What’s in Paul Kurgman’s name?

Here’s an interesting poll: When Rasmusssen Reports telephoned voters and asked them if they could give an opinion about Paul Krugman, 55% said they don’t know enough about him to give even a “soft opinion.” Those who did have an opinion of Krugman were evenly divided with 22% favoring him and 22% not favoring him. 4% voiced a “very favorable” opinion and 6% voiced a “very unfavorable” view toward him.

But here is where it gets interesting: When asked about “New York Times columnist Paul Krugman” rather than simply “Paul Kurgman,” the numbers shifted significantly. Once identified with the New York Times, his unfavorable ratings increased 15 points to 37% while those who expressed “very unfavorable” views toward him more than tripled. Krugman’s favorable ratings, on the other hand, only increased three points to 25%.

How to think of the deficit

Tyler Cowen gives his view:

Krugman writes: “Belgium is politically weak because of the linguistic divide; Italy is politically weak because it’s Italy. If these countries can run up debts of more than 100 percent of GDP without being destroyed by bond vigilantes, so can we.”

I would interpret this evidence differently.  A high deficit often is an unfavorable symptom of bad politics, even if you think the high deficit is economically OK on its own terms.  It’s a sign that you have dysfunctional institutions and decision-making procedures, as indeed they do in Belgium and Italy.  I believe that the not-always-swift American voter in fact understands high deficits — correctly — in this light.  They don’t hold theories about “crowding out,” rather they sense something in the house must be rotten.  And so they rail against deficits, as do some of their elected representatives.  It’s a more justified reaction than the pure economics alone can illuminate.

When water regularly overflows from your toilet, you want the toilet fixed, whether or not the water is doing harm.

‘Medicare and Freedom’

Greg Mankiw has a new post that begins by pointing to an op-ed by Paul Krugman. Krugman writes:

the modern G.O.P. considers itself the party of Ronald Reagan — and Reagan was a fierce opponent of Medicare’s creation, warning that it would destroy American freedom. (Honest.)

Mankiw continues by quoting an article from today’s Wall Street Journal written by three past presidents of the American Medical Association:

the right of patients to privately contract with physicians to ensure they have the medical care they want, without penalty—regardless of what the government pays—must be recognized and protected. Today, if a doctor wants to bill a patient for additional payment over the Medicare reimbursement, he has to withdraw from Medicare entirely for two years. A patient who agrees with this arrangement can’t receive any Medicare money for that service, either.

Mankiw concludes:

So, if you include the right to sign mutually advantageous contracts and engage in the gains from trade as part of “freedom,” then President Reagan was not so far off the mark.

The problem, it seems, is that Medicare sometimes tries to push the price of medical services below their equilibrium levels (a phenomenon that will likely get more severe with the Medicare cuts being envisioned in the pending healthcare reform bills). Such price controls naturally lead to private attempts to circumvent them, which in turn lead to regulations to prevent that behavior. These new regulations cannot help but impinge on economic freedoms.

Below is the audio of Ronald Reagan giving his case against socialized medicine:

Boudreaux on ‘You lie’

Below a letter sent by Don Boudreaux Wednesday to the Washington Post:

Speaking about Rep. Joe Wilson screaming “You lie” at Pres. Obama, Jimmy Carter said “I think it’s based on racism” (”Carter Blames Racism for Clamor Over Obama,” Sept. 16).  And your own Howard Kurtz detects racism in protesters’ opposition to Mr. Obama’s health-care plan (”A Black-and-White Question,” Sept. 15).

These accusations of racism – so easy and self-congratulatory to hurl – are becoming tiresome.  What sort of bigotry sparked Americans’ hostility to Hillarycare in 1994 – anti-Arkansasianism?  What prejudice blindly led Paul Krugman to oppose Pres. Bush’s plan to privatize Social Security – hatred of Texans?  Perhaps intolerance of peanut farmers is what prompts so many Americans to regard Mr. Carter’s presidency as being especially woeful.

Different people are differently motivated, but the only soul into which I can see is my own.  I assure you that my opposition to Mr. Obama’s policies has nothing to do with the color of his skin and everything to do with the content of the centralizing, market-suffocating designs he seems to have on the economy.

Sincerely,
Donald J. Boudreaux

‘The Inheritance of Education’

From Marginal Revolution:

Economix posted a graph showing a strong positive correlation between SAT score and parental income.  Greg Mankiw pointed out that the effect is unlikely to be purely causal because there may be an omitted variable bias, IQ for example. Paul Krugman and Matt Yglesias both attack Mankiw and point to graphs showing that income matters for college completion and enrollment, respectively, holding various achievement scores constant.  Brad DeLong crunches the numbers on IQ and income correlation to estimate that half the effect is due to IQ and half to something else.

All this is good but none if it gets at the heart of the matter because there are a lot of way that heredity/genes could explain the income/education correlation; IQ is only one possible mechanism, personality (e.g. conscientiousness) is another possibility.

The type of evidence that we need to resolve this question is adoption studies.  Fortunately, such studies have been done and indeed I have presented the data before in my post Nature, Nurture and Income.  Let’s do so again.

The graph below is from What Happens When We Randomly Assign Children to Families?, by Bruce Sacerdote.  Holt’s International Children’s Services places children, primarily Koreans, with families in the United States.  Holt has an interesting proviso to their adoption contract, conditional on being accepted into the program, children are randomly assigned.  Sacerdote has collected data from children who were adopted between 1970-1980, and thus who today are in their mid 20′s or 30′s, and their adoptive parents.

The graph shows how parent income at the time of adoption relates to child income for the adopted and “biological” (non-adopted) children.  The income of biological children increases strongly with parental income but the income of adoptive children is flat in parent income.  What does this mean?

The graph does not say that adopted children necessarily have low income.  On the contrary, some have high and some have low income and the same is true of biological children.  What the graph says is that higher parental income predicts higher child income but only for biological children and not for adoptees.

Now what about education?  Sacerdote looks at that as well.  He doesn’t have a child SAT-score, parent-income correlation but he does find:

Having a college educated mother increases an adoptee’s probability of graduating from college by 7 percentage points, but raises a biological child’s probability of graduating from college by 26 percentage points.

The effect for father’s years of education is even larger; about a ten times larger effect on biological children than on adoptees.  Similarly, parent income has a negligible effect, small and not statistically significant, on an adoptee completing college but an 8 times larger and statistically significant effect on a biological child completing college (Table 4, column 3).

Bigger Governments Produce Worse Recessions

In his August 9ts column , Nobel Prize-winning economist Paul Krugman stated:

So it seems that we aren’t going to have a second Great Depression after all. What saved us? The answer, basically, is Big Government. . . . [W]e appear to have averted the worst: utter catastrophe no longer seems likely. And Big Government, run by people who understand its virtues, is the reason why.

Alan Reynolds of the Wall Street Journal has a response:

This is certainly a novel theory of the business cycle. To be taken seriously, however, any such explanation of recessions and recoveries must be tested against the facts. It is not enough to assert the U.S. economy would have experienced a “second Great Depression” were it not for the Obama stimulus plan.

Even those who think government borrowing is a free lunch can’t possibly believe the government has already done enough “stimulus spending” to explain the difference between depression and recovery.

CNN Money recently calculated that the stimulus plan has spent just $120 billion—less than 1% of GDP—mostly on temporary tax cuts ($53 billion) and additional Medicaid, food stamps and unemployment benefits. Less than $1 billion has been spent on highway and energy projects. Commitments for the future are much larger, but households and firms can’t spend commitments.

Proponents of Big Government can’t say we avoided the next Great Depression due to hypothetical stimulus money that is mostly unspent. So they argue it’s more important that the federal government merely continued spending and didn’t “slash” spending as in the early 1930s. But the federal government didn’t slash spending in the early ’30s. Federal spending rose by 6.2% in 1930, 7.7% in 1931 and 30.2% in 1932. Since prices were falling, real increases in federal spending were huge during the Hoover years.

A 1999 study in The Journal of Economic Perspectives by Christina Romer (now head of the Council of Economic Advisers) found that “real macroeconomic indicators have not become dramatically more stable between the pre-World War I and post-World War II eras, and recessions have become only slightly less severe.” Ms. Romer also noted that “recessions have not become noticeably shorter” in the era of Big Government. In fact, she found the average length of recessions from 1887 to 1929 was 10.3 months. If the current recession ended in August, then the average postwar recession lasted one month longer—11.3 months. The longest recession from 1887 to 1929 lasted 16 months. But there have been three recessions since 1973 that lasted at least that long.

The relative brevity of recessions before the New Deal is particularly surprising since the U.S. economy was then dominated by farming and manufacturing—industries far more prone to nasty cyclical surprises than today’s service-based economy.

To believe Big Government explains why this extremely long recession was not even longer, we need to find some connection between the size of government and the depth and duration of recessions. There is no such connection in U.S. history, or in recent cyclical experience of other countries.

On the contrary, recessions have become longer as the U.S. government (and the Fed) became larger, more expensive, and more involved in the economy. Foreign countries in which government spending accounts for about half of the economy have also suffered the deepest recessions lately, while economic recovery is well established in countries where government spending is a smaller share of GDP than in the U.S.

In short, bigger government appears to produce only bigger and longer recessions.

In my humble opinion, a belief in Keynesian economics seems to be based more on faith in the power of government than historical or empirical evidence.

In Praise of Sweatshops

“Africa desperately needs Western help in the form of schools, clinics and sweatshops,” Nicholas D. Kristof writes.

Mr. Shaanika and the other young men noted that the construction jobs were dangerous and arduous, and that they would vastly prefer steady jobs in, yes, sweatshops. Sure, sweatshop work is tedious, grueling and sometimes dangerous. But over all, sewing clothes is considerably less dangerous or arduous — or sweaty — than most alternatives in poor countries.

He continues,

Imagine that a Nike vice president proposed manufacturing cheap T-shirts in Ethiopia: “Look, boss, it would be tough to operate there, but a factory would be a godsend to one of the poorest countries in the world. And if we kept a tight eye on costs and paid 25 cents an hour, we might be able to make a go of it.”

The boss would reply: “You’re crazy! We’d be boycotted on every campus in the country.”

So companies like Nike, itself once a target of sweatshop critics, tend not to have highly labor-intensive factories in the very poorest countries, but rather more capital-intensive factories (in which machines do more of the work) in better-off nations like Malaysia or Indonesia. And the real losers are the world’s poorest people.

In a separate article, Kristof writes,

Talk to these families in the dump, and a job in a sweatshop is a cherished dream, an escalator out of poverty, the kind of gauzy if probably unrealistic ambition that parents everywhere often have for their children.

“I’d love to get a job in a factory,” said Pim Srey Rath, a 19-year-old woman scavenging for plastic. “At least that work is in the shade. Here is where it’s hot.”

If people want to work in a sweatshop, who are we to prevent them? They are not forced into sweatshop employment. The fact that people accept jobs in sweatshops logically means it must be their best option, otherwise they would have taken a job elsewhere. The removal of sweatshops wouldn’t provide better opportunities, it would deplete options.  As Paul Krugman says,

When the movement [globalization] gets what it wants, the effects are often startlingly malign. For example, could anything be worse than having children work in sweatshops? Alas, yes. In 1993, child workers in Bangladesh were found to be producing clothing for Wal-Mart, and Senator Tom Harkin proposed legislation banning imports from countries employing underage workers. The direct result was that Bangladeshi textile factories stopped employing children. But did the children go back to school? Did they return to happy homes? Not according to Oxfam, which found that the displaced child workers ended up in even worse jobs, or on the streets — and that a significant number were forced into prostitution.

The point is that third-world countries aren’t poor because their export workers earn low wages; it’s the other way around. Because the countries are poor, even what look to us like bad jobs at bad wages are almost always much better than the alternatives.

Kistof continues,

Sweatshops are only a symptom of poverty, not a cause, and banning them closes off one route out of poverty.

When I defend sweatshops, people always ask me: But would you want to work in a sweatshop? No, of course not. But I would want even less to pull a rickshaw. In the hierarchy of jobs in poor countries, sweltering at a sewing machine isn’t the bottom.

Kristoff concludes,

Look, I know that Americans have a hard time accepting that sweatshops can help people. But take it from 13-year-old Neuo Chanthou, who earns a bit less than $1 a day scavenging in the dump. She’s wearing a “Playboy” shirt and hat that she found amid the filth, and she worries about her sister, who lost part of her hand when a garbage truck ran over her.

“It’s dirty, hot and smelly here,” she said wistfully. “A factory is better.”