Uncertain About Uncertainty

June 15, 2011
Posted by Jay Livingston

Listen to the Republicans, and you're certain to hear about uncertainty. What’s keeping unemployment high and stalling economic recovery? Uncertainty. Specifically, uncertainty about government regulation.

Now, here’s the evidence for it – Stephen L. Carter’s recent article “Economic Stagnation Explained, at 30,000 Feet”

The man in the aisle seat is trying to tell me why he refuses to hire anybody. His business is successful, he says, as the 737 cruises smoothly eastward. Demand for his product is up. But he still won’t hire.
“Why not?”
“Because I don’t know how much it will cost,” he explains. “How can I hire new workers today, when I don’t know how much they will cost me tomorrow?”
He’s referring not to wages, but to regulation: He has no way of telling what new rules will go into effect when. His business, although it covers several states, operates on low margins. He can’t afford to take the chance of losing what little profit there is to the next round of regulatory changes. And so he’s hiring nobody until he has some certainty about cost.

It’s anecdotal evidence, useful as an illustration. But we don’t know if it describes what’s going on with most other businesses. In fact, Carter’s seatmate might not even be accurate about his own firm. As Will Wilkinson and Ezra Klein suggest, the guy might be repeating the Republican line just because he’s a Republican.

A lot of people who do the hiring (or decide not to hire) are Republicans.

If companies aren’t hiring, the real problem, I suspect, is not lack of certainty but lack of customers. A NFIB report last fall, “Small Business Economic Trends,” asked small businesses what their “single most important problem” was. Unfortunately, “uncertainty about regulation” was not one of the choices, but the survey did offer “regulation”

(Click on the image for larger view.)

The big winner is lack of demand. Three years ago, fewer than 10% rated it as the most important problem. In the current recession, that has risen to over 30%.

The NYT had a very pretty graph of the longitudinal data.*


The Poor Sales section (white in the graph) suggests that when demand is high (good sales), as it was in the 90s, business have the luxury of worrying about regulation (orange). In good times, when employment is high, businesses may have trouble finding enough qualified workers (blue). But the problem today is not too much regulation or too few workers. It’s lack of demand.

I am not in business, but if demand is really up, as Carter’s seatmate claims, and if you don’t hire more workers, there are only two options:

• Get more out of your current workers – better technology or more hours.
• Ignore the demand.

The Times reported recently (here) that while businesses have been slow to hire more workers, they have been buying more machines and software. The Times story does not say how much of this investment in technology was coming from small businesses and how much from large firms that may be sitting on large amounts of cash and may as well invest it now.

But there are limits what newly-bought technology can do to increase production in the short run, and there are limits to how much employees can or will work.

As for option two – ignoring the demand – if the guy on the plane is letting orders go unfilled because he doesn’t want to hire workers, he is leaving money on the table. As I say, I’m not an MBA, but I suspect that not many “business models” (as we say today) call for turning away customers.

The point is that neither of these responses has anything to do with uncertainty about regulation. If businesses are not hiring, it’s probably because they are uncertain of how much of their product they can sell.

* The trouble with this data is that each year the percents must add up to 100% no matter how numerous or few the problems are.

America - the Default Setting

June 12, 2011
Posted by Jay Livingston

From the loop, I took the CTA Red Line up to Lawrence, 4800 North. (I’m in Chicago for a wedding.) Late Friday afternoon. My fellow passengers were the same multi-ethnic, multi-racial mix I’m used to in New York - the U.N. on casual Friday.

I don’t think Gov. Perry of Texas spends much time on the subway. Earlier this week, he proclaimed August 6 as a Day of Prayer and Fasting

As a nation, we must come together, call upon Jesus to guide us through unprecedented struggles . . . The humility of the truly great men of history was revealed in their recognition of the power and might of Jesus to save all who call on His great name.

Look at those first ten words. Gov. Perry seems to assume that everyone in America is Christian. Or should be. As in America, so too in history – all the greats worth noting are Christian men.*

It’s the same view of the US that Justice Scalia would write into the Constitution. The government putting crosses on the graves of Jewish soldiers does not violate the Establishment Clause of the First Amendment. In fact, says Scalia, the Jews and their families should feel honored. (See earlier posts here and here.)

For Gov. Perry and the others, the default setting for America is white, male, Christian. Other exotic types that they might know about are like strange mathematical systems – base 2 or logarithms. They exist, of course, but the real way of thinking about numbers is good old base 10.

Gov. Perry has asked other governors to join him in this August effort. That way, our entire nation will come together by praying to Jesus. The logical inference is that if you don’t pray to Jesus, you’re not part of the nation. Just as Gov. Perry’s nation doesn't include those who don’t pray to Jesus, his history book has no page for Einstein or Confucius or Gandhi (and certainly not Anne Frank). His calendar for August has no indication of Hiroshima.

Maybe this is a view of America you get from the Governor’s mansion in Texas and no doubt from many other places. But it’s not the picture you get when you ride the bus or subway.

* Mark Kleiman and his commenters compiled a long list of great men of history, from Abraham Aristotle to Zheng He, who did not recognize Jesus’s power to save.

Difference, Distance, and Distribution

June 11, 2011
Posted by Jay Livingston

In a famous, though probably apocryphal, quotation, F. Scott Fitzgerald says to Ernest Hemingway, “You know, the rich really are different than you and me.” Hemingway replies, “Yeah, they have more money.”

You can imagine the same conversation with “poor” instead of “rich.”

The question for those who are neither rich nor poor, those in the great middle, is how similar they feel to the people at either end of the income curve. That sense of difference or similarity may be especially important for people’s ideas about redistribution. If you feel some kinship with the poor, you’ll do what you can to protect Robin Hood. If you feel that you have more in common with the wealthy, you’ll rat him out to the sheriff.

Polls and policies are not always in sync. But when it comes to inequality and redistribution, Americans – both the general public and their legislators – differ from people in other countries. We are exceptionally tolerant of income inequality and exceptionally resistant to income redistribution – at least when that redistribution means government actions that shift benefits from the wealthy to the poor. My guess is that this resistance reflects the middle-class perception of having much more in common with the rich than with the poor.

It’s nice to find confirmation for your hunches even when those hunches are pessimistic. Henry Farrell at The Monkey Cage recently summarized this paper by Lupu and Pontusson. Their research on 15-18 OECD countries finds that

the key factor determining redistribution is the income gap between middle income voters and lower income voters . . . When the gap is high, middle class people will have a much weaker sense of solidarity with the poor, and hence be less supportive of redistribution.

Lupu and Pontusson use a measure they call “skew” – the ratio of the dollar distance of the middle from those at either end of the distribution. The question is: where do those in the middle stand relative to the rich and the poor. In the US, those in the middle of the income distribution are closer to the poor, the bottom 10%, than to the top 10%, probably because in the last few decades the very rich have zoomed even farther away from the other 95-99% of the population. If the US middle class followed the pattern of the other OECD countries, they would be more for Robin Hood. But they are not.

How then to explain the anti-redistribution preferences of the American middle?

In a post a few months ago (here), I suggested that perceived distance was still an important factor in our reluctance to redistribute, but that the distance was not so much economic as it was racial. What made the poor different was not their level of poverty but their race.

The Lupu-Pontusson paper reaches the same conclusion. Again quoting Henry’s summary:

Lupu and Pontusson . . argue that the explanation for this is straightforward – “it is clearly attributable to the high-concentration of racial-ethnic minorities in the bottom of the income distribution.” More bluntly put – middle class Americans feel less solidarity with the very poor because the very poor are more likely to be black.

So Fitzgerald might well have said, “You know Ernest, the poor really are different from you and me.” And Hemingway, having read the Lupu-Pontusson paper, would reply, “Yeah, they’re darker.”*

* What Hemingway would say is probably more like: “The poor have no money. But they are good people. When they fight in the bars it is a good fight, a true fight. Sometimes they have nada. It is a Spanish word. It means nothing. Nada. Nada. Sometimes when you run the regression, you get nada. The betas weigh no more than an ant and they have no stars. Nada. But sometimes you get the big r. It is a strong r, a true r. Then you go to the café and drink the cold crisp white wine.”

Cancer Is Good For You (Asthma Too)

June 9, 2011
Posted by Jay Livingston

In the 1950s, as the evidence on smoking was becoming undeniable, someone suggested that the cigarette companies were about to launch a new ad campaign: “Cancer is good for you.”

It was a joke, of course. But how about “A really bad is recession is good for your marriage”? No joke. The National Marriage Project has released a report with a section claiming that the current economic crises has produced “two silver linings” for marriages. Philip Cohen at Family Inequality eviscerates this report with the level of snark that it deserves.

A bad recession is good for crime too, or so says the title of James Q. Wilson’s article in last Sunday’s Wall Street Journal:

Hard Times, Fewer Crimes*

And now welcome the next cancer-is-good-for-you entrant, Peabody Energy, the world’s largest private coal company, which spends millions each year lobbying against clean-air legislation. Last month, Peabody was the object of Coal Cares, a clever spoof Website

(Click on the image for a larger view. Or go to the Website.)

What appears in this recent screen grab as “Patriot Coal” was, in the original version, “Peabody Coal.” For some reason,** the creators of the Website changed it. But it was Peabody’s press release in response that makes them the clear winner of the Cancer-Is-Good-For-You competition.

The United Nations has linked life expectancy, educational attainment and income with per-capita electricity use, and the World Resources Institute found that for every tenfold increase in per-capita energy use, individuals live 10 years longer.

The spurious logic – the implied fallacy of composition, fobbing off correlation as cause – is so obvious that it could easily be part of the Coal Cares spoof. But no, it was for real, at least while it lasted. Unfortunately, Peabody removed the document before we could award them the CIGFY trophy.

What the UN data actually show is not surprising: Richer countries produce more electricity. They also have better health, education, and income. The message Peabody wants us to get takes the global and misapplies it locally, and it reverses cause and effect If you want to be long-lived, educated, and rich, live near a coal-driven power plant.

Cancer, asthma, and heart disease are all good for you.

*I don’t know if Wilson wrote that headline. Unlike the post-hoc logic the title suggests, Wilson does not argue that the recession caused the decrease. But he does imply that the recession did not exert any upward force on crime.

**Peabody is no stranger to lawsuits, and while they are usually the defendants, their massive legal guns can also shoot from the plaintiff side.