 edition of Étienne Mantoux's book The Carthaginian Peace: Or, the Economic Consequences of Mr. Keynes. This is one I've been interested in for a while just from leafing through it in the library but never had the opportunity or inclination to pick it up. Mantoux is a fascinating guy - he was born in Paris, spent a lot of time in England including at the LSE with Robbins and Hayek (I don't yet know if that had any impact on his thoughts on Keynes). He fought in WWII and died days before the end of fighting (and before he could see his book published). The book is basically a refutation of The Economic Consequences of the Peace. It's not cited very often, although those that do cite it apparently find the arguments compelling. The preface is a little odd - it talks about how Mantoux worked on it while in the United States, and that he was therefore working with unbiased data sources. The guy was French, born in 1913. He's not exactly a neutral party in the whole "what should we do about the Germans" question. That doesn't mean it's a bad argument, but it's worth noting. What I've gleaned from the preface on the train ride is that a lot of the argument uses pre-war data. That strikes me as a little odd as well - much of Keynes's argument concerns the destruction of productive capacity.

Anyway, I do not have a dog in this fight at this point, and I'll have to read it. But it was a nice find.

Minimum wage request

If anyone that considers themselves sympathetic to/convinced by the Neumark/Wascher half of the literature and would be interested in reading and providing reactions to a 3,000-4,000 word piece on the minimum wage later in the week, I would appreciate hearing from you.

I'm writing something up on methods for a non-technical audience (or at least a diverse audience including less technical people), and I want to make sure the simplification of the issues I've made are fair (there are obviously a million factors to discuss but I am focusing on what I think is the single most crucial point in making sense of the literature).

You can leave a comment here or email me at dan.p.kuehn@gmail.com.

Three more links on the minimum wage - 2/22/2014

1. Close to home on this one - Ryan Langrill further develops the point made in the last post about travel across state borders in response to the minimum wage. BTW, this sort of accounting is super-duper due diligence. I think it's important to be above reproach in empirical work, but it's worth noting that. This applies to basically any policy that you're using state level variation for... and its effect is so ambiguous and likely small that pretty much no one addresses it. The minimum wage debate is fierce, though, so it's probably worth  addressing if we can, if for no other reason than to rule it out so in the future we can feel better about not worrying about addressing it.


2. David Henderson shares some neat work by the CBO to account for publication bias in the minimum wage literature. Here is a good example of this sort of work.


3. Finally, frequent commenter Blue Aurora shared this article with me from the most recent issue of the Economic Journal. It covers some of the worker flow effects (separation and hiring) that have recently been of interest to Bob Murphy (this is also covered in recent work by Dube, btw).

Two quick minimum wage links

The minimum wage is becoming what high skill immigration was for me last spring - my new pet interest. That's probably good... maybe I should make a New Year's resolution every year to dig into a new labor topic for a couple months, just to round myself out. Anyway... two quick links:


1. Jonathan Catalan suggests we take a page from Kahneman's book and have collaborations between researchers that disagree on the minimum wage. In theory this should work fine. I don't think any of the participants in the discussion go in to cook the books, after all. I do think there is a clear difference of opinion on the best way to model this (I'm trying to narrow in on this issue in something I'm writing right now) That could prevent some collaboration and of course that is what's highly correlated with certain results. But if people could hash differences on that point out together, sure that could be constructive. It's a good idea on any issue, actually.

2. A couple days ago the New York Times reported on people crossing state borders to take advantage of higher minimum wages. This has been in the back of my mind throughout this debate, as this sort of displacement that screws up quasi-experimental studies is a major focus of one of my dissertation chapters. It's not entirely clear how this should affect the estimate. Think of a price floor in a standard competitive model. Shift the supply curve to the right. What happens to employment? Nothing if you're assuming the competitive model. Now you would have employment reduced in the sending state, so in a difference in differences set-up you'd bias the estimate up. But that just begs the question - why would they cross the border if employment opportunities contract rather than expand as a result of the minimum wage? For that matter, why wouldn't you have the opposite effect under the competitive model - people without a job crossing the border to the low-minimum wage state where wages may be lower but at least they can get a job? That would bias it down. So the net impact gets very unclear very quickly. That does not mean, of course, that it's not important to consider.

We should have the data to look at this in the ACS (ACS I believe has both county of work and county of residence... I could be misremembering). Somebody should to get a sense of whether it's negligible or needs attending to in future work. An alternative is to do the same analysis with employer based surveys and employee based surveys, which would give you an upper and lower bound. (Actually, Dube has already done this latter suggestion and it doesn't seem to qualitatively change the results).

UPDATE: I forgot:

3. Jared Bernstein on the CBO on the minimum wage.
4. Arin Dube on time series econometrics and the minimum wage (if you look back at the literature there's a lot of old papers on this but not a lot of new ones... there's a reason for that).

Krugman back in 2009 on the downturn

Bob Murphy thinks I defend Krugman no matter what no matter how many times I end up disagreeing with Krugman on his blog, so he's going to think this is a predictable post. But oh well. I think it's right.

Recently Bob claimed that Krugman is "rewriting" his stimulus history. The issue at hand is the old unit roots debate between Krugman, DeLong, and Mankiw. Now DeLong actually said that he trusted the CEA forecast at the time (more on that a little later), but Krugman didn't. His post stuck pretty closely simply to what we think about the properties of different time series with respect to unit roots. It's not even like he left his view about the possibility of extended crisis unstated - he said that we can expect output to grow "if and when" slack capacity was used again. "When", sure - but "if and when"!?!?! This is not the writing of a guy that thinks there's no realistic possibility that we're not going to bounce right back!

And anyone that follows Krugman closely (and I always thought Bob was one of those guys) should know why Krugman said "if and when". From the beginning he has been bearish on the administration's forecasts.

He was talking about getting into a deflationary trap where we can't get out of slow growth two months before the unit root flap, when the initial administration forecasts came out:

"So tell me why we aren’t looking at a very large risk of getting into a deflationary trap, in which falling prices make consumers and businesses even less willing to spend."

But macro is hard and maybe a deflationary trap doesn't explicitly say, to Bob's standards, whether the administration forecasts are too optimistic and that there is a chance of a much worse crisis. Bob thinks Krugman is changing his tune and that:

"Now all of a sudden, Krugman is claiming that he was skeptical of the CEA’s early-2009 optimism about the recovery from the deep slump!"

How could anyone seriously think Krugman thought the administration was too optimistic??? Maybe from this (also two months before the unit roots debate):

"One more point: the estimate of what would happen to the economy in the absence of a stimulus plan seems kind of optimistic. The chart above has unemployment ex-stimulus peaking at 9 percent in the first quarter of 2010 and coming down through the year; the CBO estimates an average unemployment rate of 9 percent for 2010, so the Obama people are more optimistic than the CBO, and a lot more optimistic than I am."

MAYBE we got the idea that Krugman thought the administration was too optimistic because of that time early on when Krugman was saying it was too optimistic while everyone else was saying he was being too bearish. Or perhaps I'm just some hack that will defend Krugman on anything.

Look, even the readers of Newsweek got it. The readers of Newsweek. Why is Bob acting like it's absurd to say that Krugman thought the administration was wildly optimistic?:

This was Krugman's 2009 (much less fun than his 2008!): liquidity trap diagrams and being bearish relative to the powers that be.

So the unit root debate, to me, was about unit roots. Not about how bad the crisis was. Because Krugman was pretty clear on what he thought about how bad the crisis was and particularly how we could be stuck in it for a long time, and nothing in his unit root post overturned any of those arguments.

Which brings us to Brad DeLong. I also admire Brad a great deal, but he did say back in March 2009 that the safe way to bet was with the administration forecasts.

Here's the thing, guys. He readily admits that early on in the crisis he did not see all this coming. Bob often frets over Brad's rebuke to him that he should mark his beliefs to market and sit "at the feet of Paul Krguman, chanting 'om mani padme hum' until I achieve enlightenment." But here's why Brad says that - because that's where he had to drag himself when things finally set in about this crisis. It's where a lot of us on "Krugman's side" had to drag ourselves. I think because Brad is so brash (or I suppose "shrill" is the word of choice) in his blogging a lot of people miss how unbelievably humble he is. He regularly blogs about what he got wrong and how he is changing his views to mark them to market. And anyone that follows Brad knows that this issue of the severity of the crisis was a very important case where Brad used to be not-so-bearish and has changed his views.

Here is a particularly thoughtful and detailed admission of wrongness from Brad in 2011:

"Although I worked for three years in the Clinton Treasury Department, and am a card-carrying member of the economist guild, I predicted none of this. Like most of my peers, I was wrong. Yet the most interesting thing is that I could have -- should have -- been right. I had read economist John Hicks; I just didn’t quite believe him. 

Hicks, one of the clever young Brits dotting i’s and crossing t’s in the writings of John Maynard Keynes in the 1930s, was responsible for the workhorse formulation of Keynesian economics -- the IS-LM model -- that has been the bane of many an intermediate macroeconomics student. It was his version of the IS-LM model that formalized and elevated a key insight: that interest rates paid by creditworthy governments would remain low after a financial crisis. This formulation holds even in the face of enormous budget deficits that greatly expand the supply of government bonds. 

A financial crisis initiates a sudden flight to safety among bondholders -- widening interest-rate spreads, diminishing the private sector’s desire to sell bonds to raise capital and encouraging individuals to save more and consume less as they, too, hunker down. Thus bond prices rise, and interest rates drop. As rates fall, firms see that they can get capital on attractive terms and so issue more bonds; households see the low interest rate earned on their savings and lose some of their desire to save. The market heads toward equilibrium... 

I had read Hicks. I even knew Hicks. But I thought that his era, the Great Depression, had passed. Sitting in my first graduate economics class in 1980, I listened to Marty Feldstein and Olivier Blanchard -- two of the smartest humans I am ever likely to see -- assure me that Hicks’s liquidity trap was a very special case, into which the economy was unlikely to wedge itself again. Yet it did. 

On my shelf is a slim, turn-of-the-millennium volume by Paul Krugman titled “The Return of Depression Economics.” In it he argued that we mainstream economists had been too quick to ditch the insights of Hicks -- and of economists Walter Bagehot and Hyman Minsky. Krugman warned that their analysis was still relevant, and that if we dismissed it we would be sorry. 

I am sorry." 

 So please - let's drop this.

You might be able to squeeze a blog post or an Econ Journal Watch article out of this, but nobody that follows Paul and Brad is buying it.

Minimum wage debate - a little old but good

This is coming up on a year old now, but it's excellent. Jared Bernstein does a phenomenal job drilling down to the real issues. I can also say that Russ Roberts is wrong on at least one point. He says that some empirical studies say one thing and some say another and nobody is ever convinced either way because of our ideology. So that's certainly not true. My mind was changed. I used to think that the minimum wage reduced employment for all the reasons that are typically stated. When I was required to read the empirical work on it in my labor classes I started to doubt that, and particularly in the last several years with the spate of new work that has come out my view has been solidly changed because I think that there is far stronger evidence that the minimum wage does not have disemployment effects.

I'm not saying that is universal - that it could never have those effects. In certain labor markets it probably does and if you jacked the minimum wage up to $15 or $20 it certainly would. But I don't think anyone would question that.

So Russ, I'm one. If I have been convinced by the evidence after holding an alternative viewpoint surely there are others. I think we are at a really critical time in this literature. The differences between the two empirical approaches is crystallizing, which means people are going to be better equipped to evaluate who has the better argument. I'm writing a short piece on that right now, and hopefully we can talk more about it in the future.

Joe Kristan of Roth & Company PC has some thoughts on my job creation tax credit paper

Here.

He read a comment I recently made about it on EconLib. He first quotes me, then responds:

"My prior was that they would create jobs and raise wages. I have a good identification strategy – an RDD model. But one thing lacking in the existing literature on it is a way of dealing with displacement effects (in other words, person A gets the job from the tax credit by displacing person B who was not eligible for the credit). I can deal with that (at least within-county displacement). I expected that would reduce the effect somewhat of course, but I was sure even after accounting for displacement the credits would still generate jobs. 

So far, they seem to reduce employment. Displacement appears to be a big problem. 

There is one other explanation I’m investigating now. You have to create full time jobs to get the credit, so it is possible that I’m seeing a negative employment effect because part time jobs are being replaced with full time jobs. I’m investigating that now with individual level data. So in the end, it may create full time jobs and destroy more part time jobs, in which case it would be interesting to look at the impact on total hours. 

I’m not sure how it will all shake out in the end, but I am definitely less confident in policy than I was before I started this. 

Mr. Kuehn should be respected for following his data in spite of his prior assumptions, but that’s the result I would have expected.  The money going to the subsidized jobs has to come from somewhere, and much of it comes from unsubsidized businesses.  The politicians like to point to the jobs they “create” with “Economic development” incentives, but they ignore the loss of jobs in competing businesses and from the increased taxes on the unsubsidized. 

It’s the old broken window thing."

I don't quite agree, although it's nice to have alternate perspectives that get me thinking of what responses to anticipate in the paper and in presenting it.

These are county-level credits. It’s quite reasonable to point out that the money has to come from somewhere, but that “somewhere” is for the most part going to be wealthier counties that get less generous benefits. I would still expect a positive impact on employment in poorer recipient counties. Of course it has to be understood as a development strategy for less developed areas, and not necessarily a boon for the whole state. So I still find it a little surprising. Even though I have the chapter drafted, there’s so much additional work I want to do now and additional things I want to check out that I still have a while to go – so we’ll see!

The other point to make is that this is a credit to encourage job creation. Even if it were pushed out to the whole state, it doesn't follow that unsubsidized firms pay for it such that there’s no net effect on employment. Instead you are probably more likely to have other things compensate (as an economist my natural inclination is to think about capital, and substitution to a more labor-intensive production technology). So again, it may not be welfare enhancing for the state as whole and one would need to qualify that, but I think you’d still expect to see a boost to employment.

I definitely agree with the broad thrust of his post though. The fact that displacement in unsubsidized firms is not really treated in the literature is a major focus of my paper. My paper does not compare subsidized firms to unsubsidized firms – instead it compares regions with more generous subsidies to regions with less generous subsidies. So if firm A just shuffled workers away from firm B across the street it will not show up in my study as a net increase.

So I definitely appreciate thinking about these countervailing effects.

Joe would also need to explain why employment is going negative and earnings are going positive. That doesn't quite make sense with his explanation. As he quoted me explaining, I am currently chasing down a few explanations that would explain the movement of employment and earnings in opposite directions (because I don't think we want to argue that a demand side tax credit creates a negative supply shock!).

These thoughts on my work are great (even though I haven't shared it yet.... I should probably post it). I got some thoughts from Ryan Murphy too recently. It means recoding a bunch of things though... grrrrrrr. But good to catch. I reran the headline models and it doesn't change any of the results substantially, which is reassuring.

Caplan on the college premium

Here.

The earnings advantage of college students has been substantial, but graduation rates have barely moved. Why? Bryan offers evidence that these earnings are highly conditional on graduation, and that since expected graduation rates vary many students with low expected graduation rates are not going to be enticed by the premium.

I think this is a great example of differentiating between marginal behavior properly understood and naive assumptions about what the outcomes of marginal behavior should be.

We have really great evidence that students respond to price signals when it comes to making educational investments. This is true broadly, but also for specific majors (like STEM majors). Whenever I raise this point, though, one thing that people often respond with is asking why STEM majors still earn such a high wage premium if people are responsive to prices. Doesn't that indicate a shortage?

Well, no. The law of one price is great, but if you really expect to see an elimination of all human capital premiums you need to assume a homogeneous population, and that is unrealistic. If all you needed to do to succeed in the STEM labor market was walk into and out of a brick building covered with ivy and filled with microscopes for four consecutive years, then there would be no problem. Wage differentials would compensate for the cost of spending four years doing that, but after brushing aside credit constraints and things like that you have relatively easy substitution between, for example, day laborers and scientists.

But that's not the world we live in. There are more detailed ways to talk about this (for example, in the paper that Bryan cites), but the simplest way of putting it is that different occupational labor markets face labor supply curves of varying elasticities. It is harder to bring a STEM worker online than it is to bring a cashier online. So you observe two things in the data:

1. Occupational labor markets that are responsive to price signals, and
2. Potentially big wage differentials, particularly after demand shocks.

We can of course change the shape of these supply curves by changing institutions that produce skill. A big part of why the STEM labor supply curve is inelastic has to do with K-12 education in the United States. Another reason for wage premiums is that we don't do particularly well at producing "middle skill" workers (which has consequences for the college labor market insofar as middle skill workers are substitutes for college educated workers).

Discontinuities: not just for identifying models

Do you always think "model identification!" when you see discontinuities in otherwise smooth series?

I know I do.

But sometimes it has other uses!

This is a really great post by James Schneider at EconLib on discontinuities in the number of expeditions up Himalayan mountains, and what that says about status seeking.

Why do so many people act like labor supply curves are such mysterious, contentious things???

WSJ? I can understand them sensationalizing it I guess. They are in the business of selling exciting stories. But that isn't all.

Et tu David Henderson?

The big controversial thing about Mulligan is that he says we had a redistribution recession. It is most decidedly not controversial that he says that people reduce labor supply to maintain benefits.

Wise words from Rudy Penner on the debt limit

This is Rudy Penner, not some wild eyed leftist (although as E.J. Dionne somewhat awkwardly pointed out today, left and right has been jumbled up by a new beast lately). Here's Rudy (more in the link):

"I think that the debt limit is a crock, basically. There’s a paradox here, and that is they always say that to be effective in negotiations you’ve got to be willing to shoot the hostages. We’ve never been willing to do that in the 100 years that the debt limit has been in existence.

The real place to negotiate over spending and tax matters, including entitlements, is when you’re debating the budget resolution. That’s when we set our targets for spending and revenues.

Having a separate debt limit—I don’t think it has served much of a purpose. It certainly hasn’t brought about fundamental reforms in entitlements. One of the biggest things that happened around the debt limit was the Gramm-Rudman-Hollings [Balanced Budget Act of 1985] but that quickly became bipartisan, and once the debate got going, you hardly heard any mention of defaulting on the debt.

So in terms of what to do, obviously my first choice is to get rid of the debt limit law altogether."

Noah Smith channels William James

Here.

Rorty of course makes a similar argument. When we were covering Marx last semester, I had my students read a small portion of one of Rorty's essays on whether and how we should read Marx, and he essentially gave the Jamesian argument on religion and specifically tied the New Testament to Capital. Do read Marx, Rorty said. Read and internalize what it behooves you to and no more. This was argued in contrast to some statements from Derrida on the modern relevance of Marx.

This is a problem with a lot of Post-Keynesians too...

The problems I mentioned in the last post about how many Austrians want to talk about Austrian economics, I mean. So it's not just some concern I am making up because I disagree with the conclusion. I (generally) agree with most Post-Keynesian conclusions. But a lot of them have the same sort of issues (it comes with heterodoxy to a large extent). They want to talk about broad underlying concepts that they assume everyone else misses instead of the actual model and the actual empirical tests of the model.

I am very lucky to have taken my Macro Political Economy class with a Post-Keynesian that cared a lot about the models themselves, as well as the empirical literature on the models. Imagine a class on Austrian macro co-taught by Roger Garrison, Gerry O'Driscoll, and Andrew Young. It was like that for Post-Keynesian economics. You don't get that with all Post-Keynesians though.

Peter Boettke responds

Regular readers know that when I present a criticism of someone's position and they respond in the comments, I like to pull it up to a main post. The other day I raised some concerns about the Mercatus Center in general and the way a recent Templeton grant to the Hayek Program in particular was framed by Boettke. He responded:

"Daniel -- I assure you, this is about science and scholarship even when you don't like the conclusions. The only economics that is economics is microeconomics and in particular the economics of relative price adjustments. That isn't as outlier a position in the history of the discipline as you might want to believe. Also, I'd encourage you to read VERY closely F. A. Hayek's Nobel Prize address -- "The Pretense of Knowledge" -- and contemplate the challenge it represents to the entire macroeconomics project of the neo-classical synthesis. It is not a food fight to discus the logical coherence of a position, and its place in the sciences of man."

The comment is frustrating to me, but in a way that provides a nice illustration of the initial issues I raised. Take this whole issue (and it's not the first time Boettke has said this to me) that relative price economics is something foreign to either my position or the Keynesian position. It makes no sense. I don't know why anyone would think I, personally, "might want to believe" that it is an outlier position, but beyond what Boettke apparently thinks of me he clearly thinks the status of relative price economics is something that's questioned.

And if you read Boettke regularly you know that he particularly thinks it comes under fire from Keynes. To me this demonstrates a lack of the familiarity with the Keynesian position - both Keynes himself and modern Keynesians - and it provides an example of these artificial food fights that get ginned up between Keynes and Hayek. This is not science, in my opinion. I don't know what it is. It's like a pseudo-intellectual history that I don't think contributes to economic science. Obviously there are gradations of Keynes-skepticism. I am not saying that anyone that comes to the conclusion that there were problems with Keynes doesn't count as science. There is just a point where I get tired of this fight about how Keynesians or the left or fill-in-the-blank don't understand how markets or prices work.

It would be akin to Peter spending time discussing the intricacies of the arguments of people who thought that Austrians think everyone is a greedy atomistic individual. If Peter decided he did not want to spend his time on that and that it was more of a food fight than a serious scientific discussion of the Austrian position would anyone accuse him of just not liking their conclusions? Would I begrudge him that response? Of course I wouldn't.

I like to discuss economics with Austrians like Bob Murphy. He hasn't taken a traditionally academic career path like Peter (not that I'm currently planning to take one - this isn't judgement), but when you talk economics with him there is a common understanding that:

1. We are both on the same page on relative prices.
2. We are both on the same page on how markets work.
3. We are both on the same page on empirical work - its importance, its functioning, the sorts of claims it can and can't make.

And any number of other common denominators.

Our extensive back-and-forth recently on the minimum wage is only one example, but I can talk with him about Hayek and Keynes too and not have to deal with the constant instruction in mutually agreeable points (relative price economics) or the blowing out of proportion of very different ways of talking about what are fundamentally mutually agreeable points (market process).

When I compare Hayek and Keynes, for example, as I have recently in the pages of Critical Review, I want to talk about:

1. The main thrust of their models,
2. How the models worked,
3. How they are similar and different,
4. The theoretical merit of their models, and
5. The empirical work on their models.

And then I want to come to a conclusion.

I don't want to expound on the point that all economics is relative price economics and I certainly don't want to waste time defending Keynes on that point.

As I said in concluding my last post on this, I hope I'm wrong and the $2 million is not going to fund a lot of food fight economics of the sort we've seen in spades in the last five years. There are a lot of people doing good science at GMU - again as I had said in the last post. I want to see, for example, some GMU economists taking up the challenge offered by Luther and Cohen (2013) to Lester and Wolff's empirical work on ABCT. It's a point I had not thought of in writing my article up (which reviewed Lester and Wolff). It's a good point. It's a valid criticism of their empirical test. Does it mean Lester and Wolff were wrong? It's hard to say until we do some further analysis.

That would be awesome work on Hayek's macro work.

Hopefully that sort of thing will get done.

But when the program gets promoted with a line about how Keynesianism is a failure, I worry that that's not the sort of orientation of the program. First and foremost because that line presents Hayek not as a theoretician that is being tested by the likes of Lester and Wolff (and Callahan and Garrison and Mulligan and Carilli and Dempster and Schnabl and Hoffmann and Bismans and Mougeot and Wainhouse and Butos and Hughes and Powell and le Roux and Ismail and Young and Cachanosky and Whittle and Keeler and Weber and in a very tiny smidgen of an analysis, Kuehn) - he is instead presented as some kind of opposing figure to Keynes. But I also admittedly worry a little because a statement about Keynesianism being a failure should lead to a little bit of healthy skepticism just as in any science odd out of sync claims should be greeted with a healthy skepticism. "Don't reject it because of its conclusions" is true within reason. It's an extreme example, but we don't give flying spaghetti monsters a seat at the table. So we are at least entitled to some skepticism at certain conclusions. A little skepticism is not too much to ask for - certainly not in a science.

I've got a bone to pick with Beatrix Potter

The Tale of Squirrel Nutkin has an awful moral to it. All of Nutkin's cousins (along with his brother Twinkleberry) act completely servile to Old Brown. And not only that, but they sacrifice other animals to him. For his part, Brown is a jerk and a bully and he revels in his tribute. And in the end of course he's violent. Squirrel Nutkin wasn't even trying to take Old Brown's nuts. He was just hanging out - playing marbles with berries and bowling with pine cones. And he just sang and told riddles. At worst he was annoying. But he's the only one in the whole story that's not a jackass or pushover. And in the end we're supposed to think that Nutkin got what he deserved for what - for annoying Old Brown the bully?

I don't know... this one may have to come out of the rotation.

Plus she calls paddles "oars".

Cowen on declining German apprenticeships

Here.

Young Germans are increasingly going to a university rather than entering an apprenticeship. The article Cowen links to offers some reasons why:

"The reasons for the falling number of apprentices are hotly debated. Partly it reflects demographic trends: there are fewer young people around today than when the baby boomer generation came of age. Studying for an undergraduate degree has become more attractive, in part because it no longer takes so long. German students can obtain a bachelor’s degree in just three years, instead of five years for the old-style diploma. Almost 500,000 Germans began a university degree last year, compared with fewer than 360,000 a decade ago. Nevertheless, around one-quarter of German students break off their studies prematurely and do not graduate at all. Meanwhile, trade unions accuse cost-conscious companies of offering an insufficient number of apprenticeships, and point to an increase last year in the number of young people who were unable to find one."

He concludes with: "The Germans can’t quite seem to extend a model that everyone else is falling in love with and trying to copy…".

Apprenticeship is extensive in Germany and Switzerland already. I'm not quite sure there's cause to second guess the system if people seem to be responding to reasonable incentives in their choice between apprenticeship and college. To say that apprenticeship is an important training model in a modern economy is quite different from saying that it will be the most important or will always grow.

The real problems - for apprenticeship or traditional formal education - seem to me to be establishing the institutions and coordinating the collective action to provide training of any variety for people to choose from in response to market signals. A liberal college education may be hard to get off the ground because of the positive externalities it offers. Apprenticeships may be hard to get off the ground for Becker type reasons and perhaps due to a lack of recognition of credentials not offered in a formal setting. These are the sorts of obstacles to think about and worry about. If we can overcome these obstacles and thereby provide a suite of choices to students, the fluctuations between different degrees and different forms of education don't seem to merit concern. We expect that to fluctuate. Developing the institutions to provide the opportunities in the first place can be a bigger challenge.

I spend way too much energy criticizing libertarianism on this blog, so I'm taking a different approach with this new Max Borders piece...

1. It is an excellent example of what libertarians think liberalism consists of.
2. It is an excellent example of what libertarians are under the impression liberals don't like about libertarianism.

Evidence for these two propositions is all the libertarians that are drooling over it.

Caroline is very helpful

Some links

- Ryan Murphy has a new Cato publication calling for cutting restrictions on travel visas.

- Bryan Caplan has a new post up on scale economies in marriages. In the comments of the previous post he linked to I suggested an alternative approach that was more consistent with how economists that study household behavior model utility in the family. This one is a little better I think because it gets away from thinking in terms of utility functions and simply rehashes and explores the exercise that statisticians go through when they set poverty thresholds for different family sizes. (Recall the original post also set off a surprisingly contentious discussion about utility vs. preferences on Bob Murphy's blog - surprising in the sense that there should not have been as much disagreement with Bob and my positions on it as there was.)

- Don Boudreaux shares an interesting research effort by a doctoral student of his on the connection between minimum wages and crime here. I have some comments on how to approach such a study. One interesting thing that came up in the comments was a paper by Beauchamp and Chan (2013) on this subject using the NLSY97 (which I had suggested earlier). There is still a research angle for Don's student here, I think. Beauchamp and Chan seem to use the state-level fixed effects approach. We've talked a lot about the short-comings of that sort of analysis, and why Dube et al.'s contiguous county approach is stronger. Unless something has changed in the last couple years you have to access restricted NLSY97 data to get any geographic information on respondents below the level of Census region, so why stop at states if you've got that data?

- Robert Solow responds to Mankiw on inequality (and then Mankiw responds to him) here. Both make very good points, but I thought Solow's was excellent. I especially liked this: "It may be impractical to separate effort from happenstance numerically, but that is not reason to confound them, especially when you are thinking about taxation and redistribution"

Lerman on apprenticeship

Robert Lerman talks about apprenticeship on MSNBC.

My GME panel at the EEA conference in March

Just realized I hadn't announced this previously (we just got funding for the trip from AU yesterday, which reminded me to mention it).

I'm going to be chairing a panel on generalized maximum entropy (GME) methods in economics at the Eastern Economic Association conference in Boston this March. We'll be presenting at 8 am on March 9th, so if you are attending please come by and see it! All of the papers come from research that we did in an information theoretic econometrics seminar this past fall.

Paul Corral and Mungo Terbish will start by presenting their paper on a new STATA command they developed for discrete choice GME models. I believe the ado files are available now, and the paper itself is under review at The Stata Journal. Since they are basically explaining how the program works, this presentation will be a nice introduction to GME methods for audience members that are not familiar with it.

After that Ermengarde Jabir will present work that uses GME methods to look at household asset allocation using Survey of Consumer Finance data. This rounds out the panel nicely because it's an application of GME methods to an actual problem in economics (unlike my paper and Paul and Mungo's paper).

I'll conclude with a discussion of a GME version of propensity score matching (with estimation of the propensity score using a discrete choice GME model and estimation of the average treatment effect in the second stage as usual). I'm specifically interested in whether GME outperforms standard discrete choice estimation of the propensity score in cases of low common support. Eventually I'd like to run this method on LaLonde's (1986) data from his classic test of propensity score matching, but that probably won't be ready by the conference.

$2 million from Templeton to F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at GMU

Here.

My first reaction to it was a feeling of excitement and congratulations. That sort of money can go a long way in a program like this. But it was frustrating and deflated my enthusiasm to see the work of the program described this way in the announcement:

"Boettke, who was profiled in the Wall Street Journal as “the intellectual standard-bearer” for the revival of Hayek’s ideas, continued: “The failures of Keynesian economics to explain the recent economic crisis or to lead a recovery demonstrates the need for an approach that is grounded in the way the world actually works. We think our analytical framework can be that approach.”

Again we have the absurd "battle of the century" mentality. There are smart people at GMU that do interesting work, particularly in this nexus of philosophy, politics, and economics. When I hear something like this, though, I worry about the prospects for good economic science (I'll leave the philosophy and politics to better judges than me) coming out of the effort. If you take the contributions of Keynesianism to economic science to be a "failure", and if you see Hayekian and Keynesian contributions as competing such that in an announcement about the F.A. Hayek Program you have to mention the alleged failures of Keynes I worry about the quality of the output of such a program.

Perhaps this is just Pete Boettke being Pete Boettke. It's the sharp turn in my reaction from excitement for the program to despair at more of this "battle of the century" claptrap as I read through the announcement that made me feel the need to blog about it.

To sum up, it just seems to suggest that we have more stupid food fights to look forward to. Hopefully I'm wrong.

Dave Churvis hoisted from the comments on the minimum wage and racism

I alluded to the fact that the minimum wage/racism connection is a little weird to begin with, and Dave Churvis has an excellent response to that:

"I'm going to go out on a limb here on the third point and give the following hypothesis: the minimum wage *might* have had an effect of crowding out black labor (since black workers obviously typically made less), but this effect would have been minimal at best, and any business owner would have been firmly against something that would crowd out black labor. I say this by analogy to something similar that happened in South Africa during the early 60s. They passed a law that required wages for black workers to be set lower than wages for white workers. The result was a surge in employment for black workers (and remember, this is South Africa in the 60s, one of the most racist environments in history). Why? Because regardless of anyone's built-in prejudices, the fact was that black labor was cheaper, and therefore profits were higher. The law was repealed very quickly, and other, more effective ways of suppressing the black population were implemented.

So I am inclined to believe that, while it's feasible that there may have been racist intentions behind early minimum wage legislation, any effects that disproportionately happened to black workers would have been absolutely DWARFED by the negative effects of the general racism present in society as a whole. This is not an easy hypothesis to test, but I believe it could be done."

I think this is dead on. Anyone that knows anything about how old school racial caste systems worked in the South knows that white power brokers didn't want blacks unemployed. That's the last thing they wanted. Hell, for a couple hundred years these guys imposed a maximum wage of... errrr... zero. Even in the twentieth century, their goal was not a bunch of unemployed black people.

The goal of Southern racism was (and is) to keep blacks in "their place", not to keep them out of work.

Three quick minimum wage memes to push back on...

So as the minimum wage blog discussions drag on I've run across three memes (the original "meme", not the pictures) that I want to push back on a little (although one I need a little help with... it's more of an inkling right now).

1. Privileging theory.

The first is the tendency to say that when empirical evidence contradicts solid economic theory, you have to dismiss the empirical evidence. I have seen this put out there with varying degrees of strenuousness, of course. In any case, my view is that this way lies madness. You might be very curious about an empirical result for which there is no theoretical explanation (although in this case, of course, there is). You might want to think about how you might be getting that result. In my dissertation I'm coming up with a funny finding - a labor demand subsidy is resulting in reduced employment but increased earnings. Strange. My working hypothesis (that I'm going to test) is that part-time jobs converted to relatively fewer full time jobs without necessarily changing total hours worked (you have to offer a full time job to get the subsidy). I have no obligation to take my result at face value. But I don't just dismiss it because it doesn't at first blush match how I think labor markets work.

The moment we start privileging theory over empirics like that, our theories are going to start getting unmoored from reality and we're going to have doctrines and dogma rather than theory. Science is an interaction between theory and observation - and a constant revision and testing of theory to ensure that it is a story that best explains the world we experience. You figure that out by going and collecting data on the world we experience.

2. Empiricism as a popularity contest

I've also seen references to the fact that X number of empirical studies support the view that the minimum wage has disemployment effects. Who cares? You don't do meta-analyses by counting up studies. You organize and assess the studies by the quality of the methods they use. Any undergrad STATA monkey can run a state-level fixed effects model. That data is readily available and the model is very straightforward. So I don't care if there are a million variants of a state-level fixed effects model telling me that the minimum wage has disemployment effects. I mean, it's nice to have confirmation that that model works out that way I guess but when you use similar methods on similar data, you tend to get similar results. The important question is whether that's the right specification. The quasi-experimental studies may be outnumbered (I don't know this for sure, but I suspect it's true, particularly if you start trolling the lower tier journals [the original "trolling", not the thing Ryan Murphy does]), but the point is they are better. That's not to say you can't criticize them. Bob Murphy recently raised some important criticisms of how the quasi-experimental studies use time trends, which you may or may not be convinced by. But by almost any econometric standard the identification of the quasi-experimental studies is stronger than the fixed effects studies.

This is very similar to the fiscal multiplier debate or the immigration debate (in the empirical economics literature). These debates are not about counting studies - they are about dueling methods. If you run fiscal multipliers with certain identification techniques, you tend to get a certain magnitude of results. If you run immigration impact on native studies with Card's methods you tend to get different results from if you run it with Borjas's methods. Knowing this, nothing could matter less than how many of each type of study was run and published. What matters - once we establish the basic distribution of point estimates - is which specification we think is the best one. We might still disagree on that, but you don't argue that point by counting studies.

3. Racism and the minimum wage (this is the one I need a little help with).

I've heard a lot that the original proponents of the minimum wage wanted to push blacks out of the labor market. It's a little hard to parse... it requires the assumption that blacks are less productive than whites and that in the early twentieth century people needed the minimum wage as an excuse to discriminate against blacks. But it always seemed plausible to me simply in the sense that lots of progressives at the time were racists and progressives favored minimum wages. (And you can wave your hands over the fact that opponents of the minimum wage at the time were pretty racist too, I guess.)

The other day for completely unrelated reasons I was reading a portion of Bruce Schulman's book From Cotton Belt to Sunbelt, on the economic development of the South from the 30s to the 80s. He was briefly discussing the minimum wage legislation in the 30s and he noted that the proponents were advocates of black Southerners and that the opponents were the defenders of Jim Crow and racial terror in the South.

I doubt it's a clean story. You've probably got a mix. I am very concerned now that people who argue this point are cherry-picking cases and that there's no real solid correlation. But I do need help on this - does anyone know anymore details? My advice is to be cautious about this meme.

CBO on labor supply effects of the ACA

Here. Estimate is 2 million lost FTE jobs by 2017, 2.5 million by 2024.

I imagine in the near future we'll have sharper minds than mine discussing what to think of this. Just seemed worth noting.

Productivity growth for fast food workers

The other day I wrote (emphasis on the bold):

"I don't think that's the end of the story, though, because if you want to know whether the minimum wage is binding you really do have to think about trends in productivity, because that's what ought to determine labor demand. EPI has also done excellent work tracking what the minimum wage would look like if it had grown since the late sixties at the rate of productivity growth. Now productivity growth as it is measured is NOT the same thing as marginal productivity that we use in theory, but I think it's a fair proxy to consider when we're ballparking this sort of thing. And of course we don't have productivity information for minimum wage workers (although BLS now breaks it out by industry - perhaps someone should take a look at productivity growth in typical minimum wage industries)."

It appears the same day I wrote that, someone did take a look at food services productivity growth. The result?:

"Taking a longer view, from 1987 to 2012 the same BLS data show that worker productivity in the food service sector rose by an average of 0.6 percent per year. In limited service restaurants, the gains were slightly lower, only averaging 0.5 percent per year. Meanwhile, unit labor costs have risen by an average of 3.6 percent. Over this period the minimum wage has risen from $3.35 to $7.25 per hour which is an average annual increase of 3.1 percent. In other words, at least in food service, the minimum wage has risen at a rate five or six times as fast as justified by the gains in worker productivity."

Now at the end there he is doing the average nominal growth rate. Average annual real growth rate is about 0.96%*. So it's not quite as dire as the author suggests, but it should move your priors towards the idea that a 39% nominal increase to $10.10 is not a "modest" increase by the standards of the empirical literature and guesses at what the binding level would be (we still don't know that, of course - this data just gives you less room to make that argument).

* So I say "about" because I'm using Larry Mishel's real minimum wage values for 1989 and 2011 rather than the author's nominal values for 1987 and 2012, because I can't find immediately at hand real numbers for those years.

Help the Mises Institute of Canada Blog out, Bob Murphy!

I forgot to mention that Bob is also going to be coming out with a post on the Mises Canada blog on the minimum wage... and they really need his thoughtful suspicions of the quasi-experimental literature!

Currently they have a post up on the minimum wage seeking out "the world-view behind minimum wage advocacy". I'll give you a hint... it starts with "M" and ends with "arxism"!!!!

Now I would be the last to argue that most supporters of the minimum wage ground their views in a thoughtful consideration of what theoretical and empirical economics has to say (although some do). But do we really have to reach for Marx to talk about this? I don't think they're supporting it because of Marxist theories of power and property either.

Hurry Bob! They need you!

Bob Murphy on the Minimum Wage at EconLib

His long-awaited post is here (well, long-awaited by me because I've been discussing this a lot with him lately!). David Henderson's summary is here.

The post comes in two parts - first arguing that even if what I'll call the quasi-experimental studies (Dube's work and related papers) are right it does not mean raising the good idea. Bob presents familiar, and I think strong, arguments about the fact that the increase to $10.10 is not "modest" by the standards of the study, and second that even if employment doesn't decline, employment for disadvantaged workers might.

Both I think are essentially right, although I probably wouldn't make the point about a modest increase quite as strongly as Bob does. As I wrote up recently, the proposed nominal increase is certainly larger than what is typically studied in these studies, but that is only half of the equation. You also have to consider changes in labor demand, and productivity statistics strongly indicate that the point where the minimum wage is binding has probably been increasing faster than the minimum wage for quite awhile. Forget the fact that labor productivity as measured by the BLS isn't exactly marginal productivity - if one serves as a decent proxy for the other, the faster growth of productivity than the real minimum wage decade after decade seems notable if we are talking about whether the increase is a "modest" one or not. So I think Bob makes an important point here, but it's only half of the point that ought to be made.

The second half discusses whether the quasi-experimental studies should be trusted at all. We've been over this ground a lot recently. You know I think that:

1. The contiguous county sample is ESSENTIAL.
2. Meer and West have a strong critique (although it would be strange to think of when it might apply in the real world), but...
3. Dube seems to have done precisely what I thought would be the right response - using trends from the pre-period.

What's nice is that Bob's piece brings up Neumark and Salas, which I haven't discussed here. They show that alternative time trend specifications reverse some of these results (although I don't know if this is with a contiguous counties sample - Bob, do you know?). I don't know the paper well - my one questions is whether there is an overfitting issue - basically the Meer and West critique could very conceivably apply to Neumark and Salas.

That's just thinking off the top of my head - curious what you all think of Neumark and Salas.

I think Bob is right to treat these as open questions (both the scientific question and the policy question), but I think on the scientific question the quasi-experimental literature is quite strong. From my perspective, identification and eliminating bias in the estimate is the primary question - so the contiguous county studies carry a lot of weight with me.