Thursday, January 23, 2014

The best thing you can do: choose your parents well

President Harry Truman apparently asked for a one-handed economist because he was tired of the "on one hand" and "on the other hand."  Economists, even the Nobel laureates, rarely seem to agree on the issues of the day, which makes the rest of us--practically the entire population--wonder if there is any science at all behind the conclusions that economists reach.

Here in the US, we are now getting into discussions and debates and yelling matches on whether we ought to increase the minimum wage.  And, often, related to this is the larger context of rising income and wealth inequality.  Economists being economists, well, you can pick and choose any one leading scholar who might support your own gut feelings on this, which might also make you wonder whether you can always then pick the correct answer to questions in economics simply based on your own gut feelings and later have it legitimized by quoting a leading economist!

The Economist--not the person but the magazine that calls itself a newspaper--offers, or attempts to offer, an explanation for why some economists oppose minimum wages.  Read the entire piece and decide for yourself whether you get it or whether you need to move to Colorado or Washington in order to inject some dope into your system and then read it!  The comments are the most interesting there, and say a lot about personal feelings leading to conclusions no different from what a real economist might have. This comment by a A. Andros summarizes it:
I am not a trained economist but can, like Beatrice, see a church by daylight.
So, ok, academic economists do not have their personal money at stake, right?  What if you had to think about it as a real investor, entrepreneur, business owner?  Here is Bill Gates (who is, of course, not a trained economist):
You have to be a bit careful that if you raise the minimum wage, you’re encouraging labor substitution, that you’re going to go buy machines and automate things or cause jobs to appear outside of that jurisdiction.
Which is true. The labor substitution via automation happens all the time. At the most basic levels too.  Think about this small piece--we now have plenty of grocery and box stores that have self-checkout lanes. That means a couple of checkout clerk positions, which might have paid minimum or near-minimum wages, have disappeared. And, of course, outsourcing is nothing but jobs appearing outside of the jurisdiction.

Now, one thing is for real--the growing inequality. I followed up on Greg Mankiw's post and tried to read this paper.  But, it had way too much technical discussions for my preference. I liked this there:
income inequality increased over time in our sample, consistent with prior work. Hence, the consequences of the “birth lottery” – the parents to whom a child is born – are larger today than in the past. A useful visual analogy is to envision the income distribution as a ladder, with each percentile representing a different rung. The rungs of the ladder have grown further apart (inequality has increased), but children’s chances of climbing from lower to higher rungs have not changed (rank-based mobility has remained stable).
Yep, make sure you choose your parents well!

This finding is not a real surprise to me because Branko Milanovic wonderfully articulated the importance of the parents' background as a predictor for economic success.

The New Yorker's John Cassidy summarizes the study, and writes:
the new study doesn’t mean that the effects of inequality aren’t more serious than they used to be. With inequality rising, particularly at the top, the rewards for clambering up the income distribution are greater, and so are the costs of getting stuck at the bottom. “The consequences of the ‘birth lottery’—the parents to whom a child is born—are larger today than in the past,” the paper notes. Or, as Saez said to the Times, “The level of opportunity is alarming, even though it’s stable over time.”
So, will increasing the minimum wage do anything to this inequality?  Will that help with evening out the uneven levels of opportunity?  You know what will happen when you ask two economists, right?  So, yes, do not ask them--unless it is a one-handed economist!

3 comments:

Ramesh said...

All right; since I am not one handed, I shall not "answer".

But disagree that choosing the right parents is the biggest differentiator. Having an extra helping of grey matter is a better bet.

Sriram Khé said...

Sorry, bud. As much as you might think and believe that the parents' background does not matter as much, well, studies after studies repeatedly confirm that, on an average, they do. This is the latest along those lines.

Sriram Khé said...

Mankiw adds this interpretation:

"If we had some perfect policy invention (such as universal super-duper pre-school) that completely neutralized the effect of parent’s income, we would reduce the variance of kids' income to .955 of what it now is. This implies that the standard deviation of income would fall to 0.977 of what it now is.

The bottom line: Even a highly successful policy intervention that neutralized the effects of differing parental incomes would reduce the gap between rich and poor by only about 2 percent.

This conclusion does not mean such a policy intervention is not worth doing. Evaluating the policy would require a cost-benefit analysis."