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Last Build Date: Tue, 23 May 2017 15:02:28 -0500

Copyright: Copyright 2017
 



The Behavioral Econ of Paperwork, by Bryan Caplan

Tue, 23 May 2017 15:02:28 -0500

Next month, I'll collect my final payment from my Dependent Care Flexible Spending Account - and I couldn't be happier.  I hate filling out paperwork.  Though it only takes a couple hours to save thousands of dollars, I resent the process. 

I'm not alone.  Education researchers, for example, find that many students leave free money sitting on the table because they fail to fill out the proper forms.  Furthermore, modest help with form completion markedly raises uptake.   Some highlights:
Some students receiving college financial aid could be getting more. Others fail to qualify for aid entirely: each year, more than one million college students in the United States who are eligible for grant aid fail to complete the necessary forms to receive it. Bird and Castleman (2014) estimate that nearly 20 percent of annual Pell Grant recipients in good academic standing fail to refile a FAFSA after their freshman year, and subsequently miss out on financial aid for the following academic year.
And:
Additionally, the complexity of the financial aid application confuses and deters students (ACSFA 2001, 2005). To determine eligibility, students and their families must fill out an eight-page, detailed application called the Free Application for Federal Student Aid (FAFSA), which has over 100 questions. King (2004) estimates that 850,000 college students who were eligible for federal grant aid in 2000 did not complete the forms necessary to receive their benefits
Since I think education is extremely socially wasteful, I'm glad that so many students fail to game the system.  But - as Robin Hanson pointed out at a seminar on this research - there's probably something much bigger at work.  What researchers have learned about students and FAFSA is probably just a special case of the fact that humans hate filling out paperwork.  As a result, objectively small paperwork costs plausibly have huge behavioral responses.*

Consider a few possible margins:

1. A small business-owner decides not to hire a worker because he doesn't want to fill out tax and other regulatory compliance forms.

2. A home-owner decides not to improve his home because he doesn't want to get the necessary permits and inspections.

3. A traveler decides not to visit a country because he doesn't feel like applying for a visa.

4. An unemployed worker (note the low opportunity cost!) doesn't apply for unemployment insurance because the process is aggravating.

5. A childless couple decides against adoption because the bureaucracy is hellish (or, in the case of international adoption, hellish squared).

Many people's knee-jerk reaction will be, "Let's cut red tape!"  But the craftier response is, "Let's manipulate red tape."  If X is good, we can noticeably encourage it by modestly simplifying the paperwork.  So yes, cut red tape for employment, construction, travel, and adoption.  If X is bad, though, we can noticeably discourage it by modestly complicating the paperwork.  Indeed, complexity is a viable substitute for explicit means-testing: If you lack the patience to fill out ten forms, you probably don't really need the money.

* Of course, if someone fills out paperwork full-time, they might become inured to the drudgery.  But we'd still expect oversized behavioral effects of paperwork for everyone who can't cheaply delegate such tasks to a trusted professional.

(0 COMMENTS)



Prediction markets and loss aversion, by Scott Sumner

Tue, 23 May 2017 14:24:35 -0500

Bob Murphy left a comment after my MoneyIllusion post on the NGDP prediction market (and David Henderson had a similar question): In a traditional financial market, people have skin in the game and that helps to yield the "wisdom of crowds" results that work so well in markets, but work poorly in (say) presidential elections. Are you just saying this is better than what we have now? I.e. it would be better still if true experts could put hundreds of thousands of dollars of their own money if they perceived a large mispricing of the NGDP futures contract, but letting people use this forum is still better than nothing? I'm sure you get my point but for others: Suppose that instead of having Google stock trade on the open market, instead we let everybody who wanted to play guess on Google's 2017 profitability. And then at the end of the year we gave $10,000 in prize money to the person whose guess was closest. Surely that procedure wouldn't be nearly as good as estimate of Google's profitability as our current system. I partly agree, but would like to separate out a couple of distinct issues. Consider two betting markets, in each case where people predict whether outcome A or B will occur (such as a two person election contest.): Market A: People bet $5000, and get back $10,000 if they guess right. Market B: People bet nothing, and win $10,000 if they guess right. In market B, people have no "skin in the game", but in my view they would have just as much incentive to bet wisely as in market A. After all, in market A it's about whether you will win $5000 or lose $5000. In market B it's about winning $10,000 or winning zero. In both cases, you are $10,000 better off by making the right prediction. Research in behavioral economics suggests that many people have "loss aversion", which cannot be explained by purely "rational" models of behavior. I put 'rational' in quotes because economists define the term differently from psychologists (or the average person for that matter.) If there is loss aversion, then market A might motivate more effort into searching out the truth. I think Bob's more important point is that in a normal market a trader can invest a lot of money and earn large profits if their predictions are more accurate than the consensus. He's right that the sums involved here (while they will end up being much more than $10,000--I'll announce a big gift very soon) are too small to interest big Wall Street traders. Of course it's much harder to set up a true futures market. For instance, I'd have to go through the difficult process of getting SEC approval, with no guarantee of success. And don't write off the usefulness of simple prediction markets. Research by Robin Hanson, Justin Wolfers and others shows that these markets can be surprisingly efficient. Emile Servan-Schreiber left a helpful comment in response to Bob over at my MoneyIllusion post. Here it is: There is actually very little data to back-up the idea that real-money markets make better forecasts than play-money market, but there is a lot of data to the contrary. One significant advantage of play-money markets is that they correlate much better wealth and past prediction accuracy. In forecasting the highest-impact recent political events in the U.K., U.S., and France, Hypermind systematically outperformed real-money markets such as IEM, PredictIt and Betfair. Even among real-money markets, those that are most regulated and constrained - IEM and PredictIt - tended to make better predictions than the largest, deepest, least constrained Betfair... Hypermind has been carefully designed to attract and retain only the most dedicated "superforecasters", and it has an enviable track record of accuracy. PS. Speaking of predicting the future, how can I resist this great picture: (2 COMMENTS)[...]



The new Hypermind NGDP futures market, by Scott Sumner

Mon, 22 May 2017 18:15:20 -0500

I am pleased to announce that a new Hypermind NGDP market is up and running. Back in 2015, we ran an annual NGDP prediction market and 4 quarterly markets. Because only the annual forecast has much macroeconomic significance, this time around we are only running that one market. Traders will forecast the NGDP growth rate from 2017 Q1 to 2018 Q1.

Last time we had about $5000 in prize money for the annual market, and that is what we are starting off with this time. However I expect the prize money to rise dramatically before the contract expires, as we are involved in a major fundraising operation. If you want to contribute, there is information over at my post at TheMoneyIllusion:

http://www.themoneyillusion.com/?p=32484

Emile Servan-Schreiber at Hypermind has provided me with some useful information for those who want to participate in the Hypermind NGDP market, or just watch the action:

To follow the market's prediction in real time, go here: https://hypermind.com/dash/ngdp/dash.html

(Note that the initial price in the history chart is all wrong, but that will matter less and less as time goes on.)

To participate, one just needs to register to Hypermind at http://www.hypermind.com


And finally, a quick review of my current views on NGDP futures:

1. This is not a policy market. For policy, I propose 3% and 5% "guardrails", where the central bank promises to buy unlimited NGDP futures at 3% growth and sell unlimited futures at 5% growth. That policy does not even require the creation of an NGDP prediction market; the central bank can create the contracts.

2. In addition to the guardrails policy, I favor the creation of a permanent NGDP prediction market that delivers point estimates of NGDP expectations for policy research purposes. This experiment is thus closer to the research market that I favor, not the NGDP guardrails policy market, which is run by the central bank.

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(1 COMMENTS)



Solar Power: Lots of Jobs per KWH is Bad, not Good, by David Henderson

Mon, 22 May 2017 08:50:12 -0500

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Creating jobs is not the same as creating wealth.

When I start a class in economics, I start with the Ten Pillars of Economic Wisdom. The pillar above about jobs and wealth is #8. When I teach it, I use Dwight Lee's now-classic article "Creating Jobs versus Creating Wealth."

Mark Perry has done a great service by applying this principle to energy. In "Inconvenient energy fact: It takes 79 solar workers to produce same amount of electric power as one coal worker," he writes:

To start, despite a huge workforce of almost 400,000 solar workers (about 20 percent of electric power payrolls in 2016), that sector produced an insignificant share, less than 1 percent, of the electric power generated in the United States last year (EIA data here). And that's a lot of solar workers: about the same as the combined number of employees working at Exxon Mobil, Chevron, Apple, Johnson & Johnson, Microsoft, Pfizer, Ford Motor Company and Procter & Gamble.

In contrast, it took about the same number of natural gas workers (398,235) last year to produce more than one-third of U.S. electric power, or 37 times more electricity than solar's minuscule share of 0.90 percent. And with only 160,000 coal workers (less than half the number of workers in either solar or gas), that sector produced nearly one-third (almost as much as gas) of U.S. electricity last year.


Of course, to do a complete analysis, one would want to look at capital and other costs, not just labor costs. But given the overwhelming data on labor, it's hard to believe that other costs for solar would be so much lower as to make solar less expensive. And we don't have to speculate. If solar power weren't more expensive, governments wouldn't need to subsidize and regulate so heavily to get people to use it.

(27 COMMENTS)



Wages are the key to the business cycle, by Scott Sumner

Sun, 21 May 2017 14:34:54 -0500

Back in the 1980s and 1990s, I did some research with Steve Silver on sticky wages and the business cycle. Using postwar data, it's very difficult to draw any conclusion, as the economy was hit by both supply and demand shocks, which have very different impacts on real wages.

During the interwar period, however, demand shocks are much easier to identify and the role of wages really stands out. In the following graph we inverted the real wage series (top line), and compared it to industrial production (bottom line), to make it easier to see the strong countercyclicality of real wages:

(image)
We found that there were two factors that reduced output during the interwar years. First, falling prices in the face of sticky wages---which occurred on and off throughout the entire interwar period. Second, an autonomous rise in nominal wages (caused by government labor market policies)---which mostly occurred during the period after 1933.

While cleaning out my office I came across a 1996 QJE paper by Ben Bernanke and Kevin Carey. Here's a portion of their conclusion:

First, like Eichengreen and Sachs [1985], we verified that during much of this period there existed a strong inverse relationship (across countries as well as over time) between output and real wages, and also that countries which adhered to the gold standard typically had low output and high real wages, while countries that left gold early experienced high output and low real wages. It does not appear that any purely real theory can give a plausible explanation of this relationship. Among theories emphasizing some type of monetary non-neutrality (i.e., a non-vertical aggregate supply curve), there are basically only two types: theories in which the price level affects output supply because of nominal-wage stickiness, and theories in which the price level affects output supply for some other reason. We find that, once we have controlled for lagged output and banking panics, the effects on output of shocks to nominal wages and shocks to prices are roughly equal and opposite. If price effects operating through nonwage channels were important, we would expect to find the effect on output of a change in prices (given wages) to be greater than the effect of a change in nominal wages (given prices). As we find roughly equal effects, our evidence favors the view that sticky wages were the dominant source of non-neutrality.
That's why Bernanke was my first choice for Fed chair back in 2006.

PS. Is the 1985 paper that Bernanke and Carey cite co-authored by the Jeffrey Sachs who defended Bernie Sanders and a higher minimum wage? I believe it is. I think it's fair to say that the policy views of economists are not based on the outcome of their empirical research.

PPS. Steve Silver and I had a paper on real wage cyclicality published in the 1989 JPE. We did a follow-up paper focusing on wages and prices during the interwar years, which was published in 1995 in the Southern Economic Journal.

(6 COMMENTS)



Financial crisis or monetary policy failure?, by Scott Sumner

Fri, 19 May 2017 10:52:50 -0500

I often debate the question of whether severe slumps are caused by financial crisis or tight money. In my view it's usually tight money, with financial stress being a symptom of falling NGDP. So how would we test my hypothesis? While cleaning out my office at Bentley, I came across an old NYT article from June 11, 1933: Wall Street notes a remarkable contrast between the attitude toward the war debt question last December and that of the present time. Last year, financial circles began to become apprehensive about the war debt question long before December 15. By late November the pound sterling had fallen to a record low of $3.14 1/2 and the financial markets were severely depressed. At the present time, although the war debts payments are due by next Thursday, there has been almost no discussion of the subject in financial circles, and the possibilities of wholesale default have left the markets unperturbed. Why did the markets suddenly stop caring about the war debts issue in June 1933? For the same reason they suddenly started caring about the war debts issue in mid-1931. War debts disturbed the financial markets when they led to devaluation fears, which triggered massive gold hoarding. By June 1933, the US was off the gold standard, and hence gold hoarding no longer exerted a deflationary impact on the US. However, gold hoarding continued to be a problem for countries still on the gold standard, such as France. In my book entitled "The Midas Paradox", I did a very extensive empirical study of this question. The price of German war debt bonds suddenly become highly correlated with US stock indices in mid-1931 (when Germany got into financial trouble), and this continued through 1932. Fears of German default were triggering a loss of confidence in the international gold standard. That loss of confidence was justified, as Germany adopted exchange controls in July 1931 and the UK devalued in September 1931. At that point people started worrying about a US devaluation, and gold hoarding rose sharply. Because the supply of newly mined gold doesn't change very much from year to year, big changes in the value of gold are primarily caused by shifts in gold demand. But once the US began devaluing the dollar in April 1933, increases in gold demand no longer had a significant deflationary impact on the US. Gold kept getting more valuable, but now the dollar was losing value. (Recall that price deflation means that money is getting more valuable.) Back in 1932, the vast majority of serious people rejected my "tight money" explanation of the Depression. It was "obviously" caused by financial turmoil, both domestic and international. Falling NGDP was seen as a symptom. Only a few lonely exceptions like Irving Fisher and George Warren took a "market monetarist" perspective, urging a shift toward expansionary monetary policy. Because we were near the zero bound, they recommended a depreciation of the dollar against gold. In 1933, FDR adopted their suggestion, and it worked just as Warren and Fisher predicted---prices and output immediately began rising sharply. The policy would have been even more effective if not offset by the NIRA, which sharply reduced aggregate supply. And there is lots more evidence for the tight money--->falling NGDP---> financial distress chain of causation. After the dollar started depreciating against gold in April 1933, domestic bank failures ceased almost immediately. Some people claim that tight money did not cause the Great Recession, because there was no alternative monetary policy at the zero bound of interest rates. But something similar occurred in the 1980s, when we were not at the zero bound. Between 1934 and 1980, there was a period of calm in the banking system. Some people wrongly attribute that to regulation, but in fact it was caused by higher rates of inflation and NGDP growth during 1934-80, which made it easier for debts[...]



Nowrasteh on E-Verify, by David Henderson

Thu, 18 May 2017 21:31:23 -0500

I asked Alex Nowrasteh for his input on the E-Verify issue that I posted about yesterday.

Here's what he wrote:

E-Verify won't work because employers ignore it in states where it is required with virtually zero legal consequences (see blog post). Enforcing E-Verify laws is about as difficult as enforcing current I-9 violations. If Arizona won't enforce its own E-Verify mandate and the Feds won't enforce their own I-9 mandate, there is no good reason to expect them to enforce E-Verify.

As Nowrasteh and Harper write in their policy analysis on pages 10-11, E-Verify has barely turned off the wage magnet that attracts illegal immigrants in Arizona (second link). E-Verify is a failed program that will raise hiring costs. What's worse is that its failure will prompt calls for a national biometric identity system to plug E-Verify's "loopholes." That system's potential will be abused in short order. Best to forestall that.


The policy analysis he refers to is Alex Nowrasteh and Jim Harper, "Checking E-Verify: The Costs and Consequences of a National Worker Screening Mandate," July 7, 2015.

(7 COMMENTS)



Me on Anarcho-Capitalism on the Rubin Report, by Bryan Caplan

Thu, 18 May 2017 14:02:44 -0500

Whatever you think about anarcho-capitalism, the production values of my Rubin Report interview on the subject are top notch!  Enjoy.

src="https://www.youtube.com/embed/HPoBGQ02JTI" allowfullscreen="" width="400" height="225" frameborder="0">

In other news, Mike Huemer and I have a fan from the NFL (and GW Law).

(3 COMMENTS)



Echo Chambers and the Prevalence of Motivated Reasoning, by Contributing Guest

Thu, 18 May 2017 09:39:45 -0500

by Nicolás Maloberti When it comes to information, we have growing powers to filter out what we don't like. Suppliers have also growing powers to cater to our demand without us having to make any conscious choices. This is worrisome since we might end up living in different political universes; or "echo chambers," as Cass Sunstein puts it in his latest book #Republic: Divided Democracy in the Age of Social Media. In this week's edition of EconTalk, host Russ Roberts and Sunstein discuss the main themes of the book. Why are echo chambers problematic? Because they prevent us from facing views dissimilar to ours. As a result, we could be led to take falsehoods for truths, become more extreme in our views, and regard others as enemies or adversaries. Part of the value of the right of free speech is that it creates an environment in which our own views are constantly challenged. Sunstein's worry is that this value could be greatly reduced, even when all the legal guarantees of free speech are observed. That is because echo chambers are simply by-products of our individual decisions as consumers. This very fact imposes constraints in terms of the solutions we can call for, as Sunstein recognizes. To counteract the market architecture of increasing powers to filter out information, Sunstein suggests an "architecture of serendipity". He argues we need to increase the likelihood of getting exposed to views and materials that we have not sought out. An issue that doesn't come up in Sunstein's and Roberts's conversation is the connection between echo chambers and the more general problem of motivated reasoning. Echo chambers are a manifestation of this problem, but there are many others. In some of those cases, perhaps the government does have a more active role to play. We tend to derive important psychological benefits from belonging to groups and holding the shared views of their members. In the podcast episode, Sunstein recalls how in the very early days of behavioral economics the psychological benefits of being part of the group of people advancing this new paradigm were quite palpable. For many people, the benefits of belonging to distinct political groups are equally palpable. In order to maximize those psychological benefits, experimental research shows that we tend to engage in motivated reasoning; that is, our judgements dictate how we process and integrate information rather than the other way around. The very fact that we often seek confirmatory evidence seems to indicate, however, that we also care about being right. Motivated reasoning would be a waste of time and effort if the need for accuracy were not also part of our psychological make-up. Motivated reasoning is thus a strategy to keep high cognitive dissonance costs at bay. This all suggests that there is a limit to what our self-deception capabilities can accomplish. The benefits we derive from holding our most cherished beliefs start to dissipate quickly in the presence of growing doubts. Echo chambers protect us from doubt, and thus they help us to keep the costs of motivated reasoning low. We simply don't face the sort of evidence that could truly challenge the powers of our reasoning- or at least we don't face it often enough. Certain aspects of our institutional democratic architecture seem to play a functionally equivalent role: they lower the costs of our motivated reasoning by making it harder to confront potentially inconvenient evidence. The main mechanism by which institutional structures have this effect is by lowering the salience of the costs and consequences of alternative policies. Echo chambers protect our self-image by keeping some information out of our field of vision. Low-salience costs do it by making that information invisible to our imperfect eyes. In both cases, the architecture of our environments enables[...]



E-Verify: Let's Make Us More Like Europe, by David Henderson

Wed, 17 May 2017 15:56:49 -0500

One of the main things the United States has going for it is its relatively fluid labor market, relative, at least, to labor markets in much of Europe.

I wrote over 20 years ago about the Europeanization of the U.S. labor market, but I did not see E-Verify coming. E-Verify, if implemented nationwide, would be a system of work permits. If you started a new job, you would need the federal government to verify that you are legally allowed to have that job. How long would it be before the government started making judgements about who should be allowed to work? Convicted sexual predators, even those who were, say 19, and sleeping with a consensual 16-year-old, have to register for life and are told that they can't live in certain parts of a city. Is it entirely inconceivable that some would ultimately be told that they can't work?

Even if you don't fear that, Cato Institute immigration policy analyst David Bier has shown how bad the E-Verify system is. It makes a lot of mistakes and those mistakes cause completely legal people to lose jobs. Here's a snippet from his recent report:

The system has already proven remarkably ineffective at its intended purpose--keeping unauthorized workers away from jobs. In fact, in many cases, it does the opposite--keeping authorized workers away from employment. While many have focused on how making it mandatory would increase the number of these errors, E-Verify is already causing headaches and costing jobs for legal workers. In fact, from 2006 to 2016, legal workers had about 580,000 jobs held up due to E-Verify errors, and of these, they lost roughly 130,000 jobs entirely due to E-Verify mistakes.

So even if the feds never get really, really nasty to U.S. citizens and permanent residents, E-Verify would slow down adjustments and make our labor markets more rigid. Sad.

(14 COMMENTS)