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.

Earlier this year Andrew Gelman and co. came up with a new argument solving the voting paradox, based on social preferences (the paradox of voting: if you are rational, you will realize that the probability of affecting the outcome of a vote is negligible, while the costs are often considerable. Yet still people vote regularly).

Social preference is basically the idea that individuals incorporate other people’s utility into their considerations.

Gelman argues that if individuals take into consideration the impact of a vote’s outcome on other individual’s in society, as well as themselves, voting may indeed be rational.

A recent experimental paper by Fisman, Kariv and Markovits shows that some people do indeed have social preferences.

Voters, congratulations.

Yes, says Alex Tabarrok:

Here’s one idea which has got me thinking. In the debate over the economics of global warming the correct discount rate to apply to future generations is a key variable with those arguing that we should do something now, implicitly (and explicitly) arguing for a low discount rate. But if we count future generations highly we ought also to be in favor of reforming social security. Investing social security in the stock market “royally screws” current retirees but increasings the savings rate which will be benefit future generations. Thus, a low discount rate ought to weigh in favor of doing something about global warming and investing social security funds in the stock market. Not many people come out consistent on these grounds (I think Brad DeLong is one of the few.) I know, I don’t but Landsburg has got me thinking.

This is an interesting way to look at things. Some responses:

1. We should choose the reform that, on the margin, provides the most intergenerational benefit. Where global warming falls in this regard, I do not know, but Social Security is clearly swamped by Medicare in its long run shortfall.
2. Social Security reform only benefits current and future Americans, while fighting global warming benefits everyone.
3. There is, as Martin Weitzman calls it, a “left tail that carries most of the weight of expected marginal utility” to global warming outcomes in the absence of reform. We don’t know just how bad a world without global warming reforms will be in a century, but it could be very bad indeed. The distribution of marginal utility from an unreformed Social Security system is very tight and not particularly negative.
4. As for shirking on promises made to current Social Security recipients by investing cash that was destined for them into the stock market, then paying it out to future generations: doing so would royally screw anyone who was counting on Social Security for retirement. Future generations would not forget this sudden change, and would have to discount their SS payments by the likelihood of being screwed out of them — if it happened once it can happen again! This dynamic effect could swamp the benefit of screwing the current generation.

I believe reason 3 is why Tabarrok thinks Brad Delong is consistent. Check out Delong’s post, in which he reviews Martin Weitzman’s article.

Greg Mankiw and Robert Frank are going back and forth about one of Frank’s recent columns, in which he claimed that reducing marginal tax rates on the rich wouldn’t increase their work effort. I was reading through a review of the debate at Economist’s View and came across this statement by Greg Mankiw:

Bob is perfectly free to believe whatever he likes and to advocate increasing the top marginal tax rate. But to suggest that there is neither theory nor evidence to support the beneficial effects of lower marginal tax rates on high-income taxpayers indicates a lack of appreciation of the academic literature in public finance.

I will agree with Professor Mankiw here — lower marginal tax rates are definitely beneficial for high-income taxpayers!

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.

Last Thursday, New York City held its ceremonial groundbreaking for the Second Avenue subway line. The line was first proposed as part of the IND Second System, an ambitious plan by New York City to increase the coverage of its subway lines. Only problem is, the Second System was proposed in 1929.

Yes, it’s a subway line 80 years in the making. The Second System went the way of the dinosaur within a few years (the Great Depression didn’t leave much money for new subway lines) but the Second Avenue Subway was never quite taken off the table. Interest in it picked up during the 1970s, and construction work began in 1972 in East Harlem. However, by 1975 the city was bankrupt and construction was halted.

Is it for real this time? Will we finally get a subway to serve one of the worst-connected parts of Manhattan?

Sort of.

It seems pretty clear that the first section of the line, running from the existing 63rd street Q station to 96th Street and Second Avenue, will get built. Unfortunately nearly a quarter of the funds needed are still unallocated. It seems like once construction gets going, it will be difficult to call it off, so I imagine that the city will manage to come up with the missing $800 million.

The second stage runs from 96th street to 125th Street. The troublesome thing is, no money has been set aside for it. On the other hand, something like 16 blocks along this route were already tunneled in the early 1970s. This stage is effectively very low hanging fruit, so I have some hope that it will be built.

Stages 3 and 4, which stretch south of 63rd street, seem quite unlikely. They will be expensive and less important than stages 1 and 2, and no money has been set aside for them.

The more interesting question to me is, why is it so difficult to build a new subway line these days? Before World War II, it seems like miles were added to the system every year. In a series of upcoming posts, I’m going to talk about what changed, and how it’s influencing the construction of the Second Avenue Subway today.

Can someone give me a slightly sane justification for making Voice over IP (VoIP) illegal? This story out of Bangladesh is very interesting:

VOIP has remained illegal in Bangladesh in an attempt by the government to protect the state-owned telephone company, the Bangladesh Telegraph and Telephone Board.

But it simply hasn’t worked. Earlier this year it was estimated that VOIP calls accounted for up to 80% of the total telephone traffic from abroad.

According to the BBC, “the country’s new military-backed government has been waging war on what it sees as the too-long tolerated illegality and corruption of the past.” How about instead of forcing everyone to use the state-owned telephone provider, Bangladesh just makes VoIP legal and forces providers to pay their share of taxes?

To most economists, the answer to the question posed in this post’s title is simple: no.

That’s because economists view jobs as a quantity that is set in the labor market. For a given job, the number of people doing that job will be determined by the supply of labor and the demand of labor. Labor supply is how much labor everyone in the economy is willing to do at all the different wages imaginable, and labor demand is how much work employers in the economy want done for them at all the different wages imaginable.

At some wage rate, the number of people willing to work equals the amount of work employers want to supply. That’s called equilibrium, and the number of people willing to work at this wage will determine the number of jobs in the market.

When someone says that immigrants are doing jobs that Americans just won’t do, they are claiming that American labor supply for a given job is always zero. No matter the wage, no American is willing to get off his behind and do the work. I find it hard to believe that this could be the case for any kind of work, even if the task is extremely dangerous.

A slightly more interesting question is “Are there jobs Americans won’t do at certain wages?” Well the answer to this question is probably yes! Not too many Americans would mine coal for $4 an hour. On the other hand, some immigrants may well be willing to do the job at wages lower than any American’s. At low wages, there are plenty of jobs that immigrants will do that Americans won’t.

Just something to keep in mind when someone trots out the argument that immigration allows us to get jobs done that no domestic resident would be willing to do. Certainly there may be other benefits to immigration, but this is not one of them.

(See also Andrew Samwick)

Of course not, I just wanted to get your attention. In a recent N.Y. Times article, Krugman argues that

Outsourcing of the government’s responsibilities - not to panels of supposed wise men, but to private companies with the right connections - has been one of the hallmarks of his administration. And privatization through outsourcing is one reason the administration has failed on so many fronts.

Krugman then proceeds to give a list of failed government outsourcing programs, most of which are related to defense.

Krugman suggests a reason for the failures of these privatization efforts

In fact, the private company will almost surely do a worse job if its political connections insulate it from accountability - which has, of course, consistently been the case under Mr. Bush.

Mr. Krugman, you are clearly at least partially correct. Yet clearly there are situations where government outsourcing is in fact effective. For instance, the Trump Ice Skating Rink in Central Park - New York City wasted millions of dollars attempting to construct the rink, over a total of six years. Donald Trump then took over the job, finishing it ahead of time, and for less than a million dollars.

So when outsource?

Although there are probably many relevant factors to consider, an important one is clearly specialization. In areas such as defense, where the government has long specialized, outsourcing may indeed be an unwise move. Yet in areas such as entertainment, clearly the government is outmatched by private industry.

Another important factor is (as the ever perceptive Krugman mentioned) accountability.

So I have a question: What about airline security? As things stand, it’s true that the government has more experience in many security related matters. But what about securing an airport filled with constant civilian activity?

In recitation tomorrow I’ll be teaching my students how the Fed’s monetary policy decisions work their way through the banking sector. As I thought about the material, I recalled an old passage from Paul Krugman’s classic, Peddling Prosperity:

Robert Bartley…describes the genesis of supply-side economics as taking place over a series of dinners at Michael I, a Wall Street area restaurant. There it was that he and [Arthur] Laffer discovered that Keynesian economics was logically inconsistent — an insight that had eluded Paul Samuelson and a few thousand other people over the course of hundreds of academic conferences. They also believed that Milton Friedman was wrong in believing that monetary policy could have important effects on the economy — an insight that had similarly eluded Friedman, Lucas, and the faculty of the University of Chicago over a generation of the notoriously brutal Chicago seminars. …

[T]he supply-siders did not believe that demand-side issues could matter. Bartley reports that Laffer educated him on the importance of Say’s Law, an eighteenth century dictum that says that supply creates its own demand. This was a rejection of Keynesian (and for that matter monetarist) economics on principle. Unfortunately, the principle is wrong: try telling the unhappy members of the babysitting co-op … that a general failure in demand is impossible. What happened there was that members of the co-op tried to spend part of their receipts of scrip, not on goods and services (baby-sitting), but on accumulating more scrip (money), which was impossible in the aggrgate, and therefore precipitated a miniature recession. But the Michael I diners thought they had neatly disposed of the whole topic of aggregate demand.

Second, the supply-siders dismissed the real-world importance of the money supply in general. Bartley tells of Laffer drawing a large box to represent the overall stock of credit in the economy, and a tiny box to represent that part of the stock corresponding to the money supply. “‘Do you really think,’ he asked, ‘this little black box controls all the others?’” Again, economists from Keynes to Lucas had spent a lot of time trying to explain just why it is that the monetary instruments controlled by the Federal Reserve exert a profound influence over the economy; but over dinner this work was found to be obviously wrong.

Hopefully tomorrow I will do a better job than Laffer and my students will understand how the money multiplier allows the little black box to have a lot of sway over all the others.