We may safely leave many branches of knowledge to such as can devote themselves to special pursuits. We may safely accept what chemists tell us of chemistry, or astronomers of astronomy, or philologists of the development of language, or anatomists of our internal structure, for not only are there in such investigations no pecuniary temptations to warp the judgment, but the ordinary duties of men and of citizens do not call for such special knowledge, and the great body of a people may entertain the crudest notions as to such things and yet lead happy and useful lives. Far different, however, is it with matters which relate to the production and distribution of wealth, and which thus directly affect the comfort and livelihood of men. The intelligence which can alone safely guide in these matters must be the intelligence of the masses, for as to such things it is the common opinion, and not the opinion of the learned few, that finds expression in legislation.
— Henry George, Protection or Free Trade
In all lands, men whose toil creates abounding wealth are pinched with poverty, and, while advancing civilization opens wider vistas and awakens new desires, are held down to brutish levels by animal needs. Bitterly conscious of injustice, feeling in their inmost souls that they were made for more than so narrow a life, they, too, spasmodically struggle and cry out. But until they trace effect to cause, until they see how they are fettered and how they may be freed, their struggles and outcries are as vain as those of the bull. Nay, they are vainer. I shall go out and drive the bull in the way that will untwist his rope. But who shall drive men into freedom? Till they use the reason with which they have been gifted, nothing can avail. For them there is no special providence.
— Henry George, Protection or Free Trade
Trade does not require force. Free trade consists simply in letting people buy and sell as they want to buy and sell. It is protection that requires force, for it consists in preventing people from doing what they want to do. Protective tariffs are as much applications of force as are blockading squadrons, and their object is the same–to prevent trade. The difference between the two is that blockading squadrons are a means whereby nations seek to prevent their enemies from trading; protective tariffs are a means whereby nations attempt to prevent their own people from trading. What protection teaches us, is to do to ourselves in time of peace what enemies seek to do to us in time of war.
— Henry George in Protection or Free Trade (1886). 
Edgy in a different way was the idea of the asylum, and the welcome, that Romulus gave to all comers–foreigners, criminals, and runaways–in finding citizens for his new town. There were positive aspects to this. In particular, it reflected Roman political culture’s extraordinary openness and willingness to incorporate outsiders, which set it apart from every other ancient Western society that we know. No ancient Greek city was remotely as incorporating as this; Athens in particular rigidly restricted access to citizenship. This is not a tribute to any ‘liberal’ temperament of the Romans in the modern sense of the word. They conquered broad swathes of territory in Europe and beyond, sometimes with terrible brutality; and they were often xenophobic and dismissive of people they called ‘barbarians.’ Yet, in a process unique in any pre-industrial empire, the inhabitants of those conquered territories, ‘provinces’ as Romans called them, were gradually given full Roman citizenship, and the legal rights and protections that went with it. … As one King of Macedon observed in the third century BCE, it was in this way [through inclusiveness] that ‘the Romans have enlarged their country.’
— Mary Beard, SPQR: A History of Ancient Rome, pp. 66-67. Compare “Benjamin Franklin’s Strategy to Make the US a Superpower Worked Once, Why Not Try It Again?” and “Why Thinking about China is the Key to a Free World.”

With a Regulatory Regime That Freely Accomodates Housing Construction, Lower Interest Rates Drive Down Rents Instead of Driving Up the Price of Homes

In my travels to the central banks of many countries, when I dig into concerns about financial stability, I often find that the biggest financial stability worry associated with low or temporarily negative interest rates is about the effect of low interest rates on the price of houses in the capital city or other major cities. Let me analyze this issue.

The simplest case is when the anticipated real interest rate r is constant from now on and there are no tax complications. Suppose also that the home will last forever if appropriately maintained, with anticipated Rent and Maintenance constant from now on. Then the price P based on these anticipated values should be

                                 P = (Rent - Maintenance) / r

If no additional construction is allowed, and the economy is fairly static even after the interest rate changes (say because of a changed desire for saving), Rent and Maintenance should stay close to the same, so Price should go up when r goes down.  

But if construction is freely allowed within certain parameters–say along the lines I propose in “Density is Destiny,” which makes land costs small relative to the physical cost of building, than in the long run, the price of a home must equal the cost of constructing, say, the floor of the building corresponding to that home. With P a constant, it is useful to rearrange the equation above to

Rent = Maintenance +r P

Thus, for example, 

  • If, in the long run, the real interest rate is a small positive number in relation to the standard construction price of a home, than rent should be a little above maintenance.
  • In the limit, as the real interest rates goes down toward zero, rent should just equal maintenance.
  • If, in the long run, the real interest rate is negative, then the equation seems to say that rent should be below maintenance. But the equation doesn’t really work when the long-run real interest rate is negative, since if rent were below maintenance, the home would be a burden rather than a benefit, and no one would pay anything for it. In other words, the price is equal to the cost of building a home as long as it is worth someone’s while to build one. But if rent were below maintenance in the long run, no one would build one. On the other side, note that the interest rate on an infinite-term bond–a consol–can never be negative in equilibrium. If I give you money and can never demand anything back other than interest, having a negative coupon payment where I pay you would mean I have only give you money and you never give me anything back. I won’t do it. So at a minimum, negative interest rates must either be temporary or include either some return of the principal within finite time, or an option to demand the principal back at some finite time. 

If the interest rate is expected to move around, the same essential principles apply. For fixed rent and maintenance–corresponding in my simple example to a prohibition against new construction–any path of lower interest rates raises the present value of a home, so the price of a home goes up. For a fixed price of a home–corresponding in my simple example to a policy very favorable to new construction–almost any path of lower interest rates will lead to more construction and lower rents.     

Inequality Is About the Poor, Not About the Rich

As an initiative of the “Wicked Problems Collaborative,” Chris Oesterreich put together the work of contributors for What Do We Do About Inequality? The book is now out. We would love to get some more reviews up on Amazon.

I agreed to contribute a chapter to this effort on the condition that I could post it here on my blog, too. Here it is, slightly re-edited:


One of the most basic ways to think about why inequality matters is to use the intuition that a dollar means more to a family that is desperately poor than to a family that is astoundingly rich. In the survey behind the University of Michigan’s Index of Consumer Sentiment, 90% of respondents agreed that “one thousand dollars is worth more to a poor family than to a rich family.” [1] Even more tellingly, 74% said that $1000 to a family at their own level of income would “make a bigger difference” than $4000 to a family at twice their level of income. That is, 74% of those surveyed agreed that doubling a family’s standard of living cuts the value of an extra dollar by a factor of at least 4.  

The belief that the significance of a dollar declines with income even trumps favoritism toward people at one’s own income level: 66% of respondents agreed that $1000 to a family at half their level of income would “make a bigger difference” than $4000 to a family at their own level of income. That is, close to a 2/3 majority of everyone agrees that cutting income by a factor of two below their own level multiplies the value of an extra dollar by a factor of 4.

In this essay, I want to pursue the logical consequences of the idea that doubling income cuts the value of an extra dollar by at least a factor of four, while cutting income in half multiplies the value of an extra dollar by a least a factor of 4. If one accepts this idea, a little arithmetic then goes a long way toward clarifying issues of inequality. Extending this idea throughout the full range of income [2] yields something like the inverse square law for gravity, only a bit more dramatic: just as being ten times as far away from the Sun reduces the force of the Sun’s gravity by a factor of 100, being ten times richer reduces the value of an extra dollar by a factor of at least 100.  And just as being ten times closer to the Sun increases the force of the Sun’s gravity by a factor of 100, being ten times poorer increases the value of an extra dollar by a factor of at least 100.

Thus, quantifying the idea that a dollar means more to a poor family than to a rich family shows that as far as financial well-being is concerned, inequality is about the poor, not about the rich. This is an important idea because a large share of the popular discussion about inequality focuses on the rich. Relative to being in the hands of a middle-income family, then, dollars in the hands of the ultra-rich are merely wasted, while dollars in the hands of the poor are supercharged in their potency for making lives better.

Before going on, let me concede first of all that the amount of wealth held by the ultra-rich is truly astonishing, and that making sure that the ultra-rich do not convert their wealth into total control of our political system is important. Documenting and studying in detail all of the ways in which the ultra-rich influence politics is crucial. But short of the ultra-rich subverting our political system, the focus of our concern about inequality should be how well we take care of the poor; whether money needed to help the poor comes from middle-income families or the rich is an important issue, but still of secondary importance to how well we take care of the poor.

In practical use, the formal social welfare measure I am advocating—which treats a dollar as 100 times as valuable in the hands of a family with one-tenth the income—gives recommendations remarkably close to John Rawls’s criterion in his famous book A Theory of Justice [3] of maximizing the prospects of the least well off.  This is dramatically different from worrying about how much more the richest have than the average family. And it is very different from focusing on other common inequality measures like the Gini coefficient.

Once one focuses on the lot of the poor and desperate, many policy debates look different. Let me consider three examples: immigration policy, the minimum wage, and licensing.

In thinking about immigration policy, a case can be made that one should give the welfare of citizens a higher weight than the welfare of those who want to immigrate. For the sake of argument, let me put aside my skepticism there and accept a lower welfare weight for non-citizens than for citizens. I maintain that recognizing the fact that immigrants are human beings mandates that any ethical criterion must put some positive weight on the welfare of non-citizens. Suppose that we treated the welfare of non-citizens as worth one-hundredth as much as the welfare of citizens. The surprising arithmetic of inequality says that even given that low a welfare weight, a dollar in the hands of an immigrant family of four living on $4000 per year is still worth more than a dollar in the hands of a family of four citizens living on $40,000 per year. Given how modest the documented effects of immigrants on the welfare of citizens are, and the large benefits to immigrants of being able to immigrate, this militates in favor of a fairly open immigration policy. (I apply this reasoning further in my Quartz column “’The Hunger Games’ Is Hardly Our Future–It’s Already Here.”)

Going further, the large welfare benefits of an open immigration policy when even a small weight is put on the welfare of immigrants suggests that many political compromises are worth making if those compromises can help secure a more open immigration policy. For example, immigration is still worth a lot to immigrants even if they are excluded from social safety net benefits and from being naturalized enough to vote for many years.

Although support for raising the minimum wage is common among progressives (encouraged by cherry-picking from empirical results about the effects of minimum wages [4]), it is far from obvious that the minimum wage helps the poorest of the poor. Indeed, the US federal minimum wage causes serious problems in Puerto Rico [5], whose residents are on average much poorer than the residents of the fifty states.  A minimum wage can be seen as a rule saying that if a worker cannot find a good job, he or she is not allowed to have any job at all. The best case for a worker is when he or she already has a job and the minimum wage raises pay by splitting the benefit of the employer/employee match more in favor of the worker. But as soon as a worker is out of work, looking for a new job, the minimum wage is a hindrance. It not only prevents some deals from going through, but also leads employers to search less hard for new workers, since the employer will get less benefit from an employer/employee match.  

A higher minimum wage is a burden for someone who is out of work and looking for a job, but anything that makes it harder for employers to hire some workers increases the demand from those employers for other workers. For example, if the minimum wage is increased, employers who can’t hire workers at low wages anymore can increase the hours of higher-quality workers who were already above the minimum wage. Thus, while the minimum wage does not help the poorest of the poor, it can effectively help those who are one rung up on the economic ladder at the expense of the poorest of the poor.

It is important to note that to help raise the incomes of the working poor, there is an excellent alternative to raising the minimum wage: making the earned income tax credit more generous. Although for those concerned with inequality for those at the bottom of the heap, the earned income tax credit is still not generous enough, the political feasibility of moving in this direction has been shown by expansions in 1986, 1990, 1993, 2001, and 2009.  Its rank on the policy wish list relative to the raising the minimum wage will make a difference for whether there are further expansions of the earned income tax credit.

I have focused on the minimum wage because it is analytically clear and frequently offered as a way to reduce inequality. But in its harm to the poorest of the poor, the minimum wage pales in comparison to the overgrowth of licensing requirements that excludes the poor from more and more jobs. Take a simple example. Suppose I am desperately poor and have minimal skills. I get the bright idea that I can cut hair. I can do it in my apartment and only need a pair of scissors, an electric clipper, and a mirror. I start earning a small but helpful amount of money. Then, the neighborhood barber gets wind of what I am doing and complains to the government, which comes to shut me down. I am told I could do a year or two of training to become a licensed barber. But I cannot afford to. In this transaction, a barber, who is probably two rungs up on the economic ladder from me, has gotten the government to put his interests first over mine. There may be a pretense that it is all for safety or quality reasons, but my customers were perfectly happy with me, fully realizing that having me cut their hair was no more dangerous than having a family member who doesn’t have as good a sense of style as I do cut their hair.

Licensing requirements, like the minimum wage, say in effect “If you can’t get a good job, you can’t have any job at all.” The rhetoric focuses on guaranteeing that jobs will be good, middle-class jobs, but cutting off worse jobs is not the way to do it—at least not if one cares about the poorest of the poor.

All of this matters because the most common trope about inequality is to point to the increasing share of income and wealth in the hands of the ultra-rich and then to recommend a policy mix heavy on measures like increasing the minimum wage that effectively take from the poor to give to the middle class, rather than taking from the rich to give to the middle class as advertised. It is the reverse—helping the poor at the expense of the middle class—that is a genuine reduction in inequality.

“But what about the rich?” The answer to that question ought to be “Let’s talk about the poor and desperate a bit longer first.” One group whose members are often desperate and often poor are the mentally ill, and those who have fallen into the grip of a serious addiction. Better funding and greater parity for mental health care make a lot of sense when the rule-of-thumb version of John Rawls’s principle of “maximizing the prospects of the least well off.” And government resources should be dramatically shifted away from trying to interdict marijuana, where the harm is likely to be relatively mild, to treating people with life-destroying addictions.

As a matter of public policy, the welfare of the rich themselves is not something we need to worry about very much, since so many other people in the marketplace stand ready to help them. But how we treat the rich is very important because of their role in the economy and in society. Many have gotten rich in ways that should not be rewarded. In those cases, it is appropriate to think of how to fix that misallocation of rewards—even after the fact, when criminal actions are involved. But for those who have gotten rich in ways that are honorable and do deserve to be rewarded, we are better advised to think hard about encouraging them to be as altruistic as possible so that they separate themselves from their money voluntarily instead of being separated from their money on pain of being thrown in jail.

In between the two extremes of fully altruistic donation, and taxation, would be a “public contribution program” in which the rich and semi-rich have the alternative of either paying additional taxes or taking that same amount of money and donating it to charities in the nonprofit sector. One of the great advantages of such a public contribution program is that because of cognitive dissonance (the attractions of thinking one is donating because one is a good person instead of because required), such a public contribution program may itself encourage the rich to become more altruistic. (This is a proposal dear to my heart. See my bibliographic post “How and Why to Expand the Nonprofit Sector as a Partial Alternative to Government: A Reader’s Guide.”)

The bottom line is that where we don’t need the rich, it may be okay to arrange things so that they are no longer rich. But in many cases, we actually do need the rich. Once we are down to the rich we actually need, the wisest course of action may be to work toward their having as good a character as possible. This is made easier by the fact that, by and large, we don’t need or want people of seriously bad character to be rich in the first place, and those of seriously bad character often became rich by a pathway that we would want to foreclose in any case. But those who are merely subject to the common motive of greed, in ordinary measure, and have done socially useful things partly in service of their personal greed, are likely to be redeemable by appealing to the common, and noble, desire of doing good in the world.

Let me end by quoting something I wrote in a July 9, 2012, blog post (“Rich, Poor and Middle-Class” on supplysideliberal.com [6]), during the thick of the presidential election campaign that year:

I am deeply concerned about the poor, because they are truly suffering, even with what safety net exists. Helping them is one of our highest ethical obligations. I am deeply concerned about the honest rich—not so much for themselves, though their welfare counts too—but because they provide goods and services that make our lives better, because they provide jobs, because they help ensure that we can get good returns for our retirement saving, and because we already depend on them so much for tax revenue. But for the middle-class, who count heavily because they make up the bulk of our society, I have a stern message. We are paying too high a price when we tax the middle class in order to give benefits to the middle-class—and taxing the rich to give benefits to the middle-class would only make things worse. The primary job of the government in relation to the middle-class has to be to help them help themselves, through education, through loans, through libertarian paternalism, and by stopping the dishonest rich from preying on the middle-class through deceit and chicanery.  

Milton Friedman often talked about “Director’s Law”: the tendency of democracies to focus on the interests of the middle class even when using the rhetoric of helping the poor. Unmasking programs that serve the interests of the middle class under the pretense of the poor is a first step in working toward making things better for the poor.

Footnotes

[1] Yoshiro Tsutsui, Fumio Ohtake, and I arranged to add some questions to find out if people generally agree with that idea, and if so, how much more they thought a dollar meant to a poor family than to a rich family. Daniel Reck and Fudong Zhang helped us analyze the data.

[2] To see if it was reasonable to extend this idea throughout the income distribution, we split the sample into people in the upper half of the income distribution and those in the lower half of the income distribution. Richer people actually thought that income level makes a bigger difference to how much a dollar means: 77% of the richer half, compared to 70% of the poorer half, thought going to double their income level would cut the value of an extra dollar by at least a factor of four; 61% of the richer half, compared to 70% of the poorer half, thought going to half their income level would multiply the value of an extra dollar by at least a factor of four.

[3] John Rawls, A Theory of Justice (Cambridge, MA: Belknap Press, 1971).

[4] David Card and Alan Krueger have a famous paper (“Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania” [NBER Working Paper No. 4509, National Bureau of Economic Research, Cambridge, MA, October 1993, http://www.nber.org/papers/w4509]) finding that a minimum wage increase had no effect on employment (or maybe even increased employment a bit) in fast food restaurants. But a more recent paper by Daniel Aaronson, Eric French, and Isaac Sorkin (“Industry Dynamics and the Minimum Wage: A Putty-Clay Approach” [working paper, May 22, 2015, http://events.barcelonagse.eu/live/files/864-sim15-frenchpdf]) finds that non-chain restaurants actually shut down after a minimum wage increase—leaving more business for the chain restaurants that David Card and Alan Krueger were focusing on. Theoretically, the Card-Krueger result was always too good to be true, and certainly should not be relied on as a reason to favor an increase in the minimum wage.

[5] Charles Lane, “Puerto Rico’s Crisis Illustrates the Risks of Minimum Wage Hikes,” Washington Post, July 8, 2015.    

[6] Miles Kimball, “Rich, Poor and Middle-Class,” Supply Side Liberal (blog), July 9, 2012, http://blog.supplysideliberal.com/post/26828687393/rich-poor-and-middle-class

Ed Glaeser Argues Against Raising the Minimum Wage

Ed Glaeser may be the foremost urban economist in the world. Ed’s review in the Wall Street Journal of Robert Gordon’s book The Rise and Fall of American Growth is worth reading for many reasons. But I want to highlight what Ed says about the minimum wage:

The one point where I disagree with Mr. Gordon is his suggestion that “2015-16 is a particularly appropriate time to raise the minimum wage.” My fears about underemployment lead me to be far less enthusiastic than Mr. Gordon about the minimum wage, or any labor market regulation. If we want more employment of less skilled workers, then we should cherish, not punish, those companies that employ less skilled workers. A recent paper by Jeffrey Clemens (a former student of mine) finds that the minimum wage seems to have reduced employment for at-risk groups during the great recession. Morally, it seems reprehensible to expect the costs of social-welfare policies to be paid for disproportionately by the customers and employers of lower-wage workers.

Note: Jeffrey Clemens writes this in the abstract for his paper:

I analyze recent federal minimum wage increases using the Current Population Survey. The relevant minimum wage increases were differentially binding across states, generating natural comparison groups. I first estimate a standard difference-in-differences model on samples restricted to relatively low-skilled individuals, as described by their ages and education levels. I also employ a triple-difference framework that utilizes continuous variation in the minimum wage’s bite across skill groups. In both frameworks, estimates are robust to adopting a range of alternative strategies, including matching on the size of states’ housing declines, to account for variation in the Great Recession’s severity across states. My baseline estimate is that this period’s full set of minimum wage increases reduced employment among individuals ages 16 to 30 with less than a high school education by 5.6 percentage points. This estimate accounts for 43 percent of the sustained, 13 percentage point decline in this skill group’s employment rate and a 0.49 percentage point decline in employment across the full population ages 16 to 64.

I collected links for other posts on supplysideliberal.com about the minimum wage here.

When Women Don’t Get Any Credit for Coauthoring with Men

Link to Justin Wolfer’s New York Times column “When Teamwork Doesn’t Work for Women”

Unless it is quickly and decisively overturned, Heather Sarsons’s finding that women in economics get almost no credit for papers they have coauthored with men will irrevocably change the economics profession. And given the additional informal evidence provided by snatches of remembered conversations, the likelihood of the result being quickly and decisively overturned is not that high.

What will matter is not whether men in economics believe Heather’s finding, but whether women in economics believe it. And the news of this finding will spread like wildfire among women in economics–especially now that Justin Wolfers has broadcast this finding in the New York Times. It is going to become much harder for men in economics to find women willing to coauthor with them :(  So papers will become much more sex-segregated into papers with all female coauthors and papers with all male coauthors than they now are.

One possible change that I think won’t happen in any great measure is economists ditching the strong tradition of coauthors almost always listed in alphabetical order for the custom in other disciplines of carefully ordering the authors by relative contribution. Making order of authors matter requires very tricky negotiations that most economists are not used to and that many (including me) would find quite unpleasant.

If my prediction of greater sex-segregation in journal articles because of women’t unwilling to coauthor with men is borne out, another prediction follows: women will want to go to departments that have an above-average number of women (compared to other departments) so they will have people in their department with whom they can coauthor without losing all the credit.

In response to the Facebook discussion after “How Big is the Sexism Problem in Economics? This Article’s Coauthor is Anonymous Because of It,” I wrote that I believe there is enough discrimination against women in economics that (with some patience) a department can get ahead in the rankings by specializing in hiring and tenuring more women and being a good place for female economists to work. I think that is true even with respect to ranking judgments tilted toward the judgments of male economists, but is even more true with respect to donors who are less sexist than the body of economists whose judgments are largely behind the usual rankings.

Given the newly clear incentives for women in economics to go to departments that already have many women, the departments that are already rich in women economists are likely to become richer, while those departments that are poor in women become relatively poorer. So it will become more and more evident in the future whether I am right that hiring and tenuring more women and being a good place for female economists to work will help a department to pull ahead relative to the competition. I am betting that the women-friendly departments will move up relatively to the women-unfriendly departments.

Noah Smith: Hey, Republicans! Push Deregulation, Not Tax Cuts

Note: On Facebook, Carmi Turchick offered these interesting references:

Graef, P., & Mehlkop, G. (2002). The impact of economic freedom on corruption: different patterns for rich and poor countries. European Journal of Political Economy, 19, 605-620

Kotera, G., Okada, K., & Samreth, S. (2012). Government size, democracy, and corruption: An empirical investigation. Economic Modelling, 29(6), 2340-2348.

A number of papers show the expected negative effects of increased corruption on growth and these papers show that lower levels of regulation in well developed economies corresponds with higher levels of corruption. This is not the same in developing economies, there more regulation corresponds with more corruption, the regulations are excuses for bribery. 

Illusion of Choice, Illusion of Consent: The Bite of Apple

Which choice is the default choice can make a big difference for a software companies profits. When Apple notified me it was going to charge me $11.99 a year for iCloud services I didn’t need and never asked for, it was quite annoying that I had to research how to undo things to avoid being charged. I thought they were giving me a lesser of two evils choice of pay $11.99 a year or pay in trouble and bother and time. But it turned out to be worse. I unchecked backup for my iPhone photos–something I had never asked for and didn’t realize was happening. Then I went through the procedure to downgrade (not a well-displayed option at all) and got to the window you can see at the top of this post. I have the “free option” checked, but the “Done” button is grayed out and does not function. So there is no way to save my choice, and as far as I know I am still slated to be charged $11.99 on December 21. 

Note how it says that I am using less than 1 gigabyte, so it wasn’t a problem of lagged recognition of unchecking the photo backup on my iphone. 

I suspect there is a way to fix this by going to my local Apple Store or calling up customer service. But that isn’t fair at all! That is definitely charging me more than $11.99 in time and bother to avoid a $11.99 charge. And maybe if I were more of an expert, I would know what to do, but I am fairly confident that many, many people would have the same problem I had and give up–which means paying up. This is bad enough I think it could easily constitute an anti-trust violation.

This is how well displayed the free option is. The free option is hidden behind the “downgrade options” button. As far as I know, this screen is the only path to the free option.

This is how well displayed the free option is. The free option is hidden behind the “downgrade options” button. As far as I know, this screen is the only path to the free option.

Woo Chul Ro: Affirmative Action by US Colleges is Troubling, But Still a Net Plus for Social Justice

Link to Woo Chul Ro’s LinkedIn homepage

I am delighted to host another student guest post, this time by Woo Chul Ro. This is the 9th student guest post of this semester. You can see all the student guest posts from my “Monetary and Financial Theory” class at this link.


Affirmative action in the US colleges is inefficient to the economy and yet necessary for economic equality and social justice.

What is justice? A famous Korean law professor once told me “justice is something one cannot justify.” I was reminded of this saying after reading the article from the Economist called The Model Minority is Losing Patience. The article argues that Asian Americans are the most successful and hard working minority, but they are also the most discriminated in academia. As an example, an Asian American student from California is introduced. Being second in his class of over 1000, having perfect ACT scores, singing in President Obama’s inauguration, getting into third place in the national piano contest, being in the national debate finals multiple times was not good enough for him to get accepted into six of the seven ivy league schools he applied for. Many candidates, of a different race and much more under qualified than himself, got into the schools that he could not get into. Because of this, around 60 candidates like the student from California (Asian American & qualified) got together to sue Harvard for racial discrimination. The charge was denied by the Department of Education. Harvard practices affirmative action, and therefore the charge against them is invalid.

At first, as an Asian American myself, I definitely considered this an injustice to my ethnicity and inefficient to the economy. Through affirmative action, many Asian Americans are losing the opportunities they might have had if they were a different race. However, if they were a different race, would they have had the same opportunities? The article states that Asian Americans are the most “successful” race. As a matter of fact, Asian Americans have the highest average wage among any other category of race. This means that many Asian Americans were probably raised in a decent socioeconomic environment, where education is not scarce. And then there is the cultural side. Most Asian American parenting is considered to be much different from other races. Asian American parents tend to prioritize education more, and they also train their children to work very hard. As an Asian American, a lot of children are taught to work harder for education, and a lot of Asian American families are thought to invest more of their income on the children’s education.

So is this an unforgivable injustice? It definitely is discrimination; this is probably why affirmative action is also termed “positive discrimination.” In the Wall Street Journal article Poverty or Prosperity – Different Paths After College, the article shows a study of colleges in New York, which suggests that wages after colleges are indeed predictable through the college one attends. Although causality is hard to fully demonstrate, this suggests that prestigious colleges give students a return for their investment of time and money. Assuming this statement is true, it means that the rate of return on their investment in education before college for Asian Americans is indeed hurt by their greater difficulty in getting into prestigious colleges. But the high wages of Asian Americans suggest that they are still doing well despite that handicap. 

Could it be that the return to attending a prestigious college is greater for those who were initially disadvantaged?  A study by Stacy Dale and Alan Krueger suggested that the answer is yes: conditional on where students applied, there is little evidence that attending a prestigious college had high returns unless a student was initially disadvantaged. If this true, then affirmative action in college admissions would benefit those initially disadvantaged more than it hurt Asian Americans and raise social welfare. Some policies for welfare can be considered injustice, but it may be injustice for a larger justice.

Update: On Miles’s Facebook page, Robert Flood recommends this Journal of Economic Perspectives article on affirmative action:

Jong Beom Park-The $28 Trillion Per Year Woman: Benefits of Full Participation of Women in the World Economy

Link to Jong Beom Park’s Facebook homepage

I am delighted to host another student guest post, this time by Jong Beom Park. This is the 8th student guest post of this semester. You can see all the student guest posts from my “Monetary and Financial Theory” class at this link.


Gender inequality is most often thought more of as a social phenomenon. However, The McKinsey Global Institute, in its September report, has conducted a gender equality assumption study in which a mouth-dropping number was concluded as the potential economic implications of gender inequality: by promoting and achieving gender equality, global GDP could potentially increase by $28 trillion in 2025. It turns out that the economic loss, arising from gender inequality, is enormous.

Here is a figure taken from the McKinsey’s full report:

The research selected women in 95 countries, which together account for 37 percent of global GDP, for this analysis. The last category of the figure above, full-potential GDP, is a prediction that assumes work participation, in terms of labor-force participation rate, of men and women in chosen countries as equal. First, the study looks at the “best-in-region” scenario, which assumes that all countries achieve the same level of gender parity as best-performing countries in their respective continents. For example, India, one of the poorest performing countries in terms of gender equality, is performing well below its fellow countries in South Asia, and this scenario assumes that India is at the same level as other South Asian countries. And then, other potential GDP measures were calculated, taking economic drivers, such as gender wage gap and work hours, into account. Adding all these numbers results in an enormous increase, $28 trillion, in potential GDP by 2025.

So, how exactly was $28 trillion calculated? In this number, all unwaged work, such as housework, and lower-waged work taken by women were replaced by higher-wage work to be equal to those of men, thereby boosting the potential GDP. This means that women working in unpaid jobs, which is more prevalent in developing economies, were included in calculating labor participation rate until the figure was identical for men and women. In order to calculate the economic costs of gender inequality, McKinsey has created its own Gender Parity Score (GPS) of over 90% of men and women around the world and compared which region or country performed well in relative to others (the strongest scoring region is North America and Oceania at 0.74). It is clearly stated in the study that rich economies, though far from perfect, performed significantly better than developing and poor economies, which can then be concluded as the presence of a strong correlation between gender equality and economic performance. And then, calculating the productions from newly-assumed jobs taken by women in the study, new potential GDP was forecasted, resulting in $28 trillion at full potential and $12 trillion in the “best-in-region” scenario.

On contrary to the result that strong economies show relatively more gender equality, South Korea is an example of an advanced country with deeply-rooted gender discrimination (scoring 0.65 on GPS). Here are some statistics: in the World Economic Forum’s gender gap index, an index measuring gender equality, the 14th largest economy in the world, South Korea is ranked 117th with only 53% of South Korean women currently in the active workforce. South Korea is also rated poorly in other figures, such as gender wage gap. The situation is certainly improving with new measures, such as guaranteeing longer maternity leave. A larger population of highly educated women also contributes to less gender discrimination. South Korea has had a long journey, from the ashes of the Korean War to a today’s high-income developed country. But, with further measures towards gender equality, according to the McKinsey report, could lead South Korea to another “Miracle on the Han River.”

Going back to the McKinsey report, McKinsey offers several measures that can be initiated to improve this global problem, such as favorable laws and financial support. Personally, I believe that the roles of new businesses are extremely important. Gender equality might not be achieved in a short time in businesses that have long history and deep-rooted corporate culture. However, newly-formed firms have opportunities to start anew with gender equality. As more newly-formed businesses, with fair mindsets, enter the market, I believe, it could ultimately lead to a society with no or little gender discrimination.

Maybe, it is time that we start taking gender inequality issues seriously as a remedy for the ailing global economy.

Debating the Morality of Immigration Restrictions

Olivia Goldhill had an interesting rundown of different philosophies on immigration in her Quartz article “Philosophers can’t agree on how much we should help refugees—or even whether we should.” It won’t surprise any of my loyal readers that my position is closest to Joseph Caren’s position in the passage Olivia quotes:

Citizenship in Western liberal democracies is the modern equivalent to feudal privilege—an inherited status that greatly enhances one’s life chances. Like feudal birthright privileges, restrictive citizenship is hard to justify when one thinks about it closely.

Peter Singer’s position, as explained in 16 paragraphs in “The Drowning Child and the Expanding Circle,” also has a lot of merit to it. A Utilitarian counterpart argument that comes to the same conclusion is that, even if one puts a welfare weight on distant strangers that is only a fraction of the welfare weight one puts on oneself or on people in one’s own community or nation, there are many people in such desperate straits that it makes sense to do a lot to help them. 

Because there are so many people who need help, it makes sense to look for ways to help that will leaves one still in a position to help yet more people. Relatively open borders are exactly such a way of helping one set of people while maintaining the ability to do more to help yet others. So Peter Singer’s position comes closer to Joseph Caren’s practical recommendation than might be immediately apparent. The general principle is that helping others by giving them more liberty (in this case, the freedom to cross national borders) is a way of helping that replenishes itself.

Mackenzie Wolfgram: Why the $15 Minimum Wage is Bad for the Poor


New York Governor Andrew Cuomo has already issued official recommendation for all fast food chains in New York City to raise the minimum wage for employees to $15 per hour, and he doesn’t intend to stop there. On Thursday the Democrat unveiled plans to hike the statewide minimum wage for all workers to a hefty $15 per hour. On the surface, these wage hikes seem like a benevolent plan. One that is only fair to the people who work low paying jobs only to live in relative poverty; after all, paying poor people more money should lead them out of poverty. Again, that is on the surface. In reality, this wage hike is one of the worst things that legislators can do to these lower class workers. Raising the minimum wage this drastically will have huge negative effects on employment, the profitability of thousands of businesses, and the condition of the lower class.

The arguments against this movement are laid out fantastically in Tim Worstall’s, “Yes, New York’s $15 Fast Food Minimum Wage Will Be A Failure–Why Do You Ask?” In this article, Worstall effectively dismisses any good that the $15 minimum wage is rumored to do.  Cuomo claims that his plan will benefit the people of New York in the following ways:

  1. Ending government welfare as a means of subsidies to employees of large corporations
  2. Saving taxpayer money at the sole expense of multimillion dollar corporations
  3. Having minimal effects on employment

Effectually, these benefits are meant to raise low wage workers out of poverty. Unfortunately, not one of them is fundamentally sound.

Governor Cuomo attacked fast food corporations, namely Burger King and McDonald’s, for paying such low wages that their employees were required to live with the aid of state funded subsidies, costing the state millions of dollars annually. However, as Worstall points out, welfare is by no means a subsidy program. This can be clearly proven.

A subsidy to the workers of a fast food franchise would lead to the employer paying lower wages. Since part of the reserve wage would be met by the government subsidy, the employer would only have to make up the difference between the subsidy and reserve wage. So, a true subsidy would cause businesses to pay lower wages, since the government would step in and pay a portion of their workers salaries.

With exception made for the Earned Income Tax Credit (EITC), which is pretty clearly effectively a subsidy (and which I will ignore due to its making up only a small percentage of welfare) most forms of government welfare offered today do not allow companies to pay lower wages, and therefore cannot be considered subsidies. In fact, welfare is cause for a higher reserve wage. When a person is unemployed with no welfare, they are willing to work for a lower wage. So without welfare, companies can attract people to jobs that offer lower wages. When a person is unemployed, but has welfare, it will take a higher wage to get them to accept a position. This is because welfare will theoretically give them a bargaining point, and a means of holding out for higher paying positions to come along, as they no longer need the money as desperately as they did when there was no welfare. Since welfare does not lower wages, it cannot be considered a subsidy.

Although Cuomo’s point about subsidies was not exactly correct, I find it immoral to take the stand that we should force people to take the lowest paying jobs for fear of homelessness and starvation. In addition to immorality, the subsidy argument is mainly a semantic one. Yes, Cuomo is wrong to claim that he is subsidizing fast food workers, but the fact remains that these workers are not making a living wage, and require welfare to live. Semantics aside, there is still a problem. However, I maintain that this wage hike is only going to hurt both the employees and employers.

Cuomo’s next point was that this higher wage will save millions of dollars of taxpayer money at the sole expense of big businesses. For the sake of argument, we will give Cuomo an advantage, put on rose colored glasses, and say that companies will not lay off a single employee as a result of this wage hike. (Unlikely, and these newly laid off employees will require even more welfare than they already require.) However, even with these unrealistic expectations, Cuomo is still wrong to claim that he is only hurting McDonald’s and Burger King type businesses. Just because a store says McDonald’s on the outside does not mean that the McDonald’s corporation owns it. In fact, the vast majority of these businesses are owned by franchisees. This wage hike would double the cost of labor for these franchisees and cause many to go out of business, since they cannot afford to staff their restaurants. This plan only attacks these small franchisees. In a way Cuomo is right, he will be hurting these big brands, but indirectly, and only by shutting down their franchised locations, ending the livelihood of hundreds of franchisees, and causing mass layoffs of low wage employees. Again, this is not good for the people his plan “helps.”

Cuomo’s last point is that, empirically, wage increases have not caused widespread changes in employment levels, so this one shouldn’t either. He is wrong. This wage hike is magnitudes bigger than any that we’ve ever seen. The new price floor on labor will be binding for many work positions, unlike prior wage bumps where only a small percentage of workers were forced below the new minimum wage. In this case, a huge percentage of workers would have to be given substantial raises, many nearly doubling their salaries. Businesses cannot afford this hit. We will see vast layoffs, as well as robotics and new computer tech taking over low skilled, formerly manned jobs. Currently, these low skill low pay laborers have jobs, once they become low skill high pay laborers, they will no longer be employable. Again, this plan hurts everybody.