It's Caroline Joy Kuehn's first birthday today!

Hard to believe it's been a year.

Brief Thoughts on Piketty on EconTalk

Piketty does a great job on EconTalk, discussing his book with Russ Roberts. This was my favorite part of the whole discussion. It comes after Russ is asking about people who get wealthy in various ways - including very legitimate ways. I think this encapsulates so many of the criticisms of the book:

"Roberts: But I think as economists we should be careful about what the causal mechanism is. It matters a lot.

Piketty: Oh, yes, yes, yes. But this is why my book is long, because I talk a lot about this mechanism."

The book is long for at least two reasons. First I think he adds a bunch of stuff in there that doesn't need to be in there (the policy stuff, the discussion of the social state, could probably all be in a separate book - he could probably cut a third of the book by removing this material). But the second reason is that he is far more exhaustive than many of his critics seem to give him credit for. There is this notion that the book is all about inheritance and ill-gotten gains. The latter is a relatively small discussion and the former is a more sizable discussion but comes way late in the book and is not some kind of exclusive focus.

Generally I think this was a great EconTalk. My only criticism is along these lines. Several times Russ chimed in with a different version of "but this guy is wealthy because he improved the world!", and each time Piketty basically said "right, I agree, and I've never challenged the point" (of course it's Piketty so he spends much longer saying that). If Russ didn't keep asking those questions or if Piketty just replied "asked and answered" I think they could have gotten much deeper into the material. But still a very nice talk.

New Review of Industial Organization article is up!

It's not assigned to an issue yet, but a paper I co-authored titled Explaining Variation in Title Charges: A Study of Five Metropolitan Residential Real Estate Markets is available here.


It's an interesting situation - you'll notice I have two affiliations (American University and Urban Institute). This work started several years ago as a project for the Department of Housing and Urban Development when I was at the Urban Institute. Since then I left for AU and now have put the finishing touches on it back at the Urban Institute after being gone for three years.


The lead author, Bob Feinberg, is a great guy that's on my dissertation committee. I can't speak highly enough of two other co-authors, Signe-Mary and Doug, both at Urban. I've learned at least as much econometrics from Doug Wissoker as I have from any of my econometrics professors (and that's a compliment to Doug, not a knock on my econometrics professors who have really all been excellent). Sisi was at the Urban Institute, and is now teaching in China.

An alternative Venn Diagram for Mark Perry

I really hope I don't have to explain to everyone what's so wrong about this post by Mark Perry on the minimum wage.

All the law of demand says is that demand curves slope down.

No one that I know that is doubtful about modest minimum wages hurting employment disagrees that demand curves slope down. If you think they are arguing demand curves slope up you need work a little harder at understanding the conversation you are inserting yourself into.

Documents on Koch intentions on FSU econ department hiring

Here.

Note, this is an internal memo about the Kochs' expectations. Because of the outrage this caused (even in the absence of these documents) the advisory group was eventually restricted in how much they could impact these decisions.

This is really not good for anyone that cares about economics as an objective science and people who receive Koch money (which is not inherently bad at all of course), should be saying that.

If movies tell me anything it's that the Sudanese need to watch out

My minimum wage paper is out at EPI

You can find it here. The idea is to communicate to a broad audience the fact that the "credibility revolution" in econometrics matters a great deal for the minimum wage debate, and that if we divide studies according to whether they employ quasi-experimental methods or fixed effects models the quasi-experimental methods (which are strongly preferred) tend to produce the "no disemployment effect" results. That should matter for the debate.

I also include some cautions about how to apply this research to policy. These are every bit as important. I've had one discussion with a journalist so far about the paper and the fast-food strike for a $15 minimum. I did the math for him on how big an increase that $15 would entail and compared it to Figure A in my paper and flatly told him that you can't justify this with the existing research - our strong priors ought to be that it will reduce employment, with perhaps a few high wage metropolitan areas as the exception.

An excerpt from the report I like ("matching methods" is a more user-friendly term that I use to talk about quasi-experimental methods - that is all well-defined up front and defined in even more detail in the endnotes - the idea is that in all quasi-experimental methods you are matching some treatment case to some comparison case):

"It is difficult to overstate how uncontroversial it is in the field of labor market policy evaluation to assert the superiority of matching methods to the nonmatching approaches described above.⁹ The seminal evaluations of the effects of job training programs, work-sharing arrangements, employment tax credits, educational interventions, and housing vouchers all use at least some sort of matching method, if not an actual randomized experiment. In their widely cited survey article on non-experimental evaluation, Blundell and Costa Dias (2000) do not even mention state-level fixed-effects models when they list the five major categories of evaluation methods. In a similar article, Imbens and Wooldridge (2009) do mention fixed-effects models as a tool for policy evaluation, but clarify that these were used before more advanced methods were developed, noting that the modern use of fixed-effects models is typically in combination with other more sophisticated techniques. For example, Dube, Lester, and Reich (2010) also use a fixed-effects model, but more importantly it is a fixed-effects model that utilizes rigorous matching strategy to identify the effect of the minimum wage. Sometimes fixed-effects models are the best available option if no natural experiment or other matching opportunity emerges to provide a more rigorous approach. Well specified fixed-effects models can still be informative. But faced with the choice between a well matched comparison group and a fixed-effects model, the former is unambiguously the stronger study design."

Yes, Acemoglu and Robinson's review of Piketty is very strange

I'm only about two thirds done with Piketty - it's been very busy this summer between events, getting the dissertation proposal off the ground, and starting work again at the Urban Institute. But I just happened to get to one of the parts in Piketty that Acemoglu and Robinson quote, and it turns out to be an extremely dishonest rendition. They quote this to show that Piketty doesn't think institutions matter (from page 365): 

"The fundamental inequality r > g can explain the very high level of capital inequality observed in the nineteenth century, and thus in a sense the failure of the French revolution.... The formal nature of the regime was of little moment compared with the inequality r > g.". 

So what is in that ellipses? He explains that the revolution didn't change the course of inequality (relative to monarchical Britain) because the new institutions that were established were much closer to Britain than popular perception in France at the time suggested! It was NOT a big change in institutions, which was why the French revolution did not shift the parameters of the model. Immediately after this he goes on to discuss changes in institutions in the 20th century that WERE substantial enough to impact inequality, and he even reviews how inter-country differences in these institutions explain differences between (for example) Germany and France.

In other words, the real point of this section is that institutions matter a lot, regardless of what the hype and propaganda around the Revolution really said. And not only did A&R get that wrong - they deliberately removed the portion of the quote where he made the point.

I have always taken one of the central theses of Piketty's book to be that institutions are central in shaping wealth and income distributions. He says that over and over again. All of the explanations for the empirical changes in the distribution over time are either (1.) institutions, or (2.) shocks (which, given the nature of these shocks, inevitably also have institutional origin). Apparently it's not just Acemoglu and Robinson that missed this memo. I have since had conversations with people who suggest that discussion of institutional determinants of inequality is minimal and that Piketty is just "covering his butt" when he mentions it. But as far as I can tell that's the whole point - the analysis is grounded in inequality.

Piketty without institutions in the capital share of income section could probably survive. Piketty without institutions in the inequality section of the book simply wouldn't exist any more. I mean, you'd have the data I guess, but the analysis is entirely institutional until you get to the last third of the book where he brings some of the subsumed Solow model (all that r > g stuff) back in to talk about with institutions

"Cover your butt" for these people seems to mean "have as your main emphasis for several hundred pages". This is like saying Milton Friedman wasn't all that concerned with money!

Am I the only one to find the Acemoglu and Robinson review of Piketty strange?

I have taken one of the central tenets of Piketty to be that institutions are central to the determination of wealth and income inequality. The "laws of capitalism" act on capital ratios and even the capital share of income, but given an institutional environment that determines r (in conjunction, of course, with technology itself). And certainly institutions determine wealth and income distributions more broadly.

That's like the one thing that he says over and over and over again: institutions, institutions, institutions.

But Acemoglu and Robinson have a review out that seems like it has a lot of interesting stuff on the focus on the top shares, etc., but that centrally claims that Piketty doesn't think institutions matter.

This seems really strange to me.

Reswitching and the Minimum Wage: An Austrian doing Sraffian Economics that is not Bob Murphy

Don Boudreaux walks through an interesting exercise where the minimum wage leads to switching between two production techniques as a possible reason for increased employment as a result of the minimum wage. The logic from Don is as follows:

"Suppose that the two lowest-cost options for Acme Co. to produce Q amount of output X are as follows (and reckoned on an hourly cost basis):

1)  10 hours of low-skilled labor combined with 50 dollars of capital expenses;

2) 11 hours of skilled labor combined with 30 dollars of capital expenses.

If the prevailing hourly wage for low-skilled workers is $7.25, then Acme Co.’s hourly production costs will be $122.50 if it goes with option 1.  ($72.50 for ten hours of low-skilled labor plus $50 of capital expenses.)  If the prevailing hourly wage for skilled workers is $8.41 or higher, then Acme will use option 1; it will produce X using low-skilled rather than skilled labor.  (If Acme employs 11 skilled workers at $8.41 per hour, and uses with these workers $30 of capital every hour, Acme’s hourly production costs are $122.51 – higher than the total costs of hiring ten low-skilled workers at $7.25 per hour along with $50 worth of capital each hour.)

Now let the minimum wage be raised to (say) $8.41 per hour.  If Acme continues to produce Q amount of X each hour by employing ten low-skilled workers, along with $50 worth of capital, Acme’s hourly production costs would rise from $122.50 to $134.10.  (Ten low-skilled workers at $8.41 per hour = $84.10; adding $50 of hourly capital expenses sums to $134.10 per hour.)  But by instead employing 11 skilled workers at $8.41 per hour, along with $30 worth of capital, Acme’s hourly production costs will rise only by one cent, to $122.51."

First, I want to give kudos to Don for spelling this out when many people (myself included) were confused by a previous post where he said that increased supply from a minimum wage might increase overall employment. Actually that still confuses me and it's not at all what he has here (here it's a demand shock, not a supply shock that's occurring). This provides a sensible (likelihood is another question I'll get to in a moment) explanation of a result that empirical analyses seem to point to - and a result that is not one that is particularly amenable to Don's own views on the minimum wage as policy.

It's also interesting, though, because reswitching situations like this are typically highlighted by left-heterodox economists and Sraffians, most notably during the Cambridge capital controversy. For all Don complains about fairly standard models with turnover, fixed hiring costs, and monopsony power as explanations of the minimum wage, this invocation of reswitching is a much bigger departure from received neoclassical economics.

So what do we make of it? In practice I doubt it's a major contributor to the lack of a disemployment effect in the best empirical analyses. A lot of the studies have focused on low-skill service sector work where the opportunity for this sort of reswitching seems like it would be minimal. It seems like it would be much easier as a manager to make low-skill workers more productive than it would be to change a production process, particularly because the reswitching usually involves a capital-labor substitution of some sort. Add in the fixed costs of making the switch in the first place and it just doesn't seem likely. But if there are any good examples where something like this is going on that would be really interesting and I'd love to hear about it. The result is so anomalous I think it's likely that lots of things are going on to drive the result and this might be part of the puzzle.