Solutions For Economic Inequality From 2019 Nobel Prize Winners

Solutions For Economic Inequality From 2019 Nobel Prize Winners (WBUR)

It's no secret that I am skeptical of most economic prognostication (although I follow it relatively closely). It has been my experience that most punditry has been wrong, often grossly, more often than not, and most academics are fixed-focus on their particular models rather than open to alternate explanations to real- world experience. Because of that, I am probably over-excited about this year's Nobel prize winners and their new book, Good Economics for Hard Times. They are the kind of economists I admire and respect, because they explore the real world without preconceptions and engage in experimental economics. So, I'm impressed that their work has been acknowledged, and I want to spread the good word.

Many of their conclusions, well sourced and documented, give the lie to major political "truism" - e.g. that migrants depress incomes, that open borders would flood markets, that welfare acts as a disincentive to work, as do high taxes - none of which are actually "true" at all, and have been repeatedly debunked. (I have argued these same points often, so I am biased, but it's nice to have this support.) I cannot do better than they in explaining why, so I commend the book and the interviews.

NWRatCon said:

Solutions For Economic Inequality From 2019 Nobel Prize Winners (WBUR)

It's no secret that I am skeptical of most economic prognostication (although I follow it relatively closely). It has been my experience that most punditry has been wrong, often grossly, more often than not, and most academics are fixed-focus on their particular models rather than open to alternate explanations to real- world experience. Because of that, I am probably over-excited about this year's Nobel prize winners and their new book, Good Economics for Hard Times. They are the kind of economists I admire and respect, because they explore the real world without preconceptions and engage in experimental economics. So, I'm impressed that their work has been acknowledged, and I want to spread the good word.

Many of their conclusions, well sourced and documented, give the lie to major political "truism" - e.g. that migrants depress incomes, that open borders would flood markets, that welfare acts as a disincentive to work, as do high taxes - none of which are actually "true" at all, and have been repeatedly debunked. (I have argued these same points often, so I am biased, but it's nice to have this support.) I cannot do better than they in explaining why, so I commend the book and the interviews.

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Cutting through the flowery phraseology, no government can eliminate poverty by government mandate or by government engineered wage and price controls. Individual poverty is mostly an individual problem which requires individual actions to alleviate. National poverty results from bad business practices often designed by bad managers and government officials.

marke said:

Cutting through the flowery phraseology, no government can eliminate poverty by government mandate or by government engineered wage and price controls. Individual poverty is mostly an individual problem which requires individual actions to alleviate. National poverty results from bad business practices often designed by bad managers and government officials.

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If you can't be bothered to read the cites in the OP, why bother to post and expose your ignorance? You have just demonstrated the accuracy of the criticisms.

We could merely solve for Capitalism's natural rate of unemployment in a market friendly manner in our at-will employment States.

NWRatCon said:

If you can't be bothered to read the cites in the OP, why bother to post and expose your ignorance? You have just demonstrated the accuracy of the criticisms.

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There is no need to obfuscate. No government can pay to eliminate poverty without first obtaining the money from its citizens, essentially redistributing the wealth. Good governments do what they can to keep from unfairly burdening workers in order to pay the unemployed to live without working.

Nice find, thanks.

Everyone gets things wrong. What is dangerous is not making mistakes, but to be so enamored of one’s point of view that one does not let facts get in the way. To make progress, we have to constantly go back to the facts, acknowledge our errors, and move on.

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A key tenant of reasoning, I wish more people understood this. this is also why silence is so often objected to in politics...because science accepts errors as healthy, politicians are scared ****less of accepting errors because of the political impact.

marke said:

Cutting through the flowery phraseology, no government can eliminate poverty by government mandate or by government engineered wage and price controls. Individual poverty is mostly an individual problem which requires individual actions to alleviate. National poverty results from bad business practices often designed by bad managers and government officials.

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Your post is a great example of why the U.S. cannot have good things.
1. your claims about eliminating poverty are strawman, because nowhere in the article is that claimed.
In direct contrast to your strawman however, they clearly describe efforts to research ways to alleviate poverty.

Definitions for marke!: Alleviate (verb): make (suffering, deficiency, or a problem) less severe.

That's right marke...not eliminate, but alleviate. They sound similar, I understand.

2. Worse, government can factually eliminate poverty in the short and probably medium term...but many do not believe that's a good strategy for the nation...rightfully so.

3. Every "individual"problem in the United States can and often is influenced in a myriad of ways by society...be it governments, the economy, corporations, other individuals, etc. the idea that it's "mostly" an individual problem, defies reason.

But don't let that stop you from raging against *actual Nobel prize winners for their contribution to science with strawman and ignorance.

marke said:

There is no need to obfuscate. No government can pay to eliminate poverty without first obtaining the money from its citizens, essentially redistributing the wealth. Good governments do what they can to keep from unfairly burdening workers in order to pay the unemployed to live without working.

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...Further demonstrating your gross ignorance of the subject matter. The first rule of digging holes, stop digging.

marke said:

y without first obtaining the money from its citizens, essentially redistributing the wealth.

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More nonsense.
The U.S. economy exists because of government, and because of individual effort. Where was individual effort back in 10000 BC? It was nowhere without law and order and infrastructure and a military and a relatively healthy and wealthy populace to spend money at their businesses. And factually the U.S. government is an enormous spender IN the economy. Wake up Marke!! Time to stop watching Fox for information about reality.

Oh no, right wing talking points are so fragile and fake.

NWRatCon said:

...Further demonstrating your gross ignorance of the subject matter. The first rule of digging holes, stop digging.

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Actually, the first rule of digging holes, is when you are finished, stand up straight, request a last cigarette even if you don't smoke, decline the blindfold and smile at the firing squad.

OldFatGuy said:

Actually, the first rule of digging holes, is when you are finished, stand up straight, request a last cigarette even if you don't smoke, decline the blindfold and smile at the firing squad.

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Lol. I think of that as the second rule, but I'll go with it.

It would be nice if we can get back to the topic.

marke said:

There is no need to obfuscate. No government can pay to eliminate poverty without first obtaining the money from its citizens, essentially redistributing the wealth. Good governments do what they can to keep from unfairly burdening workers in order to pay the unemployed to live without working.

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You miss the point. Simply correcting for Capitalism's natural rate of unemployment in a market friendly manner means that increase in the circulation and velocity of money toward a positive multiplier effect. We should be increasing the efficiency of our economy whenever possible to promote the general welfare.

tax all income as income above a cap. that won't address automation, but it will provide revenue to fund a competing public sector to employ those who are nearly certain to be replaced by a robot in the next twenty years. i also support eliminating right to work for less laws that were designed to break unions.

Mach said:

And factually the U.S. government is an enormous spender IN the economy.

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True, but taking your money from you by force, and then giving it to a politician to spend as he sees fit, makes you worse off.

Helix said:

tax all income as income above a cap. that won't address automation, but it will provide revenue to fund a competing public sector to employ those who are nearly certain to be replaced by a robot in the next twenty years. i also support eliminating right to work for less laws that were designed to break unions.

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Unemployment compensation to help solve for the effects of Capitalism's natural rate of unemployment addresses that whole and entire concept in a general not limited manner. Our welfare clause is General.

aociswundumho said:

True, but taking your money from you by force, and then giving it to a politician to spend as he sees fit, makes you worse off.

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What was real estate going for before the ratification of our federal Constitution?

I think greed is one of those main features behind this problem, so it boil down to ethics - what are those ground rules to play with and how to apply them to society. When there's only small ultra wealthy group ruling and keeping all strings on hand - people should ask if that's really what majority of citizens want (is it dream society or something else?).

As foreigner, my view is far from those who live in US, so I can be really wrong about this... still, how I see it, plutocracy has been old trend in US. Using (first) free labor and then cheap labor (not paying living wage), buying beneficial policies by corrupting lawmakers, so on.. That way you can create an environment with nice rules and keep things going as you like.

My point is that fixing economic inequality is what's coming after next paradigm change - because without change in ways how people think there isn't base for ethics - what's needed for all kind of actions to distribute wealth differently (living wage, taxes, services, etc). I think there isn't any - big enough - thing in horizon now to make that kind of move, but that's my idea how it's coming (if it's ever coming). That's one reason why Bernie is facing so much trouble from so many, US isn't ready for all of what Bernie is trying to bring in US. It's not even remotely enough if only few in politics are going to change things when so many are resisting with full force: there need to be HUGE momentum and WILL for real change.

I have to admit that this is a bit shallow, just quickly typing out from my head... I'm coming back to this topic with some thoughts and hopefully with more sense, if that's possible xD

I might have something to add to this discussion as someone who has been studying economics for years. Specifically, my BSc. and my MSc. are both in economics and I currently am studying for my second year as a Ph.D. student.

One of the things you quickly learn once you start being exposed to state-of-the-art theories, empirical work, and recent research papers is that most economists care about the nuances and details of an argument. It might come as a shock to you, but I've never seen a single piece of published work in macroeconomic theory, for example, where the authors sustained a confusion between their models and reality. It's typical in a seminar that people ask questions to one of the author of a paper, pointing out the limits of what they are doing and it is also very typical in published research to delineate the environment where we believe the theory is going to be useful.

I can give you an example. It's perfectly possible to pick up an absurdly complicated model such as the one presented Ascari, Phaneuf and Sim's 2018 JME paper and derive tons of empirical implications (i.e., hypotheses to be tested against data). In principle, that model captures what is important for monetary policy: it is intended to be part of a discussion about the long term costs of inflation. It does a stunning job at reproducing an absurd amount of statistics you can produce for the US. You could also do something the authors do not do: add "stocks" in the model and derive pricing implications. It wouldn't be hard, but I can almost guarantee it will not behave very well.

Now, if you turn to the "political truism" you mention above, it's typical of politicians to grab on to a very approximative idea of what simplistic versions of our theories imply and call that an economic argument. It always lacks the proper context or nuance that would allow people to discuss what might be poorly approximated in the model, or even what might be relevant mechanisms that aren't included in the model. Many models of the labor market would indeed tend to say that at least some welfare programs can be incentivizing people to work less. In some models (supply-and-demand types of models), there is a wealth effect (you make people wealthier), so some people might opt to "spend" some of that wealth on additional leisure. In other types of models (search and matching type or contract theory types of models), you wouldn't get that effect, but you might get that very specific types of programs pressure unemployment upward by making the outside option of workers more appealing.

With that being said, those aren't truths. They're hypotheses based on imperfect descriptions of reality. It's exactly here that the details matter: why a model predicts a disincentive to work for specific types of welfare programs is important because it might have something to do with the specific ways in which it will fail to account for the relevant data. If you don't know the details, you don't know how to make adjustments. What I'm getting at here is that the process of coming up with a very clear theory, testing its implications and seeing how it fails is how you learn to make improvements.


The work of people who use statistical evidence is very important, just as the work of people who like Duflo use large scale experimental data, is very important. It's an opportunity to see in detail where and how our current models work or do not work.

danielpalos said:

Unemployment compensation to help solve for the effects of Capitalism's natural rate of unemployment addresses that whole and entire concept in a general not limited manner. Our welfare clause is General.

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i'd support debt free access to post secondary education / job training. in a rapidly changing job market, it's a poor idea not to do that. it's either pay people to work, pay them not to work, or risk societal instability if we choose the minimalist "TS. figure it out, buddy." path.

Helix said:

i'd support debt free access to post secondary education / job training. in a rapidly changing job market, it's a poor idea not to do that. it's either pay people to work, pay them not to work, or risk societal instability if we choose the minimalist "TS. figure it out, buddy." path.

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Let's assume a hypothetical fifteen dollar an hour minimum wage and fourteen dollars an hour by equivalent for unemployment compensation for being "naturally unemployed by Capitalism's natural rate of unemployment in our at-will employment States."

Anyone who wants to work would be free to do so and anyone who chooses not to work should also be free to do so under our form of Capitalism.

Would anyone prefer to stay homeless in that case?

danielpalos said:

Let's assume a hypothetical fifteen dollar an hour minimum wage and fourteen dollars an hour by equivalent for unemployment compensation for being "naturally unemployed by Capitalism's natural rate of unemployment in our at-will employment States."

Anyone who wants to work would be free to do so and anyone who chooses not to work should also be free to do so under our form of Capitalism.

Would anyone prefer to stay homeless in that case?

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a fifteen dollar an hour minimum wage means that a lot of skilled workers would suddenly be working for a little more than minimum wage, and those making minimum wage would soon find themselves in the same place that they were before. i support a minimum wage for all workers, and i would tie it to inflation. however, just raising the minimum wage isn't going to do much to change wealth disparity, IMO. i would, however, remove the tipped worker exemption. that has always pissed me off.

(Cont.)

I can give you an example that is closer to my expertise. In the 1960s, Fisher Black and Myron Scholes derived a closed-form expression for the fair price of an option. The theory was developed in a paper finally published in 1973 and they bothered checking how well it worked on actual data -- thousands of options contract were used in another paper. Robert Merton proposed another way to look at the same problem using the tools of stochastic calculus.

The model gets a neat and simple expression for the price of options because it uses a very simplistic representation of the behavior of stock prices. We now know this picture is wrong in many ways, but the way Black and Scholes and later Merton developed their arguments gives you a way to think about the problem in much more general settings. This part is of real practical importance. If you're an investment bank, you might want to write down and sell options on various stocks (there is a demand for it because you can use those things as a sort of insurance policy), but you don't necessarily want to expose yourself to risks related to how the stocks on which you underwrote options will move. BSM's argument work by giving you a recipe of how stocks and cash can be combined to behave EXACTLY like an option -- so a financial institution can drastically reduce the risk associated with writing options by adopting a strategy based on this BSM argument.

The result is simple: you have an entirely new set of tools to think about options. If you apply it to the data, especially from the mid-1980s onward, you will get odd results. One feature of the BSM description of stock movements is the constant volatility of stock returns. One way to check the model is to force the model to match prices for stocks and options and back out the implied volatility. You can do it for various strike prices on any stock you want. In principle, if BSM is correct, you should see a flat line. In reality, you see a kind of smirk -- the volatility smile. When the option is very deep in the money or very far out of the money, the BSM price is very bad -- and those situations correspond to very unlikely events.


This tells you that if you can get a better model of extreme scenarios, your model would get closer to reality. The failure tells you how to fix the problem. Without the theory to structure the discussion, you don't get that insight. A lot of dated and wrong theories are still surveyed today, not because we're dumber than you, but because the failures explain what we're doing now.

Helix said:

a fifteen dollar an hour minimum wage means that a lot of skilled workers would suddenly be working for a little more than minimum wage, and those making minimum wage would soon find themselves in the same place that they were before. i support a minimum wage for all workers, and i would tie it to inflation. however, just raising the minimum wage isn't going to do much to change wealth disparity, IMO. i would, however, remove the tipped worker exemption. that has always pissed me off.

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Why wouldn't employers raise wages like Henry Ford instead of potentially foregoing their "multimillion dollar bonuses"? Don't really really believe in Capitalism?

TheEconomist said:

(Cont.)

I can give you an example that is closer to my expertise. In the 1960s, Fisher Black and Myron Scholes derived a closed-form expression for the fair price of an option. The theory was developed in a paper finally published in 1973 and they bothered checking how well it worked on actual data -- thousands of options contract were used in another paper. Robert Merton proposed another way to look at the same problem using the tools of stochastic calculus.

The model gets a neat and simple expression for the price of options because it uses a very simplistic representation of the behavior of stock prices. We now know this picture is wrong in many ways, but the way Black and Scholes and later Merton developed their arguments gives you a way to think about the problem in much more general settings. This part is of real practical importance. If you're an investment bank, you might want to write down and sell options on various stocks (there is a demand for it because you can use those things as a sort of insurance policy), but you don't necessarily want to expose yourself to risks related to how the stocks on which you underwrote options will move. BSM's argument work by giving you a recipe of how stocks and cash can be combined to behave EXACTLY like an option -- so a financial institution can drastically reduce the risk associated with writing options by adopting a strategy based on this BSM argument.

The result is simple: you have an entirely new set of tools to think about options. If you apply it to the data, especially from the mid-1980s onward, you will get odd results. One feature of the BSM description of stock movements is the constant volatility of stock returns. One way to check the model is to force the model to match prices for stocks and options and back out the implied volatility. You can do it for various strike prices on any stock you want. In principle, if BSM is correct, you should see a flat line. In reality, you see a kind of smirk -- the volatility smile. When the option is very deep in the money or very far out of the money, the BSM price is very bad -- and those situations correspond to very unlikely events.


This tells you that if you can get a better model of extreme scenarios, your model would get closer to reality. The failure tells you how to fix the problem. Without the theory to structure the discussion, you don't get that insight. A lot of dated and wrong theories are still surveyed today, not because we're dumber than you, but because the failures explain what we're doing now.

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I may consider buying the underlying stock before getting into options.

How realistic can we get the economics of a hypothetical, SimCity application? Most planning for intelligently designed new Cities in more optimal locations may be of benefit, in some cases.

danielpalos said:

I may consider buying the underlying stock before getting into options.

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They are different types of securities that serve different purposes. Unless you plan on trading them for speculative purposes, it's not exactly an issue.

danielpalos said:

How realistic can we get the economics of a hypothetical, SimCity application?

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No more realistic than our best models. Probably even less so because computational requirements might become an issue for user experience.