Archive for August, 2009

Against Obviousness

Tyler Cowen points out why certain things we study are obvious:

Things can be obvious if they are simple. If something complicated is obvious, such as anything that anybody seriously studies, then for it to be simple you must be abstracting it a lot. When people find such things obvious, what they often mean is that the abstraction is so clear and simple its implications are unarguable. This is answering the wrong question. Most of the reasons such conclusions might be false are hidden in what you abstracted away. The question is whether you have the right abstraction for reality, not whether the abstraction has the implications it seems to.


The Inheritance of Education

Alex Tabarrik from Marginal Revolution provides a great example of why economists disagree. I strongly suggest you go to their blog to view the graph and read the rest of the post:

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

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

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


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

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

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

Higher Taxes and Spending Cuts

NEW YORK ( — A $9 trillion federal deficit over 10 years may be too hard to comprehend. But this part is easy: Such unwieldy amounts of debt could have an impact on Americans’ bottom line one way or the other — if not tomorrow, then the day after.

The U.S. government has been spending a great deal more than it has been taking in, and it is on track to do so well beyond the next 10 years. It has been borrowing money to make all that spending possible and it has to pay the money back with interest. How, you ask? By borrowing more.

The solution is straightforward if unpleasant: Shy of finding a fairy willing to leave trillions under Uncle Sam’s pillow, lawmakers will have to raise taxes and cut spending.

Real Estate Market is Growing

Some normative statements from the WSJ:

Not only are housing prices stabilizing, they are starting to grow. The three most widely used yardsticks for measuring housing prices (The National Association of Realtor’s median price, the Federal Housing Finance Agency (FHFA) price indexes and the Case-Shiller prices indexes) are telling a similar story…First, it will help banks holding toxic assets: With house prices stabilizing, these assets will regain some of their lost value. Second, the market for selling homes will get a short-term shot in the arm from the so-called “fence-sitters” who have been waiting for prices to fall even more before buying a home. Third, rising prices will help consumer spending through the wealth effect. –Patrick Newport, economist at IHS Global Insight

The breadth of gains across cities was impressive, with eighteen out of twenty cities recording increases, some of them very strong. Cleveland rose 4.2% after rising 4.1% last month, so its yearly rate is now down only 3%. …Some have argued that the recent improvement is simply a seasonal effect. That is playing some role, but seasonally adjusted, prices were flat in May and up 0.8% in June, suggesting that some underlying improvement is occurring…. Overall, this appears like a genuine turn. –Ian Morris, HSBC’s head of U.S. economics

Will the bottom hold?The main concern here is that various foreclosure moratoria temporarily limited the downward pressure from distressed properties and as foreclosures pick up again, prices will head lower. This is certainly possible, but it feels like the firming in demand for homes will be sufficient to counteract the downward influence from the ongoing foreclosure wave…While it would be nice (not least as a homeowner myself) to think that home prices are going to quickly recover a chunk of the ground lost over the past 2 or 3 years, we are simply not that optimistic. –Stephen Stanley, RBS Securities

California’s Prison Costs Higher than the UC System

From the AP:

The cost of housing state prison inmates has grown so much in the past decade that California now spends more incarcerating 167,000 adults than it does to educate 226,000 students in its 10-campus University of California system.

“In what civilized state or country do you spend more on prisons than on higher education?” said Senate President Pro Tem Darrell Steinberg, a Democrat from Sacramento. “That’s a compelling argument to vote for reform.”

Economics is about making choices with scarce resources. What does the above say about California’s choices? What are the pros and cons of spending more on incarceration than education? What are the long- and short-run trad-offs.

California’s Unemployment is 11.9 Percent

From the Sacramento Bee:

California’s unemployment rate continued climbing to 11.9 percent last month but there was encouraging news as the pace of job losses moderated. 

The Employment Development Department said the state’s unemployment rate jumped three-tenths of a percentage point during the month. But the state lost just 35,800 jobs during the month. That’s the smallest loss in months and may suggest an easing of the downturn. The state has been losing at least 60,000 jobs a month for the past several months.

Sacramento’s unemployment rate rose to 11.8 percent, up a tenth of a point from a revised 11.7 percent in June. The region lost 8,000 jobs during the month, with much of the job loss coming in education as summer schedules kicked in. In a year’s time, the region has lost 45,700 jobs, or 5.1 percent, and unemployment has risen 4.6 percentage points.

California was tied with Oregon for the fourth-highest unemployment rate in the nation. Michigan was No. 1 at 15 percent, followed by Rhode Island (12.7 percent) and Nevada (12.5 percent).

Education Costs Greater than Health Care

From Carpe Diem:collegecpi

Professor Mark Perry shows us that college tuition has grown much faster than medical care since 1978. Perhaps we should spend the same amount of time reforming education as we are in health care?