Marginal returns to schooling

There has been some debate for a while about whether expanding college education helps people, on average, or whether it just pushes more people into college that will not really benefit from it.  In the American Economic Review I got today there is an article by Carneiro, Heckman and Vytlacil that argues that the marginal return to education for the average college attendee is six times higher than the marginal return for the marginal person, which is low enough to conclude that these college expansion policies were a bad deal for those who where induced to attend school that would not have otherwise.

The article is not a light read, as you might expect from these authors, but the methods and conclusions are interesting.

Eating Locally

Mark Bittman usually has interesting things to say about our food system, but today he picked up the topic of eating "local" food, and unwittingly illustrated the paucity of good justifications for altering our food system to favor local production.

His arguments for eating local seem to be the following:

• Local food production is more secure, since we are not depending on another country for our produce.
• Local food gives us a reason to celebrate seasons, since we will only get asparagus for 2 months out of the year.
• We should prefer food produced close to us, because we can meet the farmers.

Go read the post to see if I have been unfair to him.  The first argument works if you expect foreign food suppliers to "cut us off" during a crisis or war, but you could just as easily argue that the more secure food system is the one that has the widest possible network of suppliers.  The second argument seems somewhat arbitrary - we don't need our food system to give us seasons.  If the weather is not enough, the Church calendar does nicely.  The last argument seems to be primarily about preferences, and I am not sure what to do with it.  I have never yet met a farmer I did not like, but the same goes for shoe makers.

What would a better case for eating local look like?  Here are the best arguments I have heard:

• Eating non-local produce from conventional retailers wastes energy by shipping food excessive distances, which in turn uses too many fossil fuels which pollute the air.

If we assume for a second that the price of gasoline accurately reflects the true social cost of production and use, then this argument has the weight of economic logic stacked against it. It seems unlikely that shipping food long distances would be done if a more efficient local option were available.  Some studies have been done on this topic and generally find that the economies of scale in food production are significant, such that it is often the case that local food, even when it travels fewer miles, uses more fossil fuels.

If you accept that modern supply chains are actually efficient, then we have to deal with the issue of the price of gasoline.  It may be that the market under-values gasoline because we ignore pollution and subsidize energy production.  Even if this is the case, there might be an economies of scale argument for long supply chains. It is probably the case, though, that a person extremely conscious about fossil fuel use could, with effort, find a producer and vendor combination that used less fuel than the standard supermarket fare.

• Eating local produce encourages better farming and consumption practices because it allows relationships to develop between producers and consumers.  

This argument rests pretty heavily on either having a middle-man vendor that buys local and monitors the food production methods (through a local co-op or similar organization), or putting a lot of time into choices about what to purchase. It also ends up making a moral argument against some of the efficiency gains that a market system thrives on. One of the best parts of our economic system is that we don't have to monitor every part of the supply chain - price competition ensures that resources are used efficiently and government regulation ensures that outright fraud and poison are usually unprofitable. This allows the economies of scale to work, which, in turn, allows us to do a lot more with less.  

Still, you could make the case that government regulation is incomplete, and that the regulators don't care about all the right things.  You could argue that, in some cases, low-cost production techniques might be immoral for some reason.  Or you could argue that commerce should always be embedded in relationships, not for pragmatic reasons but in order to promote a particular type of community and certain economic virtues.

In the end, though, none of these arguments have yet convinced me, so I enjoy fresh bananas year round and buy local produce only when the price & quality seem to warrant it.

        

Two types of inequality

David Brooks has written a thought-provoking piece on income inequality, in which he points out that the gap between the top 1% and the rest is widening for different reasons than the gap between the 75th and 25th percentiles.

Here is his conclusion:

But the fact is that Red Inequality is much more important. The zooming wealth of the top 1 percent is a problem, but it’s not nearly as big a problem as the tens of millions of Americans who have dropped out of high school or college. It’s not nearly as big a problem as the 40 percent of children who are born out of wedlock. It’s not nearly as big a problem as the nation’s stagnant human capital, its stagnant social mobility and the disorganized social fabric for the bottom 50 percent.

If your ultimate goal is to reduce inequality, then you should be furious at the doctors, bankers and C.E.O.’s. If your goal is to expand opportunity, then you have a much bigger and different agenda.

Wilkinson on Inequality

Richard Wilkinson gives a nice short talk for TED on his work with Kate Pickett: The Spirit Level: Why Greater Equality Makes Societies Stronger.  His thesis is intriguing if not always convincing.  He shows a number of strikingly strong correlations between measures of social well-being and inequality, arguing that inequality causes conflict and stress.  For a number of his measures, the simple causal story seems pretty uncompelling: there is a chicken & egg problem with any argument that explains high-school dropout rates using income inequality.  Nevertheless, I was struck by the number of social phenomenon that seem to be consistently related, even if the causal story is confusing.

Pine Nut Conundrum

This article in the New York Times tells the story of the "pine nut truce," in which afghan fighters unilaterally declared a cease-fire for a few weeks to allow local people to safely harvest pine cones from the forests.  As a pine-nut consumer, should I purchase more pine-nuts, to encourage more cease-fires?  Or should I purchase fewer, knowing that this crop is likely funding those fighters who are shooting at our troops?  Given that I really like pine-nuts, I think I should eat more.

How progressive is the U.S. federal tax code?

Greg Mankiw posted this link a few weeks ago, in the middle of the discussion started again by Warren Buffett, which shows how progressive the U.S. federal tax code is, and the breakdown into different tax categories.  The numbers the Urban Institute/Brookings Tax Policy Center.  They don't make explicit all of the necessary tax incidence assumptions behind these numbers, but there is enough consensus on those that it is probably not a source of controversy.

There are a number of tax misconceptions that we could correct with these numbers.  One is that the super rich pay less in taxes than the middle class or moderately wealthy.  On average, this is not true, even if we look only at the income tax.  The regressive nature of the payroll tax is also made explicit here, which is interesting, and the incidence and small magnitude of the estate tax is also worth noting.

Review of The Economics of Honor by Roelf Haan

I just finished writing a review of Roelf Haan's book The Economics of Honor: Biblical Reflections on Money and Property, for Faith & Economics.  The book consists of a series of essays, or sermons, on biblical passages that speak about economics and poverty.  For the full review, you will, of course, have to check out the journal, but here is a brief excerpt that hits one of the high points and one of the low points of the book:

The best part of Haan’s work is his wiliness to delve into specific scripture passages in depth.  This focus allows him to illustrate well the connection between economic problems and individual sin. He convincingly describes the path from idolatry to injustice, with the focus on individual responsibility before God (i.e. chapter 4).  Haan does not stop there, however.  He also is able to show where the Bible addresses systematic injustice and dysfunction. This ability to hold together the importance of both personal responsibility and systemic order is his true gift to the field of biblical economic ethics.  Haan’s essay on Isaiah 58 (chapter 19) especially stands out in this regard. 

Unfortunately, in some important areas, Haan’s ethical vision seems too narrow.  In his strong reaction to the abuse of political and economic power, he too quickly attributes the sins of Latin American dictators to an underlying economic system.  It is true that combinations of economic and political power have, historically, been extremely dangerous, but this observation does not automatically implicate the discipline of economics the way Haan argues it does. Haan’s reading of Milton Friedman, for example, (pg. 73) strangely misses the motivation behind Friedman’s suspicion of government control of the economy. Indeed, libertarians like Friedman share many of Haan’s concerns about the abuse of political and economic power.  They disagree only on whether a reliance on markets will lead to a concentration of power, as Haan argues, or decentralized power, as Friedman (1982) famously argued. This narrow and negative view of economic ethics also shows up in Haan’s treatment of poverty and wealth.  Readers will search in vain for a moral distinction between wealth gained through abuse of government power and wealth gained through entrepreneurial activity. Instead Haan seems to agree with the dependency theorists that all wealth is necessarily implicated in oppression (see chapters 7 and 21).