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Questions I want to know the answer to

What drives people to action?
Do people with a keen sense of network benefits really spend time(hour+) preparing for informal lunch meetings with people but not their homework? Where did they learn (and get the cultural discipline) to do that?
Does the preference to help other communities, when in fact there are communities that are physical health wise or financially less fortunate their ourselves, stem from the fact that it means not having to deal with complex problems around us and/or because we can deal with these problems in abstract, or at the very least, “non-life” way. Does the fear of being parochial, in this age of cosmopolitan, mean we have spent less time molding and thus preparing ourselves to deal with the real, messy problems that surround us?
“life got in the way” — what does that mean? As if Life were everything keeping you away from your goals. What a weird separation?


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Rule #7

Foreign Affairs has an article (linked to by Chris Blattmann) on how the real issue for poor consumers is not food price volatility but high food prices and that politicians mainly talk about and try to address the former and rarely think about tackling the latter (Remember Rule # 7 of the Guidebook for Interpreting Populist Politics: If something helps the poor, it will inevitably be blamed for hurting the poor, and vice versa):

…But high food price levels and high food price volatility are not the same things. Food price levels are at historic highs, but food price volatility, although high these past few years, is not out of line with historical experience and is generally lower than it was in the 1970s. This means that the world does not necessarily face a price volatility problem. It faces a high food price problem.

The effects of each phenomenon on the well-being of the poor differ. Throughout the world but especially in low-income countries, the poor are overwhelmingly net food consumers, while farmers are generally better-off net sellers. Rising prices hurt consumers by reducing their purchasing power but benefit producers by increasing their profits. By contrast, volatility does not necessarily hurt consumers, because different food staples are often substitutable.

…The way in which leaders cast the food price problem matters because it shapes policy responses. Policies aimed at curbing food price volatility, such as export bans, price stabilization schemes, and subsidies for farmers are misguided if policymakers aim to increase the welfare of the poor, or avert political unrest in developing countries. Instead, policymakers should consider measures that prevent increases in food prices, such as removing barriers to international agricultural trade and increasing investment in scientific research on crop productivity improvement, soil and water conservation, and renewable energy that does not compete with food for land. Policymakers should also focus on innovative ways to reduce post-harvest losses, which run to nearly 50 percent in many low-income countries, often due to insufficient or sub-standard storage, refrigeration, and processing facilities. 

To summarize this in practical terms, what the poor need is more Walmart (efficient processsing, refrigeration and supply chains), more free trade and more research into things like genetically modified seeds – these are the things that would make their lives better. At the same time, there are many allegedly compassionate organizations and politicains campaigning against all of these things and blaming them for hurting the poor. No surprise there.

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Minding the Gap

I am always surprised at how quickly mentioning the minimum wage causes people to dig up all sorts of strange pseudo-economic concepts to justify their gut feeling that the poor people would be screwed over by “the system” without it. Let me note some very simple things.

The important thing about the minimum wage is that, in theory, there might be some people whose current value in the labor market is less than minimum wage. Having a job would mean that they could feel better about themselves, make at least some money and also have the option of gaining some useful skills and experience that will allow them to earn more money later as they ascend in the work hierarchy. Especially the last point should seem obvious to every student who has ever done an unpaid internship: even working for free can be a valuable investment in the future. What a minimum wage does, is telling these individuals that society would prefer them to be bored, poor, government transfer-dependent and unemployed with deteriorating job skills rather than letting them decide for themselves. But do these people exist? Some think not:

Are there jobs where it’s profitable to hire at $4.75 but not at $7.25? Well, there must be some, but we’re talking about such low skill levels here that there very well might not be many.

This seems just wrong to me. After all, we can definitely agree that in any job requiring no extensive training it would be profitable for an employer to hire someone at $0.01 an hour. If you disagree, I would love to hire you at that rate to hold doors open for me and carry my bag to work. Moreover, it is a safe assumption that many of the 7 million unemployed cannot find a job at minimum wage as evidenced by their status. Thus, it must be true that there are several million people for whom it would be profitable to hire them at below minimum wage and who could thus potentially find employment if minimum wage were abolished/lowered. I think this is a pretty strong case and it would take some pretty strong evidence to the contrary to advocate for raising the minimum wage instead, as Congress did during the financial crisis.

But what about those workers who have minimum wage job and might receive less money once the minimum wage is lowered? Who will protect them from the mean capitalists? Note the assumptions in this thinking: Firstly, there will be downward pressure on wages from labor competition once the minimum wage goes. This implies that there is workers who could be profitably hired at below minimum wages but who couldn’t compete beforehand because they were not allowed to. This confirms that the minimum wage lowers employment. The new market equilibrium will be at lower wages for some workers but higher employment. Whether this is good or bad in welfare terms is not clear. Previously employed workers might lose a little, newly employed workers gain some dignity, a job and a livelihood. In the long run, efficiency gains from market-based wages and positive social externalities from lowering the number of frustrated unemployed people might matter as well.

Secondly, the concern over a drop in wages for minimum wage workers assumes that so far the employer had been tricked into employing some workers at above their market wage by the benevolent sovereign force. In anything other than the very short run, it is not clear why the employer would not change tactics to avoid making a loss on that worker. As only the nominal amount of money is fixed by the minimum wage, the employer could simply start cutting other perks that are part of the implicit salary of a job (this idea is from someone in the blogosphere, but I don’t remember from whom) like the air-conditioning and the free coffee. Moreover, getting rid of the worker is the easiest way to avoid paying him more than he produces. Thus, it is not clear that the minimum wage can keep anyone employed in the long run who wouldn’t be employed otherwise.

But there is usually a last line of defense here: What if the worker does “deserve” above minimum wage due to his productivity but something in the system makes employers able to cheat them out of that “surplus” (Welcome back Karl M.!) by simply lowering wages due to their awesome bargaining power? Wouldn’t the consequence of dropping the minimum wage just be the following (same source as above)?:

It would increase corporate profits and dramatically reduce the wages of the poorest workers, and that’s about it. Employment would probably be affected only marginally, and nothing would take the place of that lost income.

This just makes me cringe. Where is the historical evidence that companies are able to just pay some random low wage to their workers in the long run? After all, America is one of the wealthiest places in the world because its most of its workers earn so much. Secondly, if the issue is poverty, why would forcing employers to overpay for work activity be a good way of redistributing wealth? You could also force all theaters to hand out free tickets to poor workers and then have a person on stage throw paper planes made from money at the workers in the audience…except for the fact that this seems really silly. What is wrong with lump sum transfers? If you want to redistribute money to the poor, why choose the one way to do it that distorts labor markets along the way and thereby…hurts the poor?

But don’t get distracted by these details. What matters is that employment and economic efficiency (also known as “more for everyone”) are negatively affected by the minimum wage. Given that the minimum wage exists and Congress keeps raising it, the burden should be on supporters to come up with a really strong case why this increases the welfare of poor people.

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Asking is good, theory is better

In discussions with friends who from other social science disciplines, we often get into disagreements about the relative importance, and role, of theory and quantitative or qualitative data in finding the answer to a question. Most discussions come to the conclusion that anecdotal or informally gathered data (from surveys, observations, conversations etc.) can serve as the basis for developing new hypotheses. In the next step, theoretical models from psychology, economics, anthropology etc. are useful to develop a strong hypothesis for the mechanism underlying the observed phenomenon and identify parameters and predictions that can be tested to verify the applicability of the model. Finally, well-designed empirical studies (eg randomized controlled trials) should test the validity of the model in contexts other than the one that originally inspired the model.

As an economist with some interest in theory and empirical methods, I get especially frustrated by some ethnographic studies, often several decades old, where the researchers simply asked the individuals involved about why they exhibit strange social behavior X. Then, tallying up the answers, they proclaimed that the “reason” for the behavior must be X, because the people said so. Often the “reason” would involve religious prescriptions or “tradition” or some other question-begging concept.  As the severity and nature  of religious prescription is usually strongly adapted to local needs (just ask any Christian why they don’t think women have to cover their hair in a religious service, as Paul clearly demands in his letters in the bible) and thus endogenous to social mechanisms, the answer is basically useless, because it just says that locally observed behavior is due to local inclinations to promote the locally observed behavior.

One good example of this rule never to trust individuals to know the reasons for common behaviors or rules of their group is given by Robert Wyman in an online lecture:

There’s many taboos on sexual relations, especially after birth. In many cultures, as I said, a prescribed period of nursing. There’s also a postpartum taboo against having sexual relations, and again, [this is] another obvious mechanism for birth spacing…If you ask a member of a society that has a taboo they report for instance that sex at that time is very dangerous, a life and death matter.

It is dangerous to mix the man’s blood with the woman’s, and the man’s blood is transmitted through semen…If man’s blood gets into the woman through his semen then it also gets into her milk, and then the man’s blood goes back into the baby through the mother’s milk and this is poison for the baby. That’s their version of why they shouldn’t–why they have this taboo.

Note that the issue with this justification of a fertility practice is not that it is biologically inaccurate, but rather that it should quickly have become obvious that the predicted outcome (death of the child) was rarely associated with intercourse beforehand. The persistence of such an empirically untenable belief suggests that it is merely a conscious rationalization of a more deeply rooted mechanism, that is, the need to limit group fertility in order ensure survival.

But inventing “reasons” to justify deep-seated beliefs is not limited to developing countries. I think we can all find instances in our own lives, especially related to issues of identity, where there is a group norm and we make the “reason” for it up on the fly. Why is it bad to have a government-regulated market for kidneys? Well, you know, it is dangerous, a life and death matter, to mix the man’s money with…

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First steps on the ladder

Tyler Cowen links to the story of a booming Peruvian town that faces labor shortages due to to its phenomenal success at industrializing modern agriculture:

Ica, in southern Peru, is known as a city of zero unemployment…Work is so plentiful that men with megaphones ply the city’s neighborhoods offering jobs. Thousands of mostly indigenous Peruvians from the central Andes have flooded the coastal community, attracted by radio ads and word of mouth, successfully joining the ranks of the employed.

International workers’ rights groups and globalization critics often suggest that while entering an upward spiral of increases in productivity and wages was the way all developed countries got wealthy, the mean multinational corporations will somehow keep their factory workers in poverty even while there is a shortage of labor. But supply and demand seem to hold at least in this Peruvian town, so that increased demand for labor raises the offered benefits for workers:

At Chlimper’s Ica farms, about 4,500 employees help grow and export 1.4 million 11-pound crates of asparagus and more than 8,000 tons of table grapes annually. Chlimper pays bonuses for extra production, and over the years his company has improved meals and transportation for employees…It’s all designed to keep workers happy and to attract more, Chlimper says.

Wow. This sounds like the self-interest of the capitalist and the use of modern technology lead to more jobs and higher wages – somehow the appeals to international charity and leftist critiques of globalization always get the signs of those effects wrong, claiming them to go in the opposite direction. Similarly, the author of the article can’t really let that kind of cold-hearted capitalist-led development stand and tries to find out what’s wrong with it:

In fact, there has paradoxically been an increase in disease and decline in education going hand in hand with the proliferation of jobs…Yet there is also an ugly side to Ica’s full employment. Although the city now has two huge shopping malls and a third is under construction, poverty remains a nagging problem, especially among those who have traveled from the Andean highland regions of Ayacucho, Huancavelica and others, areas devastated by political violence in the 1990s.

The paradox is probably just a consequence of migrants from more destitute areas moving in and thereby impacting the disease and education statistics of the area without actually lowering the living standard of previous residents. Even if education declined and disease levels increases due to the migration, the continued influx should be evidence enough that the quality of life for migrants is still higher in Ica than where they are coming from.

Let me try and understand the second part of the quote: These migrants used to live in abject poverty and threatened by violence in the highlands. Then they voluntarily moved to Ica, found work there, and now they earn more money than before, but there is inequality of wealth because some people benefited even more from the boom. That doesn’t sound ugly, but rather like the first chapters of a stunning development success story to me. What did the author expect? That they move from the slums straight into mansions with cars without any transitional period in between? One interviewed woman summarizes it well:

Nelida Mendoza, 20, joined her father in the fields picking onions after the family fled the desperation of Ayacucho. She lives under tarps and a bit of corrugated tin with her parents, a couple of siblings and her two small children, whom she must leave behind during the long days digging in the soil. The alternative would be worse, she says. “I wouldn’t have money for anything,” she said.

For a real paradox, consider what the policy change was that led to these improvements in the lives of the workers:

Agribusiness really took off in the Ica Valley after a law was enacted in 2000 encouraging outside investment and limiting workers’ rights.

To summarize figuratively, when poor people are taking the first steps on the ladder to prosperity, well-meaning rich people like us should refrain from kicking over their ladder while complaining that there is no express elevator available.

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Of Smoke and Ice

Tyler Cowen links to an article about Iceland’s plans to ban the sale of cigarettes. This sounds like really bad public policy. Don’t get me wrong, the negative effect on other people from inhaling cigarette smoke is a very good example of a failure of the Coase theorem: the high transaction costs of bargaining with every smoker you meet to pay him not do so while you are around, prevent an efficient outcome from being realized. However, the right way to respond to a negative externality is by taxation or regulation, not by making something illegal.

On the one hand, think about long hair. How would you feel about the government deciding that looking at long hair is unbearable for those whom the wearer meets every day and the thicket on our heads might also lead to infections. Would it be justified to outlaw long hair? Of course not. While public spaces might be legitimately protected from shaggy youngsters, banning hair salons from supporting such hairdos would obviously be unjustified. Similarly, every smoker has the right to keep smoking while only endangering their own health. After all, who are we to judge whether or not this is a tradeoff they are willing to make? As long as no one else is harmed and they have all the relevant information available,  let the smokers smoke, just like we should let the lovers love and the females work – the dark history of discouraging “indecent” behaviors to the detriment of the individuals involved should give us pause.

On the other hand, the negative fallout from this policy might dwarf any potential benefit. Historical examples like the Prohibition or the ongoing war on drugs have shown that enforcement of sales bans can be very costly and creates black markets that fund other sorts of crime. At the same time, compensatory addictive behaviors might proliferate in smoking’s stead, because the wicked will find always find a way to wallow.

While policymakers might like to envision a world of puritan fitness fanatics who follow parliamentary debates, go to art museums and take bike rides (with a helmet!) when they want to relax, in reality most people like to take a break once in a while from decent sobriety and sink into the sultry arms of their primal humanity: Whether it is chocolate, love, wine or smoking – all the best things in life might kill you eventually but that will be nothing compared to the cruel suffering inflicted by a much more lethal poison: unadulterated, policy-compliant boredom.

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Gold for Glory

Arnold Kling ponders one of my favorite mysteries of public opinion:

The standard intuition is that going to work for a profitable company means that you are not serving people, only the profits of the company. On the other hand, working for a non-profit means serving the community…I think that profit-seeking enterprises serve the community, also. In fact, they do it in a way that is more sustainable and more accountable. It is more sustainable, in that the value of what they produce is greater than the cost of the resources (including labor) that they use. Otherwise, they would not make a profit. However, a non-profit can very well use more resources than the value of what it produces. A profit-seeking enterprise is more accountable, in that a profit-seeking business must satisfy consumers or else go out of business…Is my perspective valid? If so, why is the conventional intuition so pervasive?

The answer, I think, is based on our idea of why people act a certain way. True altruism, defined as a renunciation of the self and a devotion to maximizing the welfare of others (broadly defined), is very rare. Even though we call people who do social work for little money “altruistic”, we acknowledge at the same time that they have a strong desire to do this kind of work, that they receive a lot of immaterial compensation in terms of respect, a positive life narrative and “feeling good”, and that the common good they provide is not very large at the policy-relevant margin – in other words, that they are neither renouncing their  happiness nor are they maximizing others’ welfare.

Rather, when we see people do non-profit work we implicitly consider the difference between their wage and their opportunity cost and impute that the gap must be made up by non-monetary compensation. As the cognitive ability to derive non-monetary pleasure from mere institutional and societal interactions is essential for the functioning of mechanisms of social discipline and coordination, working “for” the community is  a strong signal of subordination to informal sources of authority. Such signals of loyalty are encouraged (just like supporting the military, waving the flag, singing the anthem etc. ) because they screen for deviants and resolve cognitive uncertainties about group delineations. Non-profit work signals all these things and that’s why we like it.

PS: Further support wanted? Women in the 50s worked for no money whatsoever as the homemaker, but we rarely laud their community service, so it seems that the public aspect of non-profit work matters. Moreover, we find the signal of non-profit work only commendable, if a salaried alternative exists. Think about the unappreciated non-profit work that begging street musicians do, as opposed to the highly-respected efforts of renowned singers who give charity concerts. It’s clearly also not simply about not making a profit. We clearly don’t respect bankrupt company-owners for having resisted the pull of profit. Again, we clearly regard the choice of not making a profit important, because it clarifies the differential between the non-profit compensation and the relevant outside options. That is, we would like to see the exact going rate at which one may exchange gold for glory.

Update: This post by Fabio Rojas made me  realize that I neglected the role of government in my thinking. Government is the ultimate non-profit historically, providing services to the poor and vulnerable by redistributing part of the national income. Perhaps encouraging non-profits has the same purpose of basically redistributing income to those in need. Why not leave it to the government? The reasons might be cognitive – the tax system does not feel like we are handing money to the poor, as it is too indirect. Or, we have caught on to the fact that redistribution through taxes and transfers is quite wasteful and cumbersome and that non-profits will be more efficient and responsive to local needs. In that sense, the relevant margin of comparison for efficiency might not be for-profit vs. non-profit business, but federal government vs. non-profit business. While in the former comparison the non-profits lose in many ways, in the latter non-profits might well come out ahead. Thus, non-profits might be a grassroots attempt to decentralize governmental redistribution. However, while this explains why non-profits exist, the widespread dislike of profitable activities seems to require further explanation.

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