Archive for the 'economics' Category

Occupational licensing and ex-cons

By JSC5

Matt Yglesias has had a great series of posts up about how little sense it makes for state governments to require certification before someone can provide simple services like haircuts. The silliness of occupational licensing is one of my pet issues, and I’m stunned by how many intelligent people spend time justifying the status quo instead of applying the free market principles they otherwise claim to support.

For an indication of just how ridiculous some of this licensing gets, check out this list of occupations in North Carolina requiring government licensing. Along with Yglesias’s hobbyhorse, barbers, North Carolina also requires government charters for athletic agents, chick and egg dealers [presumably referring to chickens], geologists and soil scientists [but no other scientists], interpreters, landscape contractors, manicurists, refrigeration contractors, seed dealers, and scores of other workers.

Those of us who question the extent of occupational licensing in America usually argue that it is just a tool that helps currently-licensed providers limit competition and thus artificially raise prices and profits — all while hiding under the guise of consumer protection. To be sure, licensing is a good idea for certain classes of services in which market forces and lawsuits don’t provide sufficient deterrent to and remedies for harm. But how does “landscape contractor” fall into that category? Anyone who believes that landscape contractors clearly need a government license to operate, while gardeners are good to go without public imprimatur, is probably letting their preexisting beliefs and status quo bias guide their ‘principles’.

But back to Matt Yglesias. His final post in the series praises Barack Obama for making some positive moves towards liberalizing Illinois’ licensure regime.

And Yglesias is partly right. Barack Obama, as a state senator in Illinois, was the primary sponsor behind a bill that eased occupational licensing restrictions for convicted felons. The felon, after living crime-free for a period of time and documenting certain pro-social behaviors, could apply for a ‘Certificate of Relief from Disabilities’ (CRD) that would remove certain legal disabilities all felons face when released into the world. No longer would a single felony conviction bar someone from getting a license to cut hair; the licensing board would have to come up with some other excuse, instead.

Yglesias is skeptical about the broader impact of the CRDs:

“The problem here is that when you set up these boards, they have incentives to think up any kind of halfway plausible reason to bar people from entering the field.”

Remove the felony bar, the logic goes, and the boards will just come up with other flimsy excuses.

He’s almost certainly right about most licensing boards and most occupations. But in the particular case of Illinois, the problem isn’t that the licensing boards don’t approve ex-cons despite their Certificates. It’s that few ex-cons end up applying for licensing in the first place. As this report (PDF) indicates, only 47 applications for CRDs were made within the first 2 years of the program’s implementation. Of that extremely low number, 81% of applications for CRDs were approved. But none of those recipients ended up applying for occupational licenses within the observation period. That said, a very few ex-cons without CRDs did apply for occuptional licenses, and 67% of those applicants were eventually approved during the same period.

The bottle-neck in Illinois, then, isn’t necessarily the board rejecting felons, but qualified felons not knowing about or not applying for CRDs or occupational licenses in the first place.

I guess the take-home lesson here is that occupational licensing boards really can be nothing more than thinly disguised guilds covering their own economic interests. But occupational licensing reform isn’t exactly the key to rehabilitating felons. Connecting felons with existing benefits and procedures is the easy low-hanging fruit there. That doesn’t mean that making it easier for ex-cons to become barbers isn’t worth doing … it’s just not the kind of major reform that should get our blood pumping. It turns out that the actual benefit of CRDs may just be the perception among private employers that the state says these guys (and they are mostly guys) are safe(r).*

* No, I didn’t closely follow Barack Obama’s occupational licensing and recidivism reform policies in the Illinois state legislature. I came by this knowledge honestly, as part of a much larger research project this summer.

Confidence in astrophysics

[by JSC5]

This paragraph from an essay by Dennis Overbye on discoveries in astrophysics really blew me away:

“Call it the two-sigma blues. Two-sigma is mathematical jargon for a measurement or discovery of some kind that sticks up high enough above the random noise  to be interesting but not high enough to really mean anything conclusive. For the record, the criterion for a genuine discovery is known as five-sigma, suggesting there is less than one chance in roughly 3 million that it is wrong. Two sigma, leaving a 2.5 percent chance of being wrong, is just high enough to jangle the nerves.”

If you think back to your first statistics class, you’ll remember a bunch of ways for testing an observation for significance, and I’ll bet you $10 you used the 95% confidence level for just about everything you did in that class. It’s become the default level for significance in most social sciences. Run the regression, and if p<.05, bam, you’re done. Call it significant and move on.

Then along comes a hard science like astrophysics that puts everyone else to shame. These guys run right past .05  without looking back, at .025 their nerves start “jangling”, but it’s not until 3.33 x 10^-7 that they’re ready to go ahead and say, “Excuse me, sir, but I think I have a genuine discovery on my hands.” Meanwhile the economics/poly sci grad student next door has run 1000 new regressions and ‘discovered’ a bunch of things that turn out not to be quite right but still get published with frightening frequency.

And that’s why people trust astrophysicists.

The kids aren’t all right: plagiarism(!) edition

[by JSC5]

Another day, another curmudgeonly story about “kids these days”. Today’s complaint comes from the New York Times, which goes out of its way to blame plagiarism among college students on everything except the obvious culprit.

The article starts off on a prejudicial – if hilarious – anecdote:

At DePaul University, the tip-off to one student’s copying was the purple shade of several paragraphs he had lifted from the Web; when confronted by a writing tutor his professor had sent him to, he was not defensive — he just wanted to know how to change purple text to black.

Now, on a first reading, I figured this paragraph was trying to tell me that DePaul students aren’t the brightest of bulbs if they can’t see the big text color tool at the top of the Microsoft Word window. On a second reading, however, my Old Codger radar went off. This is more than just a funny story about a lone idiot and his lack of a moral compass; this sets the stage for how the author wants the reader to interpret the entire rest of the article. What explains plagiarism in college these days, the author asks? Why, the decrepit morals of the young, of course! The author even has anecdotes to prove it!

Then we get this gem of an explanation:

Sarah Brookover, a senior at the Rutgers campus in Camden, N.J., said many of her classmates blithely cut and paste without attribution. “This generation has always existed in a world where media and intellectual property don’t have the same gravity,” said Ms. Brookover, who at 31 is older than most undergraduates. “When you’re sitting at your computer, it’s the same machine you’ve downloaded music with, possibly illegally.”

On a first reading, I figured this was a story of a 31-year-old undergraduate misfit committing social suicide on the front page of the New York Times while engaging in some pop psychology. But no, this is supposed to be another piece of “data” on young people’s attitudes towards plagiarism, with the conclusion that kids these days just lack the moral compass of their forebearers when it comes to serious things like media and intelectual property.

Then the story brings in the academic set to try their hand:

“Ms. Blum argued that student writing exhibits some of the same qualities of pastiche that drive other creative endeavors today — TV shows that constantly reference other shows or rap music that samples from earlier songs. …  Our notion of authorship and originality was born, it flourished, and it may be waning,” Ms. Blum said.

This one’s harder for me to dismiss as just the lazy observations of a single student. Ms. Blum is a professor, after all — an anthropologist at Notre Dame. What I find hard to stomache, however, is the offhanded way in which Ms. Blum asserts that today’s media content is more pastiche-driven than previous generations. While I love a good mash up as much as the next guy, I’m not crazy enough to believe that Kanye invented sampling or that Family Guy invented allusions. I’m pretty sure that most creative works going back to antiquity have drawn on pre-existing works.

Finally, the article brings in the favorite boogey man of the Old Codger: the internet and its deliterious effect on the morals of our youth:

“Now we have a whole generation of students who’ve grown up with information that just seems to be hanging out there in cyberspace and doesn’t seem to have an author,” said Teresa Fishman, director of the Center for Academic Integrity at Clemson University. “It’s possible to believe this information is just out there for anyone to take.”

Yeah, it’s possible to believe that cultural creations accessed via the internet have no author, just like it’s possible to believe that Star Wars really did take place a long time ago in a galaxy far, far away.

The difference is that we usually give moral actors who are not “kids these days” (like Star Wars fans) the benefit of the doubt and treat them like normal humans with thoughts, feelings, and beliefs similar to our own. The rules for “kids these days” are different, however. Lazy writers get to trash them at will.

Let me lay down what I think ought to be a fairly simple explanation for plagiarism:

  1. Kids today are no different from my slightly older generation, or their parents’ generation, or Shakespear’s generation. We’re all the same idiots and fuck-ups, geniuses and successes.
  2. Things like Wikipedia, YouTube, and the internet in general don’t erode our values to the point that people start commonly believing that “this information is just out there for anyone to take”. Please treat the younger generations as competent moral agents (see point #1)
  3. Instead, the internet reduces access and plagiarism costs. Copying someone else’s words no longer involves clickety-clacking them from a book to your typewriter or Apple II. Now you can Ctrl-C, Ctrl-V it (or use an entirely different and unintuitive keystroke, for my Apple folks out there). When costs fall, consumption tends to rise. In this case, ‘consumption’ is plagiarism.

Now, this explanation is boring compared with the sexy NYT article talking about the moral failings of the youth caused by “the Internet” (always capitalized, like Towne, Shoppe, or any Noun from ye olde Book of random Capitalizations). But it seems far more plausible, and has the added benefit of not treating the current youngest generation as a bunch of uniquely-monstruous idiots.

Don’t get me wrong: plagiarism is a terrible thing. But the fix seems to be pretty easy. The only way students could think they’ll get away with copying and pasting Wikipedia entries without attribution is if their teachers are in the habit of accepting long entries of text including information, analysis, and theories that the student clearly was not born knowing. Start treating shitty writing that doesn’t reference its information like it deserves — by giving it a failing grade — and you’ll be well on your way to fixing plagiarism. One can’t help but wonder how awful the teachers are if their students think that merely copying and pasting Wikipedia articles would get them anything but a swift kick in the ass and a big fat goose egg on the top of the paper — even if the actual plagiarism is never caught.

Filthy lucre

[by JSC5]

I’m amazed how common it is to believe that people who’s job it is to help others shouldn’t benefit too much in the process. Here’s the latest installment, from the New York times, quoting politicians and professional worry-worts:

“A nearly $1 million salary and benefit package for a nonprofit executive is not only questionable on its face but also raises questions about how the organization manages its finances in other areas,” said Senator Tom Coburn, Republican of Oklahoma. …

“Many donors feel that paying the leader of a charity a six-figure salary is outrageous,” said Ken Berger, [president of the website Charity Navigator]. … “I’m not advocating poverty wages,” he said. “But arguing that those working for the benefit of the neediest people in our society should make millions and multimillions like corporate leaders defies common sense.”

A world in which it “defies common sense” to compensate people highly when they provide goods and services on a charity basis that are undersupplied by a market economy is a world in which lots of people believe that money is dirty. The outcome of such a belief – low pay in the NGO sector – ensures that only the children of the ruch can afford to do things like conduct research into development interventions abroad, or run an organization connecting at-risk youth with older adults.

The world I prefer to live in is a world in which we encourage the provision of charitable goods and services by making sure that salaries at all levels are sufficient to encourage bright people with new ideas to get into the field and improve efficiency. And if someone happens to live well by doing good, then more power to ’em!

Now, of course, there is some sort of tradeoff here. High salaries in the non-profit sector could attract good people, or they could be a waste of resources that could have otherwise gone to additional provision of charity goods and services. Clearly both happen, to a certain extent. Just like with faux-scandals over corporate pay, the answer in the NGO world is to strengthen the transparency of the donor market, strengthen board oversight of NGO management, and increase competition among providers of charity goods and services so that more efficient and successful organizations can prosper, while lurking behemoths fall.

Do markets understand politics?

[by JSC7]

Ezra Klein weighs in on Tyler Cowen weighing in on the Krugman/Rogoff debate about what debt-to-GDP ratio America can stand before growth starts to feel a drag. Klein says that maybe we shouldn’t be worrying about the specific number, but rather how well our political system can deal with the problem in general. Money quote:

But the driver behind that question is not how much debt we have, it’s whether our political system can make the difficult choices to deal with that debt. So long as the political system is working reasonably well, we can get out from even quite a lot of debt. But the more it breaks… the more it has reason to worry.

What I think is worth asking, if that’s the case, is how well our business world understands the political system. We talk a lot about how politicians don’t understand economics, but what if the reverse is true? Even assuming no change in the system itself, it’s a pretty opaque system to someone who isn’t involved in it (not relevant to the budget, but all the stuff coming out of the Top Secret America report can’t be an anomaly). But, of course, you have to factor in the political systems ability to change itself, especially in response to crises (like a ballooning deficit). I don’t know how many people on Wall Street have a good sense of this.

Especially when it comes to the budget deficit, you can see the possibility of a self-reinforcing feedback loop. Businesses think that government will respond reasonably to a large deficit, and so U.S. Treasury prices stay low, but because Treasury prices stay low, the government doesn’t feel an imperative to fix the problem, and maybe even continues to make it worse. If that’s a threat, then I’m glad we’re having debates about what debt-to-GDP levels are feasible, because it at least gives us a chance to point to a concrete number and say, okay, now we have a problem, rather than relying on markets to correctly predict politicians or vice-versa.

Nudging our way to freedom?

[by JSC7]

There’s been some debate in the blogosphere this last week about an article on nudging*. It’s in the Bill Easterly vein of saying, hey, nudging is cool and all but it’s no panacea, and sometimes you need to push. From an economics point of view, I find the topic fascinating, and worked on a few research projects that dealt with these sorts of nudging questions while at school. From a policy side, though, there’s always been something that bugged me about the nature of the debate, though I could never put a finger on what exactly that was, until I read Chris Blattman’s response to the aforementioned article. Key quote:

…if we really want to change a behavior, we have to change incentives (like prices) or impose restrictions. We don’t nudge people away from domestic violence, for instance, we criminalize it. We don’t just encourage people to stop smoking, we tax the socks off cigarettes.

The obvious rejoinder is that not everyone is comfortable with regulating and taxing and messing with prices. Nudging’s appeal is that it preserves free choice and minimizes state manipulation.

Italics mine. Blattman’s characterization of nudging’s appeal is 100% accurate, but I think the appeal itself is misguided. Worse, the nature of the appeal suggests that many of nudging’s advocate don’t understand the point of nudging.

The underlying thought behind nudging, and much of behavioral economics, is that mental costs are often as important as monetary ones. Classical economics assumes that the most important characteristic of a product is its price. Changing the price of gallon of milk by five cents will have much more impact than, say, where in the supermarket you put that milk (in fact, the latter is assumed to have no impact at all). Behavioral economics comes along and says, hang on a minute, let’s use cool experiments to prove otherwise. What we’ve concluded from these experiments is that non-monetary costs are not negligible. Okay, so rather than just having monetary costs in your equation for how much milk you buy, you now have to factor in both monetary and mental costs.

Is there some kind of fundamental difference between these two kinds of costs? As far as the economics is concerned, no. And yet, policy people seem to be enamored with the idea that raising the monetary costs of a transaction reduces free choice while raising the mental costs of a transaction does not. They’re turning a semantic difference into a normative one. The point of nudging is that we take advantage of the peculiar irrational wiring of our brains in order to unconsciously change our actions. The point is to circumvent our usual (suboptimal) decision-making apparatus. How does that retain free choice any more than a tax (if anything, I can see an argument for the reverse)?**

The idea that nudging ‘minimizes state manipulation’ also seems to stem from strange logic. I think people who think this are conflating the how much a particular state manipulation costs with how much is actually being manipulation. The nice thing about nudges is that there are certain tricks we can implement to get people to do particular things, and often these tricks are quite easy to implement. It may be cheaper to nudge than to pass a tax law, collect the tax, audit, enforce, etc.*** On the other hand, a consumer will probably see none of this. If you buy two packs of cigarettes a week with no intervention, and one pack a week with either a tax or some nudge in place, would the state be manipulating less if it implemented the nudge instead of the tax?  No, it would be the same manipulation, only more efficient. The state is still meddling in your consumption. Ron Paul should still be upset. It can just meddle on the cheap.

The big picture problem is that behavioral economics puts into question some traditional assumptions about human rationality, and offers some cool byproducts of doing so. Policy people snatch up those byproducts, but continue to hang onto dated ideas about human rationality, and thus can say with a straight face that nudging both actively changes people’s choices and gives them more freedom to choose at the same time. They should ask themselves, what is the value of a choice that we know, ex ante, we will not choose?

* If the word nudging means nothing to you, it’s an idea in behavioral economics that has made its way into pop public policy via this book. The gist is that there are certain problems we can solve by making small structural changes that seem trivial but actually matter a lot, like improving health by making unhealthy foods slightly harder to reach or increasing bank use among the poor by making forms easier to fill out.

** Interesting aside: with taxes, we have progressive and regressive taxes, the former taxing rich people proportional to their wealth, like the income tax, and the latter taxing everyone equally, and usually hurting the poor more, like a hike in subway fares. A nudge is like a mental tax (or subsidy, depending on which way it goes). Is it regressive if it disproportionately affects stupid people? What happens to people with non-standard thought patterns?

*** Although not necessarily. I’m sure there are plenty of nudges that would work but would be a pain to implement, like putting an actor posing as a hobo next to liquor stores.

State-owned enterprises

[by JSC5]

A good illustration of the incoherence of our discourse about government-owned enterprises, from today’s NYT:

Neil M. Barofsky, the special inspector general for the Troubled Asset Relief Program of the Treasury Department, said both carmakers [GM and Chrysler] needed to shut down some underperforming dealerships. But it questioned whether the cuts should have been made so quickly, particularly during a recession. The report, released on Sunday, estimated that tens of thousands of jobs were lost as a result.

After having read and watched most of Mr. Barofsky’s congressional testimony for a one of my jobs, I can honestly say that I think he’s done a great job as Special Inspector General for TARP. This latest SIGTARP report, however, seems to suffer from a problem shared by just about all analysts, commentators, politicians, and academics who work on bailout issues and the problems of state ownership. What exactly are our goals with these bailed-out institutions? Should we run them for the public benefit, or run them as businesses to return them to profitability as soon as possible? Or do we have hybrid, competing goals?

I think conservatives (and the rest of us!) were worried that state-owned enterprises would get treated like adjunts of the state and be forced to operate suboptimally in order to support public goals like employment. It now turns out that the Administration, perhaps afraid this perception, has been very aggressive in pursuing profit-maximizing personnel cuts and dealership reorganizations. Does anyone think this will win the Administration any love from conservatives (or from the rest of us)? If anything, the Adminstration is now catching flack for not doing enough to support employment.

All I’m saying is, we need to decide what the proper goals for SOEs are. And then we need to tell SIGTARP, congressional representatives, and everyone else in the system, so that we don’t get whiplash going from shouts of “socialism!” to “free market ideolog!” in 2.6 seconds.


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This is a group blog. JSC5 currently writes from the US. JSC7 writes from behind the Great Firewall of China.

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