Right in the Short Run

…was written by Chiaki Moriguchi and Emmanuel Saez. It’s referring to Japan:

Second, using income composition data, we show that the dramatic fall in income concentration at the top was primarily due to the collapse of capital income during WWII. Evidence from estate tax statistics confirms the drastic decline in top wealth holdings during and immediately after WWII. We argue that the transformation of the institutional structure under the postwar occupational reforms, such as the abolishment of primogeniture, the establishment of progressive tax, and the changes in corporate governance and union structure, prevented the re-concentration of income. Importantly, such redistributive government policies, which likely hindered the “natural” process of capital accumulation, were accompanied by one of the most impressive and sustained economic growths in modern history.

This paper (“The Evolution of Income Concentration in Japan, 1886-2002: Evidence from Income Tax Statistics”) is part of a larger series spearheaded by Emmanuel Saez and his buddy Thomas Piketty; they utilize tax microdata to estimate the share of income accruing to the very, very, very rich in a bunch of countries. The fine granularity of the tax data gives them a good look at the situation of the top 1%, .1%, and even .01% of earners. And surprise surprise, the income shares of these percentiles have behaved pretty differently between Japan and the US!

This would seem to suggest that skill-biased technological change has not been driving the increase in inequality in the U.S. — not when it’s the top .1%  who are capturing the money. The interesting thing about the behavior about Japan’s income concentration is that it hasn’t increased despite some very large changes in the country’s labor markets. For example, union density has decline dramatically over the past few decades, and a much greater share of the labor force is employed part time or on short contracts. Still, the ultra-rich in Japan are not capturing much more of national income.

Most people who live in New York love the fact that subways run 24/7. Although it might take a long time, it is possible to get to every single subway stop in New York city at any time of day, any day of the year.

It always seemed to me that the big winners from this service were the poor. Certainly anyone who would like to work flexible shifts without owning a car — and it seems reasonable to me that many people in this boat are relatively poor — benefits greatly. Without late night subway service, a lucrative overtime shift could entail a cab ride back home, which could easily eat up most of the benefit of the shift itself.

Looking at it from another direction, 24/7 subway service means that it is feasible to work strange shifts without owning a car. Everyone benefits from that, but the poorest, for whom the car purchase means the most sacrifice, benefit the most.

Lastly, the guarantee of being able to pay $2 for a ride means that people can work strange hours far from home. It is not hard to imagine that the poor stand to gain from having a wider array of jobs open to them, particularly if the neighborhoods they live in are less hospitable at night or tend to offer lower wages.

Roland Fryer strikes again, this time with Michael Greenstone. The paper entitled “The Causes and Consequences of Attending Historically Black Colleges and Universities” as the following abstract:

Until the 1960s, Historically Black Colleges and Universities (HBCUs) were practically the only institutions of higher learning open to Blacks in the US. Using nationally representative data files from 1970s and 1990s college attendees, we find that in the 1970s HBCU matriculation was associated with higher wages and an increased probability of graduation, relative to attending a Traditionally White Institution (TWI). By the 1990s, however, there is a wage penalty, resulting in a 20% decline in the relative wages of HBCU graduates between the two decades. We also analyze the College and Beyond’s 1976 and 1989 samples of matriculates which allows us to focus on two of the most elite HBCUs. Between the 1970s and 1990s, HBCU students report statistically significant declines in the proportion that would choose the same college again, preparation for getting along with other racial groups, and development of leadership skills, relative to black students in TWIs. On the positive side, HBCU attendees became relatively more likely to be engaged in social, political, and philanthropic activities. The data provide modest support for the possibility that HBCUs’ relative decline in wages is partially due to improvements in TWIs’ effectiveness at educating blacks. The data contradict a number of other intuitive explanations, including relative decline in pre-college credentials (e.g., SAT scores) of students attending HBCUs and expenditures per student at HBCUs.

A fun read.

A must read paper by Banerjee and Duflo: The Economic Lives of the Poor. Abstract below:

This paper uses survey data from 13 countries to document the economic lives of the poor (those living on less than $2 dollar per day per capita at purchasing power parity ) or the extremely poor (those living on less than $1 dollar per day). We describe their patterns of consumption and income generation as well as their access to markets and publicly provided infrastructure. The paper concludes with a discussion of some apparent anomalous choices.

The passages on Why don’t the poor eat more? and Why don’t the poor save more? are especially interesting.

I was in the supermarket late last night, and I got to thinking.

There once was a world filled with egg-eating people. These people were hard workers; left with little time of their own, they were forced to shop for food during their lunch breaks. It turns out that in this strange world, there were two types of jobs, and each job employed a different type of person. Let’s call these two groups the R’s and the P’s.

Although his job was not simple, every R was lucky enough to get a long lunch break, during which time he went to the market to buy eggs for his family. When an R picked out a carton of eggs, he would inspect it for damage and look for another carton if he saw that an egg or two was broken. Once he found a good carton, he would buy it and return to work. Since the R’s were so diligent about inspecting their eggs, they almost never brought home a cracked one.

The P’s worked hard, but unlike the R’s, their jobs were much more restrictive. Although P’s got a lunch break, it was a lot shorter than that of the R’s. Since P’s needed eggs to feed their family just as much as R’s did, they would use this time to run to the market, too. The P’s found that if they grabbed an egg carton and paid for it, they could get back to work in time, but when they stopped to check for cracked eggs, they would get back to work late. Sometimes P’s who returned late were penalized with docked pay, and the next day these P’s could not even afford to bring home any eggs.

It turned out that quite a few of the cartons contained cracked eggs. Since the P’s were too rushed to open the cartons before they purchased them, P’s frequently purchased these damaged cartons. The eggs were the family’s only food, and when a few eggs were cracked, everyone ate a little bit less, including the children.

After a while, some of the R’s became curious about the lifestyles of the P’s. Eventually, an R went into a P’s home and found some egg cartons, each of which had a cracked egg or two. This R went back home and told his family about what he had seen. The family agreed that the P’s were making poor decisions at the market: cracked eggs were worthless, but the P never bothered to check for them. Furthermore, this R had heard the P complaining about not having enough eggs to feed his children. How silly, thought the R, for this P needs only to check his egg cartons for cracks to be able to provide plenty of eggs for his family.

The R family told their friends, who were also R’s, all about the P household that they had seen. Pretty soon, all the R’s had heard about the way the P’s lived, and none of them could understand it. They are too stupid to purchase eggs for their family! said one. The source of their troubles is their inability to focus on egg checking! claimed another.

So time went on, with the R’s bringing home pristine cartons and feeding their children well, and the P’s bringing home damaged cartons and leaving their children hungry. The R’s knew about the hungry P children, and most of them didn’t like it. But in this world, the R’s felt strongly that all the P’s needed to do was concentrate a little more while shopping at the market. It never occurred to them that the P’s knew just as much as the R’s about how to check their eggs, and that many P’s would have gladly looked inside the cartons if they had the time.

Every once in a while, a P would propose that something be done about the cracked eggs.  One P said that once in a while, some of the R’s should have to give a few eggs to the P’s. Another P thought that P jobs should have a bit longer of a lunch break. But the R’s laughed at these suggestions.

In this world, little was ever done to help the P’s, and in fact the situation continues to this day.

The end.

In the first of a two-part post, we look at the reflections of NYU economist Debraj Ray about new developments in development economics, in this old paper from 2000. In the second part we will look at Abhijit Banerjee’s reflections on where development economics is headed as of 2007.

In recent years, the subject has made excellent use of economic theory, econometric methods, sociology, anthropology, political science and demography and has burgeoned into one of the liveliest areas of research in all the social sciences. And about time too: the study of economic development is probably the most challenging in all of economics, and provided we are patient about getting to “the bottom line” and the “policy implications”, it can have enormous payoffs.

The main trend I would like to try and document is a move — welcome, in my opinion — away from a traditional preoccupation with the notion of convergence. This is the basic notion that given certain parameters, say savings or fertility rates, economies inevitably move towards some steady state. If these parameters are the same across economies, then in the long run all economies converge to one another.

Ray then goes on to offer a number of theories that refute the conditional convergence hypothesis. These theories argue that “societies that are fundamentally similar in all respects might behave differently, and persistently so”.

Ray offers two reasons for his criticism of convergence theory. First, he contends that economies can exhibit multiple equilibria. “Simultaneously, such societies may display low savings rates or “cultures of corruption”, but this latter set of features cannot be related causally to the former.”

Second, Ray maintains that historical configurations may be important to development trajectories. In particular, two countries can face almost identical values of parameters relevant in growth models and yet proceed down strikingly distinct trajectories due to their differing initial conditions.

Of course what ultimately matters are the policy recommendations stemming from a theory of development. Ray’s theories promote one-time intervention policies that push the country into a new (and more desirable) equilibrium, while the old-guard convergence theories would require permanent shifts in relevant parameters.

Thank god for Tyler Cowen, whose NY Times column makes me think hard about my belief in single payer health care (See also Tyler’s summary):

The monitoring, marketing and overhead costs of private insurance are what allow more expensive medical treatments through the door. It is precisely because competing insurance companies spend money evaluating the appropriateness of claims that they are willing to pay for so many heart bypasses, extra tests, private hospital rooms and CT scans.

…

When it comes to these discretionary benefits, European systems are more likely to make people wait for them, more likely to make the service inconvenient or uncomfortable, or simply not make the services available in the first place. All of these features discourage those who don’t really need care, and, of course, some people simply go elsewhere and pay out of their own pockets. Either way, the overhead costs have been shifted onto patients and their families.

But not all overhead costs get shifted. Yes, the rationing function that the insurance company accomplishes by rejecting claims gets moved, at least in part, to the individual. But what about other costs like advertising? Mark Thoma provides a long list of ways in which single payer will save money.

One of the big gains from single-payer which Thoma leaves out (although his list is quite comprehensive!) comes from giving the uninsured more efficient avenues to deal with health problems. Most states require emergency rooms to provide care to anyone who shows up, regardless of their ability to pay. For the uninsured, going to the emergency room with a life threatening health problem frequently ends up replacing a doctor’s visit because of some minor discomfort.

It is not hard to imagine scenarios where seeing a doctor early in the stages of an illness would cost far less to society than calling 911 with an emergency. In these situations, a universal health insurance scheme would save society resources — it would be more efficient! As Paul Krugman noted some time ago:

What would happen if Medicare was expanded to cover everyone? You might think that the nation would spend more on health care, since this would mean covering 46 million Americans who are currently uninsured. But the uninsured already receive some medical care at public expense — for example, treatment in emergency rooms that would have been both cheaper and more effective if provided in doctors’ offices.

(The catch is that a single payer system is sufficient but not necessary to solve this problem. Universal insurance is both necessary and sufficient. Patch-up plans like the one in Massachusetts will do the trick by simply forcing everyone to become insured.)