Chetty et al and the metamorphosis of the earnings curve

The Chetty et al. paper is probably one of the most papers of 2016 and it will long be debated. Many comments have been made on this and I need to reiterated that I do not believe the trend to be off, merely the level. I have just found another reason to doubt the level by thinking about demography. It relates to one key methodological decision made in the paper: taking the income of parents in the 25 to 35 years old age-window. This is a fixed window where their incomes are compared to that of a child at age 30.

This is probably a flaw that alters the level evolution importantly. My argument is simple. A person born in 1940 was, by the time he was 30, close to his peak earning point. A person born in 1980, by the time he is 30, is further away from a higher peak earning point. Thus, you are not comparing the same type of birth cohorts. In simpler terms, I am saying that with the 1940 birth cohort you are comparing children who, by age 30, were at the apex of their earnings while those of the 1980 birth cohort were not at the apex.

From the work of Ransom and Sutch on the economic history of aging in the United States, I remembered that graph (for late 19th century Michigan).  What I see is that for most workers, by 30 years of age, they are pretty much at the top of their earnings cure. Over time, if the shape of the curve does not change and simply keeps moving upwards, then there are no problems with the level of absolute mobility measured by Chetty et al.

earningfunctionsusa1890

But here is the problem, the curve does change shape! There are no longer flat lines like that of the Michigan farm laborers in the figure above. Earnings curve look more and more like that of the Michigan railroad employees. Not only that, the peak point is now higher in terms of income and at a further point in time. And that makes sense since we are studying longer and working menial jobs while we do for which we earn low incomes. When we enter the labor force, we get a very steep rise at a later point in our lives than our fathers or mothers did. So the earning curve of younger cohorts is more skewed than that of earlier cohorts. Kitov and Kitov shows the evolution of income by age groups relative to a fixed groups and as one can see, the youngest are getting further away from the peak over time – implying that it is shifting.  Again, from Kitov and Kitov, you can see that the 2013 curve starts later and has a steeper curve than the 1967 curve. From this trend in the earnings curve, we can more or less be certain that by 30, a person born in 1940 was closer to peak earnings than a person born in 1980. Thus, the person born in 1940 is at his apex (by the time he turns 30) when compared to his parents and the person born in 1980 is not at his apex when compared to his parents. (I am only using Kitov and Kitov for the sake of showing the evolution but this metamorphosis of the curve, I think, is not in dispute).

So, by setting the boundaries for measuring absolute mobility at a fixed point, Chetty et al. are capturing some changes that are purely related to changing demographics of the labor market and not absolute mobility. The 1940 level of mobility is too high relative to that of 1980. Chetty et al. do try to address this by looking at different time windows (they just don’t have a “rolling age window” which would be ideal – like indexing to the median age of the population).

I do accept that mobility has fallen since 1940, but I am very skeptical about how robust the big drop shown actually is. The issues of changes in family size, price deflators, taxes and transfers made me willing to entertain a fall of 25-30 points (rather than 40-45), now with this issue of the metamorphosis of the earning curves in mind, I am inching towards 20-25 points drop (still substantial).

Note: Still a big fan of Chetty et al. and their works is crucial, that’s why I don’t want pundits to try and extract this beyond what it actually says and does not say.

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Sons outearning Fathers in Chetty et al. : working hours should be considered

In response to my post yesterday, my friend and economist/nuclear engineer (great mix) Laurent Béland pointed out that the Father-Sons mobility figures in Chetty et al. are depressing. Yes, at first glance, they are (see below – the red line). fathersons

But, at second glance, it is not as terrible. Think about family structures with the 1940 birth cohorts. The father works and, in most likelihood, the mother is a stay-at-home father. Most of the earnings come from the father who probably works 45 to 60 hours a week.  If my father earns 40,000$ at 60 hours a week or earn 40,000$ at 40 hours a week, the line remains at the same height, but we are not talking about the same living standard in reality. Chetty et al. do not account for hours worked to achieve income.  The steep decline – faster than the baseline of household-size adjusted decline – matches the steep increase in female labor force participation and the decline labor force participation of males (see graph here and Nicolas Eberstadt’s work here) as well as the decline in hours worked by males.

If the question had been “what are your chances of out-earning your father per hour worked”, then the red line would not have fallen like that. Income divided by labor supplied would probably bring the red-line back with the blue-line.

Note: Again, please note that I am not trying to rip apart Chetty et al. (as some have claimed elsewhere). Their work is great and as a guy who does all his research on providing data series regarding economic history, I am never going to rip on someone who does hard data work like Chetty et al. did ! My point is that I am not convinced that the decline is so big. And, in good faith, it seems that Chetty et al. do try to put the “caution” labels where its needed – and its important to discuss those caution labels before some politician or two-cents-pundit goes all Trump on us by saying stuff that this doesn’t say!

A flaw regarding the chance of “out-earning” your parents

When Raj Chetty publishes a paper, it generally comes with a splash. The last one is no exception. His paper (co-authored), picked up by David Leonhardt at the New York Times and Justin Wolfers on Twitter, basically measures the American dream : what are your chances to do better than your parents. The stunning conclusion is that someone born in 1940 had a 90%+ chance of “out-earning” his parents compared with a few points above 50% for those born in the 1980s. I am not convinced. Well, when I am not convinced, I am saying I am not convincing about how big the drop is! I think the drop is smoother (the slope of decline is gentler) and the starting point for the 1940 cohort is too high.  As a big fan of Chetty, I must press this point.

More precisely, I am saying that the bar (income threshold) over which someone had to jump in 1940 is underestimated and overestimated in 1980. Setting the bar too low (high) means very high (low) chances of “out-earning” your parents. To set the bar too low, you must underestimate (overestimate) the income of the parents.  This could occur if household economies of scale are not accounted for.

An income of 30,000$ for 3 persons is not the same as an income of 60,000$ for 6 peoples. On a per capita basis, the income is the same. But, if you adjust for economies of scale in housing and furnitures, there are differences (the simplest is square root).  This gives you income per adult equivalent. Chetty et al. are aware of that and they provided a sensitivity analysis which is not mentioned by those who are relaying the article. Since household size has tended to fall over time, the growth in per capita income is faster than the growth in income per adult equivalent (a better measure). Any correction for this long-term demographic trend would attenuate the slope of the decline of the chance to out-earn your parents. And indeed, once Chetty et al. make the correction, the decline is much more modest (but still present – see below).

size

Simultaneously, Chetty et al. also present other important sensitivity checks. All of them relevant. But, in a strange decision, Chetty et al. decided to isolate each of the sensitivity checks rather than compile them. Taken individual, they all seem minor – except adjusting for family size. But compound this with the other sensitivity check proposed by Chetty et al.: price deflators. Using the well-known bias in the the CPI that overestimates inflation by 0.8%, Chetty et al. find that, by the end of their perod, there is roughly a ten percentage point difference between the baseline uncorrected CPI and the corrected CPI (see below). Compound this with the corrections for family and you still get a decline – but again the slope of the decline is much more modest. If you add panel B from figure 3 in Chetty et al – which includes taxes and transfers – you probably get a few extra points up. There will still probably be a decline, but a moderate one.

pricetaxes

Finally, at footnote 19, Chetty et al. also point out that they do not account for in-kind transfers prior to 1967 (there were some).  And, on page 13, they point out that “one may be concerned that levels of absolute mobility for recent cohorts may still be understated because of increases in fringe benefits, nonmarket goods, or under-reporting of income in the CPS”. Add in all these little extra problems to the family size, the transfers and the inflation correction and I am not sure how big the drop from 1940 to the end of the studied period is. Finally, I would also add that an understudied point in economic history is what the distribution of in-kind payments according to income was. From studying the British industrial revolution, I have generally to see that it is the poorest workers who receive in-kind payments (which are not measured) and the richest receive much fewer of those in proportion of their incomes. One of the few to note that distributional was the hardcore left-leaning scholar Gabriel Kolko who mentioned this issue in Dissent back in the 1950s.  If Kolko is correct, then the income of “poor parents” in 1940 is underestimated. As a result, the bar over which the children of said parents must jump is set mildly too low. If that is the case, the odds for the 1940 birth cohort are overestimated.

Combine all of these things together and I am not sure that the drop is as dramatic as many are making it out to be. I would be very satisfied if Chetty et al. would publish all the corrections they did and do a sensitivity check with hypothetical regarding a sliding-scale of in-kind payments in 1940 according to income (10% of income for poorest to 0% for the richest). I would just like to see how much it matters.

A Hayekian View of Safe Spaces

The concept of a “safe space” has dominated the discourse in identity politics for the last several years. Proponents of safe space, mostly left-leaning millennials are now demanding that colleges, schools, corporations, and various other institutions remove potentially offensive or triggering ideas or images that might harm minorities. Much of the time, this leads to hilariously captious nitpicking over things like Halloween costumes and ethnic food. Other times, it leads to what critics (mostly conservatives and libertarians) see as threats to free speech. It has led to violent reactions to opposing candidates, the ridiculous firing of college presidents, and censoring of speakers at universities.

Largely, the conservatives and libertarians are right. College and society as a whole are not and should not be “safe spaces.” Especially in education, one should be exposed to offensive, radically different ideas and world views. The reason free speech and academic freedom exists, as JS Mill argued in On Liberty, is because stifling freedom of expression robs humanity of potentially true ideas in the future. There is a similarity the merits of freedom of speech and entrepreneurship in the market; dissenters with public opinion are essentially ideological entrepreneurs who are discovering better vocabularies and better ways of thinking. If we stifle the free market, we are stuck with the same suboptimal products, services, technologies and methods of production; if we stifle free speech we risk being stuck with the same false ideas.

There is little I can say in defense of free speech on college campuses that hasn’t been said before. How coddling the youth leads to intellectual stagnation, or how tolerance is a two-way street and if we are to tolerate liberal point of views, we should tolerate bigotry. However, there are two points that are too often overlooked in the debate over safe spaces by the right wing critics.

First, the idea that the drive for safe spaces and censorship of ideas is solely a left-wing phenomenon is a complete and total myth. Conservatives like to fashion themselves as the “strong” defenders of free speech and inquiry, and the wimpy leftists as fascists seeking to protect their fragile little feelings. Beyond the fact that these are over-generalizations, it is a fact that conservatism is occasionally as much an enemy to free speech in trying to create “safe spaces” for people who agree with conservative, Christian values as the leftists are in trying to create safe spaces for minorities. I might have selection bias in that I recently left the ultra-conservative Hillsdale College, but there were many comical attempts there to censor ideas of those who disagreed with the college’s overwhelming conservatism; whether it was the administration’s banning of an LGBT group, students protesting a theatrical performance that included gay characters, or the students throwing a fit over the college using Starbucks because their CEO is a liberal. Look no further than some of the policies at colleges like Bob Jones, Patrick Henry, or Liberty University (my mother’s alma mater, for the record) where free speech is regularly suppressed to support conservative propaganda. Or the events which bear an uncanny resemblance to the recent incident at Claremont at William and Mary last decade.

As a further anecdote, I was a co-founder of the Gadfly Group at Hillsdale which sought to intellectually provoke Hillsdale students by promoting non-conservative political and philosophical viewpoints. One day, the president of the college (Dr. Larry Arnn) flat out told me and the group’s main founder that he didn’t think the group should or needed to exist on campus. While we were forming, at least according to Arnn, one of the deans had attempted to stop our approval by the administration (though, thankfully, the provost disagreed). After the group’s formation, though we had a number of popular events and many of the students were supportive of us, many students ridiculed us as “pseudo-intellectuals” engaging in “intellectual masturbation” (actual words said to me), calling us “angry libertarians” (even though I was the only libertarian in the group and we did events on people like Rawls), and some students were extremely offended by our presence and said the group should be banned. If that’s not evidence of right-wing censorship on college campuses, I don’t know what is. It’s enough that I’d consider writing a book in the spirit of Buckley entitled Ubermensch and Man at Hillsdale College.

Second, despite the problems with safe spaces when applied to macro level social institutions, freedom of association is consistent with a limited concept of safe spaces when applied to micro level social organizations. Though I detest their means, I do sympathize with many of the ends of these so-called “social justice warriors.” I am a liberal in the Rortian sense that I think cruelty is the worst thing you can do, and much of this attempt to create “safe spaces” is an attempt to what they perceive reduce cruelty to minority groups. Of course, they take it way too far in complaints about cultural appropriation which are not cruel to anyone, but it doesn’t diminish the fact that safe spaces are a potentially useful construct if done correctly.

The biggest problem that the Social Justice Warriors commit is a problem that Hayek pointed out so eloquently in The Fatal Conceit. As Hayek points out, modern man exists in “two worlds at once.” One, we live in the micro-level war world of intimate social relations such as families, immediate communities, and friends. (The type of people who are included in Dunbar’s number.) But we also exist in the “extended order,” the macro-level relationships that include humans we interact with and know, but only distantly; like trading partners in a large market, other citizens of a nation, or other members of our larger culture. Hayek’s writings on this are worth quoting at length:

Moreover the structures of the extended order are made up not only of individuals but also of many, often overlapping, sub-orders within which old instinctual responses, such as solidarity and altruism, continue to retain some importance by assisting voluntary collaboration, even though they are incapable, by themselves, of creating a basis for the more extended order. Part of our present difficulty is that we must constantly adjust our lives, our thoughts and our emotions, in order to liver simultaneously within different kinds of orders according to different rules. If we were to apply the unmodified, uncurbed rules of the micro-cosmos (ie., of the small band or troop, or of, say, our families) to the macro-cosmos (our wider civilization), as our instincts and sentimental yearnings often make us wish to do, we would destroy it. Yet if we were to apply the rules of the extended order to our more intimate groupings, we would crush them. So we must learn to live in two sorts of worlds at once.  (Bold mine, Italics his)

Those who would seek to create a safe space out of the entire university or society at large are applying the rules of our macro-cosmos to our micro-cosmos. The idea that we should not bring up certain topics or ideas in certain social situations out of considerations for our fellow human beings is the truth behind the safe space. But to apply that principle to every social situation within a university or nation is a huge mistake. Safe spaces make sense for some of those overlapping sub-orders and micro-level organizations, but not for the extended order of society. So while it is a huge mistake and assault to make a safe space out of an entire college campus, perhaps it is reasonable to make safe spaces out of a dorm room, or a professor’s office, or a meeting for a student group. While it is obviously a huge act of the most heinous form of censorship to ban people from questioning the morality of homosexuality, perhaps it makes sense to not bring up that topic at a college GSA meeting where many of the LGBT students are just seeking a place to belong, or when talking to a group of LGBT students who are facing severe psychological issues while being discriminated against.

If you think applying the concept of safe spaces everywhere and anywhere is always wrong, you’re probably apt to attack me for being “politically correct” for defending the concept in some situations. I agree, we shouldn’t be “politically correct” in the way that term is typically used, but perhaps we should be decent human beings and allow people to freely associate.

Why Few ‘Social Justice Warriors’ Actually Care About Social Justice

I notice that many people love to defend ‘equality for the sexes’, ‘equality for all ethnicities’, because ‘everyone is beautiful… everyone is awesome… everyone is sacred’. All these sound extremely good, noble and well, but I have realized throughout the years that most of these so-called ‘social justice warriors’ do not truly care about social justice at all as one cannot truly stand for justice without an inquisitive mind.

These people repeat everything that sounds good, but barely put any effort in understanding the issues at hand. They lack the critical faculty to subject ideals to severe critical scrutiny. For this reason, they are extremely susceptible for ideals that at first sight seem wonderful, but that are actually rotten and damaging. They also do not possess enough modesty in how little they know. Most social justice warriors are therefore irrationally and vehemently defending a cause they do not truly understand. The worst thing is that many of them refuse to explore the issues of social justice, to look for underlying evidence to support their arguments, to read, and to learn. Many of them are self-deceivers, and discussions with them often turn out to be a vexation as it is impossible to appeal to their reason.

I agree with Michael Huemer that actually most people who fight for a ‘noble cause’ “are chiefly moved, not by a desire for some noble ideal, but by a desire to perceive themselves as working for the noble ideal – not, for example, by a desire for justice, but by a desire to see themselves as promoting justice” (Huemer, 2012, p. 19). The ultimate test to find out whether a social justice warrior truly cares about justice is to have a rational conversation about issues of justice and see whether he is willing to defend his noble ideals rationally and whether he is open for learning.

Reference
Huemer, M. (2012). In Praise Of Passivity. Studia Humana, 1, 2, pp. 12-18.

What is social justice?

Since only individuals act, only individual actions can be judged.  Groups, governments, corporations, etc. are not acting entities and therefore cannot be judged.  The individuals who act under the aegis of such groups can, of course, be judged.  So what could social justice possibly mean?

Along comes the redoubtable Wendy McElroy with an answer.  It is “forced distribution of ‘privileges’ across society with an emphasis on providing wealth and opportunity to classes of people who are considered to be disadvantaged.”  It matters not whether a particular set of circumstances is the result of voluntary interactions.  Individuals who are female, have dark skin, low income, etc. qualify automatically as victims.  Examples of redress include affirmative action and progressive taxation.

Enough from me.  Please go read Wendy’s post.

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