Friday, January 22, 2021

Under a "marketable permits" approach to controlling pollution, firms have permits to emit a certain amount of pollution. If a firm has extra permits, it can sell them; if it needs additional permits, it can buy them. The idea is that firms that have lower-cost methods of reducing pollution now have an incentive to do so, because they can sell the permits. 

But here's a question that's obvious to economists: Could an environmental group purchase a bunch of these pollution permits and not use them or sell them, just for the purposes of reducing pollution? 

Similarly, what if government auctioned off a bunch of oil leases. Could an environmentalist group purchase them, and not drill? Or what if government auctions off leases for grazing cattle or cutting timber on federal lands. Could an environmentalist group bid on the leases but then not graze cattle or cut timber? Or what if the government gives out a limited number of permits for hunting a certain animal, perhaps by lottery. Can a bunch of environmentalists flood into the lottery, get some share of the permits, and then not hunt?  

Shawn Regan tackles this question in "Why Don’t Environmentalists Just Buy What They Want to Protect?" and gives an answer in the subtitle "Because it’s often against the rules" (PERC Reports, Winter 2020, pp. 15-23). He writes: 

Technically, any U.S. citizen can bid for and hold leases for energy, grazing, or timber resources on public lands. But legal requirements often preclude environmentalists from participating in such markets. Federal and state rules typically require leaseholders to harvest, extract, or otherwise develop the resources, effectively shutting those who want to conserve resources out of the bidding process. Energy leasing regulations, for example, require leaseholders to extract the resources beneath their parcels. If they don’t, the leases could be canceled.

Historically, there is some rationale for these rules. A local economy may depend on cattle grazing or timber or oil and gas extraction. Environmentalists can buy out private owners of land: say, buying buying oil and gas leases or grazing rights from private owners. But environmentalists are not allowed to buy rights on public lands. By setting up a lease program, the government has agreed that these are suitable uses for the land.

In the case of hunting permits, the number given out is often calculated based on what wildlife biologists think is useful for the long-run success of the species. In this case, environmentalists who try to gather up such permits to prevent hunting are opposing "the science." Timber rights are often given out based partly on the notion that letting dead wood pile up can create a landscape that will at some point suffer a devastating fire. Appropriate land management is a controversial topic. 

Environmentalists are increasingly trying to purchase government leases. Regan points out: 

But increasingly, environmentalists are testing the strategy of bidding for the rights to natural resources instead. In recent years, activists have attempted to acquire oil and gas rights in Utah, buy out ranchers’ public grazing permits in New Mexico, purchase hunting tags in Wyoming to stop grizzly bears from being killed, and bid against logging companies in Montana to keep trees standing.

Behind the scenes, grazing and timber rights have been declining over time. Regan reports: "Livestock grazing on federal lands has declined more than 50 percent since the 1950s, in part due to environmental regulations that have weakened ranchers’ grazing privileges and pitted them against environmentalists in zero-sum legal fights. Likewise, timber harvests on federal lands have fallen nearly 80 percent since the 1980s." In some cases, it may be more productive for environmentalists to focus on whether it might be possible to focus on whether leases will be granted at all, rather than engaging in a legal battle to purchase them. 

It's worth noting that use-it-or-lose-it property rights are not unheard-of in other contexts. For example, water rights in much of the western United States have traditionally operated under a use-it-or-lose it legal regime. As economists have been quick to point out, this approach is often not good for incentives to conserve water, because a farmer who finds a way to use less water simply loses their legal right to that water. But it also means that if an environmentalist purchased a western farm and did not use the water rights, the farm would lose those rights. Use-it-or-lose-it property rights are common in the workplace, too, in companies where if you don't use your vacation or your sick leave or other benefits in a given year, they disappear and do not carry over into the following years. 

As Regan writes: "It’s clear that many people value conservation and are willing to spend their own money to get it. The only question is whether those resources will be channeled through zero-sum political means or through positive-sum market mechanisms. In any case, if competing groups cannot directly acquire or trade rights through markets, whether for use or non-use purposes, the only option is to fight it out in the political and legal arenas."

Thursday, January 21, 2021

The Reproducibility Challenge with Economic Data

One basic standard of economic research is surely that someone else should be able to reproduce what you have done. They don't have to agree with what you've done. They may think your data is terrible and your methodology is worse. But as a minimal standard, they should be able to reproduce your result, so that the follow-up research can then be in a position to think about what might have been done differently or better.  This standard may seem obvious, but during the last 30 years or so, the methods for reproducibility have been transformed. 

Lars Vilhuber describes the shift in "Reproducibility and Replicability in Economics" in the Harvard Data Science Review (Fall 2020 issue, published December 21, 2020). Vilhuber is the Data Editor for the journals published by the American Economic Association (including the Journal of Economic Perspectives where I work as Managing Editor). Thus, he heads the group which oversees posting of data and code for new empirical results in AEA journals--including making sure that an outsider can use the data and code to reproduce the actual results reported in the paper. 

To jump to the bottom line, Vilhuber writes: "Still, after 30 years, the results of reproducibility studies consistently show problems with about a third of reproduction attempts, and the increasing share of restricted-access data in economic research requires new tools, procedures, and methods to enable greater visibility into the reproducibility of such studies."

It's worth noting that reproducibility has come a long way. Back in the 1980s and earlier, researchers who had completed a published empirical research paper. but then moved on to other topics, often did not keep their data or code--or if they did keep them, the data and code were often full of idiosyncratic formats and labelling that worked fine for the original researcher (or perhaps for the research assistants of the original researcher who did a lot of the spadework), but could be impenetrable to a would-be outside replicator.  By contrast, a fair share of modern economics research can post the actual data, computer code, documentation for what was done, and so on. In this situation, you may disagree with how the researcher chose to proceed, but you can at  least reproduce their result easily. 

However, here I want to emphasize that a lot of the difficulties with reproducibility arise because finding the actual data used in an economic study is not as easy as one might think. Non-economists often think of economic data in terms of publicly available data series like GDP, inflation, or unemployment, which anyone can look up on the internet. But economic research often goes well beyond these extremely well-known data sources. One big shift has been to the use of "administrative" data, which is a catch-all term to describe data that was not collected for research purposes, but instead developed for administrative reasons. Examples would include tax data from the Internal Revenue Service, data on earnings from the Social Security Administration, data on details of health care spending from Medicare and Medicaid, and education data on teachers and students collected by school districts. There is also private-sector administrative data about issues from financial markets to cell-phone data, credit card data, and "scanner" data generated by cash registers when you, say, buy groceries. 

Vilhuber writes: "In 1960, 76% of empirical AER [American Economic Review- articles used public-use data. By 2010, 60% used administrative data, presumably none of which is public use ..."

You can't just write to, say, the Internal Revenue Service and ask to see all the detailed data from tax returns. Nor can you directly access detailed data from Social Security or Medicare or a school district, or from what people reported in the US Census. There are obvious privacy concerns here. 

Thus, one change in recent years is what are called "restricted access data environments," where accredited researchers can get access to detailed data, but in ways that protect individual privacy. For example, there are now 30 Federal Statistical Data Research Centers around the country, mostly located close to big universities.  Vilhuber writes (citations omitted): 

It is worth pointing out the increase in the past 2 decades of formal restricted-access data environments (RADEs), sponsored or funded by national statistical offices and funding agencies. RADE networks, with formal, nondiscriminatory, albeit often lengthy access protocols, have been set up in the United States (FSRDC), France, and many other countries. Often, these networks have been initiated by economists, though widespread use is made by other social scientists and in some cases health researchers. RADE are less common for private-sector data, although several initiatives have made progress and are frequently used by researchers: Institute for Research on Innovation and Science, Health Care Cost Institute , Private Capital Research Institute (PCRI). When such nondiscriminatory agreements are implemented at scale, a significant number of researchers can obtain access to these data under strict security protocols. As of 2018, the FSRDC hosted more than 750 researchers on over 300 projects, of which 140 had started within the last 12 months. The IAB FDZ [a source of German employment data] lists over 500 projects active as of September 2019, most with multiple authors. In these and other networks, many researchers share access to the same data sets, and could potentially conduct reproducibility studies. Typically, access is via a network of secure rooms (FSRDC, Canada, Germany), but in some cases, remote access via ‘thin clients’ (France) or virtual desktop infrastructure (some Scandinavian countries, data from the Economic Research Service of the United States Department of Agriculture [USDA] via NORC) is allowed.

A common situation is that this kind of data often cannot be put into the public domain; instead, you would need to apply and to gain access to the "restricted access data environment," and access the data in that way. 

Another issue is that in some of these data sources, researchers are not given access to all of the data; instead, to protect privacy, they are given an extract of the overall data. As a result, two researchers who go to the data center and make the same data request will not get the same data. The overall patterns in the data should be pretty close, if random samples are used, but they won't be the same. Vilhuber writes: 

Some widely used data sets are accessible by any researcher, but the license they are subject to prevents their redistribution and thus their inclusion as part of data deposits. This includes nonconfidential data sets from the Health and Retirement Study (HRS) and the Panel Study of Income Dynamics (PSID) at the University of Michigan and data provided by IPUMS at the Minnesota Population Center. All of these data can be freely downloaded, subject to agreement to a license. IPUMS lists 963 publications for 2015 alone that use one of its data sources. The typical user will create a custom extract of the PSID and IPUMS databases through a data query system, not download specific data sets. Thus, each extract is essentially unique. Yet that same extract cannot be redistributed, or deposited at a journal or any other archive.undefined In 2018, the PSID, in collaboration with ICPSR, has addressed this issue with the PSID Repository, which allows researchers to deposit their custom extracts in full compliance with the PSID Conditions of Use.

Yet another issue arises with data from commercial sources, which often require a fee to access: 

Commercial (‘proprietary’) data is typically subject to licenses that also prohibit redistribution. Larger companies may have data provision as part of their service, but providing it to academic researchers is only a small part of the overall business. Dun and Bradstreet’s Compustat, Bureau van Dijk’s Orbis, Nielsen Scanner data via the Kilts Center at Chicago Booth (Kilts Center, n.d.), or Twitter data are all used frequently by economists and other social scientists. But providing robust and curated archives of data as used by clients over 5 or more years is typically not part of their service.

Research using social media data can pose particular problems for someone who wants to reproduce the study using the same data:

Difficulties when citing data are compounded when the data is either changing, or is a potentially ill-defined subset of a larger static or dynamic databases. ‘Big data’ have always posed challenges—see the earlier discussion of the 1950s–1960s demand for access to government databases. By nature, they most often fall into the ‘proprietary’ and ‘commercial’ category, with the problems that entails for reproducibility. However, beyond the (solvable) problem of providing replicators with authorized access and enough computing resources to replicate original research, even defining or acquiring the original data inputs may be hard. Big data may be ephemerous by nature, too big to retain for significant duration (sometimes referred to as ‘velocity’), temporally or cross-sectionally inconsistent (variable specifications change, sometimes referred to as ‘variety’). This may make computational reproducibility impossible. ... For instance, a study that uses data from an ephemerous social media platform where posts last no more than 24 hours (‘velocity’) and where the data schema may mutate over time (‘variety’) may not be computationally reproducible, because the posts will have been deleted (and terms of use may prohibit redistribution of any scraped data). But the same data collection (scraping or data extraction) can be repeated, albeit with some complexity in reprogramming to address the variety problem, leading to a replication study.

Finally, there a problem of "cleaning" data. "Raw" data always has errors. Sometimes data isn't filled in. Other times it may show a nonsensical finding, like someone having a negative level of income in a year, or an entry where it looks as if several zeros were added to a number by accident. Thus, the data needs to be "cleaned" before it's used. For well-known data, there are archives of documentation for how data has been cleaned, and why. But for lots of data, the documentation for how it has been cleaned isn't available.  Vilhuber writes: 

While in theory, researchers are able to at least informally describe the data extraction and cleaning processes when run on third-party–controlled systems that are typical of big data, in practice, this does not happen. An informal analysis of various Twitter-related economics articles shows very little or no description of the data extraction and cleaning process. The problem, however, is not unique to big-data articles—most articles provide little if any input data cleaning code in reproducibility archives, in large part because provision of the code that manipulates the input data is only suggested, but not required by most data deposit policies.

As a final thought, I'll point out that academic researchers have mixed incentives when it comes to data. They always want access to new data, because new data is often a reliable pathway to published papers that can build a reputation and a paycheck. They often want access to the data used by rival researchers, to understand and to critique their results. But making access available to details of their own data doesn't necessarily help them much. 

For example, imagine that you write a prominent academic paper, and all the data is widely available. The chances are good that for years to come, your paper will become target practice for economics students and younger faculty members, who want to critique you and to justify all the choices you made in the research. However, you may have a reasonable dislike of spending large chunks of the rest of your career going over the same ground, again and again.

From this standpoint, it's perhaps not surprising that while many leading journals of economics now do require that authors publish their computer code and as much of their data as they are allowed to do, the number of papers that get "exceptions" for publishing their data is rising. Moreover, the requirement that an author supply data and computer code is not part of what is required for submitting a paper or making a decision about publishing the paper (although other professors refereeing the paper can make a request to see the data and code, if they wish). 

It's also maybe not a surprise that a study of one prominent journal looked at papers published from 2009 to 2013 and found that of the papers where data was not posted online, only about one-third of the papers had data where it was reasonably straightforward for others to obtain the data. 

And it's also maybe not a surprise that more and more papers are published with data that you have to be an official researcher to access, through a restricted access data center, which presents some hurdles to those not well-connected in the research community. 

Access to data and computer code behind economic research has improved, and improved a lot, since the pre-internet age. But in many cases, it's still far from easy. 

Wednesday, January 20, 2021

Interview with Valerie Ramey: Fiscal Policy, Time Use, and More

David A. Price serves as interlocutor in an "Interview with Valerie Ramey On fiscal stimulus, technological lull, and the rug-rat race" (Econ Focus: Federal Reserve Bank of Richmond, Fall 2020, pp. 20-24). Here are a couple of excepts: 

On looking at news records to measure historical effects of fiscal stimulus
I started looking at news records when I realized that changes in government spending are often announced at least several quarters before the government spending actually occurs. That's really important, because the empirical techniques that researchers were using previously to measure the effect of government spending implicitly assumed that any change in government spending was essentially unanticipated. But our models tell us that individuals and firms are forward-looking and therefore will react as soon as the news arrives about a future event. This means that the previously used techniques had the timing wrong and therefore couldn't accurately estimate the effects of government spending. ...

One historical case was the start of World War II, when Germany invaded Poland in September 1939. Events happened over the subsequent months that kept changing expectations. Even though the United States was supposedly not going to enter the war, many businesses knew that they would be increasing their production of defense goods and people knew the military draft was coming because FDR was making many speeches on the importance of building up defenses. To assess the effects of spending, it was important to figure out the exact timing of when the news arrived about future increases in government spending rather than when the spending actually occurred.

You may wonder whether individuals and businesses really do change their behavior based on anticipations of future changes. A perfect example is the start of the Korean War in June 1950, when North Korea invaded South Korea. Consumers, who remembered the rationing of consumer durable goods during World War II, and firms, which remembered the price controls, reacted quickly: Consumers immediately went out and bought consumer durables like refrigerators and washing machines, and firms immediately started raising their prices. All of this happened before there were any changes in government spending or any policies on rationing or price controls.
On reasons for rising time spent on child care since the 1990s
[O]ne of the puzzling things I saw was that the amount of time that people, particularly women, spent on domestic work was going down in almost every category — cleaning their houses, cooking, and chores — except for child care. Time spent on child care had been falling in the 1970s and 1980s but then started rising in the 1990s. Trends in time spent on child care were a puzzle because they looked so different from other home production categories. ... 

Since the 1980s, the propensity to go to college has risen, in large part because of the rise in wages of a college graduate relative to a high school graduate. However, the numbers of students applying to college didn't increase much from 1980 to the early 1990s because there had been a baby bust 18 years earlier. In the second half of the 1990s, the number of students applying to college rose significantly because of a previous baby boomlet. Thus, the demand for college slots rose in the mid-1990s.

The result was what John Bound and others have called cohort crowding. They found that the better the college, the less elastic the supply of slots to the size of the cohort trying to be admitted. For instance, Harvard and Yale barely change how many students they admit to their entering class. The flagship public universities are a little bit more elastic, but they're not elastic enough to keep up with the demand to get into those top colleges. ...

Our hypothesis was that during earlier times when you didn't have this cohort crowding, most college-educated parents felt as though their kids could get into a good college. So they were pretty relaxed about it. But then as you started having the cohort crowding, the parents became more competitive and put more effort into polishing their children's resumes because they realized it was harder and harder to get into the top colleges.

Tuesday, January 19, 2021

How Cities Stopped Being Ladders of Opportunity

One of the archetypal stories of the American experience involves the person who moves from a rural area or a smaller metro area to a big city, and after starting off in a humble role and having some ups and downs, becomes a big success. But the role of cities as ladders of opportunity have changed dramatically in the last few decades. David Autor tells the story in "The Faltering Escalator of Urban Opportunity" (appearing as a chapter in Securing Our Economic Future, edited by Melissa S. Kearney and Amy Ganz, and published by the Aspen Institute Economic Strategy Group late last year). Autor begins: 
For much of modern U.S. history, workers were drawn to cities by opportunities for the more enriching work offered there and the higher pay that came with it. As the eminent urban economist Edward L. Glaeser observed, “...cities have been an escape route for the underemployed residents of rural areas, such as the African-Americans who fled north during the Great Migration” (Glaeser 2020). But an important aspect of this opportunity escalator has broken down in recent decades. The migration of less-educated and lower-income individuals and families toward high-wage cities has reversed course (Ganong and Shoag 2017): Since 1980, college-educated workers have been steadily moving into affluent cities while non-college workers have been moving out.

The theories about the reasons for this shift can be divided into "push" or "pull" categories. One set of theories is that those with less education are being  pushed from large cities--perhaps by very high housing costs. The other set of theories, which Autor emphasizes, is that the pull of labor market opportunities for lower-skilled workers has diminished sharply in big urban areas. 

In the initial decades following WWII, U.S. cities offered a distinctive skills and earnings escalator to less-educated workers. A likely reason why is that, in these decades, adults without college degrees performed higher-skilled, more specialized jobs in cities than their non-urban counterparts. Laboring in urban factories and offices, they staffed middle-skill, middle-pay production, clerical, and administrative roles, where they worked in close collaboration with highly educated professionals (e.g., engineers, executives, attorneys, actuaries, etc.). These collaborative working relationships often demanded specific skills and shared expertise, and likely contributed to the higher wages (and higher productivity) of urban non-college workers. These jobs were comparatively scarce in suburbs and rural areas, far away from the office towers and (at one time) bustling urban production centers. Urban labor markets accordingly provided an escalator of opportunity and upward mobility for immigrants, minorities, less-affluent, and less-educated workers.

In the decades since 1980, however, this distinctive feature of urban labor markets has diminished. As rising automation and international trade have encroached on employment in urban production, administrative support, and clerical work, the noncollege urban occupational skill gradient has diminished and ultimately disappeared. While urban residents are on average substantially more educated—and their jobs vastly more skill-intensive—than four decades ago, non-college workers in U.S. cities perform substantially less specialized and more skill-intensive work than they did decades earlier. Polarization thus reflects an unwinding of the distinctive structure of work for non-college adults in dense cities and metro areas relative to suburban and rural areas. And as this distinctive occupational structure has receded, so has the formerly robust urban wage premium paid to non-college workers.
Autor presents a body of detailed evidence on this shift, which I won't try to summarize here. But here's one figure, just showing how wage patterns by education level have shifted in urban vs non-urban areas in recent decades. For those with higher levels of education, urban wages have grown faster than wages in non-urban areas; for those with lower levels of education, urban wages have been growing more slowly than wages in non-urban areas.
The aftereffects of the pandemic are likely to strengthen this pattern. Autor writes:
The COVID-19 crisis may change this trajectory. It seems probable that employers will learn two durable lessons from the swift, disruptive, and yet surprisingly successful movement of knowledge work from in-person to online: a first is that online meetings are almost as good as—and much cheaper than—time-consuming, resource-intensive business trips; a second is that virtual workplaces can provide a productive, cost-effective alternative to expensive urban offices for a meaningful subset of workers. If these lessons take root, they will shift norms around business travel and remote work, with profound consequences for the structure of urban labor demand. Already, U.S. employers surveyed during the current pandemic project that the share of working days delivered from home will triple after the pandemic has passed (Altig et al. 2020). Most significantly, the demand for non-college workers in the urban hospitality sector (i.e., air travel, ground transportation, hotels, restaurants) and in urban business services (i.e., cleaning, security, maintenance, repair, and construction) will not likely recover to its previous trajectory.
When I think about the role of cities as ladders of opportunity, I find myself thinking about back-and-forth movements--that is, not just rural and smaller cities to big metro areas, but also the moves from big cities back to smaller ones. I can't point to systematic data to back this up, but my sense is that the economic role of US cities for many decades was that they were a hub for economic activity that reached out to smaller cities that were within perhaps 100-200 miles. Supply chains and also movements of people went back and forth along these urban hub-and-spoke connections. 

But in the last few decades, big cities seem to have lost some of their connectedness to the areas around them. Instead of having a manufacturing plant or a back-office operation in a location within a few hours drive from the city, that manufacturing plant or back-office operation may be in another country on another continent. For many economic purposes US cities now operate in global competition with other large cities around the world. It will be interesting to see if the post-pandemic shifts in urban labor markets include a shift of some high-skilled labor back to smaller cities and rural areas as well. 

Monday, January 18, 2021

The Broken Promises of the Freedman's Savings Bank: 1865-1874

The Freedman's Savings Bank lasted from 1865 to 1874. It was founded by the US government to provide financial services to former slaves: in particular, there was concern that if black veterans of the Union army did not have bank accounts, they would not be able to receive their pay. In terms of setting up branches and receiving deposits, the bank was a considerable success. However, the management of the bank ranged from uninvolved to corrupt, and together with the Panic of 1873, the combination proved lethal for the bank, and tens of thousands of depositors lost most of their money. 

Luke C.D. Stein and Constantine Yannelis offer some recent research on lessons the grim experience in "Financial Inclusion, Human Capital, and Wealth Accumulation: Evidence from the Freedman’s Savings Bank" (Review of Financial Studies, 33:11, November 2020, pp. 5333–5377, subscription required Also, Áine Doris offers a readable overview in the Chicago Booth Review (August 10, 2020). 

Stein and Yanellis note: 
The Freedman’s Savings Bank was an early government-sponsored private enterprise that was created by Congress to provide financial services to formerly enslaved African Americans. ... The bank spread rapidly, and at one point had more interstate branches than any other U.S. financial institution, and approximately one in eight Blacks in the South lived in a family that held an account with the bank. ... We obtain novel data on Freedman’s Savings Bank account holders from 27 branches with surviving bank records. These 107,197 account records include names of main account holders and their family members, totaling 483,082 non-unique individuals, roughly 12% of the 1870 Black population in the American South. 
The main focus on the paper is that authors match the actual names of these depositors to data from the 1870 census, and then carry out a variety of calculations: for example, those who lived in the same county or within 50 miles of a branch of the bank, and those who did not. They can compare those who lived in areas where a branch was actually established, and those in similar areas where a branch was planned but never established. The result of these and other comparisons makes a persuasive case that access to a bank account had a clearly positive effect: "We find that individuals in families that hold Freedman’s Savings Bank accounts are more likely to attend school, are more likely to be literate, are more likely to work, and have higher income and real estate wealth." For example, the freed slaves with access to banks and savings were more able to buy land, start businesses, and build and attend schools (at the time, many adult freed slaves immediately sought to become literate and numerate). 

Stein and Yanellis also offer some suggestive evidence that the failure of the Freedman's Savings Bank had long-lasting intergenerational effects on black attitudes about banking. They write: 
Historians, notably Osthaus (1976), have long noted that the collapse  of Freedman’s Savings Bank—which many African Americans thought was fully backed by the federal government—and loss of savings led to a lack of trust in financial institutions by African Americans, and at least in part explains persistent gaps in utilization of financial services. The FDIC National Survey of Unbanked and Underbanked Households concludes that African-American households are considerably more likely to be unbanked: 2015 survey results indicate that 18.2% of African-American households were unbanked, compared with 3.1% of white households. Almost one-third of households indicate a lack of trust in banks as the primary reason that they did not have bank accounts, with this explanation more common among African Americans. ... [W]e show that African Americans in the present day who live in counties that once had a Freedman’s Savings Bank branch are more likely to list mistrust of financial institutions as a reason for being unbanked; this association is not present for Whites.

I dug back a little bit to get more information on what why the Freedman's Savings Bank collapsed. The US Office of the Comptroller of the Currency has a website with a smattering of details.  Although the OCC had been founded in 1863 to provide oversight to banks and limit risk-taking that would put deposits at risk, but the Freeman's Savings Bank was exempted from OCC oversight and instead was to be overseen by Congress. The result was a lesson in the potential for dysfunction of boards, with a takeover by the corrupt.  

For those who would like heart-breaking and angry-making details of how the Freedman's Savings Bank was mismanaged, I found especially useful the account of historian Walter Fleming, "The Freedmen's Savings Bank," published in the Yale Review, May 1906, pp. 40-76, and available via the magic of HathiTrust).

I should note that Fleming's essay has the curious trait of making occasional racist statements about black Americans, and then going on to provide evidence that the racist statements are not actually correct--without apparently noticing the contradiction. For example, Fleming states early in the paper: "Before the close of the war several experiments in the way of savings banks had been made among the negro soldiers for the purpose of preventing them from squandering their pay and bounty money, as it is the nature of the race to do." But  a few pages later, Fleming is writing about how black Americans flocked to deposit money in the bank. He writes: "The negroes, believing that their deposits would be secure in these banks, which they understood were supported by the government, eagerly availed themselves of the opportunity to lay up small sums for the future." 

But even with his prejudices hanging out in the open, Fleming provides a useful step-by-step overview of what happened with the bank. The law did not specify that the bank was allowed to open branches, but several of those involved in passing the law clearly saw it as part of the mission. They travelled around the South together with officials of the Freedman's Bureau (which was not legally connected to the bank) talking to those who had run military savings banks, many of which became the basis for branches, as well as those in prominent black communities.  Those who deposited money in the bank had often been led to believe that the federal government stood behind the bank. Bank officials wore US uniforms. Depositors were given a passbook, which had pictures of Lincoln, Grant, the US flag on the cover. The version of the passbook used in New York City had printed on the cover: “The Government of the United States has made this bank perfectly safe.” In Fleming's words: 
The negroes were given to understand that the bank was absolutely safe, being under the guarantee of Congress, and having the funds invested in United States securities, which were safe as long as the government should last, and that it was a benevolent scheme solely for the benefit of the blacks. The profits, they were told, would be returned to the depositors as interest, or would be expended for negro education.
Many of the early discussions of the banks at the time were quite positive. The bank branches offered a safe haven for funds, and education on savings and accumulation of interest. As Fleming writes: 
In the branch banks and at Washington, after 1868, an efficient body of negro business men was being trained. There was a sentiment that, since the bank was for the benefit of the negroes, the latter should be its officers as much as possible, and about one-half the employees were colored. At nearly all of the branches, especially after 1870, when some of the branch banks were allowed to do a regular banking business, there was an advisory board, or board of directors, of responsible colored property holders. These men were very proud of the Freedmen's Bank and of their position in connection with it. They took a deep interest in all that pertained to the institution, advised in regard to loans and investments, and promoted in every way the habit of saving on the part of their people.
But the inner workings of the bank went badly. Some of it was incompetence, a lot of it was corruption, but the underlying issue was that far too many people viewed the money in the bank as a large pot of honey, just waiting for them to scoop up what they could. Fleming describes a range of problems. Expenses were high, including $260,000 for building a pricey new headquarters building in Washington, DC. State governments often disliked the bank because the deposits were flowing to US securities, and out of their influence. Many of the employees were deeply inexperienced,  and the financial accounts were a mess. There was one inspector who was supposed to cover all the branches. 

Although the branches of the banks were not supposed to make loans before 1870, when a prominent community leader wanted to draw out more money than was in his account, the cashiers often found it hard to say "no"--and hard to get the money back later. Then the banks were allowed to make loans under supposedly strict conditions, but many of of them. After 1870, Fleming writes:   
As soon as the authority was given to the cashiers to make loans, they were besieged by a dangerous class of borrowers, who would have received scant consideration at the ordinary bank. Often the law of 1870, requiring that loans be made only on property worth double the loan, was violated and the cashiers proceeded to make investments on their own responsibility. Some of them loaned funds on the worthless script issued by the carpet-bag State and local governments; others loaned on cotton; some even made loans on perishable crops. The Jacksonville branch put money on everything that offered, from saw-mills out in the woods to shadowy claims on property. ... Most of the incompetent officials, it seems, were blacks; most of the corrupt ones were white. There was a belief, often expressed after the failure of the bank, that when a white cashier had stolen funds and involved the accounts of a branch, a negro official would be put in his place to serve as a scapegoat. The white clergymen who were cashiers proved to be quite unable to withstand the temptations offered by the presence of the cash in the vaults. One of the trustees (Purvis) afterwards said: “The cashiers at most of the branches were a set of scoundrels and thieves—and made no bones about it—but they were all pious men, and some of them were ministers."
Bt the real coup-de-grace for the bank was a result of what should have been criminal actions, even under the laws of the time, at the top levels of management.  As Fleming points out, the original bill named the 50 people who would be trustees of the institution. In his telling, the original 50 were (white) businessmen of good character. They were to meet at least once a month. However, it only needed nine members (one of whom had to be the president or vice president) to form a quorum, and a decision could be made with support of seven out of those nine. The trustees were to receive no compensation, and were not allowed to borrow funds from the bank. The original bill said that deposits would be invested in US securities only, except for an amount to be held as an "available fund" for withdrawals and current expenses. But then the headquarters of the bank moved from New York to Washington, DC, and the board turned over. Fleming tells the story in some detail of how the "hoarded deposits of the Freedmen's Bank drew the attention of the speculators in Washington," and how the new trustees stripped the banks of assets, but here's a quick sense of the kind of thing that went on: 
The places on the board [after the move to Washington DC] were somewhat difficult to fill, and it came about that most of those who were put in were incompetent persons elected simply to fill up the lists. They had little business capacity, no business connections, no property. The incapable ones were controlled by the few capables, who, after 1869-1870, were the District of Columbia members. These latter formed a kind of a “ring" for their mutual benefit. They were involved in other schemes that made their connection with the bank of great use to them. They were at once officials of the bank, and officers of the Bureau or of the army or of the government of the District of Columbia. Howard, Balloch, Alvord, and Smith were bureau officials and were connected with Howard University, and extensive borrowers from the bank; Cooke and Huntington were officials in another bank that put its bad loans off on the Freedmen's Bank; Cooke, Eaton, Huntington, Balloch, and Richards were officials of the notorious District government; Howard, Alvord, Eaton, Stickney, Kilbourn, Latta, Clephane, Huntington, Cooke, and Richards were connected with firms that borrowed large sums from the bank, notwithstanding the fact that officials were prohibited by law from using the funds of the bank, directly or indirectly. 

The trustees were under no penalties for the proper execution of their trust. They were not required to make any deposits in the bank. The law fixed as a quorum nine out of fifty trustees, and further required the affirmative vote of at least five on money matters. The trustees provided in the by-laws for a finance committee of five, of whom three should be a quorum. Thus three could and did habitually dispose of the financial business of the bank when the law required at least five. Often two trustees, or one, or even the actuary (cashier), negotiated important loans without reference to the trustees. 
When this situation was followed by the Panic of 1873 and crash in real estate values, there wasn't much left.  Pretty much no one was prosecuted or held responsible. Fleming tells hard-to-read stories of working people who faithfully put money in the branches for years, only to find that it had all been taken. As Stein and Yannellis write: "In June 1874, the Freedman’s Savings Bank was forced to suspend operations with only 50 cents to cover obligations per depositor. The failure of a bank catering to former slaves, and the loss of their savings, led to general public concern and sympathy for the fate of depositors. Following a congressional investigation, Congress created a program to reimburse up to 62% of savings, but many depositors were never compensated."

Saturday, January 16, 2021

More on the Origins of "Pushing on a String"

Tie a string to an object. When you pull on a string, the object on the other end comes toward you. But when you push on a string, the object at the other end of the string is unaffected, because the string just crumples up. For economists, "pushing on a string" refers to the idea that monetary policy may (in certain circumstances) be more effective at reducing inflation even at the cost of a recession than it is at stimulating an economy. Back in 2015, I posted about an early use of the "pushing on a string" metaphor during Congressional hearings in March 1935

However, Samuel Demeulemeester has recently written to me with several example from the same time frame, but slightly earlier. Jeff Busby was at the time a Congressman from Mississippi. Willford King was a professor of economics at New York University, and a Fellow of the American Statistical Association. Irving Fisher is in the story, too. In short, the metaphor was not a one-off comment in 1935, but was demonstrably familiar to policy-makers and academics at this time.  What follows is from Demeulemeester, with his permission (for ease of reading, I have not inserted additional indenting or quotation marks to  his email):  

I just came across your post of July 30, 2015, “Pushing on a String: An Origin Story”, in which you suggest that this metaphor might first have been used by Representative T. A. Goldsborough during hearings held on March 18, 1935.

Goldsborough actually seems to have gotten this metaphor from Willford King of New York University, who used it during hearings before a subcommittee (presided by Goldsborough) of the Committee on Banking and Currency, House of Representatives, on January 30, 1934. King had himself heard it from “somebody” else:
Mr. BUSBY. Therefore, I think it is more essential we go to the question of dealing with both the up and down amount of bank money that may be issued so as to control it.

Mr. KING. You can prevent overissuance of this bank-deposit currency, but it is very hard to prevent underissuance of the same thing. As somebody said, you can push on a string but it doesn’t produce very good results.

Mr. BUSBY. That is exactly what I have in mind, and I want to see some kind of scheme worked out where we are pushing on the string and you can see some effect on the other end of the string.
(See here, p. 71)
This Mr. Busby would himself use the metaphor in an exchange with Irving Fisher two days later, on February 1, 1934, before the same subcommittee:
Mr. BUSBY. As Dr. King said yesterday, you can pull on a string and feel the effect of it. Therefore, you can pull down the fixed media of exchange, but you can’t push it up, just as you can push on a string and feel no effect at the other end. So in adverse times when property prices are falling the only remedy I see to get efficiency out of the arrangement is for the Government to step in and supply where this by-product of the banks' activities is wiped out.

(Ibid., p. 85)
And Fisher himself would use a variation of the “pushing on a string” metaphor in the following passage of his book 100% Money (1935):
Such must often be our predicament so long as we have a system under which our circulating medium is a by-product of private debt. The time when nobody wants to go into debt is the very time when we most need money and so most hope that somebody will kindly accommodate us by going into debt. Few will do so, despite all the official urging and coaxing and despite the low rates of interest. It is a case of leading a horse to water without being able to make him drink. Or it is like “pushing on the lines” to make the horse go.

(1935, 1st ed., p. 94; [1935] 1936, 2nd ed., p. 105; this passage already appeared in a 1934 draft version of the book)


As Demeulemeester points out in a follow-up email: `By the way, King's statement, as I re-read it, only says that he did not originate the phrase "you can push on a string but it doesn't produce very good results'. This leaves open the possibility that he was the first to apply this metaphor to monetary policy." 

Thursday, January 14, 2021

An Interview with John Roemer on Inequality of Opportunity

The editors of the Erasmus Journal for Philosophy and Economics, Akshath Jitendranath and Marina Uzunova, have prepared "What Egalitarianism Requires: An Interview with John Roemer" (Winter 2020, 13: 2, pp. 127–176).  As they note in the introduction: "Roemer’s work spans the domains of economics, philosophy, and political science, and, most often, applies the tools of general equilibrium and game theory to problems of political economy and distributive justice—problems often stemming from the discussions among political philosophers in the second half of the twentieth century."

A substantial chunk of the interview covers Roemer's background; how his professor parents left the US to work work in Switzerland and Canada for several years in the early 1950s after the State Department found that they were "disloyal"; how he took almost all math classes as a Harvard undergraduate and originally enrolled at Berkeley for a PhD in mathematics; how he was suspended from Berkeley for occupying an administration building in 1968; how took a job teaching math in a "virtually all-black" San Francisco junior high school for five years; how he returned to Berkeley in the economics PhD program; and how he did not read any Marx until 1976, after he took a job at UC-Davis. 

In about 1980, Roemer became part of the "No-BullShit Marxist Group." "Members included philosophers, economists, sociologists, historians, and political scientists. The common task was to re-state Marxian questions in a modern way, and to study them using the tools of analytical social science and philosophy. The school of ‘analytical Marxism’ was quite influential in the 1980s: it was attacked from the left by traditional Marxists, who believed that using these ‘bourgeois’ tools of analysis would surely infect our conclusions. In reply, we called these critics bible-thumpers. ... I tend not to call myself a Marxist anymore because I do not credit many of the ideas that Marx believed were at the center of his view: the labor theory of value, the falling rate of profit, and the claim that dialectical materialism is a special kind of logic."

During this time, Roemer often wrote mathematical expositions of how to define "exploitation" and how exploitation could lead to a defined class structure. But over time, he came to believe that while exploitation was real, it wasn't the central problem of capitalism, and his beliefs shifted to a focus on equality of opportunity. He says: 
I believe that all young adults should begin their productive years with the same amount of wealth. This implies that the inheritance of wealth, and in vivos transfers to the young, must be sharply constrained. If the educational system has succeeded in eliminating inequality of opportunity, and people make different career choices, then differential wealth will emerge during adult lifetimes, and I believe those differences are consistent with justice, as long as there is sufficient income and wealth taxation to prevent income differences from becoming too extreme—so extreme as to threaten solidarity. As I said, Marx’s condemnation of the distribution of capital was based on the history of ‘primitive accumulation’ that he presented. If wealth accumulation is a result of freely chosen labor with equal-opportunity background conditions, I do not believe modest wealth differences are unjust. ... 
Many leftists believe the key to understanding capitalism is to understand the extraction of labor from labor power at the point of production. And indeed, I think Marx sometimes erred in thinking this, as well. My view is that the essence of capitalism is the set of institutions which sanctify and enforce private and unequal ownership of capital—that is, vastly unequal wealth. Now, workers, surely, do face all kinds of oppression at the point of production—bosses who crack the whip, speed up the assembly line, fire workers who organize, etc. There is a constant struggle at work between workers and bosses about the conditions of work.  ... In the last analysis, power comes in the police force that enforces property relations. This is the key locus of power; oppression of workers at the point of production, though perhaps very important in building class consciousness of workers, is relatively small potatoes. Coercion at the point of production was essential in feudalism and slavery, but capitalism has subtler techniques for accumulating wealth.
This approach led Roemer to studies of how much of the current level of inequality in incomes could be accounted for by factors over which a person had no control, including race and gender, but also a range of other factors. He says: 
Before 1993, almost all measures of unequal opportunity focused upon one circumstance: the rank of the individual’s father in the income/wealth distribution of his generation. What these studies call intergenerational immobility is a special case of opportunity inequality. Societies in which the individual’s rank in the income distribution of his generation was only weakly related to the father’s rank in the income distribution of his generation were ones with relatively equal opportunity. These studies, to be precise, looked at only one circumstance in explaining the child’s income: his father’s income rank. It turns out, using the algorithm that I propose to measure inequality of opportunity, that circumstance (father’s rank) accounts for less than 10% of income inequality in a society. Today, in the plethora of studies measuring inequality of opportunity (IOp), it is not uncommon to explain 30%, even 50% of income inequality, as due to circumstances. Of course, these studies look at many other circumstances in addition to father’s income rank! This shows how the IOp theory has greatly reduced the set of actions for which people are implicitly held responsible. ... If I can show that, in my country, 50% of income inequality is due to factors that anyone would agree individuals should not be held responsible for, whereas the standard conservative view in my country is that everyone should be capable of pulling herself up by her bootstraps, I have a powerful argument to reform tax, educational, and healthcare policy.
These arguments led Roemer in several directions. He argues that if some share of the talents we have are "morally arbitrary"--not the result of our own efforts but rather passed along by family or limited by social constraints--then part of income should be "owned" by the community, too. He says: 
We should not have ...  full ownership of our labor power. If the talents we have are in part morally arbitrary, they should in part be owned by the community. For a person not to be a full self-owner does not mean the community is free to harvest one of his kidneys to transplant into another, but it may well mean that he must pay taxes on his earnings to the state. ...  The libertarian attack on common ownership of talents—that it would expose everyone to possible kidney harnessing—is a non sequitur.
Thinking about equality of opportunity in these broad terms has led Roemer to work outside of utilitarian frameworks: in his view, what matters is not just a welfare level for each individual, but a combination of thinking about the circumstances of people and their effort level.
I extended Sen’s critique of welfarism in the theory of equality of opportunity that I proposed. The language of that theory includes circumstances, effort, and type. These are fundamentals, along with utility. One cannot judge how just a situation is by knowing only the welfare levels of people in it: one must know how hard they tried and what their circumstances were. The equal-opportunity theory is non-welfarist. 
As an economist, Roemer is also well aware of the power of market forces and the perils of government ownership when it comes to achieving efficiency. Thus, he has for some years advocated versions of "market socialism," which would seek to combine market forces--like workers who get paid wages--with a much higher level of equality of opportunity. He says: 
I do not believe there is an inherent injustice in wage labor. If I did believe there were, I could not advocate the use of markets under socialism. And I think that without markets, we would be—at this point, before we discover some other way of allocating resources—condemned to terrible inefficiency and poverty. In my recent work ...  I argue that markets combined with solidaristic optimization by workers and investors, produces much better results than capitalism—in terms of both efficiency and equity. ...
I am saying that the history of the last several centuries can be viewed as one of rectifying the terrible truncation of opportunities of certain peoples, due to certain circumstances—morally arbitrary characteristics of persons, that come to inhibit their chances of leading a fulfilling life. In the middle of the twentieth century, John Rawls provided a general argument that race and sex were only special cases of the morally arbitrary distribution of circumstances whose effects on income and welfare would be eliminated in a just society. Of course, as you say, it will be impossible ever to eliminate completely these effects. Highly talented people will probably always lead lives that are more successful and happier than they deserve. But we proceed incrementally: we do the best we can. The Enlightenment, beginning, let us say, with the French Revolution, is still far from complete. ... My goal is to focus on building solidaristic societies, and I think that the most important barrier to solidarity is the individualistic ethos of capitalist society where the accumulation of private wealth is the guiding force. We are still very much in the era when inequality of income and wealth is the main problem. I speak not only of poverty, but of the way capitalist society distorts human behavior and politics.
Finally, I wanted to pass along one of Roemer's thoughts about academic research: "I find it takes about ten years for my work on a problem to become mature, so be patient. In an intellectual life of forty years, count yourself a success if you can develop to fruition three or four good ideas."

For me, Roemer is one of the answers to the question I sometimes get: "If I wanted to read the work of a serious and well-regarded modern economist coming from the Marxist tradition, where should I start?" Those who want an additional dose of Roemer might begin with the four articles in this issue of the Erasmus Journal for Philosophy and Economics that are reviews of Roemer's recent book on "Kantian optimization"--that is, a society where people optimize based on cooperative values rooted in social solidarity rather than on individualistic ones. Roemer also offers a rejoinder. Other accessible starting points for more Roemer include: