Your Daily Tao

This is a book about three Great Untruths that seem to have spread widely in recent years: The Untruth of Fragility: What doesn’t kill you makes you weaker. The Untruth of Emotional Reasoning: Always trust your feelings. The Untruth of Us Versus Them: Life is a battle between good people and evil people.

I’ll be covering a few excerpts of this book for the next week. This book is from one of my favourite authors, and this is a fascinating and interesting read where you can learn not jut about the development of your child, but also find some explanations as to why we find ourselves moving into a ever more divisive political culture in the United States.  I think some of trends are also relevant and happening in our local culture.

As John Maynard Keynes, who transformed macroeconomic policy with his ideas, wrote: “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.” Ideas are powerful. Ideas drive change. Good economics alone cannot save us. But without it, we are doomed to repeat the mistakes of yesterday. Ignorance, intuitions, ideology, and inertia combine to give us answers that look plausible, promise much, and predictably betray us. As history, alas, demonstrates over and over, the ideas that carry the day in the end can be good or bad. We know the idea that remaining open to migration will inevitably destroy our societies looks like it is winning these days, despite all evidence to the contrary. The only recourse we have against bad ideas is to be vigilant, resist the seduction of the “obvious,” be skeptical of promised miracles, question the evidence, be patient with complexity and honest about what we know and what we can know. Without that vigilance, conversations about multifaceted problems turn into slogans and caricatures and policy analysis gets replaced by quack remedies. The call to action is not just for academic economists—it is for all of us who want a better, saner, more humane world. Economics is too important to be left to economists.

The final passage of this book. In today’s media, many narratives can be pushed for different agendas, and it is easy to select things that we want to believe in, and find confirming evidence for that. What we can do, is to be constantly vigilant with the ideas we see peddled in the market, and never be too quick to jump to conclusions on things we don’t know about.

The rise of the superstar firms also offers an explanation for why overall wage inequality has been rising: some firms are now much more profitable than others and they pay higher wages. It is also true that profitability is more variable than it used to be, with more clear winners and clear losers, even outside the set of superstars. In fact, in the United States, the increase in inequality between the average salaries at different companies can explain two-thirds of the overall rise in inequality (increase in inequality between workers within the same company explains the rest). A lot of this increase in inequality between firms seems due to changes in who works where; the highest-paid workers in low-paying firms are moving to those that pay more. If one assumes that higher earnings reflect higher productivity (which is probably true on average), then the more productive workers are increasingly working with other high-productivity workers. This is consistent with a theory in which superstar firms attract both capital and good workers. If more productive people benefit more from being paired with other productive people, then the market should drive such people to come together to form high-productivity firms that would, as a result, have higher wages and salaries than other firms. Moreover, once a firm has invested in a galaxy of talents, the CEO of such a firm is in a position to make a big difference; if he pushes them down the wrong path, he would waste a whole lot of productive capacity. Therefore, such firms should strive to get the best CEO possible even if that requires paying him or her what some may feel is an obscene salary. The rise in top incomes, in this view, is just the flip side of the rise of superstar firms that value getting the best top management and are willing to pay a lot for them.

One of the trends I have remembered reading was the high (market value) / (no of employees) ratio of some of the biggest technology companies in the world. Put in contrast to the biggest market cap companies decades ago such as General Electric, and the ratios are on a completely different scale.

A lot of the difference in scale is enabled by technology, and how digital mediums have allowed a smaller group of people to  disproportionately impact society much more than before. It makes sense that knowledge workers are valued more and since there are fewer employees, it might be justifiable to the firm to find the best talent as each employee can potentially impact the firm’s bottom line much more than before.

We understand that a carbon tax is not an easy sell (taxes that hit most people never are), but our view is that it should be possible to make it politically acceptable by making it absolutely explicit that the carbon tax is not a way to raise revenues. The government should structure the carbon tax in a revenue-neutral way, such that tax revenues would be handed back as a compensation: a lump sum to all those at the lower end of the income scale, who would therefore come out ahead. This would preserve the incentive to conserve energy, drive less or drive electric cars, but make it very clear that the less wealthy would not pay for it. Given that energy consumption is a matter of habit, the tax should also be announced well in advance to give people time to get ready for it. More generally, we are quite aware that it will cost money to prevent climate change and to adapt to the part already on its way. There will have to be investments in infrastructure, and meaningful redistribution to those whose livelihoods are affected. In poor countries, money could help the average citizen achieve a higher quality of life in a way less threatening to the future of the world. (Think of the air-conditioning debate, for example; why doesn’t the world simply pay India to leapfrog to the better technology?) Given that the poor do not consume very much, it would not take a lot to help the world’s poor consume a bit more, but also get better air and produce less emissions. The richest countries in the world are so rich they can easily pay for it. The question is to frame the debate in a way that does not pitch the poor in poor countries against the poor in rich countries. A combination of taxes and regulations to curb emissions in rich countries and pay for a clean transition in poor countries may well reduce economic growth in the rich country, though of course we don’t know for sure, since we don’t know what causes growth. But if much of the cost is borne by the richest in the rich countries and the planet benefits, we see no reason to shy away. In Delhi and Washington and Beijing, it is in the name of growth that policy makers drag their feet when called upon to enact or enforce pollution regulations. Who benefits from this GDP growth remains an afterthought. Economists deserve their fair share of the blame for stoking this rhetoric. Nothing in either our theory or the data proves the highest GDP per capita is generally desirable. Yet because we fundamentally believe resources can and will be redistributed, we fall into the trap of always trying to make the overall pie as big as possible. This flies directly in the face of what we have learned over the past decades. The evidence is clear—inequality has risen dramatically in recent years, with searing consequences for societies across the world.

The taxation of carbon emissions is definitely something that we should be discussing more about when action for climate change is urgent. On theory, it makes sense to tax the negative externalities (carbon emission) of using fuel and electricity and use the revenue to channel towards more sustainable energy sources.

However, probably the biggest barrier, as stated in this excerpt, is the political appeal of adding a tax to someone we all use, and something that the poor will be disproportionately affected by. Electricity and fuel probably take up a larger proportion of expenses of people with lower income. The key is selling this idea as revenue neutral and trying to bring redistribute the surplus of such revenues to the people.

The effect of hot weather on productivity is not limited to agriculture. People are less productive when it is hot, particularly if they have to work outside. For example, evidence from the United States suggests that at temperatures over 38ºC, labor supply in outdoor jobs drops by as much as one hour per day, compared to temperatures in the 24ºC–26ºC range. There are no statistically detectable effects in industries that are not exposed to climate (for example, nonmanufacturing indoor activities). Children have lower test scores at the end of particularly hot school years. These effects are absent where schools have air conditioning, so they affect poorer children the most. In India, few factories have air conditioning. In a garment factory in India, a study looked at how labor productivity varied with temperature. For temperatures below 27ºC–28ºC, temperature had a very small impact on efficiency. But for mean daily temperatures above this cut-off (about one quarter of production days), efficiency went down by 2 percent for every one degree Celsius increase in temperature. Putting everything together, across the entire world, a study finds that it being 1°C warmer in a given year reduces per capita income by 1.4 percent, but only in poor countries. And, of course, the consequences of a warmer climate are not limited to income. Numerous studies emphasize the danger of hot temperatures for health. In the United States, an additional day of extreme heat (exceeding 32ºC) relative to a moderately cool day (10ºC–15ºC) raises the annual age-adjusted mortality rate by about 0.11 percent. In India, the effect is twenty-five times larger.

With the recent hot weather (with temperatures rising above the threshold of 28ºC frequently), thought this would be an interesting excerpt to bring up. With the rise in average temperatures, the economically weaker regions would be the one who take the biggest brunt of the negative effects of hot weather, whether it be economically or health-wise.

The contact hypothesis has been intensively studied. A recent review identifies twenty-seven randomized controlled trials (RCTs) investigating Allport’s idea. Overall, these studies find that contact reduces prejudice, although the review calls attention to the importance of the nature of the contact. If this is right, schools and universities are obviously key. They bring together young people from different backgrounds in a single location, at an age when everyone is much more plastic. In one large US university, where roommates were assigned at random, a study found that white students who happened to end up with African American roommates were significantly more likely to endorse affirmative action, and that white students assigned roommates from any minority group were more likely to continue to interact socially with members of other ethnic groups after their first year, when they had full freedom in choosing whom to associate with.This process of socialization could start even earlier. A policy change in Delhi demonstrated the power of bringing together young children from very different backgrounds. Starting in 2007, elite private schools in Delhi were required to offer places to poor students. In an ingenious study on the impact of this policy change, randomly chosen children were given the responsibility to select teammates for a relay race.Some of them attended schools that had already admitted poor children, and some attended schools that had not done so yet. And, within schools, some children were in study groups with poorer children (based on the first letter of their first name), and some were not. To help them decide who they wanted to partner with in the race, they were all given a chance to observe everyone else run a test race. There was, however, a catch. They had to agree to have a playdate with whomever they picked for their team. The study found that those students from affluent families who had not been exposed to poor students in their school avoided picking them, even when they were better runners, to avoid having to spend time with them. But those who’d had some exposure to children from less-well-off families in their schools, thanks to the new policy, were much more likely to pick the best runner even if the child was from a poor family, because the prospect of a playdate was no longer all that daunting. And those who were in a study group with poor children were even more likely to invite poor child to run and play with them. Familiarity performed its magic.

The “Contact Hypothesis”. How contact with people of different social groups can actually help reduce prejudice. This excerpt talks about 1 innovative study done in India, and there has been evidence to support this hypothesis with 27 other RCTs (Randomized Controlled Trials) done.

Suppose people suspect that others know something (perhaps the train door will open at a particular spot). They would then join the crowd (perhaps at the cost of ignoring their own information that the train is likely to stop somewhere else). But that would make the crowd bigger, and so the next person coming along would see an even bigger crowd and be even more likely to think this conveyed useful information. They might also join the crowd, for the same reason. In other words, what looks like conformity could be the outcome of rational decision making by many individuals with no interest in conforming, but who believe others might have better information than they. He called it a “simple model of herd behavior.” The fact that each individual decision is rational does not make the outcome desirable. Herd behavior generates informational cascades: the information on which the first people base their decision will have an outsized influence on what all the others believe. A recent experiment nicely demonstrates the power of random first moves to generate cascades. Researchers worked with a website that aggregates advice on restaurants and other services. Users post comments, and other users add an up- or down-vote. In their experiment, the website randomly chose a small fraction of comments and gave them one artificial up-vote as soon as they were posted. They also randomly chose another small batch to get a down-vote. The positive up-vote significantly increased the probability that the next user also gave an up-vote, by 32 percent. After five months, the comments that had received one single artificial up-vote at the beginning were much more likely to get a top grade than those that got a single down-vote. The influence of that original nudge persisted and grew, despite the fact that the posts had been viewed a million times. Fads, therefore, are not necessarily inconsistent with the paradigm of standard preferences. Even when our preferences do not directly depend on what other people do, the behavior of others can convey a signal that alters our beliefs and our behavior. In the absence of a strong reason to believe otherwise, I might infer from other people’s actions that a tattoo does look good, that drinking banana juice will make me slim, and that this harmless-looking Mexican man is really a rapist at heart.

A common heuristic that we usually rely on is on social cues, where we base our preferences on what others like. It also explains how one choosing to queue at a food stall that already has a long queue as a rational choice. After all, we are just playing the odds and if the odds are such that someone else likes it enough to queue for it, it is probably good.

But such herd behaviour, while probably rational on an individual basis and most of the items, might lead to irrational outcomes and strongly held preferences which were simply influenced by what one was first exposed to. One’s political opinions can be easily generated by “the herd”.

The idea that each one of us will have a fixed set of preferences (as in economic theory) might not be true when we are so easily susceptible to social suggestions. You might not really prefer that chicken rice with the long ass queue to the other stall without the queue to subconsciously influence you.

The real migration crisis is not that there is too much international migration. Most of the time, migration comes at no economic cost to the native population, and it delivers some clear benefits to the migrants. The real problem is that people are often unable or unwilling to move, within and outside their country of birth, to take advantage of economic opportunities. Does that suggest that a forward-looking government should reward people who move and perhaps even penalize those who refuse to? This might sound outlandish, given that the current conversation is mostly focused on how to limit migration, but in the 1950s the governments of the United States, Canada, China, South Africa, and the Soviet Union were all heavily involved in more or less forced relocation policies. Those policies often had unstated but brutal political goals (suppression of troublesome ethnic groups being one), but they tended to be cloaked in the language of modernization, which emphasized the economic deficiencies of traditional economic arrangements. The modernization agenda in developing countries has often taken inspiration from these examples. There is also a long tradition in developing countries of governments using price and tax policies to benefit the urban sector at the cost of the rural. Many countries in Africa in the 1970s created what they called agricultural marketing boards. This was a cruel joke, since many of the boards were intended to prevent the marketing of produce so the board could buy it at the lowest prices, thereby stabilizing prices for city dwellers. Other countries, like India and China, banned exports of farm products to keep prices where urban consumers wanted them. A by-product of these policies was to make agriculture unprofitable, encouraging people to leave their farms. Of course, these policies hurt the poorest people in the economy, the small farmers and the landless laborers, who may not have had the wherewithal to move. This unfortunate history should not, however, blind us to the economic rationale for promoting migration. Mobility (internal and international) is a key channel through which standards of living can even out across regions and countries, and regional economic ups and downs can be absorbed. If workers move, they will take advantage of new opportunities and leave regions hit by economic adversity. This is how an economy can absorb crises and adapt to structural transformation.

It might be hard to imagine, and probably not that relevant for our local context, but lack of immigration is also a problem, particularly when people do not want to leave areas with poor economic opportunities for those with better. On a whole, the authors are saying, that increased mobility is overall beneficial for everyone and we should embrace it.

Fortunately, inspired by Card’s work, a number of other scholars tried to identify similar episodes where migrants or refugees were sent to a place with little warning and no controls over where they should go. There is a study examining the repatriation to France of Algerians of European origin resulting from Algeria’s independence from France in 1962.24 Another study looked at the impact of massive immigration from the Soviet Union to Israel after the Soviet Union lifted the emigration restriction in 1990, which increased Israel’s population by 12 percent in a space of four years. Yet another looked at the impact of the large influx of European immigrants into the United States during the age of the great migration (1910–1930). In all of these cases, the researchers found very little adverse impact on the local population. In fact, sometimes the impacts were positive. For example, the European migrants to the United States increased overall employment in the native population, made it more likely natives would become foremen or managers, and increased industrial production. There is also similar evidence from the more recent influx of refugees from all over the world on the native population in Western Europe. One particularly intriguing study looks at Denmark. Denmark is a remarkable country in many ways, and one of them is that it keeps detailed records of each member of its population. Historically, refugees used to be sent to different cities without regard for their preferences or their ability to find a job. All that mattered was the availability of public housing and the administrative capacity to help them settle down. Between 1994 and 1998, there was a large influx of immigrants from countries as diverse as Bosnia, Afghanistan, Somalia, Iraq, Iran, Vietnam, Sri Lanka, and Lebanon, and they ended up sprinkled, more or less randomly, across Denmark. When the policy of administrative placement was abandoned in 1998, migrants most often went where their co-ethnics were already located. Therefore, the places where the first group of migrants from, say, Iraq had landed more or less by pure chance are where the new Iraqi migrants headed. As a result, some places in Denmark ended up getting a lot more migrants than others, for no good reason other than at some time between 1994 and 1998, they had spare capacity for resettlement. This study came to the same conclusion as the historical ones. Comparing the evolution of wages and employment of less-educated natives in cities subject to this chance influx of migrants to those in other cities, it found no evidence of negative impacts. Each of these studies suggests low-skilled immigrants generally do not hurt the wages and employment of the natives. But the level of rhetorical fervor in the current political debate, never mind whether it is supported by the facts, makes it hard to see past the politics of the people involved in the debate. Where, then, is there a calm, methodical voice to be found? Readers interested in the delicate art of consensus building in the economics profession may want to peruse page 267 of the (free) report on the impact of immigration edited by the US National Academy of Sciences, the most respected body for academics in the country. From time to time, the National Academy of Sciences convenes panels to summarize the scientific consensus on an issue. The panel for the immigration report had some fans of immigration and some immigration skeptics (including George Borjas). They had to make sure to cover the good, the bad, and the ugly, and their sentences often thread a long-winded path, but their conclusion is as close to unequivocal as you are ever going to get from a group of economists: “Empirical research in recent decades suggests that findings remain by and large consistent with those in The New Americans National Research Council (1997) in that, when measured over a period of more than 10 years, the impact of immigration on the wages of natives overall is very small.”

A much longer passage today, but I wanted to show all the different studies in history listed in the book that reflected the key conclusion in the cover image. When migrants come in, while they do take increase the supply of labour, they also contribute to further economic growth and demand through consumption, and this also generates new labour demand.

Now it is probably too complex to mathematically map out the incremental impact of 1 migrant on native wages, but in general, what the authors are saying is that it is unlikely that immigration can hurt the local population and probably makes it better off holistically, on the aggregate.

We don’t for a moment believe that when economists and the public have different views, economists are always right. We, the economists, are often too wrapped up in our models and our methods and sometimes forget where science ends and ideology begins. We answer policy questions based on assumptions that have become second nature to us because they are the building blocks of our models, but it does not mean they are always correct. But we also have useful expertise no one else has. The (modest) goal of this book is to share some of this expertise and reopen a dialogue about the most urgent and divisive topics of our times. For that, we need to understand what undermines trust in economists. A part of the answer is that there is plenty of bad economics around. Those who represent the “economists” in the public discourse are not usually the same people who are part of the IGM Booth panel. The self-proclaimed economists on TV and in the press—chief economist of Bank X or Firm Y—are, with important exceptions, primarily spokespersons for their firms’ economic interests who often feel free to ignore the weight of the evidence. Moreover, they have a relatively predictable slant toward market optimism at all costs, which is what the public associates with economists in general. Unfortunately, in terms of how they look (suit and tie) or the way they sound (lots of jargon), the talking heads are hard to tell apart from academic economists. The most important difference is perhaps in their willingness to pronounce and predict, which unfortunately makes them all the more authoritative. But they actually do a pretty poor job of predicting, in part because predictions are often well-nigh impossible, which is why most academic economists stay away from futurology. One of the jobs of the International Monetary Fund (IMF) is to forecast the rate of growth of the world economy in the near future. Without a whole lot of success, one might add, despite its team of many very well-trained economists. The Economist magazine once computed just how far the IMF’s forecasts were off on average over the period 2000–2014.12 For two years from the time of prediction (say, the growth rate in 2014 predicted in 2012), the average forecast error was 2.8 percentage points. That’s somewhat better than if they had chosen a random number between–2 percent and 10 percent every year, but about as bad as just assuming a constant growth rate of 4 percent. We suspect these kinds of things contribute substantially to the general skepticism of economics. Another big factor that contributes to the trust gap is that academic economists hardly ever take the time to explain the often complex reasoning behind their more nuanced conclusions. How did they parse through the many possible alternative interpretations of the evidence? What were the dots, often from different domains, they had to connect to reach the most plausible answer? How plausible is it? Is it worth acting upon, or should we wait and see? Today’s media culture does not naturally allow a space for subtle or long-winded explanations. Both of us have had to wrangle with TV anchors to tell our full story (often to have it edited out of what gets shown), so we recognize why academic economists are often unwilling to take on the responsibility of speaking out. It takes a lot of effort to be heard properly, and there is always the risk of sounding half-baked or having one’s careful words manipulated to mean something quite different.

I read the authors previous book, Poor Economics, which I have also featured previously and I really wanted to share some of the interesting stuff I’ve read on this book!

I feel this passage is a good start for this series of posts. It basically indicates why the authors think there is a general mistrust of economists from the public. In addition, the media channels of today make it hard for us to accept nuance and subtle explanations. Simple and catchy phrases are those that “go viral”. Any nuanced opinions are either not recognized, or might be taken off context and end up as a negative headline on some article or social media post.