Quick Thoughts on Norms, Institutions, and Inequality

Something that has been really bothering me since starting my MBA is the extent to which the actual operations of business are run by norms and institutions rather than by economics. Specifically, we seem to have a serious hangover of agrarian norms and institutions that cause serious damage when applied to a market based society. Instead of studying for auditing like I should be I am going to try to use my lunch hour to use this concept to tie together a few disparate blog posts that I believe are tied together by this concept.

Yesterday, Paul Krugman wrote:

Why are debtors receiving so little relief? As I said, it’s about righteousness — the sense that any kind of debt forgiveness would involve rewarding bad behavior. In America, the famous Rick Santelli rant that gave birth to the Tea Party wasn’t about taxes or spending — it was a furious denunciation of proposals to help troubled homeowners. In Europe, austerity policies have been driven less by economic analysis than by Germany’s moral indignation over the notion that irresponsible borrowers might not face the full consequences of their actions.

It isn't clear to me why righteousness is so one sided, on what ethical or moral basis does the debtor bear more blame then the creditor? Going back to biblical times wasn't usury considered sinful and the lender not the debtor the one morally suspect?


Linked to this question we get Mark Thoma's column today regarding the best way to fight rising inequality. In it he writes that "This debate brings up an important question: what is the best way to fight economic inequality? I think most people would agree that the best approach is to provide good jobs to working class households, and to make sure workers receive their fair share of the value of the output they produce." And further down he adds "And if workers have not received the income they deserve – their contribution to the value of the output they produce – as has been the case for the last several decades, then progressive taxation and redistribution returns income to its “rightful” owners. It’s the fair and right thing to do," with some excellent analysis and suggestions in between.

What is tying these concepts together, I think is mentioned in a post by Steve Roth at Angry Bear commenting on Piketty and some remarks by Bill Gates. Steve makes some excellent points on the need to distinguish wealth from capital, however the part I am interested in is his point that:

Important: that stock of real assets is not just the “fixed capital” tallied (because it can be measured) in the national accounts; that’s actually a small part. Knowledge, skills, and abilities (think: education, training, health), business/organizational systems (this is huge), and similar unmeasurables constitute the bulk of real capital — the stuff that allows us to produce in the future. Most of that stock is not specifically claimed, but it is that whole body of real capital that the market it trying to value properly via pricing of claims — basically, holding up its collective thumb and squinting.

To me, this is the crux of the problem regarding widening inequality. How do we as a society assign claims on capital in the form of "knowledge, skills, and abilities, business/organizational systems, and similar unmeasurables"?

In my MBA program we focus a great deal on the stakeholder perspective of the firm. This is all well and good, this is pushing back against the norms portion of those agrarian attitudes that I mentioned or that Krugman is describing as the sense of righteousness about debt. This is probably far too little to have a measurable impact on its own, though shifting norms is a necessary first step for social change.

The deeper problem here is institutional, in our society providers of fixed capital generally have a stronger claim to those "unmeasurables that constitute the bulk of real capital." They receive this claim through a series of institutional features. The first is the relative ease with which providers of fixed capital can combine together in unions of capital, commonly called corporations. This provides them with far greater bargaining power regarding the bulk of capital in our society than other stakeholders with an equal, or greater than, interest and role in the production of the unmeasurables which constitute our capital.

[Lunch hour is over and I am posting this incomplete as I do not know when I will have time to continue this. Hopefully there will be a part two in a semi-reasonable timeframe.]

How Much of Our Current Political Insanity Can Be Attributed to Early Childhood Brain Damage?

Kevin Drum had a recent blog post on how incarceration rates are down among younger people and up in older populations and the links between this and lead.

This led me to thinking about how a lot of the problems of the last 30 years are commonly attributed to many of the same characteristics that are often associated with criminality such as selfishness and a short term orientation. Since behavior is highly associated with social context, it stands to reason that these traits would be expressed differently in people with higher socioeconomic status then the low status people that are often incarcerated for crimes.

If this association does exist it would help to explain how our society shifted away from the more communal values of the 1950s and 60s when business and government were both moving towards a more inclusive vision that engaged diverse stakeholders* to the time since the 1980s when ideas such as shareholder capitalism began to take hold and dominate public discourse. Today the upper reaches of business and government are dominated by people who are in the age groups that are being associated with higher crime and incarceration rates. If there is an association between lead and criminality in people of low socioeconomic status it would hold to reason that there is a similar influence on people of higher status, perhaps helping to explain some of the extremely short term thinking that has become common on issues like the environment and inequality among people of high status.

*limited of course by holdovers of earlier inegalitarian social relationships and the prejudices of the time, but these were times of progress rather than regress

This Week in the Supreme Court: Protecting the Powerful Against the Weak

Just wanted to say that I think the Hobby Lobby decision is atrocious. The institutionalization of the corporate form is all about separating the corporation itself from those that finance it in return for the protection of limited liability. Further eroding the separation of ownership from direct control of the corporation is terrible on its own terms. Furthermore, it further reinforces the claims of owners relative to other stakeholders in a corporation. This is an appalling decision the further erodes the rational for giving corporations limited liability. If they are going to have full control over the assets their liability should be unlimited as well. There is no reason for the government to give the most powerful people in society something for nothing. Especially something that gives these powerful individuals even more power relative to ordinary Americans.

Didn't Weber Already Cover this Ground Adequately?

Just a little annoyed at the Washington Post presenting the linking of religion and economic growth as some new thing. Weber covered this over 100 years ago. While great writing and excellent for spurring thinking on how sociology, economics, and political economy all influence each other the underlying thesis didn't hold up to careful analysis. While this is an important topic in survey courses and something any generally educated person should know I don't really see how there is much of anything new worth saying on the topic.

Individualism and Racism

I'm a bit late to this, but reading about Sotomayor's dissent in the Supreme Court's recent case regarding affirmative action has gotten me to thinking about how racist the right wing version of individualism is.

Something that always strikes me in public discussion of race is how the right wing so often proposes policies that would have disparate impacts on individuals of different races, such as cutting funding for inner cities, or to hearken back a few decades, the midnight raids to make sure people receiving AFDC didn't have a man cohabiting with them.  In some cases these policies and denials of racist motivations are undoubtedly dissembling by people who are really racists, like Cliven Bundy, who are rather more common than those on the right are willing to admit. However, I feel that more often the policies being made are based on a deep commitment to a rather extreme form of individualism. And it is this doctrine, rather than any particular animus towards other races, that is extremely racist.*

The strong reaction to accusations of racism by the right wing, and their insistence it is the left that is racist for recognizing race matters, results from the threat that the continued persistence of racism poses to their beliefs in individualism and meritocracy. After all, if race and the previous distribution of wealth didn't matter in outcomes why is the distribution of wealth, income, and status so uneven between racial groups? In writing about these issues conservatives are forced to navigate between a Scylla of denying individualism to admit that group matters in American life and a Charybdis of making blatantly racist remarks that are a direct consequence of their individualist philosophy.

We see two basic strategies used by conservatives to cope. One strategy is to say that American culture uniquely frees the individual from group concerns, only in American culture can individuals really act as individuals. Other cultures are in some way bad and hold individuals back. If anyone actually thinks about it these kinds of arguments are obviously self-refuting, the arguer has already acknowledged that culture matters which means that more than individual merit and effort matters for results in life. This should lead to thinking about American culture a bit and realizing that there are a rather large number of factors outside the individual that matter in life. Obviously this step is not often taken, though subgroups of conservatives, like the paleo-conservatives over at The American Conservative,** show that there is room for conservative philosophy to abandon unrealistic assumptions about individualism to use a more accurate and nuanced conceptualization of the human condition.

The second method relies on various strains of "academic" racism, such as The Bell Curve.*** The common thread in these rationalizations is that they seek to preserve the myth of the individual and meritocracy by arguing that other races in general are inferior on some significant measure of ability. These beliefs help protect a belief in individualism and meritocracy by claiming that while a lack of ability leads to statistically lower achievement, individuals of high ability from these groups are just as likely to succeed as individuals from other more advantaged groups. This explanation obviously cuts rather closer to the racial animus conception of racism and gets shouted down rapidly, but it is less problematic for ideological individualism than the cultural explanations.

The hard work of refuting these claims is well beyond the scope of this post, though famous studies which compare how likely someone with a distinctly black name is to be called back for a job relative to someone with a white name are sufficiently well known that I only need mention their existence. What I am hoping to make clear, however, is that in discussions of race, conservatives and liberals are often talking past one another. When conservatives are talking of individualism, liberals hear racism, and when liberals talk about race, conservatives hear attacks on individualism.

This isn't to say, however, that there is some sort of moral equivalence to both sides. The continued persistence of racism and its well established sociological components really are arguments against strong versions of individualism and meritocracy. Liberals should do more to attack this philosophy directly, it is the root source of much of the institutional racism in American society. The facts simply don't agree with the philosophy and we should be more direct with saying this, rather than tiptoeing around it because individualism and meritocracy have positive connotations in American society. Incorrect is incorrect, whether or not we moralize the incorrect belief.

* In applying the label racist to someone I feel this is a distinction without a difference. But if the intent is to debate the issue and win arguments in the general public sphere I think it is important to distinguish between simple racial animus and ideas with racist consequences.

** Not meant as saying I've never read anything that isn't somewhat racist over there, but it is not the kind of racism I am writing about here that originates in a strong philosophical commitment to ideological individualism.

*** See this post at Noahpinion for some recent discussion of academic racism, particularly follow the link to Gelman.  The only thing I really have to add is that if someone really wanted to look into this there should be the possibility of looking at genetically distinct subpopulations that are sociologically similar, such as variation between groups of African Americans which are genetically distinct. This may easily have been done, but what I have been exposed to on the topic is normally looking at sociologically distinct groups, whether black/white or groups like Ashkenazi Jews, which seems a rather backward way of investigating the relative weight of genetic and sociological factors.

Power Disparities in the Workplace: The Indignity of Background Checks

My current job is switching me from a contract to a permanent position, part of this involves a thorough background check. Every time I go through one of these I am struck by how undignified the whole process is and how many employees have to go through this even though it has little bearing on their actual jobs. My particular case doesn't fit this, my position in the accounting department would present a number of opportunities to an unscrupulous individual.

However, reading over the fine print of the documents shows that they are not simply seeking targeted, job relevant information. Instead, the checks are very open ended and seek to gather as much information as possible. This is what I find disturbing, its a huge invasion of privacy. Yet, it seems that few privacy advocates seem inclined to take on this issue, all I ever hear about is attempts to curtail the governments information gathering, or in rare cases companies gathering information through the web, and never serious attempts to limit companies' ability to get potential employees to piss in a cup.

This dynamic represents one of the more obvious signs of the inequality between capital and labor in our economy. If we were all equal autonomous actors freely exchanging our labor for income then surely we would demand a large premium for this intrusion into our lives. Yet, coordination* among employers has rendered this individual negotiation impossible, mandatory background checks are a requirement of employment just about everywhere. Strangely enough, where they do begin to decline in frequency (but never really disappear) is at much higher levels in the economy where companies are even more vulnerable to a bad actor.

While this kind of dynamic doesn't impact me personal, beyond the indignity of it all, these practices do serve to keep labor down by creating a pool of individuals who find it difficult to compete on an equal footing for work due to having infractions that will show up on a criminal background or credit check. It would be far more equitable if employers were required to defend their background checks to only screen for items that would be directly job relevant, like drug abuse for a pharmaceutical company, theft or other property crimes for an accounting position, or serious violent crimes for any position. Yet, we see close to no pressure to force companies to restrict this practice, and certainly no pressure from individual level market participants who have no power to press their claims against employers who have an overwhelming advantage in forcing potential employees to acquiesce this invasive and undignified sacrifice of privacy.

Are Markets Better Described as Robust than Efficient?

Something that I think all of us with private sector jobs experience in our day to day lives is just how incompetent a large number of private businesses are. These may be our customers, suppliers, or another division. Yet, somehow, these businesses thrive despite not really having a good grasp of basic administrative procedures, financing, or sometimes even customer service.

Despite this, we often write and speak of private sector actors as if they are brilliant and efficient individually, despite the experiences of our everyday lives.* We simply assume as a result of mere market success that a business or individual has ability and competence. This isn't surprising, the just world hypothesis is a powerful cognitive bias which leads us to believe that the system as a whole must be more just than what our individual experiences would lead us to conclude. However, there is no property of the market system which should lead to this belief.

What's more notable is how little this impacts how we think about the market system as a whole. After all, given an immortal, perfectly rational, and omniscient central planner even the worst designed communist system would work beautifully. What's remarkable about the market system is that it should lead to ever increasing levels of productivity and efficiency even if the individual actors are all completely incompetent. Competition and creative destruction should lead businesses to be ever better even if they only differ due to random variation alone.

Yet, somehow this doesn't seem to impact how we think and write about markets and how they reward people much at all. Instead we often read in the popular press views about how market success means that an individual or business possesses unusual ability or competence despite the dearth of well established causal links between market success and any particular ability or trait. Creative destruction works as more of an evolutionary system, simple selection will lead to new forms to suit the environment they're in without the need for any conscious planning.**

An example may help illustrate this. The need for a common computing platform caused the market to require that a single operating system would predominate. In the early years of innovation in the personal computer market a wide variety of operating systems developed, all with a business plan that was more or less plausible. It was inevitable, however, that only one of these would dominate the industry due to the structure of the market. Someone was going to make billions, and did, but the need for a common platform meant that this would have happened whether or not any of the competing platforms exhibited even the barest level of competence. In addition, once established the need for interoperability mean that structural factors dominate any actual characteristics of the competition.***

This makes me think that markets might be better described as robust rather than efficient. The incredible thing about markets is that even if all the individual actors are morons the systemic factors will still lead to good outcomes, unlike other forms of human organization. But somehow this doesn't break into popular discussions of markets at all, much less into discussions about how our market system is distributing the fruits of our labors. I'm not sufficiently well versed in economic literature to know whether or not someone has done work on this, but I'm very curious if anyone has tried.

Overhead Allocation vs. Theft

I was reading Dean Baker's excellent post today on high speed trading. My initial reaction was that this was simply theft, high frequency traders supply absolutely no value to anyone but reduce the gains made by legitimate traders.

The first comment, however, made me think. SteveB asks "I don't understand how the tax solves the problem. Wouldn't it just increase the spread between buy and sell prices, and make the exchange even less efficient?" This would be an instance where the government and private thieves are doing almost exactly the same thing. So why are they different?

An easy way to answer this is to compare what the government does to overhead. While the private thieves are simply skimming other peoples money a new government tax is more like a business adjusting how it applies overhead across its various business units. The new tax assigns more of society's cost to the trading sector while allocating the costs away from other productive activities.

While perhaps not the best way to describe government's role, the overhead analogy does bear a certain appeal for communicating government's role to the business minded. As organizations grow larger and more complex their direct costs tend to decline while overhead increases. A local mechanic shop is likely to have very high direct costs and low overhead compared to a company like Ford, yet Ford will be far more efficient despite so much of its costs accruing to overhead.

Something similar is happening as government's role expands. Modern society is vastly larger and more complicated than it was a few centuries ago. Modern businesses require employees with a much larger capital investment, does anyone think the graduates of a one room schoolhouse would be qualified for a Wall Street trading job? Modern capital markets are vastly more complex and trust between corporations requires a much more active oversight role today than it did in the past. I could go on ad nauseam, but the basic point is that modern businesses exist today only as a result of a large supply of social and institutional capital. Without this capital many would still exist but in a much smaller and less productive form.

So while a financial tax would result in a roughly similar decrease in profits accruing to the parties to the transaction this money would be going to indirectly support the activities of the traders. Resistance to these kinds of taxes are ultimately akin to a business unit arguing against the allocation of overhead assigned to it. While this can increase the book profitability of the unit, this often makes the enterprise as a whole less efficient since the individual unit is unlikely to have a full appreciation of the overall costs of the organization. This makes the organization as a whole less productive since costs are misallocated.

At an extreme, anti-tax fervor can be compared to a dirty salesman who asks for his project to be costed at "true"* cost and then goes ahead and sells at near list price, driving his margins and commissions way up by robbing the organization as a whole of the portion of cost allocated to overhead (many organizations have a sufficient level of control to prevent this from being done too blatantly, I don't think the 113th Congress is one of them).

Another point is that as more of our productivity results in overhead rather than direct cost it becomes increasingly easy for the egotistical and/or unscrupulous to argue that the increased productivity is the result of their efforts rather than from efficiencies stemming from an organization as a whole. This happens at both the national level and within organizations, with direct costs so low it also becomes more difficult to assign the overall productivity of an organization to individual members. Since Americans tend to be so individualistically oriented we are rarely satisfied with assigning results to the system, instead preferring to allocate costs and production to individual people; even when this is conceptually incomprehensible.

*I've run into a few organizations where the salesmen assume that the marginal product cost is the true cost. It can be very hard to make these folks understand that overhead really matters.

Stockholders are Fungible, Employees are Not

This has been on my mind after reading some review's of Piketty's "Capital in the 21st Century" (which I really need to make time to read). Paul Krugman's recent post on it made a major point gel for me when he observes that:

How relevant is this story to what has happened so far? In the United States, as Piketty himself stresses, soaring inequality has to date been largely been driven by labor income – by “supermanagers” (I prefer superexecutives.)

Something that I've been considering as I take management classes is that it seems that a well managed firm should end up developing a strong espirit de corps and a great deal of management loyalty in the company. Companies should end up with long term employees and management that will oppose stockholder efforts to extract revenue from the company instead of using it to serve employees. Psychological characteristics and organizational behavior should be leading companies to have an in group of employees opposed to the out group of stockholders.

Yet, instead, we've seen labor share of income decline and record breaking profits. Despite the performance advantages of developing strong employee morale and loyalty companies seem prone to emphasizing staffing cuts and biased towards hiring more aggressive, less loyal employees to the expense of a strong corporate culture.

A possible explanation is that stockholders recognize that strong employee cultures can be against their interests. This forces them to compensate top management extravagantly in order to encourage them to identify with stockholders instead of the corporation they run and to engage in business practices which weaken the corporation in the long run in favor of higher profits now.

This tension ultimately results from the fact that there is no reason why the corporate entity should have any preference for what sort of capital funds it or who is providing it while there is a strong mutual identification amongst the employees of an organization. In turn, providers of capital have no reason to have a preference over which corporate entity receives their funds, with only some minor restrictions they can quickly and easily trade their stock for that of other corporations. Overcoming this difference in commitment requires capital to pay large bribes if it wants to extract wealth from companies. This also helps explain how common restructurings are despite a poor record of giving expected returns as well as a tendency for boards to hire in outsiders despite insiders with better knowledge of the company.

Examples of this would be a number of managers that have been hired to break strong, successful corporate cultures which led to market dominance and stable performance but relatively weak returns to shareholders. HP and Carly Fiorina being the textbook example from my classes.

[Cross-posted at Angry Bear]

Failing to Distinguish the Public and Private Self

Something that I find consistently frustrating about the American right's worldview is that they seem to always be defending powerful individual's rights to keep their public selves private while ignoring very real intrusions into individual's private selves. These particular thoughts are spurred by reading Rod Dreher and Ramesh Ponnuru's posts on religious freedom in the context of the veto of an Arizona bill touching on these topics by Governor Jan Brewer.

The problem is that the right keeps trying to expand the individual to encompass businesses they own. The problem with this is that a business is not a dirty old pair of sneakers, it is instead a web of contracts with other human beings and organizations. It is essentially public in nature in a way that personal property is not.

This should be obvious but for some reason it is lost on many people. Ponnuru mentions the Religious Freedom Restoration Act (RFRA), which from what I can tell is perfectly intact and doesn't really have anything to do with how businesses interact with their customers. He makes clear, however, that the Arizona bill tries to make the bill apply to businesses as well as individuals, so it's not really clear why he brings up the RFRA at all.

I don't see how this is in any way OK. The right has been trying to push this for far too long with far too little opposition. The interests of the owners of Hobby Lobby or Chik Fil A are not the same as the interests of Hobby Lobby or Chik Fil A. Well functioning markets require that these distinctions remain intact, the owners of these companies should not have any rights to impose their beliefs on their employees, their employees enter into contracts with the organization and identify with the organization's goals, which are not the goals of their owners (even if they pencil it into a values statement, anyone with any experience with a business plan knows that values and missions are linked to what the company actually does, fluffing it up is just distracting and does nothing to change how the business is run).

Whenever an individual forms a business as a separate entity they give up the right to treat their efforts as purely private in exchange for the rights and protections granted to a business entity and take upon themselves a public identity and its accompanying rights and obligations. There is no public interest, or philosophical justification, in further blurring these roles. We have already gone way to far in this direction in the United States and it should be opposed at every turn.

What we should be concerned about is the power that we have granted these powerful organizations to invade the privacy of individual's private selves. While business owners are doing an excellent job obscuring their public selves from private view, for example individual tax returns have not been publicly viewable since 1926 (critical if we are going to really on individuals negotiating wages rather than unions, I feel this is a non-trivial element in modern income inequality), donor's identities to political campaigns are often obscured, and owners can hide their involvement in their company's lobbying efforts, they simultaneously have been incredibly successful in gaining access to information on individual's private lives the first two that come to mind are routine drug testing (this is such an incredibly demeaning practice that I continue to be shocked that it is still legal, where is the outrage?) and credit checks for potential employees (another outrageous practice that there is no good argument for, how can we possibly consider ourselves at liberty when we often have to give up this information to get a job?).

American's Woke Up and Realized They are Getting Screwed. Envy Isn't the Emotion They're Expressing.

Arthur Brooks has a column in today's NY Times that I take a bit of exception to. In it, he makes the claim that envy is on the rise in America and that this is a problem.

My central issue with this is that I believe that over the past 30 years institutional and cultural shifts have resulted in an increasing exploitation of the majority of society by those at the very top of the income scale. There is no other credible explanation for why these trends are so pronounced in the Anglo-Saxon countries, with the US an outlier among this group, and so much weaker in the rest of the developed world. While there is a small shift towards inequality that is occurring across all developed nations, probably largely the result of the vast increase in labor supply caused by the development of the third world, this international component is far smaller than the country specific shifts we have observed in the U.S., Canada, and Great Britain.

However, Brooks mentions none of this, instead trying to frame it as if there is a cultural shift towards envy being caused by politicians "fomenting bitterness" and reduced mobility resulting from regulations, taxes, and a lack of school choice (never mind that this agenda doesn't well describe the policies of countries with greater mobility than us). He summarizes Alexis de Tocqueville, stating that:

Alexis de Tocqueville phrased it a little differently, but his classic 19th-century text contains the same observation. Visiting from France, he marveled at Americans’ ability to keep envy at bay, and to see others’ successes as portents of good times for all.

It's been a long time since I've read de Tocqueville, but from what I remember of it his main explanation for American's attitude is that rich and poor alike share in all aspects of life. They meet and discuss the issues of the day at each other's homes and public entertainments, they recognize the mutual equality of each in politics, they live amongst each other and interact continuously in life's daily commerce, and the benefits and burdens of living in a civilized society are shared according to each individual's means and talents.

This is not descriptive of modern America. Our rich do not brush up against their inferiors in every day life. Today, they have separate stores, separate clubs, and a diverse array of high brow entertainments unavailable to the working poor. Their children attend separate schools, they live in separate, wealthy suburbs, and network amongst each other, not their less affluent fellow citizens. Furthermore, they pour money into influencing their favored political candidates, violating the original Americans' compact amongst each other to have equal voice in the political sphere even when of unequal means.

It isn't envy to realize that this is not de Tocqueville's America. If the rich want to maintain their wealth while dispelling envy the onus is on them to return to these roots. Live in Detroit instead of Grosse Pointe, send their kids to public schools instead of private schools, and shop at Walmart. Talk to the grocery store clerk about the most recent episode of Teen Mom and commiserate about the pot holes and bad public transit that each takes along the same commuting route. In short, live life amongst those of lesser means.

Heritability of Personal Characteristics Does Not Imply Heritability of Social Characteristics

Gregory Clark has a very interesting article in the NY Times regarding research he has conducted tracking surnames and high status occupations. I recommend reading it.

However, while the data presented is fascinating I find the conclusions he draws highly questionable.

For example he writes that:

The notion of genetic transmission of “social competence” — some mysterious mix of drive and ability — may unsettle us. But studies of adoption, in some ways the most dramatic of social interventions, support this view. A number of studies of adopted children in the United States and Nordic countries show convincingly that their life chances are more strongly predicted from their biological parents than their adoptive families. In America, for example, the I.Q. of adopted children correlates with their adoptive parents’ when they are young, but the correlation is close to zero by adulthood. There is a low correlation between the incomes and educational attainment of adopted children and those of their adoptive parents.

Then goes on to say that:

These studies, along with studies of correlations across various types of siblings (identical twins, fraternal twins, half siblings) suggest that genetics is the main carrier of social status.

If we are right that nature predominates over nurture, and explains the low rate of social mobility, is that inherently a tragedy? It depends on your point of view.

I have to confess that I'm not as familiar with studies showing correlations between children's incomes and their adoptive parents, what little I have read does seem to indicate the correlation is much stronger than it is with IQ making this assertion questionable.

The real problem, however, has to do with the vastly different timing of reversion to the mean in IQ and social status. Dr. Clark is writing about reversion to the mean taking 15 or more generations. However, reversion to the mean with IQ only takes a couple of generations. I found this blog post by  Steve Sailer illustrating this, I'm not really familiar with the blog so can't vouch for the source but it is consistent with what I know from more formal reading:

The speed of the regression to the mean.

If one starts with two parents whose IQs are 160 and looks at the average IQs across generations the speed of the regression to the mean is quite fast.

Parents 160, 160
Children average 136 (assume these mate with a 136)
Grandchildren average 122 (assume these mate with a 122)
Greatgrandchildren average 113 (assume these mate with a 113)

How can genetic reversion to the mean explain the very slow social reversion to the mean? There is almost an order of magnitude difference in speed (2 generations vs 10 - 15).

Furthermore, while IQ studies tend to show high correlations between IQ and job performance the correlation between IQ and social status or income is much lower. The data certainly hint that social outcomes are the result of something other than merit and it stands to reason that something other than genetic heritability of merit is at work. Of course, there could be a strong genetic component that is not linked with ability, it is pretty well established that people tend to like and hire people more like themselves so it may be that non-performance related characteristics are being selected for and leading to unequal social outcomes. But the implications of this are very different than if elite selection is based on performance related personal characteristics.

Why Not Help Those Not Willing to Work for It Out of the Labor Force?

I was reading a wonk blog post that mentioned this statement by President Obama, "He’s said he wants to create 'more chances for folks to earn their way into the middle class as long as they’re willing to work for it.'"

The obvious corollary to this should be helping those who are not willing to work to get into the middle class to not have to. A major problem for many employers of lower wage workers is that they have issues finding employees who can do basic things like show up to work on time and spend their shift working rather than goofing off. This understandably makes them reluctant to take chances on lower wage workers more generally by giving them opportunities for greater responsibility and instead instills an attitude that low wage workers are dispensable.

This raises the question in my mind of why we consider it a good thing to make everyone work? Someone that doesn't want to work and is content living in a rat's nest of an apartment eating Cheetos, getting stoned, and playing video games isn't going to be anyone's idea of a model worker. Why is it a good idea to make someone willing to work to get ahead to have to compete with losers in the job market? Most businesses have crude measures for recruiting low wage workers, its hard to distinguish Mr. Cheetos from someone that has worked hard at multiple low wage employers with high turnover. Most small businesses won't bother trying.

Yet we constantly hear of policies that are designed primarily to punish Mr. Cheetos until he is willing to go out and get a job. This makes no sense, Mr. Cheetos is a terrible worker no one wants. Why not pursue policies to keep Mr. Cheetos on the couch so employers only have Mr. Willing To Work to choose from?

Wouldn't everyone be better off in this scenario?

Of course, if you believe in labor exploitation it makes a lot of sense to get Mr. Cheetos off the couch because this produces more labor supply and makes it easier to exploit Mr. Willing to Work but this isn't a theory often mentioned in polite company.

Interfluidity on Marriage Promotion as a Cargo Cult

I just wanted to point out a great post on interfluidity on marriage promotion for anyone that didn't see it. Given the importance I place on how incorrect ideas about what is causing poverty (like dependency or social breakdown) negatively impact policies I think it is important to share great writing like this. Here's an excerpt:

But neither wedding cake nor the marriages they celebrate cause observed “marriage premia” any more than dances on tarmacs caused airplanes landing on Melanesian islands. In fact, for the most part, the evidence we have suggests that marriage is an effect of other things that facilitate good social outcomes rather than a cause on its own. In particular, for poor women, the availability of suitable mates is a binding constraint on marriage behavior. People in actually observed marriages do well because they are the lucky ones to find scarce good mates, not because marriage would be a good thing for everyone else too. Marrying badly, that is marriage followed by subsequent divorce, increases the poverty rate among poor women compared to never marrying at all. Married biological parents who stay together may be good for child rearing, but kids of mothers who marry anyone other than their biological father do no better than children of mothers who never marry at all.

Read the whole thing. The author has a much better handle on the research than most of what I've read in blogs on the subject and makes a convincing case.

Markets Have Little To Do With Inequality, It's All About Power

I'm far from the first person to say this but reading over some blog posts on inequality have left me a bit exasperated at how the inequality debate keeps getting framed. A lot of right leaning people seem to think that the opposition to inequality is a criticism of the market system and fall back on technological and trade explanations. People on the left then go back to saying how annoyed they are by this because they are not talking of the divide between the 95th (or even 99th) and the 50th percentile but instead are talking about the divide between the 99.5th and the 99th percentile which cannot be explained by structural factors like technological shifts.

The central problem here is the right seems unable to acknowledge that economic success brings power and that this power is a distortion of markets. If market forces were at work the extreme inequality wouldn't exist, instead the wealth would be more evenly spread as competitive forces lead companies to either return more wages to employees or to slash prices forcing real wages up. The issue is that at some point in an organization market forces stop operating and the discretion of powerful individuals in the organization takes over. This allows these individuals to pursue policies that divert wealth to either shareholders or managers rather than to making the organization more competitive by slashing prices or by raising workforce quality through higher wages.

Of course, those in these positions justify their policies with elaborate theories justifying their income as the result of merit or some other nonsense. But there is no solid evidence backing these claims up, it's cognitive bias or, for the honest ones, outright legal theft. Owners and managers are complicit as a result of their positions in power in diverting wealth towards themselves. To counteract this power we need to exercise our political rights through our government since political power is more evenly distributed then economic power. As long as the myth persists that inequality is caused by market forces, rather than the exercise of power by the powerful, there will be a substantial obstacle to the level of political organization necessary to break this power.

And for those worried about government power, ask yourselves this. When was the last time that you heard of a government dictating when a non incarcerated individual can take a piss? Yet we hear of many companies doing this to their low wage employees. Which is exercising more power over an individual's life?

Power Can't Keep Labor Down Forever

The NY Times has an interesting article on how employer groups are taking a strong stand against worker centers. I hadn't heard of these before, but worker centers are groups which advocate for employee rights without going to the level of organizing workers at the individual employer level.

I don't have enough knowledge to add any insights into the organizations themselves. However, I do think this is an interesting example of how needs drive an institutional response no matter how hostile the economically and politically powerful are to those needs. America has been very anti-union for many decades and there have been a variety of institutional responses, both politically and systemically at the employer level, that have served to greatly weaken unions.

This did not however in any way diminish the need society has for the functions that unions played. Given that our institutions no longer allow unions to fulfill their social purpose it is inevitable that new institutions would develop that would be able to get around the limitations placed on unions. Worker centers seem to be at least one possible form those institutions will take.

The message employers should be getting from this is that there is a social need that needs to be filled and that their activities are actively undermining this need. It is impossible to be successful in this for any length of time and they would be better off coming to terms with the fact that they cannot simply get their way through wielding power. Sooner or later they will have to cede influence to labor, the question is if they want to do this with organized labor, which they have a long history with and can probably reach some form of mutually beneficial symbiotic relationship with, or if they want to role the dice with innovative new organizations that are being formed in response to the social needs going unmet due to their anti-union activities.

Given the often expressed fear of uncertainty I hear about the sensible thing would be to make nice with the unions. I doubt, however, that business groups will be able to acknowledge to themselves that these groups fulfill a necessary social function and will instead take the riskier, and almost definitely worse for everyone, option of rolling the dice and relying on their power instead.

Why I Have Serious Doubts About Private Sector Health Insurance

I was reading an interview with Robert Laszewski by Ezra Klein (which I clicked on because of a link from Marginal Revolution) and had a bit of an epiphany when I read the last question and response:

EK: Do you think there’s anything the Obama administration can do about that? Or is it just a question of the marketplace at work now?
RL: I don’t think there’s anything they can do for March 31. But as we move to 2015 open enrollment, the Secretary of Health and Human Services has some power to reshape the plans. The mandated benefits are so high they’ve driven costs up and created narrower networks. The statute talks about actuarial levels so the Secretary can’t just do anything she wants. But given a combination of regulatory authority and what the Obama administration has been willing to do already in overriding statute, I think they could do some pretty significant things.
If an entrepreneur had crafted Obamacare he would’ve gone to a middle class family. A family of four make $54,000 a year has to pay $400 in premiums net of subsidy and for that the standard silver plan has an average deductible around $2,500 and a narrow network. They’re going to pay almost $5,000 for that?
So the entrepreneur would say I’ve got $5,000 in premium and all this deductible, what do they want for that? And they probably would’ve said we want office visits and lab tests because the kids need to go in occasionally and then we want catastrophic care. The problem with Obamacare is it’s product driven and not market driven. They didn’t ask the customer what they wanted. And I think that’s the fundamental problem with Obamacare. It meets the needs of very poor people because you’re giving them health insurance for free. But it doesn’t really meet the needs of healthy people and middle-class people.

 [bold italics mine]

The essential problem is that almost half of health spending is driven by about 5% of consumers, a majority of whom have chronic medical conditions. Pretty much all of the cost, and many of the access, problems come down to how to spread around the costs of these high cost patients.

However, the problem lies in the text that I highlighted and put in italics. What consumers want is a health plan that they see working for them on their routine visits, routine visits that make up a vanishingly small part of our total health expenditures (from memory it's something less than 5% but I'm not inclined to search for one of the sources I read this in at the moment). This leads to the virtually unique situation where a system that is responsive to consumer demand is a system that is fundamentally broken because consumer demand is so divergent from the major drivers of cost and measures of quality (like mortality and morbidity or comparative cost of care; I would also add that hearing from my fiance she comes across a fairly large number of patients who have very good things to say about doctors that are responsive to consumer demands but give incorrect diagnoses and inappropriate treatment plans, this really is a bizarre market where we have to leave our standard rationality assumptions at the door).

I remember when there was a bit of an outcry because McDonalds, and some other employers, were cutting their health plans in response to these laws. These plans were exactly the sort that many consumers demanded, they saw them used frequently because they covered things like getting a kid amoxicillin for their strep throat. However, these were mostly mini-meds, the McDonalds plan had a $2000 yearly limit if I remember correctly. Even combining this with a catastrophic plan, plans like these simply won't do a good job getting the early treatment for chronic medical problems, or for long term health issues like maternal care (impacting the infant's long term health), that is essential to bending the cost curve.

Ultimately, the problem is that the market responds to people's short term needs while the political system responds to people's long term needs. In the short term, people want a plan that they will feel is doing something for them by paying for routine care while insuring them for an acute emergency. In the long term, people want a system that provides excellent health care to get mortality and morbidity down and that costs far less than today. However, with health care these priorities are opposed to some degree. One of the low hanging fruits to trim costs is to discourage people from overuse of routine care and antibiotics, making the routine visits that customers demand more difficult is in their long term interest, especially if it gets practitioners to focus more on long term health management rather than acute care. More importantly, designing a health care system at works means designing one that benefits not the middle class family that the entrepreneur focuses on but rather the individual with a chronic medical condition who is marginally attached to the labor market and good health insurance is the marginal intervention that will tip them into the labor force.

What this means for Obamacare I don't know. I see the good sense that getting people to sign up will mean moving towards the approach an entrepreneur would take. I also believe that this is a not insignificant part of why our health care system is such a disaster, these are the worst group to focus on to meet the public's demand for an efficient, affordable, and effective health care system. Solving the divide between what people want as families and what they want as the more amorphous public is something that I don't know how to bridge using market mechanisms.