Friday, 31 March 2017

Career costs of children (updated)

In short, big.

A new paper just out in the Journal of Political Economy (vol. 125, no. 2, April 2017, pp. 293-337) look at "The Career Costs of Children". It is by Jerome Adda, Christian Dustmann and Katrien Stevens.

The abstract reads:
We estimate a dynamic life cycle model of labor supply, fertility, and savings, incorporating occupational choices, with specific wage paths and skill atrophy that vary over the career. This allows us to understand the trade-off between occupational choice and desired fertility, as well as sorting both into the labor market and across occupations. We quantify the life cycle career costs associated with children, how they decompose into loss of skills during interruptions, lost earnings opportunities, and selection into more child-friendly occupations. We analyze the long-run effects of policies that encourage fertility and show that they are considerably smaller than short-run effects.
Adda, Dustman and Stevens point out that women have a number of disadvantages in the labour market and note that
Having children may be one important reason for these disadvantages, and the costs of children for women’s careers and lifetime earnings may be substantial.
Interestingly Adda, Dustmann and Stevens look at the gender wage gap,
Using a sample of comparable male cohorts who made similar educational choices, we run simulations to understand better the wage differences between women and men over the life course and how these are affected by fertility decisions. We find that fertility explains an important part of the gender wage gap [about one third], especially for women in their mid-30s.
What drives the cost of children?
Thus, the costs of fertility consist of a combination of occupational choice, lost earnings due to intermittency, lost investment into skills, and atrophy of skills while out of work and a reduction in work hours when in work. In addition, fertility plans affect career decisions already before the first child is born, through the choice of the occupation for which training is acquired—an aspect that is important not only for policies aimed at influencing fertility behavior but also for understanding behavior of women before children are born. An important additional aspect for the lifetime choices of fertility and career is savings that help women to smooth consumption. Furthermore, fertility leads to sorting of women into work, with the composition of the female workforce changing over the life course of a cohort of women, because of different career and fertility choices made by women of different ability.
and early occupational choice really affects wages,
Occupational choices at the beginning of the career, and before any fertility decision is made, represent 19 percent of the overall costs induced through wages, indicating that a substantial portion of the wage-induced career costs of children is already determined before fertility decisions are made, through occupational choices conditioned on expected fertility pattern.
Another factor influencing women's is is the amenity value of an occupation with regard to children (which can be interpreted as the ease with which women in these occupations can combine work with child raising).
We present estimates of these amenity values, normalized to be zero for routine occupations, in panel C of table 3. The figures show that—in comparison to routine jobs—abstract jobs are least desirable when children are present. Our estimates imply that if abstract and manual occupations had the same amenity value as routine ones,the proportion of women opting for abstract or manual occupations would increase by 5 percent. The amenity of part-time work—an option chosen by many mothers in our data—is likewise lower in abstract jobs, as the second row of this panel shows. Our estimates imply that if women in abstract jobs had the same amenity value for part-time jobs as in routine ones, the proportion of part-time work in abstract jobs would be 7 percent higher by the age of 30.
All this points to there being a complex interaction between career and fertility decisions with the costs of children often being high.

Update: Thanks to a message in the comments section we learn that you can get an open access version of the paper here.

Thursday, 30 March 2017

Should we worry about monopoly?

The obvious answer that most people would give would give is yes, but that answer may be wrong.

Having a monopoly may not be a problem if that monopoly is contestable. The danger with monopolies isn't the monopoly as such, its the ability to exploit that monopoly that is the problem.

Writing over at the Forbes blog Tim Worstall makes this point with a couple of nice examples:
As I've pointed out before I had an effective monopoly on the global trading of scandium for a few years. And I didn't exploit it because I wasn't able to. Being a scandium dealer was just a matter of putting in a couple of month's work to find out who produced and who used and making sure you had their phone numbers. I wasn't able to therefore jack up my prices and wax fat off my monopoly--because what I had was an eminently contestable monopoly. Indeed people came along, contested it and I'm not in the field any more.

The important thing about monopolies therefore is not whether one exists. It's whether someone is trying to exploit it and if they are, can people contest that monopoly?

Take another such monopoly that people have worried about recently. In 2010 China started trying to exploit it's near monopoly of the production of rare earths. As I pointed out back then that was a contestable monopoly they had. Their throwing their weight around would lead to competition. As it did. China's monopoly was broken and prices are now well below what they were in 2010.
Tim notes that the recent decision by the European Union Commission to block a merger between the London Stock Exchange and Deutsche Boerse (German marketplace organizer for the trading of shares and other securities) was wrong because even if the merger did create a "de facto monopoly" in the clearing of bonds and fixed-income products, as the Commission claims, the important question is if the merged company tried to exploit their monopoly could competition to it arise? Would competitors be able to enter the market? If so there are no grounds to stop the merger.

Thus even if we see an increase in concentration in markets which looks like a move towards monopoly before we panic one question we have to ask is, is that monopoly one which could prevent entry into its market if it was to attempt to exploit its market power? If not then increased concentration is not as dangerous as it may look at first glance.

Steve Hankie on hyperinflation

From David Beckworth’s podcast series, Macro Musings comes this audio of an interview with Steve Hankie on hyperinflation.
Steve Hanke is a professor of applied economics and co-director of the Institute for Applied Economics, Global Health, and the Study of Business Enterprise at The Johns Hopkins University in Baltimore. He is also a senior fellow and director of the Troubled Currencies Project at the Cato Institute. Steve joins the show to discuss his work on the history of hyperinflations. David and Steve discuss what exactly constitutes hyperinflation as well as historical examples of hyperinflation from 1940s Hungary to present-day Venezuela.

Wednesday, 29 March 2017

Doug Irwin defends the benefits of free trade

This video comes from Uncommon Knowledge with Peter Robinson at the Hoover Institution.
Professor Douglas Irwin defends the benefits of free trade and explains why protectionism, high tariffs, and currency wars could cause economic problems. Irwin explains the misconceptions around trade surpluses and deficits and the historical consequences and benefits of trade. He talks about an absolute versus comparative advantage with trade and why and how a trade deficit with China still benefits the United States. Irwin refers to Adam Smith’s view of trade in explaining the absolute advantage of trade. Smith argued for unregulated foreign trade, reasoning that if one country can produce a good, for example, steel, at lower costs than another country, and if a different country can produce another good, for example, an iPhone, at lower costs, then it is beneficial to both parties/countries to exchange those goods. This has become known as the absolute advantage argument for both international and domestic trade.

Irwin notes that trade still benefits the United States enormously and that striking back at other countries by imposing new barriers to trade and/or ripping up existing agreements would be self-destructive. Finally, Irwin talks about problems within the American economy, how too many people are not working, which cannot be blamed entirely on the trade deficits. Some reasons people cannot find jobs are mechanization, efficiency, productivity, technology, and skills. Irwin discusses a few options for helping people with limited education and few skills survive, including paying a basic wage, improving our educational system, and reducing regulations so the costs of hiring an employee are not as steep.

Dennis Carlton on concentration in American industry and competition policy

This is from a short interview with Dennis W. Carlton, the David McDaniel Keller Professor of Economics at the Booth School of Business at the University of Chicago, dealing with the question, Does America have a concentration problem?
Q: The discourse on concentration, market power, and bigness in many U.S. industries has increased dramatically in the last year. Do you believe that we have enough empirical evidence to show that concentration is on the rise and having adverse effects on the economy?

There is some evidence of increased concentration. But the evidence I have seen in manufacturing (I thank Sam Peltzman for his data) suggests that these increases are unlikely to have large effects on the U.S. economy. For example, using census data, with all its limitations such as ignoring imports, the evidence indicates that the U.S. economy is still generally characterized by manufacturing industries with low concentration levels.

I am skeptical of claims and have seen no convincing evidence that increased concentration overall across all industries has been a major factor in explaining poor U.S. economic performance.

Q: In your opinion, what are the main reasons for the rise in concentration?

Technology explains the rise in concentration in some industries. Regulation, which tends to burden small firms disproportionately, explains it in others.

Q: Which industries should we be concerned with when we look at questions of concentration? Do we have evidence of excessive market power, reduction in quality or investment, or growing political influence?

Every industry with very high concentration deserves scrutiny from an antitrust viewpoint. Industries where data collection is important might raise privacy issues that need to be addressed, in addition to antitrust issues.

Q: Has consolidation in the financial industry played a role in concentration or antitrust issues in the U.S.?

Concentration in the financial industry can raise antitrust concerns. The recent ABA advisory report on antitrust for the next administration raises this issue and suggests that the Federal Reserve should not adopt different merger standards than the Department of Justice.

But if the question is suggesting that bank concentration is responsible for increased concentration in other industries, I have seen no evidence of that.

Q: The five largest internet and tech companies—Apple, Google, Amazon, Facebook, and Microsoft—have outstanding market share in their markets. Are current antitrust policies and theories able to deal with the potential problems that arise from the dominant positions of these companies and the vast data they collect on users?

The report of the Antitrust Modernization Commission explicitly addressed the question of the adequacy of antitrust laws in light of new technologies in great detail, and the bipartisan panel concluded that the current antitrust laws were indeed adequate. However, special concerns regarding privacy protection can arise.

Q: Is there a connection between the growing inequality in the U.S. and concentration, dominant firms, and winner-take-all markets?

Technology influences market structure. Technology is the major factor explaining earnings inequality. But it would be misleading to say that an exogenous increase in concentration is the significant cause of increased earning inequality. The changing role of jobs because of technological change is the major reason for increased inequality.
As to the big question as to what we could see with regard to antitrust policy under the Trump administration Carlton has this to say (pdf) in the February 2017 (Vol 16 No 4) issue of The Antitrust Source.
Over at least the last ten years, complaints that antitrust policy is too lax have grown steadily in volume. Some critics have even suggested that the U.S. economy has become less competitive as a result, which they argue has led to slowing economic growth and increasing income inequality. I hope that the Trump administration’s response to such claims will be to ask for the evidence that supports these views before altering antitrust enforcement. This does not mean that the complaints should be ignored. To the contrary, it means that the Trump administration should alter antitrust policy to address concerns only when those concerns are based on evidence—not rhetoric—and only when those concerns can be appropriately addressed by antitrust policy. In the wake of these criticisms of antitrust policy, President Obama called not only for the government antitrust agencies to pursue vigorous antitrust enforcement but also for regulators to intervene in the industries they regulate to make them more competitive. I hope that the Trump administration will ask for specific evidence that any proposed regulatory intervention would likely improve competitive conditions in particular industries. The experience of regulation shows that often (though not always) regulatory intervention harms rather than helps competitiveness and economic performance, sometimes by making it more difficult for new firms to enter an industry.

Some have called for antitrust policymakers to take into account the effects of antitrust policy on income inequality and unemployment. My hope is that the Trump administration will use antitrust policy only for what antitrust does best—protection of the competitive process. Goals such as reducing poverty or decreasing unemployment are important but antitrust policy is ill-suited to achieve those goals. Over time, competition raises living standards by allocating resources to new, higher valued uses. Attaching other goals to antitrust enforcement can interfere with that process.

There are many antitrust topics that the Trump administration can usefully address. It can encourage the use of retrospective studies to evaluate past mergers as well as the techniques used to evaluate those mergers. Did past mergers systematically raise prices and do our techniques identify such cases or not? Noting that price goes up in some mergers is not a sufficient analysis unless one also takes into account that prices go down in other mergers. The issue is whether we see a systematic bias in what our government agencies are doing. A small sampling of other important topics would include guidance on the antitrust analysis of two-sided markets, bundled discounts, and tie-in cases. Finally, the FTC should think hard about its consumer protection mission, especially with regard to privacy.

Tuesday, 28 March 2017

From the comments

In the comments to the previous posting "A brief prehistory of the theory of the firm 2" Mark Hubbard asks,

I have no great problem with the corporation. Like all institutions it comes with advantages and disadvantages. I would argue that the advantages outweigh the disadvantages. For a start note that you don't have to form a limited liability company if you want to set up a firm. You could, for example, form a partnership, but most people don't. So the corporation wins out in the (competitive) market for ownership form. This I assume is because the corporation offers more to people that other forms of organisational form. Is it morally defensible to deny people an organisational form they see as advantageous?

In addition note that countries that did not utilise the corporation until recently suffered because of it. For example, see chapter 6 of Kuran (2011) for a discussion of the consequences of a lack of the corporation in Islamic law. Is it morally defensible to deny people the advantages of development?

Not all people love the corporation, Adam Smith is famous for being being against it, except for a few noticeable large capital cases such as banking, insurance, water supply and construction of aqueducts and canals. If you don't use a limited liability firm how do you amass large amounts of capital? One reason for Smith's opposition to the corporation was moral hazard, the managers of the firm may not act in the interests of the firm's owners. Also given limited liability owners only risk a part of their wealth in any given firm so may not monitor management was well as they would if their whole wealth was involved. Such issues have, to a degree at least, been overcome by developments in corporate governance that Smith had no way of knowing. See Fleckner (2016) for more.

Fleckner's abstract reads:
In 1784, Adam Smith released the third and definitive edition of the Wealth of Nations, the most influential work in economics ever written. Of the eighty pages he added, more than thirty deal with “joint stock companies” and other commercial organizations. While these additions caused many observers to praise Smith as the first to coin the governance problems in firms, a closer examination of his remarks reveals that Smith’s theory of the firm, or the lack thereof, is in fact one of his work’s weaker parts. Smith thought history had shown that joint stock companies cannot compete with smaller firms, attributed this fact to certain organizational deficits, and concluded that joint stock companies should be established only under rare circumstances. Yet, in the following decades, exactly the opposite came to pass, with joint stock companies thriving in almost all fields and markets today. What made Smith so pessimistic about the joint stock company? The answer lies, this paper argues, in the sources Smith consulted, the companies he studied, and the general beliefs he held. Why did Smith’s pessimism turn out to be wrong? Smith probably overestimated the joint stock company’s weaknesses and underestimated developments that helped overcome them, such as technological progress, organizational innovations, and regulatory responses.
Also limited liability may not be as important to the corporation as many people think. As Henry Hansmann and Reinier Kraakman have written,
In essence, we argue that the essential role of all forms of organizational law is to provide for the creation of a pattern of creditors' rights-a form of  "asset partitioning" - that could not practicably be established otherwise. One aspect of this asset partitioning is the delimitation of the extent to which creditors of an entity can have recourse against the personal assets of the owners or other beneficiaries of the entity. But this function of organizational law which includes the limited liability that is a familiar characteristic of most corporate entities is, we argue, of distinct!y secondary importance. The truly essential aspect of asset partitioning is, in effect, the reverse of limited liability namely, the shielding of the assets of the entity from claims of the creditors of the entity's owners or managers. This means that organizational law is much more important as property law than as contract law. Surprisingly, this crucial function of organizational law has rarely been the explicit focus of commentary or analysis (Hansman and Kraakman 2000: 390, emphasis added).
Ultimately I don't really see the use of the limited liability corporation as a matter of morals, its more a practical matter, can we more easily achieve ours goals using the corporation than by using other organisational forms?

  • Fleckner, Andreas Martin (2016). 'Adam Smith on the Joint Stock Company', Max Planck Institute for Tax Law and Public Finance Working Paper, 1 January 2016.
  • Hansmann, Henry and Reinier Kraakman (2000). `The Essential Role of Organizational Law', Yale Law Journal, 110(3) December: 387–440.
  • Kuran, Timur (2011). The Long Divergence: How Islamic Law Held Back the Middle East, Princeton: Princeton University Press.

A brief prehistory of the theory of the firm 2

This is the latest version of the paper and is likely the last version. I can't be bothered making any more corrections or additions to it, so all remaining errors will remain.

Monday, 27 March 2017

Losing one’s wits over the trade deficit

At the Cafe Hayek blog Don Boudreaux has been writing wise words to the Wall Street Journal about trade deficits. Boudreaux writes in response to a letter written by Clyde Prestowitz in defense of Peter Navarro’s views on the trade deficit,
First, Prestowitz insists that trade deficits are debts that must be “repaid.” Not so. For example, most of the nearly $7 billion that BMW invested over the past quarter century in its Greer, SC, operations is part of America’s trade deficit, yet none of this investment is debt. It’s equity. Americans are not obliged to repay one cent of these funds.

It’s true that BMW’s owners, as Prestowitz correctly says about investors generally, “expect a return on their investment.” But no equity investors, foreign or domestic, receive returns unless they use their equity productively – that is, unless their equity is used to produce value that would otherwise not exist. Therefore, any returns received by successful foreign equity investors are created by these investors’ own vision, efforts, and risk-taking. Contrary to Prestowitz’s implication, these returns are not resources taken from Americans, for these returns would not exist absent the particular productive uses to which the foreign investments are put.

This misunderstanding is repeated when Prestowitz writes that “At least some of that return is repatriated to the home countries of the investors…. That repatriation constitutes a net outflow of wealth.” Again, the wealth to which Prestowitz refers is created by the foreign investors. It may “flow” out of the U.S., but it exists in the first place only because of the entrepreneurial vision and risk-taking of the foreign investors who earn it.

The second example of Prestowitz’s error arises from his failure to understand what happens when foreigners “repatriate” wealth earned in America. Returns on investments in America are earned in dollars. When BMW repatriates its U.S. returns to Germany, it converts those dollars into euros – and the sellers of euros who accept BMW’s dollars will either spend or invest those dollars in the U.S. Prestowitz’s is mistaken to suggest that repatriation of foreign returns causes a leakage of demand from the U.S. economy.
Both points made by Boudreaux are important, but the second is one I have made several time on this blog (eg here) since it is an idea many people seem to get wrong. Dollars do not leave a country. For example, the only place New Zealand dollars are useful is in New Zealand so if someone takes profits "out of New Zealand" the only way they can do so is by selling those dollars. The only place the buyer of those dollars can use them is New Zealand.

Friday, 24 March 2017

The phone at the end of the world

From NPR's Plant Money comes this audio on

Some of this story may sound familiar. Some of it may sound downright bizarre.

In the late 2000s, Argentina was facing a slew of economic problems. The president was a charismatic populist with bold plans and the will to act. One of the things then-President Cristina Kirchner wanted to tackle: unemployment. So she set out to create manufacturing jobs in Argentina.

She made a rule in 2010 that if a company wanted to sell things in Argentina, they needed to make things in Argentina.

Some companies didn't play ball. Even though Argentina was a big and lucrative market, Apple said, 'we'll just sit this one out, we just won't sell iPhones in Argentina at all.' Other companies, though, decided to give it a try — to set up entirely new production operations within Argentina. One of them was the company that made Blackberry, the most popular phone in the country at the time. Making the high tech phones would mean good jobs for thousands of people.

President Kirchner didn't just demand the phones were made in Argentina. She wanted the phones made in a very particular place in Argentina, all the way at the southernmost tip of the country. The government decided that is where she said the jobs should be created.

Tierra del Fuego is home to penguins, grey skies and brutal winds. It's the last stop for ships before making the final leg to Antarctica.

Today on the show, how a town at the ends of the earth wound up making Blackberry phones, and what happened to when a charismatic president launched a big plan to create jobs and boost manufacturing.

Five lessons for urban policy

Professor Ed Glaeser outlines five key lessons for policymakers in developing countries who want to implement effective urban policies. These ideas are part of the IGC's 'Cities that Work' initiative.

Mercantilism and Fascism

Currently we see a growth in mercantilist type ideas with regard to trade policy and, some would claim, a growth in fascist ideas. Is there a connection? Just how closely related are mercantilism and fascism?

A paper published in the journal History of Economic Ideas (vol. 6, no. 2, 1998, pp. 97-122) looks at this question. Patrick J. Welch wrote on "Mercantilism and Fascism".

The abstract reads,
Parallels are drawn along several lines to support the argument that fascism is the closest 20th Century counterpart to mercantilism. The paper is divided into three sections. In the first, mercantilism and fascism are compared in terms of timing, empires, and problems of conceptualization. In the second are compared objectives relating to power and plenty, and tenets concerning trade and precious metals, wages and population mobility, and the place of the state and individual. In the final section are compared practices of mercantilism and fascism as they relate to the implementation of regulation, the role of business interests in regulation, and warfare.
Welch's conclusion includes
Such was not a concern for the 20th Century fascist regimes in Germany and Italy. Like mercantilism from the earlier time, their primary focus, without apology to the citizens, was on the wealth and power of the state.

The parallel between modern neomercantilism and mercantilism is limited largely to the place of government in, and objectives of, trade policy. Many more parallels can arguably be drawn between fascism and mercantilism. The timing of both with reference to the formation of the national state was similar. Empire was important in both mercantilism and fascism, although the short life of the fascist regimes did not offer enough time to realize territorial ambitions. The concepts of both mercantilism and fascism were criticized for being more pragmatic than founded on rigorous principles, of questionable use in describing specific situations, and carrying offensive implications. Relative power and unification were important in both mercantilism and fascism, and the relationship of power and plenty in its role in unification was in dispute in both cases. Mercantilism and fascism shared comparable tenets on trade policies and bullionism, low wage and migration policies, and the dominant role of the state and subordinated role of the individual. Finally, regulation was extensive and the business community appeared to be a beneficiary of regulation under both systems, and warfare ranked high among the priorities of both systems.
So the question is, just how close is what we see happening today to the mercantilism of old? In terms of trade policy, much of recent US policy could be considered mercantilism, or at least neomercantilism, and you could argue that the power of the state and the role of national state - "make America great again" - is important to the pragmatic policies we see being put in place. It's not clear there are any underlying principles driving policy in the US right now. And the dominant role of the state implies a subordinate role for the individual. Much of the industrial policy being put in place is more pro-business - at least for some business - than pro-market.

Wednesday, 22 March 2017

May be there are two questions

From an article by Eric Crampton at newsroom,
When I lectured at the University of Canterbury, Associate Professor Seamus Hogan wanted to set an honours project asking a student to work out whether there really were any economic questions to which an economic impact assessment could provide a plausible answer.
I would argue that there are two possible questions. The first question would be, What do economic consultants do get money to stay in business, while the second would be, How do we get a really big impressive sounding number to try to influence policy in a way we want.

I'm guessing the second answer is the motivation behind most studies and in many cases they work since the public is not critical enough of the results of such work. Which is why people should read Eric's article. to help develop a good BS detector.

If you were to ask the question, What economically meaningful question would an economic impact assessment provide a plausible answer to, then I think you have a problem. Its not clear there is an answer to it.

Andrew Gelman on social science, small samples, and the garden of the forking paths

Statistical significance, especially in small samples, is a problem in all empirical social science, including economics. Here statistician, blogger, and author Andrew Gelman of Columbia University talks with EconTalk host Russ Roberts about the challenges facing psychologists and economists when using small samples.

On the surface, finding statistically significant results in a small sample would seem to be extremely impressive and would make one even more confident that a larger sample would find even stronger evidence. Yet, larger samples often fail to lead to replication. Gelman discusses how this phenomenon is rooted in the incentives built into human nature and the publication process. The conversation closes with a general discussion of the nature of empirical work in the social sciences.

A direct link to the audio is available here.